ETF Edge - From First to Worst – Bitcoin’s Wild Ride + Betting on Big Tech 1/17/23

Episode Date: January 17, 2023

CNBC’s Bob Pisani spoke with Simeon Hyman, Global Investment Strategist at ProShares, and Nate Geraci, President of The ETF Store. They tackled bitcoin’s wild ride over the past two years and the impact on bitcoin futures trading. They also discussed what the heaviest-volume tech ETFs out there are telling us about investors’ willingness to bet on big tech this year – and delved deep into ProShares’ hugely successful dividend ETF strategy. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast, and happy new year to everyone. If you're looking to learn the latest insights on all things, exchange traded funds, you are in the right place every week. We're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, from first to worse, we'll tackle Bitcoin's wild ride over the past two years and the impact on Bitcoin futures trading in the ETF space. We'll also discuss with the heaviest volume tech ETF.

out there are telling us right now about investors' willingness to bet on big tech in the new year. And we'll also delve into pro-share's hugely successful dividend ETF strategy. Here's my conversation with Simeon Hyman. He's the global investment strategist at pro-shares along with Nate Geraci. He's the president of the ETF store. Simeon, I say you had the most successful ETF of 2021. That was the Bitcoin Futures ETF launched right at the top of Bitcoin, October, November, It was $65,000 for Bitcoin.

And then you had, I call it the least successful ETIP in that the same Bitcoin futures had a huge price drop during that time. Now Bitcoin is back. Everybody's talking about it again. What's the trading sentiment around Bitcoin right now? What do you see? We had assets come in all through that tough environment for Bitcoin in 2022. And to us, this is a very important reminder of the belt and suspenders approach of using futures in the ETF. wrapper. We see what's happening in the exchanges, the challenges that are facing those, frankly,

immature Bitcoin exchanges. But here with the futures market, first of all, the futures are tracking spot very, very well. Second, the CME futures is regulated by both the CFTC and the SEC. You've got the clearinghouse that's mitigating counterparty risk, and you have the ETF wrapper that keeps those assets segregated. So it's a very robust solution for folks to get exposure. And it's important to remind people that even though the price of the Bitcoin futures dropped dramatically as long with Bitcoin, the shares still stayed up there. They didn't abandon that wrapper that you had there. Now, what I had you own when it went public was October 2021, you said, you sort of bucked the trend. You said, look, this is the way to own Bitcoin.

We don't worry about whether your money is getting stolen. We don't worry about what's going on. You own a futures. And your position seems to have been vindicated. by what's happened in 2022? I think so. And the issue is forget malfeasance. You know, that can happen, unfortunately, anywhere, any time.

But even notwithstanding malfeasance, we had the largest Bitcoin exchange, the largest crypto exchange in the U.S., remind folks in the second quarter that their accounts may end up being commingled in the event of a bankruptcy. So there are real challenges there. You see the stark contrast in the futures market. There's more liquidity there. the futures market trades more volume every day than the largest U.S. crypto exchange. You know, Nate, one of the big criticisms of tracking futures contracts was that they don't track

the underlying very well. And yet as Simeon pointed out, this futures contract has tracked underlying fairly well. Any thoughts on that? Yeah, it's remarkable. You look at the history of this ETF since it launched in October of 2021. It's tracked the spot price of Bitcoin near flawlessly. It's done a really nice job. And I think a lot of people, myself included, thought that could be a challenge with the potential for Contango in the Bitcoin futures curve. But it's tracked it really well. And the fact is, there just aren't that many ways for everyday investors to get exposure to the spot price of Bitcoin in a traditional brokerage or retirement account. If you look at something like the gray scale Bitcoin Trust, ticker GVTC, that's trading at a 40% discount. It has not done

