ETF Edge - Finding momentum in a down market

Episode Date: May 9, 2022

CNBC's Bob Pisani spoke with Mel Faber, Co-founder and CIO of Cambria Investments along with Tom Lydon, Global CEO of ETF Trends. They discussed what to do in a down market without taking yourself out of the game entirely – whether it’s momentum trading or put options. Plus, what are the latest flows telling us about the ETF landscape right now during these turbulent times? In the Markets 102’ portion of the podcast, Bob continues the conversation with Tom Lydon from ETF Trends. 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, Investcoe, Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights in all things, exchange-traded funds, you're in the right place. Every week, we're bringing you interviews and market analysis and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, coming off of Wall Street's wildest week of the year, we'll discuss what to do in a down market without taking yourself out of the game entirely, whether it's momentum trading or put options. Plus, what are the latest flows telling us about the ETF landscape right now?

Here's my conversation with MEP Faber, co-founder and CIO of Cambria Investments, along with Tom Leiden, global CEO of ETF trends. Met, thanks for joining us, your Global Momentum EETF. It's one of the biggest winners in the ETF space this year, up 6%. S&Ps down 14%. Tell us how this works. What does it own and how often do you rebalance? Well, this fund doesn't much.

mine being different. And as Tom Liden, our fellow panelists knows, I have no problem embarrassing myself. We've sung karaoke together. So this fund is meant to be an outlier in a world of funds that kind of do the same thing. So it can go anywhere. It can do anything. It's a trend following fund. So it looks for two things. One, what's been going up? That sounds simple enough, right? Over the past year or so, intermediate term momentum. It looks at the global opportunity set. So stocks, bonds, real estate, commodities, everything. But the key criteria is it has to be in an up trend. And long-term trim following, something like the 200-day moving average,

which has been around for 100 years, right? So those two combinations sometimes can put you in a normal portfolio in times like now. It's a big outlier. It's a lot of real assets, a lot of commodities, some residential real estate, some utilities mixed in. But a portfolio that for this environment is unique. It's been a while since we've had this inflation, rising inflation. Typically, that is not a warm and fuzzy place for U.S. stocks or stocks in general.

So it's saying right now you want to be a little more in the real asset spectrum, which most investors, when we poll them on Twitter, have no exposure to. I want to distinguish between trend following and buying the dips. There's a very important distinction. I want you to make that. And I know, Mb, you did a very famous 2007 white paper on this, but make that distinction for us. So, you know, there's two pillars or foundation which we build portfolios.

One is value. So we find value in all sorts of weird, funky places. And the other is trend. Sometimes those are sort of a yin-yang diversifiers. They look very different like today, right? So most assets are in a downtrend today. U.S. stocks, foreign stocks, most real estate, bonds even. That's pretty rare.

What kind of everything's going down? Commodities and real assets are. really the only thing going up. Now, my favorite investment is when value and trend overlap, right? A cheap investment that's in an uptrend and is also usually hated. That's not the case right now, particularly with most assets in the world going down. So really, the last place to kind of hang out is in many of these real assets, and particularly the commodity patch. Yeah. So, Tom, this seems like a very good moment here for trend following overall, right? People are confused on the fundamentals. They're confused on the technicals.

So just stay with whatever is working, I guess, is the right thing to do. That's the nature of trend following, right. Well, you're exactly right, Bob. And really what Meb's pointing out is we have a moment in time that we haven't seen for a long period. And you relate that to ETFs.

Coming out of the financial crisis, we only had one-tenth of the money in ETFs that we have today. And back to Meb's paper, he wrote it in 2007. Nobody read it. But in 2009, after we had this big decline, he had 300,000 downloads after the fact. It really brings up something that's important.

Technical analysis and trend following can do an important thing for investors. It can remove emotions. If you have a technical strategy and you stick to it, you don't have to stick through these very painful days or trends like this because you have a specific plan. And we know, even though a lot of people buy and hold and do asset allocation, there are a lot of folks, especially financial advisors, that use trend following. So let's just go back to this whole point about, I don't want to get in drag in Eugene Fama and factors,

but for decades it's been known. Med was mentioning value. Value is a bit of an outperformer long term, although it hasn't been recently. And so is momentum, even, to a certain extent. Quality is another aspect. There's all of these, a small group of factors that seem to do better than the market over long periods of time. Is there an ideal allocation for trend following? Meb, for you too, if you want to time in, but, I mean, what do you do here? I think, Bob, you're hitting on something key. And,

