ETF Edge - Big Launch: Ether Futures ETFs 10/2/23

Episode Date: October 2, 2023

CNBC’s Bob Pisani spoke with Bryon Lake, Global Head of ETF Solutions at J.P. Morgan Asset Management and Simeon Hyman, Head of Investment Strategy at Pro-Shares – along with Todd Sohn, ETF and Technical Strategist at Strategas Securities. They delved into the launch of the first-ever ether futures ETFs following the SEC’s approval over the weekend – ahead of the government shutdown deadline. Another win for the crypto bulls, but does this necessarily bode well for broader spot crypto ETF approval? They also took a look ahead at the fourth quarter for the markets and discussed where the search for yield is headed going into the end of the year. In the “Markets 102” portion, Bob continued the conversation with Simeon Hyman from ProShares. 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 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, Bob Pisani. Today on the show, we're delving into the launch of the first ever Ether Futures ETF following the SEC's approval of the new products over the weekend.

That's ahead, of course, that government shutdown deadline. Another win for crypto bulls, but this has necessarily voted well for the broader spot crypto ETF approval. Also take a look at the fourth quarter for the markets ahead and get a sense of where the search for yield is heading going into the end of the year. Here's my conversation with Brian Lake, the global head of ETF solutions at JPMorgan Asset Management, Podzone, ETF and technical strategists at Stratigas Securities and Simeon Heimann, head of investment strategy at ProShares. Simon, today you've got launched three new ETFs right here at the NYSC. ProShare's Ether Strategy ETF.

EETH, there, I did the symbol for you. There you go. Good for you. Tell us about what's going on here. Now, this is Ether Futures, similar to Bitcoin Futures, but explain what's going on. Just like we launched with Biddo two years ago, had a lot of success, $2 billion in flows, top 5% of volume on the exchange. We know that

regulated futures market in an ETF is a great solution. Today we launched that in the ether space, EETH, this pro shares ether strategy ETF, and then we launched two combos, BETAE, which is the Bitcoin Ether equal weight, and BETH, which is Bitcoin Ether

market cap weight. So we have a full suite of crypto solutions with the largest crypto ETF provider. Yeah, I remember I had you here of the day we launched BITO. It is the biggest Bitcoin Futures ETF that's out there. Speaking of Bitcoin futures, ETF, I've got to ask about where the Bitcoin future, the spot one is. We all know what happened. The SEC lost the gray scale case. Gary Gensl had 45 days to appeal that. We're sort of waiting for them to make a decision.

What's going on with the spot Bitcoin ETF right now? Yeah, I think none of us know exactly where that's going to take or how long it would take or what form that would be when it's all said and done. What we know is the futures ETFs are here today. And what's important about that is that regulated futures market. It resolves a lot of the challenges as the spot market is maturing. All the news we saw the last year or so with the exchanges and those things, ultimately they'll mature. But in the meantime, a future solution is there and it works real well. Biddo two years out. Since its inception, 3% off spot Bitcoin, Most of that is fee and nothing is free to invest in, so it works really well.

Grayscale won the case against the SEC. Basically, the court said you guys approved a Bitcoin Futures ETF. They are like products. You approve that. You've got to approve a spot Bitcoin. Now they've got an Ether Futures ETF. It's the implication here that there's a good chance of getting a spot Ether and a spot Bitcoin. Or am I stretching this?

You would think so. It's a matter of time, right? And the way I'm looking at this with the indulge of product that's come to the market is it's rare when you get a new asset class, right, to enter into the ETF lexicon. We've had equities for some time. We have bonds, commodities. Crypto seems to be the next step. It may not be for everyone, given the volatility involved. But I can understand from an issuer's perspective why you'd want to try and take advantage to that market. We'll see how the asset class performs. But again, this is a new area for everyone to get involved. into. So I think that's why you're seeing such popularity with all these releases. Brian, you want to handicap the odds of a spot Bitcoin ETF that may be a little out of your

ballpark, but you're an old ETF watcher. You've been around a long, long time. You know this game? I think it will happen. I don't know when. Okay. Very politic of you. All right, I'm not going to let you. We're going to go back to the, I'm not going to give up on the spot Bitcoin. Guys, this is, people like this story too much here. But let me turn to you. Big inflows continuing into money market and short-term Treasury ETF. investors are loving these 5% yield. You can't get them to stop talking about it. They seem very happy to stay in their 5% treasury yields.

