ETF Edge - Future Proof Conference: Getting the Buzz on IPOS, Bitcoin & Treasury Bonds 9/11/23

Episode Date: September 11, 2023

CNBC’s Bob Pisani spoke with Jan van Eck, CEO of VanEck Associates and Michael Sonnenshein, CEO of Grayscale Investments – along with Alex Morris, President and CIO of F/m Investments. Live from Huntington Beach, California, they discussed the state of semiconductors ahead of ARM Holdings’ big debut this week, got the latest on the battle for a bitcoin ETF from the man who just sued the SEC and won, and got an update on the wild year we’ve seen when it comes to Treasury bond investing. In the “Markets 102” portion, Bob continued the conversation with Jan van Eck. Hosted by Simplecast, an AdsWizz company. See 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 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, coming to you from beautiful Huntington Beach, California, at this year's Future Proof Conference. Today on the show, we'll discuss the state of semiconductors ahead of arm holdings big debut this week. Get the latest on the battle for a Bitcoin ETF from the man who just sued the SEC and won and get an update on the wild year we've seen when it comes to Treasury bond investing. Here's my conversation with Jan Von Eck.

He's the CEO of Van Eck Associates. Michael Sonenschine is the CEO of Grayscale Investments, and Alex Morris is the president and CIO of FM Investments. John, we're sitting here on the beach here. I haven't been to a lot of conferences that are literally on the beach. There seem to be trying to combine social interaction, parties, with serious financial investing. What do you make of all this? I think it's, listen, attention spans.

I look at the macro picture, attention spans are really short these days, so they have content, but it's going to be short clips. And that makes a lot of sense. No one wants to sit through a half-hour lecture on, you know, the yield curve. We tend to, Michael, knock ourselves out with trying to get the best content anywhere. But what we find out of places like this is people come for the social interaction as much. They're going to have Method Man here, you know, on Tuesday night. This is Wu-Tang Clan. One of the members of Wu-Tang Clan are going to be here.

So what's the lesson here? I think whenever you can get this type of community engaged in a different type of environment, allow people to make meaningful connections. It's something you want to be a part of. Yeah. It seems like you can get, there's a lot of Alex of people who are, having here sort of private meetings with financial advisors and and chance to meet clients directly at this point that seems to be the big thing just the interaction of

being able people to meet with each they're on the beach walking around i mean i'm still giving my 30 minute lecture on the yield curve so i don't think yon will be stopping by anytime soon but in general folks are happy and it's great i mean we don't need to sit in a stuffy ballroom to talk about good ideas they're good ideas wherever they are yeah there's plenty of chances to nerd out here I don't want to give a sense that it's a giant party. But social interaction is as big as any conference I've been to. So, Jan, let me start with you. It's a big week for you.

You run the largest semiconductor ETF, VanX, semiconductor. SMH is the symbol. Market Capweight Index, 25 largest semiconductor companies. This week, Arm is going to be going public, likely Thursday at the NASDAQ. And the question is, sort of explain to us how this process works. So when will you be potentially a buyer of this? And what criteria is being used? Yeah, it's an interesting.

story because it's a $50 billion estimated market cap company that you think would go into especially a specialized index like semiconductors, Bob. And the reality is it might not. For us and our index inclusion rules, an underlying stock has to be liquid. And it looks right now that arms float, public float, meaning the number of shares, the percent of shares traded on an exchange might be less than 10 percent. That's not liquid enough for our rules. And then some of, you know, SLK and something, sorry, SLOK, the other sort of sector spider ETFs, it has to be part of the SMP. I mean, that could take years, right? This 10% rule is a little disconcerting, because you'd be a natural buyer here, and if it prevents

you from doing that, I think it's going to 9.5% is what it is right now, the float that they're talking about. You think that they would know that, that would be kind of important. They should figure this out because they want, they want. Maybe Salt Banks should get the memo on this, sir? They want passive buyers, right? That's definitely part of any investment. bankers job these days.

Yeah, how do you feel about the IPO market these days? I mean, this is a big tech IPO. We've been waiting for two years for something to happen. We want IPOs, we want M&A. I don't know if the MNA is going to come in this administration or not, but that's how we want that for the capital market. It's amazing how big these semiconductor companies. I mean, Nvidia is over a trillion dollars.

