ETF Edge - ETF Investing, The Year Ahead & Bitcoin ETFs

Episode Date: January 4, 2021

CNBC's Bob Pisani spoke with Dave Nadiq, Director of Research at ETF Trends, Jan Van Eck, CEO of Van Eck Associates, and Harry Whitton, Head of ETF Sales Trading at Old Mission. They discussed the biggest trends and themes to watch in 2021 including Bitcoin, ESG, Active Investing and whether the record inflows into ETFs will keep on coming. In the 'markets 102' portion of the podcast, Bob continues his conversation with Dave Nadiq of ETF Trends. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Happy New Year, everybody. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights in all things, exchange, traded funds, while you are in the right place, every week, we bring you interviews and market analysis, and we break down what it all means for investors. I'm your host, Bob Pisani. Today we'll jump right into the biggest trends and themes to watch in 2021, including Bitcoin, ESG, active investing,

and whether the record inflows into ETFs will keep on coming. Here's my conversation with Dave Naughtick, the Director of Research at ETF Trends, Jan Vaneck, CEO of Vannick Associates, and Harry Witten, who's the head of ETF sales trading at Old Mission. Dave, let me start with you. We have seen record inflows into ETFs at the end of 2020. More than $5 trillion now, assets under management.

I know you have talked before about inflows into ESG and thematic ETFs as a major factor in the inflows in 2020. Do you think ESG and thematic ETS will continue to account for a good part of the inflows in 2021? Yeah, absolutely. I do. I mean, this was a record year in so many ways. We had over $500 billion in new money flowing into the ETF industry. Over 300 new funds created for investors to trade in. Most of those new funds fall into the category of either something that's not beta, whether that's thematic or actively managed, or something around the ESG. Those have been two core themes. I don't think there's going to go away anytime soon. I do think we're heading into a world where folks are a little more concerned about risk management,

but thematic ETFs for sure are here to say. We've all seen this case-shaped recovery and how it's really nominated winners and losers in the market, and investors and advisors are really out there trying to find those winners. Yeah. Harry, I want to go back to ESG and talk a little bit about that in thematic ETFs, But I know you spoke in the past that active non-transparent is going to be a major factor for ETFs in 2021. And you also mentioned significant conversion of mutual funds into ETS. We saw dimensional funds starting that trend.

Can you explain a little bit more about these two trends to the viewers and why they're going to be important in 2021? Hi, Bob. Thanks for having me on. Sure. So on the non-transparent front, if you look back to January of last year, there was not a single non-transparent. parent fund available. Come the end of December, we had roughly 20 funds that are out there. And I think starting in 2021, you're going to see a lot more of these new products coming out. You're going to see a lot more of the traditional mutual fund companies coming out with these products. I know Fidelity, specifically, as already said, they're going to clone the Magellan Fund and have that as a non-transparent ETF. So that's going to be pretty exciting. I think that's also going to make a lot of people more

aware of these products. Now, on the conversion front, a lot of these traditional mutual fund players are looking what to do with the existing assets, what to do with their existing book, and they're looking into changing them into ETFs. There's already three firms, like you said, one of them being dimensional that have come out and said, we are going to be doing this. The dimensional specifically is going to change six funds and over $20 billion in assets into the ETF structure. So this has a huge potential in the marketplace to see a lot of assets being moved quickly. And if you look at what Vanguard did in 2020, they were telling people actively you should move your mutual fund share class to the ETF share class. They have a little bit different structure than a traditional

ETF, and that's what they're doing. Harry, let me just follow up with that, Harry. Do you think that the move from mutual funds into ETFs could really turn into something really significant? Let me, could it account for a sort of second wave of ETF inflows that are really statistically significant? In other words, could we see $8 trillion or $10 trillion in ETFs assets under management in the next several years, essentially a doubling? I'm just asking. How significant is that? It's a very good question. I don't really know the answer, but it could be significant. A lot of the mutual fund assets are going to be in retirement plans, so you don't see those moving. non-retirement plan assets or stuff like that, you could definitely see a very big chunk.

I mean, $20 billion from dimensional loan and six funds, that's a lot of money. Jan, I don't know if you want to jump in on this. Maybe we can get back to it, but I've got to ask you about Bitcoin. I know I constantly pester you about this, but you're kind of the man in this particular space. You have filed for yet another Bitcoin ETF after being turned down several times. We've got a new year. We've got Bitcoin at a historic high, so the timing is perfect. Kudos to you.

