What's in Store for ETF Investors in 2022

Happy 2022 to all of you and all of yours. And what a year for investors, especially U.S. stock investors, the S&P 500 closed down 2021 with a gain of 28%, hitting 70 record highs along the way. It was the third straight year of double-digit gains for the index and the Dow gained 19%, while the NASDAQ posted a 22% gain, the major averages posting their best three-year performance since 1999.

And the big got bigger almost everywhere you looked across capital markets. The five biggest stocks in the S&P 500 have accounted for more than half of the S&P 500's gain since April. Those include Microsoft, Nvidia, Apple, Alphabet, and Tesla. If you own those stocks or the big indexes in ETFs in 2021, you had a terrific year. If you chase meme stocks through their wild journeys or bought highly hyped IPOs out of the gate, you had a more challenging year. The biggest ETFs got bigger, and so did the biggest wealth managers, like Vanguard, Fidelity, and BlackRock.

Meet Tom Lydon

Tom Lydon is president of Global Trends Investments, editor and proprietor of ETFtrends.com. With more than 25 years of experience in asset management, Mr. Lydon began his career with Fidelity Investments Institutional Division prior to launching Global Trends Investments and ETF Trends. As the author of iMoney and The ETF Trend Following Playbook, Mr. Lydon is a highly sought-after speaker. His frequent appearances on CNBC and Fox Business make him one of the most recognized and well-respected commentators in the ETF industry. Mr. Lydon has been a high-profile presenter at the largest industry trade shows and investment conferences, as well as a moderator of webinars.

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Do you hear that? That's the sound of the thundering herd of global investors who have piled into exchange-traded funds (ETFs) over the past two years. For the first time ever, annual global net inflows into ETFs topped $1 trillion in 2021. This brings total global assets invested in ETFs to $10 trillion, more than twice their value at the end of 2018. The choices for both retail and institutional investors are endless. There's an ETF for just about anything you can securitize, and you can securitize almost everything.

Caleb:

"So what's in store for ETF investors in 2022? Let's go right to the expert, the one and only Tom Lydon, the CEO of ETF Trends, and a good friend of ours here at Investopedia. Welcome to The Express, Tom."

Tom:

"Hey Caleb, Happy New Year."

Caleb:

"Happy New Year to you. And before we jump in, we should let folks know that you and I are hosting our first-ever ETF Summit this Wednesday, January 5th, at 1:00 PM Eastern Time. It's 90 minutes with some of the smartest people we know in the investing in ETF universe, where we're going to explore what's next for tech, crypto, ESG, fixed income, global investing, and more. It's free to everyone. And there are already thousands of people signed up. So go to ETFTrends.com/webcasts to sign up. Tom, I'm so fired up for our ETF Summit this week."

Tom:

"It's going to be a blast, Caleb. And getting all of our friends, the ETF nerds, together to really celebrate a great year in ETF of flows, but most importantly talk strategies for '22."

Caleb:

"I know. There's so much to talk about and we have some amazing people on the docket to take questions and we've gotten hundreds of questions already. 

"Tom, let's set the stage for 2022. Given what we so far, we know we're going to be in a rising interest rate environment. There may or may not be more government spending. There's probably going to be more crypto adoption, and there's definitely going to be more ETFs. But from where you sit, what are the big things you are seeing on the horizon?"

Tom:

"Well, first of all, the demand for ETFs probably aren't going to slow down because as you've pointed out, we've got all invested asset classes covered. I think there's a lot of positivity in the marketplace right now, even though there's a little bit of concern about stock valuations. The good thing, even though it was a killer year for the market, it wasn't overly dominated by FANG stocks. They did well. And as you know, FANG stocks make up about 25% of the market cap in the S&P 500, and about 50% of the market cap in the NASDAQ 100. But even the equal-weight S&P 500 was up almost as much as the S&P. Value was up almost as much as the S&P. So being able to see advancement in all types of stocks in 2021 was very positive.

"As you point out, concerns about inflation and also rising interest rates isn't that great for growth stocks. But if smaller companies or value stocks actually get to see some love as many advisors and investors are diversified in those areas, that's really positive. I think the big concern is on the other side of the balance sheet. It's on the fixed income side. Inflation is not good for bonds. Rising rates are not good for bonds. The ag lost money this year. And when you talk about real rates of return, it's challenging, because there are hundreds of billions of dollars that are tied to the ag.

