ETF Edge - ETFs under Biden & Top Trends Abroad

Episode Date: January 21, 2021

CNBC’s Bob Pisani spoke with Jeremy Schwartz of WisdomTree Asset Management, Bryon Lake of J.P. Morgan Asset Management and Tom Lydon of ETF Trends discuss the trends driving money to overseas assets. They discussed global markets and what’s driving the red hot rally in China, broader Asia and other emerging markets so far in 2020. In the ‘markets 102’ portion of the podcast, Bob discussed the key concepts to keep in mind when investing globally, and how a weaker dollar might impact global ETF flows. 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 InvescoQQQ, 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 means for investors. I'm your host, Bob Pisani. Today we'll take a bird's eye view of the global markets and talk about what's driving the red-hot rally in China, broader Asian markets and other emerging markets so far in 2021. Here's my conversation with Jeremy Schwartz,

the global head of research at Wisdom Tree Investments, Brian Lake, head of America's client ETF at JPMorgan, Asset Management, and Tom Leiden, CEO of ETF Trends. Tom, let me start with you, generally. This is a broad question, but we've got a new administration in Washington. I'm wondering what your thoughts about what, if any, effect, the Biden administration might have,

have on the ETF business? Anything that's on their plate that's going to affect this business? Yeah, initial indication, Bob, is the new administration. The SEC will continue to support ETF issuers after a record year of flows last year, you know, all the right things, transparency, diversification, low cost, tax efficiency. And this big wave we're seeing of transitioning mutual funds into ETF wrappers. I think some of the key things will be be most recently there's been an interest in the standardization in ESG research as most issuers and index providers that they partner with have their own proprietary definition and offering of ESG. I think it will be one of the mandates for the SEC to standardize that a bit.

And even though Janet Yellen is somewhat concerned about crypto, it's really not her job. Biden's dominating Gary Gessler, former head of the CFTC. So that actually may help for the mandate to get cryptocurrencies in ETF form. And then finally, we saw a huge interest in IPOs last year. As you know, the IPO Renaissance ETF was up over 100%. So there's a big hunger among ETF investors for IPOs and pre-IPOs in the form of SPACs. Today, as you probably saw, there was the third SPAC ETF that was launched by Morton-Creek Capital and Mark Yusco. So I think that's an area that Gessler's going to look at.

He's expressed some concern over transparency and the internal interest of those behind the SPACs as far as ownership and incentives. Yeah, by the way, we're going to have Mark Yusko on Monday on ETF. Those of you want to know more about that SPAC ETF, the Tom's referencing. Brian and Jeremy, if you want to weigh in on the Biden administration and thoughts, feel free. But other than that, Brian, I just want to move on to the international market. markets, because that's our main topic today. We've seen these Asian markets outperforming in the U.S., outperforming the U.S. China is up 10% this year. It's the hottest market in the world right now. What do you believe, or why, I know you said you do, why do you believe international stocks

might have a shot at outperforming the U.S. this year and any specific areas that you think might outperform. Yeah, that's right, Bob. And kind of picking up where you started, one of the major reasons we think is because with the new Biden administration, there should be less trade uncertainty. And so I do think that will have a stabilizing effect. In addition to that, you know, the valuations are extremely attractive. On the international side, we saw some of the biggest drawdowns last year. And so we are expecting that snapback. And then, yes, to your point, China is contributing heavily. They've obviously been one of the first to hit that reopen trade, which is driving it. From our perspective, we do like,

active. One of our concerns is that the major benchmarks on the international side are heavy banks and heavy energy, whereas we're more positive on areas like clean energy, semiconductors, and luxury goods. So we do think there will be some differentiation with that. One of the best ways we think you can play that is with our international growth ETF, ticker jig. This has 50 to 70 names. It's an actively managed portfolio. Portfolio manager has been in the years and the industry for decades. It does have 14% weight to China. And so we think that's a great way to participate in what we think could be leadership on the international side. Yeah, and that jig, there it is, has been straight up for about a year. I wonder if we could put up some of the main components in that.

And I see it's Taiwan Semiconductor, Tencent, Alibabaab, all names we know. Nestle is one of the few European stocks that are in there, ASML, also in that as well. How are you, How do you weight this particular international growth ETF? Is it just what goes, how do you decide what the weightings are? Well, it's an actively managed portfolio. And so we're going to take the names where we have the conviction that we think can participate in the particular sectors that we think are positioned to benefit from potentially this reopened trade, which is why we like that.