I know you can't talk about the specifics of the filing, but we're going to get a new SEC chairman some way down the road. We have an acting chairman now, but are the prospects for a Bitcoin ETF any better in 2021 than they were in 2017, 18 or 19? Well, you know, we weren't trying to time our filing. We are just believers that this is something that investors should own, and so we'll keep at it. There are a couple of rays of hope, not that I'm predicting approval or anything like that, because nothing has really changed. But one of the rays of hope is that the SEC last month gave some guidance on how broker-dealers can custody Bitcoin in a specialized manner.

But nonetheless, I look at that as a glass-half-full announcement from the SEC its very own regulatory agency. Secondly, you've seen regulators in Canada last year and in Europe. up last year approved retail Bitcoin products. I think that's really important because I do think the regulators have similar concerns about investor safety. And so I think if others have become comfortable, then why can't they? And then, you know, look, like it or not, Bitcoin's going to keep being in the headlines, I think, in 2021. Probably the biggest news earlier in the year will be when Coinbase goes public. They're the 35 million client crypto exchange that's a operating here in the U.S. And so you can't really avoid it. And there's so much exciting things

happening outside the regulated space. The thing I like to point out is that you can earn interest on your Bitcoin holdings. Most people don't know that. That's sort of evolved over the last year or so. And so what's happening in the crypto space is moving really fast. Yeah. As I recall, I just want to stick on this for one minute, Jan. And guys, feel free to jump in. The concerns the SEC had in the past were basically twofold. One is a lot of the trading in Bitcoin takes place in overseas exchanges that they were suspicious about. They could control.

They had no regulatory control over that. That was one big concern. The second was the general fraud concern around custodial issues. Those seems to be the two big things, if I'm correct, Jan. Is there some reason to believe that those issues are now more better defined or of less concerned to this? the SEC? I'm trying to figure out, how do you get them to say yes? Was it those two issues very prevalent, and have they been addressed? Exactly. And I do think that's why the guidance on broker-dealer custody last month is a ray of sunshine. Custody is absolutely a concern.

You have firms now brand-name firms like Fidelity offering custody of digital assets of Bitcoin and Ethereum and other digital assets. So there's been a lot of movement on the custody front. So that's number one. On the market manipulation front, what people are doing and what we're doing is constructing indices that get price inputs from exchanges that have some kind of regulatory nexus. So there are five or so exchanges, crypto exchanges here in the U.S., that somehow have reporting through to the SEC. There are different exchanges in Europe. We have a retail product in Europe that was approved, and they're looking at different price feeds.

But I think if you can get the regular as comfortable with the underlying price feeds, it's better. Dave, it's time for you to weigh in here. It's a Groundhog Day on Bitcoin ETFs again. All four of us, weren't we here three years ago? I think we're going to be here. I think we're going to be here in another year or two. Look, I'm a fan. I think that Bitcoin and Kreefs.

crypto should be inside an ETF wrapper. It's a very logical way to actually deal with many of the issues that folks have around Bitcoin in terms of access and liquidity. And ETF solves those problems. It doesn't, it's not a victim of them. It's actually a solution to a lot of these problems. I think what we're seeing is just the crypto market is maturing, right? That's the key thing. And I think mostly what the SEC wanted to do three or four years ago was, frankly, let the industry mature a little bit. Let it solve some of these problems that it And as Jan points out, a lot of those hurdles are getting knocked over in a good way. I think it's a little early to think that somehow, say, in September, we're going to get

an approval. Although, you know, never say never, depends who we get in the SEC as the commissioner, obviously. I think 22 is probably a pretty likely time. I think it's, it really doesn't strike me. We're going to go much past that. I think the next 10, 12 months might be a little bit dicey. Yeah. Dave, let me just go back to ESG quickly. And Harry, feel free to weigh in here. It's clear there's a lot of interest in climate change in the Biden administration. And I'm wondering how that will impact the ETF business. Some in the SEC already have made it clear they want to make inquiries with companies about what their climate change policies are. This is what I call a real nudge.

It's not saying you're violating anything, but we're saying, hey, what are you guys doing, even if there aren't any? So I'm wondering how all this sort of plays into the ETF space. Well, there's no question that the Biden administration will be much more favorable towards ESG. investing and ESG concerns than the current Trump administration. I think that's relatively non-controversial to say that. The question is whether or not investor demand continues to be there. Everything that we're seeing suggests that investor demand will continue to be there, whether it's from the millennial wealth transfer, whether it's just high net worth individuals looking

to do something a little different with their money. ESG is rapidly being recognized not just as a values expression, but as a risk management tool. And I think risk management is where ESG is going to find its really strong legs over the next two to three years. Howard, you want to weigh in here. You feel the same way? Yeah, I agree with what Dave said. And I think what's really important about the ESG space when it comes to ETFs is a lot of firms have made allocations in their models to ESG funds. So as people who are putting money in the models, they're automatically investing into these ESG ETFs.

