ETF Edge - Pausing for Yield Signs

Episode Date: January 19, 2022

ETFs mentioned:OUSA - O'shares US quality dividend ETFIWM - ishares Russel 2kIUSM - ishares USD treasuryOEUR - O'Shares Europe Quality dividend ETFEZU - ishares eurozoneNETL - Netlease corporate real estateXLRE - Real estate select sector SPDR Fund---------------------------------------------Bond alternatives (not mentioned, shown on screen) HYLB - Xtrackers USD High Yld Corporate BdSRLN - SPDR Blackstone Senior Loan ETFCWB - Bloomberg convertible securities ETFPGX - Invesco Preferred ETFXYLD - Global X S&P 500 Covered Call ETF 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 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 and all things, exchange, traded funds, you're in the right place. Every week, we're bringing you interviews, market analysis, and breaking down what it means for investors. I'm your host, Bob Pisani. With earnings season upon us once more, consumer giants are raising prices, banks, are bemoaning higher wages as commodity costs surge, Hidered monetary policy just around the corner. It's a mess. Today on the show will delve deeper into some manner of method for tackling inflation, everything from convertibles to high yield ETFs to bank loans and beyond. We'll also get Mr. Wonderful's take on all the market mayhem and what it might bring in 2022. Here's my conversation with Kevin O'Leary, the chairman of O'Shares,

along with Scott Ladner, CIO of Horizon Investments, and Alexei Paniotocopoulos, he's the CIO of fundamental income. Kevin, good to see you again with inflation, such a big issue. Tell us how you're positioned and what should investors be considering to address inflation. Well, people don't remember inflation, but where you want to be in equities, particularly when rates start taking up is in companies that have pricing power. In other words, their goods and services are necessities for people, so they're willing to take a small increase in price, sometimes a larger one as rates go up. And so companies that don't have pricing power end up getting their margin squeeze. So right now,

health care looks really good. And also consumer cyclicals look very good. Things that people need in times of inflation, what they eat, what they drive. And so that's why you're seeing energy prices going up at the same time energy stocks going up because people have to buy energy to move around. What gets hurt are things like high PE speculative stocks and some technologies where all of a sudden you don't have such an accommodative environment where the Fed is being very easy on everybody, and as interest rates go up, PEs go down, price is correct on equities. But even as rates go up, equities are the place to be because fixed income gets hurt a lot more. Yeah, you know, I see Euro shares quality dividend ETF is trading about in line with the markets.

You know, you've got Procter & Gamble in here, Johnson and Johnson, you've got Microsoft, you've got Home Depot, Verizon among your biggest holdings. These are all high quality, high dividend yield. But is that a good inflation? fighting strategy for right now? Yes, because most of them have products and services that people need. That's OUSA. It's basically a subset of the S&P 500. It looks for the highest quality balance sheets.

Companies that are generating cash, companies at high return on assets that do distribution. So if you start thinking about what you want to own for the rest of this year, you want a subset of the S&P 500. Just owning the index could be very risky because lower quality balance sheets like the airlines right now may not perform as well as rates go up. because that means their debt servicing goes up as well. You think United Airlines started with $7 billion pre-pandemic.

It's over $20 billion in debt now. Not a name I want to own coming out of this. I'd rather own the higher quality names. And the whole idea of OUSA is to temper volatility, looking for names that do better in drawdowns. So we're having volatility now all of a sudden because people are trying to guess how many hikes there's going to be by the Fed. Is it two? Is it three? Is it four? Is it more?

Nobody knows. And as a result, you're starting to see Vol. And in names like OUSA, those big, large-cap, high-quality cash distribution names, as I like to say, cash flow, that's where you want to go, where there's the cash flow. And that's what OUSA has. You know, by the way, Kevin, love the backdrop. Wish I was there wherever you are. Scott, you use ETFs extensively in your portfolios. With bond prices dropping, you've been talking about alternatives, like senior bank loans, for example, convert.

prefertables, preferred, even potentially high yield. These are bond-like instruments. So what are the advantages of these particular instruments right now over just, say, owning bonds or a bond fund? Well, look, I mean, investment-grade bonds right now, I think Kevin probably agree with me, it's dead money. And so to the extent that you can get out of that, any way you can get out of that, is probably a pretty good idea. And we generally agree with Kevin. I think equities is the place to be. However, if we are stuck, like if we do need to get some sort of bond allocation into a model, because there's constraints or there's, you know, there's security selection types of things we have to take care of, then, you know, Bob, the things you were mentioning work pretty well.