But now we've been seeing inflows into short-term investment grade, corporate bonds recently. You've got this ultra-short income ETF, JPST, that's getting inflows. I'm a little puzzled about this. What's the appeal of corporates, even short-term corporates over treasuries? Different risk ratio here. Yeah, well, when you look at kind of peak cash levels like this, it tends to to be the worst performing asset class once you stretch out over time because everything else kind of does better. And so the ultra-short space is actually really interesting right now. You can

do what we call step out of cash and you're able to incorporate an investment grade that's now our PM was email on me over the weekend. He's buying paper 5.8, 6.2%. Your SEC yield on JPST right now is 5.38%. That's a nice step out of cash right now versus like the ag, for example, Bob. Ag, you're getting 108% of the yield with only 10% of the duration. And so that's actually a pretty attractive place to kind of hang out in these markets. And of course, ag is the biggest bond ETF out there. Although, wait, no, Vanguard total bond, I think, is bigger. Right? Vanguard total bond is bigger than Ag. They're neck-and-neck around 90-low 90s. I'm waiting for one in the hit 100 billion, actually. Yeah, that would be a big. His point is ag is sort of the whole bond market, essentially.

But you've got 5.3% on this JPST, investment-grade debt. But the risks are higher. This is what I don't get. Corporate debt has higher risk than government debt, right? You all know that. So what's the advantage of having corporates over treasuries? Some of the corporate's got higher credit quality than the U.S. government right now. We're only taken on six-month duration, and so we've got it nice and tight in there. So you've got very attractive credit quality. We've got an active manager that's individually selecting each of the bonds that are going into the portfolio, which I think particularly on the fixed income side is a very differentiated proposition. And this product's got a ton of track record. It's been out for over five years. It's the second largest active ETF in the

world. So we think JPSD is a great place to be looking right now. Boy, what a surprise. He likes his product. Is this a permanent change in consumer investing behavior? I'm a little worried about this. Our bond funds, you know, you people love these things. Are they going to pose serious competition for investor dollars? I mean, they haven't for decades. And yet everyone keeps messaging me, hey, Bob, we're happy at our 5%. You know, yield, 2% real yield. We don't care about the stock market. As long as you're in this hire for longer environment, this is candy, especially after not having it for 10 plus years during the QE era, you now just put a bowl of M&Ms in front of a child who can get that 5%. I think that's the analogy I like to use. I also think a big understatement is

that when you go out on the curve, you're getting equity-like volatility in a bond product, right? TLT has the same standard deviation as the S&P 500 roughly right now. So I think that's why you're seeing all this money go to money market funds or short-duration products. TLT is the 20-plus year bond. So as you don't understand his clipped way of speaking English. Duration makes sense when the Fed is done hiking in anticipation of cuts. But if no cuts are coming, I don't think you want that volatility. It's not fun to sit in.

I'd rather be in that short duration, treasury, or corporate, like. And what about the old pitch? Oh, active management. Have you heard this story before? Active management can move a lot quicker. Here we go. Active management, I think, is much more comfortable in a bond wrapper, right? than an equity wrapper, beating the S&P 500 is tough enough.

Beating the ag is different because the ag doesn't have high yield in it, I believe, or it's a limited amount of high yield. So there's more opportunities to outperform when you're active, and especially going across different, the whole duration spectrum. Yeah. Bob, you'll like this. We think of active management versus passive management as black and white TV and color TV, and it's exactly to the point that was just made.

A passive index is just going to give you just that. It's the duration of the index. There's no security selection. You're going to drift with duration, whereas active management can pull in not only... Do you agree with his point that active is better served in a bond wrapper than an equity wrapper? I think active management on the fixed income side is a very compelling story, particularly given the way that passive fixed income and benchmarks are constructed.

