ETF Edge - Dividend, Commodity & Specialty ETF Inflows

Episode Date: February 7, 2022

CNBC's Bob Pisani spoke with WisdomTree Asset Management global head of research Jeremy Schwartz, Amplify ETFs founder and CEO Christian Magoon and ETF Action founding partner Mike Akins. They unpacked the action in value and specialty ETFs, shared their forecasts for international investing in 2022 and analyzed the recent market rotation. In the 'Markets 102' portion of the podcast, Bob continues the conversation with ETF Action founding partner Mike Akins. 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 Pisani. Today on the show, we'll discuss the big rotation out of thematic tech, into value, energy, commodities, dividends, anything, inflation theme.

Any ETF with the title, inflation has inflows right now. Here's my conversation with Jeremy Schwartz, the global head of research at Wisdom Tree Asset Management. Christian Magoon is the founder and CEO of Amplify ETFs. Mike Akins is the founding partner of ETF action. Jeremy, let's start with the thematic tech.

We've seen outflows in January in many thematic tech ETFs. You run one of the biggest thematic tech ETFs. That's the cloud computing ETF, CLD is the symbol, had a billion and a half in assets a year ago, now it's under a billion. Sort of characterized for us, this is the big question I keep getting, the flows in and out of thematic tech right now. Are we anywhere near a bottom, or what are you seeing? Well, and what's interesting to see, like, where is the market rotation happened?

You know, we do believe in the inflation theme. We do believe the Fed's hiking rates aggressively. So as we continue the conversation, that's a number one theme for us. So it's not surprising the big sell-off you've had in the biggest gross stocks. It's amazing, actually, something like the S&P is only 7% from its all-time highs, and you've got the clouds down. They've already taken the head. They're down a third from their highs. And so, you know, they were the earliest to the bear market. Now, the question is, do they get beating up too much? You know, they are the fastest growing stocks. They're very different than the large-cap fangs, which have been holding up the market pretty well despite some of the, a few of their recent troubles. And so I think you got to see,

if some of that growth sell-off is, is, turns around, I think the cloud stocks would be, you know, prime positioned. Yeah. Same question for you, Kristen. You run the transformational data sharing ETF. The symbol there is BLOK. You know, everything blockchain, essentially. Your sense of investor flows in that space right now? Yeah, it's really interesting, Bob. We've actually seen flows inflows to block this year. I think there's been people buying the dip. Certainly, a block is having a nice bounce today as well as cryptocurrencies. It's a fund that's fairly sensitive to the price of Bitcoin. We've seen some inflows into our battery ETF, BATT, kind of, I think, due to legislation issues. You know, we're about 50 percent thematic, 50 percent growth or income and hedged equity.

we've seen more flows into our income and hedged equity than we have into our thematic growth side. So definitely seeing a rotation, but there are a few bright spots in this thematic growth area. All right. I want to move on to where the money is going rather than where the money is going out of. So Mike, investors seem to be reallocating their portfolios. Outflows, growth, thematic tech, inflows, value, energy, dividend, inflation theme, commodities. Give us a sense of what you're seeing. You're sort of watched the entire ETF universe. Yeah, I think definitely there's an inflation narrative playing throughout the market.

You're seeing it in ETF flows. You know, on the thematic side of things, flows have stayed plateaued. We haven't seen a lot of inflows, but outflows have not been crazy yet. So it's good to see the investors are staying the course there. But really broadly speaking, I look at the sector data, and you can see big shifts out of technology, comm services, into energy, into financials. You know, it's unique about that specifically,

if you look at the combination of all sector and industry, U.S. sector, industry, U.S. U.S. sector, industry, U.S. U.S. U.S. U.S. U.S.S. U.S.S. and U.S.S.S.S.S. 50% of total sector and industry ETF being energy. So you can really see that rotation playing out, not just in net flows, but how it relates to the broader market, in allocations.

