ETF Edge - Growth Overtakes Value, China's Cybersecurity Crackdown & Biden's Infrastructure Bill

Episode Date: July 7, 2021

CNBC's Frank Holland spoke with Dave Nadig, Director of Research at ETF Trends, Jay Rhame, CEO of Reaves Asset Management, and Kathleen Smith, Chairman and Co-founder of Renaissance Capital. They discussed the big questions ETF investors are facing in the second half - including the value vs. growth debate, how China's regulatory crackdown could affect major IPOs like Didi Chuxing, and the ripple effects of President Joe Biden's historic infrastructure bill. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. 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 compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm Frank Holland, filling in for Bob Bassani. Today on the show, we're tackling the big questions ETF investors are facing in the second half, including the value-based. versus growth debate.

How China's regulatory crackdown could affect major IPOs like DEDE and the ripple effects of President Joe Biden's historic infrastructure bill. Here's my conversation with Dave Nodig, Director of Research at ETF Trends, Jay Rame, CEO of Reeves Asset Management, and Kathleen Smith, chairman and co-founder of Renaissance Capital. All right, so Dave, we're going to kick things off with you, if you don't mind. Give us your sense of what to expect in the second half. How will the looming threat of inflation play into the whole value versus growth dynamic?

Well, we have actually seen a pretty strong run for value flows over the last four, five, six months. So investors are clearly looking for those opportunities. I don't think we've seen the small cap rotation a lot of people are talking about. But I do think value is back. And we see continued interest in things like dividend plays. And I think that shows investors really hunting for income, right? We've seen a lot of interest in fixed income that solves problems, like, for instance, tips, which obviously can help you with some of the influx.

side of the coin, or munis, which can help you with some of the tax issues that I think a lot of investors and advisors are really worried about going into the second half of this first year in a Biden administration. So I think we're seeing a lot of tactical usage of really interesting ETFs. But meanwhile, as you pointed out, the flows are really unstoppable. It's been Katie Bar the Door for everybody. We've seen huge uptick from retail investors, from financial advisors, and from institutions. Let's talk a little bit about utilities, a sector that often gets Overlooked, down about 13% from his 52-week high today. Do you see more room to run with utilities and the infrastructure deal? I do, yeah. And, you know, what Dave was just saying about

really income and income growth, you know, utilities are a great sector for that. The infrastructure bill, though, is a real nice, positive catalyst, I think, for the sector. You have, you know, really two tracks. The first track's a bipartisan deal that was a announced a couple weeks ago. There's spending significant money available for electric transmission, grid resilience, electric vehicle charging infrastructure, stuff like that. You know, all that's kind of incremental to growth. And then you have the clean energy side, and this is really the big upside for the sector. There's been talk about extending the tax credits for wind and solar, even creating a new tax credit for nuclear production for existing nuclear facilities,

and then a standalone tax credit for battery storage. So as it stands today, wind and solar have declined and cost by about 75% of the last decade. Today, they're just about the cheapest sources of new power anywhere in the country. And so when you factor in the effects of these tax credit, a couple more years, of cost declines, you can get to a path pretty quickly where building brand new wind solar plus battery storage is actually going to be cheaper than just operating existing fossil fuel older power plants today. So it creates an interesting dynamic for utilities to really transition the grid the more

renewable energy and do it in a cost-effective manner. And it should be a nice growth opportunity for the sector. As you're saying, they've really underperformed recently. And I think a lot of that's been focused on interest rates, higher inflation expectations. But once you get past that and look out for the longer term, there seems to be a nice catch-up trade opportunity there. Dave, I want to head back over to you. Jay's really highlighting some of the things that might be a headwin, excuse me, a tail win for utilities. But I have to ask you a question.

I know what part of the country are you in? What part of the country are you in right now? I'm in Western Massachusetts. Okay. I live down here in the New York area. We have these stores called Wawa's, not publicly traded. We can talk about them. Every time I go to one, they're building tons of electric vehicle charging stations.

Is that another tailwind for utilities? Because whether we like it or not, whether you like internal combustion engines or you like electrics, it's all going towards electric, whether it's a vehicle, even, you know, Evital's or whatever you want to call them. Everything's going electric. Is that a long-term tailwind for these utilities? Yeah, absolutely. I mean, I think it's very clear that we are electrifying the world's developed economies.

That is happening very quickly. And it's happening not just with electric cars, right? It's happening with solar power and homes. It's happening with people transitioning into new sources of energy. I think we're going to see a lot of diversity in these plays. You know, as we think about the infrastructure play, I think utilities is an interesting angle. However, I'd point out that historically, big government spending on infrastructure doesn't really roll directly into the pockets of publicly traded companies.

It's not really supposed to. It's supposed to end up at that state level or the municipal level where they're actually fixing a bridge or they're actually building a road, or they're actually building a municipal broadband system. Those are great projects, but they don't tend to hit the public markets. The two companies, the two ETFs we have to play this really are Pave PAVE PVEE from Global X, which is a great way to try to play that on the U.S. side or NFRA, which is sort of the international version of that. But the tailwinds there, I think, are largely about sentiment more than the direct revenue from A to B.

The utility space, I think, is generally much beleaguered and does have some interesting opportunities, but you really do need to pick and choose there. If you're really focused on green energy, plenty of great green energy ETFs out there. Jay and Dave, thanks a lot. Great stuff, as always. Appreciate you guys being here. Thank you. Thanks for having us. Well, that sea of SPACs, well, they continued. But coming off the busiest week in almost two decades and now China's cybersecurity crackdown, well, it's giving investors some serious pause when it comes to owning hot new. issues like ride-hailing giant Diti. We're now joined by Kathleen Smith. She joins us now.

