ETF Edge - DeepSeek disrupts AI trade as NASDAQ 100 celebrates 40 years 1/27/25

Episode Date: January 27, 2025

China’s DeepSeek AI throws U.S. tech stocks into a tailspin just as the NASDAQ 100 – home to many of those names – celebrates its 40th anniversary. What will the next 40 years look like for that index and what could the next big tech leader be? We’ll find out.              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 Invesco QQQ, proud provider of access to innovation for the last 25 years. Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you are looking to learn the latest insights on all things, exchange, traded funds, you are in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors. I am your host, Bob Pisani. The NASDAQ 100 is now 40 years old. What will the next 40 years look like as technology becomes an ever larger leader of markets

and the economy. Here is my conversation with Nelson Griggs. He's the president of NASDAQ and with Todd Sone, head of ETF for Stategis. Nelson, NASDAQ 100 is synonymous with tech, but today we have this big news story, this China firm, Deep Seek, reportedly launching an AI model at considerably less cost than the U.S. models. You're the keeper of the NASDAQ 100. What does this mean for that? What does it mean for Nvidia? What does it mean for Microsoft? What is the whole group? Well, a couple things I'll take a step back. So the NASG 100, again, 40 years averaging, averaging, 14.25% compounded yearly returns. So it has a great long-term track record.

It's 60% technology, 20% consumer, the rest healthcare and industrials. So it is a little more diversified than you would normally think. But if you do look at the new story of the day, you know, there's a lot of companies that are attached to AI and the NAC100Rshore. So it is seen obviously a downturn today.

But those companies are the innovators of the world that are gonna have to get through this moment. And you know, I think you look at their track record and they've got a great story of doing that and we'll see how they all adapt. Yeah, you know, there's all this talk about lower capital expenditures. Isn't lower capital expenditures good for the AI story? I mean, lower capital expenditures make it more accessible and faster and easier for other

companies to without AI. At least that's the way I would look at it. Yeah, yeah. It'll be a story to play out an individual company basis because some company will benefit from a lower cost of capital when they think about the R&D efforts and and others that are more directly in it. We'll have to, you know, again, they're innovative companies that we, We've seen them, you know, get through any sort of difficult times over the years.

They've shown they can do that. Todd, let me bring in you. You're, I often go to you. You're my resident ETF guru on all things. The NASDAQ 100 is one of the most successful indexes of all time. Most people don't know it launched 40 years ago. The triple Q NASDAQ, NASDAQ, ETF launched in 1999. Prior to that, people asked me all the time.

You really couldn't invest in the NASDAQ 100. You had NASDAQ 100 futures, right? But that wasn't easy for an average person invested in. So essentially, QQQ's launched in 1999, as I recall. There is an astonishing universe of products around the NASDAQ 100 ETFs, 94 of them, Nelson told us about earlier. Why is this product so successful? And it didn't just happen this year. This was not 2023.

It's been successful for a long time. When you think about the NASDAQ 100, I would put it on the Mount Rushmore of indices, right? performance and the ecosystem, the other measurements of that. The performance has been fantastic, and now because it's been so successful, you have issuers out there in the ETF space wanting to take advantage of the ecosystem, right, of the constituents involved in that. So I can get plain vanilla, I can get equal weight if I'm worried about concentration risk, I can go super concentrated now and just get the top of the cues, or I can sell

covered calls on it, right? There's so many different ways to get the power of this index, and as we always like to say, ETFs are about access, right? So the Q's gave you access to NASMNN-HU-100, and now the EUTF ecosystem gives you access to all these different strategies involving those constituents. Go ahead.

Tell us your product here. I mean, that's a very good introduction, I think that's right. Amazing introduction, but we have an incredible team here that we are investing a lot more than ever because it is a partnership. So companies come to us, firms come to us, whether it's Invesco, First Trust, great partners of ours,

or we go to them and bring ideas, and that team helps construct all these wonderful products. And I think the demand we're seeing obviously saw heavy demand in retail but now it's branching out into wealth channels, it's branched out institutional insurance products and as you mentioned earlier about global so we still think we're in the pretty early any years of what the index can become. There is an astonishing amount of derivative products and leverage products around this so I'm looking today at the

biggest volume ETFs that are out there and I see things like the pro shares triple Q3x that means you get three times If it's up two times, you get 6%. 2%, you get 6%. And the pro-share's Ultra Pro short triple Q, which is three times inverse here. Both of them are among the heaviest volume ETF. I think they're one and two,

and maybe the semiconductor ETF. So there's just one simple product, leverage at inverse products, and there's dozens of others that are around them at this point. I even think more impressive, right? So the Q's are a top five ETF in terms of assets. The mini QQQQQQQM, right slightly cheaper version is the 40th largest