Yeah, well, there's no surprise about the inflows and energy with oil at $90, a seven-year high. That sort of makes some sense. Now, Jeremy, Wisdom Tree has several products that fit into this reallocation strategy. You're very strong in dividend ETFs. You've got a great lineup there, starting with the quality dividend growth fund, DGRW there. Now, you're looking for companies that are growing earnings as well as with some growth characteristics. Tell us about this fund right now. Yeah, that's around a $7 billion ETF.

It's been the flagship for how do you find companies that can grow dividends into the future? And a lot of companies just look backwards to say, have you growing your dividend for the last 20 years or 10 years or even five years now? We were the first firm back in 2013 saying, can you look forward using accommodation of quality metrics, return on equity, return on assets? I call those your Warren Buffett quality screens. Buffett says I like high return equity companies that don't use a lot of debt. And that's what we packaged in that screen combined with earnings growth expectations from a dividend, which is a more value-type universe. It's a very interesting combination today. It's been one of the best performers in the large blend category the last three months because of that defensive rotation.

It's for top 2% of all large blend funds because of that dividend screen, but good quality earnings that are supporting that dividend. Yeah, I would note this is that classic situation where you're growing, not necessarily. having a big dividend. So Apple and Microsoft don't necessarily have large dividends, but they are growing the dividend, which is why they show up here, along with the traditional, you know, Procter and Gamble type in Johnson and Johnson names. So, Jeremy, keeping on this, commodity ETFs, we're also seeing inflows in. You have an enhanced commodity strategy fund that's out there as well, symbol GCC. That's a mix of agriculture, precious metal, livestock, industrials, metals in general. Tell us about that, too.

If you look at, we have 75 ETS in the U.S. That's the top performing to start 2022, up 7% this morning. And what it tells you is, you know, there is this fear of inflation. Rates are heading up from the Fed. What do you do for a standard 60-40 portfolio allocation? Commodities in inflation-sensitive places are one of those diversifiers. We still think inflation's here with us. And so what do you do if you think stocks can be hit by rising inflation?

and a rising bond rate, the bonds don't provide as much diversifications as they used to. Inflation, sense of assets like commodities are good portfolio hedge, and we've taken a diversified approach. An interesting thing is, historically, it cost you a lot to roll futures. It cost you like 5% a year for two and a half decades because the futures curve. That's changed where you're now getting paid for to 5% in these diversified commodity baskets. Well, that's because things have changed, Mike.

It seems like you can't lose with the commodities at the moment here. So the futures curves and commodities, a lot of them are in backwardation right now. The front month prices are higher than future prices farther out. So what's that telling us and what's the implication for owning a commodity ETF? Well, it's significantly positive is the short answer. But I think to Jeremy's point, we've seen broad-based commodity ETFs that include GCC and others go from $10 billion in AUM, a year ago to 20 billion today and no sign of slowing down from a flows perspective.

But obviously, all of these strategies have unique structures, and it's something to really note when you talk about backwardation and contango, you know, the environment is much friendly for those future role strategies right now. And it's a tailwind in an area of the market that's already hot. So I think we'll see continued flows into this space and, you know, rightfully so, in our opinion of the ETF action.

Yeah. You know, it seems like, Christian, any ETF with the title inflation, that's all you've got to put inflation in the world, in the word, it's got inflows right now. You just launched an inflation fighter ETF. The symbol is I-W-I-N. And again, this is a very interesting mix. I'm curious about how you put this together. Stocks, gold, Bitcoin, commodities.