So that's a yes? That's a yes that active management can provide a tremendous amount. I'm trying to get a T.P. Morgan guide to admit the bond funds are better in an active wrap. You know, the reason I answer it that way is because I want to make a sure that we're framing it the right way. When we're saying versus the field, I think that's a difficult thing to say. I think good active management can absolutely provide a tremendous amount of value. We just to give you our bona fides, we've got over 1,000 active managers. We spend $400 million a year on research. We're putting good active management into this. And it depends

on the outcome that you're trying to deliver, right? So we just launched a product last week. I know you make fun of me for launching products, but we're doing this on behalf of investors. We're listening to investors. What do they want to see in the marketplace? So we launch hedged equity laddered overlay. The ticker, wait for it, is H-E-L-O, pronounced hello. So we've got cardboard cutouts of Adele around the office because she's got a great song, Hello from the other side, right?

And this is designed to give you two-thirds the upside of the S&P with only half the volatility. Maybe an attractive product for the markets, like you're saying. Maybe we grind to the end of the year a little bit here, and this is a way to stay invested for the long run. He just sold us his new product. Hello. H-E-L-O. You got it in.

Very good. He's so media-trained. It's annoying. It really is. Now, you've been around a long time. You have any thoughts on this treasury craziness? I mean, their point is if you think inflation is going to cool off this quarter, the risk reward in treasuries is pretty good right now. There are opportunities, but it doesn't have to be active per se, rules-based strategies that do things that aren't exactly the same as the index can add value. For us, we have an ETF ticker IGHG. It's investment-grade interest rate hedge corporate bonds. What's cool about it is it takes that spread and staples it to Fed

funds. In effect, you're actually getting about six and a half percent yield staying in corporates, but you have zero treasury interest rate risk. You can do that in an ETF. It used to be called CreditR. You can do it in an index. So it doesn't have to be active in the capital A sense. Does it bother you that these ETF products are getting more and more complicated? I used to have a hard time explaining covered call strategies. Now I got to explain even more complicated products. The hedged interest rate products are fascinating to me. They have done phenomenal since we've had liftoff of the interest rate cycle.

But to your point, it's a little bit more complicated than a simple treasury ETF. But I do agree with Simeon that they've done fantastic. They're a great way to hedge out the duration risk for now until we see cuts whenever that comes. So you just heard both of these guys have new products that they're selling. And here's something interesting. 69 ETFs launched in September. That is the largest ETF launch in history. That's according to Todd, who actually watches this thing.

Kind of sad, isn't it? That's what he does for a living thing. What happened? Is that true? This is the largest number of ETF launches in history we had? This is true. We had a handful launches from a few different families, right? And this is the acknowledgement of the ETF space from legacy fund providers, boutique RAs,

who maybe have a separately managed account they want to put in an ETF. There's the day trading crowd, right? Those issues want to cater to them. And it's all coming together right now. The ETAF industry is 30 years old, but based on launches, it feels much younger than that. I don't know if this number will get broken again. I think it's reasonable that it can, especially if some more legacy providers come in, but it should continue.

It's the start of the fourth quarter. Wouldn't it make some sense, Brian, that you know, you try to launch a bunch of ETFs now before the end of the year? Does that? Yeah, there's a push to get things done. Obviously, we'll be able to clip a one-year performance number quicker this way in the sense, obviously not a one-year, but get a calendar year. So you sometimes do see some seasonality in launches. I think it's great for investors. You now have more variety to build the perfect portfolio for what you're exactly trying to achieve.

Where the difficulty is, is you've got to sift through more of these to find, to find, find them right once, but variety is good. Variety is good, but it's also confusing. A lot of these products I can't explain on television. It's really hard. I have to think very carefully, and it takes 30 seconds to do it. And even then, you're not sure exactly about the use case. Is there a trend at anything that's going on here?

What's happening in these products? We know ETS follow trends, for example. Remember when thematic tech was a big thing in 2016 and 2017? Thematic tech, hedged equity to Byron's part. is popular. Managing downside risk, I think, might be the proper way to put it. That makes sense. Especially because when you look at the demographics of asset management, there is a lot of folks closer retirement of a lot of money and they want to protect that.

And they still want their equity risk, though, right? That makes sense to me. And I would also just point out, we just had a record launch month, like you said, but there are still about two or three times as many equity neutral funds as equity ETFs. So while they feel saturated and confusing, we're nowhere near where that space currently is. There's room to run. This makes perfect sense to me what he said. Older people interested in hedge products.

