ETF Edge - Deep Dive on Dividend ETFs, Crypto & AI 11/6/23

Episode Date: November 6, 2023

CNBC’s Leslie Picker sat down with Dave Mazza, Chief Strategy Officer at Roundhill Investments – along with Global X CIO Jon Maier and Todd Rosenbluth, Head of Research at VettaFi. They dove into the world of dividend plays and broke down the latest big dividend ETF launch. They also discussed top thematic trends that have taken the investing world by storm this year – namely, AI in the wake of President Biden’s new Executive Order, and crypto after Sam Bankman-Fried’s trial last week. As bitcoin prices top $35,000 again today, there’s no question the crypto bulls are out in full force. But what does the timeline look like for a spot crypto ETF? 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, Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, trade funds, you are in the right place. Every week, we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm your host, Leslie Picker, filling in for Bob Bassani.

Today on the show, we'll dive into the world of dividend plays and break down the latest big dividend ETF launch. We'll also get an update on top thematic trends that has taken the investment world by storm this year, namely AI in the wake of President Biden's new executive order and crypto in the wake of Sam Bankman-free trial last week. There is no question the crypto bowls are out in full force with Bitcoin prices topping $35,000 again today.

What does the timeline look like for a spot crypto ETS? Here's my conversation with data. Dave Maza, he's strategy officer at Roundhill Investments, John Mayer, CIO of Global X, and Todd Rosenbluth, head of research at Vettify. Dave, let's start with you. Tell us more about your new fund. You've been referring to these picks as the recession kings. What's in the fund and why do they earn the crown now?

Yeah, no, thank you for having me. So the new fund is the King's ETF, ticker KNGS. And it's named that for a reason. It focuses on the dividend monarchs. These are companies that have increased their dividends each and every year for a minimum of 50 years. The holding with the longest dividend streak is at 69 years. You have to go back. That's when Dwight Eisenhower was the president.

These companies have been through it all. They've been through wars, recessions, most recently in global pandemic, and they've been able to reward shareholders with an increase in their dividends each and every year. So for investors who are concerned about the market outlook or just looking for an operational. to increase the income potential and total return of their portfolio, focusing on companies that have the consistency and reliability as the dividend kings, the dividend monarchs, could be an opportunity for them. And for those who aren't history buffs out there, this Eisenhower's presidency ended January 20th, 1961.

So we're talking quite a while there. Now, Todd, dividend ETFs are generally viewed as safer bets in times of economic. stress, you got the diversification benefit there. But the market is continuing to search for Goldilocks and the data has been more favorable lately. So do you think there will still be this continued strong demand for dividend ETS? I think we're seeing as bond yields have come down, dividends are going to be more appealing. Investors through dividend strategies like the ones we're talking about can benefit from upside in the stock market, but also get some of that downside protection and stability with dividends. So you've got Dave's new ETS.

which is a version of the Spider-S-NP dividend ETF, SDY, which looks for companies that have 20-plus years of dividend growth. That's over 120 companies meet that criteria. And that's going to include some technology companies, some financial companies that you're not going to find in that 50-year version. You also have many dividend ETFs that are focused on the dividend yield. And so SDOG, which is an Alps sector dividend dog, ETF, is one of those ETFs. equally weighted across all of the sectors in the broader market, five companies per sector.

You get the benefits of diversification and a higher yield, a higher income for those that are looking for an alternative to bonds in this kind of environment. Dave, how does the sector allocation look for some of your biggest holdings? I see you've got Coca-Cola, Pepsi, Target, but you also have 3M, Stanley Black and Decker, and Leggett and Platts. So a lot of consumer staples in here, but you've also got some global industrials and other cyclicals in there.

So how do you figure out how to kind of allocate by sector in this group? Yeah. So when we think about the sector exposure that investors are going to find in the King's ETF, it's a healthy overweight to consumer staples, industrials, and then utilities.

So it is a mix of your traditionally defensive sectors like a consumer staples and industrials paired with those industrials. So some cyclicality, but again, these are companies that have increased their dividends each and every year for 50 years. And there's only 36 names that make that cut. This ETS starts with the S&P 1500 as its universe, so large, mid and small caps. And so that's only 2% of companies that make this cut. If we look at a larger universe of securities, such as a total market index, you're going to have less than 1%. So the 36 names definitely have healthy defensive exposure. But what I find most interesting is in this ETF, there's no exposure to IT and no exposure

to communication services. So for investors who are looking to reallocate away from those names that have led the market higher this year, as we perhaps are concerned that maybe we are finally seeing the signs of a recession come to bear, particularly with last month's job numbers, something like the dividend monarchs, ETF can be an opportunity for them. Interesting. Interesting in terms of what perhaps even more interesting what you're leaving out in terms of sectors than what you've got in there.