Med, jump in here, but as we talk about the commodities area, we talk about inflation, we talk about declining rates, and people historically said, well, it's good to have three to five percent in gold. Well, gold isn't doing it for us in the commodity space right now, number one. And number two, a five percent allocation isn't going to help your portfolio. If we continue to see high, high rates and we see higher inflation. MEP? Yeah. So if you look at the long history of trend following, I mean, again, this goes back a hundred years, back at the time of Charles Dow. Trend following is probably the ultimate diversifier to a traditional portfolio because usually

it does well when everything else is hitting the fan. And this is really a key point. Like buy and hold is a fantastic investing strategy. I love buying hold. The problem with buy and hold is that it often does poorly when everything else is doing. poorly, not only in your portfolio, but in your personal life, recessions, inflation at 8%, you know, huge unemployment spike up, on and on and on. And so trend following, we say, and we're the big outlier here, I don't know any investment advisor in the country that puts as much as trend falling strategies we do. Our dedicated allocation, we call it Trinity portfolios, is half in trend following. And it's funny because you read a lot of the academic literature

and the optimizers, going back to what Bob was talking about with French FOM on the academics. and even the big banks, they'll often run these optimizations and they'll say, okay, we're going to be blind. We're going to allocate to all these asset classes and let the optimizer decide. And they always say you should put like almost most or all your money in Trin following, but then they always conclude, okay, we can't do that because that's crazy. So we're going to max it out at like 20% or something. Right?

So it's like kind of not a very honest realization. But the problem with Trin is it also is hard to follow, like buy and hold, but it's because you look different. So for a lot of the period post-financial crisis, trends been kind of totally average. Right. You know, when S&P is going up 20% a year, it's hard to follow.

It's usually, particularly during crisis periods, when it really starts to discharging. You rebalance monthly, is that right? Mm-hmm. Yep. Okay. Is there any sign this will be different a month from now? I mean, I know I'm trying to force you to say something you can't say,

but this doesn't give you a crystal ball into what the next rotation is going to look like. You're loaded up on commodities right now. Does that mean next month you might be loaded up on consumer staples or something like that? Could be. You know, this month we made a couple changes. Not a lot. We bought some utilities. We sold a couple of the value funds, stock funds, remaining stock funds we had.

But in general, you know, if you look at across the board on what it owns, like it's not a traditional happy place, risk-on type of traditional environment we've seen from normal portfolios. You know, some of the assets are closer to downtrends than others. But usually what happens is it moves in pieces, right? You'll see a chunk of the portfolio come out in another chunk. Very rarely is it like a full scale moves from, you know, a huge allocation to nothing. Typically, the time frame we're operating on is full cycle. So this is playing out over the course of quarters and years rather than days and weeks and months. So speaking of trend following, you're good to following this.

What are ETF flows telling us? First of all, do you think ETF flows are a good trend indicator for anything? They're great. Sometimes I get confused by them. Because, frankly, sometimes I don't think they tell us much of anything. And sometimes it seems rather significant. It's enlighten us. Flows can be emotionally driven.

We know that. The stock market can get emotional. At the same time, I think the key thing here, Bob, is most money is managed by people, either advisors or people who have a lot of money. People who have a lot of money tend to be older. You and I talked about this earlier. Why you're looking at me? If we're a little bit longer in the tooth, we've got more of an allocation.

Now you're really annoying me. You're pointing to me, and you're saying long in the tooth. We're both boomers. We're both boomers. Very sensitive. And with that in mind, you have more of a balance, maybe a 60-40 portfolio. You talk to advisors. They're not concerned about the volatility in the equity markets as they are as far as rising interest rates.

what inflation's going to do and you look at that fixed income portion, if your client is close to retired or retired right now, the outlook for fixed income is pretty bleak. Yeah, but I want to go back to the question. I want to talk about this outlook in a little bit, but the trend right now, what are we seeing in terms of flows? A couple of things. We have more money going into commodity-based ETFs

than we do in U.S. fixed income ETFs here today. That alone is crazy. They're following MEP around. That's what they're doing. They are. And then also, as far as what little inflows we're seeing on the equity side, we're seeing huge outflows in the S&P 500 like ETFs. And why is that?

It's because they're jacked up on Fang stocks or Microsoft or Tesla that are doing so poorly compared to the major index. And if you went into like an equal weight, RSP, that Invesco equal weight ETF, just today, for the first time it went down double digits. It's only been down single digits so far a year to day. because the broad market. You're talking about flows. Well, we're talking about performance, but also flows are down a little bit.

