ETF Edge - 2021's Next Big Thematic Tech Investment

Episode Date: July 26, 2021

CNBC's Bob Pisani spoke with Christian Magoon, CEO of Amplify ETFs – along with Jay Jacobs, Head of Research and Strategy at Global X Funds. They discussed the hottest thematic trends hitting the ETF market – including a new Thematic All-Stars ETF, what the path for clean energy and infrastructure looks like and where we’ll see the biggest flows throughout the rest of 2021. Does thematic tech really outperform? In the ‘Markets 102’ portion of the podcast Bob continues the conversation with Jay Jacobs from Global X Funds. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged traded funds, you are in the right place, my friend. Every week, we're bringing you interviews, market analysis, breaking down what it all means for investors. I'm your host, Laphizani. Today on the show, we're breaking down the hottest thematic trends hitting the ETF market, including a new thematic All-Stars ETF.

at what the path for clean energy and infrastructure looks like, where we'll see the biggest flows throughout the rest of 2021. Does thematic tech really outperform? We'll ask two experts in the field to weigh in. Here's my conversation with Christian Magoon. He's the CEO of Amplify ETFs, along with Jay Jacobs, head of research and strategy at Global X funds. I've been talking about thematic tech investing for a few years now.

This is an attempt to put all the hot thematic stocks into a single, ETF. Describe to us what's in this ETF, how you figured out what goes in it, and is there really a compelling need for an ETF that tracks these most popular thematic stocks? Yeah, sure things. So there's about 140 thematic ETFs out in the marketplace today here in the U.S. They own about 3,200 different stocks. So it can be very confusing to understand, you know, what thematic ETF do I buy, how do I avoid non-pure play stocks, how often should I rebalance. MVP is an ETF that simply looks at about 160 companies out in the marketplace that are the most widely owned by the thematic ETS across the gamut. Everything from disruptive technology

to sustainability to FinTech to the evolving consumer. And this is, these stocks are rebalanced every month based off ETF ownership data. So the thought is this is almost like crowdsourcing a thematic core portfolio allocation from some of the smartest investors in the world, the ETF marketplace, and what they believe are the most valuable stocks and themes to have exposure to. Now, you decided on seven themes here, and this seems to cover all the right basis here, disruptive technology, evolving consumer, fintech, health care, innovation, industrial revolution, sustainability, and multi-theme. Does this cover all the bases for you? I mean, is there a split here? Are they equal-weighted? Or is it literally just a crowd-sourcing situation?

Yeah, so ETF action is the index provider. And what they've done, they've sorted all 140 thematic ETFs into one of these seven buckets. And then these represent the, basically, the ownership of these themes by the marketplace. And then ETF action goes and looks at the actual ownership of the underlying stocks within these themes. Some of these stocks, like an Nvidia or Tesla, may actually own by the owned by

multiple themes. So they do an ownership adjustment for some of these stocks. No stock can be more than 5% of the index or the ETF. And that's really how this 160 stock portfolio is put together. And it allows you to have

exposure to all the different themes And as you know, just owning all the themes is important because if you miss some of the best days in an individual theme, you may never get that back. So MVP gives you a chance to really own all these themes and refresh that portfolio monthly based off ETF ownership data. Yeah, you know, Jay, you're a leader, a GlobalX is a leader in thematic tech investing. We've had you many times over the years to talk about this. You must have nine or ten billion dollar ETFs at this point all around thematic tech investing. So what do you think of this idea? And what is hot this year?

Where are you seeing inflows into thematic tech? Not all thematic tech is the same. We know they go through periods of popularity. What's hot right now? Well, I think what's interesting is that the kind of pure technology stocks are not necessarily what's in right now. You know, we think of cloud computing and we think of, you know, video games or e-commerce. Some of those tech names that were really popular during the state-at-home economy. It has kind of shifted away from that more towards what I would call kind of like,

tech transportation stocks. A lot of these are lithium and battery technology stocks, electric vehicle companies that are really leading the transformation of transportation going forward. A lot of that's being driven by the Biden administration. There's $579 billion infrastructure package that could be passed any day now by Congress, but there's a lot of money really pushing towards this new era of transportation using electric vehicles, using different clean tech, and really advancing infrastructure in the United States. So Pave is the ETF that you've got there. That's a, I had significant inflows now. Will you have $3 billion in that right now?

