ETF Edge - Market Mayhem – Time to Hit the Panic Button Yet? 06/13/22

Episode Date: June 13, 2022

CNBC’s Bob Pisani spoke with Christian Magoon, CEO of Amplify ETFs – along with Mike Akins, CEO of ETF Action and Dan Egan, Vice President of Behavioral Investing at Betterment. They tackled today’s major sell-off head-on, touching on ways to weather the storm of red-hot inflation. Plus, are retail investors hitting the panic button yet? They also dug deep into crypto getting crushed today – and discussed the latest home-buying habits in this era of mounting mortgage rates. In the Markets ‘102’ portion of the podcast, Bob continues the conversation with Mike Akins from ETF Action. 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 are in the right place. Every week, we're bringing you interviews, analysis, and breaking down what it all means for investors. I'm your host, Bob Fazzani. We've got a major market sell-off on our hands as the peak inflation story is losing credibility fast. Today on the show, we'll discuss possible strategies to help you navigate the many market headwinds, including inflation, fighting, and inflation hedging ETFs. Plus, are retail investors hitting the panic button yet? We'll also take a look at crypto getting crushed today and get the latest on home buying habits in this year of red hot housing prices.

Here is my conversation with Christian Magoon. He's the CEO of Amplify ETFs along with Mike Akins, CEO of ETF Action and Dan Egan, vice president of behavioral investing at Betterman. Kristen, you started this inflation fighter ETF in the beginning of the year. We talked about it then in February. I win is a symbol auspicious time to start it right at the start of February. And it initially attracted a lot of inflows, but it's been quietly sinking in the last week. This is a mix of stocks and commodity-like instruments.

What's in this? And why is it too starting to sink? Yeah, so there's a variety of assets in here. When you look at top holdings, you'll see everything. from gold futures to soybeans to land development companies to fertilizer and timber stocks. So it's really a kind of a mix of scarce assets either in the form of commodities or stocks that are in the commodity business. But with this market, you know, correlations are kind of going to one based off all the

sell-off conditions. Most of these assets are starting to trade downward given the increase in volatility. In addition, kind of before Friday, Bob, we saw many investors talking to us about maybe thinking that inflation had peaked or that it was still transitory. And they obviously got surprised on Friday. So kind of a new day here starting out the week with Friday's bad inflation numbers. So we'll see kind of what happens once we get out of this kind of macro risk off of it. Yeah. You know, gold is your largest gold futures or your largest single holding.

How is gold faring as an inflation hedge? I mean, it's flat this year. So I guess you could say it's performing well against equities, but why is it not doing even better? I mean, the gold defenders, these guys, when I go to them, they always say, oh, well, this year the dollar's been strong. So that's a problem for gold. But is that the only reason?

I mean, it seems pretty clear to me. Gold demand has declined in China and probably India, too. So, you know, maybe it's not such a great inflation hedge when you have this kind of weird macro environment. Yeah, I think one of the things works. against gold this year is that interest rates are rising so there's more income to be had. And you remember gold doesn't deliver any income. So when there's not much out there to sit in cash, gold can be an effective alternative. But with rates rising, you know, high interest

savings accounts are maybe now paying 50 to 75 basis points. It makes it maybe a little less attractive from a gold perspective. So I think that's one of the factors in this mix, this crazy mix of inflation and rising rates. Yeah. You know, Mike, this is the problem with a really broad market decline, which is what we're seeing. Everything goes down. You've got your inflation heads go down. You know, Christian's got farmland in here, farmland partners, Texas-specific land. They're down, too. So all these holdings drop, Bitcoin drops, land holdings drop, gold drops. You know, so it's very difficult at this point to figure out what what should be doing, what individuals should be doing at this point? Yeah, it's a tough market. That's for certain.

