ETF Edge - Concentrated Bets: Tuning Out Regional Bank Risk 3/20/23

Episode Date: March 20, 2023

CNBC’s Bob Pisani spoke with Dave Mazza, Chief Strategy Officer at Roundhill Investments, Greg Bassuk, CEO of AXS Investments and Todd Rosenbluth, Head of Research at VettaFi. Markets are still grappling with banking contagion fears and weighing the impact of the latest merger between UBS and Credit Suisse. But already new ETFs are springing forth to capitalize on the banking crisis and help investors navigate the confusion. Our panel broke down the benefits of concentrated sector bets and discuss other ripple effects from the fallout of SVB – beyond just the banks.In the “Markets 102” portion, Bob continued the conversation with Todd Rosenbluth from VettaFi. 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're 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. Markets are still grappling with banking contagion fears and weighing the impact of the latest merger between UBS and Credit Suisse. But already new ETFs are springing forth to capitalize on the banking crisis

and help investors navigate the confusion. Our guests will break down the benefits of concentrated sector vets and discuss other ripple effects from the fallout of Silicon Valley Bank. Beyond the banking industry, here's my conversation with Dave Mata, the chief strategy officer at Roundhill Investments. Greg Bassett is the CEO of Axis Investments, and Todd Rosenbluth is the head of research at Vetify. Dave, you, congratulations.

You move with stunning speed to capital. capitalize on this banking crisis. Tell us about this big bank ETF launching tomorrow. What's in it? Yeah, Bob, you're absolutely right. There's been a lot of question marks about the financial sector. And what we've been hearing from investors for years is looking for opportunity for more precision than it's available today. And with the big bank ETF is it's exposure to six banks, the largest and most liquid banks in the U.S. And so that's Bank of America, Citigroup, Goldman Sachs, Morgan, Stanley, J.P. Morgan, and Wells. Fargo. And again, these are the banks that actually stand to benefit from this turmoil and that

we believe actually are going to offer investors potentially the opportunity to do better than what we have seen, of course, with the regional bank. And I see you've got here, we're putting up a full screen here. You have an expense ratio of 0.29%. That expense ratio compares favorably, Todd, with the expense ratio of the bank ETF, the KBE. I think it's 0.35%. You know, Todd, I really marvel how quickly the ETF industry can capitalize on these hot investing trends. It really is something. Remember we saw this, we've seen this many times. We saw this with pot ETFs. We saw this with thematic tech ETFs, with cybersecurity, social media. We saw this with crypto. And investors pile in when it's a hot topic, but these hot topics often underperform a year later. So explain to us

how we should sort of look at these products. It's marvelous to see how quickly the ETF industry moves, but should investors necessarily jump on everything like this? So no. Investors shouldn't just jump to this just because banks are in the news and both the good and the bad that comes with it. You really want to do some due diligence. Make sure those six banks that Dave was talking about is important. At VETI, we're seeing greater interest in financial ETFs in particular. In fact, from a sector ETF perspective, more than 50% of our traffic on our website was towards financial ETFs over energy, over technology. But you want to make sure that you're researching for the right reasons. You could either be buying, you could be selling.

You shouldn't just go into financials just because it's making the headlines. In fact, that might be a reason of risk why you may want to steer clear of financials because you have it within your portfolio. I get this all the time from our viewers who, when we talk about IPOs on the day, and then, of course, they pop on one day and then six months later, they're lower. David, you know what I'm talking about? Why is now necessarily a good time to invest in banks, given all the increased regulation and higher costs? Well, it's interesting. We don't believe that investments in the banking sector is actually a trend, right?

