ETF Edge - China’s Out, India & Japan Are In 1/22/24

Episode Date: January 22, 2024

International investing flows are all over the place right now but two things stand out: massive flows out of China… and in to India and Japan. To make sense of it all, we spoke with Dave Mann, Global Head of Product and Capital Markets at Franklin Templeton, and Mike Akins from ETF Action.   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 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, 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. When it comes to international investing, Japan and India are red-hot right now. China is ice cold.

Here's my conversation with Dave Mann, global head of product and capital markets at Franklin Templeton, Mike Akins from ETF action. Gentlemen, thanks for joining us. Dave, you oversee Franklin's ETF business, including the India, Japan, China, ETFs. Talk to us about India and Japan. Why are these both so hot right now? Yeah, sure. Thanks, Bob. No, I think one of the nice things about, you know, the ETF vehicle is you can get target exposure to lots of different things. things and specifically what we've seen over the last year is, you know, investors looking to ETFs to get single country exposure. One of the hottest countries was India. You know, our fund, FLIN, brought in about 600 million over the last year. Part of the growth story, GDP's been strong. You know, a lot of the, you know, middle class starting to invest more has been one of the emerging

market standouts thus far. So any has been a great story. Japan is always almost like its own, own region, if you will. So we've seen lots of infows into FLJP. That's our Franklin, Japan, ETF. But just more broadly, lots of investors looking to get exposure to those single countries. Yeah, and I see some names we know very well here in the United States in the India ETF InfoSys. And Tata, of course, have been around a long time. India, though, has emerged as the obvious.

as global manufacturing competitor to China, but wouldn't you say, David, it's a long way off from really competing against China. I guess that's the sort of concern that I have here about just let's throw all our money into India as an anti-China play. Totally, yeah. This is, you know, definitely the, you know, called the early innings, but just in terms of, you know, without getting too far into politics, the mix of, you know, call it the democracy, although a messy one, is getting a lot of people to pay attention to India as a long-term emerging market play. Yeah.

Mike, your thoughts here on what's going on with India and particularly in Japan as well. I see in Japan, I see a lot of these names in Dave's ETF that we all know, Toyota, Sony, Mitsubishi, Hitachi. These are names we all know very, very well. What are your thoughts on the inflows here that we're seeing? Yeah, I think, you know, the biggest takeaway is just with the ETF vehicle, it's a great way to get targeted exposure to these countries. I mean, there's over 153 ETFs that track single countries, $100 billion in those markets, and it's very fast-moving money.

It's a lot like the sector, ETFs. It's a great way to have a macro play. If you look at India, I think there's definitely a story to be had, with regard to a new manufacturing hug versus China, but also just the GDP growth story in total. I do think investors should be wary of valuations in that area. If you just look at the India ETFs, they're trading it right now anywhere from 22 to 23 times

next year's earnings. That's extremely elevated to the most foreign ETFs and very elevated to itself, 10 year average being closer to 18, whereas China is just the opposite, right? It's got a 10-year average P.E. of 11. Currently, most China ETS are trading below eight. So there's a story there to be had with respect to the growth. But the market has reacted, and all those inflows have driven up those valuations. So it's something to keep an eye on. But I think it's definitely a macro play. Anytime you see that money flowing in and out of these ETS,

it's a great way to get sentiment about those countries. Japan, obviously, has got a very stated pro-growth mindset right now after years of, or deflation, and that also has driven a lot of information. One thing I would point out with all of these ETFs, there's two ways to play it in the country ETFs. There's usually a currency where you have exposure to that risk of the FX of that country, and there's the currency hedged. And you're just using the Franklin ETFs, FLJP, as well as the Franklin Japan hedged DTF, I believe the hedged ETF more than almost doubled the return of the non-hedged.

So big difference in returns, and you've got to understand that currency exposure as it comes to the two different types of strategies. That's a very important distinction, and I'm glad that you made that. What's amazing to me is just that Japan is a story at all. I was hired, this is my 34th year at CNBC, believe it or not, and I was hired in 1990. That was the peak for, I think, Mitsubishi owned 30 Rock at the time. They owned Pebble Beach. And literally, it's been stagnating for 30 years.

