ETF Edge - Crypto's Rally & The Fate of the Bitcoin ETF

Episode Date: August 9, 2021

CNBC's Bob Pisani spoke with David LaValle, Global Head of ETFs at Grayscale Bitcoin Trust, Simeon Hyman, Head of Investment Strategy at ProShares, and Dan Egan, Vice President of Behavioral Finance and Investing at Betterment. They discussed the bitcoin ETF debate … what SEC Chair Gary Gensler’s latest comments mean for crypto regulation … plus, we’ll get the pulse of the retail investor, Robinhood’s wild ride and what’s driving sentiment surrounding the so-called meme trade. 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'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 Fassani. Today on the show will be plumbing the depths of the Bitcoin ETF debate. What SEC Chair Gary Gensler's latest comments mean for crypto-regulation?

bus. We'll get the pulse of the retail investor, Robin Hood's wild ride and what's driving sentiments surrounding the so-called mean trade. Here's my conversation with David LaValle. He's the global head of ETFs at Grayscale Bitcoin Trust. Simeon Hyman is the head of investment strategy of pro-shares, and Dan Egan is the vice president of behavioral finance and investing at Betterment. Dave, let me start with you. Grayscale runs the Bitcoin Trust. Obviously, the Grayscale Bitcoin Trust. You said you want to convert that fund into an ETF as soon as possible. but handicap this for us. People are trying to figure this out.

Gensler has essentially signaled that he's going to support Bitcoin futures ETFs, but not necessarily a pure Bitcoin ETF. Is that your read and give us your sense of where it's going from here? Right. Well, we viewed it very favorably at gray scale because this is no longer a question of, you know, if there's going to be a Bitcoin ETF, but in fact when. And at gray scale, we've committed to converting GBTC into a Bitcoin.

ETF when regulators are allowing that. And, you know, we view it to be quite favorable. And, you know, this is just the beginning of our ETF business. And we think that we're going to be very open to, you know, all different types of products with all different underlines to meet our investors' demands. You know, Simeon, this was a nice, optimistic little spin on things. Eventually something's going to happen down the road. But I have to say, you know, it's for people who are Bitcoin purists, they consider Bitcoin futures ETF. a bit of a tough sell. Now, you were in the right place at the right time. You launched your mutual fund, Bitcoin Futures ETF. Tell us how that works and what you see the prospects.

So how do you read against us? We were really happy to launch the first Bitcoin Futures Mutual Fund. And that's a really important access point for folks. Number one, it's the futures have the advantage of being a regulated place. It's the CME, CFTC, the clearinghouse. And this is the only avenue for an open-ended mutual fund where you can get in and out every day at NAV. So that's, we think, a real move forward for opportunities for people who maybe wanted this kind of more common and more usual type of exposure that people are familiar with from other parts of the market. Yeah.

Now, you know the complaints about the futures, people who use futures contracts for proxies for the underlying here. You know about the complaints about the rollover costs, the high roll over. costs. Can you tell us a little bit about what you anticipate the rollover cost? Because you're going to be buying front month, near front month, future contracts. You're going to have a rollover cost. How is that going to impact how you price this? And do you anticipate your Bitcoin futures mutual fund or ETF will in any way approximate how Bitcoin trades? So the thing we know from history is that those front month futures contracts are extremely highly correlated to the tune of about 0.9, both correlation and volatility, with spot. Bitcoin. We don't really know what role cost will ultimately be. It's been a very volatile asset class, in fact, going straight up for much of the last couple of years of history. But of course, there are costs in any way that you would get exposure to Bitcoin, whether

it's spreads in the spot market, whether it's OTC trading of various vehicles. So there are going to be a lot of ways for people to get exposure here with some pluses and minuses. But we certainly think that the regulated future space in a regulated mutual fund and an an ETF, if it's ever allowed, is certainly a way that some people will really appreciate. Dan, let me bring you in. Betterman is a big financial advisory firm, a robo advisory firm as well. How are Betterman clients reacting to this recent rally, the 50% rally in Bitcoin in the last month? And what, if any, advice do you give them about investing in crypto as the behavioral expert? I got to say, right now the silence is deafening.

Back in 2017, we spent a lot of time trying to listen to our customer. customers, and we have multiple channels that they can speak to us through, where they can annotate what they're doing with their money. And back in 2017, when it was the first time that Bitcoin was really peaking, we saw a lot. We saw a lot of messages, a lot of questions, a lot of—actually, I might move my money out to go over to this new thing. In contrast to that, we're not seeing anything. So I think the volatility is good, but I think in order to see significant inbound interest,

in order to see people really moving money, especially on the individual investor side, We need to see it break new highs. For those sort of like attention-grabbing meme stock type assets, just moving around isn't enough. It actually needs to be the one thing that's moving the most to be able to garner all the attention to get people to pile into it. So as of yet, it hasn't hit new highs. We're not seeing too many people talking about it. Yeah. Well, Dave, what does it take?