You know, preferreds, converts, bank loans, high yield, you know, all of these types of securities can help, at least give you a chance. The catch-lo is you've got to risk manage it and somehow because all of those securities were down, you know, all of those asset classes were down 20 to 30 percent in March of 2020. So not exactly the kind of return profile that you'd want out of a bond portfolio, but at least they give you a chance if you're stuck having to do something inside of bonds. We do agree equity is probably the better place to be. Yeah, but they turned around fairly quickly. And Kevin, I wonder what you're thinking about these alternative instruments.

We always bring out senior bank loan ETFs for example, short term. You know, the rates rise fairly quickly because they're fairly short-term instruments. Is that an alternative here to simply owning? a bond portfolio? It is an alternative if you're forced to the fixed income. I mean, I'm in a mandate where I have to have a minimum of 30% fixed income, and that's what I've done. I've taken it down to 30%, 70% equities. But I'm looking for shorter duration, triple B and above, in my case. It's pretty miserable returns. However, you know, it is risk management. It's sort of how long and at what quality. And there's a lot of volatility now in fixed income. We just haven't

had a market like this in a long, long time. My guess is that that portfolio will probably underperform equities. I'm looking for 8% earnings growth in 2022 plus 1% dividend yield for a 9% total return on my equities, even in times when the Fed is raising rates, as most of the companies I own and OUSA have pricing power. I do not think I will make 9% in my fixed income portfolio. I'll be happy to make 3.5. I'd be happy not to lose money. This is an extraordinary. time, fixed income, which worked for 32 years, is not working anymore. You know, that's a very good point that Kevin's brought up, Scott. You've also said, I've heard you say this, that 80-20 stocks-to-bond portfolio is now the new 60-40, that nobody

should be doing 60-40 stocks-to-bonds. 80-20, and you can hedge protection. Can you explain why 80-20 is the new 60-40? I know you've also been talking about other kinds of things, hedged equity instead of bonds for diversification, like low volatility ETFs or covered calls or collared strategies, what might they be able to offer as well? But just explain why 80-20 is the new 60-40. It seems you agree with Kevin here. Yeah, absolutely. I mean, look, we generally think Kevin's got it right. I mean, you want to be in equities as much as you can, but there are going to be constraints sometimes on how much equity you can put into a portfolio. So if you are under some of those constraints. One thing you can do is you can say, listen, if 6040 is sort of the

standard portfolio, and I just note going in, the 40% of my money is dead. Like it's going to get, you know, like Kevin said, you're talking about, lucky to get 3% return, probably lucky to break even this year over the next couple of years. I'm lucky to break even. And so I just want to minimize my allocation to that dead money. But I need to get the same time of a current return profile, the same kind of risk characteristics as a traditional 6040. One way to do that is to say, listen, we're going to cut our passive fixing income allocation at half, and we're going to replace the equity allocation with some hedged equity types of securities. So, you know, Kevin mentioned, the USA, and those are lower volatility types of securities. You know, there are other explicit

sort of low-ball types of ETFs like HSV or USMV. These are explicitly low-ball ETFs. There's other ways you can use derivatives inside of some of these UTS to get some of these return profiles that are a little more consistent with a balanced portfolio. So something like XYLD, which is a covered call ETF, or H.EQT, which utilizes collars. These are different ways to skin this risk management cat and just get us out of this box of having to invest 40% of our money in something which we know is probably not going to do very well for us and for our clients for the next three to five years. Yeah, low volatility is an interesting strategy. I mean, to me, it says things like consumer staples. It says Procter and Gamble. It says,

for example. If Kevin is right, then we're in for a higher volatility environment. Lower volatility might make sense as a balance, Kevin, at all. Does low vol make any sense what he's talking about? Yeah, it does. Because remember, a lot of mandates where specialized ETFs like we're talking about are being used are in trust mandates or pension mandates or sovereign mandates where they mark to market every day, the AUM, the assets under management.

And so volatility is not their friend. They don't want huge swings in portfolios like that when an endowment fund is trying to distribute 6% a year. And so for the period in the last three years, last 36 months, volatility was extremely low. And more risk assets were put on even to the most conservative mandates within sovereign or pension. Today, I think we're going to see a switch back to lower vol. I think it'll become very favorable to be in higher quality names. So as you interpret lower vol, the reason a procter and gamble doesn't have a 10% swing in its price in a day is it's been a steady eddy for 40 years.