I mean, I think we're talking about Arm at 50 billion or so. That would put it on a level with Marvel technology. Marvel was about 2% of the value of your index. And one way to jump into the index right away would be to be in the top 10. You have to be $90 billion market cap semiconductor company to be in the top 10. That's a lot. So we're desperate for a hit at this point, right? This would be the biggest IPO since Rivian in 2021.

Midpoint evaluation of $50 billion. So, you know, that's below what SoftBank was looking for. But the IPO community needs some kind of hit here, I think. So I don't know how likely that is going to happen. They're pricing it below what they were talking about last time. and look what's happened to Instacart. That's pricing below the range, too. Looking like it's pricing below evaluations recently.

Stories you go. Yeah, it's a tough situation right now here. Let's turn around and talk about another topic. Michael, it's been almost two weeks since you won your lawsuit against the SEC seeking to have your Bitcoin trust convert to an ETF. The SEC has 45 days to consider an appeal. Explain to us, where are we in this process?

Yes, so the decision we got about two weeks ago is the culmination of, years of work in about 14 months of litigation. The DC Circuit ruled three to zero unanimously in favor of gray scale vacating the SEC's denial order, which prevented GBTC from converting to an ETF. We're now in this 45-day period where we have to follow the federal rules of appellate procedure that gives the SEC the opportunity, if they wish, to request a rehearing on the case. The market reaction, the investor reaction has been very, very positive. There's not only a lot of enthusiasm in the underlying Bitcoin market, but certainly seen a tremendous tick up in volumes

in GBT and interests, have seen the discount to net asset value continue to shrink since the decision came out. But all of us, great scale, our investors, the team as a whole, the community, waiting for this 45-day period. Yeah, so the problem here for the SEC, it seems to me, the court squarely rejected, folks, if you didn't hear this, it rejected the very basis on which the SEC has been denying a spot Bitcoin ETF for the past several years. The court's said, in essence, hey, you guys approved a futures-based Bitcoin product. The futures in the spot market are like products. So if you prove one, you have to approve the other. That's the rationale of the court. So I guess the question is, could the SEC come up with some new rationale

why the application should not be approved? And dare you to assume again, come up with some other reason? So it's certainly a possibility, Bob. We recently, though, submitted a letter to the SEC since the decision came out. And one of the things we said is you've actually denied spot Bitcoin ETF applications like GBTC to the magnitude of 14 or even 15 times. So we would believe that if there was some other reason that the SEC didn't want these products from coming to market or had some other issue, it certainly would have surfaced by now in one of those other denial orders.

Yeah. So there's nine applications for a spot Bitcoin ETF, including yours. assuming one or more are actually approved. Are they all going to be approved at once? I know you've called for that to happen, right? I think the SEC has a real opportunity to ensure that they're not picking winners and losers in this market. We have long been prepared for a world in which there are multiple spot Bitcoin products. There are multiple Bitcoin futures products on the market.

So it would be interesting to see how the SEC handles those applications and the variability between them. John, you've got an application in for a spot. Well, the next news item in my mind is the ETH Future. Ethereum futures, ETHRUMFs. So those have filed, we have a filing out there, and there are a number of applicants that won, and ours is supposed to go effective in October. Kathy Woods, her arc has filed for an ether ETH in addition.

Well, that's ETH spot. So we've been first to file as an ETH issuer, not a great scale, but established ETF issuer for a lot of products, including Spot Ethereum. That was in 2021. But, you know, look, the SEC is making up a different rulebook when it comes to crypto. My only point is the precedent for allowing people to go at the same time will be set here with the ETH futures.

At least that's what they're saying that intent. So how do you see this playing out? I mean, what's your thoughts? Are they going to appeal? What are they going to do? It would be interesting to watch in October. If everyone goes effective on the same day, I mean, that's a difficult thing for a regulator to manage. So let's see how that goes.

Yeah. Alex, I want to move to you here. FM had very big success last year with single treasury bond ETFs. These held on-the-run treasuries for just about the entire yield curve. The whole yield curve now, yeah. So explain how these single treasury ETFs work, and a little bit of what are the advantages of buying treasuries using ETFs directly. Sure.

