ETF Edge - Capturing an “inshoring” inversion; Plus, GLP-1s… part 2 7/1/24

Episode Date: July 1, 2024

Could “inshoring” come back? Here’s one way to play it if it does. Plus, should weight loss now be considered its own sector with its own ETF? We explore that.      Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by Invesco QQQ, proud provider of access to innovation for the last 25 years. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, 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. Is insuring really ready for a revolution? Is it really going to work?

We look at one way to play particular industrial and manufacturing stocks around the election. Plus, should weight loss now be considered its own sector within its own specific ETFs? Here's my conversation with Moritz, Todd, CEO, and founder of Tema, along with Todd's own, ETF, and technical strategist from Straticus. Maritz, tell us a little bit about what's in this ETF, and how is the election driving this particular theme? Brise Shoring. Thanks, Paul, for having you on the show today.

So, a really good question. The reshoring ETF mess in companies at the heart of the re-industrialization of America. Companies bring back jobs, bring back manufacturing, bring back innovation, and also driving the re-instructure spend in the U.S. You're seeing infrastructure spend at a 30-year high, and that infrastructure spend is required to enable people to invest in the manufacturing. You're not going to invest billions in a plant if you're not comfortable that there's infrastructure to support that plant development, also the manufacturing that comes out of the plant.

So this is a big trend. Someone called de-globalization. When the early innings, regulation and bills such as the Chips Act, R.A. Act have helped this. But really at the heart of it is job creation, manufacturing, and reshoring, bringing back local manufacturing jobs. So I'm looking at your top picks here. Applied industrial technologies and Eaton are the two top ones. How are they going to benefit from reshoring? So applied industrial automation is really focused on the automation part. So we think this way of industrialization is actually going to be a lot. cleaner than previously with naturalization.

It's going to be focused on efficiency, it's going to be focused on automation, and also a degree of sustainability. When you think about Eaton, Eaton is at the heart of the electrification space, distributing, installing, providing electricity. Electricity demand is going up as manufacturing goes up. We see this as a structural growth opportunity.

The CEO of Eaton mentioned that he expects the end market to grow 2x what it did historically. That's staggering for an industry such as electrification, which has been around for decades. You know, Todd, you and I talk about these thematic ETFs. We have seen these thematic ETFs come and go over the years. Here we have one that seems relevant, resuring, does this one have any staying power? So I'll give you a stat.

The industrial sector 30 years ago was 16% of the S&P 500. It's been cut in half since. It's only 8% now. It's roughly the size of Microsoft. And so if I'm going to play the industrials in a thematic way, I like the route of going active, right? and a more concentrated, perhaps sustainable theme, like Moritz is talking about here. So I do think there is staying power here

as opposed to some of the fads. We've seen in the thematic space, particularly those that are a little bit more tech and growth oriented. If I wanted tech and growth exposure, I just get that from the QQQ or the S&P 500. So I like the idea of going the industrial route for thematic overall.

Part of the problem, and you and I have talked about this, part of the problem is it's difficult to get concentration in the theme folks. So we're dealing with resuring. So, for example, Eaton, for example, has moved up last year and this year largely because power supplies is a big factor in AI and in data centers. That's a different theme, though, than reshoring. See, that's the problem I have. How do you get the concentration in reshoring when Eaton is a really a big story?

It's partly reshoring, but there's other things going on here. Yeah, I think it's up to the manager, right? Do they feel that a stock like Eaton or any of these other mid-cap industrials can fit in the, to this reshoring thing. The common investors is going to have no idea what many of these perhaps flyover, industrial stocks, when I see flyover because they're probably based in the Midwest,

what they do. They're focused on big tech. So you need that expertise in the ETF wrapper to help find the winning stocks and concentrate on that exposure. Maurice, you and I had talked before this when I was chatting you about it. And it seems like there are advantages

and disadvantages to onshore. And we had talked about some of the benefits here to onshore. greater control over production, reducing supply chain risk, lower transportation costs. It seems that there are obvious benefits here. To what extent today are we actually seeing any of these benefits actually occur? We still think we're in the early stages of the benefits being seen. So about 70% of the American manufacturers report being involved in reshoring.