I mean, I think the saying holds true, everything correlates to one in the down market. Though I would argue there are pockets of strategies that have been forgotten about that are doing quite well this year. Obviously, energy and broad-based commodities are doing fantastically. The world's kind of forgot about them in the last decade as we've been, you know, in a non-inflationary market, a growth propelled market, but the folks that managed to hold on to those allocations within their portfolios are being rewarded nicely for staying in the course with some of those strategies. And you're also seeing some strategies such as managed futures do well in this volatile market, more of that trend following with the long, short, in the futures markets, a number of

ETFs in that space are doing quite well. So a traditional kind of buy and hold all portfolio is doing is doing what it's supposed to have done this year. The problem is, is so many of these strategies are used tactically. And as we know, trying to time when these strategies are going to add benefit to your portfolio is extremely difficult. Yeah, it's just about impossible. You know, the old adage is it's time in the markets, not timing the markets. That's one of my favorite old lines back from the 1990s. Let me move on and talk a little bit, Christian, about some other inflation fighting.

strategies. You have a dividend growth strategy, enhanced dividend ETF. It's got a lot of blue chip dividend payers in it, Chevron's in it, United Health, Johnson & Johnson, but it also has a kicker, a tactical call writing strategy. Explain that. Yeah, so the ticker is Devo, DIVO, and it's companies that are growing their earnings as well as growing their dividends. And then the manager of the portfolio has the ability to tactically write covered calls on these blue chip companies to produce additional income.

So this is a five-star ETF ahead of the S&P by about 10% year-to-date and is paying a distribution of nearly 5% that pays out on a monthly basis. So those kind of high-quality names that have a built-in hedge and that hedge is growing their earnings allows those names to be a little bit more attractive and volatile markets like this. And certainly if we get into a crash, scenario, having blue chip companies that are profitable and strong balance sheets, we think will be helpful as well. So Depot's definitely been kind of a highlight for us at Amplify this

year in terms of performance and assets under management growth. Right. So if the S&P is down 20%, it's down, what, about 10% so far this year? That's right. Yeah, I think coming into today, the S&P was down close to 18%, and we were down a little over 7%. So there's been some less kind of downside participation, if you will, from Devo than just owning the market. And I'm rather surprised you can get 5% annualized return out of this. I mean, the top end oil companies are doing, what, 4% or so? How are you, and Johnson and Johnson isn't close to that? How are you getting 5%? Yeah, so the dividend income of about 5%, about 2% comes from actual dividends from the stocks that are held by the ETF.

An additional 2 to 3% has come from option writing or covered call premiums. So that's how you get to that 5%. The interesting thing about this ETSF as as volatility and VIX increases, there'll be more option income that can be harvested. So historically, the strategy has had a 4% to 7% total yield, and that's again from dividends and option writing income.

So, you know, being at around 5% right now, we've been at the low end, volatility hasn't been that high over the last four or five years. If we get into a higher volatility, we could get up to that 7% range. So what's the downside? Under what circumstances would it underperform just owning, say, the S&P 500? Yeah, so in big growth markets where growth stocks are favored, where S&P 500 is market cap weighted and has a big exposure to technology, Devo doesn't. It's really a blend of growth and value with a bit of a tilt towards. value. It looks a lot more like a Dow Jones Industrial

average type portfolio than an S&P portfolio. So when markets are up big, especially on tech, Devo underperforms. But in other cases where the market's more balanced or more volatile, this is definitely a more stable blue chip approach we think can stand the test of time. And it has as its five-star rating suggests. Mike, there are dozens of these enhanced dividend strategies out there. We've been covering them for many years, everywhere from just buying the highest priced dividend payers out there, which is a bit risky,

to those that are consistently growing their dividends year over year, the so-called S&P aristocrats, as we say. And there are other sub-variants of this. How are they performing this year? And the spread is still pretty small. And you can, he, in this case of Devo, They've got a little kicker in there that's a major part of this, which is buying the covered call strategy. But most pure play dividend enhancers don't have that, do they? Yeah, I think if you're looking at a long-only equity strategy and you were to look across the dividend landscape year today, one, they've been on fire from a flow's perspective. We've seen a ton of money coming into these strategies.

But if you think about it from a performance perspective, you've really seen an inverse of what we've seen historically, or over the last decade in this space, and that is the high yielders are winning. So those strategies that are owning the deepest value, thinking of yield as a value screen, are performing the best. So kind of your traditional DVY type strategies or S-Dog is doing really well.

The funds that are focusing purely on yield and going after that are significantly outperforming those that have put in additional screens around quality or consistency of growth, like a VIG, for example, which has done very well in a growth environment is not doing so well in this environment. On the option income or the derivative income side of the equation where Devo would fall, you know, I have to give a hat tip to Christian and team. Devo has done extremely well over the last five years relative to the S&P 500.