So some people probably don't even realize they have them already. So it's a big part of these models now, and it's just going to be a constant cash flow in. So you're just going to see more and more efforts going to the space. Yeah. Jan, I wonder if you could weigh in on sort of ETF trends in 2021. I just want to stay on the ESG space. I'm wondering about things like diversity. And we saw NASDAG, we saw a Dina Friedman come out very aggressively a few weeks ago and say,

hey, we want more boardroom diversity, essentially. I'm not sure she made it a condition of listing on the NYS or they kick you out. didn't, but they made it pretty clear that's what they're looking for. So now we see climate change and it seems like boardroom diversity. These are two really big issues. Is this a real ongoing trend? ESG certainly appeared in 2020 as a major trend. Yeah, look, I think that I focus on the E or environment in ESG because I think there's much more of a consensus around that. And we call it the energy transition, which isn't just 21 and 22. This is about a 10 or 20-year trend of movement away from fossil fuels.

And so we see that in every major jurisdiction in Europe, in the U.S., and in China now, which doesn't get a lot of credit or a lot of attention. But I think that's a big trend as well, and they keep pulling their deadlines closer. So there's no doubt that there's going to be an environmental transition, I think, over the next decade. or two. I think it's hard to put into a formula. And so I think active management can add a lot of value here. But that's kind of how I see. It's absolutely a major trend. We talk about a lot with clients. Yeah. Dave, I heard you mentioned two other trends, ETF themes for 2021. Number one, the hunt for income. And number two, infrastructure, once again, another, you know, we've been here before story.

Is it, tell me about the hunt for yield and how we're going to find it. And number two, how can we turn this into the year for infrastructure? What scenario happens where that actually becomes a real story and we don't just bring it up again and nothing happens? Well, the hunt for yield has been active now for a couple of years. I think what was really transitional in 2020 is we saw a lot of what I would call alternative income vehicles really come into their own. I'll highlight a couple. One of Yon's own funds, ANGL, which looks to get recently down. graded investment grade bonds into a sort of one individual bucket. Historically, that's been a strategy that's worked.

If you look back over the last year or two, that strategy is throwing out three to four percent on an SEC yield basis and beating both the liquid and the junk market by about 2 percent last year. So that type of alternative income approach has really worked. We've also seen products that, you know, use options to extract income from the equity markets. Those have been very successful. We've got a lot of those types of products filed already to launch next year. I think you'll see a lot of discussion around things like Preferreds and REITs, a lot of people bottom fishing real estate right now.

I think all of those are going to continue to be trends. You know, I think when we're thinking forward to next year, you have to ask yourself, what can the Biden administration get done, assuming we end up with deadlock, which I think is the sort of the median case outline outcome. And in a deadlock environment, infrastructure is one of the only things they can probably get strong bipartisan support. for, helps boost that big G government spending, which is sort of one of the places we haven't had the kind of response we would expect from government. It's really been an aid, not in government, direct spending outside of the narrow cases of the

vaccine. I think this is a real opportunity. There are a bunch of great funds in the space, and I think we'll see a lot of traction probably coming into the second quarter. John, you and your entire organization made their bones in the commodity space, particularly gold way back when. Want to give us 30 seconds on the gold outlook for 2021? Listen, I think investors want alternatives. They're very concerned about the huge government stimulus of early 2020 that got us out of the kind of coronavirus financial freefall that we

were going through. But that's, you know, as Dave was talking about, the income part of people's portfolio is really suffering in this low-interest rate environment. And they're looking at gold as an alternative gold as well in the low-interest rate environment. So all-time highs last year, and I think that continues. But I'd also own some Bitcoin as well, if you can. That's our diversification hypothesis. Love it. You're nothing, if not diversified, Jan. You and your firm have managed to diversify out of gold for many years. I respect you for your ability to morph into a new areas. Finally, maybe Harry, you can weigh in on this or any of you guys. I can't help but notice that the bigger just continuing to get bigger, my friends over at etF.com. Of course, we look at the

year-end flows, and one of the things I look at is the size of everything. And I notice the top five ETFs are 27 percent of the business, of the equity business. So 25 ETFs, all S&P or Vanguard Total Stock Market, here they are. account for 27% of the $4.1 trillion of the U.S. equity ETF market. That is rather remarkable. Considering, guys, there's 2,000 ETFs out there, and you've got five of them that are essentially 27% of the equity ETF market. Harry, I mean, it's just a startling fact. Is this going to continue? Or the big going to continue to get bigger? Or is there any other room for anybody else? Like Jan Von Nex Fund getting bigger? Kathy Wooden's getting bigger.