And so people buy their stuff and use it to live. And they just recently talked about how they've had pricing power in the first inkling of inflation here. And those are the kind of names where you can hide in the weeds. You know, for me, the low vol mandate has moved up to 40% of the, the holdings in our operating company, and I feel very safe being there. We've trimmed a little bit in where there's a lot of risk and volatility, because at the end of the day, when you're marked to marking in a pension or institutional fund, it's what it's worth at 401 in the afternoon. And so you're going to see managers move towards these strategies of preservation of capital for

the back end of this year. And getting 23% out of the S&P this year, I think, is impossible. Be happy with eight or nine. Yeah. That's very interesting mentioned, 8% earnings growth, 1%. That's close to the historic norm. With the dividend, the S&P is historically yielded 8 to 10% a year. And yet, guys, we haven't had that recently. The S&P has averaged 15% return a year since 2009. That's rather remarkable. If you figure 10% is the typical, is the norm. If you believe in mean reversion, it would certainly argue for what Kevin. Evan is saying there, Scott, are we entering a period of maybe not negative returns, but at least subpar returns to sort of get back to that mean reversion? Eight or nine percent return would certainly make a lot of sense after 15 percent average in the last 12 or 13 years. Certainly, Bob, look, we could get that, but averages can be pretty misleading. The period of which we're averaging is going to tell us a lot about kind of the study that we're going to go under.

but really, you know, like at the end of the day, gains are a great risk management tool. So if we can get exposure to gains, if we can get gains in our portfolios when they're able to be gotten, that ends up being a pretty good risk management tool and pretty good wealth building tool. And then when we need to play defense,

let's play some defense. Like Kevin said, and like we're all thinking, look, the Fed's embarking on tightening cycle is probably not going to be a 23% type of return year. Like we agree with that. But if we can get 7, 8, 9% out of a, you know, out of a hedged equity portfolio, that's going to be pretty good

and a heck of a lot better than we can do with bonds. Yeah, Kevin, any thoughts on allocation in terms of size, large cap, small cap, midcap? Everyone was piling into small cap value at the end of the year last year, and it seems to have outperformed everything else. And it did all right last year, small cap value, but it's been a long, long time since that was a market leader here. Any thoughts on size investing? Yeah, if you're going to a theme now of capital preservation protecting AUM, the Russell 2000, the raw Russell 2000, which about two-thirds of the names in there have no return on assets or virtually nothing, and a lot of them are profitable or provide distributions in the form of dividends.

But there is a way to mine the Russell 2000. There's about a third of the names that do actually, they're more a larger cap. They're more of the $4 to $5 billion cap. You're going to find them in an index like OUSM, which mines for yield distributions and that little extra growth you're going to get in a small cap name, but avoids companies that are unprofitable or have no return on assets. So it's a more conservative, lower-evolve version of the S&P, or at least the Russell 2000. And the other zip code that most people have avoided of late, but shouldn't because it's starting to outperform and it's at lower P-E ratios is Europe.

Europe has 50 names. You'll find them in Switzerland, in the Eurozone and in England, that are household names in America, Roche and Nestle, names like that. They're in the 50, and you'll find that index in O-E-U-R. And at the same time, why not own those names at a slightly lower P.E. in most cases than their counterparts here? And there's a lot of recovery stimulus still going on in Europe. So I'm anticipating it might do as well or better than its counterparts in the U.S. this year. So I do 40% in something like OUSA, 30% in Europe, and the rest in small cap. And I think that might do very, very well in OUSM.

It's boring, but these days I like boring. Boring is good. You're right. Well, there's a mean reversion trade. Europe has underperformed the United States for years now. Small cap has underperformed big cap. Kevin seems to be talking about a mean reversion trade. Look, we like mean reversions trade in general. This one might be a little bit more challenging for us, though.

quite simply Europe and small caps are geared towards expanding economies. When the economy is expanding, when it's growing, and when that rate of change is growing, those types of securities tend to do fairly well, especially Europe. Right now, like, we think we're probably entering a phase where growth is going to be slowing globally. Not only do we have an EM tightening cycle that's already a year old. We have China not really stepping on the gas in terms of policy. We've got the Fed and other developed markets starting to tighten policy. So, you know, overall, we think it's going to be an okay year.