So, you know, this is a bottoms up fundamentally selected portfolio of names where we're doing the research, leveraging our global footprint of analysts and identifying the names that we think need that waiting. And then we have conviction. Like I said, it's going to be a relatively concentrated portfolio with 50 to 70 names. Yeah. Jeremy, same question for you. I put up a few moments ago. We put up some of the global markets. And the U.S., as well as it's been doing, is the laggard so far this year. China, South Korea, Japan, even Europe are outperforming the S&P right now. I know you're fairly bullish on international.

You've got a suite of international ETFs as well. Why do you think this is a year for international? It's got to be more than just a weak dollar, obviously. What's behind the good feelings of an international this year? Yeah, I think some of the case for international is you have this reversion and trade rotation where you had large-cap growth, U.S. tech dominating, you're starting to see that leadership change. And so you're seeing a little bit more cyclicals. Growth globally increasing is good for international.

And, you know, when you think about the U.S., it's really tech dominated and sort of a shutdown economy doing well for U.S. tech. And as we reopen, the international cyclicals, I think, can do well. You know, emerging markets on that better trade tension is a long-term view. We think that's some of the growth dynamics, echoing what Brian has talked about. We think those EM tech giants can be the rivals to U.S. tech giants over the long run. So that's sort of a more of a strategic long run type allocation, whereas when you think about Europe, you think about Japan, they can be more of the global growth reacceleration. And I think that's where you might see some interest there. Yeah.

You have one of the interesting thing about Wisdom Tree is you very much emphasize the importance of removing currency as an effect on it to get to a sort of pure. play on the on the stock prices you have several hedged ETFs that have done very well your Europe hedged the ETF and I wonder if you can explain how this work how you hedge out the currency but Unilever Linde which is a material stock ASML BASF famous company of course another material company L'Oreal all major components in that how do you pull out the currency here explain how you how you're doing that the currency hedge part of this

sure no I think that's one of the key questions when you go overseas, you have to sell your dollars to buy, you know, euros to then go buy the underlying stocks. And the question is, are you bullish the euro or not? You know, for emerging markets, there could be a high cost to hedge in the developed world because of the negative interest rates at the ECB, the negative interest rates at Swiss, negative interest rates in Japan, you're actually paid to hedge. It's not just like a short term for now. You've actually been paid to hedge on average last, you know, three decades. And so we kind of say there's no expected return from currency, it's sort of expected risk. Now, if you think there's a big, weak dollar move,

you know, that's a reason not to have it, and that's sort of an active decision. But if you don't really know, and you're sort of more neutral, hedging lets you get to a baseline of neutral. You know, I think, you know, for EM, again, costs is higher, but for the developed world, Europe and Japan, it's sort of a better than free option that you're sort of paid the interest rate carry to not have to take it. And so I think for Europe and Japan in particular, it's markets, we'd say people should be more hedge than they often are. Yeah, I think that's a really good point. Let me, Tom, why don't you weigh in here on your thoughts on the international market?

What's striking to me is this is the first time we've actually had this conversation in years. The United States has outperformed emerging markets for, I don't know how long, 10 years. It's outperformed China, outperform Europe for 10 years. I know the era of emerging markets, it seems to me, was the 2000s. That did really well up until the great financial crisis. And then it fell apart. It never really recovered, and only now we're talking about it. Or am I exaggerating a little bit?

And tell me if I am. But why is everybody so bullish? Yeah, well, we survey thousands of advisors every week, and they are very bullish on international markets, very bullish on emerging markets. And as these guys said, just to put in perspective, S&P is trading at a forward P.E of 25. The MSC ACWI is at 20,

and emerging markets is at 15, so you can actually buy emerging market stocks for a 40% discount. And on top of that, as Jeremy was touching on, there's a strong case for the U.S. dollar continuing to slide, and that can actually work in your favor as well. So there's a lot of reasons to consider that right now. These folks do a great job in global investing.

And then one thing, though, to put on top of that, we don't spend a lot of time talking about dividend opportunities overseas, too. And both J.P. Morgan and Wisdom Tree, number one, have expressed concerns about fixed income investing in the U.S. and also have talked about the opportunities for dividend or getting that income in the form of dividends by buying international markets, which are very, very attractive today. So for all the right reasons, it really makes a lot of sense. Yeah, Brian, last word on the international part of this thing. Tell me, do you think there's, a lot of this really boils down to about overseas is the dominance of U.S. technology stocks in the 2010s.