"And you think about those that are getting close to retirement, or in retirement, that right now, after 30 years of declining interest rates, are feeding off of very low yields. But now they're in the situation where rates rise, they can actually lose money in their fixed income portfolios. So, advisors and investors, they're reacting. They're pushing more money into cash. Money market rates are low, but they've got $7 trillion in them right now. Passbook accounts and banks are $15 trillion. It's definitely a concern to the marketplace, probably one of the biggest concerns that we've seen in fixed in decades."

Caleb:

"Yeah. Been tough for those folks who have been counting on it. And we know that advisors and investment strategists have been leaning more towards the heavier equity side of the portfolio. Anyway, that 60-40 notion is a 20th-century thing, for many people out there, even though so many folks depend on that fixed income. Back to what you said about the most sectors of the market doing well. You had that rebound and energy, obviously a very big deal. That was probably helpful there, but you do want to see that kind of balanced scoring like on a basketball team. You want a bunch of players with double figures and some steals and some rebounds. But is there a part of the market that got a little too swollen, that looks vulnerable in 2021, as we head into the new year where investors were piling in, and now, it seems like they can't get out fast enough, or it seems a little top-heavy?"

Tom:

"We know areas, including the fixed income area, the marketplace that was challenged, areas like China. China and China-related ETFs, especially tech-related China ETFs took it on the chin in a big way. And also after a really good year in 2020 for disruptive technology, Cathie Wood and the folks at ARK, and any other folks that had those thematic ETFs did really, really well in 2020. Started off the year strong, but coming out off of the highs. In February, gave a lot back. So the big question is, as we look at those innovative strategies, future-looking companies, the future FANG stocks, are they dead or was it a natural correction in a very growth area? And might that be a buying opportunity? I think those are going to be some of the big of questions going into next year.

"I wouldn't bet against Cathie Wood. I wouldn't bet against China. China's going to come back as well. But I think from a safety standpoint, we definitely saw some volatility in some of those hot dots. And then we could talk about crypto. It was a great year for crypto and ETFs with this innovation of Bitcoin futures-based strategy ETFs. There were three of them that launched. The biggest launch in ETF history, as far as getting to a billion dollars in a matter of days with the pro shares, BITO ETF. Pretty amazing when you look at the space, but then again, the big question is, will we see the spot based Bitcoin ETF in 2022? That's the big question."

Caleb:

"Yeah, listeners will remember we had Jan van Eyck on the podcast not too long ago. Talking about van Eyck's new offering, which is tied to Bitcoin futures like a lot of folks frustrated that the SEC's sitting on their hands in terms of approving, or at least giving guidance on a spot related Bitcoin ETF, where you could actually trade the price, not the futures of Bitcoin. But do you expect some of that regulation to ease or tighten in 2022? Because we know the SEC's got a pretty firm eye on cryptocurrency. On the exchanges themselves, and on a lot of these ETFs and other related products that are coming out do you expect that to tighten, or do you think we'll see some loosening and see some more new products for investors out there?"

Tom:

"Unfortunately, right now, I think the message from the SEC and Gary Gensler is he's given the market what they wanted, not everything that they wanted. They have access to an ETF. He has trust in the 40 act fund strategy. It's regulated. He has trust in the futures-based strategy, as well as he spent a lot of time at the CFTC organizing and regulating that area of the market. So with that in mind, you're now in a situation where there's a choice.

"You can buy an ETF in your fidelity or your Schwab account. It correlates pretty well to the spot price, but there's also other trust opportunities. So people also can come in and buy GBTC through Grayscale. They also have an Ethereum product there. Or many people are going to Coinbase and setting up their wallets. So I think from a comfort standpoint, the SEC feels really good about options. And it's going to take probably not months, but maybe years before we eventually see a spot Bitcoin ETF."

Caleb:

"Let's go global for a sec. Tom, the U.S.-dominated in terms of returns index returns in 2021, but there were some countries that had very strong years from an ETF perspective, like Norway, given oil prices and some others. What do you expect in 2022?"

Tom:

"It really has been a U.S.-only market in the past 10 years. Developed markets have struggled. And maybe part of that is we've had such a growth-oriented marketplace and more growth-oriented stocks tend to be domiciled in the US. Valuations overseas are relatively cheap, almost 40% off compared to the S&P 500. It would make sense from a diversification standpoint to be there. If you are a diversified investor, there are a lot of great choices. The other thing is emerging markets are even cheaper from a relative standpoint, and they're going to have that much more growth going forward.

