ETF Edge - Crypto Collapsing – Time to Short Bitcoin? 06/27/22

Episode Date: June 27, 2022

CNBC’s Bob Pisani spoke with Simeon Hyman, Global Investment Strategist at ProShares, Tom Lydon, Vice Chairman of VettaFi, and Andrew Chanin, CEO of ProcureAM. With bitcoin in freefall and the crypto markets collapsing, they debated whether now is the right time to short bitcoin with the man who launched a new short bitcoin strategy ETF just last week. They also delved into the nuances of the world’s first-ever global disaster recovery ETF – an expanded approach to ESG. In the Markets ‘102’ portion of the podcast, Bob continues the conversation with Simeon Hyman from ProShares. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange-traded funds, you are in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it means for investors. I'm your host, Bob Bizani. Just back from a week's vacation in southern France. Love the French.

Today on the show, with the collapse of the crypto market, is now the right time for a short Bitcoin strategy ETF. The last demand who rolled out, just such a product last week and get an update on how that ETF has been performing. Plus, as stocks struggle to maintain their comeback from fair market lows, how are investors feeling about stocks versus bonds?

Finally, we'll get details on a new global disaster recovery ETF, the first ever of its kind, very interesting new product. Here's my conversation with Simeon, global investment strategies, the pro shares, Tom Leiden, Vice Chairman of Vetify, and Andrew Channon, the CEO of Procure AM. But let me start with you, Simeon.

Explain how this short Bitcoin ETF works. These are tied to futures contracts. And I presume this is the exact inverse again. So Bitcoin is down 1%. It's up 1%. Just to remind our viewers how it works. That's exactly right. So this is the companion to BITO, the long Bitcoin strategy ETF using futures,

as you described, that we want. last fall, one of the most successful launches in ETF history. And we wanted to offer investors the opportunity to have the short exposure with BITI. It is indeed minus one, so it provides the inverse of the CME futures index. But always important to remember that that's rebalanced every day. So every time you wake up in the morning, you know that it's going to deliver the intent to deliver that minus one times the performance of Bitcoin for that day. Yeah. You know, Tom, a lot of us, and I want to remind everyone what Simeon said there, it's reset every day. We have to keep telling people about that. You don't do that over a month. It's what every day you reset here. But, you know, a lot of people thought that crypto would be a non-correlated asset somehow and that it was an inflation hedge. This is proven to be nonsense. It essentially moves, you mentioned this before, essentially like growth stocks, essentially. Yeah, and that's it. I mean, a lot of people thought it would be a way to diversify fight inflation. It hasn't been the case. However, a good thing that's come from this has been this.

Advisors are interested in crypto ETFs because they can keep them on the platforms where they manage money for their clients. We do with Matt Hogan and the Bitwise team every year a survey and more and more advisors and their clients are interested in cryptocurrency. Now with the fact that we've got ETFs and they're available on platforms and we've had a great deflation or decrease in the value of ETFs, advisors, more advisors are getting in. Simeon, I know we've had a reduction in the total assets that we had in your ETFs, but at the same time we have more shares, so more not only self-directed investors, but more advisors are going in for the first time advisors are feeling comfortable taking positions for clients. Are you seeing that?

What we've seen, Tom, and Bob, over the last several months with the, let's call it, the volatility in Bitcoin is we've seen more and more challenges in the spot market, headlines with regards to the lending platforms, but then even in the simple exchanges that a client account in a crypto exchange may not be segregated the event of bankruptcy. And meanwhile, as we've seen these complications in the spot market, the futures market has really matured quite nicely. So those role costs that folks were concerned about have actually shrunk, shrunk, shrunk, shrunk, shrunk, shrunk, shrunk, as in stark contrast to the spot market.

So when you put the futures with the clearinghouse in conjunction with a 40-act ETF, with segregated assets readily available, It's certainly no surprise to us that that's a opportunity that's well suited to financial advisors and anyone who's looking to simply have this exposure in their brokerage now. You mentioned the spot market, the spot Bitcoin market. SEC Chair Gary Gensler was on our air this morning, again pointing out that crypto tokens would fall under the SEC's jurisdiction. He said nothing, though, about this long-delayed endless spot Bitcoin ETF. Jeff, can you just comment on that?

