Animal Spirits Podcast - Talk Your Book: Massive ETF Inflows

Episode Date: December 20, 2021

On today's show we spoke with Matt Bartolini from State Street Global Advisors about ETFs, inflation and their 2022 outlook. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by State Street Global Advisors. Go to SSGA.com to find their 2022 outlook for the year, which we're going to be talking about in today's show. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholds wealth management may maintain

positions in the securities discussed in this podcast. Yesterday, Ben Carlson, Ben Johnson tweeted of the 493 ETFs launched in 2021, 60% are actively managed, 14% track ESG indexes, 9% track thematic indexes, and 4% track factor indexes. So really, at least 87% of the new ETF launches this year were for all intensive purposes active ETFs. Ryan Curlin from Alpha Architect quote tweeted and said, not early innings anymore. Beta is built. I guess it's almost surprising that it took this long for it to happen. Which part? Active managers holding out so long to get into the ETF game and just milking mutual funds as much as they could without realizing that ETFs are a completely better

mousetrap for an active strategy, right? Yes. There was a chart floating around recently that showed the cumulative number of ETFs and it's just like literally straight up into the right. At what point does that start to plateau? We've got to be kind of into close, although we had a record, was it a record number of launches this year? We spoke about this with Matt Bartolini on the show in a few, in a few seconds. I just can't remember. If you match the new ones with the ones that go out, that was kind of the same thing of the mutual funds. There would be hundreds or thousands of new ones every year, but there would also be ones that would die. So I think that's probably, I don't know how long that actually takes

to plateau because you have just as many dying probably as you do coming new. And so what's happening is the majority of new launches were different because it's over. not taking money out of State Street vanguard Black Rock Sands anymore, right? Like, that race is we know who the winners are. So the most of the, most of the money is still going into indexes or into ETFs under 10, that cost under 10 basis points. But the new launches are all things like this. Right. It's also interesting that you can even call thematic index, like a passive fund, I guess, that splitting hairs here. But, but, but you're right, this, all this stuff is, is now active. A trillion dollars worth of ETFs globally.

an all-time record by a lot. So let's not step on any more of this material. We're going to talk about all this and more with Matt Bartolini from State Street. We are joined today by Matt Bartolini, head of ETF research at State Street. Matt, thank you for joining us again today. Yeah, thanks for having me on, guys. All right, here's a good place to start. There was news in the journal, I believe, over the weekend.

Global ETF inflows crossed $1 trillion. First time ever, last year was a record, I feel like every year's the record, but last year was a record at 735 billion. So we're running way ahead of last year. Not surprisingly, most of the money goes into places like State Street, Vanguard, and BlackRock. I mean, a trillion dollars is a lot more than $735 million. What was it about this year? Yeah, I mean, they're on like a Steph Curry-like pace. They're just completely outkicking what they've done before.

And in the U.S., it's $822 billion. And, you know, there's only a couple more trading days less than the year. and we're sort of projecting 842, and I still think that's low. We'll probably get into the 870s just in the U.S. I think what's driving it is, one is some secular drivers, the ongoing move to low-cost, transparent, passive vehicles, the constant migration out of higher fee, underperforming mutual funds.

Then you also have other secular things with the rise of model portfolios and custom models that we're trying to utilize different macro exposures and asset allocation tools. Then you just have the sort of more short-term, like market-based factors. One is it's been inherently risk-on market for basically the last three years, honestly.

I mean, this is a third consecutive year of having double-digit return. And that's really startling to think, given what's going on from a pandemic perspective. But it's been risk-on. Equities alone in the U.S. List of EPS is taken in $620 billion. So people were just buying and buying

to capture the sort of risk-on rally. And if we sort of dive beneath the headline levels, they're using some pretty risk-on instruments. So sector ETFs has taken in around 80 billion, and that's a record for them. In sectors, that's just a really interesting way to express active risk. Financials ETS are at records. You've seen tech taking a significant amount of flows, energy as well. And then smart beta ETSs are going to break a calendar year record as well.

