ETFs & Markets with Todd Sohn: Index Concentration, Overbought Markets, and Bitcoin ETFs

So I always find it interesting when there are new ETF launches that, come to market that bring different types of exposures, namely, one product that is releasing here in late October that's going to focus on the S&P top 20 index.

So it's going to be the 20 largest weights within the S&P 500, very concentrated. And there's also another product that's going to focus on large cap equities. But without some of the more focal influences in the index, namely the magnificent seven names., right, your Apple’s and Nvidia and Microsoft, Alphabet, Amazon, Tesla, and Meta. And I think that this chart exemplifies what is going on here.

Large cap index concentration is really amplified and is driving how investors are allocating these days. You have three largest names - Apple, Microsoft and Nvidia - accounting for 20, almost 21% of the S&P 500 and 35% of the Russell 1000 growth index. So, I think you can either lean into this an investor or you may want to diversify away.

And that's what's happening with some of the more recent ETF exposures out there. It's a great lens into the psychology of what's going on within the product spectrum.

Now for equity markets overall, concentration or not, you do have a little bit of an overbought condition occurring.

Roughly 57% of equity ETFs are trading between 1 and 2 standard deviations above their 200 day moving average, a simple measure of trend, and you have about 21% great trading, greater than two standard deviations above that moving average.

So, a pinch overbought.

And historically when you do get a large batch of names, 1 to 2 standard deviations above that 200 day average, you can either A) see momentum persist as it did in January of 2013 and throughout the rest of that year. That was a pretty good rally.

Or back in January 2018, it actually started, what was more or less a bear market for a lot of corners of the equity market, resulting in a pretty steep correction in the fourth quarter of that year.

So we'll see how that goes. Obviously depends on participation, but just some context for being overbought.

As for flows, if the market does continue on this trajectory higher, I'm curious to see if tactical flows do pick up going forward 2024 on pace to perhaps catch or even break the record from 2021?

But I would just say that sentiment today is still a little bit less hot than it was back in 2021.

Then things were very aggressive there, and that manifested itself into the top in 2022.

And then lastly, I think this is a really pretty neat chart here. Just looking at how ETFs can bring access to different asset classes.

This is unrelated to equities, unrelated to fixed income. But, it's been about nine months or so since the release of the Spot Bitcoin ETF.

They've taken in roughly $21 billion in inflows across the products there. And just comparing that to when the gold ETFs came out roughly 20 years ago, in November of 2004, you can see demand for the Bitcoin ETFs is much, much greater than anything we've seen from the gold ETFs. It took multiple years before they reached a similar level.

And so, I think this will be long lasting demand. I'm curious to see what this looks like as Bitcoin goes through different economic cycles, just as gold has done over the last 20 years. But so far, pronounced demand as investors get access to a new asset class, which is always a great thing for everyone involved.

And so, that's what we have today. I hope this was helpful. And let us know if you have any questions.

This communication was prepared by Strategas (“we,” “us,” or “our”), a brand that offers investment advisory services through Strategas Asset Management, LLC, an SEC Registered Investment Adviser, and provides research to institutional investors through Strategas Securities, LLC, a broker-dealer and FINRA member firm and an SEC Registered Investment Adviser.  This communication represents our views as of 10/08/2024, which are subject to change, and presented for illustrative purposes only. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product.  This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.

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