ETF Edge - Israel-Hamas Conflict Ripple Effects & Ether Futures ETF Flows Fizzling 10/9/23

Episode Date: October 9, 2023

CNBC’s Bob Pisani spoke with Ric Edelman, Founder of the Digital Assets Council of Financial Professionals (DACF) – along with Holly Framsted, Director of ETFs at Capital Group. With geopolitical turmoil shaking up the global markets, they discussed the broader macro backdrop for ETFs and broke down the market reaction thus far. They also got an update on active ETFs, which are seeing more than their fair share of inflows this year. Plus, the crypto bulls may have cheered the launch of several ether futures ETFs last week – but so far, those ETFs have seen lackluster flows. Could it be a sign of wavering interest in the crypto space? In the “Markets 102” portion, Bob continued the conversation with Ric Edelman from the Digital Assets Council of Financial Professionals.  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 InvescoQQQQ, 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 are in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani, with geopolitical turmoil shaking up the global markets today. On the show, we'll talk about the broader macro backdrop for ETFs and the moves we'll we've seen so far this year.

Plus active ETFs are seeing more than their fair share of inflows this year. We'll get the latest on that. And finally, the Crypto Bulls may have cheered the launch of several Ether Futures ETFs last week, but that was last week. So far, they've seen lackluster flows. Could that be a sign of wavering interest in the crypto space? Here's my conversation with Rick Edelman, founder of the Digital Assets Council of Financial Professionals, along with Hallie Framstead.

She's the director of ETFs at the Capital Group. Rick, before we get to crypto, you were for many years Barron's number one, independent financial advisor, and you ran Edelman financial engines. So what do you tell investors who might have been rattled by the events in Israel over the weekend? Well, Bob, first of all, our hearts and prayers go out to everybody in Israel who's just dealing with this horrific situation. We need to remember that we can't let our emotions interfere with our economic financial and wealth management decisions. You need to have all this figured out in advance because these kind of shocks to the system occur from time to time, as we well know. You don't want to be a knee-jerk reaction. You don't want to sell in a panic that never does anybody any good.

So if you've got plenty of cash reserves and you've got a diversified long-term portfolio designed for your long-term goals, you can sit tight and focus on the humanity of this rather than your portfolio. Good advice, as always. Let me turn to crypto. So last week, we had nine Ethereum futures ETFs passed. We had the head of pro shares here talking to us, Simeon Heimann about that. But the public doesn't seem interested. I'm looking at these numbers now.

There's literally a few million dollars in any of them. Like there's $8 million in the biggest one. We had this huge welcome for the Bitcoin futures ETF in 2021. And now this, low volume, low assets under management. What's going on? Are we losing interest in crypto? I think everybody is true of the stock markets and bond markets as well, in a waiting pattern to see what's going on in the world, what's going to happen next. In the case of

crypto specifically, when Biddo generated a billion dollars on its launch of Bitcoin futures, that was because it was brand new. And frankly, Bitcoin was doing fabulous at the time in 2021. And a lot of folks really didn't understand exactly what that fund was being Bitcoin futures. You fast forward a couple of years, people have learned a lot. And crypto is not doing as well, price-wise, as it was two years ago. We are, recognizing that Bitcoin futures are different from a spot Bitcoin and Ethereum futures are different from Ethereum spot. So people are recognizing, I don't ordinarily buy futures. So why would I suddenly, if I'm not buying futures in the stock market, why would I buy futures

in the crypto market? And therefore, for all those reasons, I think there's a little bit of shrugging of shoulders over this. I'm wondering whether we're at an important moment here for the Bitcoin ETF. So Gary Gensler, the chair of the SEC, he's been an opponent of a spot Bitcoin ETF. He has less than a week to appeal a very important decision that went against them, the Grayscale ruling where in the court, those of you don't know this, the Grayscare ruling, the court basically said you, Gary Gensler, have approved a Bitcoin futures ETF that is a like product to spot Bitcoin, and if you approve one, you have to prove the other. And he has 45 days to appeal

that. It's up this week. So what is Gensler going to do here? Gary Gensler. Any sign his opposition to crypto is lessening? Gary Gensler has essentially said you can eat ketchup, but you can't eat tomatoes. It makes no sense. Everybody seems to understand that if you're saying okay to a futures, how can you not say okay to the underlying asset itself? And everybody seems to understand that the existence of a spot Bitcoin ETF would improve consumer safety. What Gensler is doing is acting like they did back in the 1930s with prohibition.

