ETF Edge - ETF Inflows, Coronavirus & Gold

Episode Date: August 10, 2020

CNBC’s Bob Pisani speaks with Tom Lydon, CEO of ETF Trends, Jan Van Eck, President and CEO of Vaneck and Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management. They discussed how ETFs are on pace for another record breaking year, why gold is retaining its shine and how to play the countries that are beating the Coronavirus through ETFs. In the 'Markets 102' section, Bob discusses the evolution of Golf ETFs. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

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, thoughtful market analysis, and breaking down what it all means for investors. I'm your host, Bob Bazani. Today on the show, we'll talk about how ETFs are on pace for another record-breaking year and why.

And it may not be the reasons that you're thinking. We'll also be talking about why gold is retaining its shine in how to play the countries that are beating this coronavirus. through ETFs. Here's my conversation with Tom Leiden, the CEO of ETF Trends, Jan Vaneck, who's the president and CEO of Vaneck, and Ben Carlson. He's the director of institutional asset management at Rittholt's Wealth Management. He's also the author of a Wealth of Common Sense, one of the best investment blogs that's out there. Tom, I want to start with you. I've been looking at some of the inflow numbers for the year. We potentially have a record year of inflows,

although it's a little bit odd, because we're talking about 200, $152 billion in inflows, potentially that could be a record for the year. But if you really lift up the cover a little bit, you'll see an awful lot of this is because of bond inflows, not equity inflows. What do you think is going on here? Yeah, absolutely. The great thing, Bob, is investors are spreading a love around all types of ETFs. Yes, as you point out, 117 billion so far in fixed income ETFs, led by a lot of the corporate bond ETFs. The Fed buying, I think, has helped fuel that along as well. But there's some other areas. There's been a bifurcation in the equity side.

People have been moving away from the S&P and moving more towards NASDAQ-related ETFs. Like the QQQs have 12 billion in new assets where the SMP, SPY, has lost $23 billion. And a couple other things. You point out gold. Gold and commodities-related ETFs have surprisingly $41 billion in new money coming into ETFs with finally your favorite area, Bob, inverse and leverage, $16 billion of new money coming into that area so far. That's hard for me to figure out why that would be happening.

Jan, you've been watching this for decades as well. Does anything strike you about the inflows this year? I want to talk to you about gold inflows in a minute, but we just put up the list. Vanguard S&P 500, okay, not a lot of surprise there. Investment-gray corporate bonds, I would not have put that on a list. six months ago for big, big inflows, triple Q's, that's the NASDAQ, okay, that makes some sense. High-yield corporate, you would have thought like six months ago people would have advised

against high-yield corporate, and yet look at the money going into these. Can you make sense of all of this for us? Bob, you know, it's just don't fight the Fed, don't fight the Fed. Every single one of these trades almost except the triple Q's is don't fight the Fed. In fact, you'd probably be shocked to see that our big, inflow ETF, year to date is our high yield corporate ETF, the Fallen Angel ETF with $1.2 billion in inflows. And although the Fed literally has been buying that ETF, they only own 2% of the inflows. So can't thank the Fed for all those inflows. But it makes sense. We're going to have

lower for longer and longer. And I think investors have realized that. And they're just chasing that money. And it is a little surprising, given the hiccup, and the large discounts we had in ETS in the March, April time frame. So it's great to see that investors, I think, understand what might happen in different fixed income markets and still have embraced fixed income ETS. Yeah. And that Fallen Angel ETF's been very popular that you run. That invests in bonds that used to be investment grade that are now less than investment grade. It's great. Exactly.

They just get downgraded, quite. quality companies that have what I call a bad hair day and get categorized as junk. And that index is, I mean, people chase performance. That strategy is beating high yield benchmarks by 5% year to date. So it's working again. Just to add on to that, with earnings going where they are and some of these downgrades, there's a lot of attention to those fallen angels. and it doesn't mean that they're going to have a bad-haired day forever.

They can come back. And with this strategy, it's a real good strategy for today because some institutions especially are forced to sell those when people like Yan can come in through their strategy and buy them in at the bottom. Yeah. Ben, you write one of the best investment blogs on the street. I always find it informative and educational and coherent, which is that's a compliment, believe me. And some of the stuff I read is not always entirely coherent to me.

