ETF Edge - Market’s Sizzling July – ETF Trends Behind the Rally 8/01/22

Episode Date: August 1, 2022

CNBC’s Bob Pisani spoke with Ben Slavin, Global Head of ETFs at BNY Mellon, and Andrew McOrmond, Managing Director and founding partner at WallachBeth Capital. With the economy slowing down and a Federal Reserve pivot on the horizon, how should ETF investors be positioning themselves right now? Plus, they dove deeper into markets’ sizzling July rally and the biggest trends driving those gains – as well as why bond funds, growth and active management are picking up steam. In the Markets ‘102’ portion of the podcast, Bob continues the conversation with Andrew McOrmond from WallachBeth Capital. 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 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 Bizani. Today on the show, with the economy slowing down and a Federal Reserve pivot on the horizon, how should ETF investors be positioning themselves?

Plus, the markets had a sizzling July rally. What were the biggest trends driving the gains? We look at why bond funds and growth are back on investors' radar right now and why actively managed ETFs. Also starting to pick up some steam. Here's my conversation with Ben Slavin. He's the global head of ETFs at B&Y Mellon, along with Andrew McCormon.

He's managing director and founding partner at Wallach Beth Capital. Andrew, I was surprised to find sizable inflows into bond funds, corporate, I saw government, even high yield. I don't normally cover a lot of inflows because it's hard to figure out what it means, but it did stick out to me given that we saw outflows in bond funds for a good part of the year. Does this mean anything, these inflows we've seen in bond funds? Well, I think it was cash. I mean, there's been any selling it all.

It's been short term. And that's basically cash any, right? If you're in Bill, B-I-L-E-T-F, you're basically in cash, right, with like a little bit of a kicker. So it's been people dipping their toes into the water, you're coming out of, or what's going to be a U-shaped recovery, I believe, it might already be. If you compare it to COVID, which was a clear V. So the money that's flowing into TLT and GOVT, $9 billion, $6 billion into H.YG and J&K. So I think the real move is institutional investors starting with bonds to play the recovery. Eventually they'll move on equities.

So, you know, I'm wondering, Ben, your thoughts on this, your thoughts on bond inflows and what they meant. And again, I'm not sure historically if it's worth covering this in an in-depth manner, but I saw inflows into treasury bonds, LQD, which is the corporate bond, the ETF had inflows, JNK, Spider high-yield, USHY, which is the I-Shares high-yield corporate, all had nice inflows this month. Does it mean anything? Well, in part shows a lack of consensus. In part, it also shows or could be masking just the dominance. of the ETF structure.

We've seen significant outflows out of bound mutual funds and inflows across the board into ETF. So there's a little bit of a structural play there. But Bob, as you said, we've seen flows coming into different parts of this, you know, to this market. You know, more recently, we've seen flows come in the longer end of the curve, which is actually pretty interesting. And maybe not quite as significant or on top of the leaderboard,

but certainly actively managed fixed income is starting to attract more attention where at least certain retail investors and maybe to some degree some professionals as well are just saying, look, I'll leave it to an actively managed product or professionals to handle it at this market. So a little bit of everything. Yes. By longer term, you mean 20 and 30 year bonds I gather. Now, in contrast to bond flows, Ben, flows into equity ETF. Now, you tell me, you're the expert. It seems kind of flattish to me. There's some growth into some flows into growth funds, maybe some outflows from value, but it doesn't seem titanic to me. And you also highlighted, I asked you about this, money into high dividend ETFs like SPHD. So what are you seeing

here on equity flows? Everybody always wants to know what's going on the equity side. Of course. I mean, again, there's somewhat of a lack of conviction or consensus here with regard to the flow. But yes, we're seeing investor interest into dividend ETFs. which haven't, you know, been out of style, you know, for over time, but more recently we've seen an uptick. S Ph.D is a good example of a product that really kind of sums up where investors are at. I would say it's a way to play this market more defensively, but also try to collect some income in a way that really avoids, I guess, some of the risk or the perceived risk in the

bond market. And we also see on our book at B&Y Mellon really issuers lining up for these type of products. Some of them are passive, you know, dividend-oriented. Others are just different types of actively managed ETS, trying in some way to provide a similar type of return stream for their investors. And high-dividend, low-volatility, S-PHT, of course, has consumer staples, utilities. It's actually a defensive play if you're going to be in equities. You know, it amazes me, Andrew, how much gets bet every day on these short-term.

