ETF Edge - Gold vs. Real Rates, ETF Flows & Biden Presidency

Episode Date: November 16, 2020

CNBC’s Bob Pisani spoke with Tim Seymour, chief investment officer of Seymour Asset Management, Jan van Eck, Van Eck Associates CEO and Seymour Asset Management CIO Tim Seymour. They discussed the record rally and what's behind it, whether the value run up is really here to stay, and some of the biggest themes in ETFs for 2021 - gold, high yield, equities and more. Plus, what a Biden presidency might mean for thematic plays like pot ETFs. In the 'markets 102' portion of the podcast, Bob discusses the latest milestone for the ETF market. 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 are in the right place. Every week we're bringing you interviews and analysis and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll be talking about the record rally and what's behind it, whether the value run-up

is really here to stay and some of the biggest themes in ETF for 2021. Gold, high-yield, equities, and more, plus what a Biden presidency might mean for thematic plays. like pot ETFs. Here's my conversation with Tim Seymour, founder and CIO of Seymour Asset Management, Jan Vaneck, CEO of Vanek Associates, and Doug Yonis. He's the head of exchange traded products at the New York Stock Exchange. Doug, I want to start with you and the big picture here.

The rally is producing enormous inflows into ETSs. Just checked some of the no numbers here. 400 billion in inflows so far this year. That's only the second time that's happened that we passed 400 billion. billion in a single year. And we just passed $5 trillion in assets under management for ETF. That's a real milestone. What are the major themes for 2021? And are we going to continue to see these kinds of big, big inflows? Or is this just due to the rally that we've been seeing in the last few weeks? Yeah, Bob, I mean, you really talk about this record-breaking year ETS have had.

2020 has been amazing. If we look at the lows from March to where we are today, about $2 billion per day is coming into net cash flow into U.S. ETS. And so it's just been a tremendous year. And it's been a year of about opportunity. And also you and I had discussed at the beginning of the year, would 2020 be the year for active management? And the answer is playing out in the form of yes. Active management this year, 45 billion in cash flow almost double what we saw last year. But more importantly, it's been about growth. If you look at all the ETS launch this year, half of those were actively managed ETS. And so it's about active managers coming to the ETF marketplace

and really showing their worth. And we're seeing it in both transparent ETFs, but also these new semi-transparent ETFs. ETSs where a manager doesn't have to show their holdings every day. We now have 15 of those that are in the market, 750 million in assets already. And so it's really been about the intersection of opportunity, opportunity for growth,

and then active management really coming and playing and showing their own in the ETF world. Yeah, active management. We've been waiting for years for this to start moving a little bit, and it makes a lot of sense because right now, the active management community is in trouble. They need to find a lower cost way to do business, and the ETF wrapper seems to be the right way to do that.

I want to return to active management, but, Jan, let me ask you, the inflows, it looks like in the last several weeks, they're all inequity ETFs. There seems to be big outflows from bonds and for gold. Is that going to continue into 2020? been talking about this, you know, will we ever see outflows from bonds ever? It's been inflows for years. Do you think there's actually some legs to this story? Yeah, I do. Mainly because of

the macro outlook and the fact that, you know, the 10 year is so low. It's below 1%, right? Year ago, it was 1.8%. Now it's 8. What the phrase, I don't know how much you've been talking about this, but the phrase we've been talking about with clients is the 40% is broken, meaning the 40% of your your portfolio that's supposed to be in bonds. And, you know, institutional investors, advises individuals, no one wants to own a bond with that low in interest rate. So I think there will be that combined with our house view, which is that global growth is really underappreciated, meaning interest rates could go up, which would be bad for bond prices. So I think that, look, bonds are still, I think, a trillion dollars in the ETF universe. So it's not zero,

but I do think bonds face headwinds. When you say it's broken, you mean that old 60-40 paradigm, which I never agreed with to begin with, doesn't make any sense anymore. Is that what you're trying to say? That what you're trying to say? That what you mean when you say broken? Yeah, that's exactly right. And, you know, the great thing about treasuries, at least, is they provided negative correlation to the rest of your portfolios. So bonds would typically rise like they did this fall, this spring, government bonds, when, and the rest of the world is having a tough time.

But people are looking for alternatives to those diversifiers. They're looking at gold and other things. So listen, some of the money movements with bond ETS aren't bad. People use ETS for targeted exposure, and that's why you've seen some of the outflows. You know, we have an ETAF, a Fallen Angel ETF, which is a high-yield ETF, and that's seen steady inflows pretty much all year long since March. So different ETSs for different uses. Yeah, I want to get back to the high yield in a minute because I know you've got some of those funds.