John, kind of speaking of the macro environment, the market has really come to accept higher for longer as the new norm, at least in the short term. So where are we in the economy and are you believer in the soft landing scenario? especially as we look at the last two months of the year, if you can believe it. Yeah, for sure we've seen yields on the 10-year Treasury increase meaningfully. I think the risk premium required in the market has moved up. And with the Fed signaling that rates are going to be higher for longer, I think the market's realizing that's the case and what are the implications in Fed policy

certainly is starting to take effect. effect. Now the question is, are we at the end of this cycle? I think we're very close. Bad economic data is really good for the market. We saw that with the employment numbers. I think that it's important for the market to see an end. Right now, the market is looking at money market funds at 5.5% rates. And the market, financial advisors, investors, are overall being complacent from my perspective. And they're being complacent because, you know, Five and a half is a good yield. Can we stick with that? But longer term, if you miss, say, the 10 good days, best days in the market for the year, you're really going to miss that entire return. So you want to be positioned correctly. And we do believe that equity income is a place that for investors to be allocated to for some portion of their overall portfolio. We believe covered calls make a lot of sense right now. Covered calls are, whether it be QILD, our NASDAQ 100 covered call product, or XYLD, our S&D, our S&D, our S&D, our S&C. P500 product, you're getting paid to sit in the market. And if you expect the market to be

range bound, and we do expect the market to be more range bound for the rest of the year, those are good places to get 12% yields and you're somewhat cushioned on the downside with option premium received. Hmm. Yeah, and 12% is better than 5.5. I know enough about math to know that. Moving on, as AI continues to take the tech and investing worlds by storm, the White House just passed a landmark executive order that aims to put guardrails in place against potential risks to national security and the consumer when it comes to AI. But tech giants like Microsoft and meta continue to underscore robust investments in the space. So what are the broader implications for AI here? John, let's start with you because you run an AI ETF, namely the Global X artificial

intelligence and technology ETF. That's ticker AIQ. The new order President Biden just laid out is pretty ambitious. Do you see it as more of a burden or a boon to AI players in the space and perhaps public adoption more broadly? So I think in the executive order, there's a lot of common sense potential regulation as it relates to AI. You know, I recently went to a conference where I was listening to tech leaders talk about AI, as well as staple type companies and how AI is going to be built into their overall business model. I think AI is very important. It appeared on the scene kind of in a common sense way

to the everyday person just about a year ago. But what you are seeing is every single company in the S&P 500 companies talking about AI and how to effectively use AI. So what you have is kind of, it's bifurcated. You have the magnificent seven who have access to a lot of data, access to a lot of capital, and that's where you see the, you saw the market driven

in the first by those seven names in the first by those seven names in the first half of the year. But what you are going to see is the use of AI into business models. How to improve efficiencies? What we are seeing is a strong CAPEX cycle, a little bit weaker this quarter from last quarter, but still very strong. Labor overall is very tight.

Companies are looking to improve their overall efficiency. And how do we work with AI? And I think that's key. And within two of our ETS, AIQ, which is focused on some of the larger names, has a cap to some of those larger names, at 3% upon a rebalance is a good way to play in a measured way, AI. Also, we have another ETF of bots, BOTZ, robotics and artificial intelligence. And that ETF plays on the CAPEX cycle and efficiency and goes beyond tech.

Todd, do you think that the news out of today releases some of the air in the AI hype train? or do you think it continues into 2024? And apart from some of the more obvious candidates for AI, like big tech, for example, what other sectors do you think actually benefit the most from the current AI boom? So I agree with John that what we're seeing is this is impacting the broader sectors. So you have obviously the technology companies that are benefiting from this energy driver for their overall revenues. But we are seeing healthcare companies as well. We're seeing e-commerce companies. We at VETify running index behind the Think ETF, T-H-N-Q, which is a Robo Global Artificial Intelligence ETF, and you'll get exposure to healthcare, e-commerce companies within that

portfolio as well. This is an ETF that is constructed differently than some of the others in the marketplace. John talked about AIQ. There's also iShares, has an IRBO ETF that has artificial intelligence and robotics as part of it. It's really impacting the broader sector. So I think we're in the early stages. This is going to be, as John mentioned, we're in year one. We're likely to see three, five, seven years and why we're seeing more ETF investors look at these thematic oriented ETFs. Dave, you recently launched a new generative AI ETF in September. Chat is the ticker there. Can you weigh in here on how generative applications could play a role in the next, say, one to seven years? Yeah, no, thank you.

So the chat ETF is focused just on companies involved with generative AI. So it is a more concentrated, narrower type of exposure, but one that we believe is beneficial when we think about the opportunities for the next generation of AI. And what I think is interesting, if you look at some of the most recent earnings reports, whether it's names like Salesforce, or service now, we're actually seeing already generative AI tools being brought at the enterprise level to customers. And this is a theme that I think we are just at the early stages of. There's been folks who have a lot more tech and a lot more experience than me who have come out and said, this is the iPhone moment. This is the next big thing, just like the internet was. And there's a lot of belief in that because it's happening now. Oftentimes we think about themes. They're 10 years in the

future, 20 years in the future. Journal of AI is here now. It was just a year ago where chatGBT really became widely available. Now we know Elon Musk is getting involved most recently with launch of another AI tool. So again, we are at the early stages of something that has application both for enterprises and for consumers, which I think is really neat. So I imagine sitting around Thanksgiving tables in a few weeks. We'll be hearing a lot more about generative AI and how people maybe are using it when they're talking to their friends and family.