By prohibiting people from drinking alcohol, they thought that people would actually stop it. Well, they didn't. They just were chased into speakeasies. The absence of a spot Bitcoin ETF isn't stopping people from buying crypto. It's just forced them to pay for exotic products that cost more and have less liquidity and higher risk. So everybody gets it except Gensler. He's losing everywhere. Congress is angry at him. Four members of Congress, two from both parties, just wrote a letter demanding that he approved the ETF.

We've got the courts ruling against him. We've got the media opposing him. Investors are opposing him. So for all these reasons, there's increasing hope that soon the SEC will get out of the way and allow these to come to market, just like they exist in Canada and Australia and Europe. I'll come back to crypto, but I want to get your thoughts on active, and I want to bring in Holly right now. Holly, let's talk about active ETFs. Inflows into ETFs have been, let's just say below average so far this year, but active ETFs are getting more than their fair share. most inflows into ETFs, still into passive, folks.

You ought to know that. So this passive is index funds like the S&P 500. But so far this year, I see 22% of the $289 billion in inflows into ETFs has gone into actively managed funds. And folks, those who don't know, that's a lot for actively managed. It's a big share, including several of the funds that Holly's running here. So Holly, and here's the screen here, why is active getting a larger share of the inflows this year? What's going on with this?

Yeah, thank you so much for asking, Bob. You're right. Active ETFs represent 6% of the total assets under management within the ETF vehicle today and yet are receiving 22% of flows on a year-to-date basis. So that is very disproportionate. I think it's a function of where investors are choosing to place their money and where we would expect to see that moving forward. The ETF is gaining share on the mutual fund as a vehicle by about one to three percentage points per year. And yet 70% of the total fund assets remain in mutual funds, a majority of which is actively managed. So we find it very difficult to be bullish on the growth of the ETF vehicle and not be simultaneously bullish on the growth of active management. In particular, active management that can deliver on long-term superior results like the funds we've brought to market have.

Well, but the point being here, is it because most of the assets in passive are slowly, we know people are still taking money. and putting it into passive ETFs, yet active's been a very small group. We've seen people moving money over, as you have from mutual funds into ETFs in one group. And then there are people starting new actively managed ones. In one sense, it's a sort of natural evolution, isn't it, Holly, for ETFs? I mean, Active is a part of the whole mutual fund industry. Why wouldn't it be a part of the ETF industry, I guess? I think you're spot on there, Bob.

I mean, in 2019, when the SEC passed Rule 6C11, which allowed active managers to bring their strategies into the ETF vehicle with the same layer of tax efficiency, it really opened to the door for firms like Capital Group to get into the space in a meaningful way. Investors have long committed assets to active management. We believe that our legacy of delivering on superior long-term results for clients is one that clients want to continue to invest in. and we're really interested in bringing our investment services in all of the vehicles that can serve their variety of needs. In particular, for advisory models and for taxable assets, the ETF can be a really efficient way to consider investing. So Capital Group, it's a big company, folks. They managed about $2 trillion. But you got into ETFs relatively late, as I recall. I think there's $12 billion in ETF assets since you launched your first funds back in February of 2022. But you keep expanding.

week, five new funds, including a multi-asset fund. This is a core balance fund. That's what they call it, folks. So why they need to keep expanding here? And here's the list of the whole, the five new ones that we're putting up here for you. Yeah, thank you so much. You are right. Last week, we expanded our suite. We now have 14 ETFs in the market, just under $13.5 billion in assets under management. And the growth that we've seen in just a little over 18 months time is really quite tremendous. We think it's a testament to the fact that we have brought product. to market that our clients have specifically asked for, focused on major asset allocation categories and giving all the building block pieces to really construct a holistic portfolio.