Are any close to realizing that? Is that even important at this point? Because that would have to go through, Gensler, and he's been quite skeptical. So I don't think we know. I think what we can observe are the challenges in that spot market that we were just talking about,

so one can imagine that that's certainly one of the things on the minds of the regulators, but we really don't know. But again, the one thing that we do know is that futures have become a particularly effective method for exposure that, if anything, have been becoming more mature, more effective and more efficient marketplace. You know, there's no storage costs in Bitcoin.

So there's really no reason from a kind of theoretical standpoint for there to be any real meaningful cost involved in the rolling of those futures contracts and the ability of them to track very careful, track quite closely the Bitcoin market. with all the other attributes of that futures market, I think really do stand in contrast to spot. And again, they could be resolved. We don't know when, but they're not there yet. So, Sibyan, the fee for this 0.95%.

Now, that's high for an ETF, but I know the cost of shorting Bitcoin has been very onerous in the past. Some of these exchanges have restrictions on them, and I know the financing costs can be very high. Is it your argument that this is a more efficient way to go about? shorting Bitcoin.

Absolutely, Bob. So if you're now focusing on BITI on the opportunity to have short exposure, in addition to all the benefits of futures in ETF, we do think this is a very efficient way to go. As you mentioned, it's tough to pull this off. And indeed, those borrow costs, if you were to go on margin in a brokerage account, even if you could do it, which is a challenge, the borrowing costs are as high as close to 20%. So we think those 95 basis points there are going to prove to be an attractive avenue for folks looking for this exposure. And we've seen lots of activity.

You've traded already about $100 million since the launch last week. So Tom, you pointed out the current price to produce one Bitcoin is, what, $15,000 to $18,000? Right? We're at $20,000, $21,000 right now. That's getting uncomfortably close. What would happen if we went to $18,000? What are the implications of saying it's $15 to $18,000? We're not far from that.

We've watched the gold market for a long period of time. It costs about $800 to $1,000 to get an ounce of gold out of the ground. Prices get down to that level or below. Guess what? People shut off the machines. You wonder if the same thing would happen in the Bitcoin marketplace. We haven't been there yet, but you've got to assume some of that would happen. Now, Simian's making a very interesting argument here.

I keep pressing on the Bitcoin ETF, and he keeps sort of pushing back and saying, You know, Bob, I'm putting words in your mouth, it doesn't matter because we've got a functioning futures market. Yet the Bitcoin community doesn't seem to be very happy with this. They still want a Bitcoin ETF. Does it matter, or am I just pushing against the wind? There's a certain cohort of the industry that would like to see it, and I think people felt that way six months ago.

Today, as far as institutions or financial advisors, especially with the ability to look through a futures market and buy products based on futures on platforms, I think they're fine. I mean, folks like pro shares have done a great job. There's really, really tight correlation there. They're doing exactly what they're supposed to do. Yeah.

So I didn't want to put words in your mouth, Simeon, but is that your sort of position that it's almost not that important, whether we get a Bitcoin, a spot Bitcoin ETF or not, because the futures Bitcoin ETFs are functioning so well. Great. Suss that out for me. They're at Bidoh and Biddy are both doing exactly. what they should be doing. So we do think that that's providing a lot of the opportunity that

investors had been waiting for. If there are other maturations anywhere else in the crypto universe as time goes on, we'll see. But they're not there yet. And the futures based ETF, Biddle, and Biddy are really worth folks taking a good, hard look at because they do deliver the exposure and lots of structural advantages. Are you surprised, Tom, that we had such good correlation between Bitcoin and the futures? Because that was the argument, you know, eight months ago, everyone was saying, you know, we don't want this because there's too much variation between the spot and the futures. And we see it's actually trading a fairly tight range.

