ETF Edge - Hedge fund strategies wrapped into an ETF 7/14/25

Episode Date: July 14, 2025

Hedge fund strategies are the latest to make their way into the ETF wrapper and it could be good timing as investors search for new ways to diversify their portfolio. Plus, positioning for earnings season and top plays for the next six months. 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 Invesco QQ, proud provider of access to innovation for the last 25 years. Invesco 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 and their money. I'm your host, Dominic Chu. As we head into earnings season, investors are looking at new strategies for plans. defense and safeguarding their investments. That includes using some tactics that have traditionally been used in primarily the world of hedge funds. Here's my conversation with Todd Sone, technical strategist at Stratica Securities, and Bob Elliott, the CEO and Unlimited Funds. Now Bob, these are not, by the way, Unlimited's first hedge fund

ETF products. They are adding to a suite that you already have. What exactly is the reasoning behind putting ETF strategies and hedge funds together? Well, I think for a lot of particularly financial advisors and other investors, you know, 6040 was easy for a long time. But we're now, in many ways, reaching sort of the limits of 6040. I mean, the bond sell-off that we've seen and weakness in the last couple of years highlights the fact that maybe bonds aren't the right diversifier to your equity portfolio and instead it may be better to look for other alternatives across alternative strategies and the question is when you're looking at alternative strategies to fold into the into the portfolio do you want to invest in strategies where you know from mutual

fund managers or do you want to find the smartest minds in the world head fund managers spend billions of dollars a year beating the markets and get that into your portfolio and that's what we're really focused on is every investor with access to hedge fund strategy at a low cost in that ETF wrapper. Now, past performance doesn't guarantee future results. And we know that hedge funds have had some problems in the past. But the sophistication level of hedge funds, Bob, has always been something that's been prohibitive for average investors.

There's a whole reason why accreditation had to work, right? You had to make a certain amount of money a year or have a certain portfolio size in order to engage in hedge fund strategies. This makes it available to everybody. Is that a good or a bad thing? Well, I think it's in general a good thing. The reason why accreditation was so important is because the structure of a lot of those products were such that, say you invest in maybe there's a long period of lockups or they're structured

in a way that's particularly tax inefficient or requires a lot of paperwork to sift through. That's all things that require a sophisticated investor to assess whether or not an individual manager is acceptable. We've seen a heck of a revolution in the ETS. space where we can get more and more sophisticated strategies into that ETF wrapper, particularly with some of the regulatory shifts that have happened. And an investor doesn't have to go through the sort of due diligence that's necessary in a particular LP structure or have their money locked up for a long time.

And so by relieving some of those core attributes of traditional hedge funds by using the ETF wrapper, it makes it much more accessible and practical for the everyday investor. Now, Todd, you work with a lot of institutional investors, whether they're 40-I companies like mutual fund ETF type managers or even some hedge fund clients as well. Right. What exactly are you seeing in terms of the marketplace and how it's developed with regard to how hedge funds operate and whether or not those hedge fund strategies are still at least

effective in trying to seek alpha, finding that outperformance? I think on the latter, there's two stats I would point out to you. You have 10 stocks that are almost 40% of the S&P 500. And if you tack on, say, large-cap growth or thematic AI, you own a lot of those stocks. And then you only have defensive sectors, energy, healthcare, staples, utilities, making up 20% of the SMP 500. So I need something differentiated. I need uncorrelated strategies like a hedge fund type strategy or managed futures. That's where that makes sense.

And then suppose your first question, ETF's where money's going. There's no doubt about that. Mutual funds continue to see outflows. There are a few still have star hedge fund managers out there, but the bulk of investors want lower costs of investment vehicles. So that's where the ETF comes in, and you're seeing that in the flows, whether it's equity, fixed income, and alternatives today. Now, funds and the fees that go along with them have long been a debate point for many people, whether they're in mutual funds, ETFs, or in hedge fund type products. When it comes to the fee structure that you put in place for a hedge fund product, which I think two and 20, right, in my head, and then you put it into an ETF wrapper where I think, I mean, they vary. but generally speaking, passive ETFs are they very low cost in terms of their fee structure?

