ETF Inflows Top $1 Trillion for First | Stock Market News Today

A historic surge of cash has swept into exchange-traded funds, spurring asset managers to launch new trading strategies that could be undone by a market downturn. 

This year’s inflows into ETFs world-wide crossed the $1 trillion mark for the first time at the end of November, surpassing last year’s total of $735.7 billion, according to Morningstar Inc. data. That wave of money, along with rising markets, pushed global ETF assets to nearly $9.5 trillion, more than double where the industry stood at the end of 2018.

Most of that money has gone into low-cost U.S. funds that track indexes run by Vanguard Group,

BlackRock Inc.

BLK 0.66%


State Street Corp.

STT -0.50%

, which together control more than three-quarters of all U.S. ETF assets. Analysts said rising stock markets, including a 25% lift for the S&P 500 this year, and a lack of high-yielding alternatives have boosted interest in such funds.  

“You have this historical precedent where you have tumultuous equity markets, and more and more investors have made their way to index products,” said

Rich Powers,

head of ETF and index product management at Vanguard.

Asset managers are looking to actively managed funds, some with narrow themes, in search of an unfilled niche not already dominated by the industry’s juggernauts, analysts and executives said. VanEck, for example, earlier this month rolled out an active ETF targeting the food industry. In March, Tuttle Capital Management launched its


which is bullish on stocks popular with individual investors. 

Firms including Dimensional Fund Advisors have converted mutual funds into active ETFs. Meanwhile, bigger firms have rolled out ETFs that mimic popular mutual funds, including Fidelity Investments’ Magellan and Blue Chip Growth funds.

“We should have a broad offering of ETFs that stand alongside a broad offering of mutual funds,” said

Gerard O’Reilly,

Dimensional’s co-chief executive, of his company. “Choose your own adventure.” 

As ETFs, baskets of securities that trade as easily as stocks, have boomed this year, investors poured a record $84 billion into ones that pick combinations of securities in search of outperformance rather than tracking swaths of the stock market. That represents about 10% of all inflows into U.S. ETFs, up from nearly 8% last year, according to Morningstar. 

Asset managers long known for running mutual funds are rushing to take advantage of investors’ interest in active ETFs. More than half of the record 380 ETFs launched in the U.S. this year are actively managed, according to FactSet. Fidelity, Putnam and

T. Rowe Price

are among the firms that have rolled out actively managed ETFs in 2021. Firms new to ETFs have also entered the fray. 

The top 20 fastest-growing ETFs, largely run by Vanguard and BlackRock, this year pulled in nearly 40% of all flows, charged an average fee of less than 0.10 percentage point and tracked benchmarks of some sort. 

Many active ETFs remain comparatively small and charge fees higher than passive funds, putting a swath of new products at risk of closing over the next several years. ETFs usually need between $50 million and $100 million in assets within five years of launching to become profitable, analysts and executives say; funds below those levels have tended to close. 

Of the nearly 600 active ETFs in the U.S., three-fifths have less than $100 million in assets, according to FactSet data. More than half are below $50 million. 

“You’re going to see a lot of those firms take a hard look at their future,” said

Elisabeth Kashner,

FactSet’s director of ETF research.

The stock market’s bull run has helped buoy many ETF providers, Ms. Kashner said, adding that firms have in 2021 closed the fewest number of funds in eight years. But a market pullback, which most stock-market strategists anticipate, could flush out weaker players, she said. 

Vanguard has been a beneficiary of high inflows to funds that track indexes. A statue of founder John C. Bogle.


Ryan Collerd for The Wall Street Journal

ETF closures generally climbed over the past decade, and firms closed a record 277 ETFs last year as the coronavirus pulled markets down. Many held few assets. About a third of all active ETFs are marked as having a medium or high risk of closure, according to FactSet data that take into account assets, flows and fund closure history. 

Factors that have helped stoke active launches, analysts and executives said, include rules streamlined by regulators in late 2019 that made ETFs easier to launch. The approval of the first semitransparent active ETFs, which shield some holdings from the public’s eye, followed.

Analysts also said the success of ARK Investment Management Chief Executive

Cathie Wood

in 2020 showed how active ETFs can score big returns and pull in substantial sums of money. Several of ARK’s funds doubled last year, and its assets approached $60 billion earlier this year, though many of its bets have slumped in 2021. 


How long do you think the boom in exchange-traded funds will last? Join the conversation below.

Most other active managers aren’t doing much better. Two-thirds of large-cap managers of mutual funds have fallen short of benchmarks this year, while roughly 10% of the 371 U.S. active ETFs with full-year performance data are beating the S&P 500. More than a third are flat or negative for 2021. 

“Active management is a zero-sum game,” said FactSet’s Ms. Kashner. “Beating the benchmark quarter after quarter, year after year, is a very difficult task at which active managers have traditionally struggled. The ETF wrapper doesn’t change that calculus.” 