I mean, look, consumers end up, and corporations are flush. So they're pretty good. Like, we're not worried about a recession in the United States in any stretch to the imagination. But we think it's probably going to be a slower growth year. And slower growth years tend to be a little bit more challenging for things like Europe and small caps. Yeah.

I want to get another perspective. So let's get one on inflation and ETS. Joining us now is Alexei Paniata Coppolis. He's a partner and chief investment officer in fundamental income. He runs the net lease corporate real estate ETF. This is a real estate investment vehicle that throws off a 4% yield. Now, Alexei, explain to us how this ETF works and why a triple net lease, first of, what a triple net lease is, and why that's an advantage in an inflationary environment. Well, look, I mean, frankly, we started this ETF because everything that, you know, Bob, Kevin and Scott are mentioning.

This is a boring vanilla strategy that has performed for many years. You look at some of our top holdings like Realty Income and WB Carey, which have been around since the 90s and have averaged 12 to 15 percent annualized returns and dividend growth of 4 to 5 percent in a market that's sideways with interest rates sub 2 percent and not many places to hide, you know, preferred yielding mid-fors, mid-frees. We wanted to create an index that was total return focused. And frankly, something that most people own in their portfolio already, all 25 of these names and the index that we've created with NASDA, exist in the VNQ. However, we've highlighted 25 names that all do the same thing. All these companies own single-tenant, freestanding real estate. And it's really the real estate of America.

It's all around us. It's the gyms that we go to, the convenience stores, the pharmacies, the grocery stores, things people need. But we call this the gold rush theory. You know, in the old days, everyone rush to pick gold. But the people that are still standing today are the John Deers, the people providing the equipment to generate revenue in EBITDA. So all 25 of these companies focus on triple net leases where the tenant actually pays property taxes, property insurance, and property maintenance.

And so going into the investment, the underlying REIT already knows what their return is going to be. And they're not subject to inflationary pressure like rising labor costs. We don't look at corporate profits because, frankly, rent is senior to an EBITDA calculation. So I think to explain this simply, just somewhat where you said, the fact that the tenant pays taxes, fees, and maintenance costs sort of insulates you from inflation here. Because if there's an inflation here in certain things, the tenant's going to essentially pay that. So you get a sort of bond-like income with an equity upside, right? That's right. I mean, at the end of the day, these are 25 equity companies. They're all NYC and NASDAQ traded. And, you know, when you think about a triple net lease, they're not only long.

long-term leases with an average of 12 years, but they also have built-in rent escalators of roughly 2%. Kevin mentioned earlier trying to target fundamental investments that have 8 to 9% returns. And frankly, if you look at underlying holdings of these 25 companies, these reeds are able to buy household names like Home Depot properties and Amazon properties in 7-11 for cap rates somewhere between 4 and 7% with somewhere between 1% and 2% of annualized growth, which compounds over time. And so, frankly, these REITs are benefiting from lower interest rates because you're not really investing in a $10 billion portfolio today. It's almost like a laddered corporate bond portfolio where you've been buying into this over time with various interest rate environments. And they're going to rise when inflation rises.

Now, I'm looking at your largest holdings here, national retail properties, WP Carey, Realty Income, Stag Industrial, Store Capital. These are all, you characterize them as mission critical assets, essentially. They own industrial spaces, they own warehouses, they own distribution centers, freestanding real estate, essentially, that's very important to the operations of these various companies, right? That's right. And really, that's what you're investing in. This is akin to corporate credit and more detailed and nuanced its contract risk. What is most important to an underlying company as dividends dwindle? And that is their real estate because we focus on, and these REITs focus on real estate that is imperative to a company's ability to generate revenue in EBITDA.

Amazon can't generate revenue without a distribution center. Starbucks can't sell a cup of coffee without a drive-through. And you go through, a lot of these are insulated from e-commerce. And frankly, e-commerce, long behold, actually requires more real estate than a lot of traditional brick-and-mortar retail. Yeah, it's a good point here. Kevin, your thoughts on REITs? This sounds like a very interesting idea here. Essentially, you're going to pass on any inflation cost to the tenant at this point. Four percent yield seems pretty good. Is there

something wrong with the picture here, or is there another way to look at this? No, I think there is a change of use, though. I'll give you an example. In a lot of my private companies where I sell goods and services, bed bath and beyond close 200 stores, very desirable locations. We didn't lose any sales because they basically went direct to consumer in those suburbs. But those buildings themselves are going to get converted into climate control, pick and pack storage for anybody that wants to deliver within four hours to the people in these dense areas and rural areas as well. So what is occurring in that process, and I'm looking at these deals myself, is maybe the cap rate pre, the closing of the store, was five and a half,

maybe 6%, it might gap up to maybe 6.5%, 7% during the CAPEX required to convert it into a climate control storage pick and back robotic facility, but it'll go right back down to a four and a half cap. So there's a little volatility in real estate pricing during this conversion period. Same as going to happen with movie theaters. There's some other use cases that will change. You know, 1,200 square foot strip malls may get some change there. And I'm trying to figure that out because, real estate's always been a big holding for me around 31% of our operating company's portfolio,

but we have definitely trimmed back on office, AAA office even, and have started to be more strategic in where we reinvest it, and we're looking cloud kitchens, for example, things like that. So real estate's here forever. I definitely agree with that statement, but the way it's being used is changed as a result of consumer purchase behavior changes. What about that, Alexi? Are there use changes that you're dealing with, or it's the fact that, as you described them, these are mission critical, sort of insulate them from use changes?

No, Kevin's absolutely right. There's definitely going to be some volatility. You know, if you look at data, public traded real estate has outperformed privately traded real estate, probably 15 of 17 years. And the key here is not only do you get the current return, but you also own the asset. So in the event that Bedbath and Beyond does close stores, like Kevin mentioned, they were repurposed. They were repurposed into longer term leases with secondary use, unlike corporate credit where, you know, if you own a high-yield bond and Bedbath and Beyond goes away, your best case is your recovery, which historically has been less than 50% to bondholders. And so in this scenario, your recoveries can push 70, 80%, but your cash flow stream is still consistent. So in a period of volatility where you might see mid-cap value trading with dividends around 1, 2%, there's going to be volatility in mid-cap value. In our eyes and in our own portfolios, this is a mid-cap value exposure. This is not just traditional real estate.

And that's why we launched this with NASDAQ. It's the first and only of its kind. It shines a spotlight on a new way of investing. Investing in fixed income of old, like Kevin and Scott both have addressed, is gone. But in an 80-20 portfolio, you do need some current income. And in this fact, income and growth can offset your duration. And this is a new way to invest in fixed income. Scott, is this a reasonable alternative to owning bonds?

It seems 4% is pretty good. What attracts me is this mission-critical idea. It doesn't seem like a lot of places are going to close or have a use change that are mission critical. Sure, no, it's a very valid use, a very valid capital allocation for people. I would just kind of use the same sort of warning as with things like high yield and converts and preferreds and loans. Look, this should not be tourist money. These are specialized in niche asset classes. And with the 4% yield, is it going to come a similar kind of risk?

There is no free kind of lunch out there. And so I would just say, listen, if we're going to be building these portfolios of these kind of higher yielding types of instruments, let's not fool ourselves in thinking that yield is going to be there all the time. It's going to be a completely smooth ride. These things can have very sharp drawdowns. And so they have a very strong use case, but they need to be risk managed and need to be actively risk managed. Yeah. And, Alexi, just one final point here. Reitz were a big market leader last year, one of the big sectors. They're laggard this year. Is there a particular reason for that? Yeah, I mean, there tends to be, you know, fund flow issues and in a reaction to rising interest rates. But again, this is like a latter corporate bond portfolio. You're not buying, you know, $200 billion of bonds in a low rate environment and then subject to rising rates. At the end of the day, these reits were built over the last 20 years. And, you know, over time, your income factor and your growth are going to push down duration and you're going to grow out of this.

Because when inflation occurs, cap rates also move. And these companies are also beneficiaries with very fixed costs. cost models. And so as cap rates jump from five or six back to seven or eight, where they have been historically, they're going to capture additional yield. And one thing that's really important about these sector specific REITs is they have dividend payout ratios of about 80%. And so the dividend yield on these is not a yield trap. These are fundamentally built to reinvest cash flows. And by reinvesting, you're growing out of potential credit losses or inflationary pressures of the past. And so that yield is really generational from the reinvestment.

Yeah, that is one of the characteristics of REITs. They do need to pay out a very large percentage of that cash flow. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the E-Markets 102 portion of the podcast. Today we'll be continuing our conversation with Kevin O'Leary from O'Shares. Kevin, thanks for sticking around and continuing to talk with us. I didn't get a chance to talk to you about one of your other ETFs that are out there, the global internet giants, OGIG. And this has got, not surprisingly, all the big Internet names in it.

