ETF Edge - Heavy-Volume ETF Bright Spots & the Commodities Equation 12/12/22

Episode Date: December 12, 2022

CNBC’s Dominic Chu spoke with Tom Lydon, Vice Chairman at VettaFi, and Will Rhind, Founder and CEO of GraniteShares. They discussed some of the heavy-volume ETF bright spots hidden beneath the veneer of lighter holiday trading volumes. Plus, single-stock ETFs have gained traction as investors dig around for alpha. GraniteShares is set to launch three new leveraged single-stock ETFs on Tuesday, allowing investors to place amplified bets on Meta, Alibaba and Nvidia. The team also tried to make sense of the commodities story – as investors grapple with uncertainty over China’s reopening, the Federal Reserve and the inflation picture. 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're 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 Dominic Chu, billing in for Bob Pisani. trading volumes may be light thanks to the World Cup, the holiday season, and confusion over 2023, but don't be fooled. There's plenty of movement bubbling under the surface. Today, on the

show, we'll discuss some of the heavy ETF volumes and bright spots that we've seen. Plus, Granite shares is set to launch three new leveraged single-stock ETFs tomorrow, allowing investors to place amplified bets on meta, Alibaba, and NVIDIA. We'll discuss why single-stores. We'll discuss why single-stock ETS have gained traction this year. And finally, we'll try to make sense of the commodity story as investors grapple with uncertainty over China's reopening, the Fed, and the inflation picture. Here's my conversation with Tom Leiden, Vice Chairman at Vettify, along with Will Rind, founder and CEO of Granite shares. Gentlemen, thanks to both of you for joining us here on the ETF Edge. I mean, Tom, maybe we'll start with you with the bigger picture macro side of things.

Talk to us about some of these hot trends in the ETF business right now. What exactly are we learning about investor appetite for risk, the tolerance for it, as we get ready to close out this year 2022 and go on to next year, 2023? Yeah, Dom, you mentioned China and all eyes are on China. The Chinese government's on a mission. They're looking for a rebound. So they're supporting real estate in a big way. The coronavirus protocols have been.

a little bit lax, which is great. As more people are coming back, they're going to stores or going to casinos. Real estate prices are back. They're encouraging people to buy properties. Also, we know that China does not want to disconnect from the global capital markets. So all the saber-rattling that we've seen back and forth with the SEC looking to maybe delist Chinese Chinese stocks in the next couple of years, probably not going to happen. So is this a buying opportunity? Absolutely. There are valuations that we haven't seen in decades. And when you mention companies like or ETFs like KWeb that crane shares China internet ETF down 80% since the spring of last year. However, just in the last couple of months, it's up 50% off its lows. So there are definitely

opportunities there. When you look at valuations, Many are saying generational opportunities, but also there are other areas like fixed income. We saw negative flows in fixed income earlier in the year. However, the Fed has been a little bit more transparent. We've also seen redemptions out of fixed income mutual funds into ETFs as tax loss harvesting has been the year for that, for sure, both in the equity and on the fixed income side. And, you know, a couple other areas, we're going to talk a little bit about commodities. We've actually seen metals and miners really kick in in the last couple of months.

And I can't help but mention Kathy Wood. We haven't talked a lot about her lately. Her ETF arc is down over 70% off the highs. But if you liked it for all the reasons you liked it a year and a half ago and you had a 5% allocation, why wouldn't you think about nibbling away with the great valuations that we have today? All right. So the depressed values is certainly something a lot of folks are out there watching. I mean, Will, I'll turn to you here.

Are there any other key trends that have stood out to you? I mean, you run an ETF business. We've seen a decisive shift away from some of these growth and tech media telecom type stocks towards almost value-oriented dividend-paying, dividend yielding type assets in that mad dash for yield, although I will point out that I guess even risk-free treasuries are giving you anywhere from three and a half to four and a half percent right now. What happens to that trade, that value trade, that yield trade, so to speak? Well, like you said, I think people focused on what worked this year, and that was really

commodities is one of the few places where people made money. And that will continue in my mind to next year. The other thing you just mentioned has also been a big trend this year, which which is income or yield products really coming back to the fore, as opposed to being sort of overshadowed for the last few years, particularly by some of the growth investments. Now, we're in a situation where people are looking to prioritize cash flows, prioritize income, and really adopt a much more of a defensive posture. And so that's where income products come in.