And it's being driven by cyclical type exposures like dividends. Dividendent equities are just consistently getting an inflows. Not to mention fixed income ETFs in the U.S., again, $200 billion. That's going to be their second year in a row of $200 billion. billion, and there's more and more asset allocators and investors that are using fixed income ETFs because they become more comfortable with them as a result of some of the stress testing that took place in 2020. Do you think the only reason that ETFs haven't just completely surpassed mutual funds

and left in the dust is that the 401K plans to have mutual funds? Is that the only thing they're holding on to at this point? That's a huge part of mutual funds is the 401K business. And I don't think that's likely to change just because some of the structural and operational nature of 401Ks that don't really match up one-to-one for ETF. So I think mutual funds will consistently be the sort of option for choice for 401Ks, and that will continue to offer some upside and asset growth. Why haven't an ETF providers figured out how to easily do this for 401Ks?

Is it just because that's the way they've always done it, or is it as simple as mutual funds trade at the end of the closing day? Is that as easy as that? Yeah. It's like one of the bigger factors, just easier to allocate your 401K shares because everyone gets the same price at the end of the day, not that you might like that price, but that's sort of what it is, just really easy from a plan sponsor perspective. And ETS, it's a little bit different. One of the things that stood out to me, looking under the hood

of this report, was the number of launches exceeded a record. And they were primarily active strategies. Do you think that this is coming off the heels of Kathy Wood's success at Arc in 2020? Yeah, I think so. I mean, if she had had success prior to 2020, I mean, 2020 as well, I shouldn't say 2022. But also active ETFs have been getting launched quite significantly, particularly in the fixed income space leading up to now. And I think part of it has to do with the generic listing standards were changed in 2016 that allowed for this.

And it took a couple years for firms to start to figure out where they wanted to place their bets, particularly as those that want to come into the ETF industry. I think a lot of the active launches that you're seeing are from new entrants into ETFs, not so much new entrants into sort of manage fund strategies. They probably have mutual funds as well. We also have the ETF conversions. So operationally, some advancements took place. Then, not to mention, you have the active non-transparent.

So there's basically three different ways for an active manager to enter the market. One is just through traditional means of launching an ETF and having to be transparent. Another one is non-transparent. Then another one just convert an asset. So there's a lot of options for asset management firms to get into the ETF industry. And some of the ones that hadn't been are using their legacy active business to enter. what are you seeing on the fixed income side in terms of you said there's a lot of active fixed income is that just in terms of people that are allowed to go different ends of the credit spectrum like

what are you seeing there in terms of launches it's mainly been into sort of the core plus type spaces which kind of meets with what demand looks like for fixed income right now because if you're buying the ag you're buying an asset class exposure where the underlying securities 95% of them trade below the five-year expectation for inflation Right. Your real yields across the bond spectrum are negative right now. Yeah. So your real return is going to be negative because there's essentially a 93% correlation to the yield you buy it today and the subsequent three-year return. So the one way to increase your return potential for 40% of your overall traditional portfolio is to seek out higher yielding segments. And that represents some risk. So using active managers to do the credit selection and asset class selection within fixed income has historically been beneficial when you just look at the performance result.

And ETF allow for active managers to launch strategies in that space and capture a clientele that is maybe building all ETF portfolios. What are you guys seeing in terms of junk bonds? Because you have a product there. I saw an alarming chart showing that real yields for junk bonds are negative. So it's not even like you can go out on the credit curve and you're getting compensated for that. So what are you seeing there?

If I was going to calculate real yields, I wouldn't just look at CPI because the 6% print we're getting is not going to continue. Well, what's the spread over treasuries? Spread over treasuries at 300 basis points, which is, you know, essentially like that 45% below is long-term average. So credit is expensive. So junk bonds, there's really not a lot of a backstop there in terms of if there's macro risks that spike.

The fundamental backdrop is still positive, great earnings. There's no defaults. No defaults. Default expectations are low. You've had more upgrades, road of the downgrades. There's more rising stars than falling angels. Everything's setting it up. The only problem is it's kind of like buying high growth stocks.