What's it going to take? This is the topic of the du jour. I hate to keep hitting on it. But what's it going to take for Gensler to approve a pure Bitcoin ETF? He seems to be signaling, as Simeon said, I'm sorry, Bitcoin Futures is a regulated market. Currently, I don't have any control over a good aspect of the Bitcoin market, and therefore I've got problems.

What is it going to take for Gensler to get to say yes on a pure Bitcoin product? For 25 years, we've been innovating in the ETF market, and so the SEC is always going to say it's about investor protection, which it is. But when Spy came to market, right, it was novel, it was innovative, but it was a market-cap-weighted U.S. equity-based product. it's now $385 billion. But throughout the history of ETFs, each step of evolution, whether it was international equities, commodities, futures-based products,

you know, fixed income, sub-sectors of fixed income, the same process has happened. And really, at the end of the day, to get into a little bit technical, it's ensuring that there isn't going to be a dislocation in the secondary market trading of that ETF, right, that the price is trading versus that underlying price. And so, you know, when the SEC gets comfortable, that there's enough transparency and enough maturity in the underlying market,

We're going to see an ETF. Other than someday, this will happen, Simeon, is what needs to happen at this point? What does Gensler need to dab to say, I'm comfortable now going ahead of Bitcoin ETF? Yeah, I'll demure from kind of trying to forecast what the SEC. We were passing a little bit, but I think at this point is a good one. Look, this will evolve. We are in the early innings. The underlying use cases of Defi and the ledger and, you know,

anonymity those things and concerns over an environment of low, of very low interest rates and possibly weakening central bank currencies. Those are all things that drive the underlying value. There will be a myriad of ways for folks to get exposure over time. Futures-based mutual fund, that's allowed today. Futures-based ETF might be allowed tomorrow. Spot ETF, perhaps sometime in the future. We're all watching it. And we're watching it and when those opportunities avail themselves, we'll be exploring them very carefully. Dan, does Betterman have a dog in this race? I mean, how do you feel or how does the community there feel about what they want to invest in?

I got to say, an ETF would make it a lot easier just because it's going to be exchange-traded, a lot more transparent, and it obviously solves the custody issues. From a magnitude point of view, though, it's not that big. I do think that a little bit of cryptocurrency, for any kind of speculative asset, whatever it is, goes a long way. You do not need a lot in your portfolio, either from a volatility angle or from a sort of speculative angle. A little bit goes a long way. So generally, when people ask us, we're going to say definitely sub 10%. Generally between 3 and 5% is plenty. You just got to make sure that's money that if it comes down to it, you can afford to lose because it is very volatile. So watch out.

The last thing, if it is a speculative investment that I think a lot of people don't think about, buying is easy knowing when to sell is hard. So when you get in, start thinking ahead of time about, like, what are my exit criteria here? When is it going to make sense for me to get out of it? Yeah, my old friend Rick Aedleman, five, six years ago, when I asked him, what are you telling the number one RIA in the country, he said, you know, Bob, there's a very simple way to look at this. Try having it as 1% of your portfolio. It's not going to matter that much if it drops, but it has the potential to double, triple, and then all of a sudden instead of 1% of your portfolio, it's 3 or 4 or 5%. That made some eminent.

sense to me that if you didn't want to completely stay away from it but didn't want to go all in, you know, the 1% hypothesis, and Dan was sort of alluding to that in a way, made a lot of sense to me. Let me ask you about Gensler's comments. He seems to be indicating he's going to be more aggressive on enforcement. He said he's seeking additional authority from Congress to prevent transactions. I'm really reading from a statement here, products and platforms from falling between regulatory cracks. And it seems he seems to be raising the prospect of even more enforcement efforts here, particularly maybe even on ICOs. I wonder if this is going to give any more pause to the Bitcoin community at all.

So I would say, look, I'm a week and a half into my Bitcoin, you know, being at Grayscale, my Bitcoin experience. So I got a little more time to learn about that before I comment with more clarity. But we're certainly paying very close attention to that as we are with the rest of the congressional commentary around cryptocurrencies. And, you know, he mentioned the tokens. He didn't make a ruling on anything, but he said, you know, they seem like investment contracts to me. If you offer them, it's that old Howie test.