It's got Alphabet, but also Microsoft, Amazon, Meta, a couple of the Chinese names like Tencent. It's been hit pretty hard recently, I think, down about 25% from the recent highs. Tell me a little bit about Big Cap Tech and particularly Big Cap Chinese Tech for 2022. So the use case for tech is the way you have to value it. You know you're going to have volatility, you always do. And I always go back when I talk to investors about the, you know, the tolerance for volatility is go back. I've owned Amazon for 17 years. And it's a great case study of what you have to go through to achieve the long-term goal that you want in tech. Amazon has had 30 to 50 percent corrections almost annually for 17 years. It was painful. But look where you've remed it up. And so tech companies tend to be valued a little differently than traditional.

low-growth companies. You think a consumer staple and you're happy to see them generate, you know, a total return of 9% because they're generating 8% increase in free cash flow each year. That's great and it's stable and, of course, you should own some. But when it comes to growth, the metric is more around sales and revenue growth on a consistent quarter-over-quarter basis. Now, assuming you've got a good balance sheet and you're not speculative, in other words, your company making money, but you're growing the top line at 20, 30, 40%, like, some of the Chinese and American and European Internet giants. And the reason that's happening, particularly through the pandemic, is that you've had a change in

consumer behavior that's permanent. More people are buying more goods and services online than ever, and that trend is never going away. And so these are the companies that benefit from it and the infrastructure companies that provide that are also inside the OGIG index. But there's volatility. There's no question about it. So I use it as a tool to expose myself to growth.

I have about a 20% waiting in it, knowing that I'm going to get Amazon, and I like to say, you're going to get some volatility. But the underlying fundamental growth of these companies on a quarter over quarter, you only have to wait 90 days to watch it, is intact. Nothing's changed about the use case, including the Chinese names. You know, it's Charlie Munger just bought a whole ton of Alibaba. And people don't like China for a migrative reasons. but, you know, I'm sort of a monger follower because he's a cash flow guy. And he looks at it and says, look, the Chinese have different rules, not rules we like, but I'm going to own it, and I'm in the same boat.

Yeah, this whole debate with China last year really through the ETF community for a loop because people were simply investing on the basis of market cap, global market cap. You know, if China's 20% of global market cap, we need to have China stocks. And then all of a sudden, suddenly everyone woke up to the significant regulatory risk, perhaps country risk, and said, wait a minute, do we need to change our risk-adjusted expectations at this point and demand higher returns? Is that reasonable, though, to say, yes, we might still invest in China, but there are higher risks associated, in this case, political risk or regulatory risk than was anticipated. Isn't that reasonable, though, at this point? It is reasonable, but the question you have to ask yourself and as investor over the next 36 months or five years is, China is the fastest growing economy on Earth, and it's going to become the largest economy on Earth.

And nothing that we do or say or concern ourselves with is going to change that. And so to the extent that you're an investor that wants diversification, should you not have some allocation to this jurisdiction, this geography, it's not an emerging market. That market has emerged. It's a competitor to the United States. They're competing with us in every sector of the economy, including technology and everything else. And so the hedge your bets, and this is a controversial position, you see lots of managers that often come on, you know, CNBC and talk about China, and they just get blasted on the Twitter sphere about supporting this economy that competes with us.

Well, they're doing it because they're good managers' diversification, good manager of risk management. And I'm the same. I have an allocation to China, too thick and thin. I don't like their policies. I don't like a country that tells me how much video I can watch or anything like that. But I respect the fact that it's growing, and I want a piece of that. The whole world can't be like us. It's not going to be.

We can't make them be like us. So you've got to be pragmatic in your investment approach. Yeah, nobody ever, I happen to agree with that. I don't know how this became such a political issue. It was possible to invest in Russia for, you know, there's Russian ETFs, around for a long time. And I don't know anybody who's screaming about, you know, investing in Russia or authoritarian, other authoritarian regimes around the world. So I, my concern here is I think the political risk, the country risk is much higher than people anticipated. And, and that's why the

expectations need to be reset. It's based on a valuation question. Well, it's happened. So you're buying in now, it's not, it's done what you said. It's corrected. But the growth metrics haven't changed. Alibaba's prospects haven't changed. Tencent's prospects haven't changed. People are people. They use the goods and services. Just because they're Chinese doesn't mean they're bad people. And if you're an investor, you probably want some exposure to it. But again, you've got to tolerate volatility. You're going to get Amazon on Chinese names. Yeah. Let me move on to Bitcoin and crypto for 2022. You've recently visited the Middle East. I saw some comments you made that were very interesting about the potential for owning Bitcoin mining operators. What's the interest here

and how do you fit that into your portfolio? Well, as an index-arized service, these are the kind of funds that I service. So when I go to the Middle East and talk to the world's largest sovereign funds, I do it for a reason. I want to know what their opinion is should I want to invest in Bitcoin mining. Because what's happened over the last few years is, you know, people have a a decision to make regarding cryptocurrencies, particularly Bitcoin, and say, look, am I going to invest in it or not? And if I am going to invest in it, I've made that binary turn in the road, what allocation, how can I own it? So what I've learned, and I find this very interesting, because I spend a fair amount of time over there, is that the majority of the funds there

have not yet decided to allocate 1 to 3% to Bitcoin, although they're very interested. And what's stopping them is their ESG committees. And so a lot of these funds, now have moral committees and ESG committees. There's no different than the Larry Fink letter that gets blasted out of the black rock regarding hydrocarbons and investing in, you know, traditional energy companies. And so their problem is how can I own a Bitcoin that was mined ethically and with zero carbon emissions? So that's your mandate.

And so I'm interested in, you know, in getting involved in mining a coin that I can know with certainty is 100% ethically mine. because China got a lot of trouble with this Bitcoin mining and burning colds create electricity to make these Bitcoins in the first generation of coins that were made. So the way you can get to a place where you can say this Bitcoin was mined without any carbon emissions is hydroelectric. Surplus hydroelectricity in the Nordic countries, in the northern part of Canada in certain jurisdictions. So what I've decided to do, and I've actually started this now, I am building. a mine in Norway right now with participation of the community, the village itself, the government itself. They have a tremendous amount of overage of hydroelectricity. And what we're doing is building

compliant mining operations that actually employ some of the people there. And the heat that comes off the stacks is driven to hydroponic growing labs where we're making in this Nordic climate all kinds of vegetables with that excess heat, and we never draw any electricity that is an overage for what we need. And we're getting electrical prices between 2.1 cents and 4 cents, so it's very constructive that way. But we're in cooperation with the government. Now, here's where it gets interesting. When you create a Bitcoin, this is a little technical. There's two types of awards. There's the actual network award and the hash awards. It doesn't matter. One of them is actually awarded from countries that are not.

compliant because it's part of the pool. We have found a way to remove that 99% of that from that coin. So we're mining virgin coin that's totally compliant, keeping on the balance sheet, and the institutional investors now own that equity, which will trade in proxy with the same volatility as Bitcoin. So if you think Bitcoin's going up for the next five to 10 years, you can own the equity of that company. All the coin it mines remains remains on the balance sheet, and what we call the flag is removed. I finally figured this out. It took me a long time. This is how I can own coin without any of my clients criticizing me for not supporting ESG mandates. Finally got it nailed. Yeah. You think so you think ESG is a significant headwind for, for Bitcoin going forward?

Unbelievable. You know, it's last year at Bitcoin 2021, I made those comments. The hate mail never, stopped. But then Elon Musk came out and said, Elon Musk came out and said, look, I'm not accepting it because of ESG concerns. Then all of a sudden, major institutions, New York, the pension fence, and everything else said, we're not going to buy coin that isn't ESG compliant. Now it really matters. I'm not saying I'm the only guy that noticed it. But when you're in the financial services market already, you're always talking to your clients. You never want to go outside what they're doing. You never want to service them with a product that doesn't

pass their ESG mandates. And these ESG mandates have from Larry Fink on down have found their ways of most pension plans in America. There's so much, you know that very well, the pressure on these fund managers. And this is where Bitcoin now sits. I think I found a solution. I think I have a new model for mining Bitcoin. I think the institutions will vote on my model. We'll see what happens. I'm going to present it at Bitcoin 2020. I'm one of many people trying to solve this problem. Lastly, just on the future of Bitcoin, people keep asking me about what will happen if the United States finally gets a real tethered coin, where we could have a U.S. dollar tethered to a, to the blockchain, essentially. Will that dramatically reduce demand for

Bitcoin? Because a lot of people seem to feel it's coming, a real tethered dollar. No, it won't. The tethered dollar exists in a form right now. now, USDC, a product issued by Circle, I'm an investor there, and I use the Circle USC as a proxy for trying to get protection against inflation, because right now you can stake or lend your USDC for 4.5 to 6.5%, which is better than 20 base points for cash, but there is risk because the regulator has not ruled on it. My guess, and I'm speculating personally now, although I know the management circle, I've been working with them for a while now, if they have to turn that thing into a bank, they'll do it. If they have to be FDIC right,

they'll do it because I think it's going to be the innovators that are going to create these proxies to the dollar. If they have to back it with the dollar, they'll back it with the dollar, whatever it's going to take. So it may not require the government to do it. We may have banks create these digital currencies like USC, which is used globally. You know, a year ago, there was only about $2 billion of it under circulation. It's now past $30 billion. So the demand's insatiable. It's considered one of the stable coins.

They're trying to be as compliant as they can be. But I'll tell you, we need the regulator to rule. We all want that. Everybody in this space wants the regulator to rule because the U.S. will set policy for the globe. Yeah, I just wish it would happen. I don't see the Congress getting it together. Gary Gensler at the SEC has all but begged them to do something comprehensive so that he has clear regulatory control over things like the exchanges.

This is why he's not approving a pure play Bitcoin ETF. and I don't blame him. I wish it was going to happen. I'm on your side on that, but I don't see Congress getting it together. Do you see any real chance of a comprehensive legislation? No, not now because we're in a very, very polarized situation, and there's other agenda items in the midterms.

Nothing's going to happen for the midterms, and that's coming down the pike. We've got all kinds of issues. But, you know, as an investor in crypto that thinks it's going to, and here's the best way to look at it, without getting too technical at all. I invest in Microsoft. Many funds do. I invest in Alphabet and Google. Many funds do. I invest in Facebook. What is all this stuff? It's just software. All of its software. So why would you invest in Bitcoin? It's software. Ethereum software. Salonah software, H-Barr's software. And so Bitcoin is not a coin. It's software. It's a productivity tool. It's a payment system or an asset class, depending on what you call it. But my point is, we should not turn away from these techs. that are advanced by very, very strong talent in engineering, the hottest hands in engineering

right now are sitting over the keyboards of these blockchain companies. That's where they're going. That's where they want to be. And we are the leaders in the world. We don't want to give that up. We set the programs. We set the policy. So the regulator is not serving the people.

And so to get a foothold in this technology, I have started becoming a global investor. Canada regulator. They allowed the ETF. They allow the EFER Ethereum. That's why I'm investing. And in UAE and Germany and Switzerland. Yeah, the hard part, of course, I get this all the time from the more conservative fundamental investors is that's all very nice, Bob. But there is absolutely no way to determine any value of any of these things.

It's a problem with collectibles in general. Is Bitcoin worth $50,000, $10,000? There is no intrinsic value. It's worth whatever buyers and sellers will pay for it. A lot of people don't have that problem with gold. That's the same issue with gold. I don't see any intrinsic value for gold. And yet, it's a problem.

The volatility is crazy here. So the more conservative investors for CMBC constantly blast me for pointing out, you know, that this is a very difficult asset class to own with any regularity and hold on to. Yeah, I get that. And I hear the same thing. And in my mandate, I have a 5% waiting at gold, 2.5% in the physical gold that I store and pay. for the storage of and 2.5% that I can balance in ETS. And so, but, you know, when I talk to institutions behind closed doors when they're not,

they don't have their regulator there and they're not talking to their compliance officer, they would be allocating 1 to 3% in Bitcoin, which is not a crazy amount. Yes, it's going to have some volatility, but most of them do not consider it a currency. They consider it an asset class no different than AAA office. They just need to get by this ESG issue. They can't get blasted by their ESG committee. They have to check the box. And one of the problems these miners are having right now, even the one state side, they're saying they're buying carbon credits.

But the carbon credit tracking error is so large that if they ever get audited, they may be way offside. In other words, they didn't buy enough or they bought too much. They don't know. The better thing is just don't use hydrocarbons to make the coin. Use hydroelectricity, wind or solar. Yeah, it's a good point. All right, Kevin, I'm going to have to leave it there. It's always a pleasure to talk to you.

We can talk for virtually hours. you're just a font of different ideas, but I really appreciate you coming on. And everybody, this has been Bob Pisani with Kevin O'Leary talking about global investing and the Bitcoin phenomenon. Thank you, everybody, for joining us. Inves new innovations create new opportunities. Become an agent of innovation. InvescoQQQQQ, Invesco Distributors, Inc.