You can always, of course, everybody knows you can go to the government directly and buy, but here you have a product that is essentially the same thing, but there may be some advantages to using this product. Absolutely. I mean, we're innovating in the treasury market, so innovation of a different manner, you certainly can go to treasury direct.gov and try to buy a treasury. And we encourage folks to try it. It's hard. And if you go and search for, say, the 90-day or the two-year, you're going to see hundreds or thousands of issues because the government's constantly

issuing new debt that'll expire in 30, 20, all the way down to one year and then start counting by number of days. It's a lot of work. If you're also buying, say, 90-day paper, you're going to have to make four trades a year, if not more. There's a lot of work to that. Plus, it turns out when you focus on doing trading in that market, which is a very developed mature market, it's hard. If you do it well, you can get better execution, better pricing, and you can also deliver tax advantages, as well as accelerate income. If you buy a T bill, you have to wait up to a year to see any income. In the ETFs, T bill, X bill, and O bill, you get monthly income. And the same is true across the entire yield curve. So they're easy to buy, first off. If you go to, you know, people say,

just go on the website, you know, Treasurygov, direct, you know. But if you actually ever go on that website and try to buy bonds, it's ridiculously. I'm a financial professional for 30 years. As a reporter, I have a hard time buying on that website and understanding what it is you're buying because there's so many different products. It's very, very confusing. Forget about advising your mother to go into it. You'll never figure it out.

But here you can actually get it. So it's easy to buy. It rolls into the new contract every month. The roll costs are extremely row. Unlike commodities, like, these things roll off fine without have any serious decay associated with me. Very little decay. On the short of the curve, it's effectively zero. You're almost better off rolling, just given the way the dynamics of the role work. And now even on the long end of the curve, because coupon rates are above 3%, you're actually incentivized to roll because you're generating enough coupon that extending your duration is the right move. And the cost is, what, 15 basis points? 15 basis points? Yeah, 1-5 basis points. That's relatively cheap. So how is the product being met? I mean, I had you on when you first announced it last year. It seems to me like there's been an enormous amount of interest in at least short-term Treasury products.

I think we first started talking last year. Everyone was rightly skeptical. Would this thing work? We had three products then, T-Bill, U-2, and U-10. We're now up to 10 products, the entire yield curve, and just short of $3 billion in about 13 months. It's been very well adopted. We're seeing use cases from institutions, from advisors, from retail investors, just really mass adoption, and it's starting to speed up and get faster.

You're also trying active management. You just recently launched a new ETF, opportunistic income ETF. The symbol is XFIV. This seeks to maximize total return, you're saying, including income and appreciation. You're trying to identify undervalued and opportunistic sectors in fixed income markets. So this is a broad, actively managed bond fund essentially, right? It is. So it's X-F-I-X, X-FIX for fixed income.

And, you know, we'd probably be laughed off the set for saying we're long. long bonds, but we're long bonds. And we think it's a great opportunity in the credit market, but to think a little differently. So we approach the fund thinking like a value investor, but as opposed to buying equity, we start looking at bonds, particularly those we think are likely to be upgraded, and those that are maybe not traditional bonds in their sense. So preferred and a handful of other things that are fixed income instruments that tend to get overlooked. Yeah, it's a very interesting concept because initially your thought is why bother doing this in an ETF wrapper, but the ease of it and the role makes it.

so simple. I mean, one of the problems of owning a one year is you're going to get your money back if you go actually go buy one. Here, unless you're concerned that somehow the yield is changing dramatically in the next year and you have to pay attention, the role's automatic for you. Exactly. That's what the appeal is to me. And on the active side of the house, as we look at credit and other structures, buying bonds isn't that much easier than buying treasuries from the government. It's a hard place to be, and it's a place you need to be more concentrated than the index to actually outperform, and we think there's opportunities to do that. Yeah. Jan, you hold a whole suite of big products, but you were a commodity maven long before you were an

ETF maven. Run gold ETFs too on top of this? What are your thoughts on gold right now? Well, you know I love bonds too. Remember we had this conversation a year ago. I think it depends on how long the Fed keeps rates higher. I think there's a lot of consequences yet to roll out with these high rates. Right now, everything seems fine. But at the end of that cycle, then I think crypto, Bitcoin, and gold will do well, when that rate. But that's a lot. But that's a lot. could be a while until rates start falling, but like I always say, you can't really time the markets. So if you're going to buy it, buy some now, especially with the happening coming up. Bitcoin volatility is at all-time lows.

There's a lot of leverage out of the system. And maybe an ETF does get approved. Have you been surprised about how low the volatility has been around Bitcoin, especially since you won the court case, BlackRock got in, everybody got all excited, but it didn't move too much. It hasn't moved that much because there's still some uncertainty that investment. are needing to price in. I think, you know, coming out of this most recent crypto winter, it's never been clearer to us that the investment community shares the same idea that we do. Crypto's here to stay. And it's been one of the best returning asset classes of the year, right?