When I look around the world, what is challenging them? I don't see. much, I only see some China tech stocks. I see Alibaba, I see JD.com, I see Tencent. Is there any argument that could be made that China tech giants could challenge U.S. tech giants and be a major force in the 2020s or the politics of it get too involved? Weigh in on that. Yeah, so you raise a good point, right? And I think what we're going to continue to see is a difficulty for U.S. tech giants to penetrate China in a meaningful way. Challenges from just a governmental standpoint, languages, how things transfer over. We know that that's been a story for a long time.

But we also know that the mainland China marketplace is enormous. The demographics are huge. There was $1.7 trillion in e-commerce sales last year alone. 60% of that is happening on a mobile device. that makes up 29% of their retail sector. So some of these China names have an amazing growth story within mainland China itself. And if those names can just own their own whole market, I think you're going to see a huge appreciation from them.

There's still a lot of untapped potential in China alone, and that I think we will see them start to come to other markets. But I think they're going to keep themselves really busy in mainland China. To your point, your U.S. tech companies have done a great job really in every other market except for China, where you're starting to see some leadership there. So I think this is going to be a story where you see both Chinese tech and U.S. tech powering forward in their own specific lanes, if you will. But Tom, where does the politics come in here?

Where does the political difficulties China has relating to the rest of the world come in here? I'm wondering if that could prove some kind of break on, you know, all of a sudden, you know, Alibaba is as important as Apple and Microsoft story, the penetration story in other countries. Or am I trying to make too much out of the whole political situation? No, it's going to be in the spotlight, Bob. And it seemed that the Trump administration was pretty tough on China and that the Biden administration probably is not going to be as tough. So that will, in fact, bode well for China.

However, state-owned companies, the influence on companies like we've seen with Jack Ma somewhat being silenced recently is a concern, and I think a lot of people will be paying attention to that. However, we're still in the early stages of China, A shares especially, and there's some great opportunities there as well. So it's an area to really pay attention to. There's some great upside opportunity. Yeah, I want to move on and talk about. something I'm very interested in that is dividend products. We get a lot of interest in this from investors. And Jeremy, I know Wisdom Tree has got a very interesting suite of dividend products,

including a dividend growth ETF. You've got a mid-cap dividend, a large-cap dividend, a small-cap dividend. You kind of cover the universe there. Tell us a little bit about how you weight these products and what future does dividend producers have in 2021. We're putting up here some of the specific names of wisdom tree products here in the dividend space. But tell us how you weight these products. You know, the key, you know, on just the case, you know, Tom brought it up earlier on just the historically low yielding environment, rates at zero, short-term rates at zero, the tips yields, inflation adjusted yields at negative rates, negative 1% plus. You know, the Fed wants to target more than 2% inflation, and you're just getting a little bit over 1% on your tenure. I mean, it's,

it's a tough spot for investors who need income. And so, you know, we kind of think of dividends as things that can protect from inflation over time. They rise. If you go in the 70s and 80s, dividends grew 6%. Dividend growth was more than inflation during the high inflation in decades. And we expect a return to inflation. So that's a sort of macro case. In terms of how we weight these portfolios, unlike the market cap weighted indexes,

these rebalance back to dividend stream. So Apple pay $10 billion plus in dividends. You take all the total dividends in the, US and divided by that total dividend stream. You know, last year was a tough year for, let's say, you showed some of the mid and small cap dividends. Large cap dividends were only down two, three percent in aggregate. They weren't down by a lot.

But when you go to that mid and small cap, they're down 20 to 25 percent, you know, at the bottoms, they were down even more. And so that was really the shutdown economy, the sort of mid-small caps, more sensitive to the shutdown, large-caps, quality. more tech, more health care, not as impacted with the virus. But as you get to a reopening, I mean, we're starting to see like emerging markets leading this year. You're seeing small caps leading. Sort of the reopening, benefiting, you know, started with the election and the vaccine.

It's been doing well. But, but Jeremy, I wonder if we could put up what's in the U.S. dividend growth, the largest holdings here. So I see Apple. I see Microsoft, Johnson and Johnson, Verizon and Procter & Gamble. This is like mega cap land here. Is Apple in there because why? It's growing its dividend. I mean, Apple does not strike me as a big dividend provider or even growing it.

But what's the criteria here for including companies? It is the biggest. It's basically one of the biggest dividend payers in the world. So when you take the total dividend stream, it's paying, essentially the dividends per share time shares outstanding, which is sort of a modified market cap, time, you know, giving more weight to the more dividends they pay. It screens for quality.

The specific screens are growth in quality. I call the quality screen your Warren Buffett factor. He always says I buy like high return equity and no debt as his, as what he, when he says like what types of companies buy. That's half of the screen is those quality factors. The other half is earnings growth, traditional Russell growth type screens. You package that together. And then you wait back to the divin stream once a year.

