ETFs & Markets with Todd Sohn: Where Might Q4 Take Us?

So you may have heard that ETFs, as an industry recently crossed $10 trillion in assets under management. I would note that actively managed ETFs are now over $800 billion in assets.

That's as of the beginning of October. Roughly 8% of overall industry AUM fixed income is at about 14%. That has been accelerating for quite some time, but now you're starting to see equity ETFs - actively managed equity ETFs - really start to pick up steam, too. And that's going to be in the forms of your typical stock-picking - concentrated stock funds, as well as more derivative-heavy type products.

You can see that here on this chart (below), which is just showing the proliferation of actively managed ETF products out there.

Specifically, over the last four years, you've really seen a lot of active equity, fixed income, and then what is labeled as nontraditional, basically being products that might be super concentrated and then have to use derivatives, such as swaps to gain the exposure.

Curiously, this is actually happening while there is now a 24-year low for the number of actively managed equity mutual funds; there's still roughly 3,800 of those. We're not there yet on the ETF scale, at all, but the trade off is clearly happening. There's a shift from mutual funds to ETFs ongoing. We suspect that this is going to play out throughout the rest of the decade.

Now, as for broader equity ETF flows, 2024 is right on the heels of the record year for 2021.

I think we're going to come pretty close to here without being able to really forecast. The fourth quarter historically for equities is pretty strong. But of course, there are some catalysts and hurdles in front, such as the election in a few weeks.

So we'll see if we hit that record. But I will say you’re getting pretty close to a record overall for the entire industry, given the robust demand for fixed income products and other areas such as crypto currency.

Now at the sector level, demand for technology-related ETFs has cooled over the last couple of weeks.

That's helpful given how hot those flows have run throughout the year.

I'm curious to see if demand picks up for cyclical sectors, which have been rangebound at the flows level, and then there's really not much going on for defensive such as staples, utilities, and health care. You could make the case for a contrarian idea there into 2025, but we're yet to see really any sort of momentum inflection from those sectors.

And speaking of cyclicals, I remain pretty impressed that industrials are leadership here. They've been really great all year, especially as a complement to the dominance from tech for majority of this cycle.

But industrial sector flows don't really reflect much enthusiasm, which is surprising when you went back to say the 2016, late 2016, post-election, there was a surge in demand for industrials.

And even throughout 2020, there was a pretty good surge. But not this time, despite how well most of that sector has traded. The new absolute relative high for the sector on an equal-weight basis. You're not seeing a terribly overly aggressive attitude towards the industrials. So we think that support of into the end of the year, I'm curious if that translates over to financials as well, which is a very similar scenario.

So again, cyclical positioning overall in assets having seen those flows break out, we get more worried when those start to get much more aggressive. So, that's what we have today; I hope this was helpful and let us know if you have any questions.

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