ETF Edge - Markets in May: Riding the AI Frenzy 5/31/23

Episode Date: May 31, 2023

CNBC’s Seema Mody spoke with Dave Mazza, Chief Strategy Officer at Roundhill Investments, and John Davi, Founder and CEO of Astoria Portfolio Advisors. They drilled down on the A-I craze and broke down the Roundhill’s newly launched Generative A-I ETF (CHAT) – discussing who’s riding the A-I hype train and whether it’s here to stay. They also recapped a handful of May’s big ETF winners and looked ahead to what investors can expect come June. 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 exchanged traded funds, you are in the right place. Every week, we bring you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm Sima Modi, filling in for Bob the Sani. Today on the show, we'll drill down on the AI craze and talk to one man who just launched an ETF that aims to be the world's first pure play generative AI ETF. We'll discuss who's riding the AI hype train and whether it's here to stay.

Plus, we'll fixed income and non-U.S. Equity ETFs continue to win the day come June. We'll hear what two experts have to say about what's ahead this summer. Here's my conversation with Dave Maza, chief strategy officer at Round Hill Investments, and John Davy, founder and CEO of Astoria Portfolio Advisors. John, first to you, help us break down some of the flows you're seeing right now. Despite the big run-up in tech stocks, large-cap ETFs have surprisingly seen outflows this year. So explain why that is. Yeah, I think there's, like, if I'm defining in 2023, I see kind of three big trends.

First is you've got, you know, bonds that on a per-uner risk basis are attractive relative, let's say broad-based U.S. equities. Why? Front net rates are trading very high, right? Fed is jacked up interest rates. You can clip, you know, a T-bill and get 5% take no risk, right? So that's troubling for stocks, let's say, in the U.S. So as a result, you've got, you know, $82 billion of inflows into bonds.

You know, equity ETFs have only taken in like $55 billion of inflows, right? That's a very, you know, big difference from what we used to see in prior years. The second big trend that I see is this, you know, kind of non-U. US over US, right? So let's talk about US, right? I think the macro picture in the US is a little bit murky, right? You've got this bifurcation in some of the macro data, right? Some macro that is good. Some of it not so good, right? So I think, like, you know, the international markets are much further behind the interest rate cycle and the inflation cycle. So as a result, you know, you tend to see a lot of flows into non-US ETFs, right? So 40 billion into non-US in aggregate,

whereas, you know, U.S. broad base has only taken in like $14 billion. Some of these single country ETFs like EWI, EWP, EWG, right? These are single country European ETFs. They're up 15%. Right? The one we use IHDG, which is kind of broad development international markets, is up, you know, 11%, right? You know, the U.S. is basically, you know, the broad base S&P is being driven by seven stocks, right? And we're going to talk about that with Dave with his product.

You know, so it's just a lot cleaner in the non-U.S. market. The final thing I would say is like this rotation added value, you know, into growth. And I think, you know, we're starting to see like, you know, these energy ETFs, 8 billion of outflows, broad-based tech, not a lot of inflows relative to the move, but you really got to, you know, break down tech and you start to see the ex-emies have taken in some inflows. But broad-based, you know, I would say like when I look at the Q's, which is the big institutional product, that people are going to trade, you know, in size to get risk on, risk off. It trades like water.

You know, that's taken in like, that's seen about two and a half billion of outflows. And even if I start adding in like the levered cues and then, you know, the mini Q, which is QM, there's just not a lot of inflows into tech on a relative basis relative to that 30% move in the Q's year to date. So that's how I define kind of what I'm seeing on the flow front. And Dave, what are you watching as we head into the summer next big catalyst, especially as the desk hopefully settles on the debt-sailing negotiations? Yeah, no, that's a great point. I think John hit a few topics which are relevant here.

I've defined this market, 2023, as a haves and have-nots market. And we've seen this across sectors, across industries, and really across the globe. And the halves are companies that are really scooping up all the interest. We're obviously seeing it with AI, exposed companies versus non. We're seeing it with growth, beating value by 20%. 22% year-to-date technology sector trumpsing energy. And a lot of this has to do with the interest rate environment. We were in a time with zero interest rates where a rising tide lifted all boats.

You could pick a sector, you could pick a stock, and you may outperform. It didn't matter as much. Now fundamentals and the macro matters significantly. And going forward, I think this is going to only continue to be the case, which is why investors likely need to be more selective here. I think we've been fortunate that volatility has been low. Hopefully this debt ceiling is just another debacle. I think up until today, the market has really ignored it for the most part. We obviously have a vote this evening, which is going to be relevant. But usually time and time again, barring some exogenous event, we move on from it. And then markets

begin to really focus on the data. And to John's point, it's been a bit mixed. and communication services have been the big winners in the month of May, powered in large part by a surge in enthusiasm over AI. More and more ETF issuers are getting in the game, rolling out new products that offer exposure to AI-centric companies, and especially timely endeavor after a number of tech stocks, including NVIDIA, row the AI hype train to new highs last week. Nvidia just topping the $1 trillion mark in the overall market cap. Roundhill Investments has just expanded its lineup of thematic offerings by launching a new generative AI ETF, ticker, CHA-A-T, and Dave, you run that fun. Your goal here is to make this E-TF sort of a pure play product.