And it's, I'm pleased to see finally something is happening. And investors are taking notice and the people managing the country are taking some more pro-growth policies. But darn, it's taken a long time, you know. So I think it's as big a story as the India story was last year. on top of that. Absolutely. I think Japan is an interesting story. Just in terms of how much exposure they have across globally, similar to the U.S.,

but their valuations are so much more depressed, you know, trading it 14 times next 12-month earnings. There's definitely a story to be had for Japan. I'm a little more weary on India, not because I don't think it's a great gross story, but it's got some of the complications that China has. And if you look at China and the growth of GDP of China over the last 20 years is, you know, 10x, 13x, but the stock market is flat to down. And I think you have to understand those different variables at play. The stock market is not the economy.

So Japan, to me, seems a little bit more, well, conservative play, if you will, when it comes to the unknowns. Yeah. So at the same time, Dave, China inflows have been flat to down. some are seeing outflows. And you look at Hong Kong, you look at the Hangseng, you look at the mainland China indexes. They've hit multi-year lows. But the Shanghai and Shenzhen indexes have gone nowhere for 17 years. They're literally at the same price they were in 2007.

I mean, think about that. How much China has changed in those 17 years. But the two major mainland indexes haven't changed. So your China ETFs, I looked at, it's got all the usual names. You've got Tencent. and Alibaba in it and Baidu and swall as the big global, the big China banks. So suss this out for us. Why are investors fleeing China right now?

Yeah, I mean, the geopolitical, you know, factor with China, certainly on everyone's mind, lots of different ways to play the, you know, the China market, you know, over the last, I call it five to ten years we've seen. Hong Kong and China probably moving a little bit more in sync, especially with China's, you know, China's impact on the Hong Kong market. And yeah, you know, as we've discussed earlier, you know, China was down last year. It is down again this year. Investors are probably looking a lot of the political side and also some of the multiples that we discussed earlier here and thinking, you know, is this the time to get my, to dip my toes back into the Chinese market? especially for the single-country ETF users who are, you know,

rotating in and out of these different countries and trying to find what macro view and what signal to do to come back in. So, Mike, I'm going to ask the broad question about whether China's investable or not. And so there's three different ways this has played out in the last decade. You've been part of this as well, and so of you, Dave. But seven, eight, nine, ten years ago, we were all debating about what's the right place for the global portfolio. And basically, everyone was coming down on the side of market capitalization. So if China, mainland China was pick a number, 7% of the global market capitalization, you owned a fund that had 7% of mainland China and whatever more added for Hong Kong.

There was on top of that, there was also the value guys, which you referenced there. So China, you know, there were value guys. China's trading typically at 12 times forward earnings. If it's at 11 and below, I'm a buyer, and I don't care about everything else. But what there wasn't around that there is now about is the people who are arguing that the political risk associated with China is much higher than anybody anticipated. and that a lot of investors thought with Ji Jinping, the leader of China, 10 years ago, they were going to get Deng Xiaoping. And Deng Xiaoping was the leader in the 70s, as you know,

and instituted, brought back capitalism to a certain extent in China with government control. And instead of J. Jinping as Deng Chau Ping, what we've got is Jijim Ping as Mao Te Ching, meaning kill the capitalists. And I think people weren't prepared for that and we're surprised. And so there's a whole other group now that says the political risk is too high. China's uninvestable. This is a little bit long-winded, Mike, but I'm wondering if you give me your thoughts on this. Yeah, I mean, I think you laid it out really well there.

I think it's kind of the old, you know, cliche. Full me once, shame on you. Full me twice. Shame on me. And I think if you look at it from that perspective, you've got this situation where China's economy expanded. The stock market went nowhere. It's been very volatile. There's been periods where it's gone way up, but also come way down.

