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Investors ‘are taking advantage’ of flows into tech and small cap stocks: ETF expert

VettaFi Vice-Chairman Tom Lydon joins Yahoo Finance Live to weigh in on recent market volatility and where investors and financial advisers are shifting their attention towards.

Video Transcript

DAVE BRIGGS: July was a strong month for stocks, but with continued volatility weighing on the markets, where are investors putting their money? For more, we turn to VettaFi vice chair Tom Lydon. He joins us in studio for this ETF report sponsored by Invesco QQQ.

Good to see you, sir.

TOM LYDON: Great seeing you, David.

DAVE BRIGGS: Welcome to the studio. Nice to--

TOM LYDON: Thank you. It's great to be here.

DAVE BRIGGS: Good to actually speak to a face. So you heard the question-- what drove those gains throughout the month of July? And where do the opportunities exist into August and the fall?

TOM LYDON: So we're surveying financial advisors all the time. They're coming to our websites, telling us what they like, what they don't like. A year ago, they were really concerned about inflation, number one. Number two, rising interest rates. And geopolitical risk was kind of a distant third. Fast forward to today-- not as concerned about inflation. It's kind of come back a little bit. It's still high, but not as hot as it was a year ago.

Rising interest rates, to a great degree, are baked in. And geopolitical risk, well, it's always going to be a part of it. With that in mind, advisors are starting to go into those areas of the market that have been beat up really badly in the last 12 months, areas like technology, innovative technology stocks. The NASDAQ 100, for example, was up 15% since the mid June lows. And that was really key and critical.

Another area is small caps. So although small caps are a little bit more nimble than large caps, they focus on domestic business, mostly. And with the huge move in the US dollar, we've seen that small cap companies have taken advantage of that. They're able to buy services and also products overseas, bring them here for a lesser price. And they don't sell as much overseas, which would be more expensive for overseas buyers.

SEANA SMITH: Tom, I want to go back to what you were saying about tech because lots of interest in some of these larger cap tech names, especially over the last week. We heard from Apple, Microsoft, Alphabet, just to name a few. Twitter and Snap were the week before last. When you talk about interest in some of those names, is it largely some of the larger cap names? Or is it even in some of those smaller tech names that maybe aren't as popular or historically aren't as popular with investors?

TOM LYDON: Well, the FAANGs plus the Microsofts and the Teslas of the world, surely, in the last 10 years, have gotten a lot of attention. But the last 18 months were beat up more than underperformed the S&P 500, for example. However, recently, they've started to come back. Think-- when we think about disruptive technology, we think about the Cathie Wood stocks, for example. Cathie Wood's ETFs in the last six weeks are up 30% to 35%. So there's been some huge return--

DAVE BRIGGS: After being battered prior.

TOM LYDON: Battered 60%, 70%.

DAVE BRIGGS: Significantly, OK.

TOM LYDON: So it's a good point in time to kind of take a deep breath and say, are those companies ever going to come back? Did I not have them? Did I sidestep them? As we look forward and maybe the prognosis for the markets and the economy, although it's not as great as it used to be, is it somewhat stable? Is it a buying opportunity? And just by the flows that we're seeing in areas like technology stocks, like small cap stocks, advisors and individual investors have taken advantage of it.

DAVE BRIGGS: And so what do you and your clients make of the language that's come out of the FOMC meeting? And in the subsequent days, the markets skyrocketed off of the news, the words from Jerome Powell. And then you've had some very hawkish comments from Mary Daly, from James Bullard. What do you and your clients make of the direction we're hearing?

TOM LYDON: So the big thing-- and our clients really are financial advisors. We're helping to educate them on a regular basis through our variety of websites. The key thing there is, they're not surprised because there's been good signaling that hey, rates are going to continue to go up. And that's something that we're going to have to deal with. I think a year ago, it was unclear what the Fed was going to do. So that is really key and critical.

The other thing is, even though there's inflation, hey, they may-- there are signs that it's starting to pull back a little bit. It's a world that we're going to have to live with. And there have been decades before when we've had to live with them. We may be in a period of 5% to 6% inflation for the next three to five years. Guess what? There are times when that's actually been OK for the stock market, too.

SEANA SMITH: Tom, what do you make of earnings season so far? 78% of the companies that have reported are beating expectations. Moderna a leader today, CVS another leader in the market after reporting earnings this morning. Has a lot of this bad news already been priced into some of these stocks?

TOM LYDON: To a great degree, I would say yes. And then specifically, when you look at earnings, the big surprise is back in the small cap area. Almost 75% of the small cap stocks have outperformed on the top line and also in the bottom line.

Again, with the ability to kind of put their foot on the gas if things start to look better, they can really ramp up a lot quicker. It's nice to see the big mega caps start to bounce back as well. But at this point in time, when we've had a bit of a pullback, a lot of smart investors are trying to pick their spots. Where can they put that dry powder back to work?