‘On The Money’ with Mark Hamrick: Investing pro Tom Lydon shares how ETFs can play a key role in your financial plan

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Exchange-traded funds, better known as ETFs, have exploded in popularity in recent years. While mutual funds still command more money with their association to employer-provided retirement accounts, the growth in ETFs has been impressive. The competition for investor funds has helped to drive down costs, allowing people to keep more of their money while also taking more control of their own finances.

One of the investment professionals who identified and harnessed the now decades-long ETF boom early on is Tom Lydon, CEO of ETF Trends. In this edition of “On the Money,” Tom shares how ETFs can play an important role in an individual’s overall financial plan.

As part of the overall trend with more people taking the initiative in their own investing, Lydon says more people have sought information on ETFs over the past few years (4:30), including during the COVID-19 pandemic.

How do ETFs and mutual funds compare, in terms of investor assets? Lydon notes there’s now a total of $6.5 trillion (yes, trillion with a “T”) in ETFs, which has grown tenfold since the Global Financial Crisis (6:02). By contrast, he notes mutual funds are valued at about $18 trillion. The difference, he says, is that people don’t have the option yet of putting 401(k) fund money into exchange-traded funds. But he thinks that could change in the coming years (6:30).

As part of the so-called democratization of markets, providing investors access to more and lower-cost financial products (including commission-free stock trading), Lydon says there’s been tremendous innovation in ETFs allowing new investor options such as sector and themed investing (9:05). Other newer ETFs include leveraged, or higher-risk, products and he expects Bitcoin or cryptocurrency funds to follow next as regulators give their approvals (10:29).

Still, he says most ETF money remains in traditional categories such as those which track the benchmark S&P 500 stock index. Even so, there are a variety of different ETFs in that space, Lydon notes (11:30), or “all different shapes and sizes” as he puts it.

In terms of timely questions, Lydon says the ultimate persistence and extent of inflation, whether it lingers is the “hot topic of the day” (14:15). Lydon says most investment professionals believe inflation will be more lasting than what the Federal Reserve has been saying. Lydon says inflation, or rising prices, has sparked more interest among investors in commodities. And if inflation does last longer than expected, he says gold would attract more investor dollars, or a “second-half player” (15:30).

Lydon reminds that rising interest rates can be a bigger threat to fixed income, or bonds, than equities. As a result, he says investors are searching for more diversification in order to hedge against the potential threat. Over the next few years, Lydon says more financial markets volatility may emerge and he says investors may not be prepared for that (17:50).

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Written by
Mark Hamrick
Washington Bureau Chief
Mark Hamrick is Washington Bureau Chief for Bankrate. He is a national award-winning business and financial news journalist.
Edited by
Senior editorial director