ETF Edge - Big Bets on Clean Energy – and Reading the Summer Rally 8/22/22

Episode Date: August 22, 2022

CNBC’s Leslie Picker spoke with Tom Lydon, Vice Chairman of VettaFi, Tim Johnston, Blue Horizon Capital Partner and Matt Bartolini, Head of SPDR Americas Research at State Street. They discussed last week’s historic passage of the Inflation Reduction Act and its resounding implications for the energy industry at large. What will the policy impact be and how can investors get exposure to the new energy economy? They also took a look at ETF flows since the June bottom to get a read on investor sentiment amid a possible Federal Reserve pivot. 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. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged-treated funds, you are in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm Leslie Picker, filling in for Bob Vasani. Today on the show, we'll do a deep dive on clean energy.

last week's historic passage of the Inflation Reduction Act is bound to have resounding implications for the energy industry at large. But what will the policy impact be and how can investors get exposure to the new energy economy? Plus, we're following the flow since the June bottom, has investor sentiment shifted from a fear of a downturn to a fear of missing out. Well, here's my conversation with Tim Johnston, Blue Horizon Capital Partner, Tom Leiden, Vice Chairman of Vettify, and Matt Bartolini, head of Spider-America's research, at State Street. Guys, thank you so much for being here.

It's definitely the trifecta today. Matt, let's start with you. Given the sudden shift that we've seen from kind of the recent rally, it seems like investors are a little concerned about risk, at least today, Friday. Is that what the flows are telling you? And what does that indicate about a potential trend

as we finish out summer and head into the fall? Yeah, so I think what we've seen from buying behavior is that investors, you know, are sort of acting as if it's a summer of cynicism. They're not really buying so much into this rally. Flows have been positive. There's probably about $44 billion of inflows in the month of August alone, which is generally around historical averages. But over the past three months, you know, that trend is definitely lower than what we've seen historically. I've also seen lower participation within some of the ETF marketplaces where not a lot of flow has been more. funds beneath the surface have had inflows. Particularly in the month of August, if it was not for U.S. equities, which took in over 30 billion so far, the equity segment alone would have actually net outflows.

So there's definitely been a lack of conviction. There's been a little bit of pessimism towards this rally of how it will last. We're obviously seeing some of that being given back today. The S&P 500 really failed to break above the 200-day moving average, and that's been sort of a line of demarcation. There has been some positive green shoots, though. More recently, we've seen some positive flows into sector exposures. That's the first time they've had inflows on the last three months.

When you dig beneath the surface, it's still defensive positioning. Defensive sectors like healthcare, consumer staples and utilities, those areas that typically have worked well historically in times of slowdowns or recessions continue to be allocated to. So again, summer of cynicism, perhaps we'll go to the autumn of optimism when we get to the fall time period. Autumn of optimism. I like that. Tom, kind of along that same vein, in terms of hedging and short selling, ETFs often used as a way for investors to get exposure to both directional bets to the downside, as well as hedging out specific positions in their portfolio. We've seen short positions kind of rise with the tide of the market in recent weeks. What's the sense you get there that it's a directional bet or fears than investors have that the market has just run up to?

high versus just the fact that the market, you know, at higher levels, requires more in terms of hedging. Yeah, I'd kind of take the other side of the bet that Matt just laid out. I think advisors, and we're surveying advisors all the time, are the most positive they've been in over a year. We're seeing positive flows back into growth. We saw $42 billion go into growth ETFs off of that low. That's key and critical, very important. And also where we saw net redemptions in fixed income ETFs in the first four months of the year, we've actually seen money come back into corporates, into high yields, and leaving areas that were safer, like short-term duration and also dividends got a lot of flows in the beginning of the year. And actually in the last couple of months,

I've seen some outflows. The surveys we see from advisors are, saying because the Fed is a little bit more clear on the rising interest rates and they're fighting inflation, they're less concerned about, yes, there'll be a recession, but how deep that recession will be. So then in turn translates into them being more bullish on the market. Interesting. Tim, I just wanted to get your take, you know, as we wrap up the broader market segment. Do you feel like that the overall sentiment is kind of at this inflection point? Yeah, I think the reality is that this broad transition, as we look at it from the new energy economy, is continuing to be strong.