But Tim, let me term to you. This value rally, this is like the oldest story in the book. We've seen fits and starts in value all throughout the year. Nothing has last at all. But I'm wondering if this one actually does have legs. All the value ETFs are up 15 to 20 percent this month. Doesn't matter whether you're talking about the S&P, the mid-cap, the small cap. Even European value is up, I think, 17% on the month. That qualifies as like an eye-opener to me. I don't know. Does it have real legs at this point? And why so, Tim?

Yeah. And, you know, European value has almost been an oxymoron for the last decade. And that's part of where you're going with this. If we think about what's been working, you know, and values, of course, measured relative to itself. So there are sectors that are cyclical, but certainly, you know, are trading in value territory. And I think, yes, there's, there's an argument in favor of industrial transports, banks, even emerging markets. And some of this comes with, you were just touching on the conversation with interest rates. And I just use the term normalized because I think we even get back to 140 to 160. 160 is really kind of where, if you look back as where we started the year and 140 is we really got into the teeth of COVID. I think you're going to continue to see that rotation, which would absolutely be benefiting banks. And banks on a relative basis are value territory. Some of the industrial names are benefiting not only from COVID trends,

but also bottom-up fundamentals. I mean, look at the auto sector and look at some of those fundamentals and the fact that Ford and GM, as an example, are companies that have been value names for years. I mean, GM has been, you know, arguably a waste of an allocation for almost five years and is now appearing like it's starting to move on company-specific fundamentals, but also this sense that you're, and Yon, it referred to this too, just that you're getting an industrialized response from the market, and you only need to begin to price in the beginning of a recovery to get this. I would just caution that we've seen this rotation multiple times in the last six months.

And people were claiming growth was dead, triple Qs were dead in May into June. Yeah, yeah. Yon, I'm under the broader question. We talk about value versus growth, the time as if it's a real asset class. And I've always had grave doubts about whether you can lump these companies together at all. I'm wondering if the whole value versus growth story is sort of irrelevant at this point. I mean, Tim mentioned banks and energy. See, this makes some sense to me. Banks are obviously rallying because yields are going up. Net interest income should be going up. That's a significant

part of large banks' revenue base. So that makes sense to me. Energy stocks should be going up. The whole country, if you look at refiners, they're up 30 percent in the last few weeks. The whole country's acting like they're going to go on vacation in the first or second quarter of next year. Well, that makes some sense to me, too. I don't know, value versus growth makes a lot of sense at this point. Should we just sort of drop that moniker? I really agree with you, Bob. I do think that's an oversimplification. And really, I think that the whole industry has been moving away from value, even though it's a great simplifier. And I also like to look at on an industry basis. I think the bottom line is a company has to transform itself continuously to take advantage of technology trends,

or there is no value at the end of the day. So Tim mentioned GM. That's a perfect example. Mary Barr there is trying to transform GM into a much more asset-light, technology-driven kind of company, and everyone needs to do that. Even asset managers need to do that. So I think financials and energy will get a reprieve. But if a big bank is not investing in technology into the payments, you know, the digital payments infrastructure and everything, you know, they won't make it in the long term.

Yeah. I'm glad to hear you say that. I have been tired of the value versus growth story for a long time. I understand it's got a long history. I understand there's a, you know, research going back to the 1930s about it. And I understand Graham and Dodd and all of that. But I don't quite understand why people think it's an amazing. asset class. I prefer sectors that might be called value over that. That's enough for the editorial for the day. Doug, let me ask you go back about the active management. How much more do you think this has to go? So we have $5 trillion in ETFs. I think that's a big milestone that we just hit that. But how much do we have in mutual funds? Still like 20 trillion, something like that, more than that? Do you see a significant move in 2021? I mean, is this the start of a big, big move? from away from mutual funds into ETS? We think so. I mean, the opportunity set of ETS has always been there.

We understand their tradeability, their lower cost infrastructure, the ability for an active manager to package their same alpha, but put it in a wrapper that's going to be much more tax efficient and have global distribution opportunity. So it really is a better mousetrap, if you will, for an active manager. And now they have a solution to be able to put into place where they can still do active stock picking, they can still manage their own money without investors seeing what they're doing every single day

with that veil of transparency, if you will, that ETFs typically provide. And so now it's an opportunity to come to market. We're seeing it already. I mentioned there's 15 of these ETFs that are already in play, but the pipeline, I will tell you, is dramatic. And so I would expect in the next six months we'll see double, maybe triple the number of semi-transparent ETFs come into play. And it's the largest active managers in the world. They want an ability to tap into this growth market.