I'm not talking about you, but other people. So highly recommend your blog to anybody who's not familiar with it. I'm wondering what you think of all of this money coming into ETF. So you're a very broad observer of the market. It seems like low cost and passive is winning out. Is there anything that gives you pause or concerns about this ETF tsunami that we're seeing money keep coming into this sector? No, I do think that it's a net a positive.

for investors, obviously the fact that the barriers of entry have been taken down, makes it easier for people to hop in and out of things. I still keep coming back to the corporate and junk bond stuff. It's just amazing where we are compared to where we were. The LQD corporate bond ETF is down over 20% in March from the peak to trough basis, and now it's up 10% on the year. Junk was down 23% and now it's flat on the year. Obviously, a lot of that is the Fed,

but the fact that they can snap their fingers and make people feel more confident in this stuff and people just plow in. It's pretty amazing when you think about the facts that this stuff used to be so illiquid and hard to trade for individuals. Right. Well, you know, Ben, this makes some sense. You mentioned, don't fight, it was mentioned before, don't fight the Fed. But to a large extent, the Fed has insulated companies that have high yield, for example, higher risk from potential losses or default. Somebody wants to describe this to me as what's, imagine you've got these aging gazelles, these older companies that have these high yield, they're higher risk out there, and they're with younger companies out there like younger gazelles. And if you see a lion all of a sudden out there in the form of a recession, there's something that could be eaten here, meaning the older gazelles, the companies that are more at risk. But the Fed has come along and essentially put a fence around the lion. And it made it a lot difficult. It's making it a lot more difficult for companies.

companies that may have been weak already to actually default or go under. So does that make some sense to you? I mean, the market is reacting certainly in a somewhat rational way, or do you think the market is wrong on this call? I think, to use your analogy, the Fed is basically a big game hunter going after distressed investors because they weren't able to get distressed prices in a lot of ways. And I think that's one of the big differences in all this, is that we didn't have a huge blowout.

the spread started blowing out, but as soon as the Fed stepped in, everything came back in. So I think it really made going forward change the way people think about risk and how these things will work. And obviously, the Fed has pushed people out on the risk curve, too, because treasury rates are so low. And just finding yield anywhere is really tough for people. So I think the way that people look at risk during a crisis could change from all this. Yeah, I think you're absolutely right. It's amazing how much the spreads came in once the Fed got involved. I want to move on, speaking of inflows right here, guys, gold ETF seeing massive inflows.

The Spider Gold Trust, this is the biggest gold ETF, the bullion ETF. It's up 33% this year. Now the sixth largest ETF in the United States. Who would have thought, Jan, and you're very involved in this whole business. You have a bunch of ETFs around gold, including the gold miners. But I want to bring up your point from last week. You had a paper out saying gold could go from, what, it's 1900 today, to about 3,000. What is driving that sentiment?

And can you explain to us briefly why you've just turned or why you've become even more bullish? Well, look, I think gold competes, I'm oversimplifying here, but gold competes against interest rates. If interest rates are high, gold, which pays basically no interest rate, becomes less attractive. As interest rates vector towards zero, which they are now, then gold's relative appeal grows. it's really that it's really that straightforward now what's hard for people to understand i think is it's not just the nominal interest rates or the interest rates you see on tv it's real interest rates and so real interest rates as we saw in the inflationary cycles of the 70s went to minus four or minus five percent just because of the math you can't get there in the deflationary cycle

so right now we have negative real rates of about one percent and maybe they can get to 2%. But negative rates are still good for gold. So that's why we don't think it's going to be a blowout like the 70s, where gold would go up four or five, six, seven times in a cycle. But we think rising two to three times in a cycle is completely reasonable, given that it's clearly in a bull market. And Jan or Tom or Ben, anyone wants to jump in it.

Is it fair for me to complain that the gold bugs keep trying to change the argument? It used to be it was good for inflation, and now Jan's making an argument that may be good for deflation, too. Am I being borish by pointing out that it's heads, gold wins, tails gold, gold, gold, gold wind? I mean, can you really actually claim it's everything? I just want to defend myself really quickly. I'm not always gold bullish. So we became gold bullish in the summer of 2019 when the technicals supported the Fed stimulus. And I will say on the risk side that high, higher rates will be bad for gold. The gold bull market will end when rates start going higher. Now, the Fed said we're not thinking about raising rates, so we think it's going to be a longer cycle.