Yeah, well, yeah, exactly. I mean, the big, yeah, they still keep getting bigger. I think VTI was the number one fund for inflows in 2020, of not mistaken. You know, a lot of these are core holdings, as I talked about before, in models. So the money that goes into models are just going into these funds. But I think 2020 did show us that you can go outside the box and look at other funds. Arc is the perfect stairway, as you just mentioned. People, people, that was, they're the number four fund group year to date, or 220 in total inflows.

And they were nowhere in 2019. So I think more and more people are looking at more products outside the top five. But they're still the tops. Jan, you run a pretty respectable ETF fund family. It's up there. What are your chances for 2021 getting more assets under management? Or is it all, everybody going to just put money into Vanguard Total Stock Market or S&P 500 funds? Well, listen, we've been able to grow 20% over the last two years, I think, each year.

But every year is a struggle last year. Our biggest inflow funds was our fallen angel high-ield DTF. So you have to have diversity of offerings, I think, to be able to engage with clients no matter what's happening in the market. So it's definitely a big getting bigger industry. But if you do have quality solutions, smart beta or whatever you want to call it, I think you can still make some room for yourself. the industry. Yeah, that makes a lot of sense to me. Okay, guys, I've got to leave it there. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is our Markets 102 portion of the podcast. Today will be continuing the

conversation with my old friend, Dave Naughtick from ETF trends. Dave, thanks for sticking around. I guess what I want to ask you is, what could possibly go wrong in 2021? I mean, I'm talking about with ETFs. We're at $5 trillion in assets under management. There seems to be a lot of exuberance that the inflows are going to continue, particularly around movements out of mutual funds and into ETFs, active, non-transparent ETFs, and just the general force of everybody going into the cheaper ETF space over mutual funds. I'm not asking about a market call. I'm asking, can anything interrupt that paradigm? Is there anything that could go wrong with that? You know, I don't think there's much.

You know, I think we passed as an industry a big test in March in terms of managing liquidity. I think a lot of folks were concerned that in a big hiccup, like we saw in those last couple weeks of March, that the less liquid corners of the market, like junk bonds, for instance, would lock up and then the ETF structure would somehow break. And what we saw was ETFs did what they were supposed to do. The underlying markets did, in fact, lock up. There was a good handful of days. You couldn't trade a junk bond to save your life. The ETFs kept trading. Yes, they traded to premiums or discounts, but they did it exactly the way they're supposed to.

They became price discovery. So what that said to me was even at the height of these giant unknowns and huge VIX spikes and locked up underlying markets, ETFs continued to deliver the goods. They did what they said they were going to do on the tin. So I think the structure at this point is, you know, it's battle proven over 25. years getting close to 30 at this point. I don't think that there's a lot of risk that there's going to be a structural issue. I do think that there's a bit of a fatigue probably were headed into in terms of new products, right? There's been a lot of new products. We had over 300 last

year. That's a lot of new products for folks to absorb. Not all of them are going to be successful. If I had a wish for this year, it would be to have an open close ratio under one, meaning I'd like to have fewer ETFs launch than those that closed, because we all know with 2,500 ETFs, not every one of them is going to be successful. And yet, you know, we keep saying, gee, what else is left to turn into an ETF?

And yet, when you look at the success of things like work from home, WFH, they invented something that didn't exist before. So I think it's what one of the beauties of the ETF space is if you can think of some thematic idea that's obsessing the public, you can turn it around pretty quickly into an ETF. That, to me, goes to the underlying strength of the ETF structure, right? Yeah, and it got way easier this year with the implementation of the ETF rule.

A newcomer can come in and get a product to market in under six months. That's pretty impressive. And an existing player can probably get a fund to market in a matter of a month or so. That's really impressive. And like you said, it means that you can chase what's working now. in general, I don't think that's a great investment strategy. I don't think that we should all just be watching what Robin Hood traders are doing and make our investment calls that way. But it does mean that you can catch lightning in a bottle.

