ETF Wrap: The chicken and the egg, ETFs' record-setting year, and an infrastructure wager (2024)

Of all the bonkers details of the truly bonkers past 10-12 months, there’s one in particular that stands out.

Early last fall, as vaccine euphoria bumped up against concerns that something might go wrong with the roll-out, and as relief over the end of the long presidential race gave way to fears that it might not be decided on November 3, MarketWatch published a series of stories meant to help investors shield their portfolios against big shocks.

Just launched: an ETF made for black-swan moments like these,” which highlighted an options-based stock ETF, the Simplify US Equity PLUS Convexityfund SPYC, -0.03%, ran in early September. On October 1, we followed up with “‘Anything can happen:’ Why the hottest investing trend is playing it safe,” which considered a range of products designed to mitigate big upside or downside risks.

Flash forward five months or so, and stop to consider. Not only was the election contested, but it turned shockingly violent. Not only has the vaccine roll-out been botched, but it’s gone so badly that one public health official has warned of “perpetual infection” for most of 2021.

And what have markets done? In the months since the publication of that first “Black swan” story, arguably an arbitrary moment in time except that it was shortly after a small correction, through the close of business Wednesday, the S&P 500 SPX, -0.07% is up nearly 13%. Bond yields and oil prices have jumped, as have commodities – all normal signs of a growing economy.

It’s a bit baffling – a variation of the old “the economy isn’t the stock market” narrative, to the billionth power. Katie Martin, a Financial Times columnist, this week called it a “boiling frog moment.”

“Investors are proving adept at ignoring signs of the extraordinary,” she wrote. As we said last week, time will tell.

Thanks for reading, as always.

Exchange-traded sundries

  • ETFs had a record year, according to full-year data from Morningstar, released Wednesday. Inflows were $502 billion, with taxable-bond ETFs collecting the most of any category group, nearly $195 billion. Mutual funds saw a record $289 billion of outflows in 2020, yet their $18.2 trillion of total assets at year’s end was still more than three times that of total ETF assets.
  • Vanguard on Tuesday announced it would launch an actively-managed short-term bond fund with the category’s lowest management fee. As MarketWatch has reported, existing funds, like the JPMorgan Ultra-Short Income ETF JPST, are often used as cash management tools.
  • What’s the best way ETF play for the new Biden administration? Many analysts have recommended infrastructure funds on the belief that fiscal spending will boost that sector. But which fund, specifically? An informal Twitter bet between two of the mayors of ETF-land pits the Global X U.S. Infrastructure Development ETF PAVE, -0.29%, Todd Rosenbluth’s pick, against the FlexShares STOXX Global Broad Infrastructure Index Fund NFRA, -0.15%, the favorite of Dave Nadig. So far this year, PAVE is up 7.3%, while NFRA has gained 2.3%. It’s early innings, though.

Is there an ETF for that?

Last June, amid the unrest after the killing of George Floyd, MarketWatch profiled a unique fund. The Impact Shares NAACP Minority Empowerment ETF NACP, -0.24% is the only financial product that explicitly addresses racial inequity, relying on input from the National Association for the Advancement of Colored People to select stocks from companies that follow certain principles, like workplace diversity, collective bargaining policies, community development initiatives, and more.

Recently, after a nudge from a familiar analyst, it seemed to be a good time for an update on the fund. We spoke with Marvin Owens, who was previously the NAACP’s liaison to the fund. In November Owens joined the Impact Shares staff in a newly-created position.

“My goal is to really begin to live out the mission ofImpact Shares, which is a platform for engagement,” Owens said. He plans towork with investors, social advocacy organizations, and corporate America, “notjust to grow assets under management, but to also show proof of concept thatcapital can be used to create social change.”

Here’s a small bit of proof: NACP returned 26% in 2020, trouncing the S&P 500, which gained 18.4%.

Owens says that kind of performance helps make the case to investors that “you do not have to give up returns to make impact.”

There’s still work to do to attract investor dollars. When MarketWatch first covered the fund, there was an agreement in place that once assets hit $20 million, it would start to share proceeds with the NAACP. (As of this writing, assets are just over $21 million). That’s been renegotiated, and the fund will now remit fees once it hits $100 million.

Owens refers to the asset-gathering conundrum in terms that are familiar to many ETF-watchers: as a “chicken and egg” problem. Institutional investors want funds to have achieved certain benchmarks before they’ll consider investing, but it’s often hard to get there without deep-pocketed investors.

Owens isn’t fazed, though. The fund is coming up on its three-year anniversary, which is one of the goalposts investors often want to see, he said. “We’re really in a mode of getting out there and talking to people, being in the marketplace, representing the fund and raising its profile.”

Read next: There is no such thing as ‘passive’ investing in an America so deeply scarred by racism, says Rachel Robasciotti

Visual of the week

ETF Wrap: The chicken and the egg, ETFs' record-setting year, and an infrastructure wager (1)

Graphic courtesy of Statista; original found here.