It just did that in December. And so that higher quality nature, we think, leads to companies that can sustainably grow their earnings and dividends over time. Tom, can I be a curmudgeon on dividends? Here's a problem I've had for years. The viewers get me a curmudgeon? No. You know me, Tom. No.

The viewers think dividends are free. That's the problem I've got with this whole thing. They think that, oh, if a stock is $100 and it pays out a $2 dividend, that's like $2 that's free. but it's not free. You and I know that if it pays $100 on it pays out a $2 dividend, the stock is down $98. There is no free lunch out there. And every year I get, we just get so many, how do I get more dividends out of the thing? As if the dividend that you're going to get is suddenly going to cause your total amount of money that you're going to have to outperform everything else. And I don't know if that's the case or not, or am I just being a curmudgeon amount of this? You're not, Bob. I mean, everybody has to rethink income today. You know, you think about a classic 60-40 portfolio. People are living longer. That 40% allocation, many advisors are thinking in the next five years might be dead money. It might be not only that you're not going to make much, but you might lose money if we start to see a little bit of a creep up in rates. As you're looking at this ETF, DGRW,

and you look at the holdings, these are some of the best performers in the S&P 500 in the last 10 years, but they're fairly priced and they're kicking off decent dividends. If you're retiring at 65 today, would you rather have these types of companies in your portfolio in the next 25 years or be exposed to the bond market where you're not making much of a yield? And in fact, that money is at risk if we do see higher rates. So we're seeing more and more of a shift to they, more of an allocation towards dividends, yeah. Yeah, but that's an argument for the predominance of the quality screen, I think, rather than

on the dividends. Brian, I've sort of left you out of this. I don't know if you have any thoughts on the whole dividend question, but it's a big issue. My point is that dividends are not free, and investors somehow think that they, I don't know why, they think that they are, but they're not. So the question is, how do you pull out money in a situation, people want to pull out money in a situation where there's not a lot of money to pull out. It makes some sense to go into high dividend payers, but there are risks with doing that. Look at ExxonMobil. We don't know if ExxonMobil's dividend is safe at all, for example. Yeah, Bob, you're right. And I agree with what Tom was saying. What I think we're really hearing

from investors is less specific on dividend than more specific around I need income. And I do think that investors are continuing to look for income in the markets, particularly because they're not so sure that the bond markets are going to be able to provide that for them. One way, obviously, you can do that is by getting option premiums, right? And so we've actually launched an actively managed ETF, JEPI, which is essentially a covered call overlay strategy. It's got active equity underlying, but then using the option markets, we can overlay on that. And the way we think about that one is, you know, it protects to the downside. so you're only going to get 60 to 80% of the downside. But on the upside, you can get a 6% to 8% yield off of this.

And so that can really start to drive a nice income story for you. It's not a dividend per se, but that is that income that we think investors are looking for. On the other side of the table and tying it back to the Biden administration, investors are also starting to think about are my taxes going to creep up? And they're also seeing that there's going to be an aggressive infrastructure program. And so could municipalities benefit from the munis? We've got an ultra-short Muni ETF, which can get you 85% of the tax-equivalent yield of a 10-year treasury with only 8.5% of the duration. So I do think investors are continuing to look for income.

They might not be looking in the traditional dividend bucket. They might need to look in some other areas for their portfolio. And the symbol for that is JMST, am I right? I'm just looking off the camera here. Is that right? You're exactly right, Bob. J. M.S.T. Okay. So investors, you might want to take a look at it. That's a very good point. 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 we'll be talking about key concepts to keep in mind when investing globally and how a weaker dollar might impact global ETF flows.

Here's my producer, Kirsten Chang. Bob, looking at the framework of global ETFs out there, there are obviously geographically focused global ETFs, but they're also thematically focused global ETFs as well. Take, for instance, large-cap China tech ETFs like the KWEB, global tech ETFs, emerging markets, consumer funds, the list goes on. What areas are we starting to see gain traction globally this year? You know, Kirsten, this whole issue of investing overseas is very complicated. Simplistically, the strength of of the dollar is a very important factor in investing overseas, particularly emerging markets. It's true the dollar has been weaker recently, and there is a case a lot of people are making

for the dollar to continue to stay weak. A weak dollar makes it easier for overseas corporations to purchase goods, but it's a little more complicated than that. But this whole issue about buying stocks overseas is a lot more complicated than just owning or consider what the dollar issues are. First, there's just the general performance, even X currency. There's an argument that could be made for mean reversion. Mean reversion is the tendency for markets to sort of go back to where they used to be after periods of either outperformance or underperformance. The U.S. has outperformed all emerging market indices for more than a decade, and generally it's outperformed Europe as well. The emerging markets really had their great period of growth in the 2000s. After the big disaster of what we call the Thai bot crisis in 1997, 98, when all the currencies kind of fell apart, the emerging market economies, particularly the Asian emerging market economies, regrouped and had an enormous growth spirit in the mid-2000s.