95% of those report a positive experience with reshuring so far. So we're still in the early years of what we think is going to be a moment multi-decade trend, especially given the deficit that is sort of built up in the country, in the infrastructure and manufacturing space. So we don't think that the, we're not concerned about runway. We're concerned about finding the right companies, managing the right ways, focusing on sectors that we think are structurally going to benefit from this big trend. And yet, Todd, I see obvious disadvantages here.

First of all, this is de-globalization, essentially. Globalization, no matter of what any of we thought about, had a lot of benefits. Concentration of supply chain, reduced inflation. inflation, increased overall efficiency. We could potentially have higher labor costs as a result of this. We could have a higher upfront investment costs. We obviously could have some supply chain disruption. That was a big issue during COVID, of course, and reduced economy of scales and potentially

higher inflation. So I'm not denying what he's saying, and I understand that there are national security issues, for example, around some onshore- firm, insuring industries like pharmaceuticals or semiconductors, but this is de-globalization, and there are downsides to this right now. I think the risk is this brings back inflation in a really bad way. You mentioned inflation on what the after effects of this could be. I don't think many investors, and many just common Americans, don't want to go through what we experienced in 2022 when you had inflation go up to 9% year over year. That's going to have really bad.

effects on investor psychology and even on just human beings in general right it's the most regressive form of tax that there is is what inflation does so I'm not quite there on that what these effects may be ultimately we don't know but I think if there's a big risk for investors out there it's that inflation comes back and you're gonna have to readjust your portfolio for those types of exposures of what can handle that right and you don't deny that right you you didn't know what we're talking about this is de-globalization and there is a downside to de-globalization hundred and not all companies all participate in this but there

a number of companies that realize they'd rather take the security even at a slightly lower margin, especially given the experience that they've gone with supply chain dislocation. And also the cost benefits that they saw in some countries 20 or 30 years ago are just not there in the same way they were before. When you trade off price and security, security becomes an increasingly important factor in the overall equation. Yeah. That's sort of the way I feel about it too.

I'm a big proponent of globalization, but we saw the national security risks here of things like being held hostage. to companies over pharmaceuticals or lithium production or semiconductor production. It is a national security issue. So unfortunately, we're just going to have to deal with it. I guess, just to wrap this up here, why not just a general fund? Your point about just own XLI, which is the S&P Industrial Fund, it's not specialized enough? Is that the argument?

Yeah, I think you buy a theme ETF like this to diversify away from big cap tech and mega-cap growth. You have immense exposure in those types of funds. And then the XOI really does have a diversification problem. The top three weights are only about 10 to 12% of that index. There's no big heavy weights to move around that index. So if I'm going to play industrials at this point, I'd rather focus on a sustainable scenario, perhaps it's reshoring, rather than trying to aim for machinery, industrial,

aerospace and defense, professional services. It's funny you're arguing for active concentrated, Kathy Wood finds stuff versus the old, you know, stay with market cap weighted. I like it as an additional portfolio and not as much rocket fuel that high beta growth might have. It's an interesting argument. I haven't seen you made this argument before. And obviously you're in that space, too. You believe active is the way to go with this.

Well, I think to identify the beneficiaries overshoring, you can't necessarily take an index approach. And also, not all companies are going to benefit from this equally. So at Rats, you need to manage risk. You need to identify the winners. And we believe that this is something that the flexibility that allows you to do, coupled with experience with the people who run our strategy, that's critical. Yeah. I want to move on because there's something, you run another interesting fund, Moritz.

