ETF Edge - 500+ new funds in ‘24 11/4/24

Episode Date: November 4, 2024

More than 500 new ETFS have come to market this year with yet more in the works. Among them: repackaging of good old-fashioned “pair trades”.  Which will be the big winners by year’s end?   ��    Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by Invesco QQQ, proud provider of access to innovation for the last 25 years. Investco 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. Every week, we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bobazzani. Could two stock ETFs be better than one? We're looking at a novel repackaging of good old pairs trades, along with other trends heading into the

end of 2024. Here is my conversation with Chris Hempstead, head of ETF and AP portfolio rebounds trading at MIRA Assetta Securities and Todd Rosenblum, the head of research, at Zeta 5. Chris, 500 new ETFs this year, a trillion dollars in inflows, $10 trillion assets under management. What sticks out to you in this remarkable year? 500 new ETFs. And now since I probably gave you that stat, it's 580 ETFs this year. Obviously the biggest headline of that launch, of those launches was the advent of Bitcoin and crypto ETS that's dominating the, you know, the growth in new assets. So a trillion, I think, overall to bring assets over 10 trillion this year in total AUM, but a lot of

the growth in the new assets came to market and ETS is in the crypto space. But I think the most exciting thing we're seeing is new entrants come to market, names that are not, you know, your traditional Black Rock, Invesco, State Street, you know, ETF players who have been around for a long time. Right. You're starting to see some new players. Big players that have been on the sidelines for a long time coming to market and converting funds.

I want to talk to you a little bit about that, but I want to get your thoughts, Todd, on this remarkable year. I mean, let's not overplay this. The biggest amount of AUM is still going into plain vanilla index funds. And, for example, technology ETFs are still getting plain vanilla technology the ETFs like the S&P, the XLK, the S&P technology, ETFs still getting the big inflows at this point. They are.

So index-based products still dominate. In fact, the Vanguard 500 index ETF has already set a record for the most inflows for the year. We have had already a record for fixed income ETFs gathered thus far this year. We're likely, as you showed, to have it close to a trillion dollars, which would be a record passing the $910 billion that we had, actively managed ETFs have really been punching above their weight this year, both in product

development, as well as the assets, has been roughly a third consistently that we're seeing in actively managed ETF this year. So really strong year across the board as ETF adoption continued. I know, I was asking you to sort of, both of you to sort of pick ETFs that stood out. And Todd, one of your favorite picks for active management this year is the I shares equity factor rotation ETF. The symbol is DYNF. And folks, if you don't, don't know this. This is an actively managed ETF that's been outperforming the S&P 500. That's the bogey there.

Tell us about that. That's right. So it's outperformed this year. It's outperformed over a three-year track record as well. This is a BlackRock ETF that had almost no money as it started the year. BlackRock added it to its model portfolios that many advisors use,

shifting into more active strategies, and then it's continued to gather new money. It's close to a $10 billion dollar ETF, almost all of that has come in this year, and for good reason, as you mentioned, it's outperforming. So it shows you can have a core U.S. equity strategy. It's been outperforming, but I noticed in 2022 it underperforms. So in down years, it tends to, I don't know what exactly the strategy here is, or it's a momentum strategy,

whatever it's doing there. So it's using the individual factors, so momentum being one of them and value and quality and low volatility in size and rotating within those. So, yes, it's actively managed so it isn't going to outperform in every. year active management struggles from time to time, but over the three-year time period, this ETF has performed well. And what really caught our eye is just the investor adoption has continued throughout 2024. It was not just a BlackRock model move. But there has been some outflows, though. I mean, I look at it with oil down, for example, energy has been seeing

outflows. And I see, of course, it's very little interest in two big sectors we used to talk about all the time. Thematic tech and ESG. Still nothing, you know, I can't. keep waiting for ESG to make a comeback, but nothing. I think there's a lot of definitions that need to still be determined. You know, people like the idea of ESG. They like the idea of thematics. The thing is, Bob, when you think about a 60-40 portfolio at its core, that doesn't mean you go 60% into thematics.

You know, the thematics leave, if you look at the $10 trillion asset base in ETS, I think it's properly positioned right now. And then it gives individuals like the three of us and anyone that we know who invests the ability to have an opinion. I want to be overweight clean energy. I want to be, you know, overweight some thematic energy sector, whatever it might be. It's a really, I don't know, it's a real segment of the market that I think has room for growth as the overall pie of ETS growth. But I don't think you're going to see thematics replace the core holdings in a 6040 basic portfolio.

If you're not wondering what we're talking about here, it's essentially things like, cybersecurity, for example, pieces of the tech world. Infrastructure. You tend to buy these things at the top when they're exciting. Seven years ago, you know, cybersecurity was a hot thing, and people were buying cybersecurity stocks and putting the other ETFs around them. And so it depends to push the price up. And so you're, most amount of enthusiasm is buying right there at the top.

This is an eternal problem with ETFs. It's a popularity contest. Investors in thematics, I think the one, the investors in thematics, if you want to think them of as active managers, if they are, the ones that are going to have the most success are the ones with a long vision and a long time horizon. The ones who are trying to time the market and get in cheap and sell it at the top are probably going to get hurt more than they win. Long-term investors with good vision, get into thematics, and they tend to win overall. Let's talk about things that are growing this year that are different. So first,

continuation of buffer products, for example. That seems to be amazing. We've seen this, and I was talking to you about this, Chris, this uptake on single security leverage products. Micro Strategy has three funds that are out, the ETFs levered to them. And then we have the S&P 500 without the Magnificent Seven, X-Mag, that's brand new as well here. So I see buffer products, single security leverage products, like several stuff around micro strategy, S&P X Magnificent Seven, all sorts of innovations. There's a lot of innovation, there's a lot of creativity. Are they the most complex products in the world?

No. Does it take a little more time to truly understand how a buffer product works? It does, but there's a lot of good material out there to help people understand. I want to point this out, these micro-strategy leverage the ETFs. What is it about micro-strategy leverage? Why is there so much interest in leveraging, leverage the ETFs around micro-strategy? What is? I don't know. I mean. Good volume. Who's doing this? Look, there's at least, as you see, there's three issuers on the screen that have brought

a product out to market that's a single security, you know, pivot point. And they each have north of $500 million in them. You look, I mean, the street likes it. I think some of the street likes volatility. People like things that, you know, move around a lot. That's more of the day trader environment, I think. Obviously. I don't know if we would recommend for grandma and grandpa to put their retirement money into these kind of things. But with the right advisor, I'm sure they can find a home for it. But I think a lot of the uptake here is in traders who like fast money, no pun intended. And they're not cheap either.

So they're obviously profitable. Isn't that the real answer? There's enough people who are interested on trading this stuff. Obviously, this is short-term stuff. It would be very hard to make these products with a cheap management fee just because of the nature of how they're managed. They're managed with swap exposure and other derivatives. Right.

So how do you get like two times short or two times long macro strategy? It's a swap, right? Explain how that works. Most of them use swap. And what they do is they engage with a swap counterparty to provide them the daily return. So is it the swap? counterpart that actually has it on their books. Correct. They're the one that does not the ETF doesn't have it on the book. So there is a swap agreement. The swap counterparty holds the

securities that afford the ETF the leverage that they need. In doing that, it absorbs balance sheet at the swap counterparty and if interest rates where they are, balance sheets not cheap. And so... So it's the counterparty that's charging a lot of money because they're the ones that have the on their books. Correct. The ETF managers essentially renting the balance sheet of the swap counterparty to get the exposure and the cost of rent for balance sheet right now is higher than it has been in the last, you know, that makes sense to me then. I don't know what the, what the fee is for those, but, you know, we've seen pro shares, they do very well for their pro shares in direction, 90 basis points sometimes. And they've been doing it for a really long time,

and they've got the lion's share of leveraged assets, but they also have an audience of counterparties that include the largest global banks in the world. The new entrance to the leverage market may not have those deep relationships with the largest banks. They will eventually, so it's just a matter of time. So you, go ahead. I was going to say, so that's the sphere and greed obviously tied to investing. That's the greed part of it, these leverage and these risk-on strategies. The options-based ETF world also includes what you were talking about that are defined

outcome or buffered or protection-oriented ETF. So Calamos has launched this year a suite of 100% downside protection-oriented ETFs. So you can participate in the upside of the market to a cap and have downside protection, just, Again, a great sign of the innovation that Calamos and some of the others in the industry have brought forward this year. And I want to talk about a new product potentially. You've heard of single-stock ETFs, everybody. How about two-stock ETFs? We just had Michael Venuto from Title on.

He's a white label provider, very well-known in the business. He recently filed for eight two-stock ETFs that are pair trades. So they go long one stock and they short another. So here's some of them here. One ETF, for example, goes long in Vidiya and it shorts Intel. Another one goes long Tesla and it shorts Ford. A third one goes along Amazon. It shorts Macy's.

And you see here, one goes along Coinbase and shorts Wells Fargo and there's four other ones. So essentially what goes on here is these imitrate, they imitate trades that are already being done by some traders. I mean, you know, Netflix versus Comcast is that not exactly a new trade here? So is there a demand for these products? I think there will be. By the way, these have been filed. They have not started trading. Yeah, if they get approved and when they come to market, I think there'll be demand for it.

And look, I don't want to make a direct correlation to parlays or anything like that, but you see how people can look at the market differently and say it would just be easier if I could buy one product, do one trade, and put on this investment bet, if you will, that does what I want to do. Long one stock, short another. I want to play the spread. These won't be complicated to support as market makers. The exchanges will be able to support these products.

the market maker participants should have no problem supporting them. But again, the work will be done. Can they raise assets like some of these micro-strategy products? I suspect they will. Well, people who are doing this now can do this fairly easy. You can go loan one and short the other. What advantage is an ETF had? So the lazy man's long short here.

It's easier. Instead of having to short something yourself, the ETF is going to do that for you. And so there's a convenience factor that's out there. The same way that it's the single-stock leverage ETFs, it's easier. to be able to do with an ETF, or if you want to buy the 30 stocks in the Dow Jones Industrial average and have it just continue to do. ETFs just make it easier. They're much more mainstream.

People understand more and more how they work. I think the ETF adoption is going to continue, even if we have some of these niche-oriented products sitting side by side with Vanguard 500 in a portfolio. Yeah. So you were talking about new participants this year that have been coming. Anybody sort of stick out to you? I mean, some of the bigger ones, look, I mean, the Eagle Assets. that I think was one that I mentioned, Rockefeller.

They've been around for a long time. You mentioned Calamos. Rock Forest Sports and Ascent Management. Calamos. I mean, these are big legacy, generational managers that are coming into the ETF market for the first time. I think it's exciting. I think we'll see a lot more.

There's a lot of buzz in our industry around whether or not the share class version of ETFs gets approved sometime in the next 12 to 18 months. If it does, I think we would expect another few thousand ETFs to come to market very quickly. Right. For those who you don't know, you're using clip language here as always, but Vanguard was the only one that had single, essentially the same asset

class in an ETF and a mutual fund, and it was tremendously beneficial to them. Correct. And many other people want to do that, but they had a monopoly on it. And now the SEC has to rule on whether they want to allow that. Yeah, the patent they had expired. And so now once that patent expired, then others have filed. It's not an automatic approval.

There's a lot to consider. But it's all being discussed, and I suspect that if it were to pass... Do you support having that go through? I have no reason not to support it. I mean, I don't have a vested interest in it. I do. I mean, I think it's great for the industry. There's 34 different asset managers that right now have filed to do so.

BlackRock and State Street were the latest ones to do so, but dimensional funds has helped to lead this charge. I think it's great for the industry. if investors, the industry being investors as well, for investors to have the ETF option of a pre-existing mutual fund portfolio, that's great. The tax efficiency is so much better than an ETF.

Yeah, it could save a lot of money. I've got to ask you about the presidential election. We're right on the eve of it. Does it make any difference in ETF trends if Harris or Trump wins? Can you see anything different? Look, I certainly think that, depending on what the outcome is,

You know, sectors like energy, regional banks, high-yield bonds, the emerging markets, all of these sectors probably are pricing in some sort of a move one way or another, if Harris or Trump. Again, I think the individuals and the investment professionals will be the ones to decide how they want to wait their portfolios accordingly. But I think sectors like those are going to be in play. So I would keep an eye, you know, look at the regional banking sector, look at the emerging market equities, look at high-yield bonds, what else could there be?

Well, I would just jump in. Energy, obviously, is a big sector that could go either way. I was just going to jump in. People have an idea of what could be a winner and what could be a lagger, but we saw clean energy actually perform better under the Trump administration, clean energy ETFs than the Biden administration, even though the Biden administration passed clean energy. How do you explain that?

legislation. You're asking me to explain why the stock market does what the stock market does. It's the underlying stocks that are driving it. It was a hotter topic in 2016 to 2020 than 2020 to 24. I think this election, I think I think clean energy will favor a Harris win. It's just my opinion. I just think that they seem to be pushing that a little bit more, and it does feel like, you know, the Trump team has dialed that back a little bit. So it would make sense that the clean energy ETS work a little bit in favor. Infrastructure is a tough one. I feel like both parties really want to have, you know, a solid plan for infrastructure

and infrastructure expansion. So I feel like infrastructure is a win-win. Yeah. Tell me who's opposed to infrastructure. Who doesn't think that the bridges are crumbling and we need that to win for the goal? Who's against that? I want to say the bridges crumble. Who's against modern rail system in the United States?

Yeah, which we don't have. No, we don't. You need a chiropractor. on some of these trains that can get off. But the Global Act's U.S. infrastructure, ETF, the ticker is Pave, P-A-V-E, is a great ETF to get exposure to those trends. It's benefited from the recent legislation that's been passed under the Biden administration. It could be a winner regardless of who wins.

Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast, Chris Hempstead from Miray Asset Securities. It continues with us now. And Chris, we were going through some of these amazing numbers here for the ETF business this year. 3,700 ETFs, $10 trillion, assets under management. Notional volume in ETFs, $150 billion per day. That is a significant amount. I would estimate $500 billion in trading.

That's about right. So every day. So we're talking about almost the third. On a normal day, you know, some days it drags a little bit down to about, you know, 20% of the overall notional trading volume in the equity market. But in extreme days, think of March of 2020, right after COVID sort of set in, ETFs were probably high 45% to 50% of the notional trading volume on any given day, almost for that entire stretch.

It was the only place that investors, professional and retail, could find liquidity back in March 2020. Yeah, there might be 3,700 ETFs, but, The majority is done by a small group. 500 of the 3,700. So, you know, that's like, you know, do the math on that. That's like 15% of them do two-thirds of the volume. Yep. 750 of the top 3,000 of all 3,750 ETS that are out there make up 98% of the notional trading volume on any given day.

So 20% of the ETS do 95% of the volume. Correct. Yeah, and 15% of them do almost 60% of them. And the assets are about the same. I think the top 750 make up about 95% of the assets. What's amazing is that, you know, Jack Bogle hated this idea that ETS would be used for trading purposes, but a lot of ETS are in fact used for tactical trading. It's more efficient way to get in and out of the market at this point. So the idea that almost all investors are long-term buy and hold isn't exactly correct anymore for EPS. But I think there's a part of it that's correct and a part of it that's just education. So we have the same conversation with either you and I, directly or with other people a decade ago, a decade and a half ago, and the numbers were just smaller. The top, you know, 50 ETFs made up 98% of the assets, then it went to 100,

then it went to 300, now it's 750. And guess what? In two years, we'll have this conversation, and I might say, hey, Bob, the top 1,500 ETFs make up 98% of the assets. What drives that expansion is adaptation, right? People learn how to trade ETFs differently than they trade stocks, how to get better practices on how to get long or how to sell out of an ETF position. And once they know how to do that, the menu of ETFs that they have to choose from expands dramatically. There's still a large subset of the trading and investing population that only wants to trade the most popular, heavily traded ETFs. So most people are solely focused on the top 750 ETFs and they're not really taking the time to learn about the other 3,000. But

I promise you, as the business continues to expand, as education continues to be driven, people will look to those other 3,000 ETFs that are out there to get alpha, to find optimal investment solutions, to learn how to trade them better, and you'll start to see that the pie of ETFs expand. So these new ETFs haven't attracted a huge amount of numbers here. We have, we mentioned 580 new ETFs. They got about 100 billion in assets. under management, but that's a fraction of the, what do we have, seven or eight hundred billion in inflows this year. So the new ETFs may be popular, but they haven't attracted a huge amounts of money. And of this $100 billion, half of that is crypto ETFs, aren't they?

Better than half of it. Yep. Well, there you go, right there. That being said, so this is the first year we had crypto ETS. So that happened in January, immediate adaptation, immediate, you know, the public gravitated to it very, very quickly. Collectively, I think the crypto ETS have pulled the north of $60 billion, that number just continues to grow. But it's peaked a little bit. I guess my point here is that even though we talk about all these new innovations, and you and I cover all of this carefully, the amount of money is fairly small given the amount of money that's been going in.

So if you figure $800 billion already, and it's still only $100 billion of that is new ETFs, it's a fairly small number. Most of this is still plain vanilla money that's still going into these things. A lot of it is. A lot of it is still, you know. What's it take the break even in an ETF these days? How much do you have to have? I mean, I see ETF struggling at, you know, 50 million, I think, you know, or even at 100 million, if you're charging 20 basis points at $100 million, you know, that's not, that's, what's that $200,000?

I think it's a tricky question to answer because it really depends on how you bring your ETF to market. So a lot of managers or people with ideas will come to market and they'll work with someone like Mike Benuto to get their ETF to the market who you spoke with earlier. Right. When they do that, it affords them, you know, the ability to bring their product in, hire a team of experts to handle the day-to-day, join an existing trust, starts to lower their break-even point. Now, in doing that, they're going to be sharing some of the economics of their management fee with their new partners. So their hurdle rate was what we like to call it. Their hurdle rate could be very low. Could be as low as 15 million in AUM to cover their costs. You know, a big manager comes to market and they want to go at all alone. They're going to hide.

their own legal team, they're going to hire their own, they're going to use their own portfolio management team, they're going to set up their own trust. Their break-even points going to be higher, but that being said, if they get there, every new dollar, they keep more of the... So what do you get if you hire a wait, if I have an idea for an ETF, I don't want to hire my own legal team, I want to bring in somebody, like a title, for example, what will they do for you? Will they do, they'll do the marketing, will they do the legal team? They can, you know, it's funny, a lot of them, you know, there's title and there's some others that work in a similar way.

They will offer, it's almost, you can choose how much you want them to do. You know, some of them will be advisor only. Some of them will be advisor in portfolio management. You know, they'll do the day-to-day operations. Some of them will help with marketing and distribution. Usually that, though marketing and distribution is usually handled by another third party, but it doesn't mean that they can't work with you or work with their clients to do more, to try to bring attention to the problems.

Will they do legal work and filings? Yep, legal. Yeah, exactly. Yeah. But again, they charge money. My point is that I have people all the time with very small firms, usually RAA types, and they have an idea, and they approach me and ask, and I usually refer them out, but it seems like a tough nut to crack necessarily to make it worthwhile. I think if they're coming in for the first time and thinking about it,

they're going to absolutely think it's a tough enough to crack. But look at the data. Look at how many managers have come to market in the last two and a half, three years that were first in, and they only have a product or two, and they were an RAA, and now they have an ETF and they're above water. Look at John Davy. He's been on your show. Yes.

I was at his conference last week. So here's a guy that brings a product to market and he gets assets and he's happy. And, you know, maybe five or six years ago he wouldn't have thought it would be that easy. but I bet he's, you know, he's thinking about it now and saying that wasn't such a bad experience. Yeah, to a certain extent it's a marketing tool either. It says you've arrived, you know, you must be a big shot because you have an ETF. That's not necessarily true, though. But once you get the ETF out, now you've got to figure out how to get it out into people's hands.

So now what they all want to do, they want to get access to the big platforms. They want to get access to Bank of America and Morgan Stanley and Wells Fargo and they want to UBS. They want to get access. And that becomes a big challenge because they don't, these big firms, they don't just let everybody put a product on their shelf. So, you know, crack that out. Always a pleasure to chat with you.

Chris Hempstead at Miray Asset management. That does it for ETF Edge, the podcast, folks. Thank you for listening. And join us again next week. Or remember, you can see all of our shows on our website, etfedge.c.c.com. How does InvestcoQQQQR rethink possibility? By rethinking access to innovation and the NASDAQ 100.

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