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Investors starting to pivot into more growth-oriented ETFs as Fed slows rate hikes: Strategist

VettaFi Head of Research Todd Rosenbluth joins Yahoo Finance Live to discuss ETF demand and strategies for investing in the current macroeconomic environment.

Video transcript

DAVE BRIGGS: The big news shaking up Wall Street today, of course, the latest Fed policy decision. Jerome Powell and the central bank raising rates by 25 basis points as investors come up with a game plan to successfully navigate the latest change. To help us break down what this means for the ETF industry, we're joined again by Todd Rosenbluth, VettaFi head of research, in this week's ETF report brought to you by Invesco QQQ. Good to see you, sir. What does today's announcement, and most importantly, the language from the Fed chair mean for the industry, for investors and ETFs?

TODD ROSENBLUTH: So, 2022, we saw a strong year for fixed income ETFs. Almost $200 billion of money flowed in. And we've seen a really strong start in January to fixed income ETF demand. But what's happened is investors and advisors, in particular, have pivoted. They're willing to take on more interest rate risk. And that's what they're telling us at VettaFi. We recently held a survey of advisors, and more than half of that universe of advisors plans on taking on interest rate risk over the next six months.

So they came in to the year, coming in to the Fed meeting, as we're showing, expecting that the Fed would start to slow down its rate hikes and perhaps even cut later on in the second half of the year. You can see just 14% plan to actually shorten the duration or reduce the risk side. And so what that means and what we're seeing with ETFs is an ETF like TLT, which is the iShares 20+ year Treasury ETF, that ETF has been in strong demand. Investors are willing to take out that extra risk and earn that extra income. So we're seeing demand for that ETF.

And as you can see, it's performed well as investors expected the Fed to be more gradual going forward. We've seen other fixed income ETFs be in demand that take on additional risk, whether they're corporate bond ETFs like LQD from iShares or Vanguard's VCLT, also seeing strong demand as investors are willing to take on that risk now that the Fed seems to be more patient going forward.

SEANA SMITH: It certainly does seem like investors are taking more of an interest in fixed income into those longer term ETFs. Todd, what about some of those tech-focused ETFs? Because we certainly have seen a massive run-up in a number of those stocks since the start of the year. Is that being reflected in the ETF market as well?

TODD ROSENBLUTH: We are starting to see investors rotate into more of the growth oriented strategies. And in particular, we saw, I think, QQQ be popular with investors. But I just want to highlight for investors that have watched Meta report results today with strong numbers or that are anticipating what's going to happen with Amazon or Apple or other companies, technology ETFs own Apple and Microsoft.

So an ETF like XLK from StateStreet or VGT from Vanguard, it does not own Meta. Meta is a communications services company under the vernacular of the GIC structure. You would find it in an ETF like VOX or XLC. Amazon is a consumer discretionary company. You'd find it in XLC or VCR, to just name a couple of tickers. So it's important to know what you own within a portfolio. And that's something we identify, are trying to educate investors and advisors to know more than just the name of the ETF, but look inside the portfolio.

DAVE BRIGGS: And lastly, Todd, Morgan Stanley launching six ETFs. Anything make them stand out to you in particular?

TODD ROSENBLUTH: Well, they are the largest firm to not have an ETF presence. So we're excited that they were launching ahead of the VettaFi's Exchange ETF conference that taking place this weekend in Florida. There'll be almost 2,000 registrants that are there. These ETFs from Morgan Stanley are under the Calvert brand, so ESG oriented.

Advisors respect that Calvert name. These products are relatively cheap. They're going to have the scale advantages. And so we're seeing here one of the actively managed ETFs that investors can rotate in, actively managed fixed income ETFs to connect the dots earlier. But Calvert under the Morgan Stanley brand, we think they're one to watch in 2023.

SEANA SMITH: All right, Todd Rosenbluth, always great to have you. Thanks so much.