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READ: ETF of the Week: Know What’s Under The Hood

VettaFi’s Head of Research Todd Rosenbluth joins Chuck Jaffe to discuss what investors should consider when evaluating ETFs and what’s in favor in the current environment on this special episode of ETF of the Week. This was originally featured on a segment “Money Life” with Chuck Jaffe.

ETF of the Week: Know What’s Under The Hood

Chuck Jaffe: Hi, it’s Chuck Jaffe, host of the ETF of the Week. I also have my own weekday podcast called Money Life. On the December 5 edition of my show, I was joined by Todd Rosenbluth, head of research at VettaFi. We talked about investments in a segment called The Money Life Market Call. It’s all about ETFs, and we know you want to hear what VettaFi is thinking on that subject. Here is that interview with Todd as a bonus episode of the ETF of the Week. Enjoy.

Todd Rosenbluth, head of research at VettaFi, is here. We’re talking exchange traded funds now in the Money Life Market Call. Welcome to the Market Call, the part of the show where we talk with experienced money managers about how they do their job, what they look for that determines their buys themselves, what they see happening broadly on the market, and how they put it all together.

My guest today is Todd Rosenbluth. He is the head of research at VettaFi. Now, of course, you listen to Money Life. You know VettaFi. Well, that’s where Tom Lydon comes from. He, of course, does the ETF of the Week with us. But we say each week when we’re talking with Tom Lydon that VettaFi has this great suite of tools. They have research and data that are available for you so that you can be a better investor in exchange traded funds.

Well, Tom helps to run the company, but Todd is the head of research. So he’s the guy behind a lot of that research, which you can check out for yourself at VettaFi.com. Todd Rosenbluth is also, like me, a proud graduate of the University of Michigan. Todd, go blue. Great to have you back on Money Life.

Todd Rosenbluth: Exciting to be here.

Chuck Jaffe: So we always start with methodology. And you’ve got a methodology that, quite honestly … you have a long career. We’ve talked to you in previous jobs when you were working with CFRA research, S&P Global Market Intelligence, and all the others, and at VettaFi. I think you’ve tried to distill it all and make it the best you can. So explain what it is that you are using to say, “These funds stand out to me. These funds, not so much.”

Todd Rosenbluth: So as listeners may know, because I’ve been a guest when I worked at S&P and at CFRA, heading up research, I have a big belief in looking at what’s inside the portfolio, taking a more forward-looking approach, and I’ve carried that on with us at VettaFi. So we don’t have research set as a buy-and-hold or sell recommendation on individual ETFs like I did in the past.

But we’re following what investors and advisors are telling us about their sentiment profile and what’s going on in the marketplace. We’re offering investment ideas to give them a range of choices as to how they might want to tackle what is top of mind to them. And we cover 3,000-plus ETFs, because that’s how many that are trading.

It helps us to be able to see the forest and the trees. So, really excited to be here, and happy to talk to you about what we’re seeing in the market, what advisors and investors are telling us, and then how perhaps people can take advantage of that.

Chuck Jaffe: Well, and let’s just focus in on the idea that when you are looking at holdings, it’s a mix of, like, how well are the holdings doing, but also how are they put together. In other words, if you have a portfolio where somebody is holding a lot of high-risk stocks versus something where somebody is trying to be super safe, you may say, oh, “Well, this one’s likely to return more.”

But oh, by the way, are you willing to take the risk? Right. It’s a combination of holdings and how they are amalgamated in each fund, right?

Todd Rosenbluth: Correct. So I’m not advocating for or against the S&P 500 through an ETF like the SPDR S&P 500 ETF Trust (SPY) or the Invesco S&P 500 Equal Weight ETF (RSP). But those hold the exact same companies. Just the weightings within those portfolios are notably different, of course. So Apple and Microsoft are sizable positions within SPY and they’re 20 basis points, less than 1% of the portfolio in RSP.

And so smaller companies in the S&P 500 take a bigger weighting. So you can’t just have a view that you think the market is going to go up or the S&P is going to go up. It’s, how is it constructed, and then which one is right for you.

Chuck Jaffe: So then how do you deal with market fluctuations? Because at any given time, like we’ve had this year, a market driven by seven stocks. So obviously when you have, a broad market that has just a few people participating in the rally, that’s going to favor the one that is market cap weighted — the SPY as opposed to the equal-weighted, but market conditions change.

So how frequently does the analysis change? You know, how often do you go from like, “We may like both of them, but this is a time for this one and this is the time for that one.”