So I'm the classic baby boomer. I am the classic baby boomer, 56 and 57, with the two biggest years worth of baby boomers. And I have friends down here said, Bob, people in our age group, when you're heading towards 70, you can't have another down 20% year. That's kind of risky. You've got to de-risk in terms of your equity exposure at that point. So the rise of these hedged products make a lot of sense for baby boomers who want to sit there and say, well, I'm not that dumb. I'm not going to sit there in 5% treasuries.

That's too little risk, but I've got to have some exposure to equities. Therefore, I'll give up some upside risks. There's Jepi. You haven't gotten an ad for Jepi. He hasn't talked about Jepi yet. I can't believe it. There's a product that makes sense for the times. Yeah, but Bob, you just said you couldn't explain the strategy on TV,

You literally just did a better job than I did. That's exactly what hell was. Well, Jeffie is basically that strategy. But Jeppy gives you the covered call, so you're selling a little bit of the upside. By the way, say what Jeffie is. So you explain it to the viewers. Jeppe is a covered call strategy on a basket of quality securities. The idea to give you a premium income.

So you're getting the dividend from the other line plus the option premium that comes along with it. Right. Yielding. So you're collecting a premium, but you're giving up some of the upside. So this works great in the year, in the second half of the year where we're having troubles, there you've got a strategy that works. But at an up market, you're watching. are giving up upside.

A covered call strategy is going to struggle in a straight up market. Yes, because you've given up some of that upside. You're going to be clipped on that. If you think we're going into a straight up market right now, maybe it's not the strategy for you. My view is we're going to grind a little bit to the end of the year here. Probably be pretty range bound. JEPQ and its NASDAQ cousin JEPQ is the other ticker.

Both of those seem to be really optimally positioned right now. He got in the other one, JEPQ. See, you're going to hit the whole, you're making your PR people. We got very happy over here. But this is innovation, right? Think about like another industry. So if we went to Ford Motor Company and you say, why are you innovating with these seatbelts and all these airbags? Of course you are, because it's better for the end consumer of those. And that's how we think about it. You know, we think about fiduciary active management. What are things that we can put into these products to help investors get better outcomes? Did he just call me an airbag? I think he just did. What happened there?

No, you're the seat belt in that analogy. You're the driver. You're driving this car. Look how fast he recovered on that. Very good. I want to return to get more out of you on the Ether Futures. You've got two other products that you launched today. Both of them have exposure to the returns on Bitcoin and Ether. Now, this intrigued me. Why do we need the combination of them? What's the appeal here?

We've launched BETE, which is Bitcoin and Ether equal weight, and BETH, which is market cap-weighted. Look, they are the one and two. These are the two largest cryptocurrencies. If you want exposure to both, you know you want exposure to both. made a lot of sense to launch, launch the combined products. There's two slightly different things, and we could talk about this for hours. Bitcoin, fixed supply, Ether, not fix supply.

Ether gives you exposure to the Ethereum ecosystem. Bitcoin is proof of work, and Ether is proof of stake. We got all sorts of little things here. Bottom line, the one and two cryptocurrencies, offering them combined for folks who want one-stop shopping. to me is, and the reason I like ethers, it is defy in general, but smart contract concepts, too, that seem to matter a lot, which is a very different concept when you're dealing with Bitcoin, right? There's so many aspects to this, whether it's your, and the way it can work in a portfolio,

whether you view it as digital gold, whether you view it as a alpha satellite, what we know is the correlations are low to stocks and bonds, and that's super important, because we know correlations in traditional asset classes are going to one rapidly for everything. Even stocks and bonds often do the same thing, and have an uncorrelated asset class is very important. Yeah. I just want to move on and talk about a couple of other things. I think the key point here is you're almost acting like you want a diversification in stocks. And if you're in the crypto universe, you almost want a diversification a little bit in the two biggest ones here.

That's what it seems like. It's maturing. It's a sign of maturation to me. Absolutely. And they don't, obviously, Bitcoin and Ether are more correlated to one another than they are to traditional asset classes. But for sure, it makes a lot of sense to have exposure to both the number one and number two cryptocurrencies. Todd, I look at the top inflows this year. I see the, I see the S&P 500, usual, IVV, VO, these are the S&P 500 funds.

