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Market rotation favoring active management

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Respond to inflation: rate hikes, electricity and infrastructure pricing

We have written about the positive aspects of the economy and have been impressed by the faster GDP growth led by the consumer and manufacturing sectors. Inflation is an area we continue to monitor. We believe that much of the increase is not as transient as the Federal Reserve believes – in particular, higher wages and rental costs. But of late, the commodity complex has also picked up steam, including copper, lumber, coal, natural gas and crude. In fact, the price of brent crude is up + 277% from its pandemic low and 40% above its 5-year average.

Companies most exposed to inflationary pressures such as rising labor costs and supply shortages are looking for new ways to protect their bottom line. Stocks whose valuations are tied to future earnings are reassessed to account for inflation and rising costs of capital. The market is turning to inflation hedging opportunities such as regular dividend income, cyclical stocks that take advantage of recovery demand, relatively undervalued companies, and those with pricing power.

While increasing the capacity of supply chain infrastructure requires a lot of time and capital to build (think ships and factories), increasing labor capacity involves more to encourage individuals to re-enter the labor market. There are currently 11 million vacancies. While many have left the workforce during COVID, we believe they will eventually return to work and lead to above-trend GDP growth for next year. This strong growth is one of the main reasons the Fed may start to slow down and has indicated that it will likely do so in November or December. If inflation remains higher than their typical target of 2% (and currently Core PCI exceeds 6%), that’s another reason to reduce monetary accommodation. Despite the headwinds of the supply challenge, the economic recovery is fundamentally strong and we expect nominal GDP growth in 2021 to remain above trend. For perspective, the last four quarters have seen an annualized CAGR of 17% of nominal GDP. This shows how strong the demand is in our economy.

Uneven impact of inflation on profitability

Operating margins across all industries have rebounded significantly from pandemic lows. Corporate profits for certain industries, driven by higher demand and improved efficiency, could have a long run for continued margin expansion.

In an inflationary environment, pricing power, secular growth, and spending discipline are all important to a company’s ability to grow its margins – in addition to the specific nature of the industries in which they operate and the exposures. at inherent costs. Some firms exhibit these characteristics better than others and it is worth assessing the rate at which they can grow their profits organically, at this stage of the business cycle and in conjunction with their own microenterprise cycle. Although all sectors have improved their EBIT margins since the pandemic lows, cyclicals and financials have seen larger increases than non-cyclicals and Tech +.1

Cyclical sectors like energy, although impacted by rising labor costs, benefit from the higher price of their goods / services, the discipline of investment spending and the increased profitability of existing infrastructure. Other cyclicals, including industrials, saw their margins jump about 300% from pandemic lows thanks to strong pricing power and operating leverage.2 Financials, benefiting from strong commercial and banking activity, as well as from now rising yields, experienced a disproportionate rebound in their margins. Each of these economically sensitive sectors maintains higher fixed overhead costs and excess liquidity. Companies that exercise spending discipline and those that have invested in improving operational efficiency during the pandemic may be able to achieve these high margins for longer.

Non-cyclical technology companies, whose wages represent a substantial component of their total costs, are at a greater disadvantage than most other industries when it comes to absorbing inflationary pressures on prices and increasing their margins. There are certainly secular growth opportunities and attractive addressable markets within tech and non-cyclical stocks – and we use a barbell approach to portfolio management – but in today’s environment, due diligence and conviction more high are put forward.

As we watch the margins grow, we have to recognize that the marginal profit of one is the marginal loss of another. This is why the pricing power is so important – the ability to absorb higher costs and thereby achieve higher unit revenues. The higher costs tend to fall on the non-cyclical, with limited pricing power, and on the consumer who must measure the marginal utility of the good against its additional cost (elasticity of demand).

Our friends at Credit Suisse created the what-if analysis below using an industrial company to represent cyclicals and a tech company to represent non-cyclical stocks, and the impact of 10% inflation on their profits.3 It provides a good summary of the above:

Hypothetical impact of 10% inflation on corporate profits

ASSUMPTION: Inflation jumps 10% across the economy, including wages, input costs and consumer prices.

