One year ago, in the September 2022 Market Minute, we highlighted the large valuation spread between growth and value stocks [see chart below]. At that point, the Federal Reserve (“Fed”) had hiked interest rates 4 times on the year from 0.25% to 2.5%. We forecasted that the higher interest rate environment intended to combat inflation would narrow the valuation spread between growth stocks (considered long duration assets that benefit from low interest rates) and value stocks. From August 31, 2022 to February 28, 2023, that is what happened. As the Fed continued to raise interest rates rapidly, going from 2.50% to 4.75% over a series of four rate increases, the S&P 500 Value Index did outperform the S&P 500 Growth Index by over 13% (7.9% vs -5.4%).

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Net inflows for US-listed ETFs totaled $12.1 billion in August, bringing total ETF assets under management to $7.36 trillion. 

• Equity ETFs had net inflows totaling $6.2 billion in August, bringing trailing 12-months (TTM) net inflows to $309.0 billion. Active equity ETFs accounted for $7.4 billion in net inflows in August, compared to $1.2 billion in net outflows for passive equity ETFs. Total AUM in actively managed equity ETFs were $269.1 billion, accounting for 4.7% of all equity ETF assets ($5.78 trillion), as of 8/31/23. 
• Fixed income ETFs had net inflows totaling $9.3 billion in August, bringing TTM net inflows to $212.3 billion. Active fixed income ETFs accounted for $2.8 billion in net inflows in August, compared to $6.4 billion in net inflows for passive fixed income ETFs. Total AUM in actively managed fixed income ETFs were $155.8 billion, accounting for 11.0% of all fixed income ETF assets ($1.42 trillion), as of 8/31/23. 
• Commodities ETFs had net outflows totaling $3.2 billion in August, bringing TTM net outflows to $16.7 billion. Precious metals ETFs (-$3.0 billion) was the weakest commodity sub-category in August. 

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Call-writing ETFs have been one of the fastest growing segments of the ETF industry in recent years, as investment professionals have sought to capitalize on the larger options’ premiums that generally correspond with increased equity volatility. Over the past two years, assets in call-writing ETFs, also known as “covered call” or “buy-write” ETFs, have grown by over 500%, and net inflows this year have totaled $17.4 billion (as of 7/31/23). These ETFs typically invest in equities, while also selling call options to generate additional income. Below, we identify a few key attributes of call-writing ETFs for investment professionals to consider when sorting through this rapidly growing segment of the ETF industry. We then highlight four First Trust call-writing ETFs.

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• Net inflows for US-listed ETFs totaled $61.8 billion in July, bringing total ETF assets under management to $7.51 trillion.
• Equity ETFs had net inflows totaling $46.4 billion in July, bringing trailing 12-months (TTM) net inflows to $331.2 billion.  Active equity ETFs accounted for $7.6 billion in net inflows in June, compared to $38.9 billion in net inflows for passive equity ETFs.  Total AUM in actively managed equity ETFs were $268.0 billion, accounting for 4.5% of all equity ETF assets ($5.92 trillion), as of 7/31/23.
• Fixed income ETFs had net inflows totaling $17.0 billion in July, bringing TTM net inflows to $218.2 billion.  Active fixed income ETFs accounted for $2.8 billion in net inflows in July, compared to $14.2 billion in net inflows for passive fixed income ETFs.  Total AUM in actively managed fixed income ETFs were $153.5 billion, accounting for 10.8% of all fixed income ETF assets ($1.42 trillion), as of 7/31/23.
• Commodities ETFs had net outflows totaling $1.7 billion in July, bringing TTM net outflows to $16.4 billion. Precious metals ETFs (-$1.4 billion) was the weakest commodity sub-category in July.

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Usain Bolt holds the world record, set in 2009, for the fastest 100 meter race in history at 9.58 seconds (he ran a wind aided race of 8.97 seconds once!). Bolt’s record breaking race was run in ideal conditions on a perfect track. The 110 meter hurdle world record is 12.80 seconds (adjusted for 100 meters the time would be 11.64 seconds). That’s almost 20% slower than the 100 meter dash. Why? Simple. There are ten 42 inch hurdles to jump over on your way to the finish line! It’s a lot harder, in fact impossible, for the same runner to go faster over the hurdles than the dash. 

This is one lens to view the economy and the stock market as we move forward. We have hurdles. Primarily higher interest rates. All things being equal, higher interest rates will increase company costs and weaken demand as consumers are challenged by higher financing costs.

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In the second quarter of 2023, U.S. stocks were the place to be invested. Investors grabbed hold of the narrative that the Federal Reserve (the “Fed”) has quelled inflation, the U.S. economy will not experience a recession or if there is a recession, it will be mild and there will be a quick and decisive pivot back to an easy money economy. Perhaps the Fed’s incredibly aggressive rate hikes have clawed back some of the credibility it lost during the “inflation is transitory” period. With risk aversion set aside, and the artificial intelligence (AI) frenzy in full swing, investors seem to be emboldened by positive signals from Gross Domestic Product (GDP), housing and jobs data even though these indicators tend to be lagging and not leading. There are potential warning signs of challenging times to come. Among them are continued hawkish language from the Fed that rates will remain high for a long time, a steeply inverted yield curve the likes of which has not been seen in 40 years, the Fed Fund’s rate now exceeding headline Consumer Price Index (CPI), and the first ever sustained period of negative money supply growth.

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• Net inflows for US-listed ETFs totaled $68.4 billion in June, bringing total ETF assets under management to $7.18 trillion.
  
  
• Equity ETFs had net inflows totaling $54.3 billion in June, bringing trailing 12-months (TTM) net inflows to $298.7 billion.  Active equity ETFs accounted for $7.1 billion in net inflows in June, compared to $47.3 billion in net inflows for passive equity ETFs.  Total AUM in actively managed equity ETFs were $246.3 billion, accounting for 4.4% of all equity ETF assets ($5.62 trillion), as of 6/30/23.
  
  
• Fixed income ETFs had net inflows totaling $17.2 billion in June, bringing TTM net inflows to $228.2 billion.  Active fixed income ETFs accounted for $2.1 billion in net inflows in June, compared to $15.1 billion in net inflows for passive fixed income ETFs.  Total AUM in actively managed fixed income ETFs were $149.4 billion, accounting for 10.7% of all fixed income ETF assets ($1.40 trillion), as of 6/30/23.
  
  
• Commodities ETFs had net outflows totaling $2.8 billion in June, bringing TTM net outflows to $21.3 billion. Precious metals ETFs (-$1.7 billion) was the weakest commodity sub-category in June.

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