Write to Michael Wursthorn at [email protected]

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The Case for and Against Investing in Emerging Markets Now | Sidnaz Blog

Emerging-markets stocks have outpaced developed-market shares over the past 12 months, making them a tempting investment option. So is now a good time to take the plunge, or should investors stay away?

On the plus side, economic growth in emerging markets is expected to surpass growth in developed markets in the next few years. And emerging-markets stocks can be useful to U.S. investors for diversifying a portfolio, since they don’t move in lockstep with U.S. shares.

But emerging-markets shares come with higher volatility than developed-market stocks and an array of risks, including political risk, currency risk, liquidity risk—and economic risk, despite the rosy projections. And investors can get exposure to emerging markets more safely with a portfolio of U.S. stocks that includes companies doing business in those markets.

“Investing in emerging markets is a high-risk, high-reward proposition,” says

Eswar Prasad,

a trade-policy professor at Cornell University. “Many emerging markets have done well growth-wise, and their financial markets have had periods of success, but it tends not to last too long.”

With that in mind, here’s a closer look at the cases for and against investing in emerging markets now.

The positive case

The biggest advantage of emerging markets today is their potential for stronger economic growth than advanced economies, investment pros say.

“About 90% of the world’s population under 30 lives in emerging markets,” says Michael Sheldon, chief investment officer at RDM Financial Group, Hightower, a wealth-management firm in Westport, Conn. “This may lead to stronger labor-market growth, increased productivity and stronger GDP and corporate profits over time.”

In contrast, developed countries have rapidly expanding senior populations and low birthrates, which makes it more difficult to find workers to fill new jobs, says

Karim Ahamed,

investment strategist at Cerity Partners, a wealth-management firm in Chicago. That can limit economic growth.

The International Monetary Fund forecasts average annual GDP growth of 5.5% for emerging markets in 2021-23, compared with 3.5% for advanced economies.

Emerging markets also represent diversification opportunities for U.S. investors. That’s partly because economic growth and financial-market performance in emerging markets are less correlated with the U.S. than advanced economies and financial markets are. In addition, emerging markets give U.S. investors currency diversification, which can be helpful when the dollar is weak.

While investors can gain exposure to emerging markets through stocks of U.S. companies that earn revenue from those markets, those stocks won’t give investors the full diversification benefit, Prof. Prasad says.

The strong economic and corporate performance that is boosting emerging-markets stocks also makes their bonds attractive, says

Robert Koenigsberger,

chief investment officer at Greenwich, Conn.-based Gramercy Funds Management, which specializes in emerging markets.  

Inflation is less of a problem in most major emerging markets today than it has been at times in the past. Also, emerging-markets countries’ external deficits generally have narrowed, or totally reversed in some cases. “This should give emerging-market central banks more flexibility to absorb external shocks and deal with post-pandemic inflationary pressures, allowing them to tighten monetary policy without slowing growth momentum too much,” Mr. Koenigsberger says.

The negative case

Brazil, in addition to debt, has had a harder time than many other countries with Covid-19. Shown: São Paulo in February.


sebastiao moreira/Shutterstock

Emerging-markets stocks are more volatile than those in advanced economies. The MSCI Emerging Markets Index had a standard deviation of 18 over the past 10 years, compared with 14 for the MSCI World Index of developed markets, according to


Standard deviation measures volatility, with a higher number representing more volatility.

The factors behind that higher volatility in emerging markets include political risk, economic risk, currency risk and liquidity risk.

And while emerging-markets economies generally have been on a sharp uptrend for years, some also have experienced serious downturns. Russia’s economy, for instance, shrank 2% in 2015, compared with 2.9% growth for the U.S. that year.

Emerging-markets currencies are a double-edged sword, providing diversification but also volatility. “When you try repatriating your investment, everything may be going wrong at the same time,” with the emerging market’s economy, financial markets and currency dropping together, Prof. Prasad says.

A declining emerging-market currency makes an investment less valuable when converted into dollars. And emerging-markets currencies aren’t only vulnerable to trouble in their own country—they also tend to decline against the dollar when the U.S. currency is gaining against other developed-market currencies like the euro or yen, regardless of what’s happening in emerging markets.

South Africa is also dealing with debt. Shown: Johannesburg in July 2018.


Waldo Swiegers/Bloomberg News

Meanwhile, market liquidity isn’t as deep in emerging markets as in advanced ones. “There’s always a risk with emerging markets: It’s easy to bring money in, but not always to take it out,” Prof. Prasad says.

On the bond side, corporate debt outstanding has soared 400% in emerging markets since 2010, Mr. Koenigsberger says. So, plenty of securities are available. But liquidity isn’t just about supply. “Due to fewer banks and smaller market-making operations at those banks, there is insufficient liquidity when investors look to exit the market” in many cases, he says.

Another issue for bond investors: “There are a handful of emerging-market countries—South Africa, Turkey and Brazil, for example—that face high debt levels and large current-account imbalances,” Mr. Sheldon says. These countries are vulnerable to capital flight, which could trigger a plunge in bond prices.

