Navigating the Uncertain Market: ETF Picks and Interest Rate Outlook with VettaFi Vice Chairman Tom Lydon

Investors are facing a challenging market environment as uncertainty looms over the Federal Reserve’s year-end interest rate outlook. With heavy speculation surrounding the Fed’s interest rate strategy, investors are seeking out certainty in an uncertain market. VettaFi Vice Chairman Tom Lydon recently joined Yahoo Finance’s Rachelle Akuffo to provide expert insights on navigating the current market conditions through ETF picks and differentiating between active and passive ETFs.

Lydon highlighted the potential impact of the Fed’s interest rate strategy on money market funds, which currently hold $6.2 trillion and are yielding about 5%. He emphasized that if rates are cut, the yield on these funds could be dramatically reduced. To avoid being caught on the sidelines, Lydon suggested longer duration investments in areas like corporate credit and high-yield bonds.

In terms of ETF flows, Lydon noted a significant shift towards fixed income ETFs compared to equity ETFs. While traditionally, about 1/5 of the money flows into fixed income ETFs, this year has seen almost a 50/50 split. This trend is driven by the expectation that rates will be lower in the future, prompting investors to seek out higher yields in fixed income securities.

When asked about his top ETF picks, Lydon recommended diversifying outside of the dominant stocks in the market. He suggested ETFs like the Invesco S&P 500 equal weight ETF (RSP) and the Russell 2000 ETF (IWM) for exposure to different segments of the market. Additionally, he highlighted covered call strategies like the JP Morgan Equity Premium Income (JEPI) and the Global X NASDAQ 100 ETF for attractive yields and hedging opportunities.

In discussing active versus passive ETFs, Lydon explained that while ETFs were initially built on index-based strategies, there is a growing interest in active management. He noted that only 4% of the $7 trillion ETF market is in active strategies, but recent trends show a shift towards active management. Active strategies can offer more flexibility in navigating market uncertainties and selecting quality investments.

Overall, Lydon emphasized the importance of due diligence and understanding the risks associated with different ETF selections. As the market continues to evolve, investors are encouraged to explore a mix of active and passive strategies to optimize their portfolios and navigate the uncertain market conditions.

For more expert insights and the latest market trends, viewers can watch the full episode of Yahoo Finance Live featuring Tom Lydon for valuable information on ETF investing strategies.