HYPOTHETICAL EXAMPLE:

Source: Credit Suisse

Investing in market rotation: our inclinations

Our portfolios have been oriented towards overweight cyclicals and secular growth technology companies throughout the period of economic recovery. We also maintained a bias in favor of quality balance sheets and excess free cash flow. As interest rates rise, the pace of yield curves increases and widening corporate debt spreads make it more costly for companies to raise new capital. Growth companies that rely on new capital to generate future profits, especially those with above-average valuations, are at greater downside risk in a market downturn and have less fuel for the market. growth. The economic recovery continues to be driven by consumer demand, the resumption of manufacturing and the decline in COVID cases. We believe the momentum favors undervalued cyclical companies that can grow organically in large, addressable markets with excess liquidity and pricing power.

Stéphanie Link: CNBC TV Program

Sources

  1. Swiss credit. “Tech +” includes Internet retailing (excluding cyclicals) and the Internet parts of communications services.

  2. Swiss credit

  3. Swiss credit

Disclosures

Investment Solutions at Hightower Advisors is a team of investment professionals registered with Hightower Securities, LLC, a member of FINRA / SIPC, & Hightower Advisors, LLC, an investment advisor registered with the SEC. All securities are offered by Hightower Securities, LLC and advisory services are offered by Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is risk free and there is no guarantee that the investment process described here will be profitable. Investors can lose all of their investments. Past performance is not indicative of current or future performance and does not constitute a guarantee. In preparing these documents, we have relied on and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources; as such, neither the information nor the opinions expressed constitute a solicitation for the purchase or sale of any security. Hightower will not be responsible for any claims and will make no express or implied representations or warranties as to their accuracy or completeness or for any representations or contained errors or omissions on their part. This document was created for informational purposes only; the opinions expressed are solely those of the author and do not represent those of Hightower Advisors, LLC or any of its affiliates.

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In stock market cycles, active management can be a boon

By Active management No Comments

TThere is a lot of uncertainty in the market right now as concerns about interest rates, economic growth and inflation weigh heavily on the minds of investors. Uncertainty and volatility are environments in which active management typically outperforms, and T. Rowe Price has described current market climates as well as potential avenues to follow from there.

David Eiswert, CFA and portfolio manager at T. Rowe Price, recently wrote a white paper on the stock market cycle and the current state of the markets according to the company. Due to the economic shutdown, the strengthening of the Fed has led to an environment with little systematic risk, both now and potentially in the future if interest rates remain low and the pandemic continues to improve.

Right now, interest rates are low, asset prices are high, and there is no credit cycle to pressure and disrupt things. This has given rise to what Eiswert calls “negligent risk-taking in financial markets,” and he argues that this type of behavior is best approached through active management.

While there is general inflation in the labor market, there is always the question of whether it will become a permanent feature or whether it will increase. “While a certain degree of labor inflation is a good thing, an escalation would likely require a change in monetary policy that could potentially disrupt the cycle,” Eiswert said. The resumption of schools in the fall could play a mitigating role in the balance between labor supply and demand.

In addition to general labor market inflation, there are pockets of “absurd” inflation such as lumber, DRAM and used cars. This is a scenario where everyone loses because all assets fall; this is something that happened on a small scale in December 2018, explains Eiswert.

Added to this are the current interest rates, which are historically low. “We are wary of the level of interest rates today and believe that the price of treasury bills represents more of a hedge and aversion to risk than a precise indicator of the future economy,” Eiswert said. Although Eiswert believes interest rates should be higher, they should be kept within reasonable limits so as not to cause serious problems.

Active management can help thread the needle

With the pandemic, many growth stocks have enjoyed unprecedented gains that have not lost momentum even as economic reopening has become increasingly possible.

“Mega-capitalizing tech stocks have dethroned consumer staples and utilities as a source of defensive market positioning. We are seeing significant congestion and momentum in some of these growth areas, especially in PSPCs, IPOs, and MEMEs.2 actions, ”Eiswert explained.

This is a situation that Eiswert considers “dangerous” and where the benefits of active management can really shine by ensuring that only properly valued assets are invested. there is lower inflation than today, coupled with higher rates but which still maintain a status quo while remaining historically low.