Todd Rosenbluth: So we are regularly seeing what’s going on in the marketplace. I don’t think investors want to be tactical and make changes from one ETF to another daily or weekly, but we’re having notable shifts in the marketplace. The Federal Reserve has been raising interest rates throughout 2023. They likely have paused and have stopped doing so.

And expectations heading into 2024 and in 2024 are that there will be rate cuts. And so, for example, we at VettaFi recently hosted a symposium. I think Tom most probably talked about it when we asked investors what their views are on the marketplace and how they’re willing to take on risk. And we saw this was just this week.

The majority of people who responded are willing to take on more interest rate risk heading into 2024; they’re willing to go further out into intermediate-term or long-term products. Two-thirds of the audience that we spoke to plan to take on more risk as opposed to less risk. It was more split from an interest rate perspective. It was more split between willing to take on credit risk. People still are hesitant to do so.

So we are now advocating, and we did, we recently wrote an article saying let’s take a look at some of these intermediate-term bond ETFs. And I just changed subjects from equities to fixed income for the listeners. But let’s take a look at some of these intermediate-term bond products from some of the firms that offer popular short-term products and here’s what you get.

Here’s the reward potential. Here is the opportunity that’s happening. And happy to name some of those examples for you and the listeners. But that’s important that we’re heading into a new year, a new regime.

Chuck Jaffe: It absolutely is. So I can understand how that all plays out. So now let’s take a look and go, what are the areas of the market that you particularly like right now or that the research is telling you you like or that the advisors and others are telling you they like? And what are the types of funds best-suited to use in that spot?

Todd Rosenbluth: Let me just use that as the example of what I just had within fixed income. So we’ve seen strong interest in the ultra-short bond ETFs in the 2023. BIL, which is as low risk as you can get. It’s 0 to 3 month or 1 to 3 month Treasury bills. It’s taken in a tremendous amount of money. We are encouraging folks who want to stay within the same fund family to look at something like the SPDR Portfolio Intermediate Term Treasury ETF (SPTI).

So you take on a little bit more interest rate risk. You’re still getting paid a nice, handsome yield of close to 5% and it’s just 0.03 basis points in fees. Or if you want a more active approach, there’s the PIMCO Active Bond ETF (BOND), which, again, has a 5% yield duration, so slightly higher right now than than that index-based SPDR product..

For people who own the PIMCO Enhanced Short Maturity Active ETF (MINT), BOND could be a good alternative for them. So within the fixed income space, we think investors want to take on more risk and those are an index – and an active-based product for them to consider.

Chuck Jaffe: What about on the equity side of things?

Todd Rosenbluth: So we’ve seen a really strong year, almost 20% growth in the S&P 500, and growth stocks in particular have done even better. Technology stocks have done really well. We’re still bullish. We think there’s still room for growth within our upside potential, but we could see more value-oriented strategies or value-tilted strategies do better. So the Vanguard Value ETF (VTV) is a tilt toward value that we think could resonate again in 2024.

Given that the Fed is likely to start cutting interest rates and so more higher dividend-yielding areas of the marketplace that tend to be favored in the value area could do better in 2024. Certainly, they couldn’t. It’s hard to do much worse than they did in 2023 because growth was in favor. So a reversion to the mean could happen.

Interest rates falling could be a positive for them as well. So lots of lots of positivity happening in a shifting environment, we think.

Chuck Jaffe: What about international versus domestic? Are you tilting one way or the other? Is this a time, given everything that’s going on, to be looking to diversify more fully?

Todd Rosenbluth: I think at the beginning of the new year, investors should reallocate their portfolios. I didn’t pull the analysis up in front of me, but I believe that the U.S. SPY has outperformed the broader developed international markets. I will try to go on to ETFdb.com. Sorry for that shameless plug to see if I’m correct on that, but it’s important to just rebalance your portfolio at the beginning of the year.

If we have, as I think is correct, yes, SPY is beating EFA by seven 800 basis points this year. So you might want to reallocate into international to stay diversified. The iShares MSCI EAFE ETF (EFA) is perhaps the most one of the most widely used of those products and is low cost, so that might be a good go-to for folks.

So just make sure you’re diversified. You never know what’s going to happen in the new year, and you want to make sure you’re providing yourself with with a balanced portfolio.

Chuck Jaffe: Well, now we’re going to get your quick and dirty take on some ETFs that my audience is particularly interested in. Quick and dirty. This is the most exciting thing to ever happen in the history of history.

Well, I’m not sure it’s quite that exciting, but it’s great to get the take of Todd Rosenbluth, head of research at VettaFi on some ETFs. A wide range of them that you guys are interested in, and you can put any of our guests to the challenge. All you need to do is send your name, your hometown, and the ticker symbols you’re interested in for ETFs, traditional mutual funds, closed-end funds, or of course, stocks.

