ETF Edge - ARK’s Cathie Wood on Bitcoin ETFs, Higher Rates & the Fate of Tech 10/16/23

Episode Date: October 16, 2023

CNBC’s Bob Pisani spoke with Cathie Wood, CEO of ARK Invest, and Tom Lydon, Vice Chairman of VettaFi. They broke down the path ahead for crypto and spot bitcoin ETFs after the SEC opted not to appeal the court decision on Grayscale’s bitcoin ETF conversion over the weekend. Does this mean a spot bitcoin ETF might now be just around the corner? They also discussed the fate of technology in the face of higher rates, ARK’s foray into European investing and other investment bright spots Cathie Wood is paying attention to right now. In the “Markets 102” portion, Bob continued the conversation with Tom Lydon from VettaFi. 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 InvescoQQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast, if you're looking to learn the latest insights on all things, exchange, traded funds. You're 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, Bob Pisani, and we've got a very special show for you today. Arc CEO, Kathy Wood, joins us. She'll weigh in on the path ahead for crypto and spot.

ETFs, given the SEC opted not to appeal the court's decision on Greystone Bitcoin ETF conversion over the weekend. That was a big moment here. Does this mean a spot Bitcoin ETF might now be around the corner? We'll see. We'll discuss that. We'll discuss the plate of technology

in the face of higher interest rates. We'll discuss her foray into European investing. Another investment bright spot she's paying attention to these days. Here's my conversation with Kathy Wood, the CEO of ArkInvest, along with Tom Leiden, Vice Chairman. of VETI.

Kathy, you're one of the nine applicants for a spot Bitcoin ETF. It does look like the SEC may be forced to approve a spot Bitcoin ETF. Can you tell us what of any communications you've had with the SEC and what else we might know about this? How do we push the ball forward here? Well, actually, our partner, 21 shares in Europe did answer or send an information in response to SEC questions. And we sent them in on Thursday, I think, or it was publicized that we did. So what we see here is a little bit of a change in the SEC's behavior. They actually are asking

questions, and we provided five pages, along with our partner, of answers to those questions. So progress, we would say, yes. Yeah. You know, one thing I noticed, Kathy, is that the, the interest in Ether Futures ETFs, which only started a couple weeks ago. We had some of the people on from ProShare involved in that. It's been rather muted since they were introduced a couple of weeks ago. I'm wondering if a spot Bitcoin ETF is really going to move the needle this time. It's interesting because Bitcoin's been sideways for months, and yet we've known that this ruling came in,

and it's known that they likely may not appeal, and yet it doesn't seem to be moving Bitcoin. It's up a little bit today. Is interest a little more muted in Bitcoin than it used to be? You know, judging by the questions we're getting, no. I think many people focus on our price target for Bitcoin. And our base case is over $600,000 by the year 2030, and they really want to understand that.

So maybe they're just trying to understand our research. But there's definitely a focus on, you know, is this a new asset class that I should investigate? And I would say institutions especially when they see the SEC seal of approval in this way, I think this will finally bring institutional interest into Bitcoin. Are you on board with that idea?

I mean, what's interesting to me, the reason I ask is when the Bitcoin futures ETF launch, BITO from pro shares, you know, we had Simeon on. This was, you know, almost two years ago. And boy, the interest was through the roof on this. A billion dollars in the day. And we've got a few million dollars in the ether futures.

Am I being petty here? No, no. I don't think so, Bob. I think we're at a critical point in time. This issue with Grayscale is forced the SEC's hand. And really up until Friday, when they had their deadline, the SEC and Grayscale just weren't talking. Now that they've passed on this appeal date,

they're forced to have a conversation. All during the last few weeks, though, they've been talking to ARC, they've been talking to all the other applicants, which gives good confidence that this is going to happen. And when it does, it may take a few months, we do a lot of surveying, as you know, with the folks at Bitwise and advisors for the last five years. The big issue is they don't feel like they have real access to cryptocurrency just because of their platforms. Now, if we have a spot opportunity in a whole variety of different issuers, that will change. So you agree with Kathy's point that this will increase institutional interest? It absolutely will. Yeah, because it's on platforms as opposed to exchanges that still aren't regulated.

So my understanding here is the court will issue its mandate. It'll tell the SEC this is what you have to do to be in compliance, and they'll move from there. We should know fairly soon about what's going to happen here. Let me just move on, Kathy. Your flagship arc fund is up 20% this year, but you've had outflows and so of other tech funds. So tell us about that and what impact higher rates might be having on your holdings this year. That seems to be the big issue. Yes, well, we can tell we're not in a hugely speculative environment. A lot of people were worried about a reincarnation of the tech and telecom bubble with all of the chat GPT and artificial intelligence hype out there. We don't think it's hype. We think there's something very profound going on here.

So you can see interest rates have and fear of higher for longer has hurt our performance since July. and I would say most other growth managers. And I do think that we're seeing many investors kind of pull back into cash, which is yielding 5% plus and even into long bonds. And watching the flows into long bonds gives us great hope. If investors, bond investors, are beginning to see the peak in interest rates,

which is why they would invest in a bond fund, then that should be very good for us. And I think if you listen to company reports, and I know economic statistics are all over the place, but economic, I mean, the company reports are coming out solidly that inflation is coming down and activity is weakening. I give dominoes and LVMH two ends of the price spectrum for consumers, and both of them last week said,

it's weak out there, especially in the United States. So I think we've been through a period of rolling recessions, housing by some measures down 40 to 50 percent. Autos very sluggish at near recession levels. Inventories are not really contributing anymore. So now I think the consumer is going to follow through and probably pull back a bit. And that will, we think, then, highlight the superior growth in our portfolios as they, They are recession-resistant. So how about that?

She's saying, essentially, investors are top-ticking the yields right now. We've seen big inflows into bond funds. You and I have talked about it this year. Even longer-term funds, like the I-share is 20 plus, the TLT. My heavens, we've seen 20 billion in inflows in this thing this year. 4.3 billion in the last three months, even though it's had a lousy performance, it keeps going down, meaning the yields keep going up. Right. We're like 20% off.

It's 52-week high here. So, Kathy's far. The point here is once we get to the point where the Fed has done hiking rates, most advisors, when we survey them, say a year from now, rates are going to be lower. So what does that mean? Not only do you need to go longer duration and lock in these rates, but you're going to be able to participate in the appreciation. We haven't said that word in a long time, but appreciation and bonds. And if you're sitting there on the sidelines, like $7 billion, I'm sorry, $7 trillion sitting there in money market funds, yes, it's getting 5%. But you're not going to participate in that appreciation once the rate starts to go down.

That $6 trillion or $7 trillion seems really sticky. I mean, the viewers I've talked to, they seem very happy. That's the concern that I have. I'm not trying to be argumentative with Kathy, but they seem very happy with their 5% coupon clipping. Kathy, how do you get, tell those people, come on. Let's get in the stock market here. Don't you have any FOMO at all? Doesn't that worry you a little bit?

They seem happy there. Yeah, this is what happens near the end of any cycle like this. You know, the fear, and now, of course, we have the situation in Israel adding to the fear and adding to the fear of oil prices continuing to go up. So there's a lot of fear pushing people towards cash or making them feel comfortable in their cash. But mind you, if they see the prospects for interest rates actually coming down, then they will probably, as you say, $7 trillion, some of it will probably start migrating in a rebalancing way back to equities, and we're already seeing it in bonds.

Kathy, a year ago, I asked you, if you were sitting across the table from an advisor that bought ARKKK, in the spring of 21 and was there with a fairly significant decline. What would you say to them? And would you repeat that and do you still have the same feelings today? Yes. Well, what I probably said back then is if you have a five-year investment time horizon, we believe that these five innovation platforms, which are evolving all at the same time,

hasn't ever happened in history, are going to cause not just exponential growth, so good growth rates sustained, but super exponential growth, very good growth rates accelerating as we move into technologies like autonomous taxi platforms, where three of our major innovation platforms,

robotics, energy storage, and AI will come together. Those are three platforms that are ready, and are in the middle of prime time, and we think are going to deliver superior growth, growth beyond what we're used to when we say this exponential growth phrase, because it's one technology feeding another, feeding another. So, again, we do a lot of research. We give it away.

We give some of our models away, especially those where we feel there's a big inefficiency, or misunderstanding. And you can see the building blocks behind our forecasts and change the variables if you want to. But our confidence, if anything, has increased because of what's happening with artificial intelligence. Finally, ChatGBTGBT, Captured the imagination of the investor. We had been talking about artificial intelligence since the firm started in 2014.

And we had been very focused on Envidia as the pure play in this space. So we were there when invidia was five. We're on to the next thing now. And I would say you're picking early 21. The drop from early 21 in our strategies to the low was worse than the tech and telecom bust,

which makes no sense. Back then, the technologies weren't ready and the costs were too high. We didn't have the cloud. We didn't have deep learning in AI. We didn't have transformer technology. We were not ready for prime time and the costs were prohibitive. Today, and yet, investors were chasing the dream back then. And that ended badly.

Today, talk about investor psychology. We're ready for prime time. The dream is no longer. It's a reality. and investors are so fearful. And so we think that the surprise element out there, as our companies take off and, you know, harnessing these new platforms, the element of surprise is going to be significant.

And we will earn our way back into portfolios. There are many who stuck with this and averaged down all the way. We think they will be rewarded handsomely. if our research is correct. We think it is correct. Of course, we could always be wrong. So the big story, you mentioned AI. Let's just stay on that topic.

I look at your largest holdings in your main ARC fund. I see Tesla, Coinbase, Roku, Zoom. I know you've talked about Tesla and AI, Nvidia and AI, but describe AI's exposure in your portfolio. Where does it help other than Tesla, which you've talked about before, Invidia? Look at all these other ones we've got here, Twilio, Roblox, Unity, some of the other ones, Block as well. Speak about it broadly and where it fits in here.

Sure. Most of the stocks in our portfolios are there because we've used an AI lens. Now, we wrote a paper called Investing in Artificial Intelligence, where will equity value surface? It's on arc-dashfunds.com. Now, I think many people feel comfortable. They're on the right horses, the mega-cap tech companies or the Magnificent Seven, one of which is Tesla, so we clearly agree with that one. We are not sure when it comes to the others.

We think that AI is going to be highly disruptive, is going to disintermediate some of these platforms, not all of them, and that it may be the worst thing that has happened to a company like, Google. Google, if I can go to chat GPT and just get an answer right away and not be bothered with links and advertisements, I might do that. Well, guess what? Google is responding and now giving me answers. So it could be the best thing that happened to Google. We don't know. All I know is that when there are major changes in platforms, especially user interfaces, now that we're thinking about glasses and other wearables. The winners of the last round in technology typically are not the winners in the next

round. So we're on guard in that regard, and we know that most large-cap portfolio managers own all of these. Our portfolios are a highly diversified way to participate in artificial intelligence for every dollar in hardware that companies spend on artificial intelligence. It will probably pull $20 through in software. So that's why you see a company like UiPath, Robotics Process Automation, which we think using, it is harnessing the foundation models that Open AI, Anthropic and others, Meta, Meta's Lama 2. It's harnessing those foundations. foundation models, but is using specialized models with its proprietary data to become the robotics process automation company in the world, the largest. And same with Twilio, what kind of data.

And you'll hear four variables that we think are critically important as all companies approach AI and try and figure out, how can I harness the productivity gains from this new technology? One is they have deep domain expertise. They obviously know what they're doing, and they have a vision about where their own technology and company is going in the future. They have artificial intelligence expertise. They're taking this seriously. They have good distribution, preferably global, not always.

And then most important beyond that, they have proprietary data. And most of the companies you'll see in our portfolios have proprietary data that no one else has that they can use to help their customers. Twilio is another example, a trillion business consumer interactions every year and growing at an accelerated rate. They can help marketers and salespeople understand, hey, these were the interactions that caused movement towards your company or your product. That is very valuable information that nobody else has.

So here's another, what she's saying is essentially this is a variation on software eats the world. It's just a more advanced kind of software that eats the world that makes things more productive and efficient. I mean, what she was saying with proprietary data, we had a couple of companies go public here in the last couple of months. And one of the things they told me was they get hired to have access to the databases of various companies and provide high-level analysis. AI obviously is a higher-level analysis than you can provide. So what she's saying makes perfect sense in terms of improving productivity for companies that are using the software around this. Well, not only that, the amount of growth in Kathy and her crew have always been proponents of growth. It's not just earnings, but the growth that you have and the stocks that you buy,

and then being able to pick the right stocks at the right time with the right allocation. And that's what ARC's been all about. Kathy, I just want to use this quick opportunity. I know you have an Israel Innovation Technology ETF. Can you just spend 30 seconds on that as far as what's going on over there? I know it's a very, very difficult time, but you're investing in Israel right now. What's happening? Yes.

So this is a self-end indexed fund. Any company based and headquartered in Israel that, touches any of our innovation platforms is included in this index and it is rebalanced quarterly. Historically, when we've been through very tough times, including war times, this notion that innovation solves problems really helps investors get over humps like this one. So here we are. We're revisiting Lowe's with the Israel Innovation Technology Fund. And yet the innovators in that fund are going to help some of the problems that are being created by the crisis in Israel right now. And especially any company whose margins are under pressure and is suffering as a result of what's going on.

harnessing the new technologies that these companies, the companies in this portfolio and other companies around the world are providing, is going to help them shore up their margins, better, cheaper, faster, more productive, more creative, more creative, new products and services. So we think, and we've always seen, innovation gain traction during tumultuous times. All right. I got to ask you about Tesla. Elon. Tesla's still your largest holding. It's up 100% this year. You've got a real winner there. Has Elon Musk been able to refocus on Tesla now that he has somebody else running X? Do you

have any insight into that or feeling about that? I think that Elon is a troubleshooter and the troubles at X are not over yet, of course. We're seeing that in just recent days when they've said, you know, the Israeli conflict and all of the drama around it has caused another hit to advertising revenues. So I think these difficult times, though, spur Elon's creativity. He is a troubleshooter and a brilliant technologist. So we think that each time he does face turmoil like that. that the intensity of his brain cells takes him to new answers. And we've seen this at Tesla every step along the way.

Tesla, now that EVs are scaling, and he's got that machine in place, so to speak, we have now the autonomous side. And I think he's really focused on that. So, yes, I think it has his attention. He knows and believes, I think that they're close to the finish line with this latest software upgrade, so much so that they're now hiring ride hail experts in different cities around the country. That is going to be

a game changer. And we don't think he's lost any focus. Great. Good to hear that. Now, you recently entered the European market. You bought rise ETFs in the hopes of bringing, I think, thematic investing strategies to Europe. Can you convince European investors to buy into your philosophy very concentrated tech bets. I know you're still pretty small over there. Yes. Well, we don't have any product offering out there in the form of a USITS ETF. And that's what we were missing.

Since we were formed, I'm going to say for the past seven years, 25% of the subscribers to our research, now we give our research away for free, but 25% of the demand is from Europe. And the number one question on our website as we track these questions is, why can't we buy your strategies in Europe? And so here we found this little gem of a company inside Asset Co, which philosophically,

and from a DNA point of view, is very much like ARC. They know what's in their portfolios. They're very focused on the future, thematically oriented. they do have a sustainable orientation, which is absolutely essential in Europe. And in fact, more than half of their funds are Article 9 funds, whereas I think only 4% of all the funds in Europe are Article 9 funds. So we're terribly impressed with the quality of their own research and due diligence.

We saw it during the deal. and I think we're going to hit the ground running if the regulators approve our strategies there. And then, of course, we'd like to distribute their strategies throughout the world, including the U.S. Tommy, European distributions, you know, a challenge, even for big American companies. How is it different than the U.S., getting it out in Europe?

And Kathy's got big brand name recognition. Is that enough to break into the European market? Well, I think, like Kathy was saying, they know of Arc. They know of Kathy. She's a rock star here in the States, but also over in Europe as well. The problem is, how do I get invested? A lot of Europeans actually find a way to buy the ETFs, the ARCETFs listed here. But fast forward, this new USITS strategy is really a mutual funder ETF strategy for Europe. The problem is every country has different regulatory rules and

regulations that you have to jump through. The good thing is the USITS project, the USS process, can be sold throughout Europe. And I think Kathy's going to find a way to do that. The great thing is people already know her, and there are also people that love the research. Yeah, she's certainly a well-known name here and in Europe. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS. This is the market 102 portion of the podcast. We'll be continuing the conversation with Tom Leiden from VETify.

And Tom, you're a veteran ETF watcher. it's intriguing to me. We're three quarters of the way through the year. And for the first time in years, inflows into ETFs have been very muted, not just equity, but even bond inflows have been muted. I think we're shooting for $400 billion in inflows,

but we're used to $600, $700 billion. This is not quite half, a little more than half, but still rather surprising. What do you think is going on? Yeah. And even considering that, Well, we had a good start to the year on the equity standpoint, but that's fizzled out in most asset classes around the world.