This scenario could be created by the slowdown in the Chinese economy, the acceleration of COVID-19 cases from Delta (which would help slow the economic recovery) and the continued improvement in supply chain functionality. In this scenario, “absurd” inflation disappears and the growth of the economy stabilizes, creating an environment in which stock pickers thrive.

“Our goal is to hold stocks where we have a sense of improving economic returns while avoiding stocks that involve unnecessary risk and should be avoided. This is our role as bottom-up fundamental stock pickers, ”said Eiswert.

For more news, information and strategy, visit Active ETF Channel.

Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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In stock market cycles, active management can be a boon

By Active management No Comments

There is a lot of uncertainty in the market right now as concerns about interest rates, economic growth and inflation weigh heavily on the minds of investors. Uncertainty and volatility are environments in which active management typically outperforms, and T. Rowe Price has described current market climates as well as potential avenues to follow from there.

David Eiswert, CFA and portfolio manager at T. Rowe Price, recently wrote a white paper on the stock market cycle and the current state of the markets according to the company. Due to the economic shutdown, the strengthening of the Fed has led to an environment with little systematic risk, both now and potentially in the future if interest rates remain low and the pandemic continues to improve.

Right now, interest rates are low, asset prices are high, and there is no credit cycle to pressure and disrupt things. This has given rise to what Eiswert calls “negligent risk-taking in financial markets,” and he argues that this type of behavior is best approached through active management.

While there is general inflation in the labor market, there is always the question of whether it will become a permanent feature or whether it will increase. “While a certain degree of labor inflation is a good thing, an escalation would likely require a change in monetary policy that could potentially disrupt the cycle,” Eiswert said. The resumption of schools in the fall could play a mitigating role in the balance between labor supply and demand.

In addition to general labor market inflation, there are pockets of “absurd” inflation such as lumber, DRAM and used cars. This is a scenario where everyone loses because all assets fall; this is something that happened on a small scale in December 2018, explains Eiswert.

Added to this are the current interest rates, which are historically low. “We are wary of the level of interest rates today and believe that the price of treasury bills represents more of a hedge and aversion to risk than a precise indicator of the future economy,” Eiswert said. Although Eiswert believes interest rates should be higher, they should be kept within reasonable limits so as not to cause serious problems.

Active management can help thread the needle

With the pandemic, many growth stocks have enjoyed unprecedented gains that have not lost momentum even as economic reopening has become increasingly possible.

“Mega-capitalizing tech stocks have dethroned consumer staples and utilities as a source of defensive market positioning. We are seeing significant congestion and momentum in some of these growth areas, especially in PSPCs, IPOs, and MEMEs.2 actions, ”Eiswert explained.

This is a situation that Eiswert considers “dangerous” and where the benefits of active management can really shine by ensuring that only properly valued assets are invested. there is lower inflation than today, coupled with higher rates but which still maintain a status quo while remaining historically low.

This scenario could be created by the slowdown in the Chinese economy, the acceleration of COVID-19 cases from Delta (which would help slow the economic recovery) and the continued improvement in supply chain functionality. In this scenario, “absurd” inflation disappears and the growth of the economy stabilizes, creating an environment in which stock pickers thrive.

“Our goal is to hold stocks where we have a sense of improving economic returns while avoiding stocks that involve unnecessary risk and should be avoided. This is our role as bottom-up fundamental stock pickers, ”said Eiswert.

For more news, information and strategy, visit Active ETF Channel.

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Investor returns, misperceptions and the art of active management

By Active management No Comments

The last Watch out for the gap Morningstar research shows that over the past decade, investors have lagged equivalent market returns by an average of 1.7% per year.

Complete this over a period of 10 years or more, and you’ll end up giving up a lot of money!

In 2011, a study by DALBAR’s Quantitative and Investor Behavior Analysis (QAIB) group showed that over the previous two decades, the average investor in a mutual fund had underperformed the S&P 500 Index by 4.3% per year, while investors in bond funds lagged the Barclays US Aggregate Bond Index by up to 5.5% per year.