They're sort of priced for perfection. What we like from a implementation perspective is bank loans. And bank loans have been something that clients have liked. There's been over about $10 billion of inflows in the bank loan ETFs this year. A lot of it's been into like our strategy that's actively managed because there's another benefit there from a credit selection perspective. So bank loans are beneficial. So for people that are listening that don't know what bank loans are,

talk about why advisors are allocating to them today and have been for years actually yeah this year they've just taken off like I said 10 billion that's the most in any calendar year ever for inflows so senior loans bank loans this name that's interchangeable when we senior loans they're more senior in the capital structure as a name would say to other sort of fixed rate instruments senior loans are also floating rate instruments so they have their coupon tied to a short-term reference benchmark like libor or sofer and they will basically have a duration of like 0.25 years because they have a quarterly reset. So you're able to get a coupon. Like right now, I think senior loans yield around 4%. They have a duration of 0.25 years. Their average

price is actually below 100. I think it's like $98. Whereas fixed rate high yields 104. So that actually leads to a lot of negative convexity for high yield, meaning that there's less upside relative to the downside. And historically what we have seen, senior loans have lower downside deviation, lesser drawdowns as well as less overall volatility than fixed rate high yield because of that seniority in the capital structure. And we saw the markets back up over Thanksgiving when Omicron was first making news, high yield sold off bank loans basically traded only about 20 bits off their highs at that point. Is it the same thing in this where if you look at high yields and convertibles and preferred stocks, all these other higher yielding spaces, when the stock market gets crushed,

it falls 35% like it did in March 2020, these things. are going to get dinged pretty bad too. I would imagine that's the case. Yeah, I mean, March 2020, like correlations just moved to one. So everything just sold off. You look at like, even the difference in like small cap and mid-cap stocks is not existent. So loans and high yield both sold off quite significantly. But if you look at time periods where you take the 10 worst spread widening months, the performance for loans is much better than in high yield because it's going to sort of buffer some of that downside volatility. It's super technical, but even looking like something like a Sortino ratio. It's much stronger for loans relative to fixed rate

high yield, even just going to look at the downside deviation. Are you still seeing this crazy barbell and assets? So again, pointed back to that article, they said of the nearly 600 active ETFs in the U.S. Three-fifths have less than 100 million, more than half or below 50 million. So active ETFs, even though there's a ton of launches, they're still struggling to get off the ground against, I guess, what Balchunas calls the terror dome of the three to four basis point ETF. Yeah. Active ETS, unless you're coming to market with an inherently strong brand that people are just going to gobble up your strategy no matter who you are, which that really hasn't happened on a repeatable basis. You need to build a track record. You need to show that you have some

identifiable performance. That's three to five years. And a lot of the platforms where you need to get your ETF approved, they're going to be like, okay, you need three years before we can even look at this unless there's some other arrangement. So asset growth is, particularly just going to be from one type of clientele, predominantly in sort of like the independent broker dealers where there's less stringency in terms of platform approvals. So you don't have the full slate of clientele being able to buy your active ETS because there's an approval process you have to go through. Not to mention, just even if it was approved, the end advisor, then has to be like, all right, do I like this? How does it perform? And you don't have that

to fall back on when compared to like traditional mutual funds might have been around since the 80s. You mentioned that we had a little dip there in the S&P. I think it was down to 5%. now back at all-time highs. You did this cool piece in one of recent outlook pieces where you looked at the difference between non-profitable and profitable stocks. And I think this is something people pointed to in 2020 saying how crazy this speculation was getting because all these companies that had no profits were just crushing it. And you broke it out in a piece and you broke it out with U.S. stocks and U.S. growth and value in small caps and non-U.S. and all these other ones. And you basically did it from May 2020 to May 2021 and then since May 2021. And it's just completely

flipped. All the speculative stuff that was nonprofit was doing really well and all-performing and now it's getting crushed. And we're seeing this happen again when the market is back at all-time highs. What happened here? Like, what was the switch? Because rates, people were pointing to rates for girl stocks and rates didn't really even rise that much. I looked

today, the 30-year treasury is basically where it started the year at. So it's not like you can really point to rates. Is it as simple as inflation? Is that an easier explanation? The mosaic theory of it is like rates were a part of it, right? The rates did increase and that sort of changed some of the mathematics of how you're going to value these stocks. But there's also an aspect of from the onset of the pandemic to like May 2021, you just had

liquidity-fueled exuberance, whether it was from central banks, whether it was from government agencies, and this sort of mentality of just everything goes up. So there's exuberance, this bump, this sentiment shift that changed a lot of it. And you really didn't care about the fundamentals. I mean, there were companies that didn't make any money at all trading. You wouldn't have a P.E. actually, but they were up like 500%. At the same time, what happened, I think, is price returns outran or got ahead of fundamentals. So around June, July, we started to see earnings expectations for 2022. The upside to downside revision ratios were starting to move lower.

