ETF Edge - New Active ETF Launches & Navigating Energy Prices

Episode Date: February 23, 2022

CNBC's Bob Pisani spoke with Holly Framsted, Head of ETFs at Capital Group and Dave Nadiq, Director of Research at ETF Trends. They discussed the recent market volatility and the latest developments in actively managed ETFs. In the 'Markets 102' portion of the podcast, Bob continues the conversation with Dave Nadiq on recent market trends. 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 compelling interviews, market analysis, and we're breaking down what it all means for investors. I'm your host, Bob Fassani. Today on the show will help you make sense of the recent market volatility. Plus, we'll talk about the latest developments in actively managed ETI. As the age-old debate over active versus passive rages on, could the tide finally be turning?

We'll be talking with Holly Framsted, head of ETFs at Capital Group, along with Dave Naughtick, Director of Research at ETF Trends. Holly, Capital Group set to launch its first six ETFs tomorrow, all them actively managed, all launched down here at the New York Stock Exchange. Capital Group's relatively late-comber to the ETF space. Can you tell us why now? Yeah, thank you so much, Bob. I actually believe our time in market is just perfect. You know, we don't launch funds very often. And when we think about bringing a new ETF or a new vehicle to market,

it's really about listening to our clients and understanding if we can deliver on their expectations in the vehicles that they're asking of us. Recent regulatory change has meant that we now believe we are positioned to package capital groups, time-tested, actively managed strategies in the ETF vehicle. And so when we think about the products that we'll be listing on the New York Stock Exchange tomorrow, we'll be bringing six funds to market that really fit a majority of the major asset allocation building blocks. They're designed to sit squarely at the core of a client portfolio and ultimately simplify the investment process for countless financial advisors and end investors.

You know, when I look at these, they're very much like actively managed mutual funds that you already run, but not quite. There's a little bit of difference. There's three equity strategies that invest primarily in the U.S. You've got two equity strategies that cover international and global, and you've got a fixed income core plus strategy, but a little bit different than the mutual funds. How are they different?

And why don't you just clone them into the ETF space like some other mutual fund providers already have? Yeah, it's a really important question, I think, particularly as we've seen the ETF industry evolve. And I'll go back to the investor, because really when we think about product development, we really take an investor-first mindset. And what we heard from our clients is that they were looking for expanded choice from Capital Group.

They wanted more ways to access our time-tested strategies to access the capital system. And so we chose to launch ETFs that would complement, not clone our American funds, because in the end, we believe that that's bringing greater choice to the market. You know, Dave, in a world where many of these ETF fund groups are focused on the shiny objects, and I cover all the time, like thematic tech. Capital Group is doing something different.

They're sort of sticking to this actively managed core strategy. What's your thoughts on that? Yeah, I do think it is a differentiator here. A lot of the active management we've seen has been, as you put it, shiny objects, thematic tech, clean energy, things like that. This is really active at the core. And for a lot of advisors, this is something they're pretty comfortable with. I do, what you were saying, Bob, I think is very interesting. You know, you can go out and buy a Growth Fund of America as a mutual fund. Every financial advisor in country can do that. It's on, you know, practically half the 401K plans in the United States. However, these are different, right? There are interesting ETFs at the core. And, you know,

because they're ETFs that aren't direct clones, it means that it can take advantage of things like some of the tax loss, the tax lot management that ETFs can really benefit investors with. And it also means that they don't have to worry quite so much about liquidity issues. So I think there's a lot here for folks to grab onto. I think it's worth pointing out, too, that these are coming in pretty cheap, right? I mean, I think the weighted average expense ratio is a bit under around 40 basis points. That puts it in the bottom quintile of actively managed equity ETFs, right? 400 of the 500 active ETFs we have in the market right now that are tracking equities are over 50 basis points and fees. Yeah, you know, Hallie, what about those different fees here? So I'm looking at the fees.