And so you do see these longer-term investors continuing to build their positions in crypto. And you do have some upcoming catalysts, the happening to Yon's point. These are things that people are focused on. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. We'll be continuing the conversation with Jan Vaneck. And Jan, you are a master of so many different areas, but particularly commodities. One of the ETFs you run is the OIH, which, of course, is a big oil ETF that's out there. I think the important thing here, and you've spoken several times this year, about why oil is

rising and has been on a rally mode recently. And a lot of this you relate to Saudi Arabia. and what's going on there? What are your thoughts on this? Yeah. Well, as you may recall, this time last year, we talked about energy and commodities, and I said, you know what? I don't know if it's going to be so great for the short-term future because there are a lot of headwinds. But now, sorry, I do think energy is worth looking at, and why is that? So despite the slowdown in China, you still have record highs in demand for crude oil. So that's number one. On the demand side, even though the second largest economy in the world is slowing down or is in a recession.

And then secondly, the role of Saudi as a pivot, they're kind of the central bank for oil these days. So that's interesting for the commodity markets. That's why oil has rallied for the last two weeks. But more importantly, I think Saudi's role in the world economy is misunderstood. They did a peace trial. So let me talk about economic reforms and politics. On the economics front, they are pivoting away from fossil fuels like crazy. We know the live-golf deal, but they also did a peace deal with Iran, their biggest enemy,

and they're probably negotiating a peace deal right now with Israel. So global peace is a big deal. They're able to work with Russia and Iran on setting the oil price, which we can't do these days. And then within their economy, there are a lot of new ice. IPOs and a lot of bond issuance to make that facilitate that shift to a non-fossil fuels future. So, I mean, this is very interesting because the sort of natural thing is China is the second biggest economy in the world, second biggest user of oil, right? I mean, why is oil rallying so much? I mean, the Saudis have been cutting production, OPEC's been cutting production a little bit. But they control the exports. So 46% of oil exports come out of the Middle East, and now an increasing percentage of NAC gas exports.

come out of the Middle East, you know, which is important for Europe. If you add Saudi, India, and Brazil together, they're going to pass the size of Europe in about 10 years. So it's kind of the unsung story of emerging markets. I mean, I do think that China's got growth constraints going forward, and that's why I like to focus on these new emerging market countries. Well, they're certainly pivoting away from fossil fuels like crazy. It's not just the golf business.

I mean, it's amazing how they're transforming these cities in the Middle East into modern mecas, even tourist destinations. I mean, we would have thought of putting out anybody, Dubai as a tourist destination 10 years ago, they would have laughed at you. And yet now it's viable. People I know go there. Yeah. And one of the points that one of my colleagues makes is there's competition between the countries,

right? It's not just like a state-owned, top-down, Saudi government, let's spend a lot of money. They're using the capital markets to compete. And Dubai and the UAE are competing as well. So that's a great dynamic, right? You want that kind of pro-business, pro-market structure. To ask a simple question. This is good news, isn't it?

I mean, first of all, peace is good news, generally. Is it good news that they've gotten together with the Iranians or trying to make some broker some peace deal with the Iranians? I think it is. I'm thinking about it's in our interest, the United States. Listen, I think it is, because the last thing we want is in Iran that's alienated from the rest of the United States. world that's building nuclear weapons and maybe there could be there could be probably war between

Iran and Saudi Arabia between sooner than Iran and Israel or Iran in the United States. So in terms of a hot war. So, yeah, I think it's great news. Yeah, anything that we're... I mean, not without risks. Nothing is without risks, right? But I think it's an interesting story that people are missing because if you add it up, it makes a lot of difference to the oil markets and it makes a big difference to global

And to me, you've added an important piece here for me to watch oil rally for the last, you know, several weeks and a month with China is so weak. Right. So how do you explain that? It's because there's a Saudi put at $80 a barrel because they need that income. So they will reduce supply to keep their revenue up. And then I think there's further upside. I mean, they'll probably let their foot off the gas at $100 because they don't want the price to go too high. But they're the price center.

And I think it's really interesting, and they have a lot of revenue, and they're redirecting it in their economy. All right, Jan, thank you very much. Always a pleasure to talking with you. Yon Vaneck, of course, is the CEO Vanek Associates. That's it for today. I'm Bob Pisani. And thank you for listening.

Make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC. InvescoQQQQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQ, Invesco Distributors, Inc.