We're talking about names in this particular case that are mega-cats that actually have exposure to diversified business lines, whether that's traditional deposit banking in the case of Bank for Bank of America or Wells Fargo or, you know, really leading investor banking franchises in the case of Morning Stanley and Goldman Sachs. But what's interesting here is that a lot of firms have calls on regional banks doing well into the year. I don't think many could have predicted the turmoil that we're seeing today. But in a crisis of confidence where really investors are going and picking and choosing any areas

of weakness, whether that's Silicon Valley Bank or Credit Swift, the idea that investors are now going to have the opportunity to gain that financial exposure without the dilution that they're going to get potentially with other financial. with the ETF, I think is really exciting, and that's one of the reasons why we look to bring the big bank ETF, a big beat of market tomorrow. You know, Todd, the investors in these sector bets, banks or energy, whatever, I think it's a good time to realize that they may be more exposed than they think of to certain things. For example, just this bank thing, value is the largest, banks, financials are the largest sector

in value ETFs. Vanguard value is 20% of the market. financials. I shares, S&P value is almost 20%. So investors, if they own certain sectors, even if it doesn't say financials, they may be very much exposed. This is sort of like a teaching moment. My point is to explain to people understanding what you own here. That's right. So financials is one of the larger sectors within the broader marketplace, but in value ETFs in particular, it's the heavyweight. That's where people tend to turn undervalued companies like JPMorgan Bank of America. So with these ETFs, sector

ETFs in general and more concentrated ETFs, you really want to make sure you want to overweight that now is, according to you as an investor, is a great time to be overexposed to these companies. These are more concentrated that comes with the pluses, that comes with the minuses, but make sure you know what's inside your ETF. You know, Greg, I want to bring

you in here. You run a suite of long, short ETFs, including a very well-known the long-short arc funds. You run the short innovation daily ETF with the SARK is a symbol there, that's short arc. And you run the two times innovation ETF, which is TARK,

that's long arc two times. How can ETS be used as a tool for those who have high conviction? You run high conviction ETFs, it seems to me. We do. And actually, you know, it's interesting with this latest development, you know, with

thousands of startups and small high growth companies really driving innovation, having received financing from Silicon Valley Bank and others like it, this really could be a harbinger for concern around the ability of these kind of innovation driving companies to get financing going forward. So, you know, with that potential chilling effect on financing of tech driving companies, to your point, that access short innovation ETF, the Sark ETF, we've seen sentiment play out around that. For example, in just the seven days after the Silicon Valley Bank news broke, we saw an 80% jump in trading volume versus the seven days leading into that news. So we are, in fact,

on that side of the trade, for those with high conviction concern around how this could impact startups and smaller high growth businesses that are driving innovation, we are seeing that take place. And then the TARC ETF, the 2X innovation ETF, same thing. Over 50% jump in trading activity in that seven days following the Silicon Valley Newsbreaking versus the week leading up to it. So this makes some sense to me. I mean, to the extent Silicon Valley Bank is a whole play on the startup economy, then to the extent Kathy Woods is a play on the startup economy, these kinds of ETFs, the Sark and TARC that Greg represents do make sense for people who have high convictions with the understanding of what goes on in these ETFs.

Right, that's important, too. The daily reset and everything. Two times leverage or shorting obviously comes with greater risks than investors probably fully appreciate when they just see the price performance chart that we showed up on the screen right now. And this is obviously a playoff of ARKKK, which has seen really strong performance in 2023. And actually, we saw people rotating towards. it during times of uncertainty because it's a risk on way of getting exposure to the growth

economy. But of course, concentrated bets are concentrated and come with risk on its own. So you just want to make sure you know what you're getting and what you're not getting. My point is that what he's saying here makes some sense to me. To the extent Silicon Valley Bank was a play on the startup economy and you have a situation here where all of this disrupted, what happened with Silicon Valley disrupted perceptions of the startup economy. then Greg talking about higher volumes in Sark and Tark, which are Kathy Woods, plays on startup economy, essentially. That makes a lot of sense. You would see those kinds of volume plays. It does make sense. And again, that's the benefits of the ETF and liquidity that comes with it.

We're seeing volume spiking in areas where investors want to get exposure to it. And there's now an ETF vehicle both long or short in addition, or two times long and short, in addition to the traditional ARKKK product. Yeah. You know, Greg, you're also speaking. Speaking of concentrated bets, you're also a big mover in single stock leveraged and inverse ETFs. But aside from some trading action in the Tesla bear ETF, maybe we could put that up again,

and maybe the Nvidia bear ETF, the volumes that I see in these single stock ETFs are pretty modest. Can you parse that for us? Why is that happening? Yeah, absolutely. And you know, in our experience, it's consistent with any new innovation. So to your point, our TSLQ, ETF, you know, has been a very strong, 100 million a day in terms of volume. NVDS, which is a short Navidia stock.