So you had less upsides relative to the downsides. So the sentiments started to really wane. And I think that's when people started paying a little bit more. more attention to profits instead of just looking at some potential high growth, even though they're not making any money. So it was like a domino effect, because I think that I do believe that interest rates spiking in when was this? I guess earlier in 2021 let the initial growth stock sell off.

They bounce, but not even close to their prior highs because the tenure went from 60 basis points all the way up to 1.8 almost. and even though it's only 1.8% that's like a big, big difference. And I think that that probably got the ball rolling and then the earning revision was like the fuel on the fire. Because these companies, Zoom, for example,

they're barely growing anymore. Yeah, I mean, there was like this initial boost, a lot of these are sort of the work from home plays that really rallied. And then there was a realization that these companies weren't going to be able to grow at the rate that people were expecting based on the valuations that now they're being given.

So even when you look at like, on an enterprise value at, you know, sales level, these things are trading rich. And you have higher rates that's going to dent that from evaluation perspective. At the same time, inflation. And then really just sentiment. People are like, well, you're not able to the expectations are you're not going to grow at the rate that we expected. And that changed. And I think that's why the market started to sell off for those unprofitable names. It's been quite consistent because even in that report, I looked at it from a sector perspective. And on an interest sector basis, when you break out even tech, which has a lot of profitable names in it, unprofitable tech, outperform

profitable at the early part of recovery, and then that flipped. And so there's just a greater emphasis being paid towards the ability to generate a return. But it's not just tech. That was the thing that really surprised me is it was pretty consistent across other sectors. People point to obviously the R-complex and all the non-profitable tech names, but it was across the board pretty much. Yeah, the only place where it didn't actually take shape was with an energy. And honestly, energy is a weird sector in this type of environment, because there was a lot of companies that weren't making, there really wasn't a lot of profitable stocks to sort of create a top and bottom decile. Do you put any credence into the idea that value stocks tend to just

do better when inflation is running higher? Does that make sense? Yeah, they should because of some of the sector biases within it. So value stocks typically are going to be, unless your sector neutral, but you're typically going to be overweight financials and energy and material stocks. And those sectors have a high correlation to inflation break-even, some of the highest out of any other sort of market segment within particularly U.S. equities, but also global equities. So just from their sector biases alone, they're going to have a stronger relationship to a rise in inflation and rise in interest rates than growth stocks. I also think that this is not necessarily theoretical textbook stuff because, correct me

if I'm wrong, value stocks tend to be slower growth per higher cash flow generating companies. I know that's maybe an overgeneralization. But if you're getting cash today versus the promise of being repaid in the future by these non-profitable names, it makes sense why value stocks in that scenario would do well in this type of environment. Taking this another step further, aren't Apple and Microsoft basically value stocks now because they have all these cash flows that they never had? Like the amount of buybacks and dividends that these companies are doing now, they're kind of value stocks, right? Or just blue chippers, I guess. I would agree with you, Ben.

Those are more value than growth at this point. Yeah, I mean, those are your quintessential quality stocks. They have high return on equity, they have a low standard deviation of earnings, they don't have a lot of leverage. Like, that's the type of company that you think from a long-term perspective is going to have stable above market-like returns from operating efficiencies and all those things. All right. So, State Street likes Apple.

Got it. Isn't that the biggest difference between now and the dot-com boom and bust? Like, we didn't have this in 1999. These huge five, six, seven companies that are just enormous that are like, they're almost like fixed income of the tech world. Well, it's like just a different view of conglomerates. In like the dot-com era, we had GE, you know, and GE was this sort of behemist that, you know, everyone knew GE because their products were so intermixed within our economy.

They were making airplanes and are also producing television and making dishwashers. Now, today, Apple is the same thing. They're making iPhones, iPads, cars, watches. So their products and services now being ingrained throughout the entire economy. I think it's just a different product and service set. that is creating reliable cash flows. Matt, let's talk about, by the way, of course, that was a joke. State Street does not like Apple or any other individual stocks.