Tell us about it. Yeah, I know, happy to do so. So the chat E-TF, and the ticker is C-H-A-T is focused on companies that are at the forefront of generative AI. The term AI has been around for a while. There's existing ETS focused on AI and robotics, but not. nothing on the killer app, which is the generative AI and chat GPT. It's the fastest growing application to 100 million users faster than Uber, TikTok, and really all the applications

and technologies that we take for granted at this point. And what we're doing is looking to seek out those companies. Investors will see around 25 to 50. There's around 30 names in the portfolio today that are focused on general AI. And so there's going to be a name. like Navidia, which is providing the chips that are required for this revolution, names like Microsoft, of course, which has an investment in OpenAI itself. And then other names, C3AI, which is an AI-exploits company. You're going to see, of course, in the top five holdings a name like Alphabet with their working with their Bard, an AMD, another chipmaker.

But if you actually go down the list, there's going to be many names that are smaller, more mid-cap, perhaps even some microcap companies in there that have that AI exposure. This is an area that's going to get a lot of attention. We already are seeing it. Look at the valuation multiples of Navidia, but these companies, we believe, are not just a fad. They're powering something that could be as ubiquitous as the Internet itself and as something like the iPhone.

And it's not just us saying this. It's research firms like Goldman Sachs and others and CEOs of Fortune 500 companies. who are working on their AI strategies today so that they're not left behind in the future. John, what do you think? Do you foresee real investor appetite for these more targeted ETSs rather than exposure to the watered down ETFs

that are largely concentrated in mega-cap? Tech names, are these enough or good alternatives? Well, so I like a lot of the stocks in Dase ETF and we own a lot of them in our quantitative stock portfolios. I think like when I look at like the chat ETF, Like, you know, the key there is, like, a lot of those companies are profitable, right? I think, like, two, three years ago was all about disruptive growth, you know, those are unprofitable tech companies, right? Small kind of micro-cap, mid-cap, you know, not a lot, like hopes and dream stocks.

Whereas I think, you know, a lot of the stocks that, you know, in Dave's ETF, like, these are the big bellwethers, right? So if you can get, like, a much more narrowed, focused way to kind of play it, like, I'm a supporter of it. So I think there's going to be a lot more ETFs to come in this space. I mean, there's at least four or five that have the word AI in the ETF name, and then it's countless others that give you exposure to the semiconductors. But, you know, this is what the ETF industry does, right? It launches a lot of products, and, you know, you've got to really look under the hood and make sure you're getting that exposure to this generative AI.

And, you know, Dave's hearing seems to be doing that pretty well so far. So Dave, are there any regulatory hurdles along the way? we just saw a statement released by the Center for AI Safety, signed by more than 350 leaders, researchers, engineers, warning about the risk of extinction if things get out of hand. Yeah, I think we are. We're still at the early stages of seeing Genitive AI expand into areas where you could see impact negatively on humanity or the world itself.

As of right now, and I think John raises a great point, the companies that you're going to find in this portfolio, are highly profitable companies with existing revenue streams, and in many cases, like in Avidia, moats around their businesses on the AI side, on generative AI side, that other companies are going to have a hard time disrupting. So we're not talking about hopes and dreams, some theme or fad that could happen 30 years in the future, which may change the world. This is happening today.

Grandmas and grandpas, college students can all use chat CBT. It's so easy to use. It's ubiquitous. And so, yeah, time will tell regulations may come into the space. But I think people are realizing that this isn't necessarily displacing what workers can do or what we can do as consumers. It's complimenting. I heard a great quote actually coming out of a company saying what chatGBT can do or what I should say, generative AI and large angle with models can do, is make everyone a power user.

And how great is that? I might just not necessarily need to have expertise in that particular technology or that space. But I can lean on this as an assistant as sort of a chat block to help me make better decisions, whether that's in the medical field or working on an insurance claim. John, when you think about AI, is it a sustainable long-term bet in this market? I mean, Goldman just came out with a note today saying they believe AI could add $7 trillion to annual global GDP over the next 10 years. Yeah, I mean, I think, like, you know, technology, you know, is going to make everyone much more productive, you know, streamline your workflow. Some of these mundane, you know, routine systematic tasks that would take a human to do, you know, it's probably just better off using CHAPGBT.

So even internally in our firm, I'm starting to encourage everyone to, hey, you know, let's, you know, let's try and use chatGBT just to kind of streamline our processes. So I don't think it's a fad per se, but I'd be remiss, Seema, if I did not. say as a kind of global macro investor that pays a lot to fundamentals, you know, I am kind of concerned about some of the fundamentals of some of these stocks because I think a lot of it's in the price. So, you know, just be careful. Like, again, we own some of these stocks in the chat ETF, but, you know, we've either been longed in for a while and we've been the beneficiary of this move of late. But, you know, to be buying it now, like you just have to pay attention to fundamentals and what price you're getting in at. Good advice on both sides.

For today, I'm Sima Modi, filling in for Bob Bassani. Thank you for listening and make sure you tune in next week. In the meantime, you can tweet us, your questions or topic ideas at ETF Edge, CNBC. InvescoQQQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQQQ, Invesco Distributors, Inc.