ETF Edge - How to play Commodities

Episode Date: October 4, 2021

CNBC's Leslie Picker spoke with Will Rhind, CEO of GraniteShares, Dave Nadiq, Director of Research at ETF Trends and Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors. They discussed September flows as the red-hot streak for equity ETFs continue, what sectoral shifts to expect for the most volatile month of the year, and the global commodity surge. 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 Leslie Picker, filling in for Bob Pisani. Today on the show, we'll be digging into September flows as the red-hot streak for equity ETFs continues. We'll talk about what sectoral shifts to expect for the most volatile

month of the year. Plus, we'll hone in on the global commodity surge, everything from China's power crunch to Europe's energy woes and how investors should trade it all. Here's my conversation with Will Rwind, CEO of Granite shares, Dave Nottig, director of research at ETF trends, and Matt Bartolini, head of Spider America's research at State Street Global Advisors. Dave, markets go up, markets go down. Just in this recent market, though, it feels like flows just keep coming into ETFs. Is it such that this is still kind of a bull market phenomenon? Or do you think that even in the case of a significant downturn, that we will see these types of flows into ETFs? Actually, history would suggest that the more volatility we have, the more people are going to look to

ETFs. Remember, every time we have one of these big drawdowns, and we really haven't had a big one here, it's hardly been a crash, but every time there's a drawdown, there's an opportunity for people to sell an underperforming active manager that maybe isn't a mutual fund or to take a hit on a tax position that maybe they've been hanging out to wait on. So these are really great opportunities for people to reassess their portfolios. And when they do that, they often end up back in the ETF market, often looking at fairly low cost, fairly plain vanilla type equity exposures. So what we've seen in the very recent history in September was still about a two to one equity to fixed income ratio in those flows. That's a little bit less than it has been. We've been

running about three to one equity to fixed income. But more importantly, when you get under the hood, it does look like people are starting to play a little more defense with some inflation plays. We've seen things like a lot of flows into real estate. That was a bit of a surprise to me. People are really looking for opportunities to profit from some of this maybe embedding structural inflation. Yeah, it does really seem like an inflection point. And of course, fixed income in terms of ETS has just boomed over the last year or so in a way that it's not too surprising to see people taking advantage of in this new regime

or looking ahead to a potential new regime in terms of monetary policy. Matt, on that front, what sort of sectoral shifts, what types of product shifts have we witnessed in recent weeks, recent months? with regard to ETFs? Yeah, I mean, from a sector perspective, one of the shifts we've seen is that there hasn't been some. So sector ETFs have taken in, have had inflows in 12 consecutive months.

That's the longest streak they've ever had. And over that timeframe, they've taken in $92 billion. And I think that speaks to some of this disparity or dispersion within the markets right now when investors are trying to utilize beta instruments in an active manner to tactically adjust to portfolios, based on prevailing macroeconomic data. For instance, in the past month, energy ETFs had over $2 billion of inflows as the spot

price of oil continued to creep higher. And we also saw the inflows and energy ETFs coincided with an uptick in call volumes. So we saw, again, like a multitude of investor types expressing viewpoints within ETFs. Now, there was a bit of a shift when you look at it from a cyclical versus defensive perspective. and it's really sort of reflective of some of the lack of leadership in the marketplace. In the last three months, you've had defensive sectors taking it more, and then it was cyclicals. It was defensive now with cyclical again. And even within that sort of cyclical camp, energy and real estate led the way,

but a lot of people sold out of financials, which I think is interesting given the relationship to interest rates, but all told, you know, we're still seeing a lot of investors utilize the construct of sector ETFs to play specific tactical. asset allocations, particularly when return dispersion is so high. And I'd expect that to continue because we are headed into the fourth quarter, typically is the more volatile quarter historically, with also some pretty decent outliers. But also that macro risk calendar is pretty full when you think about what's going on down in Washington. Yeah, that's absolutely true. And especially as you mentioned, as we are now officially in the fourth quarter of the year, it's expected, at least from a

calendar standpoint that we could see some more volatility. Now, speaking of volatility, let's move across the pond if we could. China's power crunch has been roiling the global commodity space affecting everything from oil and copper, soybeans, nickel now with U.S. inventories on the rise and an energy crisis raging in Europe. The equation is getting a bit more complicated by the day. We'll drill down on the sudden surge in oil prices and price pressure on industrial metals like copper and iron ore. How can investors play it best? Will, what do you think? How should investors be playing what's going on in commodities right now? Well, it's a great question. And, you know, it really depends on what you're trying to do,

because there are a multitude of ways you can play, you know, the commodity market. If you're looking just for broad exposure, you know, the granite shares, commodity, ETF, ComB, COMB is the ticker. There's just a broad strategy, no K-1, very low cost. But of course, there are other more specific investments like gold, for example, like oil, there are other ways that you can get much more specific in terms of targeting different commodities that you want exposure to. So whether you're worried specifically about energy, whether you're worried about food prices, whether you're worried just about inflation itself, there are ways you can find that in ETF market. Matt, you have a Chmoth Palahapatia speaking at delivering

alpha last week, and he said basically that Bitcoin is the new gold. You know, maybe not speaking specifically to crypto in and of itself, but how are you kind of thinking about the specific plays as we look ahead to the potential for more inflation, or do you think that investors should stick with, you know, what's traditionally been seen as a way to play inflation? I think when it comes to inflation, rising commodity prices, you know, my intuition is for investors to try not to be a hero. You know, I think a lot of people have been burned in the past of trying to, you know, predict the path and pace of different commodity prices, particularly oil, which is so connected to the different parts of the global economy, particularly what's going on in China, but also the

reopening. I mean, you really have to have a steel stomach to be within the commodity space right now. I think you just don't try to be a hero. You mean, what's the derivative impact of some of these price pressures? We're likely to see higher inflation and higher CPI prints. Well, if you know that's sort of your base case, then why not just sort of just take a few basis points, own tips, relative to nominal and sort of continue a trade that has been working and it was basically produced some really good returns when you think about what's going on in the fixed income market. So I think we looking at the commodity space, you know, my idea would try, don't be a hero. You know, don't try to sort of forecast be sort of unforecastable with so many unknowns in the

marketplace. You're trying to eke out a couple basis points in your bond portfolio, which is really hard to do these days. Absolutely. Dave, do you agree with that? Yeah, I understand what you're saying there, Matt, and I think you're right. I think this is not a market where people should be deciding they want to become energy investors all of a sudden and starting to learn about the crude market. You know, I think a broad commodities baseline exposure, you know, like Will's product, I think is a sensible way to think about inflation for a lot of investors.

But what we're discovering here isn't so much that we have a supply shortage or a demand spike. What we're seeing is the interconnectedness of all of these markets from the industrial metals to global manufacturing to crude oil to the coal situation in China. all of these things connect, and they're global, right? That's part of the problem is that we've got local crises and we're trying to take global commodities to solve them. So it is a market that I think requires an iron stomach if you're trying to make individual calls. I think broad baseline exposure is the way to go.

That's it for today. I'm Leslie Picker. 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. investco cuckcue believes new innovations create new opportunities here's to greater possibilities together learn more at investco dot com slash QQQ. Invesco Distributors, Inc.