And a big part of that is it's not because the stock market hasn't grown. It has. There's been huge issue. China's one of the largest IPO markets over the past decade across the world. They've had large secondary offerings. So the capitalization of the market continues to grow, but the returns are nowhere to be found. And that's a good way to put it as a large part of that is the anti-capitalist stance that China has taken. They're almost taking the investor money and deploying it, you know, back across the country.

So, you know, one of the trends we're seeing from that, one of the largest inflows into emerging markets broadly over the last year has been to emerging markets X China products. Yeah, so now you've got a whole new issue that you have to think about when going to that market. Is it investable from a standpoint of total return or is it, you know, really a gross story? in economy alone and not in the actual return of the stock market. Right. Well, there you go, Dave. I mean, Mike just said it there. What's happening is X-China indexes are coming out now.

That is a very, to me, that's a clear indication that nobody's going to do this unless they think somebody's going to buy it. Obviously, you're in this business, too. So there seems to be some kind of market out there for people who think the political risk is too high at this point. Is Templeton going to do this in the future? Or do you have any plans? Yes, from a product pipeline, that's something we're definitely looking at. You know, it's almost the next iteration of, you know, giving that target exposure is if, you know, if folks want emerging markets, but they don't want China, then EMX China is potentially very attractive and something that we're looking at.

Yeah. Dave, how about some other emerging markets that did very well last year? For example, Mexico did very well last year. Brazil. Yeah, Mexico, Brazil was a good one. Yeah, absolutely. South Korea had a strong year, although off to a slow start this year. But it just goes back to the broader point of these single country ETFs where you can have a view and rotate as information changes.

Yeah. I want to move on. And Dave, you also run the Franklin Bitcoin ETF. I couldn't do a show without mentioning Bitcoin, folks. You know that. The symbol, those of me you want to know, is EasyBC. Franklin was one of 10, actually, it was 10 companies that voted a spot Bitcoin ETF. Nine of them were new.

Gray scale was already existing. Tell us a little bit of how that tracking Bitcoin, and we can chat for a moment on the other side. Yeah, I mean, Bob, to your credit, to ask about international ETFs when Bitcoin has truly, you know, suck the oxygen out of the room. It was nice to start that way. Yeah, I mean, the last two to three months in terms of all the issuers building out the plumbing and the infrastructure to make sure that these spot Bitcoin ETFs did what they were supposed to do. And here we are. And so, you know, we're only maybe a week or two into their performance live in the market. but the million dollar question was, you know, investors who like ETFs expect the ETF to track

its underlying asset. And in this case, you know, the funds own Bitcoins. And the performance of the funds have been, you know, tracking the price of Bitcoin, you know, across the 10, they're going to have different benchmarks. So maybe the performance will be a little different between the two. But generally, they're all doing exactly what they were supposed to do in terms of tracking spot Bitcoin. And Mike, one thing people were wondering about Bitcoin trades 24-7, but the ETFs don't.

That doesn't seem to have been a major problem. I'm wondering if you think so. And it looks like the nine that are new got about $4 billion in inflows. That seems respectable to me. It's hard because I don't have any benchmarks to compare, but that seems fairly respectable number here. Any thoughts on that? Yeah, I mean, a couple thoughts. One, on the structure side of things, there's no question that the ETF is a superior

structure for somebody who wants to buy and hold Bitcoin as an investment, just like GLD is a superior structure to hold gold versus putting it in your safe at home if it's a investment vehicle. If you're holding it as a speculative investment to gain access to the asset class. So the ETF is doing it. You got a bunch of smart people in a room creating an arbitrage. It's going to work. We could create an ETF of almost anything. I sure hope we don't, but you could. As far as the flows into the product, I think it's very respectful. The one question I have is, you know, what's more, where is there more demand? Is there more demand to get in to these new ETFs?

Or is there more demand to get out of GBTC, which is the elephant in the room, right? It's been locked up Bitcoin for a very, very long time at depressed values, at a discount. And now it's finally trading at par with the spot price of Bitcoin. And so far, you've had $4 billion come into the new nine ETFs, but you've had almost $2 billion come out of GBTC. So net net, it's more money coming into Bitcoin right now. How does that play out over the long term? I don't know, but it's something to keep an eye on. But, you know, Dave or Mike, it's true.

There's $2 billion came out, but it was a $26 billion fund at Grayscale. And they're charging 1.5%. Mike, Dave, you're charging 0.19.19. Is that right? Right now? 9.000 bifes way to zero. difference. 1.5% versus 0.19% is a big difference. And yet, to me, Mike, it's remarkable how sticky this money is. You know, you think that's not nine basis points or three basis points. That's a lot. And yet, you know, they seem to be relying on the idea that the money's going to be fairly sticky. And so far, I think they're right.

Yeah, no, I, there's going to be multiple types of money. Right now, GBT is a liquidity machine. Right. So if you are a big, Tusha looking for exposure to Bitcoin. For now, you have the same story that Spies had for years, right? Spy tracking the S&P 500 versus the cheaper Vanguard or I-Share's version. Liquidity matters when you're trading at scale and trading in speed. The question is, the difference is that's six basis points when you're talking about Spy and the S&P 500. This is like 120 basis points. This is huge. More than 120 basis points. And I think that's the question is how much of the money and GBT is early money that the tax hit in a taxable account or the tax hit would be a serious

hindrance versus how much of it is. I know a lot of folks that own GBT and their qualified accounts, right? They're all going to trade out of it. Why would they possibly pay that one and a half percent when they can pay 20 basis points to Franklin or one of the other issuers? That's just a no-brainer. I just don't, I don't think anybody has a clue what that makeup of that $26 billion is. And we're all going to find out, I think, over the next six months to a year. Yeah, so where does a Bitcoin and the ETFs go from here? We had CBO on last week. They were all excited about options potentially coming up. They have the application at the SEC. Hasn't been approved, but guess where this is going to go? So I'm encouraged to see anybody was going to work their Bitcoin ETFs into target retirement and

asset allocation funds. Mike, you brought this up when I asked you about where it's going. Is that ever going to happen? I think it will happen. It'll be a differentiator for a lot of folks to say that we offer that. You know, my personal views aside, it's definitely an easy vehicle to do it in. Model portfolios is the future firms such as there's a lot of big issuers out there that have very large models so they can feed these accounts. You know, small allocation goes a long ways in terms of asset growth. I do think you'll see it. Whether that's a good, good thing, well, that remains to be seen. But I do definitely think that the model game, a lot of issue, a lot of model whether it's the issuers or strategists will start adding and they'll use it as a differentiator to the competition

and we'll see how it plays out Dave I want to I want to meet the people first go ahead and do that and put it in their model portfolios you know Gensler Gary Gensler the SEC made it very clear that there are suitability issues here that are very real and reg best interest interest so that would you not agree that's a little bit of a barrier to have this suddenly Bitcoin ETF suddenly appear model portfolios? Well, that's the, you know, we're all watching these flows, you know, week in, and a lot of the conversations with either asset allocators, models, a lot of the platforms is, is a lot more, hey, let's wait and see, let's see how these things are doing. You know, your question earlier on tracking, we're getting a lot of those types of questions as well.

And so there's a lot of research going on to say, hey, what if we added, 1%, 2% or 3% Big Point ETF exposure to some asset allocation model. How does that impact the volatility, the sharp ratio? Those are, you know, all that math is going on right now, and

you know, the early feedback is I think there could be a place for adding this ETF into an investor's portfolio. Okay. Well, there you go. You heard two different kind of opinions there. I think it's going to be a while

folks before that happens. But we'll see. What an interesting conversation. Two very smart people, as always, here on the ETF Edge. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Market's 102 portion of the podcast. We're continuing the conversation with Mike Akins from ETF Action. Mike's thank you for sticking around. We discussed global investing. We discussed China, India, Japan. We talked a little bit about Bitcoin. ETFs. Give me sort of global perspective on what you think is going on in ETFs in 2024. I'm particularly interested in whether active ETFs continue to be really strong versus passive