Same thing. We're seeing some growing momentum there. But when I say it's consistent with any new innovation, a lot of it is about education and visibility. When there were other new innovations in the ETF market, many of them, Took a little more time until investors understood that these were tools out there for them. You know, big picture wise, I would also share that, you know, we are pleased with the launch of the family in a relatively short amount of time. You know, overall, we've raised about a quarter billion in assets in the fund family. And to your point, there's been a little bit of a difference in terms of which ones were faster out of the gate.

but we're very bullish on the long-term growth of this space in general. Well, Todd, this isn't a big surprise. I mean, people want to play Tesla because it's got high volatility and it's got a man, Elon Musk, that people love to play long and short. Nvidia is a high volatility, high-conviction tech stock. But Pfizer, you know, really? What's the use case there for people getting really excited about I mean, it's a low beta stock.

So I'm not terribly surprised by any of this, are you? No, I'm not. I mean, I think there was a concern within the ETF industry that we would see a single stock leveraged and inverse ETF. Universe. For the whole suite of the S&P 500. And there just wasn't a use case for that. Tesla is a company people have in their portfolio

or they have conviction on long or short, but very few companies fit that same criteria. Apple, maybe, maybe, maybe not. Meta, but most of these companies, you really want to have, you could just own the individual stocks. And ETFs, of course, you get the benefits of diversification. Greg, on Sark and Tark, the Kathy Woods long and short ETFs, who actually uses them?

I know it's popular to say, oh, professional investors use this. But do we have any evidence, like hedge funds use them? And in what cases, are they just owning them, or are they using it in conjunction with another strategy of going long or short options or something? I'm just dying to meet somebody who will come on and say, oh, I use these all the time and here's how they use them. Do you have any insight into that? We do. And let me share that with you.

Just one quick point on that last comment, though, about the other single stock ETFs. One other data point I just want to share is that where we have seen with respect to those other single stock ETFs, we have seen a nice pickup in volume, for example, around earnings season. So for something like Pfizer and Nike and some of the others, it is notable that we have. have seen jumps around those use cases like earnings and other company developments. That's why we remain bullish on that family. With respect to who's buying them, we are seeing that it's largely the sophisticated traders, but what does that mean?

It's hedge funds, it's a lot of institutions. These are big position takers often that are long, for example, on the underlying stock in the case of Tesla, but want to trade around those news investments and might have a very high conviction short-term bet. And for investors like Sark and TARC, same thing. These are large, sophisticated investors that tend to be, in a lot of cases, long disruptive technologies and looking to have a high-conviction short bet or the opposite. You know, they're looking to, you know, go-2X around news where disruptive technologies and the real innovation drivers, where there's some developments that come out, both economic or market-wise, or industry-specific, where they want

to take that short-term, high-conviction. Okay. Let me thank you for answering that. So it looks like a lot of people are using, they're loaned the stock or loan the ETF, and then they're using these for short-term convictions. As if it's a covered call. you just being able to do it in a more efficient manner than trying to use the options themselves. Good point here.

Dave, I want to bring you back in here. In a move of speaking of Kathy Woods here, you're also planning to release a suite of ETFs with concentrated exposure outside of this big tank, a big bank ETF. You're going to launch a big tech ETF, a big airlines ETF, a big defense ETF. I'm sensing a trend here. Why are concentrated bets a hot topic now? What majors decide to issue these? And when are they coming out? Look, Todd said it well.

I'm a big believer in knowing what you own. And in this market, that's more important than ever. If we look at the largest financials, ETF, XLF, which is a great fun, which has served great purposes. If you look at the exposure in the top five, there's now names like Berkshire, Hapdaway, Visa, and MasterCard. Of course, they are financials as defined by good. but they're not necessarily better.

And the same could be said about other sectors, whether that's technology, airlines, or the facts. So our ideas could bring investors the precision that they're looking for to gain exposure to that now or number of names. Now, of course, there could be environments where you want the smaller companies. There could be environments where you want non-profitable tech companies.

