ETF Edge - Bitcoin ETFs pass $100B AUM… plus, other big movers for 2025 12/9/24

Episode Date: December 9, 2024

Bitcoin funds pass a key milestone in terms of assets. Plus, the equity concentration and credit conundrums investors will face in 2025.          Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast. If you are 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 am your host, Bob Pizani. Today we are looking at Bitcoin ETFs passing the $100 billion asset under management mark,

plus other big macro moves for 2025. Here is my conversation with Brian Hardigan, he's global head of ETFs at Investco, the fourth largest ETF provider in the country, and with Nate Jeraci, He's from the ETF store. Brian, the hot topic, I got to start with Bitcoin ETFs and what's going on with that. They've now passed $100 billion in assets under management.

That's all 12 of them, including yours, BTCO, the Investco Bitcoin ETF. I think you have nearly a billion dollars in assets in that as well. So tell us about how momentum in Bitcoin ETFs and what's happening as we close out the year. Sure. Well, you've seen it just take off from early 2024 when multiple issuers launched, right? So really creating the packaging, the regulatory support, the liquidity of the ETF vehicle, you know, pushing Bitcoin forward. But I think over the last few weeks you've seen obviously the regulatory regime and at least the outlook for 2025 become very conducive for digital assets and certainly Bitcoin ETF.

So we think there's another chapter here that we're starting to enter and we're looking forward to how investors can leverage option markets and other liquidity. access to really manage their exposure. Yeah, I want to talk about 2025. But Nate, something really extraordinary is happening with these Bitcoin ETF flows. These 12 Bitcoin ETFs now have, they're now the largest holders of Bitcoin here. So 1.1 million bitcoins held in total. And I think that's relevant because that, we believe, passed Satoshi Nakamoto's 1.1 million Bitcoin holdings.

And by the way, we don't know exactly who he is or how much. much he holds, but the estimates have been in high as 1.1 million, but Bitcoin ETFs now are the largest single, collectively the largest single owners of Bitcoin. Tell me a little bit about what you're thinking. Why has Bitcoin ETS become a preferred way of holding Bitcoin? Well, first of all, I don't know that this is exactly what Satoshi had in mind when he created Bitcoin to have Bitcoin held via some of the largest asset managers in the world. But here we are. I want to go back, When you look at this category overall right now, last I checked, spot Bitcoin ETFs are nearing $110 billion in assets overall. And they've done this in about 11 months. For context, the physical

gold ETF category, which has been around for over 20 years, that has about $125 billion in assets. So it's not inconceivable to think that spot Bitcoin ETFs will surpass gold ETFs sometime over the next several months, which is just astounding when you think about it. When I think about the demand here, you know, I think everything lined up perfectly for these products coming to market because remember, you had over 10 years of pent-up demand here because the first Bitcoin ETF filing was all the way back in 2013. And this has been talked about ad nauseum over the past decade. So I think that created a lot of pen-up demand.

As we talked about earlier, Bitcoin itself has obviously performed very, well. It's up around 140% this year. That clearly helps. There's just been a ton of coverage in this space. That helps generate investor interest. So all of the ingredients have been there. It's really been a perfect recipe. Really, it's been remarkable, Brian. Tell me a bit about Paul Atkins. He's the nominee for the SEC chairman. How are they being viewed in the ETF community? I know the Bitcoin community thinks Atkins are positive, but what about the ETF community? Absolutely. Yeah, I think it's been known that he's been a supporter of Bitcoin, and I think 24 was really the point at which you break out, right? And I think, again, as I mentioned, the next chapter, hopefully the ease of bringing new ideas and new opportunities for the asset class is what we're going to see 25 and beyond, whether that's reserves, access points, or additional liquidity vehicles. I think that's a huge opportunity for the asset class. What about institutional community? Is there hope they'll, obviously, there's a lot of barriers still up about it.