I know the stated goal is not just to provide. a capital appreciation, but to do it in inflation-adjusted terms. Explain that to us, and how did you get this curious mix together? Yeah, so if you look at just the plain commodity ETFs, there's some benefits in owning that, and certainly there are a lot of people who will want to own these futures-based ETFs. What we wanted to do is create kind of a hybrid approach where you have inflation-sensitive stocks that are exposed to commodities. You know, there isn't a land futures contract out there, but you can buy land development companies. You can buy commodity reits that have some of the benefits of reits and land ownership, but also the exposure

to commodities. You can buy asset miners, gold miners, copper miners, et cetera. We want to combine those with exposure to commodity futures, corn and other agriculture, energy, gold, and even Bitcoin. So we wanted to create a diversify. basket where you could own a percentage of your portfolio to fight against inflation in hedge, not necessarily take the full bet on commodities and backwardation and contango, but at the same time not ignore the equity space as well, because many of those companies are quite sensitive to inflation if you get that selection right. You know, Jeremy, there's a lot of interest in, I don't know what you would call them,

specialty products, sort of mix and match assets. They used to be considered fairly exotic. They're not so much anymore. You have the Wisdom Tree Efficient Core ETF, NTXS. That's an actively managed portfolio of equities and treasury futures contract, leverage to, I think it's a 60-40 portfolio. Again, a little bit on the exotic side, but it's getting interest. What's the idea behind this product?

Yeah, this fund is approaching a billion dollars. We launched two versions, international emerging market. which are NTSI and NTSE that have also scaled very quickly. So there's probably about a billion and a half billion point one in the combined family. And the idea is getting more for your money. So we get capital efficient is what a fishing core stands for that for every dollar, you really get a dollar 50 of exposure of 90 cents of equities and 60 cents of bond futures. And when you think about the challenges for inflation sensitive assets like commodities, like gold,

Where do you create room in them in portfolios? And we've heard a lot for the diversifiers that they had below par expected return for the last decade. People couldn't sell bonds for them. They didn't want to give up the equity upside. And so these funds are designed so that you can put two-thirds of your capital and get that same 60-40. And then you have a third of your capital or either keeping cash for spending or to buy commodities or gold or any other diversifier like managed futures that might hedge some of, what's going on in the market risk. Jeremy, do you have problems explaining this to people?

I mean, are you selling most of these funds to institutional people or people who are professional money managers? I mean, the average retail investor is going to have a little bit of a hard time getting their head around some of these specialty products. I wonder if selling them is a problem or whether it's really just professionals that are putting it in portfolios. You know what, Bob, which is fascinating about this fund, is this was a product of the people born on Twitter

and it was actually driven by retail, I think. I think the early investors were retail, that people give the retail some more credit, that they are able to understand these things and how it fits in portfolios. And actually later, after retail was some of the early investors, then you saw some large RIAs, some other institutions. It is a well-known strategy in the RIA world, institutional world.

And so I think that professional investor came on after retail, but I don't think it's that hard to understand. I think people did get the use case, even though it's a little bit more sophisticated than your traditional standard 60-40 allocation. Yeah, and if you don't want fixed-rate bonds and nobody seems to want them, Jeremy, there's a floating-rate bonds. And you've got a floating-rate Treasury Fund, USFR, I believe it is, U.S. Frank Robert. And what's in this one here? So this is a – I think this is the fixed income fund for the next two years. when you think about there was a lot of uncertainty over what's happening in stock world,

the Fed has communicated they're on a pack to hiking rates. During the last rate hike cycle, the floating rate treasury was the highest yielding treasury by the end of the cycle. Our view is that's going to happen again. And so USFR is the way to play the Fed rate hikes. The U.S. floating rate treasury auction this week was already up 29 basis points ahead of the Fed funds target. Those floating rate treasures are already reflecting the Fed heights. And so USFR is really the best way to play the Fed. And what do they own in terms of floating rate treasuries?

Make sure people understand what's going on here when you buy them. Sure. A floating rate treasury has the shortest duration of any treasury security. The rates reset every week with the latest auctions. And so it's just a U.S. Treasury security. I mean, it is a government-issued security. They issued them in 2014. It was the first new government security after Tips were issued in 97. And so it's just a standard government bond, but instead of a fixed rate, it's a floating rate that gets reset every week.