They're seeing ETS grow dramatically, and it's a better way to shield their alpha. Yeah. Yeah, and we see some very, very successful mutual fund people moving into the active management ETF space. We're waiting for a dimensional fund advisor. It's a very successful, very well-thought-of organization on Wall Street, waiting for them to make that move over. They weren't announced that.

But give me some dollars. I mean, could we attract a trillion dollars, two trillion dollars next year? Could we be sitting here at this time next year saying the ETF business is an $8 trillion business, and $2 trillion of that is active management? I'm pushing you a little, but stop being so abstract. It's always hard to predict the future, right, Bob. I mean, none of us has that crystal ball, but we do believe we're planting a forest, if you will. And maybe it's not a six-month or a one-year time frame, but we do ultimately believe

a large portion of the actively managed funds industry will move into the ETF for all the aforementioned reasons. So, yeah, I don't think it's unreasonable to say there'll be a trillion dollars in actively managed ETS in the next year or two. I think that that's a reasonable goal. We're seeing it happen. We're seeing people in the works of working to convert traditional mutual funds direct into an ETF.

So if conversion starts to take off, you can imagine the dollar movement very quickly. And even if it's not a conversion market, you'll probably see a lot of clone strategies come to market. People who are running very successful, large, actively managed mutual funds, but want to do so in an ETF wrapper. So, again, it's more about opportunity, and it's more about a growth story than anything else for active managers to be able to use ETFs.

One observation. I mean, it's stunning. You know, we had a lot of difficulty with fixed income ETFs in March and April, right? With big discounts to NAV, a lot of dysfunction in the markets overall, not just ETF related, obviously. But it's just stunning the demand that investors have for liquidity and transparency of ETS. I mean, it's as if it didn't even happen when you see the inflows, you know, subsequent to that. You know, both on the equity side, of course, but on the fixed income side is more eye-opening to me.

I just would have thought that we would have gotten more questions. And there were questions for about a month. And then the inflows started. So I think Doug's got a really easy job. Well, why weren't there more questions? What kind of questions were you expecting, Jan? No, I just think what it reflects is that, well, questions is to, listen, why is my investment-grade fixed-income ETF at a 5% discount to net asset value? Or another, you know, others were well over 10 or 15% discounts to NAV from big fund families.

And it was, it reflected the dislocation in the underlying bond markets. My main point here is investors love the transparency of ETS when they know what they're getting and the liquidity. It's just a great, easy way for them to put money to work in a very defined manner. Let me, let's, we haven't hit on high yield yet, Jan, and guys, feel free to jump in. I know, Jan, you run two high yield funds at least, the Angel, the Fallen Angel ETF and the H.D, which is the municipal bond high yield ETF. So what's the bet now, Jan? Is the bet that a credit crisis is unlikely? We're seeing rallies here and all these high-yield ones.

Is the bet that a credit crisis is unlikely with a reopening story? And I guess I'm wondering, can we make it to the other side without a lot of defaults? The market's kind of looking over this valley here that we're going to have for the next three or four months. Your thoughts on high-yield? Well, I mean, everyone's been able to refinance at lower rates, which is really given the boost to fixed income and high-yield. We didn't see as many defaults in high yield as we might have thought this year. So corporate, look, you can get income only one of kind of two ways. You really can't even lengthen duration anymore, right?

You can't go to a 10-year or 30-year bond. So you have to take more credit risk, which is why people are looking at high yield, and you still get a 4% pickup and yield. And obviously, a lot of demand for that, especially in the backdrop of the world economy getting better than I talked about before. I think the Muni market is much tougher. There was a lot of disruption and a lot of pain there. And it really depends on the political solution if Washington will bail out some of the states here. Well, I just, you know, you mentioned Washington. And, you know, the biggest driver to me for the high-yield market's been the Fed. And if you think about

really both the implied put and, you know, Yon's Fallen Angel Fund, I mean, if anything, you know, It's targeting being there in the on-deck circle, waiting for any of these big companies and corporates with huge exposure across multiple asset classes to fall. And I think that backstop by the Fed has been most beneficial in high yield. And frankly, that backstop's going nowhere. So the Fed is asking everybody to reach out the credit curve and the risk curve, and they're there. And I think, of anything, again, you know, two years ago, we were talking about that mass of triple B into triple B minus that was at risk of teetering into high yield and the devastation that that might find. I mean, the irony is, of course, that the Fed's

still buying apples debt, but they're threatening to buy all of the high yield debt as needed, and that's actually driving returns without them having to spend much money. Right. I was going to say exactly that. It's the implied put. I mean, the Federal Reserve has essentially ring-fenced high yield. You can't do any better than that at this point. Jan, while I got you here, gold, you're one of the gold mavens out there. Can you explain why we're seeing the weakness in gold recently? Is it about interest rates? Is it about inflation? Is it about the dollar? And what about gold versus Bitcoin? Is there something to that equation about one playing off of the other? Well, certainly, we're less bullish on gold because.

