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Two-thirds of ETF inflows went to fixed-income in ‘flight to safety,’ expert explains

VettaFi Head of Research Todd Rosenbluth joins Yahoo Finance Live to discuss ETF investing trends from Q1 2023.

Video transcript

SEANA SMITH: The second quarter of the year is underway. And we're looking at the performance of ETFs so far. The cash pouring into these funds in Q1 standing at right around $80 billion. That's according to the latest ad out from Vetify.

Well, let's break down where investors have put their money and where they should going forward. For that, we want to bring in Todd Rosenbluth, Vetify Head of Research in this week's ETF Report, brought to you by Invesco QQQ.

Todd, it's great to have you back here in studio. So let's talk about two areas that investors were favoring where they put their money into during the first quarter. What was that?

TODD ROSENBLUTH: Yeah, the largest chunk of money went into fixed income ETFs. Almost 2/3 of the overall inflows went into this category. Now, there was a flight to safety overall, concerns about where the interest rates were going, and what the Fed was going to act next. And so fixed income ETFs were a nice, safe haven for many investors.

The other area that we saw interest in was also with international equities. So we've had a long home bias for US investors. To start the year, we saw a stronger interest in international equity ETFs-- almost $30 billion overall flowed into that overall category. And we saw both a combination of developed international investment interest, in Europe in particular, and emerging markets-- so strong interest overall.

DAVE BRIGGS: Given the current dynamics, is that still a wise plan moving forward?

TODD ROSENBLUTH: Well, what we've seen at VettaFi when we look at some of the data that's come out, we're seeing sentiment shift towards US equities and away from international equities. We're starting to see investors get a little more confidence in the US equity exposure overall. They're looking to rotate.

But the big gainer that we saw in international equities was BBEU. This is a JPMorgan Europe ETF-- low cost, nine basis points for the fee, really strong interest overall in developed international companies like Nestle leading the list-- exactly the high quality companies that you'd expect. And within fixed income, one of the ones worth highlighting is USFR.

This is a WisdomTree floating rate Treasury ETF. For investors that are concerned about the rising rate environment and looking for a flight to quality, you get a 5% yield with this WisdomTree ETF. And we're really starting to see investors see that as a safe haven where you can get stable income while you try to figure out what's next within the fixed income world.

SEANA SMITH: So, Todd, these are outperformers in Q1 just in terms of attracting money. It sounds like you think that trend is going to, then, continue, at least for the current quarter right now.

TODD ROSENBLUTH: We do. We're starting to see a rotation into US equities. I think we obviously saw a much stronger March from a performance standpoint. And we saw outflows for US equity ETFs in the first quarter of the year. That doesn't happen too often, especially when the market, the S&P 500, is up over 7%.

But what we did see was a flight to quality within the equity space. So an ETF like QUAL, which is an iShares ETF, was actually the number one net inflow Gainer overall. QUAL holds high quality companies, strong balance sheets, stable earnings streams, return on investment being a focus for them. And it's performed well. It actually outperformed the broader S&P 500 in the first quarter of the year as investors looked for a relatively safe haven within the equity space.

DAVE BRIGGS: And IAU. Tell us about that.

TODD ROSENBLUTH: Yeah, so gold ETFs, in particular, were out of favor-- commodity ETFs in general and gold ETFs, in particular. And that's a bit surprising. We would have seen money go into gold as the safe haven. That's the theme I've been talking about today.

But we haven't seen that. Investors are looking for other alternatives. So that's a bit of a concern to us that maybe they've shifted away from gold. They've gone to manage futures products, they've gone to alternatives-- obviously, crypto has been a much stronger performer than gold this year.

DAVE BRIGGS: What do you make of that?

TODD ROSENBLUTH: I think it's a bounceback from the really poor performance that we saw in 2022. But there has been interest. We've seen a renewed interest in crypto ETFs, in the underlying ETF of BITO, the ProShares ETF, but as well as the equity related products that are tied to crypto. So more than gold, in particular, and that's a bit surprising in this environment.

SEANA SMITH: What about oil? Because on the heels of the news yesterday, OPEC plus cutting production further. Obviously, we saw a pop in crude and a number of the larger US oil players also rose yesterday. What's the investment play there, do you think?

TODD ROSENBLUTH: So the way that we're thinking is an opportunity is an ETF AMLP. So the MLPs, the midstream companies, they make money whether oil is rising or falling. These companies have been buying back their stock. They've been raising their dividend over the years. It's actually been a stronger performer than the broader energy sector this year and investing in oil, because, to come back to it, it is, again, a safe haven within that energy space. So AMLP is worth paying attention to within the energy sector.

DAVE BRIGGS: All right.

SEANA SMITH: All right, Todd Rosenbluth, great to have you. Thanks so much for joining us here on set.