But that's the risk to the trade. So I'll turn it over. Yeah. And just to add, you know, we may be in a stagflation environment as well when you think about the unemployment numbers, the low economic growth. And as, as Jan mentioned, with low interest rates and the potential for inflation creeping in, that all lines up. There are other stagflationary periods over time where gold has done really, really well. Yeah. Ben, you've written about gold in the past in your blog. You've noted that the strong dollar is generally not good for gold.

And yet this year, we've seen a somewhat weaker dollar and gold's also outperform. So can you sort of explain that? Or is the dollar only a small component and what makes gold move? Bob, you know, one thing that I think we don't want to overlook is the pure supply and demand aspect of this. World Gold Council does a great job every month of being able to produce real reports about how much gold is being bought out there in the marketplace. It's not just central banks. It's not just individual investors like us. Jewelry demand continues to be strong in emerging market countries.

And with that, that's also supporting the price. And ultimately, it's getting more and more expensive to get an ounce of gold out of the ground. And with that increased demand, we're going to continue to see the prices advance as well. So the fundamental and economic aspects of it, but definitely demand from an acquisition standpoint. And, Jan, can you address that supply issue that Tom brought up because there is a, it's obviously a supply demand thing going on here. Tom said it's more difficult to get gold out. Is it because there's less gold to actually mine, or is it harder to get at? What is it that the supply is getting a little tougher to provide? There haven't been major discoveries for many years now.

that's number one. The amount of gold per ton of dirt is at much lower levels than it used to be. But, you know, I hate to quote my dad, but he used to say, you know, all the gold that's ever been produced is sitting around somewhere. So at the right price, there's always enough supply to drive prices lower. So we don't, I tend to focus more on the relative attractiveness rather than the supply demand. but some of the factors that Tom Mentor are no doubt important. Yeah. And one final thing to add there, Bob, if I could,

the importance between investing in the spot gold price itself and then the miners, and then the difference between the miners, the large miners that we see in GDX are quite different than the junior miners. And during times when gold's advancing, there's a lot of pressure on those large miners to gobble up the smaller miners. So, again, if you're devourable, diversified and you're looking to maybe participate in other ways with the advancement of the price of gold, junior miners tend to get gobbled up during these periods of time.

Yeah. And that's a key point about the difference between investing in gold and gold miners. Jan, you've got the gold miners, the GDX, and the junior gold miners. I guess with the key point being aside from the issue about M&A activity, gold stocks are still stocks no matter what you say and what anybody says and they can still be subject to the vagaries of the stock market. I'm just trying to get you to make the distinction between investing in gold and gold mining stocks and how they can be somewhat different sometimes depending upon even how people are perceiving the stock market in general. Could you just give us 30 seconds on that? If you want to, you know, gold, put differently, gold bullion is much lower

correlation to the rest of your portfolio than gold mining stocks. That's, that's, that's for sure on a day-to-day basis. But if you're in it for total return, the gold miners generally will give you more return. You know, the other thing that worries me about, would worry me about gold besides higher interest rates is signs of a lot of frost in the market. And there's been a lot of inflows, but I will say that from what we see in the gold mining stocks, they're still far from frost that you've seen in other cycles. We've got a long ways to go from what we're seeing. Yeah. We were talking about limited supply.

I'd done a special on gold, a big hour-long special almost 10 years ago, nine years ago. And at that time, the World Gold Council had mentioned to me that the total supply of gold ever manufactured would fit into two Olympic-sized swimming pools. That's a really good way of indicating how really limited the supply is. Think about this. the total supply of gold ever manufactured on earth would fit into two Olympic-sized swimming pools. So it's really actually a remarkably small quantity. Ben, I think we've got you back here. You've written about gold in the past, and you've noted that gold does not do well in periods when the dollar is strong, and yet this year the dollar's been fairly weak, and gold's outperformed.