term lever plays. I look at amazement the pro shares ultra S&P and the ultra QQQ which provides twice the returns here. So QLD and SSO are the ones to look at here. And the volumes are just Titanic. Yeah, we saw some Friday. I mean, I'm going to encourage to see that they're finally working or some investors are using the way they were designed, right? So you don't buy, you know, you don't hedge at the bottom of the market. We saw a 10% pop in the, we talked about this, which does 10% up in the NASDAK, 8% of the SEP, we actually got to even today. But everyone on Friday on my desk and the clients were saying, hey, are we close here? That's a nice move. Now let's hedge a little bit. So it wasn't necessarily a short bet. It's a percentage of the assets buying these pro shares

names. You can find any sector you want in direction, short ETFs and levered ETFs. And then it allows you that little bit of hedge. And I do think, you know, again, we're in a U-shaped recovery, you're not a V. There's no signs that pointed this being a V, right? Gas is $4.75 a gallon. Right. Right. We talked about vacation, how much it costs to go away. So I do think it'll be a little bumpy. And when you can, when active investors and active PMs can make these bets, okay, I'm just going to put a little bit short here in case we get a little move down again. That's where they really capture their alpha. So QLD is just for everybody, make sure everybody's on the same page, is two times the triple Q's.

Yeah, two times. Yeah, so if triple Q's up 1%. Right. If it's the long and the short. This is the long end of that. and that's been getting a lot of play recently. Ben, that being said, we've seen a strong 10% rally in tech, 8% in the S&P or 9% in July. So maybe people want to hedge the latest rally and get, you know, and get other kinds of exposure.

There are people who think the lows could be retested fairly easy. So there's a lot of stuff out there that provides downside protection. And that keeps popping up, I see occasionally. stuff that provides option collar seem to be popular. So I'm looking at this QYLD, which is the NASDAQ 100-100 covered calls. And it tracks an index that holds the NASDAQ 100 stocks, and it sells call options on those stocks, essentially to collect the premiums here. And the problem, Ben, Andrew, is these products are hard to explain to people, really hard.

There's others out there that are also hard to explain, but they're popular amongst a certain trading community. How do you explain it to people and say, all right, I need the downside protection? Can you, is there a problem with the complexity of these products? Yeah, I mean, surely if you don't understand, like, I mean, obviously the levered ones, but these covered calls are a little bit different. You just basically can tell the people like, okay, you're going to limit your losses to the downside, right? That's number one. You don't want to limit you don't want to go off 30% drawdown anymore. You know this, but if you sell options, right, and the market moves against you, you'll be protected, but you're going to just reduce your upside.

So you reduce your upside potential for these, you know, markets up 30% or how come I'm up 20? Well, because you are buying protection the whole time. It's really a risk appetite, right, Ben, for what kind of that client wants? If they don't want the risk, this really is their only option because it is very complex to try to hedge on your own. And that's why they're a good tool. That's a good point. So Ben, maybe respond to that because he's right. I mean, as hard as it is for me to explain people what these things do,

it's harder for somebody who wants to hedge on their own. They do make hedging a little simpler, right? Package. It's good. Look, I think, look, Andrew hit it perfectly, but it's good news, bad news. On the good news side, you know, the toolkit has expanded immensely over the last couple of years, and it's going to continue to grow. That said, the negative is really trying.