And I think income will continue to do well, even though, obviously, interest rates are rising and have been rising quickly this year. I still think that that more value-orientated play, people looking for high-income products will continue. Will, could I follow up on that just really briefly? I mean, there are a number of different places within the ETF market overall where people do try to find that hunt for yield, right? That income type play. We heard Tom mention some of those fixed income plays that are coming to the forefront right now.

I wonder, have you seen anything in your mind trend-wise with regard to certain exact part? of the market that are going to be hotter than others when it comes to some of that income trade is it going to be more in real estate investment trusts is it going to be so towards some of these more more dividend type paying names like the aristocrats is it going to be a certain energy parts of the market in anticipation of spending i got to figure there's a ton of things out there catalyst wise that could drive that income trade yeah i think they're kind of passed that a little bit more you see interest and we've we've seen this over a number of years but we'll continue to see interest in companies high quality companies that

have a track record, and can demonstrate a track record, they've been increasing their dividend over time, that becomes more attractive. It also has been a lot of interest in a space that we operate, which is in the pastro security sector of the market. So providing income from places that link to hard assets, so real assets that, again, have more of an inflation-related spin on the income. So that's things like master-limited partnerships,

so MLPs, REITs, which deal with physical, property, not mortgages. And so I think this is an area, an interesting area of the market where we're going to see more interest next year that this real asset-orientated income. All right, Tom, it's been a huge year, I mean a big one for ETF flows. The second best year on record now, with north of $600 billion that we've seen, can we expect to see the industry maintain this kind of momentum heading into next year? And if so, hypothetically, what sectors stand to benefit the most from that investor money that's been pouring into exchange traded funds? Right, Tom. I mean, look, when you look at 30,000 feet, mutual fund companies are continuing to have a tough time holding on to assets.

Again, nothing against mutual funds. It's all about a choice. It's all about a wrapper. But when you look at the vehicle of choice, it really has been ETFs for a variety of reasons. We touched on tax loss harvesting. That has shown a lot of money coming out of mutual funds into ETFs. And then if you look at the big players, the big asset managers, you've got companies like Alliance Bernstein, Morgan Stanley, Capital Group, Newberger Berman, that traditionally were in the separate account side or the mutual fund side that are now coming into the ETF space. And companies like dimensional fund advisors that have converted their mutual fund. funds into ETFs, I think we're going to see a lot more of that as well. There are also, as you mentioned, a lot of choices. When you look at the options overlay strategies in some of these equity-based ETFs that not only replicate the equity markets and provide a little bit of a

buffer, but they also provide some pretty strong yields, companies like JP Morgan with their JEPI product or nationwide with the Newsy and USA. If you can replicate an index while at the same time getting a 7, 8, 9% yield, it's pretty attractive. All right. So those income instruments, again, continue to be in focus here. And of course, the tax issues surrounding ETS versus mutual funds, the timing that which you can take them, the optionality that ETFs give you, maybe one of the reasons why they're becoming more attractive versus mutual funds in that regard. Another bright spot, by the way, in the ETF business as of late has been these leveraged and these inverse and single stock ETFs or any combination of those words. A phenomenon, by the way, that's clearly taken the ETF business by storm.

We've seen the Tesla Bear ETF, which is ticker TSLS, see big inflows since launching back in August. Now, we should mention that ETF resets, by the way, that one, specifically on a daily basis and gives you the daily inverse performance of Tesla shares on that particular day. Now, tomorrow, Granite Shares is gearing up to launch three new leveraged single-stock ETFs on the NASDAQ, allowing investors to place even more amplified or leveraged bets on popular names, including meta-platforms, Nvidia, and Alibaba as well. We have the guy, we have it straight from the horse's mouth, Will, tell us more about this new suite of ETFs, why now and why have such single stock products gained so much momentum

and traction in 2022? And will it continue in 2023? Will, is that, are you there? Can you hear us? Yes, sorry. I think I lost you for a second there. All right. So I guess my, did you, did you hear my question? Um, about single. Okay. You could repeat questions. Yeah, yeah. So, of course, we had talked a little bit about the advent and the emergence, if you will, of single-stock ETFs over the course of 2022. It allows a lot of investors to take specific views on stocks on both the long and short side with even leverage attached to them. So even more Uber bullish or Uber-Barrish on a certain stock using an ETF product. I wonder, since you're running an ETF company that manages these types of single-stock ETF products, can you tell us why you think

those types of ETF, single-stock ones, have gained so much momentum in 2020? Yeah, thank. Good question. I think it's really a simple answer and that more people are managing more of their own money. And to go back to the original point that you mentioned about, you know, the ETF inflows. You know, one point that doesn't get discussed a lot is advisor fees and the fees that people pay for money management more broadly. Now, people care less about that in a market where they're making money. The market is always going up. And, you know, the amount you're paying your advisor or an investing service is less of an issue. But people really care about that when you're losing money and be able to start to fix more on the fees and the performance of managers.