a good job of tracking the spot price of Bitcoin. And so if investors do want that Bitcoin price exposure, Biddo is showing itself to be a very nice option. As to why this is happening, it's tracking so well. It is a financial future. It's not oil, for example. So, I mean, you're getting a dollar. You're way ahead of me. There were folks who were skeptical with regards the ability of the futures to track, but 100 percent, it's a financial future. Our faith didn't come from any religious view. It came from the textbooks. The textbooks say a financial future, no storage costs. The oil is not in tankers. This is simple stuff. The premium should be roughly equivalent to the short-term financing cost. We got the cash there earning the offset,

and the tracking has shown up. I want to move on here because there's a number of topics, because you cover a lot of different ETFs at pro shares. You had two hugely successful tech ETFs last year again. Ultra Pro and Ultra Pro short QQQ. These are three times long and three times short, the daily exposure of the NASDAQ100. Every day when I watch this and I want Nate to comment on this as well, these are the heaviest trading volume of ETFs on the dollar basis that I see out there. These are people who are essentially making, and here you see TQQQQQ and SQ. These are people essentially making short-term bets on tech. And since the start of the year, tech's done better. I know these are short term. Is there anything we can say about how these

trade right now? Does it say anything at all about sentiment about tech? It's a challenging environment for investors to navigate. And what we know is that these ETFs allow investors to enhance return, to hedge their portfolios, or to target exposure with less capital at risk. And what the volume tells us is that investors believe these ETFs are performing exactly as designed. Nate, every day, these are the heaviest volume ETFs out there. I'm sure you you see this too, you run your own ETF business there. Three times long QQQQ,

QQ, 200 million shares a day I see routinely trading and it's what, $20? So that's $4 billion a day in dollar volume? That's a lot of ETF trading in a single ETF. It's amazing. First of all the risks,

despite the risks of these leverage ETFs, there's a group that uses them, and they charge 95 basis points with $500, $5 billion in assets. Yeah, look, clearly these are high octane tools for more sophisticated investors. But when you look at the trading volume in these products, to me, it speaks to the tug war going on in the markets right now.

There's clearly a lot of debate around the future direction of the markets. And I think the bull camp has grown more optimistic. At the same time, the bear camp has grown more pessimistic. There's this odd dichotomy in the markets right now, I think largely based on what investors, expectations are around what the Fed will do, but you can see that reflected in the trading volume in these products. Who, Nate, do you think, and you too, who uses these products? Every time we come on with these extremely leveraged, long and short, anything, we mentioned

the daily reset, average investors have a hard time getting their head around the daily reset. You come on, everybody comes on who has these products and says, these are not for long-term investors. These are for professionals. So who, do you have any sense of, on a daily basis, who keeps using? The volumes are so titanic. Somebody's got a trading strategy using these. I think what Nate said is fair enough. I mean, this is just a challenging environment with folks that are on the bullish side. So the opportunity for some folks to enhance their returns, some to hedge their portfolios, and that ability to target that risk with less capital at a risk, that's telling, you know, that's to target exposure with less capital at risk. The

volume is telling us that folks are seeing these as doing exactly what they're designed to do. Now, you also run one of the most successful dividend ETFs that are out there. This is sort of the third leg of what I wanted to talk about, the dividend aristocrats ETF, NOBL is the symbol, Noble. And it outperformed the stock market, the S&P last year. Explain what this is, a little bit, what you've got it. And I want to talk with Nate about the difference between investing in stocks with high dividends, in stocks with increasing dividends.

It's the most fundamental thing to understand about dividend investing, and yet it's amazing how many people don't get it. But explain Noble to us. It's a super important point. So Noble, the S&P 500 dividend aristocrats ETF, is a dividend gross strategy. To be in this club, there's only two rules. You're in the S&P 500, and you've grown your dividend 25 consecutive years. Now, you mentioned the outperformance last year.

Guess what? It's keeping up with the rally this year, and that's the day. key here that participate and protect. Because if you only have a defensive strategy, then you better have your timing right. And the beauty of consistent dividend growers is that in challenging environments like last year, the aristocrats delivered seven times the earnings growth of the S&P 500 and expanded margins while the S&P 500 margins shrank. But now you also have the second leg of that that provides the participation, and it's the growth of the dividends, compounding it nearly 10% since inception, that's much bigger than the S&P 500 and even bigger than elevated inflation.