And so when you step back and you look at one of the categories that has been the most requested by our clients, it has been multi-asset. Multi-assets not typically a space where ETFs have thrived, but Capital Group manages $500 billion in multi-asset funds. So we believe that the fund that we brought to market last week, CGBL, deliver our best thinking in balanced services in the vehicle that our clients are increasingly demanding. So this is this balance fund, Rick, I wanted you to talk about 6040. You're an old 6045. The balance fund Holly's talking about is a core allocation, 60% stocks, 40% bonds with the equity side being made up of individual securities and the bond side with fixed income ETFs.

You've been in this business a long time, your thoughts on active management, whether it's in a mutual fund wrapper or an ETS, TF wrapper? I think in most asset classes, there's no reason for active. For example, if you're going to buy the S&P 500, you're going to buy the biggest stocks, the S&P 500 index, you know, check the box call today. But on the other hand, international, emerging markets, and other categories like that, active can make sense because those markets are small. They are very divisive, and you could benefit from an active manager. And we have the bond guys, because the bond guys, So nuts on Alex. Oh, Bob, you see what happened this year?

You see how quickly things move? Active can do this. We hear this all the time, though, from active. But is there something to be said in that situation? It depends on the nature. The bond market is itself very diverse, whether you're doing with the governments or corporates, whether you're dealing with high quality versus high yield, U.S. versus foreign. So it really depends.

I find it really interesting. Over the five new ETS that Capital Group launched this week, three of them are income-oriented. And that's telling you really where the market is paying attention. I think so. Holly, you've got a large suite of actively managed and equity and fixed income ETFs. Where are you seeing the most activity right now? Where's the flows?

As Rick said, you've got a large group of active and fixed income, but fixed income is where some of the flows are right now, I would gather. Yeah, so we're really seeing even flows across the suite, which makes us incredibly pleased because that tells us that our clients really are looking at long-term allocations in their portfolio and not trying to chase the current hot dot. The fastest growing of the suite of funds that we launched originally back in February of 22 is CGDV, which is a dividend value ETF. It's intended to be value-oriented, but focusing on higher quality companies, and in particular those that are delivering income in a portfolio. Income has been a theme that our clients have been very interested in in this environment and in this interest rate environment.

But really, again, I would just say all of the funds that we launched last February have over a billion dollars individually. And that tells us that that growth is widespread, regardless of the asset class. And you know, you're famous, of course, from the American funds, and that's unactively managed. In the ETF wrapper, the fees are lower, right? Tell us what the fees are for these five new ones that you just launched. Well, I would say across all of our ETFs, we are pricing our mutual funds and our sort of lowest cost mutual fund share class and our ETF really in line with each other. because at the end of the day, as an organization, we are committed to delivering great value for investment,

and we are committed to delivering low-cost services to the market for our investors. And we've carried that same philosophy over to our ETFs. So when looking across available options in the Mutual Fund franchise or the ETF franchise, you will see very similar price points. Importantly, all of the ETFs that we have in market today are at or near the lowest quartile

among other active ETFs. So we really believe that we're pricing, competitively at the rate that we deliver services to market today. I want to ask your thoughts on stocks versus bonds. We talk about 6040 stock bond portfolio, and we're in this very unusual position, once again, stocks down, bonds down. This happened in parts of 2022, and people were just shocked.

Anyway, they hadn't seen it since 15 years. So what are you telling clients now about this? I mean, a lot of the, I'm the baby boomer. I've always said, here I am. I'm 67 years old. Friends of mine say, Bob, stocks down and bonds down again this year, even if it's only the little part of the year,

we can't stand another 20% down year like last year in stocks and bonds down again. And the laundry list of reasons to be negative are pretty high. What's going on in real estate? What's happening with interest rates? What's happening with government shutdown coming with the absence of a speaker of the house?

The horrific events in the Middle East this past weekend. The list goes on and on and on, let alone, you know, Ukraine and Russia, China and Japan and South Korea. We've got a lot of issues going on. So it's easy to be negative. And that could cause you to say, why do I want to put myself in a position of maybe losing another 20 or 30% of my money? When I've already amassed an awful lot of money and I'm already in my 60s or 70s and I need the safety and protection. And by the way, and get 5% in my bonds or U.S. Treasury or my bank CD.