ETF and it just came into existence less than a decade ago maybe five years ago so that just shows you how in demand this index is right so you can go for the liquidity liquidity vehicle that is as triple Q's or if you want say the more advisor-friendly option QQQQM and then the leverage products just speak to how popular this is people want exposure to this especially if you get a market shakeout kind of like what we're seeing today I would guess tactical folks are going to start piling into the leverage product at some point, especially once conditions really washed out within the market. Yeah, so we also have the latest spin-off, the Investco top QQQ. This is sort of the largest

names in the NASDAQ-100. The symbol is QBIG, QBIG folks. And of course, that didn't launch, that launched only a short while. That's part of this theme of super concentration, right? So you have single-stock leverage ETFs, and now you have top of the index ETFs. I think it is curious. Maybe we're going a little overboard in terms of skewing away from diversification. Maybe I want the healthcare and industrial exposure that the cues offer, as opposed to saying go super overweight into that top eight to ten names.

But again, it's all about access. Where do you pull in? I know you're not an index strategist. You run NASDAQ. But this concentration story is an interesting question. I personally don't worry about it that much because if you have a broad index like a NASDAQ 100 or even an S&P 500, you know, some stocks are going to be more valuable. That's the market talking.

But is there risk here in having the top 10 S&P companies or 38% of the weight? Is there worried at all? As you said about it's the market talking. And I think if an investor said that's all on buying, yeah, there's going to be more at risk for that person's portfolio. But I think there's a lot of education in the marketplace today. If you look at Go to Investco's website or all the other providers we work with, they do an enormous amount of education.

So I think that's what, you know, the investors, they would not put these products in market if they were not in demand. So that's the first step. And then if they don't get the traction, you know, they know to shut these things down. So I think there's, you know, it's individual call and making sure they're diversified, not a company saying that let's go buy one product. And of course, people keep telling me, we're only giving people what they want, Bob. So now we have these whole spate of single stock ETF products.

And there's an Nvidia leveraged ETF product. It's got huge volume today. There's NASDAQ leverage products, 100 leverage products. Do, on days like today, that's an awful. lot of stuff to move around here and for some of this is synthetic but does any of this pose any systemic threat to the system remember what happened a few years ago with the volatility I don't know about systemic because there's still a small slice of the overall ETF spectrum their usage rate is certainly

climbing right in terms of the dollar volume but the amount of dollars on brokers books is microscopic compared to just say the actual QQQ or any of other passive vanilla products that are out there so I'm not terribly worried about it, but you might see a story here or there where a wrong bet was placed and a firm is going to struggle from now on. Yeah. They'll have to repair themselves. What do you think the market leaders are going to be a couple years from now?

And again, I want to put you on the spot. I know you're not a tech analyst, but I'm going to give you a chance to talk about the NASDAQ, the junior ETFs, the QQQQJ. Now they launched this product about four years ago. I actually had you guys on at the time. That's the next gen 100 ones. I call it the NASDAQ 200. It's essentially the 100 non-financial stocks

that are next eligible for inclusion in the NASDAQ 100. So it's not the 100, it's the 100 to 200 that are out there. And what's interesting when you look at these is it's not just tech stocks. Like United Airlines is the biggest holding, I think. Then there's Anilm Pharma tractor supply. eBay is a big holding at this point. I guess people want to know what's the next Nvidia out there. And I know it's hard to figure that out.

But, you know, you try to do that here. to a certain extent. I think those are companies. If you go back and look at the, when NASC 100 was started, the median market cap was $500 million. Today it's $76 billion. So I think you look at the size of the companies in the next 100. They're still very large companies. So I think you just, you know, investors kind of want to know what is next. So next gen, I think we look at companies that are on a growth path. And what is next? That's anyone's guess. But obviously, who's taking advantage of the latest technologies. I think I mentioned before the R&D, if it's dollar percentage that goes for the Q's spend is just enormous. So these are your these are up-and-coming

companies. You also got it covered in terms of rotation too because people are worried about okay so this tech is too much out there. There's actually a NASDAQ 100 equal weighted ETF that's out there they got everything folks QQQQ so QQEW is the NASDAQ 100 equal weight. So it weights all hundred of them on an equal weight basis there and well that's still heavy tech concentration even there, but it certainly spreads it out more. It's just, you know, it's going to be spread out the holding. Yeah, the amount that's helped. Yeah, but the money in that is much smaller though.