So it's a pretty standard government security. Yeah. Now, Christian, you have one of my favorite titles for an ETF. You have the Black Swan ETF, the symbol is Swan, S-W-A-N, and you have a Q-V-V-V-V-V-S-W-A-N. But the Swan tracks an index, speaking of specialty products, long-dated options, as I recall, on an S&P-500 ETF. And you also have U.S. Treasuries with an average of a 10-year maturity. So how do this work? You get some equity exposure through options, but you also have some downside risk.

That's the theory, right? That's right. It's kind of the classic Black Swan Barbell approach, where you have a risk-off asset like treasuries, and then you have a risk-on asset like the S&P or NASDAQ. And what this allows you to do is get about anywhere from 50 to 70% of the return of the relative index, whether that's the NASDAQ or the SMP, but have considerable always-on hedged exposure to the market. So a quick example would be the decline that we saw in COVID, where the S&P was off over 30 percent in, you know, several days. Black Swan was down just

9 percent during that time. We've seen more interest in this just because of the geopolitical tension. Certainly people aren't making tactical calls really on Treasury exposure here, but we know when market volatility increases, when there is a geopolitical event, investors go risk off, they focus on U.S. Treasuries. Treasuries then have a negative correlation to the equity market can be important part of a hedged portfolio exposure. Should we see disruptive events or black swan events? Yeah. You know, Mike, speaking of trends, another thing that keeps coming up, is a lot of interest in international investing over U.S. investing.

Now, the U.S. has outperformed Europe and most of Asia for more than a decade. That's been pretty clear, particularly the Europe part of this. What's the theory behind international investing in 2022? Why does it keep coming up when I talk to ETF people? Well, I think, broadly speaking, you know, the environment has changed, right? We've gone from an environment where everything was tech-related, growth-related, and the U.S. stood to stand best from that, and it did. And as a result, you saw a flows significantly tilt to the U.S.

year after year after year for the last decade. And you add that up, and it's quite amazing. If you look at $5.5 trillion in equity ETF assets here in the U.S., $4.2 trillion of that is in U.S. focus-only ATF. So 75% of all equity ETFs in U.S. listed funds is in U.S. only names, whereas if you look at AQI as a proxy, only 58% is in U.S. So from an allocation perspective, there's been a huge migration into U.S. as favor. And now we're already seeing early evidence of that trend starting to change. So like here today, you've got $55 billion and flows into equity ETFs.

And almost half of that has gone to funds focused on companies outside of the U.S. So I think it's just a natural fit into the broader story of growth falling out of favor. A lot of these international markets are better situated with higher allocations to cyclicals. Valuations we know is a big discussion right now. And international, DEVX, U.S. emerging are historical discounts to the U.S. from that perspective. So pretty much there's a lot of factors driving this, but it's important to know it's got to go a long ways to get back to even somewhat close to even. Right. That's a problem. But Jeremy, a wisdom tree partially got famous on its hedged, currency hedged ETFs years ago. The HEDJ, as I recalled, hedged currency hedge Japan. You have a currency hedged Europe one. We haven't brought that up at all,

but what kind of flows are you seeing in those or interest in those? For sure. I mean, it's interesting. The dollar has surprised a lot of people. I think a lot of it ties to the Fed. And we had seen some chunky inflows, chunky, you know, sort of a little bit of rotation in the last few months. Japan started to see a lot of interest in the value rotation.