Why don't I just park it, earn 5%, call it a day and go watch HBO. There are two schools of thought. One is, go ahead and do that. Why take risk if you don't need to take risk? You've spent your career, the last 40 years, accumulating assets. You've been climbing a mountain, building wealth. Congratulations, you're now at the top of the mountain. Once you're at the top, stop climbing.

Well, you just fall over the other side. What's the advice of stop climbing? You mean, are you saying convert more money to cash or just stay there? Increase your allocation to short-term securities that are going to pay four, five percent in interest these days. Well, let me just push back against that. I'm 67. I'm planning to live at least until 90. In fact, you were one of the people for years kept saying, I kept thinking folks that I was going to die at 85.

And Rick, who's an old friend of mine for a year, said, Bob, you're wrong. You're going to live to 90, and you should even work on 95. But that means that if we're down this year, it's not going to matter in 20 years. That's the other school of thought. So why don't we just stay in my allocation now? Why should I move more towards short term? I prefer that viewpoint. However, it comes down to behavioral finance.

It comes down to human emotion. Do you have the stomach? Does your spouse have the stomach to hang in there if things get ugly like they did in 0-1, 08, 2020? Can you hang in there? You should, and if you have ample enough cash reserves and a stable income stream that helps you hang in there. But if emotionally you're not going to be able to cut it, if you panicked this morning over this past weekend, I don't know if you're going to be able to handle the market downturn. So if you can handle it, You're right. Plan on living to 95 or 100. And if you're 65 today, you've got 30 years to go. It's a long ways. Exactly. But if you can't handle it emotionally, then take some chips off the table, go safety. Even if it's less profitable, even if it exposes you to inflation and taxes, you'll sleep better at night. Holly, are the flows in your, go ahead, Holly. I was going to say, I do think, though, it's important for us to realize that there are $6 trillion of cash sitting on the sidelines today. That's two to three times what you normally see as the baseline for cash on the sidelines.

And when cash rates peak or have been at elevated rates for a long time, you tend to see reinvestment in the market. And so we think we could see a trillion dollars come into the bond market alone over the next few years as cash comes off the sidelines. And so we really think that there's a lot of opportunity for investors to consider putting more money to work in the environment that we're in today, despite the uncertainty. Because as you both have been talking about, we're talking about the long term here. I mean, a 30-year investment horizon is a long time to leave money on the table.

And that is a completely logical and accurate statement. I agree with Holly. But I'm not sure everybody who's in the investing world is acting logically as opposed to emotionally. You've got to know yourself. You mean people act irrationally? If this gets out, we could start a whole new school called behavioral economics. Just think about this. Holly, where are the flows going in fixed income?

I mean, are you seeing people throw money in short-term muni bond funds or anything stick out to you? Yeah, so we are seeing increased interest in short duration fixed income. So CGSD is the fund that we recently launched in that space. And it's certainly an area where we're seeing enough interest in part because, as you highlighted, interest rates are quite high, even with very little duration risk on the table. But additionally, we're seeing a lot of demand for core bond and core. plus fixed income. CGCP was among the original six funds that we launched again over a billion dollars in assets

and continues to grow. So really we're seeing interest among our client base who tend to be a bit longer term oriented in nature across the full spectrum, but certainly a lot of conversations in the short duration space, given the environment that we're in. What else is out there for Capital Group in terms of, I mean, I'm not asking you to give away what your next six months is going to look like, but is there gaps in, you know, your coverage right now that you want? You covered the basic universe that you've already got going here.

What else, what opportunities exist for you out there? Well, I mean, we think we have a lot of opportunities to be a meaningful player in a continually growing active ETF environment. As we think about, you know, our asset allocation services, as I mentioned, we manage $500 billion in multi-asset funds today. We just launched our first. I could envision a world where there are multiple behind. that. As we think about bringing our best in-class international investing capabilities into the

ETF vehicle, we have a few offerings in that space today. I would imagine there is plenty more white space for us to continue to participate. And at the end of the day, our focus is really about being responsive to investor and client needs. So what we've been focused on to date is bringing out core building blocks that can ultimately lead to a model portfolio solution, because we know a majority of our clients are asking for all ETF models and are really looking for active management in that space. So that's where our near-term focus has been. And as we look even further out, we plan to continue to be responsive to client needs and bring our best-in-class investment services into this vehicle. Just last word with you.

