Bond ETFs ‘are not a great place to be’ amid market volatility: Expert

ETF Think Tank Director of Research Cinthia Murphy joins Yahoo Finance Live to discuss ETF positions against the current market's volatility, as well as energy commodities and stocks.

Video transcript

SEANA SMITH: The retail sector and some of those bigger names like Target and Walmart among the worst performers in today's massive selloff. Again, all three of the major averages in the red right now. The XRT, the retail ETF, that's off just over 8%. So we want to talk about what all this means here for the ETF space. And for that, we want to bring in Cinthia Murphy, ETF Think Tank director of research. And Cinthia, it's quite an exciting day to have you on when you're taking a look at losses of this type of magnitude. But what do you make of the selling action that we're seeing today?

CINTHIA MURPHY: I mean, it's always shocking to see this much red all at once. I mean, we keep hoping to turn the corner and get back to the things we like to see, which is green and it just doesn't happen. I think what we keep seeing in the ETF space is just this dilemma. Is this the bottom? Is this not the bottom?

And at any signal that it could be the bottom, we, all of a sudden, see a resurgence in buying and people looking to maybe talk this market into stop declining. But then, like we saw a little bit yesterday, and then today is just back to things are not actually looking better, and the selling resumed. So it's been a really tough market to watch everything, for sure.

RACHELLE AKUFFO: But then when you have these kind of drops day after day, these kind of wild swings, what's the defensive play here in terms of ETF sector action?

CINTHIA MURPHY: You know, what we're seeing people do primarily is, I mean, there's not a lot of things that are working. We've heard this line throughout 2022, which is, actually, all the hedges are failing. There's no place to hide, these kinds of really hyperbolic statements. But they're really reflected the sign of, what do you do? So if you look at just the last week and to the last month, so, you know, last couple of weeks, there's been a lot of money that, all of a sudden, is going into your short-term bond funds.

That's, like, the closest you can get to a money-like allocation, but picking up a little bit of yield. It's that fixed income exposure, which is considered your traditional safe haven, with the minimum amount of duration risk you can possibly get because rates are going up, so bonds are not a great place to be. So within that spectrum, the short dated bonds are picking up a lot of assets. I mean, we see some of these funds pick up, just three of them, BIL, SHV, have picked up, like, $5 billion in a week. So it's really a space that's heating up as people look for safety.

We've also seen a lot of demand for dividend ETFs because, again, it's, let's try to generate some income. Everything else is going down. So let's find things that bring a little bit of cash to your pocket. So dividend ETFs, especially high dividend yield ETFs, has been really popular this year, and people keep putting money into that space. So it's been really, like, a little bit of trying to find ways to diversify your risk a little bit and find plays that can help you in that space.

SEANA SMITH: Cinthia, you mentioned the hunt for dividend ETFs. I'm curious what the role you think energy has played in this because energy has been an outperformer. We had oil above $100 a barrel. Is that a significant driver of the interest that we're seeing there?

CINTHIA MURPHY: Yeah, that is fascinating because from a sector perspective, it has a massive performance this year. And yet, if you look at actual energy ETFs and oil ETFs, you don't see a lot of money going there. So energy has really been the played out through the high dividend ETFs, which tend to right now have a really high allocation to energy stocks, which are generating really strong dividend yields.

So people have played energy through that vector, and they have played energy more through the value ETF factor, so ETFs that are out there looking for relatively attractive value stocks. So value ETFs have a lot of allocation to energy right now because energy has been beaten down for so many years. So people have really accessed that energy story through your dividends, through value ETFs, more so than directly through oil and energy ETFs. So it has been kind of an interesting indirect play. But for dividend yield, energy is a big component this year because it's done so well.

RACHELLE AKUFFO: And I want to shift gears and talk about what you've seen in terms of the record inflows into ETFs over the last two years. You say that year to date, asset creation in ETFs is now lagging year earlier levels, at about $200 billion year to date versus $350 billion in the same period in 2021. Why is that happening? And when you factor in things like some of these quarterly earnings, what is your outlook?

CINTHIA MURPHY: You know, I think it's fascinating because throughout all the market turmoil, as we've seen, from 2008 on, you always see that ETF investors, more investors, not just ETF investors, have really turned to ETFs to allocate and be tactical because ETFs are so liquid. They're easy to get in and out. So they're attractive vehicles to express any kind of market sentiment. What's been interesting in 2022 is that assets, the pace have really slowed down. So I think it's just, it just speaks to investors are reluctant to put more money to work in the market.

So it's not about ETFs as much as it is just by an overall risk aversion at the moment. I've been talking to people. More and more people are telling me they're just starting to park their assets into cash, because they don't know what to do with this money. And I think we're starting to see that in the overall ETF flows. They're slowing down because there really is no great place to put your money to work today, with all this much red across the board.