One negative factor for emerging markets in the near term is that countries such as India and Brazil are having trouble dealing with Covid-19. That will likely weigh on emerging-markets stocks this year, Mr. Ahamed says.

How to invest

For those who want to jump into emerging markets, what’s the best way? Mutual funds and exchange-traded funds will suit most investors better than individual stocks and bonds, because researching and trading individual securities in these markets is often difficult.

When it comes to the question of actively managed funds versus passive index funds, “you can make an argument for active management to provide some downside protection,” Mr. Ahamed says. “But an ETF gives you very broad-based exposure in a way that’s generally cost effective, with lower fees.” Most ETFs passively track a market index.

For bond funds, actively managed is the way to go, Mr. Koenigsberger says. The growth of emerging-markets debt amid continuing economic challenges in many countries puts a premium on active management to sort out the winners, he says. Emerging-markets bond indexes tracked by passive funds are usually weighted by market capitalization, so the most heavily indebted issuers have higher weightings. “Emerging-market debt isn’t an asset class that is suitable for index funds,” Mr. Koenigsberger says.

Mr. Weil is a writer in West Palm Beach, Fla. He can be reached at [email protected].

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Clean Energy ETFs Take a Hit, but Money Keeps Flowing In | Sidnaz Blog

Investors have lost a bundle this year betting on solar-panel and wind-turbine makers. Their response: to double down.

A year ago, green stocks and the funds that track them rallied tremendously in the aftermath of the market’s recovery from a pandemic-induced swoon. Solar-panel and wind-turbine companies were among firms benefiting from a surge of investor- and consumer-driven demand for renewables, despite many being small unprofitable ventures.

This year, returns are trailing the broader stock market. That is thanks, in part, to stocks having run so far and uncertainty around the Federal Reserve’s interest-rate course and how its actions may ultimately affect growth stocks.

Exchange-traded funds that track renewable-energy indexes have posted double-digit declines so far this year.


iShares Global Clean Energy ETF

has fallen 18% since December;

Invesco Ltd.

’s popular

Solar ETF

has posted a 17% decline.

Even so, money continues to pour in. Professional money managers and individual traders alike have invested $6.2 billion into green-energy ETFs so far this year, according to data from Refinitiv Lipper. The inflows are on course to eclipse last year’s record $7.2 billion.

Index makers and asset-management firms say that, for now, large pullbacks in share prices don’t reflect investors’ desire to bet on green companies.

“It’s an area where we see continuous demand,” said

Ari Rajendra,

a senior director of strategy and volatility indexes at S&P Dow Jones Indices.

At BlackRock, the world’s largest asset manager, clean energy funds reported $2.7 billion in inflows so far this year and $1 billion into a European clean-energy fund, according to FactSet. Interest was so high that S&P had to broaden its clean-energy benchmark used by BlackRock funds to fix the problem of having too much money in mostly small, hard-to-trade companies.

Such changes don’t happen often, said S&P’s Mr. Rajendra, but intense demand from investors warranted the index’s revamp to 82 stocks from just 30. The firm also lowered the criteria for the inclusion of stocks, among other things.

Ross Gerber,

chief executive of Gerber Kawasaki Wealth and Investment Management, thinks renewable-energy stocks, from solar-panel makers to manufacturers of alternative batteries, will eventually transform transportation and other facets of everyday life.

A solar farm in Maine. With clean energy stocks pricey, they and funds that track them may be more vulnerable to market or political changes.


Robert F. Bukaty/Associated Press

Mr. Gerber has put more client cash into Invesco’s clean-energy fund, contributing to the $446 million of total inflows into ETF so far this year. He shuns oil stocks, which are among the stock market’s best performers this year.

“The more speculative the stock, the higher the valuation. But in this market, people care more about fantasy than reality,” said Mr. Gerber. “So with solar, you have a little bit of the fantasy in there, too.”

Invesco’s solar ETF jumped 233% in 2020, while BlackRock’s global clean-energy fund soared 140%—easily the best years ever for both as valuations of green stocks climbed to dizzying heights.

Although both funds have declined in the year to date, valuations are elevated. Invesco’s solar ETF trades at a forward price/earnings ratio of 36, versus 21 for the S&P 500, according to FactSet.

In an interview with WSJ’s Timothy Puko, U.S. special climate envoy John Kerry explains the roles he’d like to see the private sector and countries play in fighting climate change. Photo: Rob Alcaraz/The Wall Street Journal

Meanwhile, clean-energy companies trade at a 70% premium to traditional energy companies based on a ratio of enterprise value to earnings before interest, taxes, depreciation and amortization, a standard valuation yardstick, strategists at

Bank of America

said. They noted this valuation was down from highs earlier this year but still well above the five-year average.

With stocks pricey, they and funds that track them may be more vulnerable to market or political changes. Their allure may dim, for example, if the Fed begins to raise interest rates earlier than expected, taking some of the shine off growth stocks.