owning that. Is there any sense that might change? Yeah, so if the ETF becomes the liquidity vehicle for holding the digital assets themselves, that's a known vehicle, it's liquid, it's regulated, and I think that really touts the benefits of the ETF. So hopefully that's the kind of that intermediary vehicle that we needed to give the institutional marketplace more access to digital coin. Yeah, you know, Nate, he mentioned here, Brian, briefly, there's this entire huge complex around Bitcoin now, from options to income variance. Rift on that for a moment. Why has Bitcoin acquired such an aura in the American mindset? I mean, Jay Powell has said it's

primarily a speculative investment. Is that right? Is it essentially a get-rich-quick scheme, or does it have another kind of use case? Well, I think if you look at the demand overall, investors are clearly viewing this as a viable store of value and something that is an asset that is here to stay. And when I think about the ETF specifically, you know, I think that's indicative of a shifting regulatory landscape, which is given investors and in particular advisors and institutional investors much more confidence to come into the crypto arena. And then you look at how the ecosystem is developing around Bitcoin and in the traditional finance, with things like options coming to market. I think we're going to see a proliferation of ETFs that play on Bitcoin. We're going to see buffer defined outcome Bitcoin ETFs.

We're going to see tail risk hedging Bitcoin ETFs. We're going to see all flavors of ETFs coming to market. And going back to the regulatory environment, I do want to make a quick note on that and that by all accounts, the Trump administration is going to take a much, friendlier approach to crypto-friendly. We're already seeing that with the establishment of a crypto czar, in David Sachs. Paul Atkins is set to succeed Gary Gensler as SEC chaired. He's viewed as being much more crypto-friendly. So the overall regulatory backdrop has turned much more positive. I think you're seeing that reflected in crypto prices. You're going to see that reflected in a proliferation

of crypto-ethefs coming market. Yeah, Brian, regardless of the use case, your point before, there's this huge complex around it now. Options to income variance, for example. That's going to keep expanding. Right. Yeah, I think the big next wave is the wealth channel, right? So advisors have asked us, how do I use it? Where do I allocate it to?

And we've helped them with some of the research, I think, as Nate had mentioned, you know, when you look at it as a storage of value or compare it to gold, but if you add up all of the assets in the investable market, including Bitcoin, you're right around a half a basis, 50 basis points to 1% allocation. So for people asking that question, if you don't own it, you're 1% under allocated to Bitcoin. So that's kind of been the initial wave of getting investors to allocate within their portfolios. But then as the options market and derivatives start to come out, there's ways to manage around the volatility. Your point is $100 billion is roughly $1% of the $10 trillion in ETS under management.

market, correct. Yeah. I want to move on and talk about equity. We've been hitting Bitcoin here, but let's talk about equity. As we're closing out the year, what kind of equity bets are you seeing investors make at Inves? You run the fifth largest ETF in the world, the triple Q's, the NASDAQ, the NASDAQ, that's had new high, strong inflows.

But you also run the equal weight S&P, sort of the opposite bet, or the RSP, which has also come awful high but had great inflows. So characterize what's going on here. Just speaking to QQQQQUM, 40 billion inflows for us for the year. So about 4% of all market flows in ETFs shows you the power of the performance that the innovation factor that we like to highlight has demonstrated. But it's also the concentration trade around the Magnificent 7, of course. And you've seen that start to have been flow this year. 24 was really a tale of two markets. The first part of the market, very much a concentration story. And as we dovetailed into fears of inflation rates decreasing, you started to see the market broaden out a bit. And that's really where the RSP, S&P, Equal Weight

strategy takes that other view of concentration and helps investors balance out all of their portfolio risk. But to me, it really shows that you have this precision that investors are using ETFs for it to really balance out either under concentration or over concentration. from living in their portfolios. Nate, riff on that for a minute. It seems like some investors want concentration and some investors want diversification. They seem to be asking for both at the same time.

Well, it's interesting because two of the ETFs that were just mentioned there in QQQ and RSP, those are both in the top 10 of ETF inflows overall this year. And then if you look just outside of the top 10, you have QQQM, which is the lower cost version of the triple Qs. So the way that I view this is that this has really become a major battle line in the markets right now, because there's one camp of investors who believe the market has grown too top heavy. And they believe valuations of the Mag 7 stocks and other mega cap names are overextended.

And then there's another camp that says, well, look, that's what's been working. And so there's no reason to fight the tape here. And that latter camp has mostly been right for a long time now. But I think investors are growing a bit wearier as to whether or not that can continue. What I think is really interesting from an ETF perspective is that we're seeing a number of new products come to market that allow investors to express their views on this concentration in a much more targeted fashion. So Invesco actually just launched the top triple Q ETF Q big, which captures the top 45% of the NASDAQ 100. We've seen other issuers launch products either targeting the largest mega cap name. are specifically avoiding them.