Yeah, it's a way to dial back concentration risk. And it's probably working out today, I'd say. Equal weight indices or having a better day just because Nvidia took a hit right off of the AI news. I want to ask you about the ETF market while we have you here. We don't get Nelson here that often, so I want to pick your brains. This is one of the many things in your portfolio. to make sure the NASDAQ ETF business continues to do as well, do well.

It seems to me there's two big trends here. One is the cryptocurrency trend. The cryptocurrency ETF's biggest, I mean, I don't know if it's the most successful launch ever, but 150 billion in assets in one year, it's pretty darn good. You have iBit, which is the biggest one out there, is lists on NASDAQ, right? The BlackRock ETF. Give us some riff on that, if you will. And then the other trend I see is sort of option-based ETFs in general,

But talk about crypto. You know, we're still obviously big proponents of the active market. So I think there's still a lot more money in active assets, but more new money going into, you know, ETF assets. That's very clear, too, I have every three dollars moving in that direction. So we just continue to see demand for ETS being built by NASDAQ. It's not just NASDAQ, though. There's other big providers out there.

So I just think we are to see this trend of passive. But you need to have active to, you know, marry that so you don't end up being too concentrated just in active. Because I think we're in a unique moment in time to say how does active have a, continue to have a role. So you do have moments, a whole sector gets developed around something like digital or crypto, and now potentially having more clarity on the rules of what it actually is going to be. Do you anticipate we will? I mean, we keep waiting for this grand piece of legislation for years now that it seems more real now, the possibility. It feels as real as ever.

So just being over it at the World Economic Forum, there's a lot of the players in the digital space. but then you start talking and talk of the institutional side, the bank saying, well, if there's rule clarity, you know, we're going to be more active in the space. So I think it certainly feels like to us that a mandate from the top saying there's going to be more clarity is coming. And that we'll say. And of course, this means if this happens, a whole buildout of the crypto universe like a buildout we're seeing of the equity universe. I think that's already happening based on some of the recent filings we've seen. Solana's coming. Yeah. Heaven knows how many other coins are coming.

I think the interesting thing will be you have Bitcoin is to crypto as the QQQ right is to technology type stocks and I think that's always how it's going to be Bitcoin will be the biggest the Q's will be the biggest and then you're going to get all these supplementary products there that some of them will make a living for issuers and some will disappear over time because they weren't as successful yeah and the other part here is the options of the continuous explosion of the options business where does that does that ever and I mean a lot of this really picked up during COVID when all of

sudden younger people it seems staying at home decided to learn about how to trade options and they seem to have a taste for this yeah well it's depending on the kind of option could be casino-esque right you know you're you're living by 24 hours or you can actually use options to create a sophisticated risk-managed strategy whether you want to sell calls by puts whatever it might be and that's all wrapped up in the ETFs now and so with with crypto you can now build out a risk management say all right I want to gain some upside but I would like income So I'm going to buy a covered call crypto ETF, right?

Just to limit any volatility and keep the weekly or monthly income streams coming. So this is all sort of important stuff that's going to keep happening via NASDAQ. Yeah. I want to ask about the IPO market. This is another one of Nelson's pieces of a portfolio that you have to manage on top of the ETFs. You also manage a substantial IPO business here at the NASDAQ. We've had three subpar years. I've been covering IPOs since 1997, so 2027.

I don't remember a worse three years in terms of total amount of capital raised. It was below 50 billion again for three years. You can't because there hasn't been. Yeah, I don't think there has been. Give me a reason to be optimistic in 2025. Sure. I think you look at starting from 23, it was probably one of the worst years we've had in a long time. 24 was just a bit better. And at the same time, you had an amazing market backdrop with strong index performances, right? But it was pretty heavily weighted, but started to broaden out last year near the end of the year. And the deals went out to did fairly well, did very well. So we have a track record now and 25, if you look at three straight years of having, you know, limited capital raised in the public markets, there's

certainly an enormous pipeline and I think it's going to be another kind of going from a really tough 23, a better 24, now a good 25, not a floodgates, but I do think we're starting to pick up more of the back half the year. But even the first half of years, we're starting to see some activity already. How do you deal with this private equity problem? I don't mean from the EETF point of view. I'm just me. We've got so many tech companies that seem to be very happy sitting there, get funding to stay private. What will get them incentivize to go to go public? I hear this endless whining. Well, there's too many regulations. We don't need to go public. And number two, we're getting a ton of money. You know, look what happened to data bricks.