Is this an historical anomaly or? Well, the futures market is something that the ETF industry has been a part of for a long period of time. You've got the plumbing down. You've got the market makers, the APs all doing what they need to do. And it was all up to them to make sure that they performed and that those spreads are tight and that the correlation is accurate. So it wasn't just one company. There are many companies that are doing this and it's important that they stay tight. If one falls out of favor and doesn't perform in line, they're not going to get the money.

Okay. I want to switch topics a little bit because I want to bring in Andrew Chan and he's the CEO of Procuriam. this month he launched the procured disaster recovery strategy ETIF. I know that's a mouthful, but the symbol is FEMA. FEMA, get it. Designed to invest in companies engaged in recovery and risk reduction related to natural disasters. Andrew, this is certainly topical.

I just got back from Europe where, by the way, the temperature was 100 degrees in the south of France and central Italy. They don't even know what's going on. They kept asking me to explain it. But explain to us how this ETF works. You've got four investment categories, right? Yeah, so what we really wanted to do was we looked at what was going on with climate change, natural disasters, and realizing that this is actually becoming a growing concern where we're seeing the cost of devastation from natural disasters slowly rising.

And so for us, this means that we need more resiliency, more mitigation, more recovery, more rebuilding. So trying to define what those companies that are involved in this entire life cycle of a natural disaster became extremely important. So our partners at VETI and the team that helped construct this index looked at things like hurricanes, floods, droughts, wildfires, tornadoes, natural disasters that are occurring all around the globe and what companies are actually stepping up to help us in those efforts. So you'll see a wide range of companies like consulting, engineering, home improvement, energy, portable energy solutions like generators, waste removal, and so many other crucial areas. So these are the companies that really help bring our lives back to normal when we need them the most. Yeah. You know, Tom, this is a lot like crypto mining.

We talked about this years ago. Okay, so we had an ETF. How do you get exposure to crypto when there aren't many crypto? companies here. I have the same reaction to this. It's a great idea. It's really topical. But when you look at the holdings, for example, here, it's pretty obscure companies, Fujitsu Limited, which is an IT firm, Veris Analytics here. I just put up a few of them here. Data Analytics. Wilden Group is a technical consulting group in energy. Middlesex Water is a water company. These are all very interesting, but is it, if there's a natural disaster,

is any of these going to naturally move? I guess that's the problem I have. I love the idea. Just tell me how you capture that. Well, the crazy thing is especially since climate change is top of mind with everybody today, where you're thinking about floods, you're thinking about drought, you're thinking about hurricanes. All these natural disasters are starting to add up to a lot of money. They're estimating that by the end of this century, it's going to be almost $2 trillion a year. That's a lot of money to spend for repair, whether it's software to analyze it,

fixing bridges, construction, all this. And in constructing this index, the VFI crew put a lot of time and effort into saying, this is not a small market cap, and natural disasters aren't going away. And with all this, Andrew's team came in and said, that makes sense. We're going to put an ETF around this because, unfortunately, there's a little bit of doom and gloom here, but this isn't going away. Yeah.

But you get my point about this, Andrew, because we had, dealt with this with the crypto community years ago. How do you get exposure when, you know, everybody's answer was, you know, buy semiconductors, for example. And that's hard to say that's going to have any impact, you know, if you want to buy and do, you know, the Bitcoin ecosystem structure. So tell us about some of these largest holdings. I mentioned Fujitsu, Varus, Gwilden Group, Middlesex, Water. They're not exactly household names. Sure. Let's talk about some of the other ones that we can point, you know, real time to. So you looked at the Texas grid, going down last year when Texas froze. What did you need? You needed emergency energy and mobile

energy solutions. So a company like a Generac, which provides generators, sought a massive increase in demand. And now no one wants to be left without power. So you're seeing more and more people starting to purchase generators for their homes and offices. You look at something like a Hurricane Sandy, which affected New York and New Jersey and others tremendously. You have a company like Great Lakes Dredge and Dock that came and helped build miles of the rebuild miles of the New Jersey coastline. These are companies that are coming in and helping us, whether it's trying to help us better prepare and build things like Ascanska out in Sweden that's helping to build water treatment facilities, helping to build up higher coastlines along riverbeds to prevent the damage

