ETF Edge - Gold ETFs, Online Retail & ETN Delisting Dangers

Episode Date: August 17, 2020

CNBC’s Bob Pisani speaks with Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database, and Chris Hempstead, director of institutional business development at IndexIQ. They discussed exchange-traded note delistings and the risks they pose to investors, gold’s winning streak this year, online retail, and some top headlines in the ETF space. In the markets 102 segment Bob discusses the work from home ETF. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

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 and thoughtful analysis and bringing now what it all means for investors. I'm your host, Pasani. Today on the show, we'll talk about what's driving gold miners hire, the online retail boom, and a growing crisis of confidence in some of the exchange traded notes that are out there. Here's my conversation with Chris Hempstead, the director of institutional business development at Indeastern. IQ and Dave Naughtick, CIO, and Director of Research at ETF Trends and ETF Database.

Guys, I want to hit on the hot topic of the moment, which is gold and the gold ETF here. Gold miners are spiking on very heavy volume here after billionaire investor Warren Buffett's Berkshire Hathaway firm revealed he's betting on Barrett Gold. That's very, very interesting. Van Eck vectors gold miners' ETF, that's GDX, is up 6% today, on pace for its best day in almost four month. This is a new investment for Berkshire Hathaway. But, you know, Dave, I've said this many times. Mr. Buffett has complained in the past that gold is an unproductive asset that unlike stocks, it doesn't pay out any earnings, it doesn't pay any dividends, unlike bonds,

it doesn't pay any interest. It's curious. I know this is Berkshire Hathaway may not be Warren Buffett's personal pick, but it's curious that they're interested in gold right now. Is there something in the air besides the old gold bugs, or is something changing out there in the atmosphere? Well, I mean, look, it's clear the ETF investors want to be in gold. We just had the most amazing first half we've ever had. We had 734 tons of gold end up in gold ETFs as a block. That's more than the best year we've ever had for gold ETFs, which was 2009. So clearly investors are looking at that. At the same time, there's a supply story here. year too. Supply is down about 15% year over year. That's partially because of COVID shutdowns,

but it's also just getting really hard to get gold out of the ground. So the supply side is a really bullish story. The demand side has really been purely an investment story from financial buyers, folks who are in ETS. We haven't seen much demand really at all on the retail side. First half demand for things like gold bars. We're at 11-year lows. And, jewelry demands down quite a bit as well. So there's a bit of, you know, two sides of this coin, but there's no question that investors are looking for safe haven assets. And while gold may, in fact, be unproductive, that is true. It's never paid a dividend. When people are looking for something to hedge against potential, you know, inflation, coming up, all the Fed easing that we've

been seeing, and also just the general state of the world right now, if we're looking for the next six months, having a little safety doesn't seem dumb. You know, Chris, this is sort of hard to pull the threads apart from this, but gold stocks do tend to move in tandem with gold, but because their stocks, they can also move in tandem with the stock market. So this is a little hard to pull this thread apart for us. We saw when the market dropped dramatically, the stock market dropped dramatically in March. Gold stock dropped along with it. When gold started recovering a little in April and again in June, gold stock started. rising with it. So which is it? Is there is there some correlation with both gold stocks and gold

and the stock market overall? Just pull that threat apart for us. I think I think you could make a higher correlation of gold stocks to the stock market for a number of reasons. One is, you know, they're governed, their share issuance, they're sensitive to, you know, to cash flow, they're sensitive to regulation. They're also going to be, you know, look, gold mining stocks are also going to be sensitive to the new hot theme, which is ESG, being compliant, being, you know, like there's a number of things that affect a gold mining company that are unique to, you know, to a corporation, whereas with physical gold, you know, the bars of gold that are sitting in a vault really don't have any of those other costs and risks associated with it.

And so for that reason, I think you're going to see a higher correlation of gold stocks to the equity market. That being said, Bob, I also think that, you know, the correlation itself is a little bit loose. You know, we do look to the physical metal as an inflationary play, you know, to Dave's points about the supply chain being very disrupted throughout COVID. In addition to that, demand for physical gold for the ETF and coupled with the fact that one of the largest drivers of gold supply and demand is that jewelry business, which comes a lot from India, very disrupted. So there's a lot of moving factors with the physical part of it, but the price of gold is going as high as it is. Gold miners are more relevant now than they were before. So I see the direction

that people are going in. So Dave, just to close out this part on gold, we've talked about this before. Gold, the GLD, the gold ETF, the biggest one, is 80 billion in average. assets now, it's the sixth largest ETF out there. You said you think it could go to $100 billion. Is that fairly certain at this point? I mean, there's nothing that's going to turn that around. Like gold's being bought as a hedge against uncertainty, at least right now. Some people think it's a hedge against inflation or deflation, but hedge against uncertainty, you don't see anything changing that fundamental mindset right now. Is that correct? No, I mean, you know, fundamentally, this is a commodity of psychology, right? It's worth what people are willing to pay for.