They keep getting inflows. I also see an awful lot of bond funds in here. 20 plus year treasuries, short term, zero to three-month treasuries, total bond, BND, all big inflows. Your thoughts as we enter Q4 here, what ETFs are going to be working in Q4? So the inflow lists, you know, it's your typical who's who, right, folks allocating as they need to. I drilling down and watching more equally weighted ETFs, you know, your equal-ated S&P-500 are already. EQUA, Russell 1000, EQAL, because that's key for market participation and durability. We know the influence of the top five or top ten stocks.

I need to make sure that the bench is being involved in the market here. I want to keep an eye on semiconductors, XSD, SOX, and housing as well, ITB. I think those are good tells on the strength of the underlying economy. Things seem pretty good. But those have consolidated here after a pretty rough quarter. So I do want to keep tabs on those. I'm looking at Lenar over here. Had a great earnings.

You're talking about housing ETFs. Had a great report, September 15th. Stuart Miller, business is good. They're taking business away from existing home sales because the high rates. People are sticking with their mortgage. They don't want to move. The report was great.

They beat on the top and bottle. And stocks has been straight down because you can't fight the macro here. When you get a rise in yields this rapid, investors say sell consumer discretion. sell autos, sell Lenar. We don't care what everybody's saying right now. And it's really kind of sad to see generally business has been good, and yet they're acting like business is going to be terrible.

This most recent leg up and interest rates around the world has caused more agitation than the entire year, really. Now you're starting to see the more cyclically oriented areas underperform, whereas for most of the year they were in pretty decent shape. So we're seeing new lows today on all the big utility ETFs, all the big REITFs, that you might expand, and a lot of the bonds to new lows, but I'll give an example of the effect of larger interest rates,

the biotech ETF, just hit a new low, because funding costs for all of this stuff goes up. So this is a good example, how it affects virtually the entire ecosystem of investing in the United States. The biotech ETF has been, or is it, IBB, has been affected by this. That impacts small caps too because they have a heavy presence in Russell 2000. So you can't buy biotech, you can't buy small caps then.

You've got to stay up the scale and quality. All right. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the E-Markets, a 102 portion of the podcast. We'll be continuing the conversation with Simeon from ProShare. Simian, thanks for sticking around. You launched the Ether Futures ETF today. How is it trading?

Trading really nicely. The volume is strong and the spreads are tight. So we're very pleased with the trading today of ticker E.E.T.H. The most important thing is those tight spreads. People were concerned that there would be some deviation somehow between the back when BITO launched the Bitcoin and a spread. There would be wider spreads between the spot and the futures, particularly when it rolled over. But that hasn't occurred. But it makes some sense. These are financial products. They're not commodities where you can get irregularities sometimes.

Right. So two things. So one, I was mentioning just a trading spread today, which are really tight. But what you're referencing is very important, too, the learnings that we had from BITO, the largest crypto, the largest crypto ETF. Biddo's been out for two years, $2 billion in flows, top 5% of trading volume. And what we learned from Biddle is that a futures-based ETF can track spot really, really nicely. exactly as you described it. It's a financial future. There's no storage costs. There's no oil in cargo ships around the world. So therefore, this is the important little nuance here, so we're in podcast. I get my extra 30 seconds. The roll cost of a financial future should be pretty darn close to short-term interest rates. And remember that in these ETFs, whether it's BITO or EETH, we're holding all the cash because these are just, they're not leveraged products. We're just, delivering $1 of exposure for $1 invested.

So that means if that cost of the role is pretty darn close to the short-term interest rate, yet just earn it on the cash, and boom, the tracking is there. Two years since the launch of BITO, with 3% off spot, most of its fee, there's no way to invest for free, it works. So what's the implication of higher rates on the role of these products? Does that matter at all higher interest? It shouldn't matter at all for the roll because you just get it back in the return on cash. So that's really key because some folks have been looking at the crypto's futures market and they say, wow, the roll costs went up.