And what that tells you is issuers are clearly aware of this battle on the markets right now. I think we're gonna continue to see sort of this tug-of-war play out moving forward. Well, here's your chance to talk about QBIG. You're essentially, Nate's right, you're getting deeper into the concentration game. So you launched, this is just last week, right? That's right. QBIG, what we're talking about folks.

This captures the top 45% of companies in the NASDAQ 100 index. And again, concentrated bets still in a way. That's right. Yeah, the Investco top QQQETF, so really looking to capture 45% of the market cap of the NASDAQ 100. So as we know, the acronyms of Mag 7 and Fang have evolved Faye-Aing with two A's over time. So this will allow you to really capture that concentration story within the index over time. And that's what investors were asking us for. How do I dial up that exposure and really capture the majority of the drivers of returns in the NASDAQ?

You know, Nate, I'm torn about this. There's clearly some debate in the markets right now about whether it's time to diversify away from the MAG 7, for example. But other people don't think so. Other people are into either diversifying or just staying concentrated. This is a hard one to call right now. Jack Bogle inside me says, be very careful about concentration, Bob. That doesn't work on the long period over long periods of time.

Maybe we're seeing some unusual development here where small groups of stocks are going to capture huge amounts of market share for much longer than is historically normal. Yeah, my high-level view on this, which I've talked about before, is that if you had been invested in market-cap-weighted indices, market-cap-weighted index ETFs, you have received the benefit of this growing concentration over the past five to ten years. That has been a good thing. But as we sit here today, are there more risks involved in investing in those indices? Yes, I think you would have to say that that concentration does present some additional risk. And so from my standpoint, I think that means it's time to diversify a little bit. Does that mean shed your market cap weighted exposure altogether? No, because again, that's worked.

We know historically that works over the long run. But is there some additional risk as we sit here today? Yeah. And I think investors should be cognizant of that. Not surprisingly, we're also seeing some factor rotations, but it's the typical suspects in an up market. So, for example, it's momentum and quality. So you have a quality ETF does very well.

SPHQ. That's seen nice inflows as well. But when you look at what it is, it's really a big cap tech ownership still. SPHQ has Broadcom, Apple, Adobe, Cisco, Qualcomm. And you know how these work, folks. quality is general profitability, return on equity, I guess, is what you're looking for. And then you have debt to book value, financial leverage or low financial leverage. Here's what SPHQ owns. These are the largest holdings in here.

I don't have any problem with this. Quality is certainly a good way to go. It makes sense in terms of picking a factor. Anything you can... I guess the question is how long would quality necessarily work? Yeah, I think quality is a testament of profitability. some of that concentration we've seen on earnings growth in the market. I think the bigger component we've seen with the rotations is the concept about market breadth.

So market breadth allows for more market rotations, factor timing, and to the original question, where are we seeing some of those bets? We've actually seen a big shift from quality in that first half of the year move into momentum towards the second half of the year. And that is a testament of, again, the factor timing, the factor shift. There's a stat, I think the first half of the year, less than 25% of the S&P 500 companies actually outperformed the S&P 500. Second half of the year, it's well over half. So it's showing you there's more opportunity set within the market to be selecting from,

and that factor leadership is starting to change. And we've definitely seen that in the number. A lot of quality is momentum right now, and not all quality is momentum necessarily, but a lot of quality right now is momentum. I keep waiting for some momentum to be low volatility. When is value you're going to sort of make a comeback. But it doesn't happen here. I want to move on here.

We've got a couple more subjects I want to hit on. I want to talk about fixed income a little bit. Bank loans, BKLN, is private bank loans, essentially. And tell us about how that's doing. It seems like it's had some inflows recently as well. Under what circumstances would something like bank loans do well? Yeah, so bank loan is the 100 largest, most liquid senior loans. They typically have a floating rate tied to them.

But we see the flows tend to ebb and flow depending on the market. So this year we actually saw more of the inflows into BKLN in the second half of the year. And I think that was when there was a little bit more certainty on the shape of the curve, where rates were going. And it was a bit of a credit and yield opportunity where investors were looking and favorable for taking. some of the credit differentiation and getting the yield difference. You think this would be a play on interest rate changes, but really it's a play on credit, right? I mean, essentially, you're going to be, if credit remains well, doing well, this will do well, right?