A story I'm watching closely. You saw Buffett buys Japan a few years, maybe 18 months ago. He bought a number of the Japanese trading companies. He did down a currency hedge gold. basis, by the way. And I think there's some rumors that he's buying more Japan right now. So I'll be focused on that story. But we're seeing that rotation to international, rotation to value, even some of our international value baskets are outperforming U.S. value now. And so I do see that in performance right now. All right. We're going to have to leave it right there. And folks,

this is the best brain trust you can get out there. This is where the money's going. These are the guys who are following it. 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. Today we'll be continuing the conversation with Mike Akins from ETF action. Mike, thanks for sticking around and chatting a little

bit longer. I want to talk to you about whether you think there is really some long-term, by long-term, me a secular shift in investments these days. We obviously know that growth has outperformed value

for a long time, particularly the last five, six, seven years, but really in the last decade. And I guess the question here is, and I know this is a market call, not an ETF call, but is this a part of a real long-term trend? So people who have owned growth funds since, say, the financial crisis ended and the Federal Reserve told everyone they were going to put massive amounts of money into the economy, Should they now considering switching to, for example, value funds, or should they at least consider switching to broad funds like the S&P 500 rather than S&P 500 growth? Yeah, I think there's strong evidence to suggest that a longer-term rotation is underway across the economy,

whether it's growth to value, sensitive sectors to value sectors, U.S. to international, reallocation to commodities. But I think the bigger trend to think about is, honestly, it's time for ETF strategies to shine. You've been in that environment for 10 years where any sort of diversification was divorceification, right? It was a detractor from your portfolio. And we're starting to see evidence again where diversification does work. And those that have stayed the course are starting to be rewarded for that. So we believe here at ETF action that you're seeing going to see a big continuation of flow

into model portfolios, ETF model portfolios, whether that's models done by the issuers themselves, or probably more so to the professional strategists and allocators who have been using these strategies to diversify portfolios for a long time. Yeah, this is a fancy way of saying stock picking is back because ETFs are used for tactical allocations, but I can't help but think this is the Jack Bogle in me talking, and remember I told you before,

I'm a Jack Bogle disciple from way back when. Jack would be laughing at us. His whole point would be you can't pick the market. And so, flavored ETFs, whether you call them them them them them them them thematic tech or ETFs or Bitcoin-related ETFs or pot ETFs or inflation-themed ETFs, ultimately you're still picking strategies. And one of the key precepts of long-term investing is market timing is extremely difficult. You have to be right going in and going out, and generally stay invested long-term in broad funds. This is the precept Bogle founded Vanguard on, essentially. And although I love thematic ETFs, thematic tech ETFs, I love the idea of cloud computing and 3D printing and, you know, lithium batteries,

I can't help but hear Jack Bogle laughing at us saying, you guys think you know how to time when to buy this stuff. and you should be owning the broader market. Is there something wrong with his argument? I don't think there's anything wrong with his argument, though I think that, you know, Jack Bogle would also say that you should be diversified across these broad asset classes, right? So, you know, even Vanguard has extended market strategies, and I don't think anybody has been calling that you should only own the U.S.

or only own equities. And I think that's really when you think about asset allocation. It's very different than stock picking. Now, that being said, I think, you know, The schematic ETFs provide that extension to the market that you don't otherwise have, and those that are willing to stay the course, it provides alpha opportunity over full market cycles. But the trick there is to stay the course. And I think what we live in as a market where people gravitate to the next shiny object, and in reality, why I keep going back to that concept of the asset allocator, the real benefit of the ETF is being able to use them collectively to create a portfolio that will allow you. lines to your ideologies, your macro assumptions, your risks.

So when you talk about ETF model portfolios, you're talking about a financial advisor who buys into a series of funds that or a series of ETF models that will say, here's an inflation model ETF or here's a growth ETF model that will contain a basket of different ETFs. Is that correct? And your point is that that is growing. Why is that growing? Well, I think there's a number of underlying themes. First and foremost, within the financial advisor community, more and more advisors are taking

advantage of the technology available to them to assign clients' accounts to broad-based models that are done by professionals, whether it's zero feet models by the ETF sponsors themselves or by professional asset allocators and they're spending more time on traditional financial planning and working with their clients. But I also think that a broader concept there is the transparency in the market, right? We always say, you know, one of the reasons we named our company, ETF actions, we thought ETFs were a harbinger of what's going on in the broader investment landscape as a whole. And you think about the transparency at the ETS.