Where does a product like Unlimited's hedge fund ETFs fall in that fee spectrum? Yeah, so as you mentioned, most hedge funds, what they're doing is they're charging 2 and 20, a 2% fixed fee, 20% of the performance. And the challenge with that is that that means that most hedge fund managers basically take all the alpha that they generate, leaving investors not much better off than they would. would be on their own. One of the nice things we can do, because instead of hiring Star portfolio managers

and paying the millions of dollars, we use technology to understand how they're positioned, and then we take that understanding and put it in the ETF wrapper. And so we can charge a lot less than a traditional hedge fund while still benefiting from all the insight that those various hedge fund analysts are bringing to the table. And so we're charging a 95 basis point management fee

on a product that's typically, our new products run at sort of 2x the target return of a traditional hedge fund strategy. That adds up to something like one-tenth, roughly one-tenth the fees that you'd get in a traditional hedge fund vehicle, not to mention the fact that it's much more tax-efficient to be in the ATF wrapper. Now, strategy-wise, I had mentioned before that there are a number of products that unlimited funds has unveiled. And unlimited, by the way, is not the only ETF provider out there who's trying of mimic hedge fund strategies. When it comes to your particular products, can you take us through what exactly was the thinking behind putting the products together that you have? You're looking

at things like long short equity. You're looking at things like global macro. You're looking at things like model driven funds like CTAs, commodity trading advisor, momentum following strategies. How exactly did you put the product suite together? And what exactly was the, I guess, the feedback or demand from the investors that you talked to, in advance of rolling these products out. Yeah, I mean, we've had our flagship product, HFND in the market for a couple of years now, which really proved out the fact that our technology

can capture how those managers are positioned in real time. But that's really, in a lot of ways, I like to say it's the spy for hedge funds. You know, it's just meant to capture hedge fund returns at a lower fee. I think for a lot of advisors, they basically see two challenges with sort of hedge funds as they come out of the box.

One, hedge funds typically target sort of bond-like risk, lower risk because they're managing to an institutional benchmark. And two is a diversified strategy doesn't let advisors sort of pick and choose how to complement their portfolio. And so with our new product line, we're breaking out the individual hedge fund strategies into the pieces that you say equity, long, short, global macro managed futures. That from a risk perspective represents about 90% of the risk in the hedge fund industry. And we're taking that and turning up the target return to a 2x target return.

something more akin to equity volatility, which is a lot more cash efficient for advisors building a total portfolio. From a strategy and technical perspective, are there certain strategies that you observe in the course of your daily work, Todd, from a hedge fund standpoint that you see as being perhaps more effective at generating outperformance in this market right now? I mean, the macro market has been very volatile and uncertain, but is it something like picking convergences and diversions? divergences in things like long short equity? Or is it in training or training yourself to kind of look for certain patterns in the rates market and what happens in corporate credit? Or is it something as simple as just saying, hey, you know, this has been going up for a while. It's going to stay that way. Let's keep going with it.

Yeah, yeah. I think it's very, you have to be agnostic to headlines today because it's 24-7 cycle. We've seen everything thrown at this market. And I think a strategy like managed futures makes sense where you're going off of signals. You're not going off of the news. And if I see agricultural commodities rising or if I see bonds rising, for whatever reason, I'm getting involved there. It's for that uncorrelated exposure and that news agnostic exposure.

I think that's super important today just because the amount of noise that's out there, whether it's coming from geopolitical or the administration, right? So I think it's just a go with the momentum type of market right now. Okay. Now, another thing, Todd, you talked about it before. The defensive sectors are starting in your mind should be getting some more attention. right now. Yeah. How should investors be thinking about those sectors or the exposure, the relative weighting of them in someone's portfolio as we head into this earnings season? As we

head into kind of like the back half of the year, how are things positioned in your mind? And what exactly does it look like in terms of how this earning season is going to shape up? The bar is so low for some of these defensive companies. Has it really been managed that low? It's not going to take that much. It's basement bottom pickings right here. So energy, You just had an event in the Middle East. Can't even get oil above 70, 75 bucks. So energy is just kind of left or dead. I do think healthcare is very interesting

in that there's been a mass exodus of outflows from healthcare sector ETS. And healthcare's performance versus the S&P is in its bottom decile over the last 50 years. So it's really bad out there, however, for healthcare. Folks are scared of the administration. I get that. But I wonder if you can start to nibble in certain areas.

Maybe it's equipment. Maybe it's some pharma right there. So we'll see if they can surprise in the upside for earnings, and that would be a boost for healthcare sector ETS. And then Staples, to me, is just not built for this generation outside of Costco and Walmart, right? Nobody wants to eat the types of cereals and whatnot as tasty as they are from those traditional companies. And so I guess overall, you have to think differently about your defensive exposure

because they just do not have the same clout as they normally would within the SMP 500. Bob, from a CIO's perspective, from a hedge fund CIO's perspective, now from an ETF CIO's perspective, what exactly has you thinking about where the opportunities are in this kind of market? It's all correct, everything you've been saying. It has been very headline driven. It's very macro-oriented and focused. How exactly does one navigate through that kind of a market? And where exactly are you seeing some of those opportunities as they kind of percolate through this new cycle? Yeah. I mean, I think it really comes down to going global and going long and short. And the reality is, if you look at most investors, they are long only, and they're mostly focused on U.S. assets.