trying to parse all of these different products, really understand what you're owning and explain that to investors or even advisors who are struggling to keep up with the nuances between these products. So you cited a couple different products just in the last minute, right? Q-Y-L-D being one and some of the double or triple levered products linked to the cues, those are two very different return streams out there. And investors can use them in a way to hedge risk. also you know provide some other you know return stream and that's getting more and more

complicated so um you know again i think the burden will be on the issuers um and to a large degree the advisors to really kind of weed through all that and try to understand i'll give you another one that drives me crazy that seems interesting but i can't i can't explain it in any one simply b ufr now this is essentially buffer like this is four funds um that buffer declines in the s andp 500 essentially. So they're designed to limit losses. They use options with spread out expirations in them. And it's easy to remember. That's why I'm bringing up because BUFR is easy to remember. It's easy to remember. But it's easy to remember. But it's fairly complex. Yes. Well, the spread is good. I mean, when you had the products that came out with the futures, like the oil and the energy products,

remember those? They were like, hey, we're rolling every month. And so you would have a systematic risk of the, of the ETF being too big. The spread out option callers really alone. it to have a smooth transition. And they're laddered. I mean, that's what they are. But I actually think when you're talking about, how do you explain it to investors? Well, the name is perfect.

You're buffered on both sides. You have limited less. It's literally a collar. Yeah, it's a collar. And I think that who's it good for? If you have a 50-year-old investor that just went through this process, and I'm not retired yet, but man, I don't want to be down when I am retired in 10 years, and you're getting to this period and you still want to be in ETS,

or you're an RIA that represents these type of clients, buffer is going to be a good option. you for your clients that are in a lower risk, a lower's portfolio? Ben, there are the usual attempts out there. I'm moving on to another topic here, chasing the inflation trade, which hasn't gone away, simplify as an interesting product, PFIX, the simplify the interest rate hedge ETF. And it provides a hedge against a big increase in long-term interest rates by holding

interest rate options and treasuries and treasury. inflation protected securities tips. This gets crazy complicated to explain this too as an effort to just sort of hedge inflation. Well, yeah, again, here we are again, right, talking about other sophisticated product, but another tool investors can use. Yeah, I mean, look, TIP is a monster,

but then there's these products like PFIX that have come along that are really trying to isolate this concept of providing an inflation hedge. And not surprisingly in the first half, This was an incredible performer. It was at the top of the leaderboard. Obviously, you can see the chart. It has since cooled, right?

But there are other products that are coming onto the market that issuers are trying to really gain, you know, investor interest in to be able to just provide these ways to play. Another great example is really like a direction product that just launched BRKY that is designed to provide exposure to commodities that you find at your breakfast table, right? another way for investors to, you know, try to play, you know, this inflation trade. But again, I think the longer term play and what we're going to see more of is some interest in the fixed

income ETFs, specifically in the actively managed space. Again, I think we are seeing some early signs that investors are, you know, just looking for some professional management to really help navigate these tricky waters and, you know, some early signs that we're seeing flow there and the issuers are lining up to launch product. You know, I'm so old, Andrew, I remember that really the only way to do inflation, play inflation, was tips. Treasury, TIP, the original one with Treasury inflation protected securities. Whatever happened to it. I mean, it's still there, but I get the sense like there's not enough return.

There's another new product. So PPI just came out. That's a multi-asset. Actually, one of your guests on the show from, I believe it's an RAA that comes on your show all the time, is behind that. That's global stocks, commodity. because inflation is not just a U.S. story, right? So the tips are a set product, and even the product we mentioned before

that Ben mentioned, PFIX, they're using OTC derivatives that mirror long-term treasuries, right? They're more efficient, makes the product more efficient, makes them charge a little bit less. It's not the same story as it was. But hey, the good news is we ruled out Bitcoin

as an inflation hedge. Well, thank goodness. And by the way, this is the first time I've mentioned, Bitcoin on the show, and I'm not planning on bringing it up, all right? Just so, you know,

I want to move on and talk about, I'm moving to a different subject, Now, single-stock ETFs. We've had eight of them launched recently. Yep. And there's a lot discussion here. What's going on here? Is there going to be one for every big cap ETF?

It seems like that's potential. Like the top 100 are going to get all leverage and inverse ETFs around them. Single stock. Now, Innovator launched a hedge Tesla strategy. Yeah, that's two kind of different products. Right. That's like buffer for one stock.

