By Paul R. La Monica
Stocks are still doing a happy dance a good week after Donald Trump won a second term to the White House. More stimulus, lower tax rates and less regulation are coming -- maybe. And another rate cut by the Fed didn't hurt either.
But what's next? Probably more upside. And why? Investors are gobbling up passive index funds heading into the end of the year, analysts tell Barron's.
Melissa Roberts, of Stephens, attributes the excitement primarily to two things: the election results and the typical year-end moves by investors to prep for next year's taxes.
Roberts ran down the numbers in a note: Index funds attracted $51 billion in the week after the Nov. 5 election, compared with $32 billion for the same period in 2016 and $29 billion in 2020. That $51 billion puts index funds on track to surpass the $89 billion of post-election inflows through year-end from 2016 and $72 billion in 2020.
That's obviously really good for top index ETFs that track the S&P 500, the Nasdaq 100, the Russell 2000, and other high-profile market barometers.
And investors know it, too. The cash just keeps flowing -- gushing -- into funds. U.S.-listed ETFs have already attracted $912 billion in net new inflows this year as of Wednesday, topping the annual record of $909 billion in 2021.
"It's been otherworldly in November," Matt Bartolini, head of Americas ETF research at State Street Global Advisors, told Barron's.
Bartolini said inflows for the year could break the $1 trillion mark sometime in the first 10 days of December -- and hit nearly $1.1 trillion by year's end.
And Roberts argues that certain stocks may enjoy an even bigger boost because they have more exposure to passive ETFs relative to their trading liquidity. Put another way, they tend to be smaller and midsize companies that stand to gain more from investors scooping up index funds that own these stocks.
"For smaller names with less liquidity, index funds can be a big buyer in the shares," Roberts told Barron's.
Many retail investors, she added, are already buying individual megacap stocks that have significantly more shares outstanding. Low volume isn't a worry for the Magnificent Seven.
Since Election Day, the stocks with a higher level of exposure to passive ETFs relative to their trading liquidity have done much better than the broader market, Roberts said. The top quartile of this group of stocks beat the Russell 3000 index by 6.4% in the week following the election.
Most of the individual stocks that Roberts identified as possible winners are financials. The top five are City Holding, Cathay General Bancorp, S&T Bancorp, United Bankshares, and Internet of Things connectivity company Digi International.
Roberts told Barron's that one reason small financials dominate the list is because many show up in several passive index ETFs. Examples are small-cap funds such as the iShares Russell 2000 and iShares Core S&P Small-Cap ETFs, sector funds like the SPDR S&P Regional Banking ETF, and dividend-oriented funds such as the Schwab U.S. Dividend Equity ETF since many banks pay high yields.
SSGA's Bartolini said financial ETFs have jumped because of massive post-election interest in bank stocks. Investors are betting on less regulation and more banking mergers.
Jill Carey Hall, equity and quant Strategist at BofA Securities, chimed in on the increased interest in bank stocks. She wrote that inflows into financial services ETFs from BofA clients in the past week were the largest since February.
Other stocks stand to get a post-election lift as well. Roberts pointed out several, including Rush Enterprises, a commercial truck sale, rental and leasing company; Flowers Foods, which owns Nature's Own, Dave's Killer Bread, and Wonder brands; NCR Voyix, a digital payments company; and industrial tools maker Fastenal.
But equity ETFs aren't the only funds that could get a bump up from Trump. Crypto ETFs could too, with Bitcoin close to $90,000.
David Mann, global head of ETF product and capital markets for Franklin Templeton, told Barron's there were outflows in its Franklin Bitcoin ETF in the weeks before election, but the fund has posted modest inflows since then.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 14, 2024 14:46 ET (19:46 GMT)
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