If you give some guy money and you're anticipating making money, that's an investment contract. That falls under the SEC. He seems to be, and I'm reading between the cracks, but I'm not, I don't think I'm crazy, that they're almost all investment contracts and should fall under the purview, implying that a lot of people are unregistered out there. There's unregistered securities out there. Well, all of these pieces of the... the crypto world have different uses. Bitcoin is not the same as Ethereum. And we're in such

the early innings that they're going to be evolutions of usage. They're going to be evolutions of regulation. Those are all going to be facts of where we are in this, in this nascent business, but it's not going away. And investors are going to want multiple ways to get that exposure. Because you may need, again, you may need that exposure to the bot, excuse me, to spot Bitcoin. You may need your own wallet. You may need your private key, or you may just want a 1% allocation in a portfolio for diversification, digital gold, alternative to currency, in which case something like a futures-based mutual fund or an ETF might be a great solution for you. You made a good point, Simeon. People might want Bitcoin in a lot of different ways.

Gray-scale Bitcoin Trust is very successful. I find that people are a little confused about what it is. Maybe you can take 30 seconds. And I know this is a problem. But people need to understand what it is. It's not a mutual fund. It's not really a closed-end fund either. Some people think it is because you own a set number of Bitcoin. What is it exactly? So there's an evolution to the products that we have brought out,

starting with the Grayscale Bitcoin Trust. It starts as a private placement, then it moves to be a public quotation, and now it's an SEC reporting company, hopefully with the goal of becoming an ETF. But it's traded on OTCBB. That's over-the-counter. It's traded over-the-counter. over the counter. There's a lot of talk about it trading at a discount. And, you know, we've been on the record, and I continue to say that typically something trading a discount can be a

buying opportunity. And if we do have the ability to have regulatory approval to launch an ETF, that that discount should collapse. Yeah. So it's, it's, people somehow think it's a closed end fund. It's not technically a closed end fund at all, even though you own a set number of Bitcoin. This is where the confusion comes in. I don't want to get too far into the weeds. Right. It does, it does, it does, it's a grant or trust. I think is the technical word. I think people make that distinction that it trades like, trades like a closed end fund because of the premium and discount characteristic to it.

Yeah, yeah. And it did trade at a premium up until February or so, and then we started trading at a discount. Yeah, traded it even a steeper discount and now has rebounded significantly. Yeah. And the initial Bitcoin holding, you have what, 650,000? It's somewhere around there, right? Correct. Right, right.

And is it still fair to say that roughly, 1,000, is that the normal ratio to a Bitcoin? So it's roughly 1,000 shares to 1 Bitcoin. Yeah, I always like to say it was 10 shares of the GLD, you get gold. And roughly 1,000 here you get. I know you can trade the discounts and everything, but that's a rough estimate, right? Rough estimate. That's a fair estimate.

Okay. Dan, tell us a little bit about how Betterman customers are interacting with meme stocks. I want to just move off of this just a little bit. obviously Robin Hood has been in the news recently, but even going back to GameStop, what do you tell people about that involvement? Because now you have stocks that are obviously trading for people who are, let's say, fundamentally insensitive. I don't know what the word should be. But how do you advise people when stocks start trading at prices that are completely divorced from fundamentals?

One of the key things about meme stocks that we see is that they kind of need to have a focusing their attention on just that one thing. It can't be, it's not a matter of being diversified. Everybody needs to focus on GME or a silver ETF, whatever it is, especially if they're trying to do short squeezes. So I think there's some level of, we have to be realistic. People like to enjoy investing. There's some level of gambling tendency in it. And that's okay, as long as you keep it kind of under control. As long as you say, I'm going to treat this like Vegas. I'm taking money out. I'm not allowed to take out more than I've taken with me. I'm going to have a sort of set risk budget for it. And as you said, if I make huge returns

great, I should rebalance back out of my speculation pot into my serious retirement goals, et cetera. That's a little bit what I think we're starting to see over at Betterment, which is that we're over a year now on from the trough, the 2020 March trough, where a lot of people started speculatively trading, look at individual things. So we've moved out of that kind of like initial novelty area. Now people are a little bit like, you know what, this feels like a job. I've got to manage assets. I've got to look for buys and sales. I probably have an Excel spreadsheet somewhere.

So we're starting to see what I would call day trader fatigue or people saying, you know what, the novelty is worn off, and I want somebody who's going to do this for me. So we're still actually seeing pretty good inflows from new customers and new signups as well. Yeah. You know, this is a story that's been around for 25 years. Even Jack Bogle, who's probably the person who most influenced the way I look at the world, the founder of Vanguard, admitted that people like to gamble a little bit and said he himself said, if you feel the need to scratch that itch, take a small amount.