Right. TSLH. It aims to provide the price return of the Tesla stock up to a cap and hedges the downside risk over a three-month period. Now, that's not a leverage and inverse, but I guess what I'm trying to get at here, I want to specifically talk about single-stock ETFs in general. It is a single-stock ETF with a buffer. Why now with all of these products and how do you feel about them?

I believe they came out due to the popularity of the retail trader. And, again, they saw, you know, just because you can lose, so to keep it simple, if you short a stock, you have infinite losses, right? That's what the traders need to. They can short a stock and go to wherever. Never mind. I've never met anyone at an infinite loss, but it's on paper. theoretically, theoretically.

You can only lose, but you can let's say, forget infinite. You can lose three times what you put in the Tesla by shorting. You short a thousand dollars, oh my gosh, I'm down $3,000. With this, let's say, TSLQ, second most successful launch of an ETF this year, that's the short Tesla. It's only been out of a month, right, dollar in volume. you can now only lose what you put in. Hey, I'm going to bet $1,000 of Tesla's going down. That will eventually go to zero over the course of time, right?

Like that most of these ETFs, just like the lever ones do. You'll only lose your $1,000. So it's appealing to those people. And, of course. That won a short without the downside of short. And no margin. No margin. And international investors who can't short.

But wait a minute. You're paying 1%. Oh, you're paying. 1.2%. You're paying. It's not free. No, because the hedge includes the cost to borrow. And I'm sure Ben can speak to that.

being, you know, but the hedge includes the cost to borrow for the, you know, the PM. So it's all factored in. But again, the person on Robin Hood can now short, they're going to be happy about that. Ben, talk about this. What's the upside and the downside of these single stock ETFs? I mean, the advantages, we just said, these single stock levered ETFs, they're more accessible than shorting and using margin. So, but what's the downside here? Yeah, look, the convenience aspect of that, I think you hit the points perfectly earlier is huge, right? But it's important that these products also, you know, have their downsides and in many ways, you know, work similar to many of the leverage and short products that are out there now,

such as the daily reset. And again, this concept that, you know, it is daily and, you know, you're not going to track the cumulative returns over, let's say, a six-month or a 12-month period. But look, the race is on with the ETF issuers. First mover here is key. So you are going to see the spaghetti on the wall approach, in my view. We have a line that is growing quickly on our platform to launch these products and bring these to market. So yes, you are going to see products pretty much up and down some of the larger, you know, larger mega cap names.

And I think you're going to see multiple tickers now for each of those stocks out there. And look, some of these products are going to be quite volatile. You know, again, you look at the vol of a Tesla, right? Or some of the other stocks, you know, assuming they come out, you are going to see some significant risk. Now, you know, again, you can't lose more than you put in. But again, the betas on these products are going to be very, very high. And there's going to be the traditional confusion in the market on how they work. And I think it's an added bonus on the tickers.

Yeah, I'm sorry, the Daily Reset, I've been trying to explain it for 15 years, and people still can't get their heads around a daily reset on this. So what I'm concerned with is the top 100 stocks are all going to have these leverage and inverse ETFs. And I don't think it's a coincidence that on the week the first group launched, Gary Gensler at the SEC, comes out and makes a statement about leverage and inverse in general, that they're very risky products. I don't think that that's a shot across the bow here. Even though they have not tried to stop these products, they obviously had some concerns

about their impact on the market. and investors not knowing what they're doing. Well, investors need to look at it. It's going to be the same. I mean, again, you could bet on like, you know, Commodore computer. Some stocks will go to zero, but the general market doesn't. If you looked at a chart of the short S&P levered ETFs over years, they're all go to zero. I mean, they actually reset, but they go like, you know, because of the daily reset,

because the market generally goes up. So that alone, we should, everybody in the show should learn. These are short-term bets, unless you are betting that the stock is going to zero, right, bet? without a doubt. I mean, but that, Bob, that concept, again, is for whatever reason, despite some efforts there just, you know, alluded some investors who just, you know, still struggle with that concept. And it's just, again, important to remind investors that, again, these products are no different than the other, you know, sort of index-based products that have been out there for years.