from flooding. One of the first things I did when I was down in New Orleans when we heard Hurricane Katrina coming was everyone was going to Home Depot to buy plywood. And then you need to go and you need to purchase more stuff, whether it's shingles, whether it's things to repair, whether it's paint after these disasters. So it's a wide range of companies that are all involved throughout different parts of the life cycle. There's even an overlap that we have with UFO, our space ETF, which is MaxR, a company that has satellites in orbit around the globe that are helping us track weather patterns, alert us to the creation of new natural disasters, tracking the spread of wildfires. So it is a very diversified basket. Natural disasters are a very natural disasters are

global problem. If you go back to Tomstad of the U.S. budget costing about two trillion dollars to it from natural disasters alone, that doesn't include what it's going to cost other governments. That doesn't include what's going to cost individuals and households and companies for resiliency and preparedness and rebuilding efforts. And that $2 trillion alone is roughly $5.5 billion a day from the U.S. government alone. So this is something that we're seeing, you know, significant calls for increase in needs. You look at just in the West Coast in California, they need to spend billions of dollars

to make sure that hospitals are earthquake-ready. So this is something that is going to be with us for a long time, and these are the companies that we need. Yeah, Simian, if you have any point you want to make on this because you're an old pro at this too, please weigh in. But Tom, let me just point out to the viewers that VETify did the index for this.

Is that right? That's right. Explain how VETI is making it possible for companies like this to do index. Sure. So through Allerian indexes and the S network index, they're now part of VETify. And we, although most people know us through ETF Trans and ETF database and the work that we do with the advisor community, we're now able to help out ETF issuers match up with longstanding indexes that not were just invested or invented overnight. These index has been around for a long period of time.

All the data is out there. People can track them. And the great thing about the ETF industry. like indexes that nobody's using that you're helping people pick up on? Is that the point? Absolutely. And the great thing is, with all the behavioral data we get from the advisor community, we can see which articles they're reading and they tell us what they want more information on, which will inform ETF issuers like these folks of ETFs that they may want to bring

to market. Unknown ETFs. We're going to do a show on, no, undone indexes, orphan indexes. Let's do a show on that. I'd love to come up with something really. European Travel Index. Nobody's thought about before. Don't bring up European travel, please.

I just got back from France, folks. A few nightmares on that one, even though I love France. Let's stop there. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS. This is the E-Markets' 102 portion of the podcast. Today will be continuing the conversation with Simeon Hyman from Post-Pers. Simian, thanks for sticking around and continuing with us. We talked a lot about your new Bitcoin short ETF.

What interests me is when you launched the Bitcoin Futures ETF eight or nine months ago, there was a lot of objections from the Bitcoin community that was an inferior product, that there would be a significant spread between the spot Bitcoin and the futures prices. And that because of that, this was a less desirable product than a pure play Bitcoin. ETF. We still do not have a pure play Bitcoin ETFs and heaven knows when we will. But one thing we do notice is that the spread between spot and futures has been very tight. Can you explain why that that is happening because there are other situations where the spread could have been wider, but that hasn't happened. Well, can you explain why? And what's extra interesting

about is that as that spread has narrowed, it's tightened up, the spot. market is getting yet a little bit more chaotic with the lending platforms and even the observation that your Bitcoin exposure in a exchange could actually not be segregated in the event of a bankruptcy. But specifically to your question, the shrinking and it's the role cost, that's that gap that people were concerned about. When you're investing in futures, you have to keep buying the next month's contract. that role cost is what people thought was going to put a gap between the futures performance

and the spot performance. And as you noted, that's been shrinking. And if you're looking for a reason why, it's simply in kind of first principles of finance. There's no storage costs in Bitcoin. So therefore, you know, the role cost should be really, really small. You know, you're talking something on the order of, you know, almost a risk-free cash rate. Yeah, that's a very very important point to bring up. I mean, traditionally on futures contracts in agricultural commodities, which is where futures started, there was significant role costs because there were significant storage costs. And even today, that is the case with commodities. With Bitcoin, well, maybe label a commodity, it certainly doesn't have any physical assets. So I think, thank you for