He might have mentioned 10%. But that seems to be where a lot of financial professionals are gravitating around. If you really feel the need to gamble, you should have most of your money in long-term, you know, passively managed funds most people feel, but take 10%. Dan, does that 10% number mean something a lot of? to you. What I find interesting is exactly what you said, that it's very easy to get in, but devising an exit strategy is very, very difficult. Market timing is extraordinarily hard to do, and generally you lose for the simple reason that you've got to be right going in and you've got to be right

going out. So we all know this, and you've been talking about it for many, many years, and the academic literature is overwhelming that market timing does not work over long periods of time. So do you think, I like that line you used, investor fatigue, is that starting to get through to the new investors that are out there? Yeah, I think we're seeing something kind of interesting. So, you know, if you think about life cycles of people, young people, you know, like 16 is when you learn to drive a car or something. And I don't know, maybe like 30 is when you buy your first house. What we saw is the pandemic in 2020 kind of smushed a whole generation of people into learning about investing in the same time. namely about April, May of 2020.

And the academic literature says this often happens. People come in, they want to get their hands dirty, they want to learn about investing, and they do it. They manage their own portfolio in stocks that they're familiar with, retail name, consumer-focused names, things that make them feel comfortable with getting invested. After they do that for about a year to two years, they start to learn that, you know what, day trading is work.

It takes attention. Sometimes it's stressful. And I don't know that I want to do it anymore. So you generally see this sort of fatigue kick. in somewhere between a year and three years with people realizing that, number one, they're not beating the market by that much, and number two, it's a job, and they don't want to have a spare job. Yeah. You know, one of the things that amazes me, Dan, is the old Wall Street. I've been 31 years at CNBC. I'm down here at the New York Stock Exchange. It's 24 years. Old Wall Street tends to pooh-poo

the reddit traders and the Robin Hood crowd. And I do not understand that attitude at all. To me, I look at Robin Hood. I see 22 million accounts in a few years. That's an amazing number, 22 million. Schwab has 33, 34 million, and the vanguard probably is 37 or 38, and BlackRock probably the same number. But they've been around for decades. 22 million accounts in a few years. Now, Wall Street says, oh, but there's not much money in the accounts. And I say, you know, that's not a good attitude. Those people are going to grow, and what you want to do is encourage them to stick around and educate them. So, you know, what you're saying, Dan, makes an awful lot of sense to me. I just hope that they stay around because you know there's going to be a downturn at some point.

They're going to lose money. So will they just throw up their hands and say, oh, it's all rigged? Wall Street's rigged, but it's not rigged. It's just the market turned down. And hopefully, they'll stay around. So I'm cheering for Robin Hood. I really want those $22 million, not for the company, but those new investors, I want them around. They're a really valuable source of energy for the market.

So, Dan, I hope you're going to be able to be a factor in making those people stick around. Well, we'll take them and upgrade them. Yeah, okay, very good. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS with our markets 102 portion of the podcast today. I'll be continuing the conversation with Simeon from ProShares. And, Simeon, thanks for sticking around and chatting with us a little bit more. Pro Shares has a very wide lineup.

ask you about dividends because you run one of the biggest dividend ETFs, the dividend aristocrats, ETF, NOBL. There's a lot of different dividend products. Tell us what's to you unique or interesting about the dividend aristocrats. Sure. The S&P 500 dividend aristocrats, the index and NOBL or ETF focuses and holds companies that in the S&P 500 that have grown their dividends for at least 25 consecutive years. It's a simple way to get a very high-quality companies that have consistently delivered cash flow to shareholders. Now, there's a lot of different ETF products out there.

There's products that, for example, just hold the highest dividend yielding ETS. Is there academic literature, or is there indications that rather than hold the highest dividend yielding companies, because I want the most yield, therefore I'm just going to buy the highest dividend, I should buy the companies instead that are increasing their doing. Is there evidence that one does better than the other? The growers are really, really important because if you simply focus on yield, number one, you don't know if the quality is there. In other words, you don't know if a cut is coming,

but also those high yielders are typically quite interest rate sensitive. So if you focus on the consistent growers, you get much higher quality and you get much less of kind of cyclical running, throwing you two and four in the business cycle and in the equity market cycle. But the nice thing is, because those dividends are growing, very quickly, you get your cake and eat it too. You know, stocks are not defenseless like bonds that have fixed coupons. Last year, the S&P 500 Aristocrat Index grew its dividends 14%. So that first spot dividend doesn't look that high, but all of a sudden it's three or four years later,

and as a function of your cost, you have your cake and eat it too. And make the case for dividends. I talked about dividends. You know, I always say I'm a Jack Bogle disciple. he was big on dividends. But younger people, they look at me and say, the S&P yields 1.3%. Dividend.