Most of the outflows on the equity side are coming out of the end. And bond funds, though, since the beginning of the year. Bond funds, very, very small. It's net positive, but it's less than $20 billion. This amazes me. You know, at your conference, I mean, people were saying 70-30 or 80-20 is the new 60-40, and we're still not seeing big outflows. No, but in the bond funds.

There's a record amount in cash. in money market funds, record amount in short duration. People are taking their marbles and they're going elsewhere. Okay, I want to talk about that a little greater. But just speaking of flows, Kathy Wood's arc fund, I did an interview at your conference with Kathy Wood. And she marveled at the fact that she has a very loyal following. And it's amazing to me.

There was 190 million shares outstanding in April of 2021. There's still 190 million shares outstanding. This is buying the dip here. People want to say, not trend investment. She's saying now, you've got to stick with me four or five years, but it's remarkable how loyal her following down 60%. And still no outflows significant. If you believe in her premise, if you believe in the game plan that she's gotten in place, and you could buy her for 60% off compared to a year ago, and you've got time. Again, I'm not going to talk about the age much anymore, but my kids are in their 20s.

I keep telling them, push into Kathy Wood because 5, 10, 20, 30, 40 years from now, not saying you and I don't have the time, but boy. You keep pointing at me when you say old people and don't have the time. I said, you and I, come on. Okay, sure. Not that I'm sensitive about this. Meb, Cambria, changing the subject, has several other funds for investors who want alternatives out there.

You have a tail risk ETF. It holds cash and treasuries and put options. This is kind of an unusual choice, but tell us about this. Yeah, so, you know, when we launch funds, we want funds. We say there's 10,000 funds out there. You guys talk about a lot of them. I always say, why do we need any more funds? And so we only launch funds that either don't exist or we think we can do much better or much cheaper. And better, obviously, subjective. But all of our funds are cheaper in the category average. And in this case, we've launched two tail risk funds. So there's tail and fail. The tail is the U.S. fails the foreign. But we looked around the category and we said there's not a way to express this trade that we want to do that's out there currently. So we wrote a white paper. We then launched this fund, and the concept is simple. If you want to be able to hedge a part of your portfolio,

how would you possibly design it? And the long history, when we did this white paper, when stocks do very poorly, you know, the more vernacular, when they barf, when they puke, when they really go down bad in a given day, a given month, or even a bare market, what helps? Well, all the things you expect not to help, like look at today, don't help historically.

Foreign stocks don't help. real estate doesn't help. Gold is like your crazy neighbor. Help sometimes, maybe not. Commodities on average don't help. Bonds help sometimes, right? But the better part of the first part of the century, the 20th century, they didn't really help during the bad times. Everyone expects them to help today, but they may or may not. But on average, they've helped. And so what else has helped? Trend following has helped. But tail risk, you can't say guaranteed in our world, but it's almost guaranteed to help by buying puts. Okay. So what we do in this fund, 90% hangs out in the 10-year treasury, and the rest we buy our latter puts on the stock market.

The goal is to try to, over a really bad day, month, bare market, and get about a one-to-negative-one exposure to U.S. stocks. And it's done a very good job of that. But the key for all these tail-rest type of strategies, you look at them over time, they just kind of, it's like a life insurance policy, right? It just lose money, loses money, and then does well. So the trying to lose less money in the bad times, which is where a lot of the other fund struggle. Well, that's the problem I have with this, Tom. It's a money loser over time. I mean, you've got cash and bonds. Cash is going to deteriorate, and bonds are already deteriorating, and they're buying puts to get a little, to prevent you from losing too much over time.

It's a tough argument. Well, when you look at trend following, and you can put a 200-day average on this ETF, and over time, if you have an equity market that looks expensive, and bonds are flat, and the prospect for bonds are flat, this is. This is a great way to hedge. And most people, you know, again, rather than going short or inverse and leverage, that I'm not going to get you started on that, Bob. Please. But it's one of those things where it's another option, it's another choice.

