ETFs: ‘Value might not perform as well against growth’ in 2023, expert explains

VettaFi Head of Research Todd Rosenbluth joins Yahoo Finance Live to discuss 2022 ETF inflows, equity and fixed-income markets, ETF trends, investor sentiment, Fed rate hikes, a recession, and the outlook for ETFs in 2023.

Video transcript

DAVE BRIGGS: ETFs just closed their second most active year ever. In all, $611 billion flowed into the ETF industry during 2020, according to data from Vettafi. So what's in store for 2023? Joining us now to discuss is Todd Rosenbluth, Vettafi's head of research. Good to see you, sir. So we're about done looking back on last year, but in how that informs the future, what do those inflows tell us about what's coming to the industry?

TODD ROSENBLUTH: Well, we saw a number of bright spots within 2022 that make us encouraged heading into 2023. Of course, remember, we had a down year for equity and fixed income markets. So the second best year ever is impressive.

We had a record year for actively managed ETFs, a record year for smart beta ETFs, a record year for value oriented ETFs. And these are all trends that are set up as we look towards 2023. And as we had, at the team at Vettafi are putting together the Exchange ETF Conference, how we're setting the agenda so that advisors can stay informed about what these trends have, as we look towards the future.

SEANA SMITH: Well, Tom, what are you hearing from advisors? And how has or has the conversation changed at all from 2022 to what we look ahead here for 2023?

TODD ROSENBLUTH: So 2022, as mentioned, was a year where value was a strong performer. Value index-based products outperformed growth alternatives. The S&P 500 value outperformed the S&P 500 growth by over 2,000 basis points. Similar outperformance for the Russell 1,000 value versus growth. And advisors are telling us they believe that value is going to continue to outperform in 2023. We did a survey of advisors. And value significantly was more popular than growth.

What's concerning to us about that, not that people are confident in value, is that the value indexes are rebalanced and reconstructed, certainly the S&P 500 based ones, at the end of 2022. So what used to be in a growth index is now in value. What used to be in a value index is in growth. So let me give you a couple of examples. ExxonMobil and Chevron and UnitedHealth, these are typically value oriented stocks that helped the iShares S&P 500 value ETF, IVE, be a significant outperformer.

They are no longer in IVE. They're now in IVW, the iShares S&P 500 growth ETF, whereas companies like Amazon and Microsoft are now found within the iShares S&P 500 growth index-- I'm sorry, in the S&P 500 value index ETF. So value might not perform as well against growth because of what's inside the portfolio. So we can see here names you probably wouldn't expect to see within a value portfolio, like Microsoft and Amazon and Meta Platforms, a long time growth company, but that has fallen out of favor with many investors.

DAVE BRIGGS: So anything, trends to avoid in '23?

TODD ROSENBLUTH: So we expect that the Federal Reserve is going to continue to raise interest rates as we start 2023, but then perhaps slow down. So I think investors are trying to rethink where their fixed income exposure is going to come. In what form are they willing to take on interest rate risk or not? And we could see products that are more rate sensitive. So products like the iShares three to seven-year Treasury ETF or longer term products like TLT, the iShares 20-year Treasury ETF, if they're concerned about recession.

But we think investors are going to be steering clear of some of those short-term oriented products. And as we are looking to pivot in 2023, advisors are top of mind as to how they move their interest rate sensitivity, looking out into the rest of the year.

DAVE BRIGGS: All right, excellent advice there. Thank you, Todd. Appreciate that. He's from Vettafi, head of research. That's the ETF Report brought to you by Invesco QQQ. Appreciate that, Todd. All right--