of what potential rise and rates we're calling for maybe on the 10 year next year to get to 1.5% to 2%. So if real rates go up, I always say that's the enemy of the gold trade. So we're a little less bullish. And we don't think that's tremendously disruptive to the gold bull market, but it is a little bit of a headwind. I do think Bitcoin has been the asset of the year, really. It's rallying right through this rotation to value. that Tim was talking about. So I do think that is taking away some marginal demand for gold. But still, there are many investors that will only stick with gold.

Is there actually a trade like that, Jan? Is there a trade out of gold and into Bitcoin? I mean, what would be the rationale there for that other than to look for one relatively high beta investment to another one, or really high beta investment? Well, I think there's always alternatives. competes with silver, gold competes with gold shares. There's always other stores of value. And, you know, we've been trying to push for a Bitcoin ETF for years.

And we think that Bitcoin is another type of competitor to gold. And you should really show on a little of each of those. That's really, that's really my chance. Do you think we're going to get a Bitcoin ETF under a Democratic, Democrat controlling the SEC? No idea. Stay away from that one. Okay. We're going to move on.

Nobody's raising their hand. on this one. Okay. Go ahead. All right. Hey, Tim, this is the part of the program where we ask about pot ETFs. Those of you don't know, Tim is our maven on pot. He's long a number of names. He's the portfolio manager of a cannabis ETF, and he sits on advisory boards for a cannabis company. So the full disclosure on all of this. Tim, they've been all over the place, although CNBS is okay. Tell us a little bit about what's going on. Bob, you're the one with the psychedelic posters behind you. So, but now let's talk about cannabis. The dynamics in the cannabis sector are really extraordinary. And the top down and through the election cycle, we saw

five new states vote through either adult or medical markets. The top line growth story is 30 to 40 percent. I don't need to get too deep into the top-down consumption story. This is CPG. This is very sophisticated. And the country's in favor. So it's really. going to be about finding the right exposure. So in ETF land, look, we're the only, you know, cannabis, you know, derivative free cannabis ETF that's up year to date. If I looked at my screens coming in, I think, you know, we're up about 10.5% if I'm looking at my Reuters screens this morning. The largest cannabis ETF is down 23%. So this is all about active management. This is all about being someone that's investing in a sector and in the middle of the sector,

talking to companies and watching the allocations because it's moving very quickly. But it's notable how profitability in the sector, which was once thought of, hey, growth at any cost, and a lot of the big Canadian names, frankly, were spending money not only that they didn't have, but to build capacity to nowhere. And I think part of the trade has been, first of all, as you would do in any active portfolio on the way down, and it was a vicious bare market. It was about being defensive. It was about finding the best balance sheets. It was about finding the companies that actually hadn't levered their balance sheet or put a bunch of dilutive equity warrants in their structure. So that's really what we're doing at CNBS.

And I think the sector, you know, people may or may not believe in what's going on in the cannabis story. But again, this is a national issue and the macro on it, which continues to be one where states are plugging holes in budgets and fiscal through cannabis legalization. and the country doesn't care. More importantly, it's a very sophisticated consumer product story. And active management and being thematic in the space is what we do, and it's working. I love that line. It's a very sophisticated story. I don't hear that a lot about pot ETFs, but I appreciate that.

This is for intelligent people, Bob. This is not for you, Bob. I'll explain it to other people later on. But thank you for clearing that up for us. I love the Led Zeppelin poster, by the way. Don't think I didn't notice that, all right? I got my eyes open. Doing what I can, Bob.

Yeah, doing what I can. Fellow old, you're just an old hippie like me. There you go there. Thank you, gentlemen. I very much appreciate it. Thanks, Bob. Coming around, Jan and Tim and Duck Yonis, all friends of mine. Now it's time to round out the conversation with some analysis and perspective

to help you better understand ETFs with our Markets 102 portion of the podcast. Today we'll be talking about a milestone for the ETF market. Here's my producer, Kirsten Chang. So, Bob, we have another record rally on our hands on the heels of another strong week for ETF flows. Over $30 billion pouring into U.S. ETFs last week, the bulk of it going into U.S. equity ETFs, but also pockets of strength in global equities and fixed income. Is sentiment running a little hot here, you think, especially given valuations? Or is that no longer the right metric to measure the strength of the market buy right now?

There's two things going on here, Kirsten. First, there is a slow but inexorable trend out of mutual funds and ETA. that has been going on essentially for more than a decade. And that is the main driver of money into the ETF business. Sometimes you'll get more flows into bonds. And in recent years, we have as a safe haven play than into stocks. Recently, however, we have been seeing enormous inflows into equities. And I think this is very much related to the reopening and vaccine story. So remember, while we may have a rather difficult three or four months ahead of us as we have to deal with COVID without a vaccine, the stock market is looking over that valley, that COVID value, you might call it,

to the reopening spring. The market is anticipating that by the second quarter of next year, there's going to be a reopening story happening and that a vaccine will be successfully implemented in large parts of the population. That is causing an enormous rally. First, we had a rally earlier on the growth stocks, on technology stocks, and on the idea that no matter what, COVID is going to force companies to be more efficient, and more efficiency means more technology. That's why the technology companies did better. Other parts of the economy, like banks and energy and industrials, really suffered because that's the real economy. However, if the real economy starts opening up, well, maybe you're not going to see a big rally in growth stocks like technology, because that's already happened, but you

could see a very big rally in energy stocks, in industrial stocks, and in other parts of the economy, like bank stocks. And that's exactly what we're seeing. That's why we're getting this rally. So this is a kind of all-in rally that we're seeing. And when that happens, what ETFs are now used, not just for investing purposes, but for tactical purposes. What does that mean? It means that ETFs can be used by investors for long-term purposes. You can buy mutual, you can buy ETFs that are ESMP 500 or the Russell 2000 and hold them for years. Or you can have investors that trade actively buy ETFs for tactical purposes. Tactical means they're not going to hold them that long necessarily. So what you're getting now is an explosion of both of them. You're getting a lot of

long-term investors who've been sitting on the sideline saying, good God, I don't know what's going on with this COVID thing. I'm not going to do much. Now they're starting to see over the valley because of the vaccine. They're putting money into the stock market. And the way to do that, the easiest, simplest way is to buy ETFs. That's why we're seeing these inflows, this $400 billion this year. What's happened is that that's the biggest amount that's come in since 2017. And the only the second time we've passed $400 billion. So that's a big, big move up. And while I, as I said, this is partly because there's this inexorable flow from mutual funds into ETFs. It's the reopening rally towards the end of the year that's pushed everything over the top. You also had a major milestone for the ETF market,

of course, assets crossing $5 trillion for the first time ever. What's driving that strength? And will we continue to see that kind of growth next year? What are some of the hot areas to watch for? I think the key story, as I mentioned, is the equity rally. We have seen inflows into bonds for a good part of the year. That is starting to reverse, although in the grand scheme of things, the outflows from bonds have been fairly small. You have to keep an eye on that, though, because if rates keep going up and they have been, you may see some serious outflows from bonds at this point. I think another key point is this whole active management story. We've been talking for several years about active managers of mutual funds.

These are people who are stock pickers. They charge more money than passive funds. So instead of 10 basis points or 20 or 30 basis points to manage a passive fund like the S&P 500, active managers pick stocks and they charge more. They might charge 50 to 100 basis points a year. Well, the problem here is because most active managers don't outperform, they're losing money to ETFs and to passive funds. So active managers who are still relatively viable, are looking to move into an ETF wrapper because it's cheaper. So instead of charging, you know,

maybe 100 basis points, maybe they can charge 30 basis points or 40 basis points. It's also more tax efficient to use an ETF wrapper. So there's a number of reason why these people want to get out. Now, there's a lot of money here. There's about $20, $21 trillion sitting into mutual funds. There's $5 trillion in ETF. We just passed $5 trillion. So think about this, $21,000. versus $5 trillion, that's an awful lot of money that can go out of mutual funds and into ETFs. And I think active management is going to be a very big theme in 2021 because those guys who are still viable, who can still survive as active managers, they know they've got to lower their costs because they're losing people even if they're good. And they know that ETF,

the wrapper of an ETF is a better way for them to just stay in business in general. So I think that I don't know if we're going to see $8 trillion at this time next year, but I think it's quite possible that we could somewhere around there. 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.