And Nate, this is the education part of ETF. Explain the difference between, oh, I just want to buy the highest dividend yielding stocks in the S&P versus dividend growing and why high dividend is a little riskier. Well, I think if you look back to what we saw in 2022, it was a perfect example in that, look, this was a record year for dividend ETFs overall as a campaign. category, some $70 billion into the space. And I think dividend ETS in general were simply a better place to be because the environment had shifted away from growth-oriented companies that had no earnings, they weren't generating cash. And it was much more favorable towards profitable towards profitable cash-generating companies and dividend payers, which tend to be more value-oriented

companies. But when you look at the distinction between dividend growers and then just high-yielders, you have to make the distinction there between really, in my mind, quality and less quality, because I think the dividend growers have a proven track record of more stable balance sheets. They've generated cash and profits year after year. With the high yielders, there may be a reason why that yield is high. It may not be one that investors like. Yeah. And, of course, the classic example, I mean, let's be perfectly blunt.

Oil stocks had very high dividends, and yet many of them, there was tremendous worry that they would end up cutting their dividends if, in fact, oil prices remain depressed. So there's very real reasons why you might get someone with a 7, 8, or 9% dividend and say, oh, my God, why wouldn't I buy that? What idiot wouldn't own that? Well, there's a reason. And even if the high dividend is relatively safe, but not growing, guess what you really own? You own a fixed coupon bond if that dividend isn't growing. I mean, there is a reason that the equity market in general is the greatest inflation hedge of all time, and dividend growers enhance that. I go along with that. go along with that. So 2022, Nate, a record year of inflows for dividend-focused ETFs. I mean,

is that why? Because people were looking for additional return when you can't figure out what necessarily the earnings. I always like to say people hate dividends because they think they're so puny. But, you know, if the market is dropping and you still want to be in equities, how suddenly dividends look pretty good. Yeah, I think it was twofold. One was what I spoke to earlier and that I do think there was a market regime shift away from growthy, you know, unprofitable companies towards a more value-oriented approach and high-quality dividend payers certainly fit into that. I think the other obvious reason was clearly we had a rising interest rate environment. And I think there was a large subset investors.

They did not want to stand in front of that rising rate freight train. And so they looked to higher quality dividend ETFs for that income. I really think it was that simple. Yeah. So you were mentioning the importance of dividend accretion over time. I want to explain why this is important, because when I bring up the fact that the S&P 500 is a 1.7% dividend yield, a lot of the younger investors say, why do I care about 1.7%? I want 10% and 20% returns. And it goes back to what Simeon was talking about, reinvested returns. So here's the S&P 500 from 1926, 26 to 222. The average total return on a yearly basis is 10.2%. That's total return. Total return is price plus the dividend. If you take those dividends and reinvest them every year, that's what you get here. Now, the key is reinvesting the dividends because you get the magic of compounded interest growth. So of that 10.2% return, price is 61% of that total return. This is over long periods of time,

and almost 40% is the dividends. This is the great power of compounded interest. And when young people say, why do I care about 1.7% dividends? Who cares about that? And importantly, in more challenging environments like the 70s, the dividends were 60 plus percent of that entire decades of return. Much higher.

Nate, I know you're not an economist, but is dividends going to be equally important this year? Do they become less important? if inflation becomes less of a concern, where are we? Yeah, I think clearly it depends on the economic environment moving forward and what the Fed does. But I want to say this about dividend paying ETFs. There was a lot of talk last year about the death of the 60-40 portfolio because bonds did have their worst year on record.