Send that to me at Chuck Money Live Showdown.com we’ll add it to our list. Hope it makes it into an interview soon. We start today with a request from Tom in Smithfield, Kentucky. He wants to know about the Fidelity Blue Chip Growth ETF (FBCG).

Todd Rosenbluth: I like that this was chosen. I mentioned I think that value’s got a chance to do better relative than it has beforehand but a high-quality growth strategy, one that’s actively managed like FBCG, is a good way of going. You’re getting a well-established manager, but now you’re getting the benefits of an ETF structure, tax efficiency, and lower cost.

So if you want to stay in growth, I think an active approach like this Fidelity product is a good one.

Chuck Jaffe: Oh yeah, beautiful. We could make a fortune. That was a buy on FBCG. Our next request comes from Rick in York, Pennsylvania. He wants to know about the ALPS Sector Dividend Dogs ETF (SDOG).

Todd Rosenbluth: So I’m glad we picked this one. What an amazing ticker. Even if you don’t have a pet at home like I do, SDOG is just a memorable ticker. This is the highest-yielding stocks within each of the sectors of the broader market; there are 10 of them. So it’s a version of the Dogs of the Dow that many of us grew up with, just in ETF form and more sector diversified.

And so if you want to get income, we think income is going to be important in 2024 for a nice diversified approach like SDOG in an index form is a good way of doing it. So yeah, I can’t wait to hear if you’re going to be barking in favorable tones next.

Chuck Jaffe: Yeah, you could say that SDOG just said hi there. That was a buy on the SDOG. Javier in Wilmington, North Carolina wants to know about the Amplify CWP Enhanced Dividend Income ETF (DIVO).

Todd Rosenbluth: DIVO is a twist on, well, this was different than the one we talked about for a couple of reasons. One is that there’s active management picking those stocks as opposed to just being an index-based approach. And then there are covered calls that are used on top of this to generate enhanced income.

And that’s going to provide some additional downside protection that’s going to give you additional income in an income-oriented marketplace. DIVOs a good ETF.

Chuck Jaffe: Well, by the way, I like calling it Devo, but I wanted to make it clear it’s not Devo like the band, right? It’s, you know, that’s Devo. This is Devo. So, you know, because we are not men, we are Devo. We need to make sure that we are actually making sure that everybody knows which fund we’re talking about.

That’s a buy on DIVO. Richard in Chula Vista, California wants to know about the iShares Floating Rate Bond ETF (FLOT).

Todd Rosenbluth: So I probably showed my hand a bit by saying advisors and investors are expecting that the Fed is going to cut interest rates and are willing to take on a bit more interest rate risk. The benefit of FLOT is that you don’t take on interest rate risk. You’re protected against rising interest rates, but you don’t benefit when rates are falling.

So I think there are better alternatives in the fixed income space and a floating rate product is a good product is not the right time for it in 2024.

Chuck Jaffe: So while we sometimes say, you know, good company, bad stock, this is a good fund, not the right time, other alternatives which we talked about, Spotify, BOND, etc., but FLOT was a sell.

We finish with a request from Tom in San Francisco. And we’re going places we haven’t gone yet in this discussion. Because he wants to know about the abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI).

Todd Rosenbluth: Yeah, I like that we’re adding commodities into the conversation. However, we touched on the benefits of diversification through international investment. There are the benefits of diversification through commodities as well. And we certainly saw in 2022 that having something other than stocks and bonds in your portfolio was rewarding. That could very well be the case in 2024. I like that this is diversified across various commodities.

This isn’t just a focus on gold or energy. You get those as well as a whole range of agricultural products too. So we don’t want to get in the weeds here. But you don’t have to worry about K-1 from a tax standpoint with this ETF. It’s just a simpler way of getting commodity exposure through BCI.

Chuck Jaffe: Yeah, it sure is. We don’t want to get in the tax weeds. But understand, anybody who’s ever done anything commodities can generate a K-1. It’s just extra tax paperwork that just kind of makes you hurt. That’s really what we’re talking about. But no pain here because BCI avoids the K-1.

That was a buy. We have to step aside because we’ve come to the end of our time. But Todd, always great to chat with you. Thanks so much for taking the time. We’ll do it again in 2024.

Todd Rosenbluth: Sounds good. Thank you. Go Blue.

Chuck Jaffe: That’s Todd Rosenbluth, a proud Michigan grad and the head of research at VettaFi. Learn more at VettaFi.com,  and on Twitter @Vetta_Fi. Todd is on Twitter or X at @ToddRosenbluth.

For more news, information, and analysis, visit VettaFi | ETF Trends.

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