RAPRapper provides, it's a very powerful tool to decide what ETF is right for you and to create portfolios that align to your macro assumptions versus just owning a market or just owning a handful of BTFs. You can very efficiently allocate across a number of different market segments and really stay to your core. Still keep the, you know, the Jack Bogle 80% of your portfolio allocated, but tactically adjust as markets change, and markets are always changing. Yeah, Bogel used to describe taking a small portion of your portfolio because even he was aware of the need to scratch the itch, that's what he called it, to think that you're a portfolio manager and you can pick winners and losers. So he always used to say, take a small part,

sometimes 10% of your portfolio, and go ahead and try to pick funds that you think are going to outperform. But he always used to say, you're going to find in the long term, mean reversions a very powerful factor. We're seeing that now with value versus growth. This is probably the biggest potential change we've seen in 12 or 13 years. You could have sat on a slightly tilted growth portfolio since the financial crisis since 2009, and you would have done very well in that. It's not clear for the next 10 years whether you would do that,

which is why you keep getting email from people saying, you know, Should we just do go back on the S&P 500 or you know The old Bogle portfolio total international stock total internet Total bond and total stock market at that point so this there's this is the The moment where there's the most questions about asset allocation I've seen in a long time Now that now that growth is a little more in question and I don't have I don't know the answer I do believe that mean reversion is a very powerful factor Yeah, I know I think like

You can't really go wrong. Number one key to investing is just doing it, right, and getting allocated. But I do believe there is strong benefits to being able to manage a portfolio to your clients, to you. If you're just a do-it-yourself investor, being able to align your investments to your risk tolerances, to your beliefs in the market, whether that's ESG or non-ESG, or whether that's thematic tech or deep value companies. there's a power in that alignment. And I think it's the biggest trend that we continue to see in the ETF market is the ETFs are the best way to align or to take that view on the market. And that's why we continue to see that growth. Yeah, there's no doubt about that. Let me just ask you one last question on ESG.

So hot in 2019, 2020. 2021 started cooling off a little bit as people started questioning, including Gary Gensler, the head of the SEC, whether or not these funds were really what they were advertising and what exactly do they mean when they say ESG. Do you have any sense of whether the demand is going to cool off this year? Where is that going to go? So I don't think that ESG is going to cool down first bay, whether that's just because it's forced upon investors or whether there's true merit behind the investing. I do think part of the flows that we've seen outcoming is also just a product of cost basis. You saw ESG funds really got popular at the top of the market, and now if you were going to reposition out of a portfolio and you were looking to avoid tax consequences, you're going to look to those areas of your portfolio that aren't going to generate the largest taxable gains.

And right now that, especially in broad buckets of your portfolio, that's ESG. So that's one kind of anecdotal thing to think about with respect to flows. But a bigger picture on ESG is it's very similar to thematic ETS and that it's in the eye of the beholder, right? If you look across thematic ETS, we've talked about this before, but there is very little overlap across one cloud competing ETF and another, or one, you know, multi-theme innovation in the next. ESG is very similar. I think that's a big problem for those preaching the ESG story is that it's not a one-size-fits-all when it comes to, you know, your views on ESG. And if I look across ESG portfolios in the marketplace, I-Shares versus State Street versus Vanguard, they have incredibly different takes on which companies are truly ESG. And that's a problem.

And that's exactly what Genser was complaining about. and while they saw outperformance in the last few years, because they owned a lot of tech names, you're going to see some underperformance the next few months. Mike, I'm going to have to leave it there. Thank you for joining us. Mike Akins is in charge of ETF action and one of the great ETF experts that are out there.

Thank you, Mike. And everybody, thank you for listening to the ETF Edge podcast. InvescoQQQQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQ, Invesco Distributors, Inc.