Possibly more volatile. Right. But that's why I don't think it resets everything. It's not Coke is not going to be the problem. It's not going to move around. You know what I'm talking about. It's going to something around Tesla or something around some other more high beta. GameStop. What if they put it on in game stop, right? And we're going to be blue in the face saying it's resets daily and it's still going to happen. And somebody's going to still have a problem. And they're going to, we're going to have to go around explaining things again. Correct. To everybody. Charles Schwab's got a lot of work to do. That's what I have a problem. Yeah, there's going to be a lot of illegal statements around these things when they launch.

Ben, you're going to be very busy with your department, explaining this to everybody in the next few weeks. 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 the podcast. Today will be continuing the conversation with Andrew McCormon from Wallach, Beth Capital. And Andrew, you know, one of the things that's interesting to watch these fund flows is no matter what happens, the market's up. you still generally are getting inflows into equity ETFs. Markets down this year, on aggregate, you're still getting equity inflows, particularly into this giant plain vanilla, S&P 500 ETFs,

or anything like that, triple Qs in general. And it is remarkable to me that I'm sure there's going to be a year when people are going to freak out. Just the flow of money out of mutual funds, actively managed mutual funds into ETF seems to provide that buffer where the assets and the management just keep going up. Yeah. Ease of use. People want to do it themselves. They're definitely not picking active managers. They're going to pick ETFs.

They can see the tickers. They watch the NBC. They get the information they need every day. In addition to that, you know, I would say these kind of markets can give, the market where in the last two, three months can give active managers. there's a little bit of a boost, but in general, right, what are we going to do? We're going to have a U-shaped recovery. It's going to take some time. The Fed's going to back off.

They'll become dovish again. We'll go back to a grinding bull market at some point. And it is very hard for active managers to then justify 250 bibs, 175 bibs. And obviously, in the hedge fund world, which is different. It's different investments, but you're getting, you know, 2 and 20. It's still 200 bibs to start. Chasing what? Underperforming the S&P 500, right?

So it's ease of use combined with low cost. We're all, we discussed before all the shows today, the consolidation of employees, you know, everything. Dollars are coming in and it's a squeeze and ETFs are such a cheap wrapper. We talked about fixed income. We talked about that the new I shares high yield, which is now only 15 hips to get high yield. Yeah. What's amazing to me too is just how effectively the ETF community is providing competition to the mutual fund community. So you now have BlackRock, you have State Street giving out model

ETF platforms to their clients. You can have a BlackRock platform and essentially become like an ETF, a tactical ETF manager. At PM. At PM at no cost, essentially. They'll tell you, they'll provide you, look, you want high yield, here's where you go, here's your options, and we'll tell you. They're practically running, they're not running a mutual fund, but they're running a quasi advisory service in a certain way that you can utilize very easily and effectively cut out the mutual fund companies. Well, the RAs, right, if an RAs primary focus in the most part is talking to his investors and have a succession plan for the families that are their clients, not picking investments. So what were they doing before? American funds, I need a 6040, I need an 80-20,

I need an very aggressive and I need an international. And as you mentioned, it was very astute, BlackRock will come in, say, here's some software, we'll give you all of this for free. You don't need to pay these mutual funds, 125 bibs anymore. It's literally free. And what do the software do? For people who don't understand how this works. So as you, if you're 40 years old, it has a model. And then when you're 50 years old, the software will tell the RIA, sell 20% of his position in the S&P and move it into 10% government bonds,

all ETS. Right. No, it's not required. I'm sure the SACFinder. They can't walk in there say, you must use our products. They're just encouraged soon. And when the model kicks off obviously suggestions, it's going to kick off iShares by Black Rock suggestions.

It may think about the time efficiency and the money the RAA is saving by doing this. Versus because the client, of course, would say, well, why am I using American funds? You know, in a down here, we were down 10% or why I'm using Franklin Templeton, any mutual fund, not picking on any one of them. And then the R.A simply says, well, I'll check it out. I'll look at the, you know, we'll call the PM, Or, you know, did you look at the prospectus, you know, those kind of things where customers get lost in the weeds.

