ETF Edge - Hedging September Volatility with value and the under-valued 9/3/25

Episode Date: September 3, 2025

September is already volatile and we haven’t even had a Fed meeting yet! Now might be the right time to look into the “value” promise of AI… and add some under-valued sectors as cheap insurance.    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 InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged 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 Leslie Picker in for Dominic Choo. Less than a week in September, and it's already proving to be a challenging month with more hurdles. coming up quickly. Here's my conversation with Bryant Van Cronkite, Senior Portfolio Manager at All Spring Global Investments, along with Todd's zone technical strategists at Strategic Security. Todd, let's start with you, because September often has a bad reputation with investors. First two days have already been volatile. Where are we from a technical perspective? Yeah, hey, Leslie, great to be with you to Bryant. I would say, listen, we're to equity market globally.

That's an all-time highs. I think it's really interesting. You've started. started to see a little bit of a pickup in equity ETF flows. A little other sentiment data of ours starting to percolate. I would not call it a massive risk yet, right? Sentiments getting a little bit hotter, and that makes sense with stocks at all time hours. But so far, we're still in pretty good shape. Risk the appetite is good. I think that the real low will happen further in the fourth quarter when there's really good seasonals historically.

I would think there'll be a little bit of a chase in the equity ETF market too. And that's when people can get hit with a speed. of sorts, perhaps not too dissimilar like we saw back in April. It won't be as quick and as big as a drawdown, but that's what's on our radar. Again, things are in good shape. Equity TFLO is rising, but not in massive risk just yet. Yeah, and it's pretty remarkable. The rebound we saw from April, we'll see if that can repeat.

Brian, many investors think a Fed rate cut is locked in later this month. Obviously, that would potentially be some kind of a tailwind for stocks if it's not already priced in at this point, but you don't think it's necessarily a lock at this point. Why is that? Well, I think the market's overpricing the odds of a cut. I think the odds are of a cut are, it's the base case as a cut. But the reality is the Fed is still behaving in a very data-dependent manner. And inflation is still safely above target, and there's uncertainty about the level of

impact on tariffs on inflation. And so I think from that point of view, the Fed has every reason to just wait for more data. Now on the other side of the mandate though, employment clearly is weakening, but the headline numbers on employment rates look quite fine, quite healthy, and so supply demand is imbalance. But under the covers, we're seeing fewer openings, we're seeing certain demographics like new college graduates having a hard time finding employment. And so I think a forward-looking Fed, which we don't traditionally have, a forward-looking Fed would say, look, I see deflationary pressures, maybe six to 12 to 18 months down the road, which will save us on the inflation side. and I see employment already weakening under the covers, I can cut rates here. That's what they probably do, which would be a shift for the Fed to forward-looking. But from a data-dependence standpoint, they don't have to cut if they don't want to in September.

Yeah, important to make that distinction there. Todd, on a sector level, where has the money been flowing? Where is the most interest right now? Yeah, so we're talking about rate cuts with Brian. What we like to do is take stock of where flows have been since the first cut, almost a year ago, and a bulk of money has gone to A, technology. And I think that's been warranted, right? Tech stocks have been pretty strong.

And then B, financial stocks, maybe that's a derivative of the AI play. I can understand financial companies using AI as a productivity boost. But where they are not also going is defensives. There has been absolutely no demand for defensive, whether it's health care and the staples and energy to some extent. So I think if you're looking for corners that are desolated, desolate, look at health care. And if you're looking for corners that are popular, but maybe have a risk brewing on the horizon, it's going to be financials and tech. And in the meantime, you have a lot of just kind of noise in between there.

So we always like to cue off of where the cyclical flows are going. Again, similar to the broader market rising, but not necessarily a major risk yet. I would punt that until later in the fourth quarter before we start even to think about warning signs. Yeah. And Brian, that brings us right to you and your value-oriented fund. And of course, tech, a clear beneficiary from AI. And we've heard a lot of talk coming from productivity gains and other sectors from the AI buildout. Where are you seeing value and AI intersect? Is there anywhere where that Venn diagram crosses?