bringing up that important point. I'm wondering about what this drop in Bitcoin. It's down almost 70% from its high back in November of last year. What that drop in Bitcoin means for ETF trading in the futures contracts? I mean, are you seeing more, less trading as a result of all of that? Well, it's been a robust futures market for a while, and it continues to be so. In fact, the volume that you see in the CME futures market is actually well in excess of the largest Bitcoin exchange. And the other thing that some of the academics point to is that price discovery, if anything, is even a little bit quicker in the futures market, which shouldn't be a

shocker. That's if you're looking for an analogous place, it's long been observed that CDS react more quickly than the spreads in cash bond markets. So it's been a robust market. It continues to do so, and it looks like it's maturing. And that's very important for the ecosystem. Yeah. Let me just ask you had a couple other products you've got while the ProShares has. One of the ones that have been popular this year that some investors have turned to is consistent dividend growers. This hasn't stopped the sector from being down, but perhaps not as much as the rest of the market. Pro shares as a dividend growers. How is that doing? Down a lot less, as you have observe. Tickerno BL, the S&P 500 dividend aristocrat, has certainly gotten a lot of interest

as well as the rest of the dividend growth suite. And I think what's important here is in an environment of rising rates and inflation, you can see what I would suggest is kind of an overextension of the bond analogy over to the equity market. So people say, well, I got to shorten the duration of my equities. Okay. But what does that mean? mean. That must mean looking for no growth equities. Well, let's just take a stock with a P.E. of 10. Super cheap, no growth still has double the duration of the aggregate bond index. There's no salvation in equities with no growth. You have to have growth. And quintessentially, perhaps the best inflation hedge overtime is the growth of those dividends. And the aristocrats indexed at

Noble Tracks grew their dividends 10% last year and 14% even in 2020 at the height of the pandemic. So I certainly no surprise that folks are seeing that as a worthwhile place to look. Yeah, I would remind people, and I know dividends don't seem to matter anymore, it's only about the S&P only throws off a one and a half percent dividend. But historically, other than the most recent period, I mean the last decade or so, dividends have been a significant part of the return of the S&P 500, going back to the 1920s and its inception. And while that has not been the case in the last few years, heaven knows, it may well be the case in the future. And the academic literature is pretty clear on this. And Simeon, you can affirm or not agree with you, but the best

way to own dividends is not to own the highest dividending, a dividend yielding companies. It's to own companies that are consistently growing their dividend year after year, which is what Noble does, N-O-B-L. It's the growth that's the key, because if you just are seeking out high dividend and yielders that aren't necessarily growing, if anything, they can actually be more susceptible to getting a stiff headwind from inflation and rising interest rates. Right. You also have the infrastructure ETF out there. Now, infrastructure is not dead out there. There's still a lot of money left to be spent. Tell us how that's doing. So there's two flavors of infrastructure in two broad baskets. One are the cyclical builders

and servicers and drillers and things. And that's a very cyclical piece of the infrastructure market. Our focus is on the owners and operators of infrastructure assets. That's why our ticker is TOLZ, tolls, the toll takers. And that's a very stable, again, almost a real asset inflation hedge because you have lots of pricing power because you own water distribution, energy distribution, airports, cell towers and transmission. Again, a place for stability, for growth of earnings cash flow and dividends. It is nice yield here too as well.

And a real nice kind of real asset alternative that can be an important compliment to your equity exposure these days and a real important alternative to fixed income with all of those challenges of yield up, price down. Okay, I'm going to have to leave it there. Simian, congratulations on the short Bitcoin futures ETF that launched last week. And it was always a pleasure to chat with you. Simeon is the global investment strategist at ProShares. Everyone, thank you for joining us on the EPF Edge podcast. InvescoQQQ believes new innovations create new opportunities.

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