Any thoughts on that, or is the dollar only peripheral in this particular circumstance? No, I think actually if the dollar continues to fall, it could juice gold returns. But I looked at over the last 50 years or so, half of the years roughly the dollar increases, half of them it decreases. When the dollar rose, the average return for annual return in gold was lost of about 1%. And in the years when the dollar fell, gold was actually up around 18% for a year. So that is a really good dollar hedge. So we have these things like, you know, you track real interest rates and inflation and all these things. but gold is actually a really good hedge against the falling U.S. dollar.

So if the dollar continue to fall, so your point is there's a very, your point is, your point is there's a very good correlation between the dollar and gold. When the dollar's weak, gold tends to be strong. That was your point, right? Correct, yep. Okay. I want to move on here and talk a little bit about coronavirus and ETS a little bit.

One thing that's very striking is about how well, Europe's doing right now. Tom, you were talking about this. We were talking about this at the end of last week. The Nordic countries are doing really well right now. I don't know if this is entirely because of what's going on with a relatively good situation regarding coronavirus here. But you see the Denmark and ETFs up nicely up nicely, the Nordic ETFs, which is a combination of several countries, all up nicely. Vanguard Europe, which is the broad ETF there for Europe, generally is on the downside. But remember, that includes a lot of southern European countries that have had a tougher time with things. Tom, could you comment on this? What, if anything, is this

ETF activity telling us and does it related at all to coronavirus? Well, I think there has to be some relation, Bob. You know, when you look at single country ETFs, it tends to be when you take Europe, for example, those areas like Italy are not doing well with a coronavirus and their markets aren't doing well. Contrast, northern Europe, the Nordic regions are actually doing really well. Now, you can lift up the hood and you can see that they have certain sectors that they're overweight. For example, healthcare industrial materials in Denmark, which is the majority of that I shares Denmark, E-D-E-N. So you would definitely be able to argue, well, they're not diversified as far as certain sectors. However, if you look at the Global X Nordic ETF, a bigger sample of the Nordic regions,

and actually their banks are doing much better than banks are doing here in the U.S. So something to take into consideration. And I know we also want to touch on China as well, because like it or not, China's done a great job in tackling the virus lately. And there's been a lot of encouragement among the local media in China for investors locally to buy stocks. And that's rewarded the Chinese stock market in a great way too. And, Jan, I know you run a China ETF, CNXT there. And that's also done well year to date. Is it fair to say that part of the reason it's done a lot better?

is because a somewhat better outcome than expect, or at least so far, on COVID? Is that a fair observation or are there other reasons? No, I think absolutely. I mean, it's really amazing how well China is doing, all the other issues aside, economically, what I like to point out is that the central bank has actually allowed interest rates to rise there over the last couple of months, which means that they're so confident in their economic recovery that the central bank has actually allowed interest rates to rise there over the last couple of months, which means that It just don't feel like they need to be doing a ton more stimulus.

So it's just a sign. The whole thing could be a head fake, but China seems to be growing. I love what I call Dr. Copper, which is copper prices as an indicator of economic growth globally. And copper is higher than it was before we went into this coronavirus recession. So I think that's another sign that actually the global economy is doing pretty well. Yeah, Ben, you're going to get the final word here on coronavirus. We're about 90% through the earnings season for the second quarter, and the amazing thing that I've seen is companies are beating by much wider estimates than anybody anticipated,

22% above expectations, according to refinative. I think the obvious conclusion is analysts have been a little too pessimistic about what the numbers are going to be, and the third quarter numbers seem to be rising as well. You just give me 20 or 30 seconds of where you feel we are in the stock market in terms of how it's interpreting the coronavirus epidemic. Does it have it right, or is it, as a lot of people say, a little disconnected from reality? I mean, I think the stock market has been ahead of the game in terms of finding the fact that the jobs market has bottomed in a lot of these things that's turned to come back. So I think it's hard to say where it's gotten too far ahead of itself. But I think the stock market has been maybe smarter than people give it credit for.

But if you look at countries like Germany and South Korea and Australia, who have also done better than the U.S. in the crisis, if you look from the bottom when stocks bottomed on March 23rd, those stock markets are up 60, 70 percent in some cases versus a 50 percent gain for the S&P. So I think some of these countries who have handled a better are actually being some benefits in the stock market. I would agree with that. The stock market is definitely grading countries and sectors by how well they've been responding or being impacted by COVID. I definitely agree with that. Thanks everybody here. Really appreciate all that. We have the best people on, the best people in the business here on ETF Edge. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Today we'll talk a bit about the evolution of gold ETFs. As usual, here's my producer, Kirsten Chang. Bob, you talked on the show about how July was a red-hot month for ETFs with record inflows and how gold ETFs are. aren't losing their lust or anytime soon. Why is that? Why is gold still so popular?