You're charging here for some of these. There's six of them. 33 to 54 basis points, it looks like, for these actively managed ETFs. But these, these are you. These are all lower fees than you're charging for the mutual funds that are out there. Are you at all concerned about that competition you're setting up with your own funds here? These are cheaper, as Dave points out. Well, I think an interesting point is when we think about pricing our products in the market, we're focused on the competitive landscape. And as an organization, we have had a legacy of delivering very low-cost active management.

We strive to be in the lowest quartile among peers with every product that we bring to market. And so with these ETSs, we will be priced in the lowest quartile and some, even the lowest desile among competitors in this space. Our mutual funds and our ETS are priced actually very similarly if you look at common share classes here. So we don't believe there's a very big disparity here. And again, when I think about the ETF, it's about increasing choice for clients that prefer the vehicle.

We think there's a place for both mutual funds and ETS in our client portfolios. And you're choosing to stay in the core. active management space. I'm just intrigued because Dave and I love covering shiny objects, fanatic tech and things like that. But things like factor investing, for example, another sort of differentiator out there. But you're sort of sticking in this core space. Is that because that's where you feel your competency is or those other spaces are too trendy or maybe that'll happen in the future? I'll just give me a sense of where you're going to go with Capital Group in the ETF space. Yeah, so I think there are

a couple interesting trends for us to look at here. First, while a majority of the news that talks about ETS is focused on, you know, Dave, what you call the shiny objects, where we look at investor flows and really client demand, it is for those core solutions in a portfolio. When you pair that with the fact that Capital Group's legacy is delivering core investment services for our clients, we believe that we can package what we do best in this vehicle and actually be a differentiator. Right. These aren't intended to be shiny objects. They're intended to sit at the core of a portfolio. And at the end of the day, I think what that accomplishes is it helps financial advisors and individual investors cut through the sea of complexity and choice that's available in the ETF landscape

and really get back to basics at the heart of their asset allocation process, which is really what matters most. So, David, go ahead. I was just going to say one thing that we should point out here is that this is sort of the last of the big managers to enter the ETF space, right? I mean, they're one of the only, the only $3 trillion plus manager out there that hasn't been in the space, right? Roughly the same size as Goldman as an asset manager or J.P. Morgan, folks that have been in the space for quite a while. So that means they're coming to market with an audience, right? There are folks out there who are avid believers in the capital group process, right? That combination of individuals and teams working together. That's not a new idea. This is a 1930s idea that's just finally showing up.

up in the ETF wrapper. Yeah, and it seems, Dave, like there's a lot of different motivations for fund families to get into the ETF wrapper. And we're seeing that, you know, here today. They're not always the same. Elaborate on some of these different motivations. You think, like, the main concern would be you want to make sure that you still have people who are coming into your family overall and people are into the ETF space.

But it's not just about making sure you're maintaining market share, right? Well, I think for us it's about recognizing that we can expand the clients that we're able to service by offering our strategies in the vehicles of choice for them. I think that there are a number of existing capital group clients for whom there are taxable pools of assets where they'd appreciate the ETF as a vehicle of choice. We have heard from our investors that they would like to add to their investment with capital group via increased vehicle choice. And if we look at how we've developed and brought new services to market in the past,

we had a similar experience with separately managed accounts, where when we launched the separately managed account business, what we found is that financial advisors that invested via SMAs with us actually subsequently did more mutual fund business, because we were offering choice in how they accessed our strategies, and that made us a more relevant partner for them in their businesses. We believe ETFs will enable us to deliver the same to our existing clients, and then also, of course, expand access to clients for whom the ETF vehicle is preferred. Right. So you're known for active management. American funds are famous for that.

And these are all active management. But as we've talked about before, the bulk of the money in ETFs is still going into the passive strategy. Even now, in the first six weeks of 2022, the bulk of money is still going into passive strategies. Look into the future. Is there any consideration to getting into the index space where a lot more money Maybe it's not as profitable, but a lot more assets under management are potentially available. Yeah, so I'm actually going to reframe your statistic because I think that there's a bit of a confounding effect here. A bulk of the money in ETFs, I believe, are going to core solutions. I think investors in the ETF vehicle are really looking for those core building blocks.

A majority of those have been indexed. So certainly we've seen assets move toward index management, but I think it's a, I think it's investors speaking to where and how they want to allocate money versus the investment style. So when we think about capital groups 90-year legacy of delivering above-market returns for our clients, we really believe that active management is at the heart of who we are as an organization. And that's why our entrance into the ETF marketplace is really squarely focused on active management and not index management. Yeah. And Dave, I guess Holly's right. If she considers like an S&P fund, you know, a core fund or a core investment strategy because that's where still most of the money is going at this

point. Can you just characterize some fund flows for us in the last six or eight weeks because I'm getting that question all the time? Where is the money going? Yeah, so I mean, it has been going to that core, right? We haven't seen a dramatic shift here in the last six weeks that we saw last year. About 10% of the money is going into actively managed products. That's about what we saw last year. We're running at about something like 15 billion year-to-date into active ETFs here. So, you know, really, I think this is a stick-to-your-knitting kind of market where we've seen a lot of folks allocating in. We haven't seen really dramatic shifts in the flows picture that would make you think, for instance, that everybody's running for the hills or everybody's piling in and buying the dip. It's been pretty consistent.

That actually, to me, feels very, very healthy. Yeah, I think the important thing, Holly, is you are now firmly established in the E-TOP. ITF space in that core space. And the question here is, now that you've got that core built around you, where else can you go? Are there other, I know I've asked you this before, but are there other ambitions? You're such a big company. It seems like there's natural room for you to move and breathe a little bit more here. Now that you've got these core ETFs that are out there, are you going to simply stick to that strategy

and just manage those six right now? or you're going to do like Schwab did and others and just try to expand out from there and see what the market is like. Yeah, so the six ETFs that we'll list tomorrow are absolutely our entrance into the marketplace, but this isn't where it ends for us. If you look across the services that we are launching in this initial suite, they cover a majority of the largest asset allocation building blocks, but not all of them. All of the equity services have a roughly large and mid-cap universe to them, and we only have one fixed income offering in this initial suite.

So we anticipate, again, continuing to listen to feedback from our clients, continuing to take feedback now that we're out in market, and respond to investor needs. And so I expect that the product lineup will continue to expand, but we're going to take a very patient approach to that and ensure that we're incorporating new product development with the lens of an investor in mind and incorporating their feedback. And how do you respond to these age-old debate of active versus passive? We all know the studies. We've seen the S&CHA. STP studies that come out, the SPIVA annual reports that over long-term, most active fund managers do not outperform their benchmark, certainly over long periods of time, 10 years, 85% don't outperform. What do you tell the naysayers, you're famous for active managers, been around a long, long time doing this, what do you say to the naysayers that say, well, you know, frankly, the evidence

is just staying in an index fund is probably a better long-term strategy. How do you respond to those arguments? I think there are a lot of valid ways to invest. And Capital Group, with our fundamental bottoms up selection process and our multiple portfolio manager system has a 90-year legacy of delivering superior investment results for our clients. So I think our track record really speaks for itself. And that is why we have a loyal investor base

of $2.6 trillion of assets under management. So I think there's a place for both active and index in a portfolio, but really at its core, we believe that we can deliver actively for our clients and have a track record of doing so. Yeah, and Bob, remember, we've got 800 actively managed ETFs now, right? I mean, that ship has long since sailed. It's, you know, roughly a quarter of the industry. Yes, and we keep talking about the year of active management day, but we did that in 2018 and

2019, and we did 2020 as the year of ESG, and, you know, we're constantly re-proclaiming the year of active management here, and we're going to retire you. and I on that idea that 2025 is the year of active management. But I watch the fund flows, not the number of funds, and you do too, and you still see where the bulk of the money still goes. The debate goes on. You know, you and I have been talking about this for many years. I love active management.

I think it's very important for people to have choice, and I agree with Holly completely about this. People need choice, but you know, you and I watch what goes on here and how difficult it is to outperform the market. There's very fundamental reasons why it's difficult to outperform the market. But, Holly, I'm pleased Capital Group. As Dave said, you were in the last holdouts. That big, big, fun family getting into the ETF space.

And I want to congratulate you in Capital Group. And we look forward to having you on again in the future. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS with the market's 102 portion of the podcast. Today will be continuing the conversation with Dave Naughting. from ETF trends. Dave, thanks for sticking around and chatting a little bit more. I wanted to talk about recent trends

and what's going on with the markets. Obviously, it's been fairly volatile in the last several weeks. Does anything stick out to you in particular? For example, I've seen an awful lot of trading in commodity ETFs, not just equity commodity ETFs like the XLE, but some of the more active commodity ETFs in general, like

U.S.O and some of the broad agricultural commodity ETS like DBA as well. Any thoughts on this? This seems to be a lot of obviously speculative activity around how far you can push oil stocks and how far you can push commodity stocks like wheat, for example. Yeah, I think we're seeing a lot of activity, as you point out, speculative activity in the inflation sensitive sectors, right? We're seeing that not just in things like U.S.O, obviously, which are really obvious vehicles. But KRBN is one that I've been spending a lot of time. The crane shares carbon credit ETF.

I've been spending a lot of energy focused on that because I think that's one of the more interesting transition pieces. So I think we've got a little combo platter here of traders really trying to play the headlines with ETFs, which is a tale as old as time. They're going to do that. We can't stop them. They're great for that if you're really into that game.

But we've also got these folks looking for longer-term allocations to live in a world where we have, dollar oil to live in another couple years where we have this kind of deal of political unrest. So we are seeing a lot more interest in those types of plays. But you know, you bring up the inflation stuff. We've just seen a raft of these inflation fighter ETFs launch. They seem to be getting a decent amount of traction. You know, our friend John Davy from Astoria launched his a little while ago. So I think that's a really interesting trend. I'm not sure how well those are going to do overall because obviously targeting inflation is a little tricky if it was easy.

everybody been doing it, be doing it? So I think for most people, commodities are going to be the key play. Yeah, it makes some sense. And it was very interesting yesterday, watched the XLE, which is the energy stocks ETF. It's the energy stocks in the S&P. It's been up 30% in six weeks, opened up big, multi-year high, and then dropped 7%. Now, when you see the entire energy complex move 7% in a single day after going up 30%. That's a sign of, to me, confusion. That's a sign where traders are not sure if they can push this stuff up much further than that. And some are obviously taking profits.

So this is where it's really fun to watch the ETF space, because you can watch in real time how actively speculative traders are making bets. And when you see something move 30% in six weeks and then it moves 7% opening and then bottom down in a single day. I mean, that is a sign of, you know, traders not sure what's going on, not sure how they can push it. My point is,

ETFs are instructive to watch. Absolutely, right? They're the best sentiment indicator we have of, you know, the moment-to-moment vagaries of investors that exist, right? The challenge is always that in that pool of trading that we're watching include hedge funds and mom and pop, you know, Robin Hood,

individual traders and advisors. managing multi-billion-dollar books of business, all of whom have very different objectives, right? So that's the thing I always try to remind folks of when we have these moments of crisis like this, where we're in the middle of a downturn, when you're looking at the tape and you're seeing all this movement, remember that every investor class in the world is playing in these ETFs at the same time. Yeah. Yeah. Well, yes, they're not, these are speculative trades. And what's also interesting you can see is sudden explosion in trading activity in very obscure countries.

ETFs. So the last couple of days, Turkey, Russia, Taiwan, ETAF has been extremely active as well. So again, you can read the minds of the speculative trading community and see exactly what they're doing here just by following, you know, the volume trends. Yeah, to some extent, there's a little bit of a greater fool question there, right? I mean, I saw that what was going on in Taiwan, right? That's a bit of a, well, is Taiwan the next Ukraine trade? I think a lot of what we saw as people trying to position ahead of something there rather than actually making an economic bet on something that's going on. Turkey, obviously, same type of issue as well. I think anything associated with Eastern Europe is going to be catching those sort of speculative moments

here and there, because obviously we don't know how seriously to take Putin at his word that he's trying to effectively reunite the USSR. Yeah. Let me move on and ask you about ESG, environmental, social and governance. Our favorite topic of 2020 and a good part of 2021, it seems like the inflows, which were titanic in 2020 and a good part of 2021, have slowed dramatically. Does this mean anything? Does this mean that the bloom is off the rows of this? Or is it just a sign of the volatility recently? Is there anything to read into this? I think it's way too much to overread into the flows, honestly, even for a week or two, I think it's too much to read. The performance has come off a little bit in this year so far. If you look at, say, SUSL, which is the I-Share's leaders,

ETF, or DSI, which is the sort of older version of that, they're both trailing the S&P so far year to date. I'd point out, if you look at them on a reasonable time frame, like, say, the last year, they're still beating the S&P 500. So the idea that somehow there's a performance thing that's falling off. I don't really buy. In terms of flows, I think a lot of the flows we saw in the fourth quarter was, frankly, advisors positioning portfolio so they could talk about their ESG allocations and their annual reviews. And obviously, that's done, right? So, you know, historically, February is not a big time when a lot of people do a big reallocation. So I wouldn't be shocked about this. If we close in towards, say, mid-April and we're seeing negative flows in ESG, then I think we

have another conversation. Yeah. Well, they're down, they're underperforming because they all own large-cap techs. They all own Microsoft and Apple and many of them don't own energy and miss some of that run. Yeah. I mean, it's all, essentially, they're quality funds. That's what's amazing to me. To me, quality is high earnings, high margins, low debt and comparatively low debt. This is part of the problem I have with them. It's trying to nail down a little bit more clearly about what ESG exactly means. Well, you'll never get there. You'll never get there, Bob.

People are going to try to define ESG until we're long since retired, and it's going to mean something different to every person you ask. That's just the nature of what ESG is. I know it's early. Is there anything else sticking out to you? I mean, it's hard to pick a trend here,

given the volatility that we're seeing because the Ukraine crisis, I think, is distorting a lot of flows here. But is there anything that you can see for 2022 that is on the horizon that's interesting at this point. Well, I would point out that, you know, in the midst of this sort of drawdown that we've had here, I think a lot of people were like, oh, this is when everybody's going to sell everything and go to cash, right?

As soon as we have some crisis that chases the equity market away, what we've actually seen is the opposite. Like last week, we had 10 billion in flows into ETFs. Now, that was a fairly risk-off week in the sense that we actually, you know, got big flows in the things like Vanguard's Corporate Bond Fund and BNDX and some of those classic, you know, safety plays, but the money is still flowing net into ETFs, right? And I think we're going to continue to see that. If this goes down another 10 percent, I think that will even accelerate. Because, Bob, as we've seen before, all that happens is people sell their underperforming mutual funds, and then they reallocate whether that's in a safety moment or in a go-go growth moment. They reallocate into the ETFs, right? So it's just going to keep happening.

So that's an interesting observation, though. Your point is it's almost like ETFs, win no matter what. The market goes up. You get natural inflows into the market goes down. People sell their mutual funds and buying into ETFs. You're sort of positioning it as a win-win for ETFs no matter what happens. It is. Look at what happened in March. Look what happened in the global financial crisis. Look what happened in 2001. In each case, we have a big sell-off. And what happens, all that money shows up into ETFs. So I don't see any reason to think that this time will be different. Okay. Dave, I'm going to leave it there. I appreciate, as always, your insight into everything. And, of course, Dave Nodick with ETF trends and about to be sharing a very large ETF conference in April, which we'll talk more about in the coming weeks.

And, of course, I'll be there as well. Dave Nodick, as always, thanks for joining us. Thanks for having me. And everybody, thank you for watching and listening on the ETF Edge podcast. InvescoQQQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQ, Invesco Distributors, Inc.