And that leaves a lot of opportunity out there for those who are willing to hire managers and look for returns that are, you know, outside of the traditional 6040. So, you know, a simple example is there's great alpha to be generated in the exchange rate markets that very few investors have as part of their portfolio. You know, hedge funds have done a very good job benefiting from the falling dollar positioning. Or the opportunity to maybe fade some trades that, or some consensus thinking. So if you look at global macro managers as an example, they're actually starting to build long bond positions as yields have risen in recent weeks. That's a very non-consensus trade. It's a trade that actually paid off a month or two ago when they built those positions.

And it's a trade that's building today. And so that sort of flexibility, long, short, being able to flexibly respond to the policy environment as it evolves, I think is really important in terms of building a portfolio and getting away from the long only, you know, mega-cap tech stock mindset and get to something that's flexible that can navigate through this sort of environment. When you as an ETF manager look at the dynamism that you just referred to, how quickly or frequently are you adjusting the portfolio within your funds? I mean, so let's say we pay you the 95 BIPs to manage our money as ETF, you know, ETF customers.

What exactly is your strategy with regard to how often you trade or turn things over or make portfolio adjustments? Yeah, I mean, we're looking at managers' performance and market action on a daily basis and adjusting our positioning based upon how we're seeing managers shift their positions. You know, in normal times, if you're managing a substantial portfolio, you're probably trading over weeks and months because you don't want to incur, you know, undue transactions costs. But in times like these, where policy is moving quickly and where market action's moving quickly, you can see managers shift positions from long to short over the course of weeks.

It's the sort of thing that if you're sitting in the shoes of, say, an advisor trying to build a portfolio, you don't have the time to be able to navigate through policy as it goes from secularly high tariffs to pause back to secularly high tariffs as a simple example. And so that's one of the great things about the ETF wrapper is you can bring in strategies that can essentially do that for you as part of a strategic allocation in your portfolio. Now, Todd, you look at fund flows quite often, quite often. What exactly are the flows telling you right now about how things are shaping up for the second half of this year? So we're about three months off the S&P 500 low back in April 8th. The leading category, I like to dig a little level deeper here, has been crypto. Investors are just latching onto this moving crypto.

And by the way, we're speaking timely because this is going to go into an archive somewhere. But as of today, we hit $123,000 plus on Bitcoin prices. So that's a big deal. Oh, yeah. Yeah, I think there is this kind of opening up of the gap of allowing crypto into model allocations or other portfolios beyond just the pure speculative nature for it. I think investors are realizing it's an asset that's here to stay. You're also seeing plenty of money to cash. You still get four and a quarter in a money market fund or similar type of short, short duration ETF.

So crypto and cash are popular. And then on the outful list, you have folks hating small caps. Small cap outflows despite the massive rally off the low. Perhaps an interesting contrarium play there. Small caps haven't worked in ages, but it's tough to beat mega-cap growth with them. All right. And as we conclude this, because we could go on forever, I'm going to ask each of you the same question, your favorite part of the market right now, where you think is the one that's ripest with the most opportunity,

whether it's in the stock market in certain specific names or sectors, or whether it's international on the macro side of things, dollar, euro, yen, whatever it is. What's your favorite spot in the market for the next six months? Well, I think building portfolios that can do well in a falling growth environment. So you're talking about positions, long bonds, long gold, and short the U.S. dollar. Those are all positions that, you know, for those who are sort of all in on, you know, the U.S. growth story, that's a very non-consensus view that is also favored by some of the smartest financial minds in the world in the hedge fund community. All right.

Now, same question to you. Long bonds is very interesting to me. I'm going to go with the momentum from Bitcoin, though. that area. I think that it's going to become consensus very quick, but a lot of lift there. Do you think there's a catch-up trade for Ethereum? Why not? Okay. Even though I couldn't tell you the difference, and the viewers the difference between the two of them, but that also seems to be coming into play as well, and the Ethereum funds are taking the money, too. Now it's time to round out the conversation with some thoughtful analysis and perspective

to help you better understand ETFs with our Markets 102 portion of the podcast. Todd Sone of Stratiga Securities continues with us. now. Todd, the conversation that we had involved hedge funds vis-a-vis ETFs and kind of where the melding is happening between the two of them. We got that from that conversation, but now I want to delve a little bit more into just how you see things developing as we head into what is the most important earnings season since the last earnings season. That's a good way to put it. I would give you this stat. We're three months off the market low. It's one of the best

three-month returns in the history of the S&P 500, going back 50, 60, 70 years. Okay, what does that mean? Historically, the next month or so is basically a toss-up. You can get mean reversion. I don't think that would be out of sorts or unexpected. Perhaps earnings is the catalyst to develop some sort of correction here in the summer, maybe a little summer speed bump. But more often than not, the next three to six months usually come in with very strong above-average returns and good hit rates. So I wouldn't get too deterred by any sort of summer correction unless earnings come in really, really weak. And I wonder if that leads to any sort of defensive outperformance, which feels like forever since we've last seen that.