And there's a lot of good education that goes in that. Meb, you've got a more traditional yield-E-T-F that I can understand a little easier, SYLD. It looks for stocks with attractive cash flows. Tell us a little bit about this. I have a board of what's in it, too. I'll get you to comment on that. Yeah, you know, it's funny. You guys listen, listeners probably are like MEB's a perma, perma bear or something. And that's not remotely true. You know, I just think right now, if you look at U.S. stocks, they're expensive, some of the most expensive they've ever been, and they're in a downtrend. And historically, that is produced about 0% returns. So on evaluation level alone, we're expecting zero real returns on U.S. stocks for the next decade. That's market cap weighted, however. So what can you do within U.S. stocks? Our largest fund is this U.S.

stock fund. And it's very Buffett-esque sort of strategy. It's looking for great companies that generate a lot of cash flow that are trading for cheap valuations, and the CEOs are behaving by returning cash to shareholders through dividends or net buybacks. You can take this strategy back-tested back to the 1920s, and it outperforms basically almost any traditional value dividend strategy over time. It's a very sensible strategy. We run it in U.S., foreign, and emerging. They've all done well. But some of the characteristics right now, you can pull it up on Morningstar or CBC wherever

and look at the actual X-ray of the holdings. You know, value for a better part of my career when we launched ETFs in 2013 has been out of favor. You alluded to that in the beginning that something changed in 2020, whether it was the election, interest rates bought it in near zero or the pandemic bottom. You know, value had one of its worst years in history. in 2019, and then following, I think it was 2020, 2021, it's really rebounded. But if you look at the spread, like, it's barely even moved off the bottom. It hasn't condensed

at all. And so I think you have this opportunity that could last for years. You know, days like today, it may clear up by the end of the year, I don't know. The SYLD is not necessarily value stocks. I mean, I'm looking at these, it's attractive cash flows. I'm looking at top holdings, Dillard's, New Corps, Mosaic, Louisiana Pacific, Steel Dynamics. I guess you would call them value. I don't know. Part of the screen is we use a value ensemble. So there are very traditional value factors that Fama would love at the beginning.

When we talk about value, all that really matters, it doesn't have to be that specific, is that are you using value at all? Because the opposite, everyone all loves to talk about value stocks and we love them. But it's not just that you're buying the cheap stuff. It's also that you're avoiding the really expensive. And let's be honest, the last two years, my God, some of the craziness we've seen in markets and some of these stocks, like 10 times revenue used to be the ceiling, it then became the floor. And a lot of these stocks.

And so you have both sides to it. You're hanging out the cheap stuff, but it's also that you're avoiding the really expensive. Before we let you go, just one quick thing. If you were to pick right now, where's the best value around the world? This is unpopular. This is why value works is because the U.S. is a long-term P.U. ratio, Cape ratio, Schiller, about 32. It was 40 last year.

Foreign developed, totally reasonable around 20. Foreign emerging. This is my pick. Close your eyes. Hold your nose. Stinky opportunity. Emerging value over the next decade on a pure compounding basis. I think is the place to really be.

A lot of these countries are now in single-digit PE ratios. historically got everything going for them, demographics, you've got super cheap companies, and they get a kicker from a lot of the commodity trade as well. And they have a tough time in a rising interest rate environment. Really tough. Really tough. Thank you for saying, really tough. I felt like saying.

Yeah, yeah. But that's why we like meb, because he comes on. That's why they're cheap place. That's it. That is why they're cheap. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Market's 102 portion of the podcast.

Today we'll be continuing the conversation with Tom Leiden from ETRF Trends, cut off of the great ETF conference, which you put on less than a month ago, which I really enjoyed attending. I got a chance to talk to some of the RIAs there, the registered independent advisors, but you're the expert on this.

What did they tell you? What are they worried about right now? What's interesting, Bob, even though we're seeing all this volatility and equities, most advisors are managing money for people who have money. So they're close to retirement or in retirement. So there's a big chunk of their allocation that historically has been on the fixed income side. They're scared to death about rising interest rates and they're scared to death of inflation.

There are also concerns, secondarily, about geopolitical risk and what that might mean to making that trend continue over an extended period of time. Their third concern is market volatility, but not as much. Because when you think about their clients who safety and income and getting a regular income stream is their top priority right now. And that's the big concern right now. When you think about it to a certain extent, investment advisors and RIAs in particular are active managers. They might have ETFs, but their allocation and where they move it around is their decision. They might even buy a portfolio of ETF strategies, but even that is a tactical allocation decision on their part. It's got to be scared to death with 6040, because I kept hearing 80-20 was the new 60-40 at this conference.