Historically speaking, if you just look at a passive derivative income or buy right covered call type strategy, you give up a significant amount of performance during up markets because you keep getting called away, right you're writing these covered calls the market goes up it gets called away you lose that that gap in performance so if you take something that's a passive like a pbp or a qy ld you know over the past three to five years they've significantly lagged their benchmark whether it be the s mp 500 or the um nasdaq 100 Devo is much more tactical it's an active strategy and if you look at it from a historical performance perspective it's managed to deliver that extra income while maintaining a nice up-down capture ratio and I'm just looking at it on my screen right now,

you know, it's kept up with the S&P 500 with much lower volatility over the past five years. And I think that really kind of lends that idea of a tactical overlay versus a peer passive writing calls on a broad index. Over time, that type of strategy is going to, it's going to lose ground significantly to the marketplace because we're in more up markets than we are down. So I think the tactical active overlay in this case makes a lot of sense if you're looking at the derivative income space. That's a great point. A tactical overlay like we're seeing in Devo makes sense when the market is like this, but it would have not necessarily done as well in a consistent up market. Christian, I just want to move on here. I want to ask you about the growth part of your portfolio.

Amplify has a number of ETFs. You have a transformational data sharing ETF, Block BLOK. That was a big hit last year. You and I talked about it several times on air in 2021. It tracked a lot of inflows. But it's mostly equities focused on blockchain technology. So you've got micro strategy and CME group in it. And it's tended to move with Bitcoin. So with Bitcoin in a new load today, so is Block.

And just give us your thoughts on crypto here. Do you anticipate outflows from this fund or how is it doing? Yeah. So the fund is actually down for the year and seeing a fair amount of, outflows, it really is one of the highest correlated, publicly traded ways to access kind of Bitcoin-type returns. It's because many of the holdings are highly correlated, like a micro-strategy, for example, to Bitcoin.

But ultimately, you know, blocks investment thesis is on blockchain technology, which is, you know, a broad-based technology of which one application is crypto. So we think there are other use cases, whether they're. that's payment systems, third party validation of transactions, data recording, etc. I think there's other applications besides crypto that are coming that will be game changers and good growth opportunities to invest in. So we're still bullish on the whole blockchain space. We understand how volatile it can be.

We launched back in 2018 and saw Bitcoin go from 19,000 to about 4,000 in price. before it rallied significantly. So we've been there with this fund before, and we've been able to come back and see strong performance. So I think volatility will continue, but we don't think over the next three to five years that these recent highs we're at are insurmountable. We think we can overcome those over time.

Okay. I want to bring in Dan Egan. He's the Betterman's Vice President of Behavioral Finance and Investing, an old friend of mine. You know, Dan, I often bring you in during dramatic market moments, to help sort of calm things down, bring a little perspective. Let's put the adults in the room here. One of the big classic mistakes we always see investors make is trying to time the markets,

thinking they know when to get in and get out. And then another one, which breaks my heart, I have seen it many times my 32 years at CNBC, is selling at bottoms. So remind us what the right way to think about this is, what we're going through right now, and what are you telling your clients at Betterman? One of the nice things that I've seen kind of over the past two decades is this transfer from people having to manage their portfolios themselves, going into brokerage accounts to place trades, even rebalancing trades or your common buy trades, with people investing in 401ks and even automated digital advisors like Betterment.

We're seeing much more consistent investing behavior. So so far what I've seen through this, it's been a scary period, but we aren't seeing people freak out in any way whatsoever. everybody who has had auto deposits or 401k contribution set up, that continues to chug on relentlessly. There hasn't been any fear factor there. And additionally, we're seeing very little kind of like defensive movement even in allocation. So for context, Betterman has 700,000 plus customers. Of those over the past week when things started to get scary, we saw about 50 or 60 defensive allocation changes, which is just not that much. conversely we saw about 200

unexpected kind of like new novel deposits of people putting money in so the ratio is still very much kind of like stay invested keep chugging along don't pay too much attention to your investments this might be different if you're on a brokerage app or a trading thing but a lot of our customers they seem to be holding the line

pretty easily because they're not focused on doing it themselves yeah I want to get back to trading in a minute but you and I were talking last week on the phone about what looks like a slowdown in housing at least the number are indicating that. You had a very interesting point. You noted that withdrawals to buy a house