"So if you've got the patience and you have the long-term outlook, there's some good bargains to be picked off if you have more of a home country bias in your portfolio. And the average investor has a very high correlation to the S&P, as you know, Caleb, it makes sense as long as that's winning. When it's not winning, you're going to start shaking your head. So the best thing to do is diversify when you're overweight in the winners because those losers will eventually pick up. And then also, small caps. Small caps, over the long term, outperform large caps, but that hasn't been the case in the last 10 years. Looking at the small cap of the Russell 2000, they're also, from a valuation standpoint, cheaper stocks available that will eventually catch up."

Caleb:

"But the big got bigger, not just in stock land where the FANG stock again are so concentrated, and you have Microsoft, and you have Tesla in there now as well. Concentration across the big indexes, the market-weighted indexes, but also concentration ETFs, where the big ETFs got bigger in 2021, just like they did in 2020. And you know who they are. A lot of folks are invested in them actively or passively. Is this just the land of the giants? And they're still, you can make some money in some smaller ETFs, but really, we live among the giants here?"

Tom:

"Well, eventually the market reverts to the meat, and it has been an incredible 12 years coming out of the financial crisis for large-cap stocks. Diversification, though, is going to be important. And there are so many people out there that have been at this for decades that understand boy, you can buy some cheap stock value, for example, in the last 10 years, that's just drastically underperformed growth. And for those that have hung on there, hasn't been a reward. But eventually, they feel that it'll be there. On the other hand, there are some that are saying the dynamics of the marketplace has changed. Technology is moving at such a fast rate that the Cathie Woods of the world and the thematic disruptive technology company are areas that you have to be in. Because even though you might see more volatility and some larger pullbacks from time to time, that's okay. Because if you want to be in those future FANG stocks, you've got to make some commitments now."

Caleb:

"Anything on the regulatory front that ETF investors need to know about going into the new year?"

Tom:

"Well, the neat thing is the regulatory landscape for ETFs have just gotten easier, more accommodating. The great thing is more and more issuers are coming to market. For example, if you're an investment advisor it's not difficult for you to launch your own ETF. And one thing that you're going to start seeing is a lot of large- and medium-size financial advisors that use ETFs in client portfolios are actually going to be creating their own ETFs, Caleb, you and I could create an ETF if we wanted to. In fact, maybe we should, but with that in mind, there's so, so much more creativity that's out there. It's so much easier to bring good ideas to market. And as you pointed out ear earlier, there's a ETF for everything."

Caleb:

"Right. So I'm not creating one with you unless we come up with the best ticker out there, because it's all about the ticker for me and what you can put on a t-shirt. So we got to put some thought into that, but why not? How do retail investors take into account what they should be paying attention to when they're making choices? If you're looking at that top five checklist for the individual investor when they're examining an ETF, considering an investment, Tom, what do you recommend?"

Tom:

"Yeah. Well, first of all, it's nice and entertaining to talk about the hot dog like crypto, but it's only going to be a small portion of an advisor client portfolio or individual investor portfolio. So let's make sure we hone in on that. The other thing is the core positions are really what's going to provide that growth in the future. So for example, even though we had almost a trillion dollars in new money come into ETFs in 2021, over $100 billion, came into the top three S&P 500 ETFs. So the story is more of the big ones, continue to gain the assets, make sure you're properly allocated in the core. At the same time, and this is one of the big things we're going to be covering when we get together with our team later this week, it's going to be about strategy for the new year.

"So some big themes are going to be inflation and rise, interest rates. So what do you do about your fixed income portfolio? What do you do about the 60-40? Many advisors and investors are moving to 70-30, or even 80-20, because it's not safety to have big fixed income allocations. What are areas that do well during times lie when inflation is hot? We really haven't seen inflation hot since the '70s.

"But we know that areas like commodities, energy, agriculture, carbon has been hot. And even there's a case for crypto there as well. So there are a lot of commodity strategies out there that did really well in 21. Carbon is an area that as we are looking to have a cleaner world, there's going to be more and more focused on carbon futures that are out there and it's a tradeable area of the marketplace. It's done very, very well. Clean energy, green energy. ESG exploded in '21. There are many people, not just baby boomers, but young investors, that are saying, "Hey, I want to have a diversified portfolio, but there's certain stocks that I really don't want to get behind. And I want to clean up my portfolio." You can do that today very inexpensively and you don't have to give up performance."

Caleb:

"Yeah. I wanted to talk to you about that. So ESG is obviously a big theme and our listeners know that, well, we have the green investor podcasts that we recently launched to get into it and talk about it a lot, but that screening and that notion of have it your way, you and I are old enough to remember the Burger King commercials, "Have it your way." And investors can have that these days, there are platforms like Canvas that allow you to screen companies in and out of your portfolios, or your advisor could do it for you. But more and more of that.

"And then ESG is being unpacked more to realize that there are some companies that are in some of the top ESG funds, as our listeners know, that would surprise you that they made it in there because they're either oil producers or they consume a tremendous amount of energy for what they do. So that whole thing needs to be unpacked some more. But Tom, would love your hot take for 2022. Didn't prompt you for this one. Just going to give it to me hot. What do you think that could happen in 2022 out of nowhere that may surprise us?"

Tom:

"I think back to fixed income. Investors are not ready for Verizon interest rates. They're not ready for what that's going to do to portfolios. I'm still kind of shocked by the amount of money that is in 401k plans that in target date mutual funds. So remember, if you were set to retire in the next couple years, your target date mutual fund that happened to be, let's call it a 2025 target date mutual fund, probably more than half, 50%-60%, would be in bonds because you're retiring at that point. You're not going to have more income. It's important that you keep that safe.

"Well, that 50% or 60% is not going to be safe in a rising rate environment, number one. And number two, if you're 65 years old, there's a great chance you're going to live to 85. And if you've got another 20 years, why wouldn't you have a greater percent of that allocation in growth, or in value stocks, or dividend-related stocks where you can actually offset the low rate that we have right now in the threat to fixed income? So I think the big eye-opening event that we will happen is when we start to see rates kick in and people see how that has a negative effect on their portfolio, they're going to play catch-up. And when they all head to the exits to sell fixed income at the same time, it's all going to be exacerbated."

Caleb:

"It's going to be another one of those extremes. And years full of extremes here comes another one. But I think you're absolutely right about that. Tom, you know we're a site built on our investing terms. What's your favorite investing term and why? Which is the one that just speaks to your heart and makes you love doing what you do?

Tom:

"I think inflation. For the year, I know that's one of your top terms. But understanding inflation and you guys do a great job with terms. Understanding that inflation is based on declining of purchasing power. And if we've seen some pretty high inflation numbers right now, understanding that in the fixed income area, people say, "Well, I'm going to make 2% or 3%." Well, that's great. And even if you can maintain that, first of all, that's not safe. But if you calculate it from a real return standpoint, if you've got an inflation rate that's 5%, you've got to chop that off the real return number as well. So understanding inflation is almost as critical as understanding what inflation rising interest rates can do to fixed income. Hey, I'm sorry I'm nerding out on the fixed income side."

Caleb:

"Oh, come bring it. We love it."

Tom:

"... but it's really key and critical for people to understand that."

Caleb:

"Yeah. Don't worry about nerding out with Investopedia. We go there and we love it. So folks, if you love this and you want to hear more about ETFs, you got to join Tom and I and about a dozen of the smartest people we know this Wednesday, January 5th, at 1:00 PM Eastern Time. It's a 90-minute free ETF Summit, and we're going to be going over all of these themes and more. You can register for free. So go to www.ETFTrends.com/webcast/ETFs-2022. And we would love to see you there. Bring your questions. Tom, thanks so much for joining us on The Express, and follow Tom Lydon, follow what the folks are doing over there at ETF Trends and ETFDB. So much good information there for investors. Thanks for being with us."

Tom:

"Thanks Caleb."

Term of the Week: January Effect

This week's term comes to us from Numan in Hyattsville, Maryland, right there in lovely Prince George's County. Numan, the January Effect for this week, and why not? According to my favorite website, the January Effect is a perceived seasonal increase in stock prices. During the month of January. Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors engaging in tax-loss harvesting to offset realized capital gains prompt a sell off. Another possible explanation is that investors use year-end cash bonuses to purchase investments to start the year. Since 1938, 29 out of the 30 years of gains seen in January resulted in average yearly S&P 500 advances of 20%. In other words, a strong start to the year is usually a good sign that the rest of the year will also be strong.

On the other hand gains in January, mostly come if December was strong. So if there's momentum coming into the new year, the January Effect usually plays out. But the bottom line for investors like us is that calendar indicators like the January Effect, the Valentine's Day Indicator, the Santa Claus Rally, they're interesting and they're noteworthy, but they should not be the foundations of our investing strategy. We should be aware of them, but let's stick to our own consistent investing strategies.

Good suggestion anyway, Numan. Socks are coming your way to warm up the new year.