You also run the TEMA obesity and cardiometabolic ETF. That's a mouthful, folks. The symbol's H.R.T.S. If you want to look it up. And obviously this is weight loss drugs, GLP1 drugs. I understand we're going to be getting some very important research updates soon on the efficacy of weight. lost drugs. Can you tell us what's going on here? Yeah, so every month new results come out and the results are just staggering. Last month was Zeeland's results, which is an upcoming player listed in

Scandinavia. Next, later, next month we see the first six months of Zepbound data from Eli Lilly because Zepound was only approved in November 2023. The market is weight loss, right? Weight loss. Okay, so we'll get updates on weight, and you're anticipating if the pattern occurs here, there'll be significant upside. So current market estimates are about 150 billion by 2030. We think that's underestimated. No, I'm talking about Lilly specifically. So Zetbound, the first six months of Zabound sales will come out in, I think, August 7th, because remember Zepound's only very recently been on the market.

Previously, obviously had We've got Wai Gobi. We think that as the, you know, there's a billion obese people in the world. Today, currently they expect 5% are currently treated. Market estimates look at the overall market as a $150 billion market. We think this is a trillion dollar opportunity. A billion people, 20% penetration. Assuming pricing gets caught by 50%. That's a trillion dollars of annual market in this just opportunity.

So only 5% are being treated for obesity. That's what Nova Nordic publicly estimates. Yeah. That makes some sense to me. And the obese population is expected to grow from 1 billion to 2 billion by 2035. So we think this is a big, big opportunity, especially if you start to look beyond weight loss. Imagine this GOP-1s are used for cancer, for Alzheimer's, for Parkinson's. There's so many emerging applications where trial data is so early, but very promising.

It really is kind of astonishing, like the early results here. Are you anticipating that it's going to show not only that it is efficacious for weight loss, but that reduces heart disease, cancer risks? I mean, it's really a little bit of miraculous in a way. The companies we track and the companies invest in are looking not just at a weight loss approach, but also at other approaches. And we could see a world where the majority of the world's population takes a GLP1, not just for weight loss, but for other disease.

And the argument is, of course, well, you have to take it forever or you go off and you don't, but isn't that true of everything? I mean, I'm on a statin drug, for example, to keep my cholesterol levels down. If I stop taking the statin drug, my cholesterol levels presumably will go up again, right? So I'm essentially taking a statin drug forever. So for example, there's also an approach looking at genes. So we actually think genetic applications of obesity, where there's two companies, Regeneron and Amnimin, which we invest in, which are really really interesting.

And these are looking at it, like, what are the genes that predisposed someone to obesity? or to these kind of diseases. Ultimately, it's a trifect of diseases. Heart disease, diabetes, obesity. And understanding the linkage between the three is key as you look to how can we address these disease groups. So this ETF you're running, I mean, obviously you think it's just Lily and Novondordisk

because that's all we ever talk about. But this ETS is much built bigger than that. You have very large positions in Amgen and Alnilum pharmaceutical. Tell me about Amgen and Al-Nylum and why they're, look, these weights are almost the. same here. So when we think about onylam, we think they're the leader in genetic approach to obesity. When we think about Amgen, we think about reducing the dosage.

Some of the major issues with GOP-1s is the fact that they have side effects. They have muscle loss. They have injectables is not for everyone. People are working oral. People are also working in reducing the frequency. You don't have to take a weekly, you can take a monthly. And in the case of an is anilm, you basically have a genetics approach, which fundamentally is a very different approach.

So the industry is actually looking beyond GOP1 drugs. Although the industry today is manufacturing GOP1 drugs, they have a industry. Innovation is looking beyond the OPEO1 in order to offer better experiences to patients. The goal is how can you improve the lives over a billion patients today that live with obesity? Yeah, and Amgen too? Amgen is focusing on lower dosage. So right now, if you have to take it every week, especially if it's an injectable, it's quite invasive. That can become an oral, so in Viking is a leader, an oral.

And how likely is it to get oral? Everyone I know is using injectables, right? Correct, but oral is actually quite advanced. So Viking is some of the more advanced trial data. Lillian has an advanced trial. This is hard. Pfizer, for example, had a product in trial and that failed. So that's why biotic investing is very hard. And what is it about the difference between just injectables versus oral?