Obviously, you run an association to advise investment advisors on digital assets. What are you hearing from them? I know you talk to them. What do they want to see happen at this point? It's been a tough year. It has been. What advisors say they want to see is the spot Bitcoin ETF. Everybody's both excited about its coming and frustrated that it's not here yet.

And at DACFP, we are enrolling more and more advisors every day in our new FINRA-recognized designation program, the CBDA, certified in blockchain and digital assets. What it all comes down to, Bob, instead of a 60-40 portfolio, the new is 50-40. The new is 59, 40, and 1. Just a 1%. You've been saying this for years. A 1% allocation to Bitcoin gives you some exposure without that much risk. Is that the theory here? And a combination of Bitcoin and Ethereum for that 1%.

Yeah. Check the box. Call it a day. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. We'll be continuing the conversation with Rick Edelman from the Digital Assets Council of financial professionals.

And Rick, you know, you're an old hand following mutual fund and ETF flows. ETF flows have been remarkably quiet this year. There's been modest inflows into equities, a little bit more into fixed income. But most of this is going into short-term assets, you know, money market ETFs, one fuse that are available. And one-year treasuries and below that. We've been so used to the idea that people will buy into the ETF story. Is it because we had a period last year where stocks are down, bonds are down, and people are just sort of reassessing things,

or everybody's just happy in one-year bank CDs these days? I think it's always good to be with you, Bob. I think you're right about that. People are in a holding pattern. They're in a wait-and-see game. Last year was bad. We all know that. And there's a lot of uncertainty in the world right now.

We've got the House of Representatives without a speaker. We've got a coming government shutdown two weeks before Thanksgiving. We've got the horrific events in the Middle East this past weekend. We've got the ongoing crisis with the war that Ukraine is fighting against Russia, China, saber-rattling over South Korea as well as Taiwan and Japan. We are dealing with so many uncertainties, let alone what's going to happen with the federal debt, the federal deficit, rising interest. interest rates and inflation, the unemployment numbers. There's a lot of reason for a lot of people

to be saying, I think I want to sit and wait and see what happens before I make any big decision. I don't know that that's the right attitude to take, but I think that's a common theme of a lot of investors. So where are, I mean, the key issue is where are we on interest rates? Like you mentioned, everyone seems to be happy with their 5% one-year yields. The Federal Reserve still remains concern the economy is going to be overheated and that will have continuing relatively high inflation. And yet unemployment is low. Everyone's still spending. Maybe the lower-end consumers a little pressure, but people are bidding up prices for everything still. The Fed's been trying to convince everyone to slow down spending, but it hasn't been working, and the Fed's a little frustrated. Now people

are worried the Fed's going to keep going and break something. So where are we on this? I think you've summarized it really well. Fed is frustrated. They keep raising rates and by now you would have assumed that the brakes would be on and the economy would be cooling and we'd get to that soft landing we were supposed to have had last summer. Hasn't happened yet. Instead, the jobs numbers came out much stronger than anybody thought with over a quarter of a million or thereabouts employed in the past month. And we are expecting more rate increases. We thought rates had topped out, but apparently not. So people are wondering, why should I go into the stock market, which is uncertain, when I can get a yield that's 500 basis points more than what it was two years ago.

So I think for all these reasons, people are wondering, is the Fed in control now? It looks like the bond market's in control. And that is far less predictable, far less controllable than Fed governors. Well, what do higher interest rates mean? On the one hand, higher interest rates to me says the economy is still. relatively strong. Some people try to turn this around and say, well, no, this is a supply problem. It's the bond vigilantes. There are people who are not buying bonds as much. The Treasury is going to flood the market with new bonds. So it's a supply problem. That's why yields are high.