Before the 2000s, investor returns were even worse. While performance over the past decade has arguably been less severe, consistent underperformance persists.

Why such bad results?

Excessive fees, heuristic-backed processes, lack of repeatability, and misalignment of interests are perhaps some of the main reasons for poor long-term results for clients.

The biggest cost to clients, however, has been the ‘timing and selection penalty’ – the cost of investing in a fund after a period of good performance and then selling it after a period of good performance. period of poor performance.

Poor execution is primarily the result of behavioral biases, a topic frequently discussed, but rarely practiced.

The market – or more specifically, parties with a particular interest, which include consultants, custodians, trustees, third-party research providers, wealth managers, and even academics – have come up with solutions to overcome the poor performance of financial institutions. clients.

Generally recognized and accepted solutions include the diversification of specific security risks, the use of passive indexation strategies and the systematic rebalancing of investor portfolios.

Taking them at face value is, in our opinion, misguided and in fact increases some risk without addressing the fundamental problem.

Below, we discuss the factors that we believe are crucial to achieving strong and consistent long-term results.

A significant amount of evidence shows that fund flows follow performance.

A typical fund investment is only three years, which we believe is far too short to prove or disprove a manager’s competitive advantage, or even sustainability.

Indeed, performance over a period of three years or less is mainly impacted by asset allocation factors.

All of these factors can be managed through better and more in-depth fundamental research: a better understanding of the intrinsic value of the security – or fund – in which you invest and how that intrinsic value composes over time.

This should allow investors to better understand their safety margin, manage downside risk and allocate capital more efficiently.

Ultimately, better long-term results while involving less short-term risk are possible.

However, it requires a willingness to be different; a portfolio of high conviction and quality; efficient capital allocation, underpinned by a fundamental understanding of intrinsic value… and patience!

Ernst Knacke is Head of Research at Shard Capital

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Active management was designed for volatile markets

By Active management No Comments

One of the big problems today is that many investors have turned completely to indexing or passive investing. There is nothing wrong with buying a vehicle like the SPDR S&P 500 AND F Confidence (TO SPY) Where iShares Russell 3000 AND F (IWV). They can form large grassroots farms.

But they’re not perfect either. With indexing, you get both the good and the bad. Investors are subject to the general vagaries of the market, and this includes volatility shocks and shocks. Because of the way most indices are weighted by market capitalization, a few stocks can significantly influence their direction and price movements.

But active management can work differently.

On the one hand, active managers do not have to buy all the stocks in an index or in the same weightings as their benchmark index. It can help reduce volatility. Second, active managers can focus more on dividends. Dividends have long been a great way to reduce overall portfolio volatility. After all, getting 2-4% in cash goes a long way in increasing yields.

One of the advantages of active management over passive management is probably the possibility of not being 100% invested at all times. Active managers have the flexibility to sell stocks as they see fit and flee to cash if they feel volatility is too high or valuations are too high. However, this is not the case with passive indexing. An index fund will hold all of its benchmark holdings even if stocks rebound or trade with triple-digit P / E’s. This ability to hold cash can be a great way for active managers to reduce losses and improve returns for their shareholders.

A recent NAAIM One study highlights this factor and calls it the “buy and hold equalizer”. Looking at 70 years of market data, active managers can actually be on the wrong side of the market almost 40% of the time and still equal buy and hold returns. Indeed, the ability to flee towards liquidity creates a leverage effect during bull markets. Conversely, the remaining 60% who succeed end up outperforming during times of high volatility.

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China Tumult highlights the strengths of active management

By Active management No Comments

The demise of China’s largest real estate developer and its potential effect on the Chinese economy has added stress to already volatile markets. Previous Chinese government regulations in several sectors as well as Delta hampering China’s economic recovery have already created drawbacks in the markets, and now, with the addition of Evergrande’s default on billions of dollars in debt, Chinese markets and investments in China are shaken.

With stocks going back and forth, this is a time when active management really shines, as active managers are able to exit distressed investments with agility and potentially transfer funds to safer ones, while that passive funds face a roller coaster ride until their next rebalancing.