Let's talk about profit margins. I'm looking at a chart from Yardinney, and the spike is sort of like an FU to everybody who's eating the inflation costs. And this is, of course, why you own stocks. But the fact that profit margins were at all-time highs, that was one of the data series that historically had been mean-reverting. And not only they're not muneverting, they're accelerating. What do you make of what's going on in this area of the market?

So for profit margins, some of it is just low base effects when you look at a year every year, which I think so will, that'll probably crest over ahead of 2020. Some of it's been just we've adopted more technology, that's more operational efficiency, that's been a benefit of margin compression. I think those two things are going to sort of generate in higher margins right now. I just don't know how sustainable that is going to be, which is why I think if you're looking at high, not so much high margin areas of the market, but more repeatable margins, which then goes back to profitability. Is it possible then? Because obviously a lot of these

companies have been able to pass on some costs to their customers. If we got a surprise to the downside where like inflation came in under expectations, is that like a bad thing for the stock market potentially? Like, could that be something that people go, wait a minute, we thought this was going to be a good thing for the economy? Inflation comes in at 0.4 instead of 0.7 one of these months or something. Hot take, hot take. I'm just throwing it out there. Like, is it possible that, like, corporations have so much pricing power now that that higher inflation is actually a good thing for the stock market. We're in the past, you'd go, no, this doesn't make any sense. By the way, Matt, I don't know if you know this, but Ben also has a side gig for the Federal Reserve.

So if he's defending inflation here, now you know why. I'm saying it's crazy how much power it seems corporations have these days. And maybe it's just because consumers have been so flush with cash. We complain about it inflation, but then we still pay our prices anyway. But I don't know. Is it possible? Well, what are you supposed to do, boycott bacon? Well, maybe from a health perspective, I don't know. Like, inflation is just so weird. Like, I think inflation just needs to meet expectations every month for the next few months,

so people don't lose their mind. Like, equity markets and fixed income markets. Because if it overshoots, then everyone's going to be like, oh, what does this mean for Federal Reserve policy? They're going to tighten. Well, what if they tighten too quickly? And then they have an inverted yield curve. And if it slows, then it's going to be like, well, we're going to be ultra accommodative

forever, and this is only going to fuel more inequality and risk assets. So, like, if it just meets expectations, which the expectations are for to start to roll over and come down. Like, what are those numbers look like as far as, like, expectations going forward if you have on the top of your head? This might be a little old, but globally, inflation forecast for 2020 is essentially 3.3% and then 2023 is 2.8. Nailed it. That's still pretty high.

Yeah. No, that's nothing. What are you talking about? Look, historically, 2% is nothing. This is recency on our part of never having to live through this. Excuse me, sir. 3% on top of 6% all of this year is not nothing. Nice try. Yeah, but the U.S. is the only country that's really experiencing this. It's like us in Venezuela. Everyone else is a little lower than us, right? No, global inflation is high.

Not 6.8% though. We're on the higher end of the developed economies, for sure. Matt, mediate, please. We are higher, but we're also part of the globe. True. We're a big piece of the pie, yeah. Yeah. And I think that's the biggest problem, though, is everyone's now talking about the Fed being hawkish and raising rates. Like, raising rates to 50 basis points, does that solve the inflation puzzle that we have? We have supply chain. constraints? Like, is that going to really affect higher interest rates? Are they going to affect

that? So, I don't know, there has to be something more intuitive from a policy perspective, like almost like an Operation Twist Plus, where they sell long end, buy short end, and hike at the same time to try to steepen the yield curve, but then raise rates. So your real rate goes up, and then that will curb sort of excessive spending. I think that would be something interesting. Plus, the whole thing about raising rates for the Fed, a lot of people have said, we have to raise rates to ring out all the speculation. Guess what? All the speculation is getting crushed right now. It's already happening. Unless you really want to see, okay, the Fed's going to raise rates to 2%, so the market crashes. Maybe that's what people

want to see. But it seems like the speculative stuff has already kind of taken care of itself. Yeah, I mean, going back to like, unprofitable names. Like, that's pure speculation, that they're going to be able to all of a sudden turn a profit. And if they're losing 10 cents or share in earnings, and they can go to positive 10 cents. Like, that's phenomenal growth. now you're also making real money and you can pass that cash onto your end investors. And those stocks haven't done well. And the other sort of more speculative assets have started to fall. Mem stocks.