for it. And when people get nervous and they decide now's the time to buy gold, I don't particularly see any reason for that to change until we have a change in investor sentiment and people are really wanting to put all of their money back on risk. And I just don't see that happening over the next six months. Obviously, the broad markets have been doing great. But what we're seeing here in gold is just further evidence that a lot of investors are actually kind of in a risk off mode. I mean, despite what's going on in equities, we had negative flows in equity. these last in over the last three months. But here we are talking about gold and gold stocks.

I can't believe we're, you know, but wait, Dave, are we really going to say that risk off on gold miners? I mean, that's, but in that, in that, I mean, it's funny that that's, you know, we are seeing that risk off movement, but a shift to gold miners is, yeah, yeah. I think the miners are actually quite, I think they're quite risky for all that, you're susceptible to both the movement in the price of gold and the movement of these companies. And as you pointed out, Chris, there's always single-stock blow-up risk when you start putting companies to work, right?

Things happen. Management can be bad at its job. They're all sorts of things that can go wrong in a company. Yeah. We've got to move on, guys. I want to talk about the online retailers. We've seen some really big moves in the retail ETF, the online retail. And there's four or five of them. But I just want to highlight a couple of them. 75, 80% moves in here, pro shares, online retail. I like the clicks. This is this. This is. This is. This is the long, online and short stores one, where they actually have a short position in department stores. But they're all up, essentially, at this point. Guys, any thoughts? I get this question all the time. Other than gold, this is the most asked question about retail.

Any thoughts on buying? This is obviously a bit overbought. Obviously, depends on the work from home story continuing at this point. I'll take a quick stab at it, Bob. I mean, in terms of it being overbought, I think that, you know, I think there's going to be differing opinions there. I think that even before COVID, even before the shift for a lot of people to being forced into an online, you know, merchandising environment, there was already a strong tendency to use services like Amazon and other online retailers. So we were seeing that demand pre-COVID anyway. I think COVID just gave it a little bit of a fuel injection in a sense.

So to say it's overbought, I mean, maybe perhaps it's been a little bit of irrational exuberance in a sense. jumping in really quick. But I think long term, I think this is the future of e-commerce, the future of how people are going to be doing business. I think even if COVID were miraculously go away and we get life back to normal, I think online retailing is going to be here for the long haul. So in terms of a core allocation, I do think that those stocks are going to continue to perform well. Dave, you want to take a shot at quick? Yeah. So, you know, I totally agree. I think. this is, you know, this is just accelerating a trend that was already there. You know, there are a

couple of ways to play this. Bob, you pointed out clicks, which is the, you know, 150% long, 50% short. The only issue I have with that is that it really has been hindered a little bit by the fact that not all brick and mortar is created equal. So, you know, that short position includes things like tractor supply company and Home Depot, both of which are up enormously this year, because not everything has gone online. There is this narrow corner of brick-and-mortar retail that's actually had a phenomenal year, of course. That hasn't worked for you as well as you'd want.

You know, the long portfolio in both clicks and O&LN is the same long portfolio. It's dominated by really a handful of companies. It's almost 30% Amazon, 15% Alibaba, et cetera. In this environment, I think I might like something like I buy, which is the Amplify product here. It uses sort of an equal weighted scheme, so Amazon only gets to be about 2.5% of that portfolio. I think that can help mitigate some of the overbought concerns people have about the names at the top of the list here. But no matter how you slice it, online retail is expensive right now.

I think the PD on O&LN is about 180 right now. Yeah. And they're remarkably similar. I mean, they all have overstock. They all have Etsy in them, for example. They all have PayPal and stamps.com. It's rather remarkable. Not all of them have, surprisingly, have Amazon, but very similar names in all these.

I just want to move on here because we've got a number of topics. I want to get some thoughts from you. I want to move on to the fact that a lot of exchange traded notes, E.TNs, are being delisted this year, but they're not being liquidated. Did I hear a groan out there? Okay. That's why I have you guys here to pull the threads out and explain this to us. Some of them are continuing to trade on the pink sheets.

Here is your shot to sound intelligent without sounding wonky. Because I want to start, Dave, I'm going to give you the first shot. Can you explain two things to us? What is happening with the exchange traded notes? Why are so many of them being delisted but not liquidated? And is this a problem for ETF investors? Is this a problem for the ETF community? And again, don't get too wonky.