And I think we look back at 2020 and we see some of these giant headline stories like ARKKK is being their lead fund, which pulled in billions and billions of dollars. But along the way, there were lots of smaller launches that in another year we might have been talking about, even something like, I don't know, the Round Hill Sports Bet, which is BETZ, had a really credible launch in the midst of all this chaos pulling in 100 million bucks. That's a success by any measure.

Yeah. And by the way, I agree with your point about passing the test for ETFs. The only real negative hanging out there for ETFs is the ATF haters have for years been saying, oh, way to volatility, you know, really blows up. The markets are, the ETFs aren't going to be able to handle it. All of those Treasury bond ETFs and those high-yield ETFs,

they're not going to be able to sell into the underlying. It turns out the tailwags the dog. I mean, how much more volatility do you want than this year? And the ETF space held up extraordinarily well. So I think that ship has sort of sailed. And just the fact that we didn't have blowups and the fact that we're seeing a lot of mutual, this year we're anticipating a lot of mutual fund conversions into ETFs. I think the story is pretty much over on ETFs blowing up.

And as for leverage and inverse, what are they, one percent of the market, Dave? I mean, I don't know. I'm concerned about a little piece of it. Yeah, I think the SEC has done a good job sort of appropriately regulating the corners of the ETF market. We're not going to see a giant rash of sort of leverage and inverse trading vehicles. But, you know, those products exist for folks that want to get that kind of exposure in an active trading environment.

So I feel like we're kind of in the best of both worlds where we've managed to segregate the products that are truly just speculative trading vehicles from those that we're all using for, you know, buy and hold, mom and pop exposure. So I do agree. I think that the questions about the legitimacy of the structure are long gone. I think now we should be focused on the investments themselves. And largely, that's what we've done. We've had more conversations about whether or not, you know, Arc is going to be able to continue their run, whether Kathy Woods, the next Peter, Lynch and Tesla, those have been the ETF conversations. And frankly, they're not really ETF conversations. They're just investment conversations. Yeah. And I mean, I love Kathy Wood,

but let's all remember she made the right bet on a single stock. This has happened before, right? We've made heroes out of investment people before because they made one brilliant bet. And again, I love Kathy. But you know the odds and the probabilities of this kind of one person suddenly coming out. Somebody's going to do it, you know, whether it's, I don't know, Peter Lynch is maybe not a fair example, but, you know, you have other value investors out there in the 90s that we made stars out of that eventually their winning streak ended as well. So let's all remember about the probabilities of all of this happening. Somebody in the universe of an ETF investors is going to emerge as a star. Yeah, I think it's a little unfair to, I think it's a little unfair to put

Kathy Wood in the realm of coin flippers we've never heard of who just got lucky 25 times in a row. She has stuck to her knitting and her team has really stuck to their knitting since they started the firm. They've been very consistent with their approach. It's not just Tesla. If you look at, you know, on the days when Tesla's down quite often, her funds are still up, largely because she's invested in a broad, wide spectrum of innovators. Now, those have been the top of the K-shaped recovery, and that's why she had the year she had. why the team had the year they had. And that's great for them.

I wouldn't necessarily expect another 150% year in all those funds. I don't think they would either. But it is an approach that is, I think, valid. Now, whether or not you're a buyer of it, that's your own decision. But I don't think you can look and say it's just luck. Good point. All right. Last question, I'm going to hit you up on.

You mentioned Robin Hood. So is it fair to ask you what effect does the Robin Hood trade have on ETFs? Most people feel, you know, day traders, the retail day traders were probably 15% of the trading volume a couple years ago. It's been small. Maybe it went up to 25% last year. That was Citadel's estimate. Did it have any effect on ETFs and will it in 2021? Well, of course, it has an effect.

And I think that core effect is anytime we have what we would call it a retail market, and I think it's for sure the last couple of years have been a retail market the last year in particular, that's great for ETFs because it educates investors. Now, we know mathematically that most individuals, if they trade their own individual stocks, will underperform the market by a fairly substantial margin. That's the bad news. The good news is those folks have gotten a little bit of an education. And if they come off the other side of this feeling comfortable putting in trades with limit

orders and using their brokerage account but end up in ETFs for long-term allocation, that's probably a win-win for everybody. It's a win-win for those individual investors and the issuers of ETS. Yeah, good point. All right, Dave, going to let it go there. And thank you for sticking around. Of course, for us to be with you in 2021. That's it for this week's EFH podcast.

Remember, you can see all of our videos and the podcast, ETFED.com. Everybody has to help us, happy and safe. Trading.