And these softwares that the vanguard's and the state streets and the I shares put out are very easy to read. We're simply rebalancing. You get a statement, hey, I sold an equity ETF. We moved into fixed income. You're safer now. Yeah, and this is what enables you to drive costs now. So even instead of 120 basis points, maybe with that kind of efficiency, you can just charge 100 basis points. Yeah, the R.A. himself.

to you and I as consumers. Exactly. Yeah. So this is part of the relentless efficiency of the ETF. So it's not just the efficiency of the ETF, but you can now provide platforms for the, for an registered, you know, an RIA that drives the cost down. Their cost down, correct. Provides options for the clients.

And essentially continues to provide a reason why people should take money out of mutual funds and put them into ETFs. We were talking on the show with Ben Slavin from B&Y Mellon about active ETFs, and I made a joke about, you know, within a year we're going to have 100, all 100 biggest stocks are going to have leverage and inverse single stock ETFs. I wasn't really joking. I mean, don't, don't. No, they'll happen.

You're right. Tell us what's going to happen with these single stock ETF. I believe, as we said, the large mega-cap non-volatile names will have them. it'll be interesting they just won't get a ton of volume like at any given point why would you short for right you know uh or you know or a product like that or g e you know but they're not going to be the one it's not the low it's test load beta yeah invidia exactly right um and i will tell you that the warning sign is this they will you know there's no free lunch there is there is now lunch i guess is a good way to put it right if you were if you couldn't short now you can so you have a new

menu item, right? But just keep in mind that what will happen is on really big down days of earnings or a miss or a takeover, you know, he's going to, now I'm going to buy Twitter again, right? And it's all coming, although that's going to be a lot of news around that. When you are paying that ETF, when you're trading it that day on your Robin Hood platform, you will most likely be paying a real premium to short it on a down day or a discount to buy it on an update, right? because you have to, you have to. Well, how does the premium get expressed? You're, you're already paying a fee.

But the market maker, so let's just say, if Tesla's down 10%, it wouldn't surprise me if you're buying the short down 15 or 20. Because like, the other side is the head. So how does this change the underlying price of Tesla? I mean, is it, how does that interact? Until it's really big, it won't, but it just means more trading because you go buy the short, the market maker has to turn around and buy the stock as his hedge. You're not both short, right? he sells it to you, he has to go buy Tesla.

So it kind of has a counterbalance there, but like I said, on a day where it's really down, they're just going to drive the price of the ETF where it is attractive for them to be buying Tesla long as you are shorting it. That's simple to explain, right? If they're forced to buy it, they're going to move the market down to where it's at least,

okay, Bob, you want to short Tesla at 10, fine, but you're going to short it real. It's really down 15 or 20 percent, so I can buy it there and I have a spread, So I know I'm getting into B. Yeah. Weeds a little bit, but suppose you have an ETP that comes out that's one-time inverse. So if Tesla's up 1%, you're down percent and the opposite.

You're essentially, you know, betting, you're betting against Tesla. Correct. And for that day, it will work on if it's not, obviously, if Tesla's up 1%, that's not a busy day for Tesla. So the inverse will, should work up until that day. And again, without getting into the weeds, when we get into the reset it, night, that's just when you have to be careful. The reset will reset the leverage with a swap trade that's done with a bank. That's where we're getting in the weeds, how that actually is done, how the swap is done. And does that ultimately, in any way, impact the underlying stock?

I don't think so at the current levels, but it'll be very interesting to see when these things are, I've garnered $500 million, a billion dollars in assets. That's what I want to keep an eye on, because I think that can happen with certain styles. But if the traders use it correctly, Bob, meaning the clients, the consumers use it correctly, and don't hold the products over time, then the AUM will also reset itself every day. Yeah, theoretically. All right, Andrew, good talking with you, as always.

Andrew McCormon is the managing director and founding partner at Wallach, Best Capital, and everybody, thank you for joining us on the EPS Edge podcast. InvescoQQQQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQQ. Invesco Distributors, Inc.