Injectibles obviously is efficacious. Oral isn't yet. So the goal is, like, can you get the same efficacy as with oral as you can with injectables? And also is it deemed to actually be safe. The reality, the trial data is still earlier. Well, obviously there's a problem with ingesting in the gut. Correct. Absorbing the drugs in a wrong way.

so it's not efficacious, that's the problem. Correct. So how do you get the same efficacy or similar efficacy? Because anything like efficacy, bariatric surgery, which is where we came from, is 50 to 30% weight loss. Weight loss drugs today are basically on the higher limit, 15% to 20%. Lilly's triple-G approach, maybe 25%. The question is, if you do oral, can you still get to that double-digit efficacy? And that's where the trial data is really focused on. So far, we're high single-digit.

We're optimistic you could get this double-digit. And a lot of people we hear anecdotally talk about compounding drugs. They seem to be buying cheaper versions of these drugs. They call it compounding. Do we know if these are, first off, effication, or are they safe? So we don't know if they're safe. I mean, there's also been rumors around Hymns around that they've been selling drugs that have not been authorized. This is a short-term opportunity because there's a legislation that allows when there's a drug and short supply.

Supply is a key issue with GLP1 drugs. You can make sure reformulate. You can manufacture outside the patent. That's an approach HIMS is taking. We don't own HIMS. HIMS is a distributor. We don't believe that's core to what we think is the thesis today of GOP1 and non-GOP1 drugs addressing the cardiometabolic obesity, GOP1 space.

So let's go back to the election. Will the election have any impact on drug pricing or on weight loss drugs? So there's historically been two camps. Biden's frankly being more lenient, but Trump was quite heavy-handed on drug pricing. Drug pricing is a real issue. There's two issues today, it's supply, which is being solved through more factories or through conversion of factories, M&A, and two pricing, affordability. But we see affordability actually already improving, and we see steps of making it also available within Medicare plans. There was a bill passed through the house last week, which now goes to the upper house, which will basically expand the coverage of Medicare for weight loss drugs.

So we see that this is only going to expand. The cost of society is so large that people want to make it more affordable. It is kind of staggering when you consider, is it not in the benefit of insurance companies and medical companies to introduce these drugs because you're going to reduce the incidence of other kinds of diseases, obesity and diabetes? Is that not in the long-term interest of the health? We would definitely support that view. There are short-term some concerns about whether people abuse it, whether people who desperately don't need it or use it for other reasons would take the drugs. But our view is that long-term, the insurers should actually be aligned with the patients and offering better outcomes to patients and extending the supply. of these medications. So we think that, you know, there's a lot of sensitivity around

about pricing. For example, the Nova Norda CEO is going to testify in front of the Senate in early September about drug pricing. But we think that drug pricing will come down. And even if we're talking to now with $700 a month for some of these drugs. Well, it depends. Like if you think of the upfront price, it's about $12,000 a year, so $1,000 a month. But that's also reduced if you look at what covers, what is covered by insurance. If we're just thinking about like the headline price before insurance coverage, we think that will come down. We could see that We see drug pricing come down from 12,000 to maybe $6,000 a year, so maybe $500 a month.

And how fast? We think maybe in the next two to three years. I think there's a billion people there, there's such demand, even if pricing goes down 50%, we still think this is a big, big opportunity. When we think about the trillion dollar mark cap. You could buy compounded versions of, I know, some of these drugs now, for under $500. But that's very short term. So that's only a short term like loophole in the right?

like loophole and the regulation. The real concern is patents. So in China, the patent expires in two years. In Europe, the patent expires in six years or seven years. And in U.S., the patent expires in eight years, 2032. So the real question is, you know, how much the market can you access before the patent expires? We don't see any likelihood of the patent being extended. In China, the patent may actually be shortened. Yeah, different way of looking at the whole thing. Were you going to say something? So I can't think of a theme or an ETF where the knock-on effects are so substantial, potentially substantial, right? I lose weight.