We have about $4 billion in that fund and about $4 billion in our lithium and battery tech fund. Those are our two largest funds, and collectively they've gathered about $4 billion in new assets this year. So there's a lot of investor appetite for this segment of the market. You know, tell me a little bit, Christian, about the impact. And, Jay, you're weighing on this, of Kathy Wood on thematic investing. She's sort of the big cahuna in this particular space. Has she helped popularize the concept of thematic investing, or is she sort of an unusual sort of comet that comes into the space?

How would you characterize her impact on thematic investing? I think she's been quite bullish for thematic ETF investing. Previously, it was ruled, I think, by index-based ETS. And she proved that you can be active in certain themes and create alpha. And her personality is one that has really kind of been synonymous with thematic investing. or investing in innovation. We think that she's definitely been somebody who's been a champion for thematic ETF investing.

If you look at ARKK, an unbelievable ETF. In fact, MVP's, some people compare ARKKK to MVP's, our new thematic ETF. We have about a 28% overlap there, so some different opportunities between the two funds. But certainly, Kathy has been kind of like the Peter Lynch of thematic investing. Well, we've seen thematic investing really come into the limelight over the last 18 months or so. Prior to the pandemic, thematic ETFs or thematic assets in ETFs were about half of 1% of the total ETF industry. Now it's 2.2%. So still kind of small potatoes, but almost four times larger as a percentage of the ETF industry. So thematic has really become widely adopted as an accepted approach to portfolio management.

We've seen active approaches work. We've seen passive approaches work. We've seen technology. We've seen non-technology. themes really do well. So the entire ecosystem of thematic investing has really taken off in the last 18 months, and I think we're frankly just getting started. But there's been a lot of accelerants recently, whether that's Kathy Wood, whether that's the COVID-19 pandemic, really showing the value of thematic investing. Now, Kristen, I'm looking at your largest holdings here. At Tesla, NVIDIA Square, Amazon alphabet, N-phase energy, Z-scaler, other than the fact that they're tech stocks, not a lot to tie them together. And this is going to rebalance every month, right? So this is next month we may have a different situation,

right? That's right. So kind of the beauty of this MVP's approach is it simply is looking at, you know, the ETF ownership. So new funds or new themes launch, it gets included every month into the new portfolio. Something closes or scales down from a kind of a investor sentiment standpoint. The allocation reduces. So this is really kind of a core theme. portfolio and an autopilot, again, just based off ETF ownership of the themes and the most valuable stocks kind of underlying these themes. It's really a form of momentum investing, isn't it? I mean, it's not fair to say, I mean, you're not following necessarily price trends. It's really you're following ownership trends, but there's probably a relationship between ownership

trends and price trends, right? Yeah, I think so. You know, keep in mind the ETF space is also growing quickly in launching new themes, right? So we've launched a couple of new themes this year at GloBlex as well. So some of the ownership will actually results from just new themes being accessible to the ETF marketplace. I almost like to say this is a little bit like crowdsourcing. We've seen social media sentiment ETFs. This is really actual ETF ownership data that is powering these themes and the stocks underlying.

Yeah. Well, he, Kristen mentioned, you know, what's hot, what's next. You're pretty good at picking up on the trends. You create new ETFs all the time. What's on your radar right now? So we just launched a hydrogen ETF. Now, to go back a little bit into history, 11 years ago last week, we launched a lithium and battery tech ETF, which we've been talking about.

Over the course of 11 years, electric vehicles have gone from about 0% of the global auto industry to about 3% of the global auto industry. So when we talk about long-term thematic investing, we're really taking. talking long-term, several decades. We think the next long-term trend is going to be the shift to hydrogen, not necessarily displacing lithium batteries, but just a new form of clean power that can power trucks, that can power trains, that can power boats. It's really kind of a heavy industry form of a battery, frankly. What do you think of Elon Musk who constantly puts down hydrogen? I mean, obviously the guy's got a lot invested in electric vehicles, but is there anything to his

idea that it's not really feasible on a big, big scale? What's wrong with his thinking? They're not really apples to apples comparisons. So in a passenger vehicle, it does not make sense to have a fuel cell powered car. I mean, there's no infrastructure for it. A fuel cell itself is kind of large and unwieldy. But if you're looking at a truck, you don't want to have a huge battery on that truck because just driving a truck in New York, you have a weight limit. So how much of that weight do you want to allocate to a battery powering that truck versus the cargo in the truck. A hydrogen fuel cell weighs very little. A big battery weighs a lot. So just from a pure efficiency perspective, heavy transport really favors hydrogen. On top of that, you see way more solar,

you see way more wind that's being put onto the grid, that's power that's creating power intermittently. How do you store that power? Hydrogen is actually a very efficient way of storing that excess power when it's not being used. You can put that hydrogen in a truck. You can ship it over to another country that maybe wants it, but it's a very efficient form of battery for excess renewable power. So, Alon Musk, I think he makes a lot of sense on the passenger vehicle side, but, you know, hydrogen is very good in these heavy industry capacities. Yeah. Christian, what's on your radar? What do you see on the horizon? That's the next big thematic idea. Yeah, so we, you know, earlier this summer, we launched detox, the cleaner living ETF that we've had some, a lot of interest in. It's not an

ESG ETF, but really appeals to a lot of people who are interested in ESG. And about a month from now, we're going to be launching our digital and online trading ETF. So this will be companies like a coin base, a Schwab, probably somebody like a Robin Hood that allows you know kind of this digital asset to digital asset marketplace, online trading marketplace. That's you know app friendly, mobile friendly. We think that's a fast-growing area within financial services that is really capitalizing on the trend around the world for investors to trade stocks, bonds, commodities,

cryptocurrencies, digital assets, and that will be a launch here in September. Not to be boorish, but I am a Jack Bogle disciple. One of Jack Bogle's favorite phrases was tinkering around the edges with portfolios. He was basically an index guy. And anytime you start talking about investing by portfolios or investing by sectors, he would point out that long term there isn't a lot of evidence that that kind of investing works. Is there any evidence that this kind of investing, thematic investing, outperforms, just buy and hold, S&P 500 kind of things, going back to Jack Bogel? There is. I mean, one of the challenges for investors is that we talk about new themes all the time, and these new themes don't have a lot of track record.

So we have to go to some of these earlier themes that have been around for five years, 10 years. We can look at the track record of lithium. We can look at the track record of some other funds like robotics or millennials or fintech that have been around for a while. By and large, the performance has been very good. One thing that I would suggest is what are you comparing it to? Comparing a global robotics fund that is 50% Japanese equities doesn't necessarily make sense to compare to the S&P 500. But if you compare it to industrial stocks, the stocks that are being disrupted by robotics,

you see a huge divergence in performance. Similarly with lithium, lithium is disrupting the energy industry. It's the oil companies that stand to lose. So if you compare lithium to the energy sector, it's a completely different tale of two industries. Is that fair, Christian? I mean, you are, what you're essentially doing. is you're buying growth sectors at their early stages, hopefully. And that would make sense that there would be some outperformance.

The question is longer term, would that actually happen? Yeah, I think Jay said it well. I think, you know, thematic investing does introduce some more challenges like purity in terms of the underlying holdings as well as timing. So, you know, for the average investor, I think they're probably best served by buying a broad-based kind of thematic ETF, something like an MVP's, for example. For others who maybe know certain market segments

and feel like they can review purity, they can have an edge when it comes to timing, I think these underlying individual thematic ETFs have provided some substantial alpha. And we've seen it even just coming out of the last two years with an up-and-down economy and a reopening and a reopening. So it's definitely, I think, something

that should be part of all investors' portfolios in one way or the other. It's definitely hard to price a lot of these stocks. I mean, particularly electric vehicles, they don't have any profits at all. The estimates could be years out. There's no PE ratio at all, essentially. So when you're dealing with these kinds of companies, it is a little difficult to figure out what the right price is, whether you're undervaluing them or whether you're overvaluing them,

or of course, it depends on your time frame. but it's a little tougher than when you're dealing with established companies. And that's why I'd argue the opportunity is. A lot of these companies are less covered by analysts. They don't fit into classic sector definitions. You know, more value-oriented conservative investors are going to look at something like a Tesla and say, there's no value in this company.

But they're not looking at what could happen in 10 years from now that completely changes not only this company, but perhaps the entire auto industry going forward. Well, what I like most about thematic investing is it's understandable. The average investor can say, hey, I like cyber security. I like 3D printing, and there it is. The average investor thinks like that. The average investor does not think, let's buy consumer discretionary stocks.

What does that mean? It doesn't mean anything to anybody. Even consumer staples, which sounds like you know what it is, doesn't really mean that much or elicit anybody's, you know, get anybody particularly excited. So I like the concept a lot, and I like the idea of buying into growth stocks in the early states. So I'm a very big backer of this in case you haven't noticed, folks. And we're going to have a lot of new ideas. We're going to have Jay and Christian back many times to talk about what's going on there.

Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS. This is the market's 102 portion of the podcast. Today we'll be continuing the conversation with Jay Jacobs from Global X funds. Jay, thanks for sticking around a little while longer. We were talking about trends this year. You were very interested in hydrogen. you'd launch a hydrogen ETF, but I'm wondering about some other trends that are out there. There's a lot of interest in selling covered calls, and you have a covered call ETF, QY-L-D.

You're getting inflows into that. Explain a little bit about what a covered call is, and why are people interested in it right now? Absolutely. Well, looking at the macro environment or in a low interest rate environment, very hard to get any sort of income from buying a bond. even a high-yield bond is like trading at historically low spreads to treasuries. So people are looking for income. At the same time, they're worried that in two, three years we're going to see rising interest rates. So even if you can find a bond that's paying pretty good income, what do you do when interest rates start rising?

So people are looking for where they can get income that's going to be uncorrelated to the interest rate market. Covered calls basically take care of that. So a covered call is essentially buying an equity security or a basket of equities. In the case of QILD, it's buying the NASDAQ 100, all 100 of those stocks. and then selling a call option on the NASDAQ 100 index. By selling that call option, you receive a premium, which over the last 12 months or so has been about 2% per month, that you can then pay out as a dividend to shareholders. Now, the downside of that is that you're giving up the upside participation in that index.

Because you're selling a call option, someone else gets to participate in the upside, you get the risk premium from selling that option. So it's kind of a transformation of risk. You're giving up the upside in stocks in exchange for the income from the volatility and that risk that someone else gets to participate in it. But the NASDAQ's been up in the last year. What happens if the NASDAQ goes down? Do you, does that change the profit of the trade? It would. So you're capping your upside, but you are participating in the downside. Now, there's a little bit of a buffer because what prices options, a lot of that is volatility.

The more volatile the market is or the more expectations there are for volatility, the more expensive the option is. If you're selling a more expensive option, that means more income to you. So as the market goes down, volatility goes up, the option value starts to go up to the seller. So that's actually a pretty good buffer against the downside, but it will participate in the downside. I would say the best market environment for covered calls

is a choppy sideways market. The choppiness creates the volatility that gives you income from that option. The sidewaysness means you're not missing out on any upside and you're not really having any downsides. You're just collecting that income where the markets really kind of going nowhere. And frankly, if you look at the markets over the last few months, that's kind of where we are. We're kind of in a choppy sideways market. What else is interesting?

What else are you seeing in flows into? Well, we're continuing to see flows into thematic investing across the board, but it's not just in technology stocks. It's in infrastructure like Pave. It's in sustainability. A lot of people are looking at ESG funds, but they kind of want a little bit more to grasp onto, not just the S&P 500 minus oil stocks. They're looking at, you know, how do I participate in the clean water trend? How do I participate in health and wellness? How do I participate in clean tech becoming more ubiquitous? So we're seeing people are making kind of more targeted bets on sustainable themes

that have this ESG flavor to it, but also that kind of upside growth experience. Pave, of course, is your infrastructure E-T-F-P as in Peter A-V-E, as in Pave the Road. Any other interesting themes that you're seeing breaking out? More recently, over the last month, we've seen a pretty solid amount of flows going into cybersecurity. Now, if we back up, there's really been kind of two market stories over the last 18 months. There was the state-at-home economy, you know, those cloud computing is e-commerce, everybody connecting remotely. And then more recently, it's been the reopening and kind of Biden administration economy where people are trying to play that side of the world. Cybersecurity really lands squarely in the middle of the two.

If we go backwards in COVID-19 because of this delta variant, people are going to be connecting on their laptops. again, they're going to be working from home. That's where a lot of cybersecurity risks occur. So that's good for cybersecurity on that side. But if we continue with reopening and we continue with the Biden administration and where they're funneling a lot of money and energy, they've been really supportive of cybersecurity. We saw the solar winds hack.

We saw the colonial pipeline hack. Biden has been very aggressive about beefing up the federal government's approach to cybersecurity. So really, these two sides of thematic over the last 18 months both point in the cybersecurity direction. And when we talk about investing in thematic tech, We tend to think of it as a younger demographic going in in your 20s and 30s. Is there any sign that older people, for example, are interested in this?

Is thematic tech? Or am I just being an ageist by saying that's my impression? It's a little bit of a misconception that this is young retail money. When we look at the data for Global X from 2020, about 50% of the flows came from financial advisors. Financial advisors are just not the 25-year-old at home that you expect. A lot of these people are 50, 60 years old. have clients who are baby boomers.

So a lot of money is coming from kind of an older generation. On top of that, we're seeing a lot of institutions really start to look at thematic investing as well. You know, COVID-19 aside, look 10 years ahead. We have, you know, rich equity valuations. We still have structural growth issues in developed markets. We have aging populations. So where people are going to get that growth over the next 10, 15, 20 years,

still an outstanding question, and institutions are looking at these high growth segments to generate it. What's amazing to me is just the prevalence, of the growth mentality over, say, the value mentality. My friends who are, you know, Jack Bogle-type disciples, have pointed out for decades that over long periods of time in the last, since World War II, small caps have tended to outperform big caps, and value has tended to outperform growth.

And none of that has happened in the last six or seven years. It's been a pretty long drought, and yet they insist there is meaning reversion and eventually value will come back. We've had a few pockets of value that's done well this year, like some industrials, but not much of it. Do you have any particular thoughts on that? You're obviously a growth guy because we're in thematic tech here. Why do people continue to keep paying up for growth? Obviously, the idea is there's not a lot of growth around, therefore I'm willing to pay a lot more for a dollar of growth, a dollar of earnings that might be happening faster than for value. But do you think that outperformance, the growth over value, will continue?

I think it very well could. I mean, I'm not ready to declare value is dead, but I think a lot of the risk within value is that these are the segments that are being disrupted by these disruptive technologies. So oftentimes in value stocks or value ETFs, you see financial firms, you see energy firms. These are companies that are actively being disrupted by fintech companies and lithium mining companies and all these new forms of transportation. So value could do well and we could see an environment like we did in Q1 where value recovers and closes that gap. But I think there's still a really big risk that some of these value stocks never recover and are just kind of these dinosaurs of the past. I think it's probably best if investors barbell their portfolio, have a foot in value and have a foot in this high-tech growth side of the equation, and really kind of diversify those sources of returns.

Yeah. If Jack Bogle was alive, I'm sure he would laugh this year and say, you can argue all you want about. value versus growth, but the S&P 500 is up 17% so far this year, and you could have spared yourself a lot of agony in debate just by owning the S&P 500. You would have been a winner no matter what. And it's hard to argue with viewers who want to get their hands dirty and knock themselves out in this kind of debate, I always encourage them to do so. But if you don't, there is a very simple solution that Bogle and others helped set up, you know, more than 40 years ago. And I think for a very large percentage of people, it makes a lot of sense to me.

Although I do understand the growth mentality. And frankly, I think we're in a period where people are willing to pay a lot more for growth. Jay Jacobs, head of research and strategies to Global X. Thanks very much for joining us. Always appreciate coming by. And you're down here in person with me at the New York Stock Exchange. have people back here on the floor. Thanks, Bob. Okay, thank you, Jay. That's it for today. I'm Bob Bizani. Thank you for listening. And make sure you tune in next week. And in the meantime, you can tweet us

your questions or topic ideas at ETF Edge, CNBC. Investco QQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at investco.com slash QQ. Invesco, Distributors, Inc.