They basically just said, we've just raised a whole bunch of new money. They don't look like they're going public anytime soon. That was a big candidate. How do we get people these companies incentivize to go public. Yeah, yeah, and it's there is a massive I guess convergence of public and private because even in the private space you can now have access to more liquidity but if you want deep sustained liquidity you need to go public so at some point you know companies do have on the road map to go public I always kind of say the pendulum can kind of swing one way or the other it is swung to privates but as you know you look at just the markets kind

of coming back you'll start doing better valuation discounts kind of compress a bit then the public markets get healthy again so I think I don't think we're in this sustained hey this has changed forever but certainly we do see more activity in the private space we have in and more innovation there too in terms of how companies can get liquidity, how they raise money. So I do think we have to look at how do you broaden access to the private markets is probably your next big trend. Private wealth, those other areas. So we see this already. We look at the ETF industry, tying itself into pretzels, trying to figure out how to access private equity and private credit.

We've seen some deals out there being floated that are a little bit on the questionable side about how are you going to have a fundamental. illiquid product trade in an ETF wrapper. Are they going to be able to crack this nut? Do we even want them to crack this nut? I'm not terribly sure you do without further build out of private secondary markets until you can get clear information on what the valuable company is, what the price of it is. I can't go on the internet right now. I can get five different quotes on a specific private company, and I don't think that's acceptable.

And the dispersion, what I mean, is extreme, right? If they're tightly knit in terms of a bit of a ass, fine. But when I start to see $20-type differences, that's not exactly the most helpful thing. NASDAQ one of the most successful private markets operations out there. It's transparency, it's data, and then more efficient ways using technology, you get liquidity.

So I think we're still in the early days of that. But it is certainly, if you go back, I don't know, seven, eight years ago when it started to develop, it is certainly to come a long way. It's, you know, marks a lot of development. You know what I'm saying. You're a, I mean, I know you run NASDAQ and you're a business guy, but I'm a public markets guy.

Isn't it better for companies to be public than them getting squeezed into these private markets and all of our viewers trying to figure out how do I get in on this? Because I'm not a qualified investor or whatever. I mean, that's what frustrates me. I want more companies to be public. In the 90s, we had companies going public

that they argued were too young and they were too volatile. Now we have companies that are geriatric that are out there, have been 15 years sitting there private, and they come public, And they're already middle-aged companies. That's the other side. That's worse than going too young. We're on the same page here.

We love to see companies go public more often. We'd like to see them look at the public markets as an opportunity to truly thrive. I do think when you think about the regulatory pendulum, it has swung a bit too far in terms of over-regulatory aspects of the public marketplace. And there's an opportunity now to say, what are things around proxy access,

the whole proxy process, the different rules that come out of the age, SEC can that be done in a framework that still protects investors it doesn't overburdened companies so I think that's an opportunity and and you know very hopeful that this this is a moment of time to do that we advocate for companies all the time at Nasak to do that let's hope it is now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs this is the markets 102 portion of the podcast Todd's own head of

ETFs for Stiegis continues with us now you know we're on a day where tech is taking a big hit today on some words, some news out of China here. But other parts of the market are doing fine at this point. Does this argue for the value of a more diversified portfolio and a more diversified ETF portfolio? After a year or so of ultra concentration and forgetting about 490 other companies within a S&P 500 type index, diversification is making a comeback today. The last side check, you had equal aid ETFs, actually were up or at least

close to being up on the day, whereas Big Cap Tech was down 3% to 5% depending on where you look. So even Europe, UTFs were up through the middle of afternoon. So this does argue for at least having some sort of diversification. Is it sustainable? We'll see. Or does the rest of the market get dragged down? But for now, big tech takes a hit, but the rest of the market, the bench kind of holds up here. Well, this is a very good example of behavioral economics, because actually there has been rotation

since the beginning of the year. Energy's doing better. Materials, industrial is doing better. The only thing that's kind of lagging has been consumer staple. So this has already been happening. But the long-term problem with this is what the behavioral economist is called recency bias. That is, people who are a knee-jerk used to having tech in a big way who want to trade actively, as opposed to long-term investors, they want to own the magnificent seven stocks. And it's very hard to get them off of that because they have a recency bias.