But in this market, there is a flight to safety. People are bidding up some of the larger names, especially in the banking space, because they may be the benefit of the benefits. fisheries over the greater regulation coming there. And that's why we're bringing the big bee to market. The others we hope to have seen, but you're absolutely right. The intention here is that big B is not just a standalone opportunity, but the idea of it being the leader in a potential suite down the line. So again, Todd, this, the hot topic, we're back to this hot topic issue.

All of a sudden, you know, concentrated sector bets seem to be the ETF, you know, hot topic du jour here. Is there a use case for concentrated benefit? I do, because I don't think it's being used individually. I think what people are going to use these big ETFs, the Big B for the banking one, or aerospace or

airlines or what have you, is going to be a complement to a broader S&P 500 strategy. So you own the I Shares S&P 500 ETF, IVV or spy, the Spider S&P 500 ETF or so forth, and you can use more concentrated the ETFs to be able to augment your exposure. So if you want more in the banking space, you want

more than airlines, the same way that you might do individual stocks of favored names, but now you're getting the benefits of five or six of these companies to augment that. I think that makes sense to that as opposed to just trying to do it themselves. And we're seeing this year that active management and actively manage ETFs in particular have been relatively popular in complement to an existing core strategy. Well, we talked about, of course, what, you know, the whole fang stocks. And essentially, I don't know, Dave, can you tell us what's going to be in this big tech concentrate? How many stocks are going to be in this? Yeah. So for the big tech, it's structured in a similar way. It's, you know, the five stocks that you probably know,

know, know and expect, you know, you're, we know who that is. Yeah, exactly. Your alphabet, your Amazon, your Apple and your, your, your Microsoft's of the world. So, you know, this would, essentially it's your exposure to mega-cap growth, its name, whatever is the topic of going. I should have said meta would be in there as well. Yeah, it's fang. You're sort of trying to reproduce what, you know, we used to call fang.

My colleague Jim Kramer invented the word fang. But you can't get that right now easily within ETAF, just those five or six socks. Either they're in a different sector because some of... Vanguard big cap tech, right? There is a... There is, but it holds a... It holds a few other things. It holds a few other companies as well. So if you really wanted to make a call on just those five or six companies, there's an ETF that soon is coming, it sounds like from Roundhill. It's not coming tomorrow, like the banking one, but there'll be a future ETF that's out there. You heard it here, folks. Big ETF's coming, concentrated bets. We're on top of everything. That's why I got Todd here and my other friends here. So you heard it here first on ETF Edge. Now it's time to round out the conversation with some analysis and perspective.

help you better understand ETFs. This is the Markets 102 portion of the podcast. We'll be continuing the conversation with Todd Rosenblu from Vetify. And Todd, I want to take up a topic that I discussed on Friday, but didn't have a chance to discuss on the show today. And that is

S&P has reweighted, the S&P 500. Every year S&P and MSCI get together and they have an agreement called the Global Industry Classification System. I love that word. GICS as we like to call it, where they move stuff around. in different sectors.

And this year they did two things that were really common sense, made sense to me in a common sense basis. They took Target and they took Dollar General and they took Dollar Tree, which were in consumer discretionary,

and they moved it to consumer staples. Now, Walmart was already a consumer staples. People used to ask me for years, how come Walmart's a consumer staple and Target is a consumer discretionary? And I'd say, I don't know. It doesn't make any sense to me. And this year, they finally took

three obvious consumer staples, target, dollar tree, and dollar general, and moved it with Walmart. And then they did another common sense thing. Visa and MasterCard and PayPal were always classified as technology stocks, why I don't know, but they moved them to financials, which makes some sense. So the effect of all of this has been that consumer stables got a little bit bigger, and tech got a little smaller, and finances got a little bit bigger. Riff on this for a minute.

and I try to explain why this is important. We have $6 trillion indexed the S&P 500. It's important now because this stuff now changes how these indexes trade in the future. That's right. So there's a whole suite of products that are sector ETFs. They own the S&P 500 financial sector. That's XLF, or they own the technology sector of the S&P 500, XLK, or they own Consumer State Bills, XLP.

