Tech ETF inflows surge and defy AI concentration risks

In the latest installment of Yahoo Finance's ETF Report, BlackRock head of iShares investment strategy for the Americas, Kristy Akullian, sits down with Julie Hyman to lay out where the biggest tech ETF inflows are happening as the latest bout of AI momentum stokes the flame of the market.

Investors are defying AI concentration fears as the tech sector continues to lead the market, and we've also seen the sector dominate ETF inflows. My next guest says the AI theme is not necessarily playing out along traditional sector lines. Joining me now, Kristy of Coulian, she is head of iShares America's investment strategy at BlackRock for this week's ETF report brought to you by PIMCO. It's good to see you, Kristy. So we have seen, I've seen various charts that show the flows this year are like skyrocketing for anything tech-related, and everything else is just kind of bumping along. Um, and I'm curious if that's what you guys have seen there at BlackRock also, and does it concern you at all? What what do you think is going on there?

Yeah, absolutely. It's it's great to be back. It's to see him this morning. Um yeah, I mean certainly we are seeing the resurgence of the AI trade. Um certainly off the March lows. We've seen that lead to, you know, concentration in flows, concentration in indices, but even more importantly, we're seeing that lead to concentration in earnings. So, you know, for us it's not necessarily raising alarm flags because most of the recent rally is really grounded in fundamentals as opposed to expectations and valuation. So, you know, even though, you know, we're seeing indices like the S&P 500 be, you know, more dominated by tech and more dominated by the top names within the index, you know, I think we're also seeing that is where the earnings are coming from, coming from. So, you know, it makes sense to us. Um but yes, certainly, you know, tech is is uh the hot topic. I think that what people are really looking for though is AI and we think that there are some some better ways to get access to that trade.

Well, I mean, we have seen that spill out at at various times at least into different parts of tech, right? Memory and storage, some of the older server companies like a Dell, Cisco catching the wave also, but then also into energy, right, has been a big related trade to that. So, when you think about it, is are those the kinds of areas you're looking or are there maybe areas that we haven't thought about yet?

Yeah, absolutely. You know, it's interesting because I think that tech is both in some ways too narrow of a way to think about uh AI and also too broad as a way to think about AI. Too narrow because we're not just seeing AI play out, you know, along the tech sector. It's certainly in industrials, it's in materials. It's not just in the US, it's in Asia in particular in emerging markets. Um so we like accessing, you know, more of that diversification of the AI trade, whether it's in a single ticker solution like the AI, which is our BlackRock AI ETF or getting really specific um in terms of which parts of technology you're accessing, like maybe something like SOXX, which is the semiconductor name. You know, we're seeing the largest dispersion within the tech sector on record between software um and semis earlier this year. So it's not again, it's not just about allocating to the sector to the tech sector and calling it a day. It's getting granular within semiconductors, it's getting granular within power generation, which we do think is is really one of the next legs of AI. So something like POWR um is our power thematic ETF, um and then getting more diversified across geographies as well. So many ways to access AI. Tech is part of the story, but it's not the whole story.

And Kristy, as you mentioned and as many strategists we've spoken to have talked about, um this is backed up, the move has been backed up by earnings growth in most cases, right, when people are looking to play this theme. Here we are kind of at the end of earnings season, right? We're going to get Broadcom later this week and then it kind of quiets down. So do you think the momentum will continue even without those earnings headlines?

Yeah, and certainly, you know, we do see more idiosyncratic risk during earnings season, we see more, you know, single stock names. You know, I think we're we're kind of shifting back into a period where markets are are going to focus too on macro data. And that has continued to surprise to the upside as well. So I think that there is kind of this confluence of positive macro, positive micro news on the earning side. and certainly as you mentioned, you know, when we came into this earning season, you know, the expectation was for single digit year-over-year growth. What we got just about at the end of it, you know, as you you laid out there, too, we're just about at the end here. So we can really tally up what this looked like. It was about 27% year over year. So I do think that those numbers were strong enough um to to convince people again that this this rally is is driven by fundamentals that can carry forward some of that momentum. Now it's really on the macro data to hold up as well.

Kristy, one of the other interesting phenomenons uh that I think we've we've seen is that with all this enthusiasm going into AI, it's been coming out of another area that had been very hot in ETFs and that's in crypto. You know, with your IBIT product um in particular over at BlackRock, the biggest one, seeing outflows here. Um so I'm I'm curious what you're thinking about that crypto cycle because, you know, as we've been talking about, the AI trade doesn't show any signs of slowing down. We're going to get some big IPOs that will also be drawing people's dollars. Maybe they'll be taking profits elsewhere to invest in those. So do you think there are any catalysts for for crypto to start coming back?

Yeah, and that's a great question. It's something that we've looked at a lot too. Obviously, um crypto doesn't have fundamentals like equities do for us to track as closely. So it's going to be more of a supply and demand driven market. Um I think that the macro has weighed on crypto, you know, kind of from the start with higher interest rates. Um expectations for maybe even policy rates to move higher, um just will weigh on a non-yielding asset like crypto. Um but you know, we we still, you know, do see opportunity in allocating to some of these scarce assets, um particularly in a time where investors are concerned about concentration, they're concerned about diversification. Um I think that, you know, we'll need to see um some of the the macro underpinnings behind some of that crypto trade maybe reverse a little bit, maybe expectations for interest rates to fall can be um another tailwind behind them. But as you know, you know, we do see investors um are are gearing up to allocate to or are are already allocating to some of the more high high volatile sectors um of the AI trade and and certainly some of the IPOs that are upcoming may be influencing um investor demand to raise cash as well, which I'd say we're also seeing play out in the ETF form too. You know, we saw the largest ever month for fixed income ETF flows in May. So it's not just about adding to risk assets. SGOV was was kind of the biggest winner there. So investors are both barballing sort of this need to raise liquidity and adding to kind of cash like instruments, as well as this demand to reach for some of the high growth areas, um some of the areas where we're seeing the the fundamentals play out in terms of earnings.

Very interesting. Um, Kristy, thank you so much. Good to see you.