Adviser Investment Management chairman Daniel Wiener, recently appearing on CNBC AND F Edge believes this is the time when investors “have to work with investment managers, portfolio managers with boots on the ground.”

Active managers are able to react in real time to potential market meltdowns in a way that could save investors a lot of money. Periods of volatility are historically when active management really comes to the fore and outperforms the benchmark and passive peers.

Troubled markets for international investors, along with downturns in US markets, provide actively managed funds the perfect opportunity to showcase their strengths.

Long term, DWS Arne Noack of the group said AND F Edge that he doesn’t think Evergrande’s default is one that will create far-reaching effects in the markets at large.

“Evergrande being a struggling development company obviously concerns us, but we don’t see it as a larger systemic risk in China,” Noack said.

T. Rowe Price in difference and the benefits of active investing and active management. The company currently offers five actively managed ETFs for investors looking to invest in a record IPO environment that benefits stock pickers. The company brings a wealth of experience and research to its products, with portfolio managers averaging over 20 years of investment each, as well as more than 400 investment professionals dedicated to researching companies within ETFs.

For more news, information and strategies, visit the Active site AND F Channel.

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Turbulence in China highlights the strengths of active management

By Active management No Comments

The demise of China’s largest real estate developer and its potential effect on the Chinese economy has added stress to already volatile markets. Previous Chinese government regulations in several sectors as well as Delta hampering China’s economic recovery have already created downside in the markets, and now, with the addition of Evergrande’s default on billions of dollars in debt, Chinese markets and investments in China are shaken.

With stocks going back and forth, this is a time when active management really shines, as active managers are able to nimbly exit troubled investments and potentially shift funds to safer ones, while that passive funds face a roller coaster ride until their next rebalancing.

Adviser Investment Management chairman Daniel Wiener, who recently appeared on CNBC’s ETF Edge, believes the time has come for investors “to work with investment managers, portfolio managers with boots on the ground.”

Active managers are able to react in real time to potential market meltdowns in a way that could save investors a lot of money. Periods of volatility are historically when active management really comes to the fore and outperforms the benchmark and passive peers.

Troubled markets for international investors, along with downturns in US markets, provide actively managed funds the perfect opportunity to showcase their strengths.

Long term, Arne Noack of DWS Group told ETF Edge he doesn’t think Evergrande’s default is one that will create far-reaching effects in the wider markets.

“Evergrande being a struggling development company obviously concerns us, but we don’t see it as a larger systemic risk in China,” Noack said.

T. Rowe Price believes in the difference and benefits of active investing and active management. The company currently offers five actively managed ETFs for investors looking to invest in a record IPO environment that benefits stock pickers. The company brings a wealth of experience and research to its products, with portfolio managers averaging over 20 years of investment each, as well as more than 400 investment professionals dedicated to researching companies within ETFs.

For more news, information and strategy, visit Active ETF Channel.

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How active management can help trade China: a $ 7 billion fund manager

By Active management No Comments

Active management may be one of the only ways to generate alpha from China’s turbulent trade, according to one investor.

Chinese stocks slumped this week over fears that one of the country’s biggest real estate developers, Evergrande, could default on billions of dollars in debt.

Given the growing litany of risks in China – not only from Evergrande, but also regulatory crackdowns on domestic tech, games and education companies – it is imperative to remain nimble in this market, said Monday the chairman of Adviser Investment Management, Daniel Wiener, at CNBC’s “ETF Edge”.

“I don’t think you can index China just yet,” said Wiener, who manages $ 7 billion in assets. “You have to work with investment managers, portfolio managers with on-the-job skills. This means using actively managed funds, not ETFs. “

One such option exists at Vanguard, where Wiener is editor-in-chief of The Independent Adviser, a monthly newsletter.

The Vanguard International Growth Fund, an open-ended mutual fund with an almost 14% position in China, has outperformed Vanguard’s Total China Index ETF since the start of the year and over the past 12 months, three years and five years, Wiener said.

“They have people on the ground. They make choices about which businesses to buy and which to avoid, and that makes all the difference,” he said.

