The rally in growth and tech stocks in the first quarter caught much of Wall Street off-guard, but many ETF strategists are sticking to their call and not chasing the hot sectors quite yet. As the calendar turns to a new month and a new quarter, CNBC Pro took a look at some of the trends in ETF investing during the first three months of the year and whether they’re likely to continue in coming months. Is growth back? The big winners in the stock market during the first quarter were found among growth stocks. After a terrible 2022 (down 33%), the Invesco QQQ Trust tracking the Nasdaq-100 index rose more than 20% in the first three months of the year. QQQ YTD mountain Growth stocks rebounded in the first quarter. This move was not only in contrast to how 2022 played out, but also to how many Wall Street strategists predicted 2023 would develop. But the latest rebound for growth did not come from a change in their business fundamentals and could be short-lived, said Indrani De, head of global investment research at FTSE Russell. “There are many factors in today’s market that are much more supportive for value, and long-term trends in the other direction of growth” look like they bottomed out toward the end of 2021, De said. Fund flow data suggests that investors did not abandon the value trade, even though it was underperforming in recent months. One area that is popular among value investors is income funds, which can help investors offset market declines by generating cash. “We still very much believe that an income-oriented equity allocation is important going forward … We don’t think that is changed by what we’ve seen so far in the first quarter,” said Paul Baiocchi, chief ETF strategist SS & C Alps. Alps is one of several firms whose income-oriented ETFs have recently proven successful, notably its Alps Sector Dividend Dogs ETF (SDOG) . Other popular funds in this vein include the Pacer US Cash Cows 100 ETF (COWZ) and the JPMorgan Equity Premium Income ETF (JEPI) . One sweet spot between growth and value could be the strategy of focusing on quality stocks, which also captures some of the more traditional tech stocks. The iShares MSCI USA Quality Factor ETF (QUAL) , whose top holdings include Microsoft and Apple , has been the top U.S. ETF by inflows this year, and had a total return of about 9% in the first quarter on a total return basis. Sectors and Themes One of the major themes of the first quarter for ETFs is the shift into fixed income. Bond funds have traditionally been a smaller part of the ETF market, but fixed income outpaced equity for fund flows during the quarter. That could continue in the second quarter, according to the strategists at iShares. Kristy Akullian, senior member of the iShares Investment Strategy team at BlackRock, said the group is tactically underweight equities and generally defensive heading into the second quarter. Quarterly Investment Guide Markets and the economy survived a tough first quarter, but it’s not going to get any easier “Our base case is for a recession. I don’t think that equities are really priced” for an economic downturn, Akullian said. Some of the most popular bond ETFs in the first quarter were short-term funds, which are affected less by the Federal Reserve’s rate hikes. However, if the Fed stops tightening monetary policy soon and the yield curve flattens out, investors may rotate back into medium- and longer-dated funds. To be sure, the iShares strategy team has an improving view of growth stocks, at least in high quality names. Global tech and energy are two areas that screen as “growth at a reasonable price” sectors, according to iShares. “We haven’t recommended tech for more than a year now, because the path of interest rates is so incredibly important to that sector. And there wasn’t a clear view into what exactly that would look like. Now that we have that line of sight to the path for interest rates, I think that opens up some opportunities to lean a little more into growth, particularly in the more defensive higher-quality growth,” Akullian said. “We’re still certainly far away from the speculative, super long-duration type of technology,” she added. One subsector that helps global tech score highly as growth at a reasonable price is the group’s exposure to semiconductor companies, Akullian said. That sector has been hot in recent weeks, as the VanEck Semiconductor ETF (SMH) gained nearly 10% in March. SMH 1M mountain Semiconductors rallied in March. Another thing that investors should keep in mind when exploring sector and thematic ETFs is that many funds have recently rebalanced, which means that changes in their holdings could make past performance less predictive of future results. The struggling Financial Select SPDR ETF (XLF) , for example , added payments stocks Visa and Mastercard to its lineup in March. Global scope Another area that enjoyed a first-quarter rally was international stocks. The Vanguard FTSE All-World ex-US Index Fund ETF (VEU) gained almost 7% in the first quarter. The JPMorgan BetaBuilders Europe ETF (BBEU) rallied 10% and raked in about $6 billion of inflows from investors. Europe is behind the U.S. in bringing down inflation, but that means Europe could see similar declines in inflation and rallies for stocks, De said. “Similar numbers that we saw in the U.S. six months back — signs of inflation peaking, still high but peaking — are probably what is happening in Europe right now. And the dividend yield in the Eurozone is much higher,” as is always the case, De said. Investors with a greater tolerance for volatility, and risk, might look to China funds. The KraneShares CSI China Internet ETF (KWEB) has seen big swings so far this year as Chinese government officials appear to have loosened their stance on some tech regulation, and the fund rallied again in late March after Alibaba announced it was splitting itself into six companies.
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