Just explain what's really going on here. I'll go backwards. So yes, this is a problem for the industry and for investors. Credit Suisse had a bunch of exchange-created notes. They were under the Velocity Shares brand, things like triple-leveraged and triple-inverse gas, natural gas exposure. They decided they want to get out of this business, but instead of just shutting the products down, they closed them for new money and then delisted them, meaning they took them from Nizier, NASDAQ or CBO where they were, and they pushed them into the pink sheets. What happens then is all the volume dries up,

because it's the pink sheets. Many investors can't even trade on the pink sheets. And yet these funds still have, in some cases, hundreds of millions of dollars trapped inside them. And investors really don't have much of a way to get out. I think this is a big issue for the industry. Most of these were held by institutions, not by retail investors. But my e-mail box has folks that are trapped in some of these things as well. So it is an issue. Really what this means is you've got to pay attention and know what you own and why you own it

and not get caught blindsided when somebody decides they want to delist a product. Chris, why did they push these things to the pink sheets? Why didn't they just liquidate the whole fund? What's the value in keeping them on the pink sheets and creating all this confusion and illiquidity? Well, I mean, for one thing, they're going to, you know, if they're going to abandon the product in a sense from a marketing and from a product efficiency standpoint,

which is a way in what's happening, they're sort of orphaned at the bank. The other thing you have to keep in mind, too, is that unlike an ETF, these exchange traded notes don't have a board. So there really isn't this oversight, you know, committee to sort of look over those things. So these banks are very accustomed and familiar with creating custom products and custom strategies for their institutional and for their high net worth clients, you know, on the derivatives desk or anything like that. These exchange traded notes, they're like,

hey, look, why don't we just do the same kind of thing and put it out there and see what happens? but then they get left without anyone really, you know, to account for it. And it's a problem because once they turn it off for creation and redemption, once that vehicle goes away, they lose the efficiency that we're accustomed to in exchange-traded products, which is very dangerous thing. Isn't the answer that they still make money on it? Of course they are. They're charging a fee until it goes to zero.

Well, that's the answer, right? They should be shutting them down. We're not going to solve this problem. Probably not. But what we could do is what we could do is. Dave, isn't that the answer? Let's just get to the bottom line. Shouldn't they just have shut them down rather than just collect fees on it?

100%. I'm not trying to put words in your mouth. Tell us. No, this is just unadulterated avarice on the part of Credit Suisse, right? They are keeping them open so that they can continue to collect their fee or in this case reduce their liability as these products wind down. It should be criminal. It should literally be not be allowed because it is incredible.

anti-consumer. It just hurts investors. There's no reason for this other than the greed of the issuer. Right. And it's just important note, Bob, these are not exchanged traded funds. These are notes and it's, you know, everyone after listening, look under the hood. Right. Yep. Okay. So let's, I want to do a lightning round. I want, I want very short, 10 or 15 second answers to two or three things that I want your thoughts on. First, I noticed, did you see this, Saudi Arabia's $300 billion public investment fund, one of the biggest public investment funds in the world, chaired by Crown B. M. Mohameds-Mohamed bin Salman, invested $4.7 billion in exchange traded funds focused sectorally. Real estate utilities and materials. They had a U.S. filing on this.

Dave, is this a new milestone for ETS? I don't know. Am I trying to make too much of this? It seems like a pretty big deal. A company like that. Yeah, I think what's interesting is what they're buying, not that they're buying sovereign funds in general have made very good use of ETFs, in some cases seeding big ETFs like we've seen in the ESG side. So I don't think this is a big surprise. I think the big surprise is they're investing in what look like pretty downtrodden old economy sectors. Yeah, yeah. Let me just move on here.

And Chris, I want your thoughts. Work from home. I sort of made fun of this when it came out, what, seven weeks ago and said, oh, here's another thematic ETF that's trying to capture the zeitgeist like pot ETFs, two years. ago, and the thing's been a hit. We've got it's attracted $70 billion in assets in a few weeks. And that's a modest hit overall. It's got some great trading activity recently. Is there got, is there legs to this story? Of course there's legs to it. Look, this is a timing thing. You know, we say this about ETFs all the time. Timing is key when you're an ETF issuer and you're

launching a niche product like this, you know, the folks over there direction, and they knew what they were doing, they got this fund out at a great time, and they're seeing instant success. I think a lot of it's probably retail. These niche ETFs seem to sort of slow down around $100 million. So we'll see what the next wave of growth looks like. But yeah, kudos for them for timing that right and getting it out there at a time when people were clicking for that kind of stuff. And Dave, we've seen a bunch of these that have actually been hits thematically. the Global X, the video games, and ESports ETF Hero, is also a hit.

I guess this is all a matter of hitting the zeitgeist right. These are all thematically essentially tied to the work-from-home concept and people working at home. That, you know, whether you're dealing with the ESports or, you know, even Home Depot, they're all essentially tied to the work-from-home thematic concept.

Yeah, and I think these themes are effectively replacing sectors, right? I mean, just look at what we're talking about on the retailer side. You can't even talk about retailers as a single class. You really have to break them down into the online retailers, the more institutionally focused retailers, and the brick and mortar retailers. I think the same thing is true throughout big sections of the economy, particularly anything with the tech component, the traditional way of putting companies in industries and sectors, doesn't actually get you what you want as an investor, which is exposure to certain big movements in the economy. I think things like Work From Home make a ton of stunts. Okay, guys, that's it. That was the lightning round.

I said I keep it short. I did. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs with our Market's 102 portion of the podcast. Work From Home plays are still going strong. Direction's Work from Home ETF has gathered nearly $70 million in assets. Despite volatility and the prices, today we're going to go a little deeper into the dynamics of that. My producer, Kirsten Chang, joins me now. Bob, we've highlighted the thematic success of work-from-home ETFs for a while now. But how much more room do you really think they have to run?

Now we're starting to see signs of a stronger economy creep back up in the weekly data. Some of the reopening trades start to pick up steam again. Do you imagine we'll continue to see such strong flows in WFH and other stay-at-home plays? And what about when a vaccine comes to market? You know, Kirsten, when this work from home, this WFH-H-E-T-FFF. came out about seven weeks ago, I kind of made light of it because it was just one in a long line of thematic ETFs that basically tried to capitalize on the zeitgeist, the zeitgeist being whatever the spirit is out there that people are investing in. The ETFs have a long history

of doing this, you know, several years ago, remember the pot ETFs were going crazy, then there were attempts around Bitcoin ETFs, even though there wasn't a lot of ways to invest in Bitcoin. So So, ETFs have a long history of trying to figure out whatever people are really hot in and sort of creating an ETF around that. In a lot of ways, these thematic ETFs around ideas, like internet or online retail, they're sort of replacing the traditional sectors that the S&P had. So rather than retail, I mean, who wants to talk about retail? Because nobody wants to own department stores, but a lot of people want to own online retail. So they're creating ETFs around that. There's several, three, four, five different online retail ETFs that

slice the universe in different ways. There's even emerging market retail ETFs. There's an ETF, the CLIX, that goes long stocks that are internet-related for retail and short the bricks and mortar stores. So there's a lot of different ways to do this. And if you look at WFH, which just launched about seven weeks ago, that is part of a long line of thematic ETFs that have worked this year around the generic concept of work from home. So what else has worked this year? Internet stocks have worked. Video gaming stocks have worked. Online retail has worked. Social media stocks have worked. What do they all have in common? They all have in common the concept that people are staying home more in doing things, whether it's gaming or engaging in social media or buying,

stuff online, it's all centered around that work-from-home concept. The other thing, of course, that's worked very well is gold for a different reason, is what some people view as a hedge against uncertainty. So to a certain extent, these thematic stocks, these thematic concepts, whether you're talking about social media or online retail or internet, are momentum plays to the extent that they work as long as people are continued to be interested in them. I think that's probably the issue here. I think this whole concept of work from home and all the stuff that's around it that's been working well and doing well depends very much on a vaccine. Now, if we get a successful vaccine, what is a successful vaccine? Well, I don't know. In six months, if somebody announces that we have a vaccine with a 60% or better success rate, I think most people will consider that successful. I think you'll start seeing a little more reopening of parts of the economy that have some. suffered a bit, and I would have a hard time imagining that the work-from-home stocks, given how much

they've run up already, you know, some of these online retail ETFs are up 75% this year. I find it hard to believe that they would all keep going up under that scenario. So in that sense, the whole work-from-home movement that we've seen very much depends on a vaccine. You might almost say they're inversely related. But that doesn't mean that there's not a future for all of these I think the Bulls would argue that people who are not staying home, even if some of them go back to work, these technologies have accelerated the trend towards doing more online. And so I think you can say a portion of these gains are definitely permanent. I don't see any massive sell-off.

Even if a vaccine happens, the question is how much more upside should we get one of those? And I think that's the parameters of the debate right now. 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.