She's chairman and co-founder of Renaissance Capital. And Didi is set down to the Renaissance Capital IPO ETOEF tomorrow. Kathleen, thank you for being here. Thank you. So I've got to ask you, how are you feeling about the ripple effects on the U.S. IPO market? Well, we kind of like to see a little bit of fear in the IPO market. it helps pricing to be more reasonable.

And it may be a little harder for issuers to come out, but it's good for investors when there is more fear than not. And we have had a very robust IPO market, and prices have run up. And so this will cause new companies when they come out to be a lot more careful about how they price their IPOs and how they move forward. I also think we will see less Chinese IPOs in the future and certainly in the U.S. market.

So perhaps it will be a premium on owning some of these Chinese IPOs in Hong Kong or wherever. But we do think that it's going to slow down the very active issuance of some Chinese companies, D.D. being the largest Chinese IPO of the year, raising $4.4 billion. That will be a part of our U.S. ETF. It's going to be, we have 70 names, it'll be in the middle of the pack there. And fortunately, a lot of price discovery has happened already, so it will be part of a portfolio of 70 other stocks.

And when people get comfortable again with D.D., hopefully we will benefit from that. You know, Kathleen, before we switch back over to the gentleman, I've got to ask you one quick question. The largest holding in your ETF is Snowflake, up big today. It's also probably the best performer in your holdings. What's your take on cloud computing, cybersecurity, as we look at that big hack today?

Well, this has been a very good space. We also own Cloudflare and many other cyber-related security companies. So it's just a big space. There's a lot of opportunity. Investors are looking for growth. You know, the benefit of owning this name and others like it is you're not going to see these names readily. You'll have to really look to find them in other major indices.

So here's a way to get exposure to some of the newest technologies and new business ideas out of the CTO. All right, Dave, tease it up right for you. You've been looking at that growth versus value trade. What are your thoughts here? One is a rational IPO market. It actually does nobody any favors when the sort of default for an IPO is it doubles on the first day and then trades with a lot of volatility. We're hoping to use IPOs to actually generate capital to fund growth companies. That's kind of the point of going public.

As far as where Didi fits in here, I think it's worth pointing out that this is really part of that cybersecurity story in a way, right? This is really about China cracking down on how data is managed by Chinese companies, obviously with a bit of a command and a control bent. So, yeah, DD is a bit under the thumb, if you will, but I think we need to be cautious of a lot of the Chinese Internet companies that are similarly going to be under the thumb. And that's going to show up in how they can access public markets. but it's also going to show up in how they run their businesses. We've seen that with Alibaba as well. So I think it's worth a little caution here. I don't think any of these companies are just going to go away.

I don't think they'll do anything that dramatic. I think these are wrist slaps from China that will result in these companies coming a little more under the fold of the Chinese Communist Party. All right, D.D. Share is down more than 4% today. Finally, lawmakers in Washington, they just passed a historic infrastructure bill involving $579 billion in new investments in rogue construction.

Waterways, electric utilities, and broadband internet. That's giving a big boost to infrastructure ETFs, like the global ex-US infrastructure development ETF, ticker symbol, Pave. We're just talking about that, which is up 20 percent so far this year. How should investors think about buying infrastructure stocks and especially ETS like Pave? Yeah, I think the important thing to recognize is these are long-term plays, right? There's not a direct line from that $500 million deal to building directly into the pockets of these companies.

But there's no question that the entire planet is really in the middle of this infrastructure rebuild and build out, depending on whether you're looking at emerging markets or domestic markets. I actually kind of prefer the international play here. I think a lot of the big companies we might associate with the development of these sort of full infrastructure buildouts around the world are really in that international fund. So NFRA, I think, is the more interesting long-term play. If you're looking to catch that pop from the headlines, Pave is probably the way to go.

All right. Jay, what do you make of the deal? Well, it's complicated, right? There's having a two-prong deal is, one, it's really hard to pass an infrastructure bill. I think, you know, presidents have been trying to pass one for several years now. And two, you have this one where part of its budget reconciliation, part of it is a negotiated deal. And so I think there's a lot to come before you actually use. get to the finish line. However, you know, certainly there's a lot of incremental spending that benefits a lot of sectors. And, you know, while Dave made the point earlier about how

it doesn't really benefit the public companies, I think that's true, but there's certainly impact on lower financing conditions, helping to, for example, lower the costs of renewable power that can really, really benefit a lot of companies and a lot of consumers. So it's a hopeful that the deal will get passed still a lot to be done. I think the budget reconciliation has to be done sometime in September, end of September, I believe. So exciting, but a lot of work to do. Yeah, we were just looking at some of the holdings in your infrastructure ETF. A lot of utilities in there.

So, again, you see utilities as a key part of any infrastructure deal, and you see them as one of the main beneficiaries, it sounds like. Right, yeah. I mean, I think certainly the Biden administration's been pretty vocal. about clean energy being a real, you know, real portion of their infrastructure plan. And, you know, I think their plan is net zero carbon emissions by 2035. And we think it's definitely certain utilities that stand to benefit from that ship. Yeah, I think certain of some of those utilities also have their own benchmarks to reduce carbon emissions by 2035 and similar things.

So a lot of synergy there. And that's it for today. I'm Frank Collin. 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. InvestcoQQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at investco.com slash QQ, Invesco Distributors, Inc.