I think there's a contributing factor there. China is dramatically reducing the amount of money it has in U.S. Treasuries. As their treasuries are maturing, they're not rebuying to the same degree they historically have. They're instead using their currency to prop up their their local currency because their economy is in difficulty. So this is flooding the market with treasuries. One interesting thing, one of the largest owners of treasuries now is tether, a stable coin. Could it be that crypto is coming to the rescue of the Fed? I think that would just be down to make funny. That would be funny. So we're in an environment that we haven't seen before. And we all know that 20% of U.S. Treasuries are coming due over the next year, $600 billion so far, a trillion are coming due over the next couple of years.

And as that happens, the government which has been financing these treasuries at 1 and 2% are going to have to refinance at 4 and 5%. This is going to radically increase the cost of the government on its interest costs. That's going to have a big impact on its budget. That's going to, in turn, have an impact on Congress and taxpayers. and tax rates. And for all these reasons, people are saying, with an election coming up in only one year, I think I might want to sit this one out for a little while.

Yeah, service on the debt, as I recall, is already, 22 is 8% of the outlays. That's certainly good going to go on. It could easily double in the next several years. Yeah, so that right now, I think Medicare and Medicaid is about 20%. Social Security is 20%. I forget what defense is. That's the third.

It's projected by 2030. We'll be spending more on interest on the debt than the defense budget. Yeah. That's quite a difference at this point. You're a good comment on the sociology of work, too. I've known you for 20 years. I wonder what you think about the return to work. I work downtown at the New York Stock Exchange.

It's gotten better this summer, if I had to guess, I'd say 60% back to work. But I know in Philadelphia, it's still not, it's still 50%. It seems nationwide that still is stuck at 50%. Is this a permanent thing that we are seeing here? I believe so. And why? Because people have recognized that over the past three years, they've gotten used to and enjoying working from home, basically setting their own schedules.

The stress goes out. They don't have to buy a work wardrobe. They don't have to spend money on commuting. They don't have to spend money on lunch in the office. They don't have to worry which one of us stays home when the plumber has to come or when the baby is sick. It's easier on the lifestyle. for caregiving of children and of aging parents. And guess what we also discovered over the past three years?

I got my work done. Now, my boss is arguing I didn't get it done with the proficiency or efficiency or productivity that they want. That's their problem, not mine. So a lot of people are resistant to going back into the office, and I believe that the traditional working from an office, for the most part, is dead. Instead, we know that Fridays are gone. Try calling an in-office staff meeting on a front.

Friday. Forget it. You can probably forget about doing it on a Monday as well. At best, we're going to have a hybrid workplace. You'll be in the office some of the time, maybe a couple of days a week, maybe a couple of weeks out of the month. But for the most part, it's going to be technology-based work environment. And the management, these companies that are being run by old men who have been doing this for 40 years have to recognize it's a whole new world. Class A space, Not a problem, but Class B space is going to have to be totally redesigned. I agree. I think this is elements of a permanent, and the only way that would change is if suddenly corporate America announced productivity was nosediving and people had to come to the work.

And it's not. Not from the evidence I don't see yet, but I expect that to be used if we have a downturn. I think that arguably would. Where I could see the bosses making a difference, we know that an employee, you know, a lot of these big Fortune 500 companies have offices all over the U.S. They have offices here in Manhattan. They also have offices in other cities around the country. For example, Charlotte, North Carolina. We know the cost of living in New York is much higher than Charlotte, and we know that they pay people more in New York City than they do in Charlotte to compensate for that fact.

If you're not going to come to the office, why isn't the boss saying, I'm going to cut your pay? Part of the reason I was paying you what I was paying you is because of the premium for you to commute into Manhattan. If you don't want to commute, then why should I be paying you? But if I'm still living in an apartment in Hoboken, New Jersey, and I'm still paying $3,500 a month. Amazon and Apple and Google, they all told their workers during the pandemic, live wherever you want. Fine. I'm going to pay you commensurately. That's one way to get people into the office. Otherwise, let people agree, I'm willing to be paid less to enjoy the lifestyle of working from home on a hybrid basis.

Rick, thank you very much for being here. Always a pleasure to see you. That's it for today's show. Posani, and thank you for listening. Make sure you're tuning next week. And in the meantime, you can tweet at your questions or topic ideas at ETF Edge, CBC. Thank you for listening to the ETF Edge podcast. InvescoQQQQ believes new innovations create new opportunities. Become an agent of innovation.

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