Or volatility could increase if there are hiccups for a $1 trillion infrastructure plan agreed to by President


and some U.S. senators. Green stocks rallied last year after Mr. Biden won November’s presidential election, as investors bet the new administration would hasten the U.S.’s transition toward wind and solar energy and away from fossil fuels.

Investors already are experiencing some of that volatility. Clean energy stocks have rallied alongside growth stocks in recent weeks. Invesco’s solar fund is up nearly 11% over the past month, while BlackRock’s ETF has added 2.2%.


What do you think 2021 holds for exchange-traded funds? Join the conversation below.

The willingness of investors to continue pouring money into this part of the market shows they are positioning for a potential longer-term readjustment of the energy sector and economy.

Rene Reyna,

head of thematic and specialty product strategy at Invesco, said expectations are premised on a belief that technology will eventually bring the cost of batteries, solar panels and other green efforts down enough to garner wider adoption—and big profits. In that sense, clean energy is the “hope trade,” he said.

Construction at a wind farm in New Mexico last year. Clean energy companies trade at a 70% premium to traditional energy companies.


Cate Dingley/Bloomberg News

Write to Michael Wursthorn at [email protected]

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What Inflation? Stock Funds Rise Again | Sidnaz Blog

Nothing has been able to derail the monthly winning streak for mutual-fund investors.

But things came close in May.

Worries about inflation helped to cause volatility in stocks and other investments during May. In the end, however, stock funds—along with the overall stock market—once again came out on top. U.S.-stock funds tracked by Refinitiv Lipper (including mutual funds and exchange-traded funds) squeaked out an average return of 0.5% in May, to push their year-to-date gain to 14.2%.

It was the seventh straight monthly gain for U.S.-stock funds.

International-stock funds did even better in May, with a 3.2% gain, though their year-to-date gain of 10.2% still trails their U.S. counterparts.

“The market has been resilient in the face of accelerating inflation,” says

Jay Hatfield,

portfolio manager of an energy-focused exchange-traded fund,

InfraCap MLP

ETF (AMZA). It has helped that the Federal Reserve has indicated that It won’t taper, or slow the pace, of its bond-buying stimulus until there is full employment.

He says there are still sectors of the market that are undervalued and thrive in an inflationary environment, including energy, materials, financials and real-estate investment trusts. “As inflationary expectations rise, the market is rotating into these sectors and out of tech rather than declining on an absolute basis,” Mr. Hatfield says.


May 2021 fund performance,
total return by fund type.

Lipper’s financial-services funds category rose 2.5% in May, to push the year-to-date gain to nearly 28%. Natural-resources funds were up 8.2% in May, to push the year-to-date gain to more than 36%.

Real-estate funds were up an average 0.8%, to make the year-to-date gain nearly 17%.

Bond funds also rose for the month. Funds tied to intermediate-maturity, investment-grade debt (the most common type of fixed-income fund) were up 0.4%, to trim their year-to-date decline to minus 1.8%.

Mr. Power is a Wall Street Journal news editor in South Brunswick, N.J. Email him at [email protected].

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The Wall Street Players Who Worry Inflation Heralds Wild Markets | Sidnaz Blog

Some investors are preparing for wild swings in financial markets, worried that inflation, and the Federal Reserve’s pledge to let it rise, will lead to a more volatile world.

The reason: The economic policies aiming to create inflation now are the opposite of the ones that kept markets relatively stable for decades.

Simplify Asset Management recently launched the Interest Rate Hedge ETF, which will seek to take advantage of what its backers see as a titanic shift in markets and is designed specifically to gain from rising longer-term Treasury yields.

The ETF, run by

Harley Bassman,

a former Merrill Lynch trader who developed a widely followed measure of bond-market volatility known as the MOVE index, will put half its cash in long-term Treasurys and half in long-term options that gain if seven-year interest rates rise above 4.25%.

That is high compared with current seven-year Treasury yields of about 1.25%. But at higher levels of rates, between 3.5% and 5%, stock and bond prices become more volatile and move in sync—so this ETF is meant to protect investors from that outcome too, Mr. Bassman said.

“The idea of the Fed from 2009 onward was to force money out of safe assets into riskier assets, which would fund growth,” Mr. Bassman said.

Investors bought longer-dated bonds, riskier credit instruments and complex products that directly or indirectly involve selling options to generate income, Mr. Bassman said. These kinds of investments don’t work when inflation and volatility rise, he added.

Other investors agree that the Fed’s focus in recent decades on supporting the economy by keeping financial markets stable will be upended by its more liberal stance on inflation since the Covid-19 pandemic began. In the past, when things got rocky, the Fed boosted liquidity, cut the cost of credit and ultimately buoyed stock prices.

That was a virtuous circle while inflation is low and the Fed could step in whenever volatility jumped—the broad trend of the past 30 years.

But it will become a vicious one, according to

Christopher Cole,

chief investment officer of Austin, Texas-based Artemis Capital Management. The Fed has promised it won’t tighten monetary policy until inflation is well and truly here and has run hot for a spell.

This means the Fed will end up restricting credit when higher inflation is already making markets more volatile, and that action will feed volatility, making things worse, according to Mr. Cole. “The problem here is if we get inflation—real inflation—it removes the Fed’s monetary ability to support credit, ” he said.

Mr. Cole is well known on Wall Street for a long paper he wrote in 2017. He described how huge amounts of money were in effect betting that volatility would ease and stay low, whether investors knew it or not. A volatility spike in early 2018 proved him right.

He sees danger from the decades that investors have spent getting used to the old paradigm that kept volatility contained. When trouble loomed and stocks fell, investors relied on bond prices being lifted by Fed rate cuts and, since 2008, bond buying. That would provide gains to cushion stock losses. Then easy-money policies would help kick-start more lending—in bond markets as well as by banks—which in turn would lift stocks again.

This pattern, which has played out in all of the downturns since the late 1990s, is behind the popularity of passive investing, balanced portfolios of stocks and bonds and specialist fund strategies such as risk parity and volatility control. All of these make implicit bets that volatility declines or remains low: They are short volatility, in the jargon.

Today more than $1 trillion is still invested in these specialist strategies and trillions more in passive funds, according to analysts. Over $100 billion is invested in strategies that use options to make explicit short volatility bets, having been rebuilt even after last year’s huge volatility spike because once again, the Fed rescued markets.

“The implicit assumption of continued Fed support has massively incentivized the short volatility trade,” Mr. Cole said.

Artemis Capital’s answer is to buy insurance against rising volatility through options markets and bet on trends in commodities and currencies to the same extent as owning traditional stocks and bonds. There is a fifth leg to this stool too: owning alternatives to regular currency, which means gold and to a cautious extent cryptocurrencies.


What adjustments do you plan to your portfolio to address volatility in the markets? Join the conversation below.

Other investors say the greater role government spending began to play during the Covid-19 pandemic will add to the volatility. Governments will want inflation to run hot to help erode the size of the debt they have taken on.

“We know that when the economy slows again, fiscal stimulus will be the answer rather than monetary stimulus,” said

Matt Smith,

who runs the Total Return Fund of London-based Ruffer LLP.

Ruffer’s long-term view is that trends of the next 30 years will roughly mirror the past 30 years: a steady decline in asset values in inflation-adjusted terms, punctuated by occasional upcrashes, or sudden rallies driven by inflationary injections of government spending or tax cuts.

Mr. Smith said governments such as the U.S. will cut their debts by reducing their real value over time through inflation, as happened after World War II. They won’t do it by trying to repay borrowing with spending cuts and taxes, as they have since the 1990s.

Ruffer’s strategy is to own inflation-linked bonds, gold and potentially bitcoin to protect against inflation—although a recent experiment owning bitcoin ended in April because its huge rally made it too risky.

Some investors say the Federal Reserve’s focus on keeping markets stable will be upended by its more liberal stance on inflation since the pandemic began.


Ting Shen for the Wall Street Journal

Mr. Smith is also getting protection against a jump in volatility by betting on corporate debt in credit-derivatives markets: He buys protection against default among the most popular companies that are cheapest to insure, and sells protection on a handful of the most deeply unpopular ones.

To help protect against the risks of inflationary bursts, he also holds shares in companies that do well when bond yields rise. Right now, that means banks, especially cheap U.K. and European ones.

There are other ETFs that offer direct defenses against volatility and inflation—for example, Quadratic Capital Management’s Interest Rate Volatility and Inflation Hedge ETF, run by Nancy Davis. It is set up to profit from rising interest-rate volatility and long-term yields rising faster than short-term yields, while also investing in inflation-linked Treasurys.

Ms. Davis said the fund is meant to be a better protection against inflation than buying esoteric commodities that suddenly prove popular, such as lumber.

Write to Paul J. Davies at [email protected]

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Reopening Bets Pay Off Big for Stock Pickers | Sidnaz Blog

Investors are amassing hefty gains by loading up on economically sensitive stocks that have flourished during this year’s explosion of business activity.

More than two dozen actively managed exchange-traded funds have surged at least 20% so far this year, outpacing the S&P 500’s 12% climb. Goldman Sachs analysts say 56% of stock-picking large-cap mutual funds are beating their benchmarks, the highest percentage in more than a decade.

Some of the best performers include companies with smaller market capitalizations and so-called value stocks—those deemed inexpensive relative to measures of a company’s net worth. The energy-focused

InfraCap MLP ETF,

for example, has risen 48% this year thanks to a recovery in oil prices. It includes top holdings such as

Energy Transfer

ET -1.10%

LP, up 62% since December.


Cambria Shareholder Yield ETF,

which focuses on companies returning the most cash to shareholders, has also jumped 48% this year. Primary holdings include

Rent-A-Center Inc.