I'm not going to need a healthcare equipment company because I'm not getting an operation done. I'm not going to go buy certain fast foods, perhaps, right? That's what I start to impact consumer discretionary. And then I also need to buy a new wardrobe. So that impacts discretionary in another route. And I'm not buying Hershey Candy. Yeah, and so now you're talking about consumers' table. So the potential knock-on effects of these companies,

and this ETF in particular is really substantial. But it's even more substantial. They're not just weight loss drugs. I mean, the drugs seem to reduce desire, particularly in more extreme cases in general. So not just eating, but drinking. And not just drinking, but even gambling heavy or sex addiction. It seems to reduce desire in compulsive behaviors in general.

Are there not preliminary indications of that? That is the preliminary indications. And that's why we think this drug or this approach could actually have a much wider audience and much wider market than we currently see, which is just where it started obviously was diabetes, which is now moved obviously to weight loss. But we see that the market vastly underestimated given the applications we see beyond just weight loss, where the data is still early but promising. And we think that in the next two to three years... This would scare the hell out of the gambling industry, for example.

and, you know, scare the hell out of the sex toy business. I know I'm being a little glib here, but seriously, if you draw the tendons the way you do, just doing. You don't go to a casino, you're not going to the restaurants of the casino. Yeah. All chain reaction. Holy shit. You're not staying in the hotel. This could be one of the more transformative experiences for patients or for everyday people,

especially if this basically becomes like a drug that people take every day over time. Well, when you talk about that trifecting, you're talking about the diet. diabetes and heart disease. What was the third one? And obesity. And obesity. My heavens. I mean, that attacks all three of them. Heart disease is the biggest killer in the world today, more than cancer. And the reality that the correlation between the three is very close. And that's why when we think about the heart CTF, it focuses on the comorbidities. So not only just do you address GOP1 or weight loss, but also do you address diabetes.

We actually look at like the different companies and also the different players that affect in that trifecta. So just go back to what we talked before with your, your, earlier the on-sharing drug, why can't we get exposure just by using healthcare? There's the XLV is the S&P healthcare ETF. That's broad health care. And there's an IBB, which is a biotech ETF? Is it the same answer? Similar. I mean, XLV, you're getting managed care in there. You're getting equipment and services. Novo Nortis is not even in the XLV. That's a big player here. And then IBB, I don't have the sheet in front of you. I don't even think Lily's in that. Maybe I'm wrong. Because

Lily is technically classified as pharma. It's probably not a biotech. So you can get biotech exposure, but if you're looking for the expertise on which company maybe had the next new drug IBB is going to be way at the bottom of the list because it's probably a microcapped stock So that's where the the active expertise can come in for this idea same thing there yeah, I mean biotech is a is a difficult place to invest majority of the majority of the terms of the minority of companies there's two big players in room today It's been a desert every fall on this for 20 years. I cannot figure out I have no idea how to invest in biotech other than owning an ETA auto ticket. Yeah, it is.

Which is why indices have been... And look what happened out of the island last week. They had a heart disease drug, the stock went through the roof. Correct. Out of nowhere. You need active expertise to manage risk. So when I think about active in biotech, it's to manage risk. This is a risky space.

It's a space that's difficult to make money. Indeces are challenged. You need experience, you need process, and also you need to be in this university for a while to do this. Yeah. Okay. Thank you. Very interesting discussion. Two big topics here. Onsuring and weight loss.

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. Todd Stone from Stratigas continues with us now. We just finished the first half of the year. June stats are in and inflows continue to look very healthy, particularly on equities. We seem to be heading towards, I don't know, something like $600 billion in inflows this year. That seems like a pretty good year. Yeah, great first half. 265 billion, let's call it, into equity ETFs. That's the second best first half in history, only following the more euphoric environment of 2021, where you did about 350 or so.

Robust equity performance has helped, and you have these big old school active managers coming into the wrapper. We just had Capital Group last week launched 70 new ETFs, and so that's also being reflected in that number of demand. I'm curious to see going forward. We have an election coming up in a few months. The max drawdown in the first half was only 5.5% of the S&P 500. The typical year averages 14%. So if low-val persist, I think it's going to be great for flows. If you get some volatility, how does that look going forward then?