Yeah, sure. We certainly saw the same thing, Todd saw, which was financial, especially banks. We're highly attractive coming into the early part of the year and through today. Within financials, we're rotating capital from banks into capital markets. We also saw the tech benefits as well and we own Alphabet, which has been a nice success for us. But now is the time in our opinion to begin shifting and broadening your exposure. The next wave of AI benefits maybe doesn't accrue to tech directly, but rather to the users of AI when it comes to expense cuts, but also into a broader theme that's going to not only

embrace the benefits economically of AI, but also partner that with the tax benefits from the one big beautiful bill that will enhance and push capital to be depressive. employed through companies today saying that CAP-X is re-escalating right now. And also we see great balance sheets across most of the corporates that we invest in, and they're using that to buy back stock. And so today, we want to take some capital out of the past winners, tech, maybe some financials, and move it more towards industrials and materials where we're seeing offense opportunities. And then to Todd's point, we actually really like healthcare.

There's some big secular tailwinds in healthcare that we think are being ignored due to some political and some cyclical issues. but healthcare in certain pockets looks really attractive to us today. Yeah, maybe some second derivative beneficiaries of AI there. Todd, you note that we're coming up on year four of the current cycle and agree it makes sense to add tilts to active in value for diversification purposes. Do the bull markets, do cycles die of old age? That's usually the case.

I think this is more about the concentration problem that's plaguing a lot of passage of indices, right? You have 10 stocks that are almost 40% of the S&P 500. That's a 50-some-odd year high. It's 60% in large-cap growth. And so if you don't do your due diligence on ETS and you own a blended large-cap fund and a growth fund and maybe a thematic type fund, you have a lot of exposure to a small cohort of related tech and AI names. And so I think this is where, especially as cycle ages, having an active manager involved makes sense, and then also tilting towards value. So active value we think is a very good proposition heading into 2026. Maybe it's not necessarily the bulk of your portfolio, but just add it in there,

just get something different besides a tech and growth-heavy portfolio. And keep in mind, stuff like small caps or transportation stocks. Bryant mentioned the industrials. A lot of those have not really participated from a technical perspective over the last couple of years. So to us, we like this idea that there are corners that have been in a bare market or just a big trading range for the last three to four years. So that leaves us with a lot of opportunity away from growth and tech-oriented names that investors really should consider for their portfolios going forward.

Yeah, that concentration risk remains front and center. Bryant, take us a little deeper into ASLV. Some of your top picks within the fund are Canadian Pacific, Kansas City, Vulcan Materials, and Lab Corp Holdings. Why do you like each of those? Yeah, the Allspring Special, Large Cap Value ETF, ASLV, is, designed to take advantage of companies that are going to use their balance sheet flexibility to control their own destiny, to invest in their future. And of course we want to capture that

along with the tailwinds of the economy, which we're talking about. And so in the case of CP, Kansas City Southern, so Class 1 rail, the only one that's tri-national, from Mexico through the U.S. to Canada, the stock today is being, I think, caught up in a lot of the rhetoric around integration and acquisitions within the Class 1 rails. We understand that. But underneath all of that, we have Kansas City, Canadian Pacific and Kansas City Southern working together to integrate the acquisition they made a couple of years ago, which we think ultimately is still underpriced. We're going to see length of haul increase. We're going to see pricing go up.

We're going to see margins expand as they get more operating efficiencies. And on top of that, if there is integration in rails, they probably are going to be a beneficiary as some of the required asset sales from the merged companies come to CP's way. All of that will also benefit from, we think, a nice, onshoreing trend in the year. US. Not to mention, Mexico is now the largest importer to the U.S. just now surpassing China. So that's a great way to catch a bigger theme while actually harnessing the individual investment CPs making. Looking at Vulcan just really quickly, sorry, go ahead. No, that's what I was going to ask, Vulcan.