Yeah, of course. Short-term interest rates went up, as we all know. But you earn that right back on the cash so it doesn't matter. Tell me about, I know your reticence to get involved in speculation on Bitcoin futures, excuse me, the spot Bitcoin ETF. But it seems like SEC Chair Gary Gensler is in a very difficult position. Grayscale won the case. They said, you approved Bitcoin futures. Those are like products.

You approve that one. You're going to have to approve this one. He hasn't announced whether he's going to appeal yet. And yet it seems like there's really, I'm trying to figure out what new grounds can he introduce to say that he's not approving a spot Bitcoin ETF at this point. His choices seem to be narrowing. Yeah, we don't have a crystal ball. At least I don't.

So, you know, trying to figure out where this will go, it's going to take some time at the very least. That much we know. What we also do know, though, is that the regulated futures market is kind of a cool place. That's my technical term. It's a cool place. What's nice about it, as opposed to the spot exchanges that have had all this stuff going on with them in the news flow. So futures, regulated, CME, Clearinghouse, it's all got that regulated thing over there. So it's a mature place.

The spot market is still fluid a little bit, if you will. I'm curious about what happened with these Ethereum futures. So in the past, I recall some time ago you had filed and a bunch of other people had filed, and they basically told you to withdraw. saw, then they did, this happened a while ago, right? And now you filed and it looks like it's going to, it got approval. So did something happen here? I don't know what the, what the precise path of that was, but we just are certainly pleased for, and you have to use the word allow, allow is not approved. So that these ETS were allowed to come to market. And as again, from the experience of Biddo, we know the solution works and we were super, super, super, happy to be able to bring these three ETFs to market today.

You know, when I talk to people about pro shares, you guys are sort of the envy of the ETF world because you run a whole suite, you run the largest suite of leverage and inverse products out there, and they all have fees that are the envy of the ETF world, 70, 80, 90 basis points up there. I think your largest product is the Ultra Pro, the Triple Q, LGBTQQ. Yeah, 16 billion in assets, 86 basis points. That's quite a hefty fee structure you get every single year. It's amazing about these leverage and inverse products because they always show up among the heavily traded products that are out there,

even amongst equities in terms of the dollar value, even share value, no matter what you look at, they show up. What is it about these products that still has a certain amount of appeal, even though in theory they're tiny, they're 2% of the ETF universe, essentially, and yet they have outsized influence. Look, they offer a very important solution to investors, whether it's to get exposure with less capital at risk or whether it's to hedge your portfolio.

They resonate with folks, and they do a good job for them. Yeah, it's, you know, there's been arguments for years that these kinds of leverage and inverse products sort of constitute a separate universe and that there should be a separate product classification for them. Does pro shares have any opinion about that? I think the only thing I would just share with you is folks at proshares.com, we have lots of educational material.

We want to make sure that folks can avail themselves of that. You got any thoughts about where we're going in the fourth quarter? Put on your old ETF, you're an old ETF watcher, or I know you're a smart guy on the markets too. Where are we going to be heading in the fourth quarter? We're trading at a multiple that's very consistent with four and a half, five percent, ten-year treasury yield. But as an old mentor of mine told me back in the day, the problem with averages is you can

have one hand in boiling scalding water and the other half in a pile of ice and say you're okay on average. There's a wide disparity of valuations in the marketplace, tech still trading it 35 times, but the problem is on the deep value side, if you're not getting any growth, you might as well be a bond. So I think in the fourth quarter, quality growth strategies that have been left behind in the first half are probably going to have a day. Yeah, this word quality shows up a lot. You said trading at valuations consistent with 4 to 5 percent yields.

The S&P's current valuation is between 17 and 18. It's high 17s right now. That's about his – 17 is about an historic average that we've got right now. Yeah, you always got to put in the context of interest rates. You could tolerate a 20 times trailing with a 4.5 percent 10-year treasury. But again, we've got a market where there's a bunch of stuff at 35. And then the problem with the stuff that's 15 times is if there's no growth there, that's a value trap, if you will. It's a value trap.

Simian, thanks very much for joining us. I appreciate it. Simeon is the head of investment strategy at pro shares. And thank you, everyone, for listening to the ETF Edge podcast. InvescoQQQQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQ Invesco Distributors, Inc.