ETFs: Gold ‘tends to be a second-half player’ in inflationary periods, expert says

VettaFi Vice Chair Tom Lydon joins Yahoo Finance Live to discuss the best investments for 2023 and the opportunities in gold ETFs.

Video transcript

DAVE BRIGGS: We're nearing the end of the first quarter and checking in on ETF investments so far. Year to date, ETF flows are $90 billion, according to VettaFi. Joining us now is Tom Lydon, VettaFi Vice Chair, in this week's ETF report, brought to you by Invesco QQQ.

Great to see you, sir. Inflows at that level tells you what lies ahead?

TOM LYDON: Hey, David. Yeah. OK year so far for ETF flows. We're running at about $90 billion. That puts us about $360 billion for the year, which is drastically under last year, where we had $600 billion.

A couple surprises. We've seen some nice equity flows; however, the key thing is more money has been going into international equity ETFs than domestic ETFs. And a lot of that's because of the valuations that you're getting overseas. We are seeing a pickup in demand for fixed income ETFs. And a lot of that might be tied to the Fed and the job that they're doing so far in battling inflation.

SEANA SMITH: All right. Well, Tom, it's the Final Four this weekend, so much hype around the games that are going to take place starting on Saturday. So we asked you to break it down, the top four ETF plays that you see for the rest of the year. And we have a bracket here to put up on the screen, highlighting the four ETFs that you see as outperformers for this year.

So let's start it off at the top left hand corner, Vanguard Total Bond Market ETF. Why do you like it?

TOM LYDON: Yeah. Well, first of all, the Fed has done a pretty good job so far. And a lot of advisors and investors are going in with the idea that they may not see yields as high as they are a year from now. So going longer and lower credit quality is something that you can get in a diversified bond ETF. This is the biggest bond ETF out there, with $90 billion.

However, I think it would lose out to the biggest regional bank ETF. I mean, this ETF is down 30% off its high from early February. I think when we look back and see what's gone on, there are a few outliers that maybe, whether it's creative accounting or lack of oversight, might have spoiled that pool for the rest of us. Hopefully, there's a little bit more confidence in that marketplace. I think we're going to see this market come back.

And most importantly. during times of rising interest rates regional banks actually make more money on the lending side then their bigger bank brothers, who make money, yes, in lending, but more also on trading and investing. So I would say the SPDR Regional Bank ETF, KRE, will win out on that one.

DAVE BRIGGS: Yeah, we've been focused on that one just about every day. I would equate those two to kind of the Miami- UConn side, that could have seen that coming. On the other side of the bracket, I did not see coming the Florida Atlantic-San Diego State. And there you have Wisdomtree up against gold. Tell us about that match-up.

TOM LYDON: Yeah, I think Wisdomtree would be Florida Atlantic. And again, with the camp-out that Xi and Putin had recently, talking about Putin's support of the Chinese yuan. I mean, putting that into perspective, the core global currency is the US dollar. Most central banks have about 60% of their allocation to the US dollar, compared to only 3% to the Chinese yuan. This move is not going to really move markets at all or cause any type of stress.

So I don't really feel that the Chinese yuan is really something to invest in long term. It might get a little bit of a bump from this, but the reserve currency will continue to be the US dollar. And you put that up against gold. Gold recently peaked above $2,000. We all know that. It tends to also be a second half player during times of inflation. And there have been plenty of times when inflation has last, not just a couple years, but five or six years. I think we may be in that situation.

And back to our friends over in Russia, in selling dollars, what do they do? They bought a million ounces of gold. So central banks are continuing to do that. It comes down to supply and demand. And when you look at demand, it's all around. Jewelry demand across the world, and also, during times of uncertainty, we also see more demand as well.

There's only so much gold out there. It costs a lot to get an ounce of gold out of the ground. And frankly, gold hasn't done anything in 10 years. It was the worst performing commodity that we've seen over the last 3 years, when commodities in general did well.

So I think it's gold's time. If gold doesn't do well during this period of time, I think we're all going to be wearing Bitcoin necklaces in the next couple of years.

SEANA SMITH: All right, Tom. So we've got the final match-up up on the screen, the championship here. The regional bank ETF, KRE, versus the gold ETF that you were just talking about the bullish case there, GLD. Who's going to be the champion?

TOM LYDON: Yeah. I think it's going to be gold. I've got a lot of faith in regional banks coming back. I think we're going to see some of the big banks actually going in and snapping up some of these regional banks. However, gold is an asset class that's been with us not just for decades, but for centuries.

And to the fact that it really is expensive to get gold out of the ground, which is going to help increase the price of gold, this is the time for gold. And I think between now and the end of the year, we're going to see gold have a pretty good move.

DAVE BRIGGS: You've got to tell us who wins the real Final Four. You got UConn? You got Miami? Who you got?

TOM LYDON: I actually saw Connecticut and Gonzaga last week in Las Vegas. Connecticut looks really, really strong. I'd go for Connecticut.

DAVE BRIGGS: Dan Hurley. Yeah, they dismantled the Zags, didn't they?

Tom Lydon, always great to see you. Terrific work on the final four of ETFs.