ETF Edge - A volatile September could be prime time for ETFs 9/9/24

Episode Date: September 9, 2024

There are lots of indications that volatility may be here to stay this September. But that’s great for ETFs which have proven to thrive during times of market upheaval.   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 am your host, Bob Pisani. A continuously volatile September could be prime time for ETFs. Here is my conversation with Noel Archer, Global Head.

of ETFs and Investor Solutions at Alliance Bernstein and Todd Rosenbluth, head of research at VETI. Noel, a lot of volatility around tech, and I know you have a very interesting fund, actively managed large-cap equity ETF, big holdings I see here in Microsoft, and Vividia, and Alphabet. This is still where the flows are this year, still in tech. Are we going to continue to see this flows in tech outperforming? Yeah, look, I think there's obviously a lot of questions, which

way the market's going to go. I think the numbers on Friday gave a little more fuel to the fire of, okay, is a rate cut not only imminent, but what's the size of it going to be? But at the end of the day, you know, you want to step back from that. And if you can, take a bit of a longer-term view. And I think in that long-term view, we've continued to see a lot of robust energy in the U.S. markets and in some of these global providers, not just in technology. Technology touches everything that we do in most facets of our life, but there are other industries in play. So we're continuing to see a lot of interest in investing broadly, not only in equities, but in a lot of the flows, some of that volatility has changed up to fixed income. And we're looking at how you've done

this year. And this is parallel, the S&P 500 actually fairly well. Of course, you have tremendous tech representation in this. Todd, let me ask you about volatility too. Low volatility ETFs. SPLV is the invest in the invests, a low volatility one. They invest in financials, consumer staples, telecom, you've got Coca-Cola, you've got Berkshire and these things. What I find interesting is investors don't seem terribly impressed, though. I don't see big flows in consumer staples. I don't see big flows into SPLV this year. I'm wondering, I mean, I know it's certainly rational to say flows follow prices, but when is that going to turn around? When are we going to see real flows, not just price changes?

Well, you're right. So SPLV has hit another high or recently. It's actually performing almost in line with the broader S&P 500, with Spy and IvyV and VU this year. But you're also right. We haven't seen the flows. SPLV and the I-Shares product, USMV, that's the minimum volatility, ETF, have not been that popular this year, we've actually seen more money going into quality-oriented ETFs. So Investco's SPHQ, I shares, QAL, we've seen free cash flow, victory shares, V-Flow,

see strong demand in the month of August. So we think investors are going to sense the volatility that we've seen in September and then start to rotate in if this volatility continues September and October like it traditionally does. What about that quality overlay? No, I mean, we're all traditional guys in the way we grew up, listening to Fama French two-factor models. There was beta that mattered. Generally, small-cap outperform big cap over long periods. Generally, value outperform growth over long periods. Neither of these worked very well in the last 15 years.

But this quality overlay, which in my mind, big emphasis on profitability. That seems to have captured investors' imagination. I think it has. I mean, the quality factors are pretty important, and that plays into some of our strategies we think about a lot about quality, stability of the price, you know, what are you getting for that? But I think, you know, the interesting thing about volatility, like the end of July and the beginning of August seems like ancient history somehow already. It wasn't that long ago. But that's what was a little bit of a wake-up call for some folks, I think, and seeing that and saying, all right, we probably need to think about, you know, how do these allocations fit? We finally started to see some of the rate sensitive sectors start to get a little bit of play. Because people hate to say, but you sort of forget about volatility until it's there, and then all of a sudden it becomes very front and center. But rather than just think about complete dampening of volatility, trying to think about how can you participate in the markets, maybe keep a little bit of bumpers on either side of it,

but still keep this upswing because there still seems to be a lot of momentum at play. I want to ask you about your actively managed low volatility ETF. You have a very strong exposure to tech here. Can you explain that? I mean, tech to me doesn't seem to go very well with low volatility, and yet here you do, have one. I think the way that you want to think about the low volatility strategy that you're referencing is, again, we're trying to make sure that we are going to participate in the upside and

try and cushion on the downside to some degree. So that doesn't mean that you're just going to go into deep value. It doesn't mean that you're going to avoid tech or some growth aspects of it, because you want to have growth at a reasonable price built into it. Yeah, so here's what's interesting. We just put up the Invesco one, which of course has Berkshire, Coke, Visa, Colgate. Here's yours, low volatility ETF. Microsoft, Alphabet, Apple, Broadcom, United Health. I mean, you get my point. It's a little bit, it's different. I know you're pointing out, no, there isn't a broad rule about low volatility, but. Yeah, I think there.

I don't think Microsoft's low volatility. I guess that's what I'm front of getting at. Which is fair, but I think a lot of us grew up in an error when Microsoft, sometimes behave very differently, right? And it's not that this is like some, you know, company that doesn't have, you know, this great potential to it or still isn't so impactful in our world. But again, you can, it's a really big company with a lot of different assets. All I can tell you is you're getting flows into this low volatility

ETF. The traditional low, SPLV, is not really getting big inflows this year. So whatever you're doing, you know, it flows is what matters, you're certainly getting. And even we can bicker about what's low volatility and what's not. You know, Todd, low volatility, high volatility, it doesn't seem to matter in terms of flows. I'm looking at year-to-date, you know, where we are, ETF assets, flows into equity, flows into fixed income, non-traditional is getting some inflows, active is getting some more inflows.

It's really remarkable. It's really kind of incredible. Like, low volatility, high volatility, you're still getting inflows no matter what happens, essentially. Yeah, I mean, well, there's investors that are buying ETFs for strategic reasons, and Vanguard 500 ETF already has set a record for the calendar year, and we have four months to go in terms of its overall net inflows this year. But we are starting to see some of the other sectors participate from a flow standpoint. Real estate being one of them.

We've seen Real Estate XLR, which is the Real Estate Select Sector Spider-EF, VNQ, which is the Vanguard real estate ETF, those saw net inflows thus far or in the past month. So we are seeing some of those more defensive sectors that are performing relatively well since the beginning of the third quarter start to see investors demand. So this gets to that question of those flows follow prices because we've seen interest rate-sensitive sectors. Utilities in real estate, for example, outperform recently, which makes some sense. And I know inflows like in real estate have improved a little bit. But assets under management are still pretty modest in some of these smaller sectors, essentially.

Will they see inflows? Will we start seeing more significant inflows as investors take profits and tech and maybe broaden out into other sectors? I think it's more likely that if we see a sell-off that those defensive sector ETFs get bid up, as opposed to people using them to outperform, but more to reduce the risk profile. We've also seen the more risk mitigating strategies, the defined outcome products, the ones that have structured protection,

Calamos, Innovator ETFs, you guys have those products as well that have come. That's starting to gain traction and people are not going and building their own sector defensive strategies the way they might have beforehand. Yeah, I want to move on do bonds and talk a little bit. We've seen bond ETFs, great inflows this year as well.

We just put up a screen about that. You have an active high yield fund that's seen inflows. Prices have held up. To me, this is quite amazing. It would seem this is a good sign, because if there was an imminent turn down, folks, high yield would sell off, right? I mean, it's credit and it's risky credit.

Well, I think that the health of the credit markets is in some of the best shape that it's been when you think about the last few years and where we've seen the move by a lot of companies and how they're treating their books from a credit perspective. The yield that you're getting off this is still really attractive. The yield of the worst in the high yield space is usually highly predictive of where the markets are good or the credit markets are going to go and the three to five years in front of it. So I think what we're seeing is a continued interest in the health of high yield and what that can look like in a portfolio as the

as investors start to think about how to re-deploy some of this cash, that has frankly been sitting on the sidelines for quite some time now. It's amazing to me how much the viewers, investors in general, love their short term. You have a short term one, two. Even though yields are coming down, we still see inflows into your ultra-short income ETFs. They love these 5% yields, but they're coming down. Even as they're coming down, it's remarkably sticky. Money market funds are holding up $6 trillion very well.

They seem comfortable even at a lower level. Well, I think what we see... There's a behavioral psychology thing going on here. They still perceive there's a positive inflation-adjusted yield there. Well, there's still, I think, a view, too, in the ultra-short space, that that is a... And here's your ultra-short. Increasingly, you know, a better play than money markets, because when rates do decline, and they tend to go very quickly in the money market space.

They'll decline faster than you'll see in general in that ultra-short income space. So for those that want to stretch out their duration a little bit, who might not be convinced of completely which way the market's going to go, that ultra-short leg has been, I think, a good transition phase. And that's what we're seeing. We're seeing either people go into the ultra-short, or they're just going out to long duration and just saying, okay, I'm then I'm going to try to be there. You're still over 5% on this ultra-short here, right?

I believe so. Yeah, I think it's 5.5, as I recall, somewhere around there. I mean, it's really remarkable. It is. And I think, you know, what were the conversations where I mean, I don't know how much you're hearing about this, Todd, is also this a little bit, you know, balanced its back, right? Which we haven't had that in a lot of years either, this thought that I really do need to look at both sides of that equation.

I mean, people have been so focused on what's going on with rates and when a rate's going to fall and what should I do in the fixed income portfolio and should I move out of cash now or later. Meanwhile, there's been, you know, 25% run in the last 12 months on the equity side of the books. And folks that sort of took that balanced approach have been in a pretty good place over that time period as well. And we've seen the benefits, you know, what they offer is an actively managed

ultra-short bond ETF. So we've seen investors been embracing active strategies like year, which Knowles team has firms like products like Mint from Pimpco, JPST, from JPMorgan, these ultra-short active fixed income ETFs that can go outside of treasuries to be able to find the best reward for that. We'll explain that a little more. By the ultra short is, what, 30 days?

What are we talking about mostly? One year or less, right? One year or less, okay. They'll flex, the products will flex anywhere from six months. Right, and when they can go outside of treasuries, what, is there a, what percentage would this have, for example, in a, outside of traditional? Again, it's going to vary by time period. We're very focused on our particular product on the liquidity piece, because you want to make sure that in sort of periods of volatility or steadiness, whatever is, that the liquidity is there in an ultra-short product. So things like, you know, securitized, but only be 5% of our portfolio.

There's going to be Treasury repos. There are going to be a little bit of money market exposure there as well. So there's always going to be a blend just based on what's going on within the course of that year. And we'll dial duration up. Again, you might have a few pieces in there that'll go over. But on average, you're going to be at that one year or less. We'll go as short sometimes as, you know, down to six, seven months duration where we tow the line right up between a year. So it's not a, it's actively managed.

It's not a money market fund where you're almost entirely. I mean, if there's a government market, money market, by definition, you're entirely. Right, but it's also not bill, like the State Street product that's just Treasury-oriented. The benefits of active management is they can find where that best reward opportunity is. From a liquidity standpoint, own corporates, own CP, which is a great addition for investors and advisors. Yeah, and for us, the focus is we run a lot of income products across the, you know, across the suite of fixed income products of AB. So the same team that runs our income portfolios

is running that ultra-short income portfolios. They're looking at that whole market and then trying to put their best thinking into that, again, into that ultra-short space to make sure we get that intersection of yield and liquidity. Yeah, we just put up some charts of your core plus bond fund, which I gather is broad bond fund, treasuries, corporates, some high yield as well, right?

Yeah, correct. Yeah, and corporate bond ETF as well, the EYEG. What kind of flows are we seeing here? My impression is overall it's still very good. These are newer funds, so they are trying to recall when we launched those products towards the end of last year. So these are still relatively new in the marketplace. But we're starting to see a lot of queries on this front.

And this goes back to that. The ETF market's 30 years old now, And we have a lot of passive products in the marketplace. But so many of our conversations are how can I take some of this active management? You and I talked about this a little bit earlier that the active funds today aren't the active funds of yesterday. And so we're getting a lot of how do we pair these together in model portfolios cross-fixed income strategies. So Todd, we have a record August for bond-in flows. I had Matt Bartolini on from State Street last week.

talking about this. Our investors, riff on what he was just, Noel was just saying, our investors distinguishing between short term or long term or treasuries versus corporate versus high yield. Look at these, 33 billion in August, a record for August, 190 billion. This is bond ETFs, not stocks. And the last time we had a record was $212 billion in 2021. Look, we're going to break the record. We're going to break it in September, quite possibly, because of investor adoption. of the ETFs. They like the liquidity, they like the accessibility, they like how easy it is to put these products into use. So to your question, TLT saw a really strong demand, that's the 20-year Treasury ETF from iShares. It saw a really strong demand in August as investors expected that the Fed was going to begin cutting rates and they could get rewarded for that.

We did see some interest in the ultra-short categories that we were talking about. We saw high-yield demand. USHY, which is that I shares ETF is now the largest. It eclipsed HYG in terms of the overall flows that we're showing here on the screen. And I just want to come back to active management within fixed income. It's fully being embraced as firms like Knowles, firms like Capital Group and Tiro Price and Fidelity,

bring their best managers into the ETF space. And we're seeing a lot of success from these firms that are either they've converted and now they're here to stay in the ETF marketplace or they've launched those products and they're benefiting from the ETF ecosystem. Noel, you've been around a long time. Where else do you see?

Obviously, active management is a major part of things. Some of this is not your father's, your grandfather's active management. A lot of this, of course, is different than active stock picking. But what are the growth areas do you see in the ETF business? Yeah, well, I think what's fascinating is it's not only about the ETF, right?

We're seeing so many different changes in the ecosystem around investing. So the active stuff is, I think, really positive. 30% of flows here into active ETF. So I think, and that builds on where we were last year. So it's such a good blend going on there. SMAs are another growth story in the marketplace. And again, it's always like these sort of unsunny- SMAs being separately managed accounts.

Just want to make sure the viewers understand all that. And then you've got- So you're people who have separately- These are funds that are managed for individuals or funds or companies themselves, and they convert them into an ETF? They can. I mean, that's one arena. I think the mutual fund to ETF conversion is another piece of this. But I think, you know, again, the unsung hero of the ETF is its operational flexibility. And using ETFs within the growth of the separately managed account space,

within unified managed accounts, so these are accounts that can hold mutual funds, SMAs, ETFs, all in one package. 25% of the accounts in the U.S. today are UMA accounts, meaning you can hold. anything within it. And investors are getting really savvy about how can I take the tax benefits of an SMA, marry it with the tax benefits of an ETF, take my low-cost beta, park it next to my active ETF that might have again some tight combination of qualitative and quantitative factors and build optimal portfolios. Boom, you've got a diversified portfolio.

It's pretty nice. It's a great time to be an investor. It's a great time to have ETS. It's so much fun. I've been covering ETSs. I'm trying to remember when. It's somewhere around. the late 1990s and to watch them grow up like this is just wonderful because not only are largely they're indexed and diversified which is old Bogle guy at my big thing diversification but low cost and that was Bogle's other thing you know Bogle was never against active management he was against high-priced active management so here even with active management you generally have pressures to keep the fees down

which is what makes it successful. It's highly competitive. I think what you're paying for the active ETF in the marketplace. Again, you're going to have a combined portfolio of active and passive and have a pretty low basis point, average weighted portfolio and get the benefits of both views in there. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs.

This is the Market's 102 portion of the podcast. Todd Rosenbluth, head of research at VETI, continues the conversation with us. Todd, good to see you again. Thanks for sticking around. I want to just pick up on something Noel was talking about, about active ETFs. I see 171 billion so far in 2024. That's about a third of all the money.

We had a 500 billion or so so far. That handily surpasses 2020. I think we had 120 billion. So it's 30%. You know, I used to poo poo active as a sort of, you know, small cousin. to passive inflows, but it's starting to make a difference. It is.

So just for perspective, it's less than 10% of the overall asset base. It's in fact, five, six, seven percent, depending upon the asset category. So 30% is well punching above the weight for a second, third year that we've seen for actively managed ETFs. We're seeing, we talked about the conversion of mutual funds to ETFs, that's part of it,

but mostly investors are converting their efforts. from a mutual fund into an ETF. So people who are fans of active management and fans of the Capital Group company, instead of using the American funds, mutual funds, they're using strategies from Capital Group. Tiro Price is seeing some strong inflows into their actively managed ETFs.

They have a ticker TCAF, Capital Appreciation Equity Fund, that's seen really strong inflows. We've seen Fidelity have success with their active fixed income. UTF. So part of it is demand for active strategies in general, and that as you touched on in the past, we're seeing investors embrace these options-based strategies from J.P. Morgan, among others, the JEPPs, the JEPQ of the strategies. Those are actively managed. The active management is on the options side, but those are active ETFs that remain popular with investors.

Yeah. It's quite impressive to me, although, as We've talked many times. These active ETFs are not your grandfather's active. They're not old-fashioned alpha-generating stock picking ETFs. It's options overlays and things like that. But I think that still should count. I'll tell you something that's interesting about the equities, looking at the equity inflows. We're north of $300 billion.

It's almost all U.S. I was looking at the numbers last week. In August, $38 billion inflows in the equity. what a US developed world, X US, like Europe, four billion in inflows. Emerging markets, regional, single country, five billion in outflows. So it seems like it's almost entirely US

and elsewhere in the world, it's like, nah. Well, the US has been the outperforming market and that's where investors have gravitated towards, but in just the early days of the new month, we saw the I shares MSCII, EFA Value ETF, the ticker is EF, That saw a strong demand. There was a rotation from a model portfolio into that ETF.

So it traded significantly above its typical average. Investors are looking towards value. European stocks are have historically been undervalued and you get more exposure to the financials and the consumer staples there than you would within the US. So we could see heading in to the rest of the year, investors taking some of the chips off the table in the U.S. large-cap growth stocks

and rotating into European, develop market strategies, but I still expect we're gonna see strong demand into those broad-based S&P 500-based strategy. I find it hard to believe they would do that. You saw Mario Draghi making comments just over the weekend. We need to do more to stimulate European growth. It seems very hard to make an argument

to invest big in Europe right now. The other problem is if you look at the composition of Europe, It's very underrepresented in terms of technology. The US controls things globally. There may be a few, the Netherlands has a few semiconductor capital equipment companies like ASML, maybe InfoS, a few other things, but gee, by and large, tech US dominates the whole world. Right. So if you want the technology exposure as you're an international or non-U.S.

investor, you're coming towards the United States to get exposure and using ETFs to get if you're trying to balance, if you don't want to have too much of your exposure towards those mega cap stocks in the United States, mega cap growth stocks, then diversifying the portfolio is the ETS offer an easy way to be able to do that. Can it keep up? Can those, can European stocks outperform U.S. stocks in the fourth quarter? I don't know. It'll depend upon whether or not there can be stimulation for growth and what we see here in the U.S. as the Fed is cutting rates. but there are ETFs to provide that diversification balance for investors. Yeah, all right. Todd, thanks very much, appreciate it.

Todd Rosenblut, the head of research and VETify. That does it for ETF Edge, the podcast. Thanks for listening. Join us again next week or remember you can see all the shows. Etfedge.cc.ccc.com. How does InvestcoQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investco Distributors, Inc.