had slowed down significantly on your website. Tell us about that. And what does it mean? Is there signs? Sands froth really is coming out of the housing market. Yeah, one of our favorite goals that customer set up at Betterment is a house down payment goal. It's a, it's a bittersweet moment when a client finally manages to withdraw to put the money down on the house that they probably wanted. And we've seen very high activity of those withdrawals over the past two, three years for obvious reasons. We're starting to see that reduce quite a bit as affordability goes down. And people aren't not saving for that house down payment, but they're setting higher targets and they're extending their time frame further into the future. So definitely seeing,

at least for us, a good thing of people saving longer and for higher balances, but less froth in the market of actually I'm going to pay it right now. I want to go back, that's interesting. I want to go back to the flow, the trading flows. And one of the things that we've seen this year is there is continuing to be a core foundation of inflows into plain vanilla exchange traded funds. Tell us about your experience. Essentially, it looks a lot like auto deposits to me. And this seems to be sort of apathetic to the markets. This is just robo investing, essentially.

Are you seeing that right now as well? I would say, yes. I would say they're less short-termist. So let's take a slightly longer time frame. You go back three years. Your total return on the S&P 500 is about 40%, I think, over a three-year period. This is not some horrible thing for your average investor who's invested over the past few years. This is not the signs of panic and, oh, I've made a horrible decision.

So for people who are investing, and generally we talk about somebody investing for at least three-plus years, and the further out you go, if you're talking about your kids' college education or retirement, these are things where you don't get distracted by really short-term ups and downs in the market because your focus is on something that's 10-plus years away. And it makes it really easy to sit through these ups and downs and say, maybe this is more of a buying opportunity than a freak-out opportunity. That mindset, that mentality of the money is going to be here for a long term, so drawdowns aren't a horrible thing.

It's something unique to investors, not traders. Is anybody buying the dips right now? Do you see anybody suddenly taking large chunks of money? I mean, for a retail person, $20, $30,000 and just saying, I'm betting on the bottom here. Or is that not happening? I think what we've seen is that it's already been happening. I think it's been happening for probably the past month or so. You know, people got very used to the idea of buying the dip.

It'll rebound quickly, such that all they needed was sort of a 5%, 10% drop in order to trigger that behavior. I think that dry powder has been used up at this point. And the inflows we're seeing are always the more consistent ones. or people who have out of unexpected windfall, money coming in, tax returns, et cetera. Yeah. Mike, you get the last word here. What's encouraging here to hear Dan talk about is, and maybe this is because the betterment crowd is slightly older.

Maybe they've got a little more experience doing this, or maybe they're just listening to Dan more. But inflows are fairly consistent in these plain vanilla ETFs, despite the gyrations that we've seen this year. tell us what you're seeing and what that tells you. Yeah, I think it's a combination of things. I mean, you have to kind of break the ETF market between, you know, buy and hold, beta strategies that you and Dan were just talking about and more tactical strategies.

You can even do that within the S&P 500 tracking ETFs. So like spy is more of a trading vehicle than IVV or VO, and you're clearly seeing that those long-term holding vehicles continue to pull in assets. I think one thing you have to remember with the ETF flows staying more consistent than mutual fund flows is that you're continuing to get a tailwind of folks transferring from mutual funds to ETFs. And I think every time we've over the last 10 years where we've seen a significant disruption in the marketplace where the whole market is down significantly, ETF flows actually pick up. And that's largely can be attributed to the fact that folks that we're sitting on legacy long-term gains in, vehicles like a mutual fund now have an opportunity to roll out that, roll into a more tax-efficient ETF without the same consequences.

And on top of that, you continue to have withdrawals out of 401Ks, folks that are required minimum distributions. And as that money comes out, if they're not taking it and putting it to work, they want to leave it in the market. It flows out of that qualified money into a more tax-efficient vehicle like an ETF.

So ETFs have really proven time and time again that when the market pulls back and people have an opportunity to reallocate, their choice is the ETF vehicle for its tax efficiency, its liquidity, and its lower costs. Yeah, that makes a lot of sense. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETF. This is the Market's 102 portion of the podcast today. We'll be continuing the conversation with Mike Agnes from ETF Act. And Mike, thanks for sticking around. And we had an extended discussion with Christian Magoon about inflation fighting ETFs and all sorts of other ways of combating inflation, including dividend ETFs. There seems to be a lot of, I guess you would call them alt strategies that are out there that are starting to see inflows because of the confusion around inflation.

