ETF Edge - Investing under Biden & ETFs in 2021

Episode Date: January 11, 2021

CNBC's Bob Pisani spoke with Jay Jacobs of Global X ETFs, Todd Rosenbluth of CFRA Research and Anna Paglia of Invesco. They discussed what a Biden Presidency means for key sectors like energy, ESG and infrastructure plays, along with other important thematic trends to keep an eye on in 2021. In the 'markets 102' portion of the podcast, Bob discusses the ripple effects of a Democratic sweep and the biggest beneficiaries in the ETF space. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're certainly in the right place. Every week, we're bringing you interviews and market analysis, and we're breaking down what it all means for investors. I'm your host, Bob Pisani. Today we'll discuss what President-elect Biden's wind means for key sectors, like energy, ESG, and infrastructure plays,

along with other important thematic trends to keep an eye on in 2021. Here's my conversation with Anapolia, head of Investco ETFs, Todd Rosenplu, the senior director of ETF and Mutual Fund Research at CFRA, and Jay Jacobs, head of research and strategy at Global X funds. Anna, let me start with you, though. It's just you and me for the first few minutes here. The best year for ETF flows in history in 2021, a tremendous close, particularly November and December. Big inflows right across the board. More money coming from mutual funds converting to ETFs. I anticipate that will happen in 2021 more.

Is there anything just generally broad stroke, anything that can interrupt these continuing inflows into the ETF business? No, Bob. That's the short answer to your question. The long answer is that you named it. We had a record year for the ETAF industry in 2020. The industry has amassed more than $500 billion

dollars of new assets and that approves a couple of things. First of all, the industry is not saturated, has not reached the capacity yet, but it continues to grow. The second thing is that investors really accelerate their adoption of ETFs in a period of market crisis. We have seen that in 2000, we have seen that in 2009 and 2010. We have seen it again. in 2020. So I don't see anything in the horizon that can stop the growth of the ETIF market. If nothing else, education is reaching all-time high for this technology. Adoption is becoming widespread.

And, you know, 2020 has also taught us a number of lessons on the resilience of the ETIF wrapper, especially when it comes to fix-seekamidia. Yeah. One thing that really struck me was that big tech ETFU control, of course, the NASDAQ-100 QQ, nice flows there. But the junior QQQ that you debuted in the middle of the year also has done really well. You have $300 billion in assets under management there. That's essentially the NASDAQ 101 to 200, I guess you would call that.

And the appetite seemed really strong for that as well. Your thoughts for tech in 2021. It is. It is. And Bob, we couldn't be more pleased about the success of our innovation suite. QQQQQQM have really been embraced by the investor population. Invesco is at the forefront of ETF Innovations. And for us, the keyword is not really technology. It's really about innovation.

We have seen that innovative companies were the ones that succeeded in 2020. And if you think about the NASDAQ 100 or the NASDAQ100 next gen, QQQQQM, is not really about technology. We have had innovators in other sectors like health care, care or communication. So I think that we should expand our viewpoint and our concept of technology to go into innovation.

Whoever is able to innovate, whoever is able to invest in technology, development, and research is really going to succeed in 2021 and beyond. And the QQQQQQQM really embrace that. Everything that brings innovative ideas to the market, is likely going to find a place in those funds and in investors' portfolios. Yeah, so tech is certainly having a moment. One thing that disturbs me a little bit is the concentration in the S&P 500.

The top five stocks, Anna, as you probably know, almost 25% of the S&P 500. Overall, I think this is the highest concentration since the 2000.com bubble that we saw. I don't know what your thoughts are on this, but you do control something for people who are concerned about. that and that's the equal weight S&P 500 RSP. Could you just give us your thoughts on this concentration we're seeing? Is this worrisome? Is this like 2000 or is this occasionally happen? Should we not worry about it? How should we look at this concentration? Well, Bob, I think that every time that there is concentration, you should be looking at that, you should be monitoring that. As you said, we do have.

have a very effective product that is going to help investors a hedge concentration risk. That's RSP, the equal weight SMP 500 ETF. The fund has performed well, the fund that takes away the risk of concentration. And if I were an investor, that would be something that I will be looking at with a very close eye, because as you know, concentration can be good

if the top five, top 10 constituents of a portfolio performed really well. But as soon as you have a collapse, as soon as you have something unexpected that happened in one of the big companies, your portfolio can take a very big hit in terms of returns. RSP is the vehicle of choice for those investors who have tried to take away concentration

from the SMP 500. We have seen the RIPC, assets, significant assets going into the fund at the end of last year and the beginning of this year. And to us, this is really reflective of the fact that just like you, other investors are looking at concentration in the SMP 500, they're trying to stay away from that and trying to diversify into other products that provide the same or similar returns to the SMP 500 index, taking away concentration risk. Another big theme, other than concentration, which I talk about all the time at CNBC, is thematic investing.

And I'm wondering if you think this is going to continue. Well, you see, of course, here where you, Invesco, has a number of big thematic tech ETFs. Tan, the solar ETF, had a tremendous year, not only up price-wise, but a lot of new inflow. Clean energy, PBW also did well. the water ETF PIO did well right across the board. I've sort of worn out the carpet talking about why investors like thematic ETFs. Can you briefly explain what is the attraction and do you think that's going to continue this style of investing based on themes? Absolutely, Bob.

I believe that thematic products are going to be the big winners of 2021 and beyond. people are expressing more and more interest in those products. You know, our clients have both with their money. And if you want to know what investors are going to buy, you just have to look at how they behave, their normal behavior in their day-to-day lives. Investors at this point in time, they are very conscious about their social responsibility,

environmental responsibility. They don't just want to look at research. They want to look under the hood, so to speak. They want to know exactly what they are financing by buying an ETF. And their sentiment, their passion, their strong belief really comes out when you look at the growth of ESG ETFs and thematic ETFs. With thematic ETFs, it's easier for investors to bring their passion to life because they look at a team, solar, water, clean energy,

and they can invest in 100% in that. Okay. Okay, I want to bring in our other two guests, both friends of mine, of course, Todd Rosenbluth and Jay Jacobs. Jay, Global X, which you control, has many of the thematic EETs that Anna and I have just been talking about. I wonder if you can sort of give your thoughts on whether or not these will continue. I mean, you have some of the big ones that you have an infrastructure ETF,

PAVE, I've talked about, you've got a cannabis, several climate change ETFs, hot tech ETFs like a lithium battery ETF. Give us your thoughts on thematics for 2021. And do you have something that's going to come out of nowhere? Here's your chance to be a profit. That's going to be a hot topic in 2021 we haven't thought about. Yeah, absolutely. I mean, I agree with Anna. We're living in a very disruptive time. We're seeing disruption

in technology as advancements in technology are happening at a very rapid pace. We're seeing changes in people and demographics, how consumers decide to spend their money and aging populations around the world. And we're seeing a changing relationship with the physical environment, how we think about infrastructure and how we think about climate change. So disruption is happening in many different areas of the economy, and thematic investing and specifically thematic ETFs are really trying to harness that disruption. I think one of the reasons why thematic ETFs are growing so much right now is let's just look back at history. If you wanted to invest thematically 30 years ago, you know, maybe you

you bought a single stock. You bought a Microsoft, you bought an IBM to capture innovation. That gives you good exposure 30 years ago to innovation, but not a lot of diversification. Fifteen years ago, maybe you bought a sector ETF. You bought a technology sector ETF, which gives you good diversification, but it's not really targeted to a specific theme like cloud computing or robotics. Now with thematic investing in thematic ETS, you can really get the best of both worlds. you can get that targeted exposure to these themes while getting diversification across dozens of companies that are providing that exposure to a theme like cloud computing or cannabis or infrastructure development.

So we think the rise in thematic ETF is going to continue, especially in the new year. I think clean tech and clean tech related technologies like lithium and battery tech are really going to take off as we've just seen a global environment that's become very focused on reducing and mitigating the effects. of climate change. Todd, let me bring you here. You're an old hand like I am at watching these ETF business and thematic ETFs. Is there any roadblocks here to think that the concept? I believe that it fits very well with the concept of ETS, particularly with the changes

in the ETF structure last year, some of the legal situation last year with ETFs to make it easier for them to be created. Your thoughts on them, is there any problem? problems with it? Is there any roadblocks to it? And give us, is there something that's going to be happening this year that we haven't thought of that's going to be a big ETF theme? I'll give you an idea. Like, who would have thought work from home would have been an ETF theme in January of 2020? Yet it turned out to be that way. Obviously, that was a pretty hard game to guess. But if you had to guess, what would you say would be a big thematic ETF theme in 2021?

So I think the big challenge for investors is making sure they understand what they have. As Anna said, going under the hood. So PBW, which is an Invesco product, which is very popular, has about 40% of its assets in industrials and 6% in utilities, a competing ETF, which is from ISHAIR, their global clean energy, ICLN, which tripled in size, has the majority, more than half the assets that are in utility companies, and much less in industrials and technologies. And So these ETS are not going to all perform the same, even if you get the theme right, you got to make sure you understand what's inside the portfolio. The one thing I will say is the ETF industry does a great job of spotting that theme and then having multiple products that have come into the marketplace. We now have three work-from-home related ETS that are directly tied to it and then sub-themes like cloud computing from GlobalX and Cybersecurity products from First Trust and others.

I don't know what that theme is going to be that comes from under the radar, but I'm confident the ETF industry is going to gravitate towards it relatively quickly. And how about you, Anna? Here's your chance to be a soothsayer for the year. Todd's right. The ETF structure is uniquely suited to be able to pick up quickly on these themes and turn them into investable ideas. Is there something out there that we're missing?

I mean, it's pretty obvious clean energy is going to be a hot topic. It's pretty obvious diversity. is going to be a hot topic. But if we're here one year from now and looking back, is there something you think we're missing that's going to prove to be popular? Well, Bob, I would look at renewable energy as one of the topics that are going to lead the conversation in 2021.

Because when you have the combination of new policy changes and the technology advancement, think about solar panels, today that costs 80% less than they used to. This is where the growth of an industry is going to come from. One more thing that I will be looking at is active non-transparent ETAF and ESG filters applied to active non-transparent ETIFs because if you have an opportunity to bring up with an ESG filter into the ETF wrapper, you may have some pleasant surprises this year.

Yeah, I want to pick up on that. I want to go back to Jay for just a quick second. I've been reporting on the inflows in these thematic ETS, but particularly the clean energy and tech-oriented, you know, for several years now. But in the last few months, they've gone parabolic. I guess my question, particularly on things like clean energy, and stuff you manage is up 50% since the election. What legislation does anybody think is going to happen this year

that it's going to justify moving these stocks up 50%. I guess I'm getting a little skeptical just on sheer valuation issues, or am I being silly for asking this kind of question? No, I mean, it's a great question, and we have to look at it as it's not just regulation. I look at it as there's three different factors that move thematic ETFs forward in general. You have the business environment,

how much is being invested in by businesses. You have consumers and how much they're spending on a specific technology or team. And then you have the regulatory environment and government spending. So if you look at those three different segments, Clean Tech is really doing pretty well in all three. You do have Biden with a Democrat Senate behind him, which he's been very focused on a $2 trillion infrastructure plan, which is inclusive of clean tech as well. On the consumer side of things, you see more and more people installing solar panels, buying electric vehicles.

Electric vehicle sales were up 70% in China this year alone. And if you look at the business environment, you're seeing, that a lot of what's happening with ESG is not just about investing. It's about changing how companies operate. And one of the things that that's doing is companies are becoming, you know, they're thinking about themselves as members of society. How do they impact the environment? How do they impact their customers? How do they impact their employees? So when you have this rise of interest in something like climate change or, you know, various social issues, you see companies really putting dollars behind that as well. So I think it's not just a regulatory change. I think

it's the confluence of multiple different stakeholders that are pushing clean tech forward right now. Todd, is that enough? I mean, it's a good point he's making, Jay is making, changing how companies operate, it's sort of the zeitgeist, sort of shifting the Rubik's cube in everybody's head towards clean energy and diversity and ESG themes. But still, there's a point where the prices get stupid. And I know you're not a stock strategist or an analyst. You're an ESG analyst. You're an ESG analyst, but isn't there a point at which somebody's going to push back? I love to see inflows into these things, and they've been Titanic, but is it reasonable to start asking questions here about the constant inflows? So certainly, yes. I think the inflows, the fact that the stocks

inside have climbed so much in many of these various themes is certainly something to be watchful of. So we at CFRA rate ETFs in part based on the holdings and what we think of the valuation of the holdings. And there are thematic ETFs, like for example, SKYY, a cloud computing ETF, where we think the stocks inside are overvalued. And we think there's better opportunities that are out there. So investors really want to understand what they're getting, not just the theme, but the underlying stocks inside to make sure it makes sense going forward, not just in the past.

Yeah. And I just want to close with you and ask about the whole ESG theme. There's been a lot of discussion that there's going to be some pushback to some of these themes. So, for example, the SEC, there's already people floating around the SEC who are saying, we want to do a survey of companies asking them, what is your policy on climate change? Not that you're violating a policy, just what policies do you have? And the mere act of asking this question is a sort of nudge, a way to push them into thinking more about doing that. Already I'm seeing articles and people emailing me saying, aha, you see, this is very subtle.

coercion, maybe not a strong word, but towards pushing people towards adopting policies on climate change. The same with diversity. NASDAQ recently said that they're going to be looking much more at boardroom diversity, particularly more women on the board, as a factor in listings at the NASDAQ. All of us seem to think that this is a good idea, but there are people who immediately push back and said, wait a minute, is this necessarily the role for the SEC? Is this appropriate given their role in the market structure? So I guess this is a broad question, a policy question for you.

All of us feel that these questions need to be answered. The question is what forum is the right one to address them in? That's a very interesting question, Bob. And I will break down the answer into two pieces. So on the one end, you have disclosure, because the SEC is really focused on disclosure, truth in advertisement. It is not enough to say that you are ESG, especially when ESG mean so many different things for so many different sponsors.

So one thing is about disclosure. Truth in advertisement, we want to make sure that companies that portray themselves to be ESG compliant somehow show what means for them, and disclose that. The other piece of the answer is pressure and pushing a certain type of behavior. So data shows that certain behavior associated with TSG is actually helping the companies deliver better performance.

So on my end, there's nothing bad with that. Pushing for better diversity, whether it is gender diversity or any other type of diversity is healthy. I don't think that the SEC is trying to change behavior, but it's certainly putting pressure on companies to come clean and disclose their policies. Now, that in turn may result in changes in behavior, which I think overall are healthy for the industry. And right now, we have seen that by focusing on ESG, you don't have to choose between performance and socially responsible investing, because ESG strategies have delivered the very good results over the last few years. Okay, we're going to have to leave it there.

Folks, we have just scratched the surface. ESG, active versus passive, international versus domestic. We're going to be hitting on all these subjects throughout the year on ETF Edge. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the market's 102 portion of our podcast. Today we'll be talking about the ripple effects of a Democratic sweep and the biggest beneficiaries in the ETF space. My producer, Kirsten Chang, joins me now.

Bob, everyone talked about how a blue wave would be a net negative for the market. But now that the elections are out of the way, not only have the markets not crumbled under a democratic sweep, they also appear to have embraced it. I mean, we've seen a return to the reflation trade sparked by higher yields and more talk of stimulus. So talk to us about whether this revival of value is for real. and if investors should be concerned that some of these cyclicals are a bit pricey right now. The market is pricey. It's trading for about 23 times, 2021 earnings.