S&P's kind of hanging in there just because of a handful of stocks. But the surprising thing, Bob, I would say for the year, is we have almost as much money going into U.S. fixed income as we have into U.S. equities. And that's really, really telling. Most that are investing, and we talked about some of this long-duration demand that we've seen right now, where most advisors and most investors feel a year from now, we're going to probably be in a recession

and we're probably going to see lower rates. The Fed's going to have to do something. And investors are banking on that. With that, you have to start getting that longer duration and locking in those higher rates now because if you're sitting there on the sidelines in money market funds, and we know there's $7 trillion in money market funds. That's always the thing you've got to buy now, but we were saying this a year ago. A year ago, the market was saying, we're going to be in a recession right now. Literally this moment, we're going to be in a recession wrong on that. If that doesn't make you humble, I've been doing this 33 years at CNBC.

And what's astonishing is how bad economic and financial forecasting is. The market was wrong. The consensus opinion on recession in 2023 was wrong. Now we now, we're getting this line, oh, by now for treasuries because yields are going to be lower a year from now, prices higher. and yet, the job market's still strong? We keep waiting for this recession that's ever on the horizon. That's not happening.

So long-term 60-40 has worked, hasn't worked in the last couple of years. Those individual investors or those advisors that deconstructed the 60-40 probably were better off. But the problem is, you've got this big pile of dry powder on the sidelines. When does that go back in? because in most cases, we know from an emotional investing standpoint, they're always late. You're always going to be late. So I keep going back to Jack Bogle, the founder of Vanguard,

who had the biggest influence of me on anybody, who always used to say, don't just do something, stand there. It might have been, the best thing to do was nothing in the last couple of years. Although arguably people who had cash should have put money into short-term treasuries. There's no reason to have cash when you have 5% return on. you know, on a money market fund, that would have been an obvious play. Even Bogle would have argued, I think, that. Arguably, you know, leaving money, selling at the moment that the fed's selling bonds

at the moment the Fed started raising rates, probably would have been a smart thing if you're an active manager. But other than that, most of these prognostications don't go anywhere. I'll tell you one thing that's interesting this year is there's a bunch of new companies getting into the ETF business. You know, Jeremy Grant them at GMO running things. So you've covered this as well. This is a further sign that the business is winning,

even if the inflows aren't as strong as they used to be. So this is the business of ETFs. When you think about these fund companies or these big asset managers that have separate accounts, it's worked really well for an extended period of time. However, an ETF is a great solution for separate accounts. That's a lot of money that you can really simplify in management for those conversions. So companies are doing that. In addition, we now see the demand for

ETFs among mutual fund investors because, look, even periods of time like now when you have declining valuations in your portfolio, at the end of the year, we're just a couple of short months away from what the year in distributions are going to look like for the mutual funds. And if we're seeing net redemptions in a fund, what are they doing? They're selling low-cost base of stock, and those gains are passed on to the current shareholders, even when the other ones leave. And this is a year where we really need to watch for that, because we've seen a lot of redemptions in mutual funds.

That money shifted over to if we're to get a Vanguard ETF share class, or if these companies decide to open up their own ETFs, we can sidestep those unfavorable tax situations that mutual funds offer, and a lot of them are doing it from a defensive standpoint to stop the bleeding of the redemptions that they're seeing. So maybe if we get, my point here is maybe if we get yields stop going up, and the markets rise a little more. We'll get a little more fomo. People will pull some of that money out of those one-year CDs and one-year treasury bonds

that they seem very happy about. Yeah. And maybe no longer stocks down, bonds down. And it's tough to do because if you're getting 5% and it's safe, that really feels good. Your clients feel good, and you as an advisor feel good because they're in that area. But one final thing, Bob, is when you look at valuations on the equity side, boy, just a few months ago, we're at 21 forward earnings on the S&P. It's now 18. And you look at valuations in small caps and especially overseas.

We're approaching single digits in some instances. One thing for sure to me, four and a half to five percent on a 10-year seems a lot more normal than 0.4.4. I kept saying, I want to meet the person that's going to lend the federal government money for 10 years at 0.5%. That never made any sense for me. Even with low inflation, it still didn't mean any sense. It's more normal now. It's what we've seen in the last few years that's an anomaly.

Now we're at least getting back to be more normal. I've got to let it go, Tom. That's it. Everybody, thank you for listening. I'm Bob Fisani. Make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETS. edge CNBC. Everybody, thank you for listening to the ETF Edge podcast.

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