Either way, Evergrande’s debt dilemma is not expected to have a major impact on global markets, said Arne Noack of DWS Group in the same interview.

“We obviously take the issue very seriously and are looking at all the implications,” said Noack, his company’s head of systematic investment solutions for the Americas and the man behind the Xtrackers Harvest CSI 300 China A-Shares ETF ( ASHR).

“Evergrande being a struggling development company is obviously of concern to us, but we don’t see it as a larger systemic risk in China.”

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Economic uncertainty increases investment in active management

By Active management No Comments

Market performance, fears of Delta’s global economic impact, and concerns about inflation are prompting investors and advisers to watch the markets closely for any signs of what many see as an inevitable correction. US markets have consistently outperformed for so long that there are growing concerns about impending volatility and a significant correction looming on the horizon.

It’s a concern that causes advisers to divert funds overwhelmingly to actively managed funds, Wealth Professionals reports.

“With the current cycle moving very quickly, the risk that the correction will be hard increases,” Binky Chadha, chief strategist at Deutsche Bank, warned last week. “Market-level equity valuations are historically extreme on almost every measure. “

A new poll from PGIM Investments, part of the $ 1.5 trillion global investment management firm Prudential Financial, Inc., discovered that advisors had funneled 62% of their clients’ assets into active management and 34% in passive funds.

Fears of COVID the resurgence of the Delta variant and the looming specter of another economic shutdown have a huge impact on how advisers approach investing; 76% said pandemic concerns guide their decisions, and 68% said volatility in stock markets is their main concern for portfolio management.

“What we have discovered through our research and experience is that financial advisors continue to use a mix of assets and liabilities, but rely more on actively managed solutions within the portfolios of customers, ”said Stuart Parker, President and CEO of PGIM Investments. “The ability to generate alpha for clients, especially during times of market volatility, is critical.”

The study also found that while almost all financial advisors use mutual funds, 65% plan to use more ETFs in the next three years.

T. Rowe Price believes in the difference and the benefits of active management. The company currently offers five actively managed ETFs covering a variety of investment objectives. The company brings a wealth of experience and research to its products, with portfolio managers averaging over 20 years of investment each, as well as more than 400 investment professionals dedicated to researching companies within ETFs.

For more news, information and strategies, visit the Active site AND F Channel.

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Global economic uncertainty leads to greater investment in active management

By Active management No Comments

Market performance, fears of Delta’s global economic impact, and concerns about inflation are prompting investors and advisers to watch the markets closely for any signs of what many see as an inevitable correction. US markets have consistently outperformed for so long that there are growing fears of impending volatility and a significant correction is on the horizon.

It’s a concern that causes advisers to divert funds overwhelmingly to actively managed funds, Wealth Professionals reports.

“With the current cycle moving very quickly, the risk that the correction will be hard increases,” Binky Chadha, chief strategist at Deutsche Bank, warned last week. “Market-level equity valuations are historically extreme on almost every measure. “

New survey from PGIM Investments, part of the $ 1.5 trillion global investment management firm Prudential Financial, Inc., found advisers funneled 62% of their clients’ assets in active management and 34% in passive funds.

Fears of a COVID resurgence with the Delta variant and the looming specter of another economic shutdown have a huge impact on how advisers approach investing; 76% said pandemic concerns guide their decisions, and 68% said volatility in stock markets is their main concern for portfolio management.

“What we have discovered through our research and experience is that financial advisors continue to use a mix of assets and liabilities, but rely more on actively managed solutions within the portfolios of clients, ”said Stuart Parker, President and CEO of PGIM Investments. . “The ability to generate alpha for clients, especially during times of market volatility, is critical.”

The study also found that while almost all financial advisors use mutual funds, 65% plan to use more ETFs in the next three years.

T. Rowe Price believes in the difference and the benefits of active management. The company currently offers five actively managed ETFs covering a variety of investment objectives. The company brings a wealth of experience and research to its products, with portfolio managers averaging over 20 years of investment each, as well as more than 400 investment professionals dedicated to researching companies within ETFs.

For more news, information and strategy, visit Active ETF Channel.

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