The markets went up tremendously at this time. Europe also went up and outperformed the United States during this period. But after the financial crisis hit in 2008 and 2009, these markets fell apart and they never really recovered. I mean, they recovered, but not like the U.S. did. They have underperformed the United States, both Europe and emerging markets, for a decade. Essentially, emerging markets have been sideways for a long, long time. And just recently, just now, last few months, we're talking about outperformance by the group. Why did this happen? Well, the most obvious explanation is, first off, the U.S.

pumped huge amount of money into the U.S. economy after the financial crisis. Other countries did as well, but the U.S. really went all out. And the reason is because they had a leadership in the Federal Reserve that was very experienced with the Great Depression in the 30s, and the one thing they figured out was the reason the depression was so bad in the 30s was not because the stock market crash. It was because the government did nothing to assist or did very little to assist banks and other people. They didn't pump enough money into the economy. In 2008, 2009, Bernanke, the head of the Federal Reserve, decided,

I'm not going to make that mistake, and they were aggressive. The one thing I think the Federal Reserve feels now is studying the 2008-2009 crisis, they should have done even more. That's why you hear Janet Yellen say, go big, because that works. They know that works. So, U.S. pumping money into the economy helped the U.S. stock market in the 2010s for sure over other countries. Second point is U.S. technology owns the world.

It did own the world. It emerged in the 2000 to 2010s dominating technology, the primary growth factor in the world economy dominated the world. And it was U.S. technology stocks that dominated the world. Now, here's a very interesting question. It'll color how you feel about emerging markets. China is considered an emerging market. For how long, I don't know.

But China's tech companies are starting. starting to compete with U.S. tech companies. So we know all about Alibaba, we know all about JD.com, we know all about Tencent. U.S. tech companies have changed the world. Here's a good question. Could Chinese tech companies change the world? I don't know the answer to this, but I can tell you that's the question to answer. There is a problem here. There is not just execution questions. That execution question is how well can the companies perform with their management and grow with the ideas they have? There is a political question here. which is how is China interacting with the rest of the world?

And does the rest of the world want to interact with Chinese companies? Do they want to interact given the influence of the Chinese government on some of these companies? And that is a very difficult question to answer. But if you can answer it correctly, I think you'll figure out about whether Chinese companies can equally compete with U.S. tech companies in the 2020s. And what's driving the rebound we've seen so far in emerging markets, ETFs? Is it partly commodity-driven, commodity inflation helping that along, a weaker dollar? Some of this tied to U.S. market valuations looking frothy right now and people needing alternatives? You know, Kirsten, the thing about commodities is it's generally an effect of a global rally.

It's not a cause of it. So we use this phrase, the global reflation trade. And it's a term we used to imply, simply put, higher levels of inflation. But why? Well, it's due to the massive stimulus that's going on around the world, but particularly in the United States, stimulus to get through the COVID winter, essentially. We're anticipating a smooth vaccine rollout and for a significant second half reopening of the U.S. and the global economy because of all of this stimulus. And one of the effects of this stimulus is increased economic activity, obviously. And one of the leading indicators of this is commodity inflated. So that's exactly what we've been seeing.

Prices for copper, prices for aluminum, what we call base metals have all been going up because of anticipation that the global economy is again going to be expanding. China is the biggest consumer of global commodities in the world. So when China starts recovering, as it has been, coming out of the COVID winter earlier than the U.S., commodity prices tend to rise, and that's exactly what happened. exactly what happened. You can track this if you want. There are a number of commodity indexes, but the Goldman Sachs commodity index, if you just Google that, you can see that. That's a basket of different commodities, including the base metals, and you

can follow that fairly easily. So just remember, generally commodity inflation, which we are seeing, is an effect of some kind of event, either a global expansion, a global expansion of money, a global expansion of jobs or something like that. It's generally not a cause of anything. 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. Investco QQQ believes new innovations create new opportunities. Here's to greater possibilities together. Learn more at Invesco.com slash QQQ. Invesco Distributors, Inc.