RCII -0.83%


Toll Brothers Inc.,

TOL 0.26%

which have both gained more than 50%. The Avantis U.S. Small Cap Value ETF, which has soared 36%, boosted by

Goodyear Tire & Rubber Co.

GT 0.20%

’s 82% gain and a climb of 72% from aluminum maker

Alcoa Corp.

AA 1.69%

Alcoa’s stock has helped lift the Avantis U.S. Small Cap Value ETF to a 36% gain this year.


Justin Merriman/Bloomberg News

The moves mark a reversal of last year’s trend, when the pandemic slowed economic activity and stock pickers flooded into shares of technology companies that many believed could benefit from the crisis. Now business activity is expected to surge to its highest level in at least four decades, driving investors toward shares of manufacturers, energy companies and others tied to economic growth. That includes steelmaker

Nucor Corp.

NUE 1.47%

, which has gained 93% this year to lead the S&P 500 and

Marathon Oil Corp.

MRO 0.17%

, which has climbed 82%.


What do you think the rest of 2021 holds for exchange-traded funds? Join the conversation below.

Banks from UBS to Wells Fargo expect that the U.S. economy will continue accelerating, with many analysts saying cheap stocks that tend to rise during periods of growth are poised to benefit. Investors will get new clues on the pace of the rebound this week with the release of the Federal Reserve’s “beige book” report on regional economies and May’s unemployment numbers.

“The beginning of this reopening trade has been a bounce for value stocks and smaller-cap names. But it hasn’t even really started yet,” said

Meb Faber,

chief investment officer of Cambria Investment Management LP.

Mr. Faber’s fund targets inexpensive stocks with sound fundamentals that make relatively large cash payouts to shareholders via dividends, stock buybacks or other means. This year’s rally has put it on track for its best year since its 2014 launch.

Some worry that the big gains racked up in recent months suggest the reopening trade could reverse just as quickly as last year’s tech surge if growth falters.

Ford Motor Co.

F -2.35%

, for example, has gained 65% so far this year, including a 26% leap in May. The surge comes despite the company in late April predicting a drop in earnings due to a continuing shortage of microchips used in vehicles.

Cathie Wood

of ARK Investment Management LLC provides an example of how quickly the ground can shift. Ms. Wood was crowned last year’s star stock picker after her flagship

ARK Innovation ETF

soared almost 150%. Now, her fund has slipped 10% for the year and lost 30% from its mid-February high, buffeted by worries that inflation will force the Fed to step back from economic stimulus, which many fear would hurt tech stocks.

The risks are also apparent in the highly volatile energy sector, where rebounding demand has driven an increase in oil prices, powering gains in scores of stocks. That has helped make

Virtus Investment Partners

VRTS 1.05%

’ InfraCap MLP ETF into the U.S.’s best-performing actively managed ETF.

Some analysts say a crush of demand for oil this summer could push prices even higher. But oil prices can be volatile and the ETF uses borrowed money to juice returns, which some analysts said could leave it vulnerable to sharp swings. Just last year, the fund lost 58% during a brutal stretch for oil, and it is down 89% since its 2014 inception.

“This fund started doing well when vaccines were approved” last fall, said

Jay Hatfield,

the InfraCap fund’s portfolio manager. “But it is less about stock picking. Ideally, energy would be this stable sector, and you pick one stock or another and you’re brilliant. But it gets caught up in the macro stuff.”

Write to Michael Wursthorn at [email protected]

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Cathie Wood’s ARK Stumbles as Tech Trade Unwinds | Sidnaz Blog

Cathie Wood’s

ARK Investment Management LLC is bearing the brunt of the stock market’s faltering technology trade, again.

Ms. Wood was crowned a star stock picker last year thanks to her exchange-traded funds’ hefty exposure to many of the coronavirus pandemic’s work-from-home winners. But her funds have sunk further than the broader market during May’s selloff in shares of technology and other fast-growing companies, suggesting their midwinter pullback was no fluke.

Her flagship innovation fund has fallen 13% in the first eight trading sessions of May. That is more than what the ETF shed in February and March when worries about a sharp rise in bond yields began to dent the allure of growth stocks. Shares of the fund are now down roughly a third from their mid-February high after more than doubling last year.

The Nasdaq Composite, in comparison, has stumbled 5% in May and set a record as recently as April 26, while the S&P 500 is off 1.2% and continues to hover near its record highs.

Many of the stocks that sit in ARK’s funds are unprofitable tech and biotech companies whose lofty valuations are tied to bets that they will one day dominate their industries. Those stocks have stumbled lately on worries about rising inflation and an eventual tightening of monetary policy. The latest sign of inflation came Wednesday when the Labor Department said its consumer-price index jumped 4.2% in April from a year earlier, the highest 12-month level since the summer of 2008.

Analysts and money managers also say there are rampant concerns over the rich valuations of companies that boomed during the pandemic but whose growth now appears unsustainable as the economy moves closer to a full reopening.

“You have a pretty clear trend of the frothiest and costliest corners of the market needing to be repriced,” said

David Bahnsen,

chief investment officer of the Bahnsen Group, a $2.8 billion money-management firm. “And the darlings of 2020 have a ways to go.”

Several of those darlings litter ARK’s funds and have given up a chunk of the large gains they racked up last year.

Tesla Inc.,

TSLA -2.65%

the biggest holding in several of ARK’s funds, has tumbled 14% in May after surging 700% in 2020 and is on track for its first annual decline in five years.

Teladoc Health Inc.,

TDOC -3.75%

Fastly Inc.,

FSLY -7.52%

Twilio Inc.

TWLO -5.15%


Crispr Therapeutics AG

CRSP -3.35%

—other pandemic winners that generate little to no profits—are down even more.

Few tech stocks have been left untouched by the selloff. Even the FAANG stocks—

Facebook Inc.,

FB -2.26% Inc.,

AMZN -2.17%

Apple Inc.,

AAPL -2.27%

Netflix Inc.

NFLX -1.57%

and Google parent

Alphabet Inc.

GOOG -2.89%

—have suffered declines of about 4.3% to 7.8% this month.

The tech behemoths reported blowout earnings for the latest quarter, but many investors say the economic winds have shifted away from the group. For starters, the economy is getting back on firmer footing as more Americans get vaccinated and businesses fully reopen, creating a more conducive environment for a wider variety of stocks to run.

Tesla is the biggest holding in several of ARK’s funds and has tumbled 14% in May.


Toru Hanai/Bloomberg News

“The quick money is gone,” said

Max Gokhman,

head of asset allocation at Pacific Life Fund Advisors, which manages $32 billion in assets, of the tech trade. “When growth is abundant in an economy, that’s when lower growth stocks, such as value, do better because you don’t need to pay a premium for growth.”

Mr. Gokhman said Pacific Life’s funds remain tilted toward value stocks, such as regional banks, energy firms and consumer staples that trade at low multiples of their book value, or net worth.

Inflation also appears to be simmering, with analysts and investors pointing to shortages in the labor market, rising commodity costs and a pickup in consumer prices. The Fed’s primary tool for combating inflation is raising interest rates, something the central bank says it has no intention of doing this year or next. Yet, the influx of fiscal stimulus along with near-zero rates has spurred speculation that the Fed might have to act sooner to rein in an overheated economy.

Investors said any chatter about a potential rate increase puts tech stocks on unstable footing, especially after last year’s gangbusters performance. That is because interest rates are a significant variable in often-used valuation models that discount cash flow. Higher rates, under those models, diminish the value of future cash flows, lowering the ceiling on valuation projections.

“The outperformance in megacap tech stocks has likely run its course,” said

Andrea Bevis,

a senior vice president at UBS Private Wealth Management. “We believe the next leg of the equity rally will be driven by value stocks, and small and midcap segments of the market.”

The latest downdraft has cut valuation multiples in half for some of the pandemic’s biggest winners. Tesla shares now trade at 121 times future earnings, down from nearly 220 earlier this year, according to FactSet. Online marketplace

Etsy Inc.,

ETSY -4.87%

whose shares quadrupled last year, trades at 51 times earnings versus more than 100 times in January. Its shares have fallen 17% this month.

Both stocks remain relatively pricey. The S&P 500’s consumer discretionary sector, where the stocks reside, trades at 36 times earnings, while tech is at 25. The S&P 500 stands at 21 times earnings, above its five-year average of 18.

The tech sector’s repricing has shaken billions of dollars out of growth and tech funds, including those run by Ms. Wood. Investors have pulled $1.6 billion from the ARK’s ETFs over the past month, with nearly $600 million coming out of the innovation fund, according to FactSet. That’s on top of about $7 billion investors have pulled from other U.S. growth and tech funds so far this year. Over the same period, more than $30 billion has flowed into U.S. value funds.

Ms. Wood has repeatedly brushed off worries about the losses and outflows, saying the firm invests in stocks for at least five years, and nothing has changed other than their cheaper price tags. In fact, ARK has taken advantage of the selloff to add to its positions in some beaten-down stocks such as

Twitter Inc.,

Peloton Interactive Inc.

PTON -3.48%


Roku Inc.

ROKU 1.16%

in recent sessions.

“Many consider what has happened in the last three months to be the beginning of another, or the equivalent of the tech and telecom bust,” Ms. Wood said in a Tuesday webinar. “We do not believe that’s the case in the least. The kinds of growth that we’re going to see coming out of these technologies, we believe, the kind of growth is going to be astonishing.”

Other investors have followed Ms. Wood’s lead—they stepped in to buy the dip in tech stocks Tuesday, helping the Nasdaq erase nearly all of a 2.2% intraday decline by the end of the session. ARK, in this case, tracked the market, with its innovation ETF closing up 2.1%.