And all that leads into this trend that we're seeing, you know, over and over again, which is people are taking more control of the money, of their own resources and managing that. And in part, you know, what that means is more focus on leveraged single stocks or individual securities as well as obviously other sectors of the market that people are interested in. ultimately comes down to people taking more control of their own finances. Will, if I can follow up just very briefly here, and I know it's a complicated question, is there a worry in your mind that there has become, in essence, a gambling mentality or a gaming mentality between some of these names? And that's the reason why some of these folks have gravitated towards inverse and leveraged products that can enhance returns.

If they can't get enough of just meta, on the beta, a loan basis, they can lever it up and get one way or the other's exposure. Is there a worry that that kind of leads to perhaps irresponsibility down the line with regard of managing risk? Well, I think that leverage ETFs and they all work the same way, been around for over a decade. So people have a lot of experience with these products and in terms of how they work. That doesn't mean that there's not more room for education.

It's not more room to have these kind of strategies out there and explain more detail how they work. But I think the leverage involved in these single stocks is actually less than what you see with other parts of the leverage market, particularly even the leveraged ETF market. So we're typically talking about 1.5 times the daily performance of an underlying company like Alibaba or Mesa. So, of course, there are going to be some people that this is not appropriate for. These are really designed for active traders. You know, people who are experienced in the market, who probably have active trader accounts, and they're very familiar with these. line companies, and definitely that they're not, you know, long-term buy and hold, you know,

one-size-fits-all type solutions. But for the right investor, for the right trader, you know, they provide that exposure that people are looking for in some of these cases, which is, you know, short-term amplification against big names, or indeed if you're inverse, you know, inverse exposure, which for the majority of investors, still incredibly difficult to get. It's an excellent point, Will, understanding some of the risks associated with these instruments. Tom, hearing what we just heard from Will, how exactly would you or us as a society, basically, measure the success of these leveraged in single stock ETFs? Many are expecting the markets to be stuck in this kind of fat and flat type trading range next year. Does that factor into investors need for finding more alpha outperformance rather than just market exposure or that beta?

Well, Tommy, as Will said, it just gives more options. These types of ETFs have been around, as Will said, for a long period of time. We have to give individuals credit. They're not, if they're going to shoot themselves in the foot, it's not going to be with an ETF. It's going to be with a meme stock or cryptocurrency or NFTs or something like that. We have a lot of sophisticated investors and advisors that are using them. The volume has increased dramatically over the years, especially with this downturn in the marketplace.

But it's meant for traders. It's meant for more sophisticated investors, and you have to look at it every day. With these new single-stock ETFs, the great advantage is if you want to put more money in it or if you want to be short, you can do so in this ETF structure without having to fill out a margin application or an options application with your brokerage platform. So kind of a neat opportunity for investors out there, but they know they have to be careful. These things have been around for a long period of time. There's been a heck of a lot of education that's been out there led by SEC guidance and the ETF issuers that offer them up. So more importantly, as we look at the ETF space continue to evolve, there are more and more choices, which makes a lot of sense as the structure has kind of held the test to time as we're coming on 30 years of ETFs as we look back on to SPY, the first

ETF that we had in the in the U.S. in 1993. It's been a great run. A huge run for sure here. Will Granite shares has already had several single stock ETFs in Europe for a few years now. Why has the reception overseas been perhaps warmer to these types of products from a regulatory perspective than here. And maybe that goes to my question to both you and Tom with regard to the risk tolerance and profile for these products. I think it was more a case that what most of all don't know, Dom, is that in the U.S., there are only actually two companies allowed to launch levered products. So when we started Granite shares, we weren't allowed to launch any levered product. It wasn't possible. And that's really been the state of play in the market for a long time,

the market structure issue. And that really changed. over the last couple of years with the introduction of the ETF rule, which allowed companies like us or any company for that matter to launch leveraged products for the same time. So the US has definitely had some issues with regards to, you know, updating regulation around leveraged funds and, you know, providing that access to issuers who want that. That wasn't the case in Europe.