I mean, what are we buying here? Sure. It's play on credit, right? Right. You tend to be a little bit less interest rate sensitive. You know, BKLN was one of the first ETFs to access liquid loans, and we often, you know, see investors using it for part of their private credit sleeve, right, from a liquidity standpoint. So as they're moving towards funding or as they're looking to dial up exposure, but potentially

deals aren't available, they use that as a bit of a liquidity vehicle as a proxy towards some of their private credit, which has certainly been a top. Mate, what about that? He brought up private credit here, private equity, a hot subject right now. Could something like this, these bank loans actually be considered a form of private credit? It's sort of like a magic pixie dust saying private credit. Yeah, I think you could probably mount an argument around that. But, you know, it's interesting because putting private credit in the ETF wrapper, that is the topic pejor right now.

And I think that'll be one of the key storylines we see heading into 2025. With bank loans specifically, I don't have strong views here. I'll just say that if you look at credit spreads right now, they are near historic lows. And so from my perspective, I'm just not sure this is the right spot to be loading up on credit, especially riskier credit. Though I will say with bank loans, as you were touching on, you do have that floating rate component. And so that can be helpful if rates rise.

I think there is some uncertainty moving forward around what rates will do. So that does offer some protection. I'm just not a huge fan of loading up on credit right now. Yeah, everybody wants to own fixed income to a certain extent, short term, from a year or less. money market funds all the way up into sort of the middle of the range, five to seven years. There's a whole bunch of laddered bond ETFs out there.

You've got the bullet ETFs. Tell us a little bit about what they do. I mean, essentially here, folks, you don't know these. These are, they have defined maturity dates, and you can buy them in many different flavors. You can get corporate, high yield. And so there's one, BSCQ there, that ends at 2026. What do you get when you get here? and what's laddering?

How is it helpful? Yeah, so the Bulletchair suite, BSC for corporate, BSJ for high yield, and BSM as the prefix for munis, all have a target date. So they're really pinpointed towards a maturity, which allows investors either to target their duration across all three of those asset classes, allows them to do some level of liability matching, right, in terms of funding needs or other opportunities they need

within their portfolios. But it's really the specific pinpoint accuracy that we see investors using it for, but it's not just duration management, right? Fixed income this year has grown far beyond its market gap. So fixed income utilization via ETFs has really started to grow. We've seen that not just within the bullet share suite, but within active fixed income and across the board. Quickly, for people don't know about laddering, you could buy a 2026 to 2027. You could buy a 10-year or a five-year treasury or whatever.

The same one. You can buy a five-year treasury and have it expire in 2027, 208. laddering right yeah so what's old is new again right so what what better way to manage duration but simple ladders to stagger out some of your duration management these tools do exactly that for you and we're seeing that adoption rate increase right Nate fixed income is a bit of a problem though right now I mean there's a lot of uncertainty over the future direction of rates I know our viewers love 4% anything and they're quite happy with their 4% money market funds

or or even you know five years treasuries, but your view here, what's going to happen in 2025? Yeah, I do think fixed income is a huge challenge for investors and advisors right now. And if you think back a few months ago, the prevailing thought was that rates would be coming back in. But now, as I was alluding to previously, there's a lot more uncertainty. And there's some thought that the Trump administration could reignite inflationary pressure. There's also concern over the budget deficit. And so I think anytime there's rate uncertainty, it makes it a challenge.

And that's why something like the bullet shares, they make a ton of sense to me because these do have defined maturities. You can ladder them out. That can help manage that rate risk. And I think investors like that control and flexibility. But fixed income, it remains a huge challenge. Yeah. I maintain that anybody who knows exactly what's going to happen in interest rates isn't

paying enough attention because it really is rather uncertain right now. Now it's time to round out the conversation with some analysis and perspective. To help you better understand ETFs, this is the Markets 102 portion of the podcast, Nate Geraci from the ETF store continues with us now. And Nate, we just had a great discussion about what was going on with Bitcoin ETFs and that remarkable move that we've seen this year, $100 billion in assets under management. Tell me a little bit about 2025. I mean, I guess Bitcoin ETFs were the big success story. But look at it from a 30,000 point of view for me. What does the ETF industry need at this point?

Is there anything that long-term advisors and investors are missing here that they don't have right now? I'm sort of searching for some missing ingredient here. That's going to be the big topic in 2025. What's interesting is that we've had over $33 billion of net inflows in the spot Bitcoin ETFs this year. And if you think about the backdrop of that, Bitcoin ETFs aren't even available on many of the major wirehouse platforms yet. You have advisors and institutional investors who are still in their due diligence process. They're still getting comfortable with the idea of even allocating to Bitcoin altogether. And so I think as we move into 2025, you're going to see a lot more comfortability from institutional investors and advisors to allocate into this space.