They think because the VDVITI was up 170 percent. last year, it's supposed to be up 170% this year. And you tell them this. And intellectually, they know that's probably not going to happen, but yet it's such a powerful bias, this recency bias, and this overconfidence, well, I had in video, I made a bunch of money, therefore I can't be wrong. That's a gambler's fallacy.

So you know what I'm saying? It's hard to wean people off of this idea that this doesn't go on forever. Yeah. Here's the perfect example. The Kansas City Chiefs are in the Super Bowl again. And as much as you may want to fade the Kansas City Chiefs or fade big tech, it's really hard to do that. And I think there's this kind of, as you mentioned with gambling, like if you stick with what's working, but sometimes trends change. And maybe you need to start looking elsewhere for where there's more opportunity that's more timely.

Maybe it's a little more reasonable evaluation perspective, right? And that's going to be all the stuff that's away from technology. Well, that's why you diversify, right? Isn't that the whole point? People keep saying this over and over again until we're all broken records. and yet people don't quite get the message. It hasn't mattered in almost 15 years diversifying. You've just had to own large-cap growth throughout the QE era,

and even to some extent, outside of 2022 for this whole cycle as well. Large-cap growth has been the place to be. I'm sure it will be the place to be in the long run, but for now, I do think it makes sense to have some other type of exposure, whether that's through value, through real assets, right? There's plenty of real asset ETFs out there. Inflation protection, need be. Wouldn't it be nice of small?

cap value actually I've had a year I mean we know the academic research going back for 50 years says that in the long run small cap outperforms big cap value outperforms growth but none of that's happened in 15 years things have certainly changed whether the market structure or the way interest rates were suppressed for so long so it's hard to measure that against prior history but at the same time I can look around and say okay where is there less tech exposure and it's going to be overseas as much as that has not worked either for a long time It's seemingly, and I think it's very out of consensus, too. There's not been a ton of flows there recently.

So that's interesting for me to look at Europe and Japan, develop markets like that. Speaking of diversified, what happened to crypto? Crypto's down three or four percent today, and that's supposed to be a diversifier. But it turns out, if you watch a lot of the stuff, crypto often tends to trade like a speculative tech, essentially, like Kathy Wood Arc Fund, for example. And so I wonder how diversified it actually is to argue I should own Bitcoin as a diversifier. I look at crypto as a, it's tough to say. I mean, I think I can make the case of diversifier, but it's also a risk on vehicle to me.

So the whole market were to go risk off. I'm not sure I would have crypto exposure then if I'm an active player. I also think on the product standpoint, things got a little bit ahead of themselves the last two weeks, right, in terms of the filings we're seeing out there from the crypto space. We're talking about stuff that there's not even a real market. for it. The crypto universe is now convinced there's going to be broad legislation that's going to allow anybody to do anything, essentially. These coins are essentially going to be declared to be commodities and not securities, which puzzles me a little bit, because some of them are, obviously.

But they're building out the crypto options universe. The same thing they did with equities, they're now building out in the crypto. They're creating a parallel universe, essentially. Which I think is great, although it's going to really be buyer be one. where you really have to read the ingredients of what you're digesting in a portfolio. If you take a supplement, you want to know what's in the supplement, right? And that's going to be the same thing. But you're at the realm of anything. If you get, you know, Elon Musk declaring that XYZ coin suddenly is popular, all of a sudden it's there.

When he says it's not, then you're at, there's nothing fundamental going on. A lot of these will disappear over time. And the most, the largest, the most liquid one, Bitcoin or Ethereum, those will hang around. We don't know what the performance will be, but all these... So people will argue own crypto indexes that own 10, 12, you know... Yeah, I'm a fan of that, at least, having some... Maybe just like stocks, right? We don't know where the next Nvidia comes from.

We don't know where the next big crypto comes from. Whatever advancement that is. And so if you have it in a 10 or 20 coin fund, maybe that makes sense. But buying one of the random ones, I don't know about that. All right. Todd, always a pleasure talking to you. Thanks for coming down to the NASDAQ today and be in with it. That does it for ETF Edge.

of Edge, the podcast. Thanks for listening. Join us again next week or remember you can see all the shows. ETFEdge.cc.com. How does InvescoQQQ-Q-Rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investco distributors, Inc.