So besides that, we see commodity ETFs picking up. I see managed futures ETFs picking up. Always seems to be a little risky to me. But what are you seeing in the sort of alt-ETF strategy to sort of deal with this market volatility? Yeah, I think any time you get market volatility, somewhat unfortunately, you see a number of categories that have remained stagnant for a number of periods or years peak up because they're starting to do well again. And there lies the problem with a lot of these strategies and that folks tend to, put their, allocate their capital to them when it's too late, right? When, when the market's already moved, when the volatility already happens. And I think what we spend a lot of time talking to our,

our clients about is, you know, utilizing these strategies as they were intended and finding something like managed futures, for example, or gold or broad-based commodity ETFs, you know, if you would have had just three and a half percent allocated to those three strategies since over the last five years, you'd be down half as much as a lot of money. the normal 60-40 portfolio year to date, and over the five year, you'd be equal, right? But that shows you what you would have trailed in those four or five years,

and that's where the problem comes to these strategies is if you don't allocate and stay the course, you tend to see a lot of money start flowing into these strategies after the damage has already been done. And I think that's the biggest thing that we're seeing in the market is a lot of these strategies that are doing quite well year to date are attracting a lot of flow.

but my question would be, is it too late? Yeah. This is the problem with Wall Street. You know, Mark Twain once said when a man asked me for advice, I find out what kind of advice he wants, and then I give it to him. So there is no shortage of ETFs. This is the glory of the ETF business

that can be created around anything that's popular. We saw this four or five years ago with pot stocks, and then we saw it with Bitcoin-related ETFs and virtually anything. The problem is the difficulty of picking up. sectors consistently and the academic literature is pretty clear on this. There's sort of a random pattern. If you look at the S&P 500, 10 or 11 sectors over the last 20 years and look at the top two or three sectors, what's startling is how random the pattern appears to be. We did have a

small period there in the mid-2020s where growth and technology was consistently among the best performers, but that tends not to be the pattern historically. I mean, doesn't this tell you something, Mike, about what Wall Street wants to sell you and what you ought to be doing? Yeah, I think there's definitely kind of buyer beware with any product outside of the mainstream beta asset allocation vehicles. That being said, I do believe strongly in a lot of the alternative and thematic strategies used properly. And I think there's two ways to use any investment product. It's a long-term allocation. You don't set it and forget it, but you allocate to your risk tolerances.

know, if folks that want to use commodities, I think there's a good argument to be made that you've got a small allocation to commodities all the time in your portfolio because when commodities decide to run, as we're seeing right now, a little bit can go a long ways and a little bit will help you stay the course when it withdraws from returns. Same thing with thematics. Oh, go ahead. Well, finish your point. Finish your point about thematics. I was going to say thematics. I mean, I think are very similar in that I don't believe. that you should have, you know, 20% of your portfolio allocated to a lot of these crazy themes.

But if you find one or two thematic ETFs that are essentially growth with a macro overlay, I do believe that over time they can add outperformance just like allocating the cues or potentially more than the cues. But if you're doing it in such a way where you're chasing returns and you're not saying, hey, I'm making a decision to allocate to this area of the market and this amount, across my portfolio, understanding your risk profile, understanding how much tracking air to the broad-based benchmarks you're willing to accept, they can add value to a portfolio over full-time. But like you said, the problem is, generally speaking, when people are selling it to you, it's the wrong time to be buying it.

Yeah, as, you know, I forget whether it was Jack Bogle or whoever used to say this in the 1990s, but it's stuck with me. It's time in the markets, not timing the markets. And I, I have, I have been watching this for 32 years as a correspondent for CNBC, and it's startling to me the randomness of the patterns. It's certainly true that it seemed illogical for commodities and energy stocks to go down to 3% of the S&P 500, which is what happened a couple of years ago when it was 20 and 30% 30 years ago. So I think at that point you can argue on a mean reversion trade that it would be worth putting money into something that had been down that much. unless you believe that the economics of commodities were repealed. So that makes some sense to me as a tactical play.

But the endless amount of offerings that ETFs provide, I think it's just wonderful, but often very, very confusing. And I see this with the viewers. And I go back to the old lessons. You know, I learned being with Jack Vogel in the 1990s. So that's the story. At any rate, Mike Akins, thanks very much for joining us. Appreciate that.

everyone for listening to the ETFH podcast.