Maybe one day can help build a Thanksgiving menu and other ways to make Thanksgiving a little easier on some of us. We'll see. And finally, even in the wake of the Sam Bankman-free trial last week, the Crypto Bulls still on parade with the price of Bitcoin topping 35,000 once again after the SEC decided not to appeal the court ruling on Grace Gale's proposal to convert its Bitcoin trust to an ETF. The markets appear to have fully embraced the idea that a spot Bitcoin ETF is just around the corner. So good news for the Bulls there. Todd, what's your sense of the timeline here? How soon do you expect to get this long-awaited Bitcoin ETF? There are at least a dozen proposals in front of the SEC right now. Is the most likely scenario a broad swath of approvals all at once?

Or do you think there'll be a little bit more piecemeal about it? So we at VETI are expecting that when we are running the exchange conference in February 2024 a few months away, we are going to have a number of products that it will already be trading that are spot Bitcoin ETF focused. We think that the SEC is going to follow what it did with the futures-based Ethereum ETFs that came to market where ProShares and BitWise and Van Eck, among others, all launched products that came to market at the same time. This is, of course, different than what we saw with ProShare's BITO, which came to market just over two years ago. And we're seeing strong interest in that.

And what we're finding is that investors are interested in a spot Bitcoin ETF. They're going to have diversification benefits of that within a broader portfolio. It's just a matter of months probably before we see the first of those ETFs trading. So the finish line is near. John, Global X is one of those applicants filing for a spot Bitcoin ETF. The SEC has managed to postpone a decision up until now. but can you tell us how you see the crypto ecosystem shaping up? Are you expecting approval here?

Sure. I concur with Todd. I think at least by the end of the year, beginning into 2024, we'll likely see numerous Bitcoin spot ETFs on the market. I think that will help institutionalize the overall market, and that's why I believe you are seeing an uptick and price in a Bitcoin as well as Ethereum, because Ethereum will certainly follow not too long after Bitcoin. I think it's a positive for the market and in light of, you know, recent actions in the bit in the crypto space. So we look forward to that. And Dave, I'm assuming you're on the same bandwagon here

as you filed an application for the Round Hill Bitcoin covered call strategy ETF. So how do you think about the environment for crypto ETFs and how does yours differ from some of the other ones that are seeking approval? Yeah, I think we're starting to see the time is coming. The marketplace is ready folks, investors are getting educated on crypto and the opportunity that an ETF can bring in the space. What we filed for is a bit different. It actually combined. It's similar to a covered call strategy on Bitcoin as an asset.

And again, I think what we're starting to see is that it's not just opportunities for ETS when it comes to equities, bonds, commodities. We're now seeing the structure be able to apply in a multitude of different ways, whether that's options income, whether it's in the crypto space. So I think, again, as I said, the time is here. There's going to be more opportunities for investors. They are going to need to do their homework, as noted from my colleagues here at ETF Edge today. There's going to be likely more than one, but investors can be prepared and there's going to be choice for them, which is always a good thing.

And we can help them a little bit with their homework now because speaking of covered calls, ETFs. Todd, this has been a strategy that's gained a lot of traction this year in particular. Can you help explain how it works and unpack the recent surge in popularity? Yeah, so we've seen covered call ETFs that provide, in most cases, equity exposure to the broader markets, and then they use calls to be able to, they sell calls to be able to provide some income, and that provides some downside protection. So the J.P. Morgan Equity Premium Income, JEPI, is the most popular of the actively managed ETFs in general, And it has seen strong demand.

We've seen strong interest from Global X suite of products that John talked about, QYLD and XYLD. We've seen new firms enter the marketplace. Goldman Sachs launched a product earlier about a month ago. And then Morgan Stanley Lawrence and ETF PAPI, Poppy, just a few weeks ago. And we were talking about those two ETFs at the VETIFI Income Strategy Symposium. We're seeing really strong advisor interest in these ETFs. And I think heading into 2024, it's only going to increase. Yeah, just it's a strategy.

It sounds like for an uncertain future where you don't know what the downside could look like. That's it for today. I'm Leslie Picker filling in for Bob Fassani. Thank you for listening and make sure you tune in next week. In the meantime, you can tweet up your questions or topic ideas at EPF Edge, CNBC. InvescoQQQQ believes new innovations create new opportunities, create new opportunities. Become an agent of innovation. Invesco QQQ, Invesco Distributors, Inc.