Weekly rap

Top 5 gainers of the past week
Global X Cannabis ETF POTX, -0.38% 20%
ETFMG Alternative Harvest ETFMJ 14%
Cannabis ETF THCX, +1.29% 12.7%
Amplify Seymour Cannabis ETF CNBS, -0.80% 11.1%
Global X MSCI Nigeria ETF NGE, +1.52% 7.9%
Source: FactSet, through close of trading Wednesday, January 20, excluding ETNs and leveraged products
Top 5 losers of the past week
iShares MSCI Global Silver Miners ETFSLVP -7.9%
ETFMG Prime Junior Silver Miners ETF SILJ, +0.22% -7.6%
Global X Silver Miners ETF SIL, +0.12% -7.3%
United States Natural Gas Fund LP UNG, +0.20% -6.7%
Global X Gold Explorers ETF -5.6%
Source: FactSet, through close of trading Wednesday, January 20, excluding ETNs and leveraged products
Top 5 biggest inflows of the past week
iShares Core Total USD Bond Market ETF IUSB, -0.13% $2.9 billion
iShares MSCI EAFE Value ETF EFV, +0.27% $2.35 billion
Financial Select Sector SPDR FundXLF $1.73 billion
iShares Core MSCI Emerging Markets ETFIEMG $1.34 billion
SPDR Dow Jones Industrial Average ETF Trust DIA, +0.16% $1.27 billion
Source: FactSet, through close of trading Wednesday, January 20, excluding ETNs and leveraged products

MarketWatch has launched ETF Wrap, a weekly newsletter that brings you everything you need to know about the exchange-traded sector: new fund debuts, how to use ETFs to express an investing idea, regulations and industry changes, inflows and performance, and more. Sign up at this link to receive it right in your inbox every Thursday.

As an expert in finance and ETFs (Exchange-Traded Funds), I can confidently analyze and provide insights into the concepts used in the article you shared. My expertise is based on a comprehensive understanding of financial markets, investment strategies, and the dynamics of ETFs. Here are key insights related to the concepts discussed in the article:

  1. Black Swan Moments and Risk Mitigation: The article mentions the introduction of an ETF designed for black-swan moments, specifically the Simplify US Equity PLUS Convexityfund (SPYC). This ETF employs options-based strategies to mitigate risks associated with unexpected and extreme market events. The concept of using ETFs for risk management is crucial for investors, especially during periods of uncertainty, such as the contested election and challenges in the vaccine roll-out.

  2. Market Performance Amidst Uncertainty: Despite the tumultuous events mentioned, including the contested election and vaccine roll-out challenges, the article notes that the S&P 500 has shown resilience and is up nearly 13%. This highlights the often complex relationship between market performance and real-world events. Investors must carefully navigate such situations, and ETFs like SPYC are presented as tools to help them do so.

  3. Record Year for ETFs in 2020: According to Morningstar data, ETFs had a record year in 2020, with total inflows of $502 billion. Taxable-bond ETFs attracted the most significant inflows, amounting to nearly $195 billion. This indicates a growing trend of investors turning to ETFs as investment vehicles, possibly due to their flexibility, transparency, and diversification benefits.

  4. Vanguard's Actively-Managed Short-Term Bond Fund: Vanguard's announcement of an actively-managed short-term bond fund is noteworthy. Such funds, like JPMorgan Ultra-Short Income ETF (JPST), are often used for cash management. The emphasis on actively-managed funds suggests a desire for more dynamic strategies in fixed-income investments.

  5. ETFs for the New Biden Administration: Analysts recommend infrastructure funds as a potential play for the Biden administration, anticipating increased fiscal spending in the sector. Two ETFs, Global X U.S. Infrastructure Development ETF (PAVE) and FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA), are mentioned in a Twitter bet between industry figures. This reflects the ongoing interest in thematic investing based on political and economic developments.

  6. Socially Responsible Investing (SRI) through ETFs: The article introduces the Impact Shares NAACP Minority Empowerment ETF (NACP), highlighting its unique approach to addressing racial inequity. The ETF selects stocks based on principles like workplace diversity and community development initiatives, showcasing the growing interest in socially responsible and impact investing through ETFs.

  7. Weekly Market Performance: The article provides a snapshot of the top gainers and losers in the past week among various ETFs. This information gives investors insights into short-term market trends and performance.

  8. Inflows and Outflows: Data on the top five biggest inflows and outflows in the past week, including popular ETFs like iShares Core Total USD Bond Market ETF (IUSB) and Financial Select Sector SPDR Fund (XLF), offers a glimpse into investor sentiment and preferences.

In summary, the article touches on diverse topics within the realm of finance, including risk management, market performance, ETF trends, and socially responsible investing. Analyzing these concepts provides valuable insights for investors navigating the complexities of the financial markets.

ETF Wrap: The chicken and the egg, ETFs' record-setting year, and an infrastructure wager (2024)
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