ETFs. A majority of the ETFs that launched in 2023 were actively managed. Does that have any implications for ETF investing at all? You know, it depends, right? So there was almost 75% of ETFs launched on a record year of ETF launches. were actively managed. It's a little bit misleading when you factor in all of the specialty products that came to market last year around covered call strategies, which technically are active from a prospectus perspective, but have really act more passive. The same thing with buffer ETFs, but in general, we are seeing a lot of active come to market. We're seeing really big asset

managers that were late to the ETF game come into the market, and they're doing it in an active format. A big part of that's the ETF rule that came out a few years back, making it easier to bring these products to market. And I do think they have a place in the overall portfolio, especially if you think about it from a pure factor investing perspective. We know that, you know, a decade ago, we are all on on this show talking about smart beta and factor investing. And active is truly, you know, just a little bit more of a hands-on approach to that factor investing, whether it's value, growth, momentum. You just get that active. added benefit. And now that we're seeing these active managers come to play in the market,

they're coming with competitive prices. So if you can compete with the passive prices and then add a little active to that, I think they'll be successful. It just really comes down to the use cases. And watching right now with the big players, fidelity, capital group, coming to market with these ETFs, I expect to see large growth in this space. And I think as the legacy mutual fund holders, see how tax efficient they are, you're going to see flows really start to ramp up and across these product lineups. All right. I got to ask, of course, about the Magnificent Seven.

I know that's sort of an endless topic of conversation. But as I look at some of these big ETFs, it's amazing how many have weightings, 25% or more towards this infamous, magnificent Seven, Vanguard megacabab growth, ice sheet. shares growth, invest go, the NASDAQ 100, even the S&P, is 29% magnificent seven right now. We want to riff on that? Does that mean anything? Considering these are big companies here, big ETS. Yeah.

I mean, you're talking trillions of dollars of money tracking products with over 25% to just those seven names. And some, like you mentioned the Vanguard mega cap growth, 57% of that ETF, MGK, has allocation to the magnificent seven. And I think you're starting to see a trend over the last quarter where flows are starting to go into alternative weighted ETS. But it's a scary proposition. We've had this conversation before and those folks who went and decided to underweight those names got hurt. So it's a rock and a hard place for these managers to decide how far do I go. I'll tell you what I think about that. In general, you're absolutely right. Mean reversion is a very powerful thing. And it's really worth noting that historically it would be good to actually go to an equal weight on this.

The logic is perfectly clear. You're using market history. Here's the problem. We know that it doesn't always follow market history. This may be one of those events, a defining event where, just like the Internet in the 1990s, AI is a defining event that has legs for years, not just a single year. And I think that is what's going on. And if that is the case, if it's a true paradigm shift,

like the internet was, you know, who knows? You know, everybody said, Nvidia can't be up 200% again. Well, what's up 17% this month? I mean, yes, in theory, but sorry, folks, you're wrong. So you see how tough it is to call this if it's really a big paradigm shift with AI? Yeah, no, I think that definitely plays into the discussion.

Though, you know, eventually, you know, there is this too big concept. And I look at something like Apple. It's a fantastic company. It's actually got a relative to the other magnificent seven, a decent valuation. But there's no doubt that they have more concerns than just market share of their product. They have to start considering about the political concerns of, you know, government stepping in, antitrust laws. And when you think about it from a, it doesn't, it only takes one of them.

to have a bad thing happen to really hurt returns in some of these strategies. So at some point, I do think that we'll see mean reversion. It's just how are you willing to stay the course? That's the real question. Yeah. Oh, it's a tough game. And this is why, you know, market cap weighted indexes still win out. You know, it's a bet at that moment where the market thinks it's going.

and the market is giving a very high valuation to AI-related stuff. And this time, they may be right, at least for the next few years of this, is really a paradigm-changing event here. Mike, I'm going to have to leave it there. Thank you very much. Mike Akins, everyone, is the head of ETF Action. And thank you for listening to the ETF Edge podcast. Join us again next week or head to etfedge.c.combec.com.

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