You have to remember, there's a huge education process that has to happen here, especially if you're managing money on behalf of somebody else. You can't just plunk Bitcoin into a portfolio and expect your end clients to jump for joy. They have to be educated on this. They have to understand why it's in the portfolio. And so I just think we're going to see continued adoption moving into 2025. And I think the flows that we've seen in 2024 are going to continue. I think we're still building momentum here. Yeah, that makes a lot of sense to me. Tell me, though, about, I'm trying to look for some secret

sauce that's missing besides Bitcoin ETFs. I know active has been a big part of this year, active ETFs, but a lot of these are just really indexing plus investments that are out there where people are sort of tweaking indexes and adding some factor associated with it, maybe a tilt towards small cap or a tilt towards value. And I think that has a lot of value as well. But, But is there anything on the horizon that's sort of unusual that you think might be a big mover in 2025? Yeah, I think the big one is one that we briefly touched on, which is private assets and ETFs. I think this is going to be one of the most closely followed stories of 2025. You have issuers working overtime, trying to figure out how to stuff private assets into the ETF wrapper.

And, you know, if you think about this from an investor perspective, it's not a lot of, always easy to access private investments, whether we're talking about private equity or private credit, private REITs, and you have this wrapper in the ETF, which is democratized access to everything. And so, you know, the problem that's trying to be solved there is how do we marry those two things up? Now, I'm a little bit skeptical about allocating the private assets in a portfolio, but part of that skepticism is based on how you have accessed those in the past and that it's been very expensive. it's opaque, there are lockups, there are challenges with accessing private assets. If ETFs can solve some of those challenges, then I think the case for owning private assets

makes a little more sense. But I think that's going to be a huge story next year. I don't know how it's going to solve the problem. It's a pretty simple problem. To me, ETFs have to be able to redeem and create shares depending upon demand because private equity and private credit by definition is difficult to trade, that creates a major problem. And I don't know how you crack that particular nut. I know I've seen some plans now.

State Street has a plan to be able to buy and sell private credit from Apollo, but that's created its own little set of questions and how Apollo, for example, sets prices on things like that. How do you crack that nut, Nate? That's the million dollar question. And it's interesting because Apollo, they have built out a private credit trading desk. And they're trying to figure out how can they provide enough liquidity to service the ETF wrapper. But as you're alluding to, there are some real conflicts of interest here around valuation and how that liquidity is formed. And so I think that's going to be something that regulators are going to have a keen eye towards.

It's not, there's not an apparent easy mouse trap as we sit here today, but I'm also optimistic that if anybody can figure it out, it's ETF issuers, especially some of the largest ETF issuers in the world who have figured out how to put everything into an ETF. How about some aspect of equity market coming back? How about value? How about international equity? It's amazing how much oxygen the United States sucks up now. It's 60% of the world, essentially, equity market, at least. It might be 65%. It's a little over $100 trillion in total equity market value for the world.

The United States is probably 65%. billion of that. That's a pretty remarkable number. I think look back over the past a decade or so, and what have we heard every year? We've heard this is going to be the year for international equities. This is going to be the year for value stocks. This is going to be the year for small caps. And every year, by and large, what do we see? It's large cap U.S. equities leading the charge. I think it's very difficult to make a call that that is going to change. I think we have to see that first. I think it's difficult to go against that momentum. That's a challenge, though, because we know, if you look at investor portfolios and advisor allocations, they continue to be more concentrated

towards the market cap weighted indices. But I think it's difficult to sit here today and say, now's the time to jump in with both feet to international equities for some of these other factor rotations. Yeah, it's one of those things we've been waiting for ages. It's like value stocks making a comeback. It's like small cap making a comeback, although small caps have done better this year. You can wait and wait, and there's a good reason why you don't sell your winners and move on. And that's because you can wait a long time for trends to turn. And in this case, international, emerging markets, even Europe, we've been waiting a long time for our performance. and we might have to keep waiting.

I agree with your position. Don't sell your winners right now. Nate, thanks very much. Always a pleasure to chat with you. Nate Geraci from the ETF Store, and that does it for this week's ETF Edge, the podcast. Thank you for listening. Again, join us next week.

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