Yeah. I guess there's probably a bunch of different baskets of speculative names. But the two big ones, as far as I'm concerned, were the non-profitable tech names and the meme stocks of the world. GameStop and AMC are getting slaughtered. We're recording this on December 13th. AMC is at the lowest level in, I don't know, a long time. that it's off a lot.

Yeah. What happened at the early part of the recovery was speculation was rampant. And now you're having a different type of environment where people are trying to place a little bit more of an emphasis on fundamentals, which I think is a sensible approach. Because even if we look at growth expectations going in 2022, we are moving from a boil to a simmer. And when that happens with growth cooling, but still positive, you want to be able to make sure that these companies are able to create profits in other past.

them through to end shareholders through buybacks or dividends or reinvest it into high profitable areas of the marketplace. One of the things that you highlighted in one of your pieces was sectors that could potentially do well, have the wind at their back in an inflationary environment. And I always thought that REITs could do this because they could just raise rents. But one of the angles that you took was interesting was the labor component. And I never thought about it that way. But sales per employee at REITs compared to other industry groups is like ridiculously

high. So talk about this. Yeah, I mean, they're just less labor-intensive area than marketplace. They're more capital-intensive, more fixed costs in terms of buying buildings and then renting them out. But they also are able to sort of pass on some of that inflation. I mean, if you look at home prices, they've drastically increased, like something like 25 to 30%. Ben thinks they're still too cheap. Well, if someone who lives in Massachusetts, relative to interest rates, I think they're still going to keep going up. That doesn't mean they're cheap. There's houses in and around. my area that are being bought, and I don't live in the most well-to-do area, but, like,

they're going way above market, and it doesn't make sense sometimes, but that's not here nor there. The thing about REACH is home prices have increased. Some research done from the Fed is basically owner's equivalent rent usually trails by 18 months. So if we've seen a 25% or 30% increase in home prices, we're likely to see rents start to increase as well, which then, again, is going to probably put some upper pressure on CPI, because OER is such a big component of that. And REITs are going to be able to take in that higher rent and pass it on to end shareholders. So REITs in this type of environment is something like, and we looked at a historical analysis, if you break out CPI by quintiles, when you're in this top quintile, which is where

we are, REITs significantly outperforming the broader market historically since 2000. And that's another reason why we think REITs are an area that should likely benefit in this type of inflationary regime. We talked earlier about finding yield and fixed income, and people really focus on the yield, but surprisingly, I haven't heard a ton about tips much this year, even though that is like one of the most unique assets there is, right? Because it gives you that one-for-one inflation. So how are those positioned because it doesn't matter if it's like expected inflation versus actual inflation? And if it comes in line with expectations, does that mean that it's already sort of priced in? And you also made a point in here about why it makes sense to own tips in an

ETF rather than the actual securities because I know a lot of people say, I want to own the bonds and hold them to maturity because that makes me feel safer about it. So talk a little about that about why it makes sense from a tax perspective to own those in an ETF. So tips continue to be one of the most or misunderstood asset classes because even earlier I was having a conversation with someone. They were like, well, I buy tips to hedge inflation. I was like, well, tips have a 0.1% correlation to CPI. If you don't really hedging, a proper hedge would to, you know, buy tips and sell nominal, then capture that break-even rate. Now, some of the return generators of tips is, yeah, if inflation expectations exceed the current rate is, it's going to be a beneficial

from a TIPS performance perspective. And that is what we have seen over the last 18 months. Right. Because the whole idea, though, is that the rate you get on tips is going to bake into whatever the inflation expectations are, which means like the current rate on tips is negative, basically right now. The actual yield on tips is negative. And actually, so if you look at our website, TIPS ETS have a negative 30-day SEC yield because real yields are negative. But where you're going to get actual current income is through the inflation adjustment. So going back to the other part of the question is the tips, they pass on that inflation adjustment every month through the forms of dividends.

Does that follow shadow stats or real CPI? I mean, real CPI or shadow stats? Or I got that backwards. Damn it. I think that's the trailing three-month CPI. Okay. So what happens is you get the real current income. And on the tips, that inflation adjustment just builds until maturity.