Why would I care about a dividend at this point? Why is that something that an investor should focus on? So there's two pieces to this. First, if you look at the aristocrats, the yield actually today is well over 2%. A little bit of a function of those high-flying tech stocks taking a little bit of a long run here. So the yield is a little more when you're focused on the consistent dividend growers.

And the second piece is because as your portfolio matures, that growing cash flow is a key element of stability in the portfolio. You may even end up if you're in retirement actually living off of a component of it. Yeah. 2%, again, doesn't seem like a lot, but over time, it's that compounding interest over decades. That's right. Boko was very fond of doing these charts about the difference between 1% accumulation and 2% accumulation. All of a sudden it's three or four years later, and your yield as a function of that initial cost might be four, five, six percent. It starts to really make a difference. Now, other people who are maybe a little more sophisticated say, well, Bob, that might be true, but you see what corporations are doing.

They are, the payout ratio is still, well, let me ask about the payout ratio. What is it right now for the S&P 500? Of all the earnings stream, there's a portion that goes to dividends. What is that? That one you caught me on, so I don't know the payout ratio of the S&P 500 off the top of my head. What we do know is the S&P 500. Aristocrats payout ratio is actually a little bit lower, which is fairly common in the history of the consistent dividend growers.

So they're not companies out there that are borrowing money to pay out cash flow. You don't necessarily want somebody who's paying out 80% of their earnings necessarily because you... There won't be enough growth left over. Yeah. The other thing, of course, is companies like, you mentioned high dividend payers why you don't want them, like Exxon, for example, pays 6% right now. And obviously there's been debate for years about whether Exxon's going to cut its dividends. Occasionally you get a high yielder that is also a consistent grower, but typically the yields are a little more modest. Let me go to the buybacks now.

So the sophisticated people say, all right, Bob, maybe, all right, in the old days, dividends were great. But today, companies are diverting that stream of their earnings, cash flow that they're paying out to buybacks rather than dividends. Is there an argument that could be made that I should own a buyback ETF instead of a dividend ETF? Here's the key distinction, Bob. If you increase your dividend as a firm, you are signaling that the good times are in front of you because nobody wants to cut a dividend. If you buyback shares, the indication is that the good times were yesterday. I'd rather you pay it out than hoard it or blow it on a jet, but it's still telling you that that that cashed,

piled up from good times yesterday, but an increase in a dividend is a much more powerful forward-looking signal. I think that's a very good point. You're also, pro-shed is also very big in leverage and inverse ETF. You've got $13 billion in the Ultra Pro Triple Q. That's three times leverage exposure to the triple Q. Obviously that money can come in and out, but how is the leverage and inverts? It's only about 2% of the total assets under management for the ETF business, but it's often

generates a lot of the controversy because you're leveraging essentially. Where is that whole debate? Are you seeing more inflows, less inflows? Is leveraging and is buying into leverage and inverse ETS more or less popper than, say, five years ago? We've seen strong flows. We're, of course, quite pleased to offer this tool to investors. And, you know, one of the things that I found interesting, just in the earlier conversation we had about the meme stocks, If you look at first principles of finance and investing, if you want to take a riskier posture, you're supposed to leverage up a diversified portfolio. That in many ways, the academicians have said, if you want to take a little more risk,

leverage up a more diversified portfolio. So that's certainly something that I think some of the folks who are using our tools understand. And also, I'll just throw this in from putting my strategist hat on. Very interestingly, in the whole sort of growth, value technology debate, if you look at price-to-book as your relative metric and you look at growth and value stocks, you will convince yourself that the end is nigh because the relative value of growth over value on a price-to-book basis is 4x. It was 4-X right before it crashed in 2000.

If you look at it on an e-bid-da basis, it's not even close to peak. because all these companies now make money. They didn't make money 21 years ago. They make tons of money now. So that's also an important ingredient. I want to thank you for joining us. This is a great product, and you've always been a good friend

and always available to help answer my questions whenever I have. So much. Simeon, thanks for joining us. Simeon Hyman is with ProShares. And everybody, thank you for joining us on the ETFAH podcast. InvescoQQQQQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at Invesco.com slash QQQ, Invesco Distributors, Inc.