ETFs to watch amid the coronavirus

ETF.com Managing Editor Cinthia Murphy joins Yahoo Finance's Seana Smith to break down the ETFs she's watch in Q2 amid market turmoil over the coronavirus.

Video Transcript

SEANA SMITH: We have our ETF report brought to you by Invesco and investors pulling their money out of ETFs in March by about $10 billion in total. But overall, in Q1, ETF asset flows hitting about $65 billion, which is pretty astounding when you take into account all the volatility and the nervousness that is out there in the markets over the last several weeks. So here to discuss all this, with Cinthia Murphy, managing editor of ETF.com. And Cinthia, in the year in which we saw markets really crater over the last couple of weeks, ETF investors, at least, have not seemed to panic. Why do you think this is the case?

CINTHIA MURPHY: You know, it's been really incredible, especially yesterday alone, the last day of the month. We actually saw $6 billion flow into ETFs. And it's really been a story of two markets right now. Investors are showing their true long-term buy-and-hold stripes by piling money into funds like VOO, which is an S&P 500 fund from Vanguard, or even some SPI, IVV, VTI, your long staples that stay in portfolios for a long time.

And then you've seen a lot of money flow into your ultra-short-term bond ETFs, things like BIL, which is a one and three month note portfolio, or FHY, one to three year portfolio. These funds picked up, like, $9 billion each in the last month. So it's been really a story of your long-term buy-and-hold, just broadly diversified equity exposure and your short-term cash-like bond exposure that people are piling into, very little bit in the middle.

SEANA SMITH: Cinthia, it's interesting what we've seen, just in terms of new ETFs entering the market or lack thereof. So there's only four new ETFs that entered the market in March. It was the slowest pace since August. And we put that into perspective, just in terms of what we saw in February before these jitters about the coronavirus outbreak really worldwide started, we saw over 20 new ETFs upstart in the month of February.

So do you think this is a trend that will likely stick around now for some time, at least in the short-term, meaning that some ETFs that maybe were planning to enter the market, that they've attracted those new issuers there might suspend some of their plans at least for a couple of months at this point?

CINTHIA MURPHY: We know that has been happening for a fact. I mean, not only-- it's hard enough to start a new ETF and find initial capital and finding seed capital and who wants to take a risk on an untested idea. It's that much harder to do it when everybody's trying to figure out what the market-- where the market is even going. I mean, how many more times are we going to hear about we're flying blind, there's no precedents for this, data's lagging, no one knows where the bottom is.

It's the worst environment to bring a new idea and try to say, hey, come, put your money on my new fund and see what happens. So it's not surprising to see a complete slowdown in launches, and I think it will continue, as long as there's no certainty of where we go next.

I mean, to reference what Jared was saying earlier about the corporate guidance, there really is no guidance at this point. And I think until we get through some of the earnings season and start to get a feel for what this has meant to bottom lines, what it looks like going forward, I think if I were an issuer, I would hold back. There's no reason to take that risk right now and pay that expense.

SEANA SMITH: Yeah, Cinthia, how long do you think this will be the case for, just in terms of the hesitation out there in the markets, waiting for things to subside? Is this something that you think will get going again in a couple of weeks, maybe a couple of months, or is it something that could really not happen until maybe closer to the end of the second half of the year?

CINTHIA MURPHY: I think in terms of ETF launches, it really depends on the product. So the funds we have seen come to market, despite all odds, are things like buffer ETFs, defined outcome ETFs, that-- you know, the type of product that offers you some kind of insurance policy or protection on the downside because this is what investors are looking for.

I mean, tomorrow we have the big launch of the non-transparent active ETFs, which have-- it's a launch has been postponed a few times. We've waited for months, and they're finally biting the bullet tomorrow. American Century is bringing them to market, and it's a completely new type of wrapper. So maybe we're going to start seeing, you know, people come out and take their chances here, but it's going to be a slow trickle, I think.

SEANA SMITH: Cinthia, if you are looking to put some money to work into ETFs right now, trying to decide what you should buy in this type of environment when there's so much uncertainty out there, when there has been some unexpected volatility here from time to time, who do you think will perform or what do you think will perform best in the second quarter?

CINTHIA MURPHY: You know, we like to think of-- in terms of equities, right? So US equities picked up $21 billion in ETF assets in March alone, despite all the craziness. So you'd like to think about where is good value and where is strong companies? So you probably want to look for companies that have really strong cash flow right now. So segments that would be strong, they tend to be the more defensive segments like consumer staples.

I actually think technology, even though it had rallied so much last year, it's kind of a defensive sector in a way right now because we are all so dependent on technology to keep some of the economy going remotely, if you will. So I think funds like XLK, VGT, or even, like, cloud computing strategies, CLOUs, a big one in that space, semiconductors are all pockets that remain interesting through this, outside of staples. I mean, the obvious no-gos would be, like, financials, regional banks, ETFs like KBE, KRE. I mean, those funds are down 45%, 50% this year, and the outlook is really not that great with rates where they are so, you know, pockets to avoid.

But one of the most interesting calls I heard this morning was actually AGG. So AGG, the biggest bond fund, investment grade, lost almost $9 billion last month. But if you look here today, it's up 3% when SPI, the S&P 500 is down 20%. If you look on a trailing 12 months, it's up 9% versus SPI down 12%. If you look two years, if you look three years, it's crazy that, you know, your Aggregate Bond Fund is actually outperforming S&P 500 equity on a trailing three year window, so maybe AGG is the play to go, even though people have been taking a lot of profits in that space because bonds have rallied so much.

I think at the end of the day, the message is focus on quality. You might even want to go with an ETF like QUAL, which is quality stocks. And they screen that by different measures of cash flow. You want to invest in the companies that have the cash to withstand the storm and come out on the other side, you know?

SEANA SMITH: All right, Cinthia Murphy, managing editor of ETF.com, thanks so much for joining us this afternoon.

CINTHIA MURPHY: Thanks for having me.