And I think it's important to highlight that dividend ETFs are not the same as high-quality bonds, right? There's obviously equity risk associated with dividend ETFs. It's a much different risk profile here than high quality bonds. And you look at where we sit now after the carnage in the bond space last year, investors can now get 4 or 5% plus risk-free or with minimal risk and high-quality bonds. And the fixed-income space as a whole looks a lot more attractive. And so my point is I just think the obituary on the 60-40 portfolio was written a bit prematurely. and investors who have moved away from, say, a 60-40 allocation or whatever their allocation was equity-wise,

they just need to make sure they understand the risks of being in a dividend strategy moving forward. Because if we do get into a nasty recession, that could impact clearly dividend ETFs. Their equities. Yeah, and remember, everyone declared the death of the 60-40 portfolio when, you know, the 10-year was below 2%. So things have changed. is 4% on a two-year treasury makes suddenly this competition for the stock market. The death of the 6040, QT was the quantitative tightening

was the death of the 6040 because you're supposed to have a bond rally in difficult environments, but the long end was so suppressed artificially that it had to rise even if the economy looked a little weak. We may be getting a little bit to the end of that, so I think you'll see some stability in the long end, but the nice thing about those dividend growers, you saw it last year, even if it's a challenging time for the equity markets, the protection they offer is quite substantial. Nate, you're my all-round ETF expert here. We had inflows of $600 billion last year into the ETF business despite a down year. A lot of it, plain vanilla, some of it you saw going into dividend ETFs.

Your thoughts for 2023 for the for the for the ETF market. Obviously, we know money's going to keep coming in from plain vanilla into plain vanilla ETFs, mostly continuing out of the mutual fund business, but any any broad thoughts on what you think is going to happen in ETFs this year. So I'm on record is saying that I expect us to do over a trillion dollars in inflows in 2023. I think to your point, you look at what we what we saw in 2022, very challenging market environment and yet over 600 billion. into ETFs. I think what's going to be a big catalyst this year is what I was just saying in that there's now actually income and fixed income. And so I expect the bond ETF category in particular to really help drive inflows. Now, if we have a positive equity market environment, I think a trillion dollars is going to be a layup. I think we're going to see massive flows into equity ETFs as well. But even if it is a more challenging environment, I think between fixed income ETFs and then even alternative ETFs. If you want to talk about physical gold ETFs and managed

futures ETF, some of the alt categories, I think we're going to see substantial flows there as well. So I'm bullish. I think we're going to do over a trillion dollars in total inflows in 2023. Why gold? And I don't want to get off on a little corner here, but what is so wonderful about gold this year that's going to attract everyone's attention? Are we talking about business improving in China? I mean, fundamentals like China or India, that's what drives demand. Gold is fascinating to me because if you look last year, the physical gold ETF category actually had outflows, over $3 billion in outflows, yet gold was only down 1 or 2%. Of course, the S&P was down 18%, broad bonds were down 13%. That struck me as odd. And I think what we're going to see this year is I think people are expecting we'll have at least a mild recession. Perhaps that could pressure the U.S. dollar a little bit, but yet inflation is going to remain elevated. I think there are some people who, who are concerned about the crypto space overall, that maybe it's not digital gold.

And so they're going to move back to actual gold. And I think all of those things could be potentially bullish for gold ETFs and obviously the price of gold overall. Simmy, you want to put on your prognosticator hat at all? Any thoughts? You're an old hand at this business. You've seen a lot of ebb and flow in your time. It's going to come down to earnings because we've had the multiple compression.

I don't think we're going to get multiple expansion, back to even if the Fed backs off, the long end is now in an equilibrium position. So it's got to come down to earnings. I come back to the dividend growers. Interestingly enough, with all that quality, the margin expansion, if you look at expectations for next year, it's for zero earnings growth for the S&P 500 aristocrats and still mid-single digits for the S&P 500. That to me seems like a little bit of an opportunity. Multiple expansion in a, even a soft landing is tough to argue very difficult. And I think the big problem is going to be margins next year. They're going to have a hard time raising costs, raising prices because the consumers are starting to push back. I think that's going to

be a real issue. So I agree with you on that. Thank you. Very stimulating discussion. These two are the best people out there, folks. That does it for this week's ETF Edge. My thanks to Simian and to Nate. And remember, you can see all the shows on our website, etfedge.cmucc.com. And remember, you can hear it on our podcast as well. Everybody have a healthy, happy and safe trading week.