That's the S&P. That's very high. But you could be high for a long time in these markets, particularly in uptrends. Remember something. The market's anticipating a huge rollout in the second half of the year. You could have a higher multiple than normal when you get situations where there is a dramatic expansion in earnings that are expected. And that's exactly what we're getting right now.

As for what's going to work and what's not, I tend to think that the value revival is finally a little bit real. Remember, value is very tilted towards bank stocks, and rates are the key to that whole value revival in the banks. The whole bank argument is around the rates going up, and that's what's happening. And also remember, financials are heavily represented in small caps. That's one of the reasons the Russell 2000,

the small cap index, has been going up so much. So remember, just the simple idea. Higher rates are positive for banks. It's not the only thing. Loan growth is very important as well, but all in all, the market moves bank stocks on rates. As for the priciness of the market, you know, if we get more stimulus, particularly fiscal stimulus from the Congress, the Fed will likely taper their purchases later this year. That could make the whole overall market a little muddier.

And I'm not talking about bank stocks. I'm talking about the impact on other cyclicals like industrials and materials. So this is not a simple equation. Let's just throw more stimulus at it. Somewhere down the road, it'll get more complicated. Nearly $17 billion poured into EU's ETFs last week. And that's a strong start to the year after an already record-setting year of flows in 2020. What are the key pockets of strength and thematic drivers, in your opinion,

that investors should be paying attention to this year, given the new Biden administration? and as the world continues to grapple with the global pandemic. I continue to believe that people will be investing by themes. This is one of the great innovations from ETFs. It's very easy now to open an ETF by theme, to buy solar stocks, to buy cybersecurity stocks, to buy social media stocks, almost anything. Who would have guessed last year

that one of the biggest trends in ETFs would have been work-from-home ETFs? That didn't even exist to me. years ago because nobody thought of COVID happening. And we don't know what the big themes are going to be in 2021. It's certainly starting out with climate change, diversity, anything around thematic tech investing again, but we don't know if it's going to end up that way. This is why I like it. People love themes. They think that way. They love buying clean energy or infrastructure now has been hot theme. Cybersecurity was hot six months.

And when you put these themes together with strong momentum, you have a very powerful investment tool. The problem I think I have right now is the market is pricing in a pretty big wish list. I mean, just look at infrastructure. The market believes some kind of giant infrastructure bill is coming. We don't even know what it will look like or what the chances are of it passing. Just believe something could happen. Clean energy is another one. We have no idea what kind of clean energy proposals are going to be made.

but stocks have run up in that sector, 50% since the election. So I think the market's at risk of running ahead of the legislative agenda right now. And the other thing is, if you look at this, look at the clean energy ETF and what's really in it, look at some of the other stuff, solar stocks. We know long term, only a small group of these companies are going to be big winners. I mean, it's nice to have big disruptors like solar stocks and lithium batteries, these ETFs disrupt things. We all like the idea. But get on the granular level, it's very likely only a few of these companies are going to be big winners. And this is where it can be really

good and bad to own ETF. Remember, ETFs, you own a concentrated portfolio. You're owning solar stocks. So what happens if five years from now, only 30% of the solar stocks are going to be successful and you own a big basket of solar stocks? Well, you know, if their market cap weighted, the bigger ones will be more successful. you might do okay. If they're equal-weighted, you will do okay. Just because you said you own solar and solar did well and 70% were losers and 30% were big winners, that might not work in the portfolio. So it can work for and against you. So this is true with the S&P 500 too, but the S&P 500 is not a concentrated bet on solar stocks. It's a bet on the broad, largest stocks in the S&P 500. That's a

little less risky than owning thematic. So just remember, thematic ETFs have. upside and downside. That's it for today. I'm Bob Bizani. Thank you for listening. And make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC.