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‘The Haves and Have-Nots Market': 2023 Trends for the ETF Investor

Source: NYSE

Among global recessionary fears, interest rate uncertainty and a drawn-out debt ceiling debate, safe haven strategies have been at the forefront for investors in 2023. But there's been plenty of ways to play the volatile market this year for exchange-traded fund investors.

"If I'm defining 2023, I see three big trends," John Davi, chief investment officer at Astoria Portfolio Advisors, told Seema Mody on CNBC's "ETF Edge" on Wednesday. "First, you've got bonds that, on a per unit risk basis, are attractive relative to broad-based U.S. equities."

Davi said that bond ETFs have taken in $82 billion this year, compared with $55 billion flowing into equity funds.

"That's a very big difference from what we're used to seeing in prior years," he said. "Finance rates are trading very high. The Fed has jacked up interest rates. You can clip a T-bill and get 5%, taking no risk."

The second trend Davi sees is the variation between non-U.S. and U.S. flow trends. Within equity ETFs, non-U.S. funds have brought in $40 billion this year, while U.S. equities have taken in $14 billion.

"I think the macro picture in the U.S. is a little bit murky," he said. "The international markets are much further behind the interest rate cycle and the inflation cycle. So, as a result, you tend to see a lot of flows into non-U.S. ETFs."

Single-country European ETFs have been slowly gaining momentum since the start of 2023. The iShares MSCI Spain ETF (EWP) is up nearly 14% this year, while the iShares MSCI Germany ETF (EWG) has gained 15%.

"The final thing I would say is this rotation out of value and into growth," Davi said. "We're starting to see energy ETFs [with] $8 billion of outflows. And broad-based tech, not a lot of inflows relative to the move."

Despite their strong returns, Davi explained that large-cap growth stocks have brought in $1.1 billion in inflows. And while the Invesco QQQ Trust (QQQ) is up 32% this year, the fund has still logged $1.8 billion of outflows, according to FactSet.

"Even if I start adding in the levered QQQs and the Invesco NASDAQ 100 ETF (QQQM), there's just not a lot of inflows into tech on a relative basis," he said.

But as the dust settles on debt ceiling negotiations and investors await catalysts for the months ahead, Dave Mazza, chief strategy officer at Roundhill Investments, defines 2023 as the year of the "haves and have-nots market."

"The haves are companies that are really scooping up all the interest," Mazza said in the same interview.

He explained that artificial intelligence was the obvious "have" factor this year. Trends of growth stocks outpacing value, the technology sector trouncing energy and the outperformance of semiconductors are other examples.

"A lot of this has to do with the interest rate environment," Mazza said, highlighting that the days of selecting a certain stock or sector with a zero-interest safeguard are over.

"Fundamentals in the macro matters significantly," he said. "Going forward, I think this is going to only continue to be the case, which is why investors likely need to be more selective here."

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