That's the big question for me. Yeah. And most of this continues to be passive ETFs. The active business is making some noise, but it's still relatively small. And a lot of it is still in that protection. area of the ETF, the covered call, the buffered ETFs that are out there that I don't really consider true active management, but it's a good business.

I'm glad baby boomers seem to like some buying, owning the stock market, but having some protection. That's what this is. But does anything else particularly stick out to you? I do think that the buffered product is for real. You're talking a hundred and some odd billion dollars there, covered calls with synthetic income, I guess. is what we can call it. That is going to continue to grow. And active is in different

shades now. There is active searching for alpha and managing risk. And then there's active, which is using options and derivatives to protect capital. And then the other big development we had was crypto ETFs. I know we didn't talk about that today, but you now have Bitcoin ETFs at 60 billion or so. You're going to have Ethereum coming up. I'm waiting for that. We thought maybe we'd get something, you know, last week, but I think within the next two or three weeks, it seems likely they'll make some kind of announcement. I don't know if the demand will be as big as it was for Bitcoin in January. No, it won't.

But it's yet another vehicle, an asset class, for investors to access. And so I suspect that we're going to see more and more launches around that ecosystem. And then just back to active, you're up to $430 some odd billion in AUM. This is managers trying to stem the tide of what happened to mutual funds over the last 20 years. We just had a great guest on today. Moritz Pot from Tema, who has a reshoring ETF. There's sort of an interesting thematic idea around the elections that bringing jobs back in the United States. Industries like industrials reshoring in the United States.

Very interesting discussion. We also had a discussion about another interesting thematic weight loss drugs. He runs a weight loss ETF as well. Tema does. And again, I love these thematics, but you've been very involved in tracking them. And there's a real problem with these thematic. going all the way back to 2017, 2016, when we saw tech thematics like cybersecurity. And the problem is they get in on the top at popularity contests, people buy them at the top,

and then the interest wanes over time. Is there any reason to think reshoring would be different or weight loss drugs would be different? Those are classic thematics. The thematics have a major supply and demand problem. There's over 300 products, and there's only $120 billion of a home right now to go around. So not enough investment dollars. And speaking of what we're selling with active, there's money going there too now,

stealing away from thematics, to hit that supply. Now, I'll give the reshoring and weight loss ideas more leash than others because they're at least not tech-heavy. There's no reason for me to buy some sort of high beta tech growth when I can just get that with the NASDAQ 100, and frankly, the SP 500 too. Whereas if I'm buying an industrial or healthcare thematic play, Those sectors are a little bit more challenged because they're so diverse.

At least this gives me some different exposure for a small sleeve of my portfolio. Well, I think the important thing is we've got to figure out a way. I support these because ETFs are popularity contests. One of the beauty of them is you can create these really fast and people can pile in. But that's also the downside. And that's what worries me. I love the fact that it's easy to talk about. It helps people to understand what's going on, and it gets people excited.

But it's hard to generate. If the goal is, can we make money for people? Generally, when you create the ETF, that's a sign of a mark at top. That's what I'm trying to get at. It's when the copycats and multiple products of the same idea, innovation and disruption being kind of the book cover here, when trouble seems like it's around the corner, that there's too many investment dollars chasing these things.

Yeah. Any other theme you see in the second half? You know, I feel like something with politics will come back into play. You know, we have congressional tracking ETFs that are out there. We have another one that's in the FIC filing system. Probably trying to play around political volatility, but I just don't know how sustainable that is. Yeah, yeah. All right, we'll see what's going on. The reshoring one was a good one that we had today around the whole election theme.

That does it for this week's ETIF Edge. the podcast. Thank you for listening. Thank you, Todd, for being with us. Join us again next week. Or go to etfedge.ccc.com. You'll see all of our shows. How does InvescoQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility, Investorbiters, Inc.