It's just a slightly different case here involving market access. But, you know, I think in Europe, the reception these products as being good. And, you know, there's more of a culture, perhaps, you could say, abusing derivative-based products. And so that's something that investors perhaps are more used to. But that being said, you know, the U.S. is obviously a huge market for leveraged ETF. It's the biggest market in the world to leverage DTF.

And I think we're starting to see, you know, some of that reflected in the volumes here with these particular single-stock funds, even though it's still very early days. Majority of these products launched only in August. So it's early days. The trend certainly has been to the upside with regard to the trading activity and volumes for some of these single stock names for sure. Okay, gentlemen, and finally, I want to bring up the commodity trade because we referenced it earlier. Those commodity prices have ebbed and kind of flowed along with every new headline that comes out of the China reopening story, crude oil coming off its worst week in months, and then gold regaining some of its luster.

But overall, there are still high hopes for a full-fledged reopening sometime after the spring, which would be possibly a net positive for assets like copper, like oil. But given all the worries out there about a recession in 2023, we have these conflicting cross currents very much at play here. So let's drill down, pun intended, on the commodities complex. Will, we'll start with you here. You run several big commodities linked ETFs like the Granite Shears Gold Trust. The ticker there is B.A.R. for Barr. What's your sense on where some of these precious metals prices will be in 2023?

can they continue to see some of the maybe upward momentum that we saw in the second half of this year? I think we can and, you know, large amount was based upon interest rates for the more interest rates sensitive commodities such as gold. And I think with the dollar seemingly peaked, at the short term, whether it's an absolute peak, we don't know, of course. But I think that some of those expectations are coming down, allowing metals like gold to appreciate. But your metals, we're going to need them. They're absolutely vital for this energy transition that every major government in the world is talking about. We need more copper. We need more nickel. We need all of these metals which are going to help transition away from fossil fuels. So I think this is a longer-term

secular bull market for commodities, but in particular commodities that will be used to hasten this transition away from fossil fuels. But that doesn't mean that there's not opportunity for oil and for some other traditional, you know, certainly hydrocarbons as well. But they will definitely be battling against these recessionary forces and, you know, stimulation from the likes of China and things the next year. Tom, where are we in that so-called peak inflation narrative, that story? And how exactly do you view the commodities industry right now? And how do you reconcile all of these conflicting cross currents?

I only ask this because you'd think when inflation fears are high, that you'd see oil prices rising, but they've been falling. What gives? Yeah. We're surveying advisors all the time, Dom, in the last couple of years, their number one concern has been inflation. It's nice to see a little bit of a pullback, but really, when you look to the next three to five years, we may be in higher inflationary times, which tends to bode well for commodities. To Will's point, even if we have a soft landing and we come out of a very tepid recession and we get back to that growth stage, whether we're building more, which we will be, or we're going to be transitioning away from fossil fuel, we need commodities. It comes down to a supply and demand issue. And one area, gold just hasn't done as expected in the last couple of years. It's been quite surprising. However, historically, if you look back, it tends to be a second half player.

It tends to really kick in during the later years of an inflationary period. So look, don't count commodities out. If you don't have it in your portfolio, don't feel like you've missed it. There's only so many bars of gold and barrels of oil that we can pull out of the ground. So if you look at it from a supply and demand standpoint, it makes sense. And there's some great commodity ETFs out there like the folks that granted chairs are offering at the right price. So now's the time as people are adjusting portfolios. When you look at what you have in the portfolio, you've got to make sure you're diversified. All right, we've got a couple seconds left here.

I'm going to give two quick words to you to end the program today. Will will start with you. The same question for you both. What's the biggest wild card for the ETF business in 20? Well, that's a great question. I think the wildcar would be active performance coming back in a major way, so active management, coming back into vogue, and perhaps putting the cat among the proverbial pigeons in terms of, you know, people's one-way directional view on, you know, ETFs or passive, always being superior. All right, so that's active versus passive. What do you think, Tom?

Yeah, I would say equities coming back, surprising. folks, but also being creative with these options overlay strategies because there's that demand for yield. However, the Fed may continue to raise rates well into 24. That's all for ETF Edge today. I'm Dominic Chu filling in for Bob Bassani. Thank you for tuning into our ETF Edge podcast. And remember, you can find all of our shows on our website, etfedge.cbc.com. Invesco QQQQ believes new innovations create new opportunities. Become an agent of innovation. InvestcoQQQQ, Invesco Distributors, Inc.