I'll stop naming all of the tickers right here. And so if you own those ETFs on $1,000, Friday, you owned a collection of stocks, and that's quite different than on Monday what you now own. So right now, Visa and MasterCard are two of the top five largest holdings within the financial select sector, Spider-ETF. So we were talking earlier on the show. People are looking towards the financial ETF, XLF, to get exposure to the banks, to JPMorgan, to Wells Fargo, to Bank of America. They're getting less exposure to that today. Banks actually only represent 24% of the overall financial sector of the S&P 500, in part because Visa and MasterCard are now part of it in addition to American Express.

So it's not, it's not, it's really a bad idea to think if you own, oh, I own something that's an ETF, it's a financial, I own banks. You don't really. You own a lot of insurance companies. You do, right. And Berkshire Hathaway is the largest holding. And it's also important because there's new companies that if you were looking at the past performance of the sectors, you're looking at what, was in it in the past, not what is in it today. So it's all the more important. The future is going to be different. The future way this trades will be different because Visa and MasterCard and PayPal are in financials now. That's right. So the valuation is going to be different. The

earning stream is going to be different. It does matter what's inside the portfolio going forward, not just in the past. Yeah, again, it's a great teaching moment to explain to people. 30 years ago, nobody cared about this stuff because it was all an academic exercise. And now, with $6 trillion directly indexed the S&P, this kind of stuff really matters. What kind of flows are we seeing around all this banking craziness or this year in general in the ETF business? So we're seeing lots of interest in financial ETFs in particular. I mentioned on the show. We're seeing traffic towards our VETify websites disproportionately skewed towards financials. 50% of the sector. ETF traffic has gone to financials. It's moved away from technology,

from energy, from some of the sectors that we were talking about earlier. We are seeing lots of trading volume. That's a good sign that there's a liquidity. Doesn't mean people are buying. People are also selling as well. But what we are seeing is that overall flows for the year in the ETF space are not trending as strong as they were in the past. We thought coming into the year we might see a trillion dollars of ETF net new money coming in. I think I was on your show.

At the end of the year, I thought that would end up happening. It's not happening. Money is not going in to traditional equity ETFs. There's a lot of uncertainty. You mean plain vanilla like S&P 500 type funds? Exactly. Well, that's been a trend for a decade. That's a very interesting point there.

So what does that mean anything? So I think it will come back. I think people are moving money out of, some money's moved out of equities and gone into fixed income or money is gone into fixed income ETS or money has gone into money markets. So if it moves from an equity ETF to a fixed income ETF, that would still be flows. That would make some sense. That would account, those facts would account for what's been going on.

If bonds are down and equities are down, some people are going to. My mother is, I joke about my mother, she's pulling money out of her bank account, putting into two-year treasuries. Right. You can get 4% now to be able to do that. And so why bother even doing anything else? I think money is going to come back and we will see a good year, not as good a year as we originally thought. But what is encouraging is where the money is going. It's going into international equity strategies.

That's been out of favor. We have a home bias in the United States. People tend to ignore the international markets. We've seen demand for EFA, European ETFs, the I shares core MSCI emerging markets ETF, IEMG has been very popular this year. So that's a good sign that people are looking overseas to get diversification benefits. Yeah, I think it's a very interesting thought about finally international showing up. Europe's up three and a half percent this year, the stock 600, outperforming the SSB its first time in a long time. Asia is generally doing better.

Again, though, the problem with some of these moves, particularly in Asia and emerging markets, is it's very dollar dependent and interest, you know, yield dependent. So to the extent that the dollar gets weaker, some parts of the world are definitely going to do better. Right. So it's a hard, I'm eager to talk about reversion to the mean. You'd think that global equities eventually there should be some kind of reversion to the mean. But if the dollar remains strong, you don't necessarily get that. Exactly. So we'll see if it holds up lasting, longer, depending upon how the currency swings

happen. But it's encouraging just to see to start the year, that's where money is going. It could again stay on the sidelines and stay in the U.S. Yeah, good point. All right. Thanks very much. Todd Rosenblut is the head of research at VETify, and we appreciate you stopping by and talking with us. It's always a pleasure to be with you. And thank you, everyone, for listening to the EVEG podcast. create new opportunities. Become an agent of innovation.

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