You know, Kirsten, gold has always held this special place in a lot of people's hearts. It's beautiful to look at. It's malleable. It can be used for jewelry. It can just be held as a store of value. Remember, Midas turned everything into gold. If something's really valuable, we always say, oh, it's good as gold. So gold has this mystical appeal. But a broader question I think people should asked about gold today is, is there a reason to own it? And I think it depends a lot on how you view the world, how you view gold. What exactly would you be buying it for? Are you buying it because you love to look at it because it's beautiful? Are you buying it as an investment? Are you buying it as a protection against uncertainty? What exactly are you doing when you buy it? You need to answer

that question. I mean, obviously, gold can be bought for a lot of different reasons. Traditionally, it can be bought as a store of value. So you can trade gold and store it for future use. about 40% of the production in the world for gold goes directly into physical investment in gold and bullions or coins and people just hold it as a store of value. But the bigger use for gold has always been jewelry. About half of the production in the world goes into jewelry. And in many countries like India, gold in the form of jewelry is a very large part of a household's net worth. So again, they may view gold differently than an investor who just wants to hold bullion.

gold can also be used as a hedge against inflation. And often when inflation rises rapidly, some investors turn to gold. Some, and we had a discussion with Jan Von Eck today, they're claiming it can be used as a hedge against deflation as well. I have questioned this. The argument you can hold gold as a hedge against inflation and then hold gold as a hedge against deflation strikes me as sort of wanting everything all at once.

I think everybody agrees that if interest rates rise, is gold may have a tougher time. We had also Ben Carlson today talk about the fact that he felt that the weakness in the dollar was a major factor in gold, and since gold, excuse me, is dollar denominated, that makes some sense. You can also, of course, buy gold as a hedge against uncertainty, that's historically, and for diversification. So gold is often considered as a separate asset class from stocks and bonds and other commodities. And so you can use to diversify risk, since it's often not correlated with the movement of other asset classes. Here's the problem investment people make about gold, the problem a lot of people have.

It's not obvious that everybody should own gold. Investment advisors have pointed out that gold's been a fairly poor performer against stocks and even bonds over the last several decades. One study I know found that from 1972 to 2013, stocks outperform gold, whether rates were rising or falling or flat. It didn't matter. And I think gold is not proven to be a great hedge against inflation. I've heard many people say.

I think the biggest problem with gold is the Warren Buffett problem. Warren Buffett always said that the biggest problem with gold doesn't do anything. It's an unproductive asset. Unlike stocks, you know, it doesn't throw off any earnings in the future that you can lay claim to. And it doesn't pay a dividend. And unlike bonds, it doesn't pay any interest. Gold just sits there and it costs money to store it, even if you unlawful. own an ETF. This is a point Warren Buffett has made repeatedly about gold. If you're interested,

you can track the price of gold. The World Gold Council has a terrific website, gold.org, and you can track the price of gold on a daily basis and they have a wealth of information. You were on the floor when George Milling Stanley, so-called godfather of the gold business, first took his spider gold trust public back in 2004. That's the GLD. How has the attitude toward gold ETFs evolved since then? You know, Kirsten, it was really hard to own gold a long time ago. You had to purchase physical gold in the form of bullion, like gold bars or coins. You could invest in gold futures, but that was very complicated to do.

And today, it's a lot easier to own gold. Thanks to ETFs. I mean, you could still own physical gold directly, of course, but now many investors own gold through these exchange traded funds. And in most cases, these ETFs, the gold is held in storage in a vault. The largest gold ETF, the spider trust, that's the symbol as GLD, it's not one of the largest ETFs in the world. There's $83 billion in assets in it.

Last I checked, it was the sixth largest ETF in the United States. So that's a very fast and easy way. And simply put, I think supplies of gold held in storage for investment have gone up because of how how ETFs have made gold easy to buy and to sell. That's it for today. I'm Bob Bizani. Thank you for listening. And make sure you tune in next week.

And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC.