Geopolitical tensions are high and the economy's outlook is uncertain. That presents investors even with the best ETFs with what might be the toughest environment since 2022. Even loading up with megacaps, tech and Magnificent Seven isn't helping portfolio returns this year.
A tough market is hurting investors ill-positioned for the current downturn. But volatility also created opportunities for ETF issuers offering more diversified, actively-managed products.
One of those issuers stepping up in a tough market is AdvisorShares. With roughly $1 billion under management, it specializes in actively managed niche and thematic strategies for ETFs. Those offerings range from cannabis to restaurants and hotels as well as a number of broader stock strategic packages. Acknowledging that the low-cost index fund space is saturated by the largest issuers, AdvisorShares aims to differentiate itself through offerings meant to fill out some of the corners of portfolios.
Investors Business Daily caught up with AdvisorShares CEO Noah Hamman to discuss the firm's planning process of its ETF lineup, how active management could be poised to make a comeback and the current geopolitical environment.
What Is AdvisorShares?
IBD: Give us a little background on AdvisorShares and the ETFs that you offer.
Hamman: All of our ETFs are actively managed, with some focusing on specific themes such as restaurants and hotels. Most recently, we introduced an ETF dedicated to the heating, ventilation and air conditioning (HVAC) industry. Several of our top-performing strategies — including our focused international Dorsey Wright ADR ETF, with over 10 years of outperformance over its benchmark index, AdvisorShares Restaurant ETF and AdvisorShares Focused Equity ETF, all have top Morningstar rankings.
Rise Of Alternative Best ETFs
IBD: We've seen more "alternative" ETF strategies offered by issuers beyond the traditional stock and fixed income products. Is this the new direction that smaller issuers will be heading into to compete?
Hamman: I do (think so). There simply isn't an opportunity for new or smaller ETF firms to break into what I would call traditional beta — broad indexes, style boxes, sectors and common commodities. These categories are dominated by large firms that have pricing and distribution power, and many advisors are less comfortable allocating to smaller ETFs.
What Are Best ETFs For Cannabis?
IBD: You offer several ETFs that fall into the "vice" category, including cannabis, psychedelics and the AdvisorShares Vice ETF. How are you finding investor demand for products like these?
Hamman: For cannabis, investor demand has been strong, with approximately $2 billion in flows to our three cannabis-focused ETFs. However, while the category started off well with a rapid rise, it has since experienced a four-year decline — primarily due to the Biden administration and the Democrat-controlled House and Senate failing to pass cannabis reform, despite campaign promises to decriminalize cannabis.
President Trump has publicly stated that cannabis should be medically legal and that states should decide on adult use. In fact, he has said he voted in favor of adult use in Florida. However, he has not specifically promised cannabis reform. That said, his stance is clear, which gives us optimism that this administration may finally make progress on federal cannabis reform. A promising sign is his recent appointment of a cannabis czar — someone he previously pardoned for a nonviolent cannabis conviction.
Psychedelics have faced a similar performance environment but have not been nearly as popular as cannabis. The vice category has had its challenges. It's difficult to compare with the tech-heavy S&P 500, though, it saw strong numbers during the pandemic. Since then, however, demand in the category has been impacted in part by the rise of GLP-1 obesity drugs, which do not match well with alcohol consumption.
Specialized ETFs Matter
IBD: You just recently launched the AdvisorShares HVAC and Industrial ETF. What was the thought process for targeting this industry for an ETF.
Hamman: This is a great example of looking at equities by themes. We came across an article about how private equity firms were acquiring local HVAC companies due to their large operating margins and high cash flow. This sparked the idea of how to approach it in the equity markets. We built a portfolio of HVAC companies and found that it consistently outperformed both the industrial materials sector and the S&P 500. We believe private equity is still early in this space, and we see the category continuing to grow — driven by a growing global middle class, infrastructure modernization in the U.S. markets and the expansion of data centers needed for AI and crypto. And we see this as a market-beating investment theme for the long term.
Competition With Index Funds
IBD: In an industry dominated by low-cost index funds, AdvisorShares specializes in actively-managed ETFs. With the market seemingly shifting away from the mega-cap tech leadership of the past two years, is active management primed to make a big comeback?
Hamman: I hope so. The market has essentially moved straight up since the 2008 financial crisis. Every market drop has been propped back up by an increasing Fed balance sheet. It has made sense to stay long in broad market exposure. We believe that if there is a real change in policy, such as no longer leveraging the Fed's asset purchasing ability, we might see more changes in market action and less correlation across sectors. Regardless of the environment, we have managers and strategies today that are top in their category. So, when investors are ready, there are some great outperforming ETFs to consider.
Best ETFs Consider Global Trade
IBD: The markets are focusing on the global trade war. Do you think this puts the possibility of recession back on the table in 2025?
Hamman: Yes, but I remain optimistic that it will be short-lived and, more importantly, will lead to more job creation and opportunities in the U.S. Unless you are good at market timing, times like these can present good opportunities to invest.
IBD: We've seen a big shift away from risk in the markets over the past month. Previous winners, including the Magnificent 7, have struggled, while previous laggards, such as Treasuries, consumer staples and value stocks, are leading. Is diversification finally coming back in vogue?
Hamman: Yes, we hope so. That said, I believe tech, in one form or another, will continue to lead. I could easily see it shifting from chip demand to software demand. Being willing to narrow down into themes can be a great way for investors to add value to their investment strategies.
Best ETFs Finding Risks
IBD: What is the most underappreciated risk you see in the financial markets today?
Hamman: With the markets at or near all-time highs, it's important to remember that conditions can change quickly. Investors need to periodically reassess how much they are willing to risk and then adjust their portfolios to align with their evolving risk views.
IBD: Any other final thoughts on the state of the global economy and financial markets or best ETFs?
Hamman: Given the volatility we are seeing early in this administration, my view is that we should expect it to have a ripple effect on already weakened foreign markets.