People couldn't seem to decide. Jeff Gunlock was telling people commodities, long-term treasuries, and cash, and a small stock allocation. What you're pointing out is there's more money in motion than we've seen in the ETF space forever. Coming out of the financial crisis, if you were a financial advisor, and you did a 60-40 allocation to, let's just say, the world's stock market in, and the Bloomberg-Barkley's Ag, you did 60-40, you would have killed it up until recently. So now, after 30 years of declining interest rates, having to face inflation and rise in interest rates for the average advisor, it's a huge conundrum. And they don't have faith that the Fed is going to tackle this head on. They've been very, very slow to the punch.

So we just had Med Faber on. His momentum ETF is essentially a commodity fund at this point, because they're following momentum, obviously. Is it too late to have the commodities to play commodities at this point? I know you did some webcast recently with our mutual friend, Jan Von Eck, who's a master at commodities. Is it too late? Are we all piling in after the barn doors closed? We had the commodities team on from Van Neck for a webcast and in Vesco.

Both teams feel like we're in the early innings. We might be in the third or fourth inning. If you look back to the late 70s, early 80s, there's a five-year period where we saw. really hard inflation. And the crazy thing is, Bob, how they measured inflation back then to compare how they measure that today is different. If we use the same measurement, the numbers would be even that much more scary. So that's really the thing.

Fed is signaling, oh, we've got this under control, and it's going to go away. And now, most recently, well, we're going to have to do more to address it. What if this is going on for another five years where we get five to seven percent inflation? What's that going to do for rates? What's that going to do for purchasing power? I doubt it's going to go on five to seven years. I think there'll be demand destruction this summer that will eventually slow inflation down.

The problem we're all dealing with here is how do you call a bottom? And what do you look for at a bottom? And maybe you get these false bottoms. Do you remember November 2008, where we were down 50%, I think we were hit high in October 2007, and we were down 50%. And all of a sudden, all these technical indicators indicated we were bottom, but it wasn't. The market rallied into December and then went down another 25% or something like that through March 2009.

And that was the bottom. We didn't even know what was going to happen then, but that was the bottom. And people were trying to buy in December as it was rallying, then got clobber going down. And then they were selling at the bottom in a big way to people just massively selling. They couldn't take it. It was a disaster. I remember being so depressed about it, watching people sell. Because if you're going to be down 54% or whatever it was down, you're not going to sell down 54%.

That's just not a rational decision. So that capitulation we have yet to see here, and hopefully it's not going to be that painful. But the other important thing is commodities in inflation is based on supply and demand. So if you look at global agriculture, global energy, real estate, and even the job market with this great resignation, if people want to do something, I want to do something from home, but people are telling you to come back to the office and I don't want to. I can change jobs and I can get a job where I can work from home and actually make more money. All these shifts really need to happen. And the only thing that people have been invested in in the past to protect from inflation is gold,

and gold has been the worst performing commodity because there's not a heck of a lot demand on. So there's concerns about food shortages in countries over in Europe and in Asia right now. If those things start to kick in, we could see this inflationary thing get really ugly. Yeah, I agree, and that's why I'm hesitant to, you know, you want to look for science. You know, 200-day moving average, you know, 35% of the S&P 500 is, you know, at 52-week lows. And there are numbers that are indicators, technical indicators, are very high now. So people are tempted to say, well, gee, start buying here if you're a trader type. In fact, all this could be wrong.

In a market like this, that could be all false indicators, which goes to the point about why you're not staying long-term buy and hold. I go back to my Jack Bogle roots, if you're actually going to be sitting there. Unless you need the money in the next year, and obviously you shouldn't be in stocks, I still go back to the Jack Vogel principles. Right. Well, there's an... Jack Bogel is great because he removed the emotion. He just said, lean in, just continue to buy over time.

Right now, we have an emotional period of time. And if you're questioning whether you missed this inflationary trend, and let's just say it's still in the early innings, by following a trend like Meb's ETF, the momentum ETF, it does the right thing for you on a 200-day average? The other thing is, if you want to do that yourself, through a 200-day average on PDBC, which is the Invesco Commodities ETF, and as long as you buy it now with a 10% allocation and you sell it when it goes below its 200-day average, you're not going to kill yourself in buying at the top and not know when to sell. I think technical analysis really works.

In this kind of situation, it does. Okay. Tom Leiden, of course, runs ETF trends and just completed a very successful ETF conference. Tom. Tom, thank you for joining. us and everybody thank you for listening to the ETF Edge podcast. Invesco QQQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQQQ, Invesco Distributors Inc.