I mean, the defensive outperformance that would hypothetically happen as a mean reversion because it's been underperforming for so long. That mean reversion or possible upside move would be part of, you could characterize, as the so-called broadening out of the markets. Right. They're not the tech media telecom, mag-7 mega-cap type names that have been all of the headlines. pretty much for the past decade. When you say defensive, what exactly would you be looking for this earning season to say that this could be a real true catalyst

for outperformance in those underperforming sectors? I think the most important ratio for investors to watch and one of our favorites is consumer discretion versus consumer staples. So you can use, and I like equally weighted. That way we give it of Amazon and Tesla's influence. You can use RSPD, or that's a discretionary ETF,

if an RSPS for consumer staples ETAF. And that's just a simple barometer of the economy, right? If discretionary is outperforming, that means autos, retail, home builders are working against toothpaste and toilet paper. Conversely, if you get staples outperforming, that's gonna tell us that the market is seeing, does not like what we see from earnings,

and it would suggest a more defensive tone. And I would think that might leak into other areas like the industrials, if industrials start to peter out here, especially specifically machinery, and then the semiconductors too, semiconductors are are back. They've had a great revival here. I think they're probably at the center of the storm

in terms of the geopolitical and the tariffs scenario out there. But if I start to see semis lose some luster here too, and I'm not talking about just Nvidia and Broadcom, but applied materials, AMD, that's going to be more suggestive that something is a little bit off and maybe the tariffs are going to start

to impact companies more than we thought. Have you seen any of those types of developments happen with that kind of relative move between discretionary and staples, the relative move in semiconductors, the relative move in places like health care and industrials, have you seen anything that would indicate to you that there is a deeper trend that could be developing early on right now? Or are things very much still kind of a wait and see in your mind? No evidence, right? It's still risk on trends are very much in favor of the offense, cyclical type of sectors right here. There's been no evidence of

defensive moves, which on one hand makes me a little bit nervous. Whenever you start wondering what could go wrong here, then you can't find a reason. That's not great. But I'm going to pay attention to the flows. Do this flow start to get hotter yet? There's no quite major evidence of that outside of some corners here and there. But overall, we're yet to see any sort of bid for defensive push, which is very curious, I think. So we also mentioned during the online show that we just referenced. The conversation at one point did tilt towards some of the hedge fund strategies that are more model-based, the so-called commodity trading advisor or CTA-based trend following type situations. You look at trends, you look at some of the dynamics for momentum as a factor.

What exactly, is it still just really AI and tech? Is that the only place there is momentum in the marketplace? Or are there other places that you can look that might not be as readily being focused on that might provide those opportunities, momentum that nobody's really seeing or calling attention to now. I think you have to look at the next layer of AI, right? Don't go for the obvious stuff like in tech. Look at exchanges in financials, right? So the banks have been good. I'm a big fan of the exchanges, though, because they are basically turning into data companies. Yeah, trading volatility helps like we had in April. But you look at some of the U.S. and foreign exchanges, companies that are running these markets, they just want all the data out there, all the

analytics out there. Now when you say you're you're speaking specifically about companies like ICE the parent company of the NYSE you're talking about places like the CME group right or you're talking about the NASDAQ that sort of thing. NASDAQ so go through why I'm curious why again do you think that these are the derivative plays on artificial intelligence? So they need all kinds of data analytics right people want their data because they want to know how much folks are trading they want to know how much retail is doing they have market making businesses I think that can help produce profits and I'm sure AI I don't

an AI expert will factor into all this. Up north, TMX group is another one that has been very, very strong, and they have a very data-centric business, a lot of content involved there as well. So I think those are the next level there you want to take a look at. Of course, there's the power story for industrials, but I think that might be a little bit overcooked. So take a look within financials.

That seems to be the place where AI can help with productivity, and you get these data analytics. You can spew out spreadsheets of all kinds of flows and trades that you need to. that are out there. I mean, I'd probably be a little bit vanilla in that description. But if you just think about the power that you would need for some of that analysis, then I think that's where AI comes in. All right. So the melding of data, markets and everything else in exchange operators. That's the call from Todd So at Straticus. Index providers, too. That's the other way to think about it. There you go.

Index providers and exchange operators. Todd Sone is Stratigas. Thank you so much for joining us here in ETF Edge the podcast. Thank you. All right. So that does it for our podcast. Thanks very much for listening. Join us again next week. And as always, you can just head over to etfedge.c.com for all of our archived content. We'll see you next week. How does InvestcoQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100.

Let's rethink possibility. Investco Distributors, Inc.