Yeah, Vulcans is one of the largest aggregate players in the U.S. aggregates go into the manufacturing or construction of roads, bridges, buildings, both Resi and non-Rezi. There's a massive cycle of spending that we think is going to ultimately allow Walkin to push volumes higher. But importantly, Wulkin is sitting on a really powerful balance sheet that they're using for acquisitions today that's going to expand their footprint. That combination ultimately is going to drive much higher free cash on the market's pricing in the day.

So again, harnessing the power of the company's balance sheet while benefiting from the power of the economic cycle around us. Yeah, economic cycle and political cycle as well. We talked a little bit about how. health care and you both see the potential breakout potential in this sector. Todd, what do you think is going to drive that? What do I think? Gosh, it's been a great question for about a year and a half to two years now because, A, you've had a mass exodus of outflows. Health care's relative performance versus the S&Ps and its bottom desicile historically. So it's hard to get much worse for

health care. So the positioning is a asset. Ultimately, if you really want to see Sistia, sustained move into that space, it's probably going to take a more drawn out bare market, which comes at the cost of everything else, a more defensive move like you had in 2022. So that's kind of the main issue there. It will take a deterioration in the economic backdrop before I think you see a wholesale move into all of health care. So potentially in the meantime, it's more of a hedge, like a Stables hedge if it's going to benefit when everything else goes down. We like it as just a differentiation hedge going forward, especially because no one is there. And it's a very, people, I think the market has been very bearish in health care, given the performance.

So the flows reflect that. We like it as a hedge, especially relative to other defensive areas. Staples just don't see very dope for this environment. So at least you can get some diverse areas within health care, whether it's equipment, pharma, and some of the big cap or biotech type names. What do you think, Bryant? Well, I think a defensive shift in sentiment would be good for health care relative to the broader market, but we're not dependent on that in our view. We'd be careful with health care. A lot of the different industries, have different exposures to regulatory change right now, pricing dynamics, and we want to make sure we capture the right end markets. And so for us, we mentioned LabCorp is one of our top holdings.

LabCorp is in the blood and tissue diagnostics, so sample testing for drug disease identification. And what we like here is there is a significant secular tailwind of an aging demographic and a personalized medicine trend that's going to require a lot more testing and a lot more frequent testing over time. And importantly, the shift, the mix shift is heading towards higher price testing as we try to customize and personalize treatments around oncology or genetic testing. And so the long-term secular trends here are going to push volumes, in our opinion, from low single digits to mid-sing plus. On top of that, you'll get benefits in pricing. Now, the beautiful thing about LabCorp is that they, too, are using acquisitions right now to integrate and consolidate the space. and that will add another point or two on an annual growth basis to the company.

And so right now the market's worried about a lot of elements of health care. We understand that and sentiment is negative overall. But the LabCorp as a company and that testing space in general, I think, is in a really unique spot to both benefit from secular drivers and company-specific opportunities. No, that's a great point there. Todd, one more before we let you go. Small caps showing a technical breakout potential, but there are some headwinds in rates and such, no, if that's essentially not a lock?

Yeah, so there's this idea that rate cuts will help small caps. I can understand that, right? There's a little bit less interest expense, but you have to be careful about how many rate cuts, right? Once you start to get, say, 200 to 300 basis points worth of cuts, and we're 100 basis points in right now, then the market starts to wonder, okay, is something wrong with the economic backdrop? And that's hard then to say, well, do I really want to go overweighting small caps as we head

into some sort of economic deterioration. That's not the case just yet. We think the positioning and sentiment is very supportive for small caps, but just be careful what you wish for in terms of the rate cut backdrop, right? A couple of cuts will be okay. But once we start hitting another 100 basis points worth, that would suggest that maybe there's something worse off underneath the surface. We may not know yet.

And that's going to be hard for the overall equity market. But for now, I think it's still worth adding some small capser portfolio just because they've been off the field for so long. How does InvescoQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility, Invesco Distributors, Inc.