But the tug of war in the stock market will likely continue, with several money managers saying they have no intention of leaning back into the tech trade soon.

“I don’t think there’s any place in the tech space where there will be easy growth or cheap growth,” said Mr. Bahnsen. “I believe we’re living in an era that favors cash-flow generating companies.”

Write to Michael Wursthorn at [email protected]

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U.S.-Stock Funds Ride the Earnings Wave | Sidnaz Blog

The investing world, like the real world, might not be quite “normal” yet. But it is getting there, if the stock market’s performance is to be believed.

As companies’ earnings reports continue to roll in with impressive gains, stocks have responded. And that has boosted stock funds. U.S.-stock funds tracked by Refinitiv Lipper (including mutual funds and exchange-traded funds) posted an average return of 4.7% in April, to push their year-to-date gain to 13.5%.

That year-to-date gain is, coincidentally, nearly identical to the gain that U.S.-stock funds posted a year ago just for April—the month stocks recovered ground after plunging in the wake of the early Covid shutdowns in March. Stock funds went on to post a gain of 19.1% for all of 2020. This year’s market is on pace to better that performance, if conditions don’t deteriorate.

“The strength surprises us and it doesn’t surprise us at the same time,” says

Ralph Bassett,

Aberdeen Standard Investments’ head of U.S. equities, based in Philadelphia. “As we’re well aware, there are two things coinciding right now—monetary policy just looks extremely accommodative, and fiscal policy as well. So all this liquidity needs to find a home.”

And while wary investors have poured billions of dollars into bond funds, they are also sticking with stocks. In addition to the U.S. gains, international-stock funds rose 3.2% in April, to push their year-to-date advance to 6.7%.

Of course, the robust earnings gains being reported are from a low base a year ago during the broad lockdowns—making today’s numbers “easy comparisons,” in Wall Street parlance. Still, broadly speaking, the earnings have been beating expectations.


April 2021 fund performance, total return by fund type.

Smaller stocks, in particular, are on investors’ radar. Mr. Bassett notes that these stocks have lagged behind larger stocks in recent years, and only recently have begun to exhibit outperformance.

But, he says, “We’re getting to a point now where domestic [investing] is in focus, both in terms of where capital investment will happen and where we’ll see outsized earnings growth over the next several years. We do think there has been a rotation that started and it will have a duration.”

Bond funds rose in April. Funds tied to intermediate-maturity, investment-grade debt (the most common type of fixed-income fund) were up 0.8%, to trim the year-to-date decline to 2.1%.

Mr. Power is a Wall Street Journal news editor in South Brunswick, N.J. Email him at [email protected].

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Convertible-Debt Funds: Are They Good Investments? | Sidnaz Blog

When stock markets fall, convertible bonds—a debt/equity hybrid—are designed to hold their own.


Jeenah Moon/Getty Images

Should individual invIstors consider convertible debt? Based on my analysis, the answer appears to be “yes,” at least on a risk-adjusted basis.

Convertible bonds—a debt/equity hybrid that does well when markets go up and preserves some of its value when markets fall—are accessible for most investors through mutual funds and exchange-traded funds. In conjunction with Daniel Arguedas-Cornejo and Emily Baucom (research assistants at George Mason University), I examined the returns of all dollar-denominated convertible debt ETFs and mutual funds over the past 15 years.

Dividing the convertible-bond funds by their areas of focus (U.S., Asia, Europe or global) the first salient finding is that funds investing in convertible debt in the U.S. have far outperformed those in the rest of the world. Over the past 15 years, the average European-focused convertible-debt fund has averaged 4.40% return per annum, the average globally focused fund 4.93% and the average Asian-focused fund 5.39%. The average U.S.-focused fund, meanwhile, delivered 8.81% per annum over the same period.

Next, when comparing the average U.S.-focused convertible-debt fund with U.S. large-cap stocks (S&P 500), we see that convertible bonds have delivered returns comparable to those of stocks while exhibiting lower volatility and crash risk. Over the past 15 years, the S&P 500 has beaten the average U.S. convertible-debt fund by just 0.71 percentage point a year (9.52% v. 8.81%), yet has exhibited much higher risk over the same period (14.21% volatility for the S&P 500 and 10.81% for the average convertible-bond fund).

To show how convertible debt softens the blow on the downside when markets crash, nothing paints a clearer picture than the dot-com crash of 2000 to 2002. While the S&P 500 lost 39% from the beginning of 2000 to the end of 2002 as tech stocks plummeted, convertible-debt funds in the U.S. lost an average of just 10% over the same period.

All in all, the historical data highlight that convertible-debt funds capture much of the upside when equity markets are going up but fall considerably less when markets crash—serving as a potentially good addition to an investor’s portfolio.

Dr. Horstmeyer is an associate professor of finance at George Mason University’s Business School in Fairfax, Va. He can be reached at [email protected].

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