There's clear leaders. There's clearly a whole bunch of innovators that have done a lot of work over the last couple of years. And also maybe short-term pullbacks at the end of the day. We see that the trend is continuing. We see that enthusiasm for the sector remains strong, even if in the short term, there's some skepticism around what's going to happen day to day. All right. Well, let's move on to one area that's seen kind of the will they, won't they in terms of fiscal stimulus.

We're diving deep into clean energy plays. The Biden administration, of course, taking steps to combat the climate crisis with last week's passage of the Inflation Reduction Act. Sparking questions about the new energy economy. What will the ripple effects be on supply chains and beyond as we move toward a more energy efficient era? And what are the most crucial alternative energy sources out there? Tim, You know, the administration pledging a lot of capital here, about $370 billion worth in energy and climate incentives, more spending in this area than any other single piece of legislation Congress has ever passed, according to Goldman. That's mostly, though, in form of tax credits. Give us your take on this bill.

Who do you think stands to benefit the most? Yeah, absolutely. I mean, well, it's very clear that the administration is using the carrot in terms of trying to incentivize people to domesticate or at least work with fair trade countries in order to bolster the supply chains that are necessary to build out this next generation of infrastructure when it comes to both sustainable energy generation, but also how we use that energy, we're talking up all the way through, of course, to electrification. This capital that's flowing in through the administration, it's not just coming in the form of loans

and grants, which is some of the things that we've seen in the past. But it's also coming through in this form of tax incentives as well. So what we're expecting to see is a structural benefit that's geared towards some of these companies that are really helping with this overall transition. Tom, let's get more specific companies or types of companies. What's your take on this? We've seen a big push toward clean energy ETFs. Do you think this could be the next big catalyst that drives further flows in those companies or specific industries that stand to benefit from it. Yeah, it's not as no clean energy has been new to the ETF space. There have been some great ETFs that have been around for over a decade.

To the biggest, the I-shears global clean energy ETF and the Investco Solar ETF collectively have $9 billion, and both are up pretty well year-to-date. I think what Tim's alluding to, though, is you need to look at other. areas. You need to look at smaller companies. You need to look at companies outside of the U.S. You need to look at companies that may not just be battery or solar. You need to look at producers of lithium cobalt. We're going to need those minerals as we continue to move this clean energy process forward. And that's really going to be key and critical. Most of those ETFs that we have today that have billions of dollars in them tend to be cap-weighted. So there's more invested in fewer

companies. I think Tim's approach is a little bit more broad base where it's more of an equal-weight approach. So you have the opportunity to invest in smaller companies and have it be meaningful on the performance side. Well, Tim, why don't you tell us? You've got this new energy ETF. It's all about exposure to a wider rate of renewable energy sources. So what is in it? What is your approach here? How did you do the screening to determine? how to structure this particular ETF? Yeah, absolutely. So we look at it from the energy, new energy transition being broken up basically on five broad segments,

bringing energy generation, energy distribution, energy storage, performance materials, as Tom was alluding to, as a big part of what we do, and then, of course, immobility, ultimately how we utilize that energy. And what we're saying is that effectively that this transition is really broad-based. It's not just here in North America, it's global. We invest all the way around the world. And what we're trying to do is we're identifying what we consider the leaders. So this is like the companies that everybody has in any new energy, ETF, companies like Tesla. But we're also focused on developing and incorporating the innovators.

So this may be in areas like new types of battery technology. So groups like solid power are in our ETF, because we're in our own. we see them as being an important part of this transition as we go forth. Yeah, we just need some more IPOs to increase the amount of available clean energy companies to invest in. But it sounds like you're doing okay in the meantime. That does it for this week's episode of ETF Edge. I'm Leslie Picker filling in for Bob Bassani. Thanks to everyone for tuning in.

And just a reminder, you can always find all of our latest shows and podcast episodes online at cnbc.etphedge.com. InvescoQQQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQQ, Invesco Distributors, Inc.