So what happens, though, is you're actually going to be taxed on that phantom income as an individual tips holder, but you're actually not receiving it. So you have a misalignment of your taxes. You're not getting any income, but you're being taxed on it. Within the UTF, you get at the same time, you get your income and your tax associated at the same level. So that's why we like tips ETS because you generate real current income in the current environment, but also matches up from a tax perspective.

So what is the best way to hedge against inflation? I know this is a question that everyone's searching for the answer. I guess it depends on the inflationary regime. It's so nuanced, but like gold, for example, which had all of the ingredients necessary to bake the gold pie of high returns, came to fruition except performance did not match. Yeah, so gold, there's other factors that could weigh on the price of gold, and one of that is a stronger dollar. The dollar has been really strong, and there's an inverse relationship to the dollar

and gold, so that's weighed on performance this year. But what about commodities? Because the dollar's been strong in other commodities are priced in dollars. Yeah. So one of the things that we think from an inflation perspective that could possibly benefit and continue to benefit is just natural resource equity. owning miners, metal firms, energy, that has historically exuded a strong relationship to break even inflation rates. Bitcoin miners? No, actual physical commodity miners. So Michael and I were trying about this last week, maybe, or two weeks ago. In November, commodities finally came back in a little bit. They were down nine or ten.

10%. Any relationship there where you can see the price of commodities and actually forecasting inflation somewhat? I haven't really seen that. I mean, I think from a trend perspective, when you start to see natural resource equities go up, that's an expectation that those firms are going to be able to benefit from higher commodity prices, and then that creates higher cash flows and higher earnings. We looked at earnings sentiment in some of those markets this year. They really started to increase in like a March to July timeframe. Since then, they started to wane a little bit as, again, some of these commodity prices got really high, and the expectations started to roll over. Matt, anything that we didn't get to today that you wanted to?

No. I really covered it from like one of the things that we've been working on recently. All right. I'm not going to hold you to this. Anything for 2022 that you're, I don't want a prediction. What are you particularly interested in watching as we head into the new year? Well, if the Celtics can play consistent defense, that would be one thing. Well, no. The answer is no. Yeah. Next. From an ETF perspective, I would like to see, where flows go. We've been having significant asset raises throughout the industry, and we're going to have, could be at $900 billion by the end of this year, and I just wonder where it would go next year. I think it's definitely going to be above where prior records were, but I wonder how much

the 2021 boost continues to roll over. You could probably have like $700 billion of inflows next year, and I wonder if people would think that's like a failure because it was less, but actually it's continuing to be really strong. Basically, I wonder if 2021 is the massive outlier, and 2022 we get back to like go from 500 to 700. Last question. I'm sorry. I forgot to ask this. Where is the fixed income money coming from?

I know we can't separate the wheat from the chip as far as flows and see where they're coming from. They're not on the blockchain. But if you had to guess, where do we think these flows are coming from? Are they existing bond mutual funds? Like, where is all this bond money coming from? I mean, bond mutual funds are still getting net inflows as well. I mean, there is some migration.

There is some migration of bond mutual funds, bond ETFs. but together, they're still growing. I think it's only just new capital, new people coming into the asset allocation world and that's led to the flows and fixing ETFs. But, yeah, I don't really have the greatest answer for that. Target day funds, maybe that's probably a big element. Yeah. I mean, more and more people today are investing than they did in, say, 2018, the share of population.

So, you know, managed strategies like ETFs are going to benefit because from a marketing perspective, is low fees, tax efficiency, consistency of performance, that's quite attractive to people new to investing. I think people also underestimate the people who have been investing for a while. If they move to an advisor or something that is more managed, when you're retired, you need to have some sort of safety valve, whether the yields are high or not, right? Yeah, I mean, bonds, whether they have negative, expected real returns, they still play have a valuable role from a diversification perspective. And diversification is one of the main

reasons why you would still hold bonds, even though those returns expect them to be negative. All right. That's a good place to leave it. Matt, thank you so much for coming on today. Yeah, thank you. Thank you, Matt. Thank you, State Street. Animal Spiritspod at gmail.com. We will see you next time. Thank you.