ETF Edge - Post-Pandemic ETF Plays & What's Ahead in 2021

Episode Date: May 10, 2021

CNBC's Bob Pisani spoke with Douglas Yones, Head of Exchange Traded Products at the New York Stock Exchange and John Hoffman, Head of ETFs and Indexed Strategies, Americas, at Invesco. They discussed the top trends in the ETF space, why the clean energy trade is losing steam and why equal-weighted funds are suddenly getting more love, and what the flows tell us about where the money is headed in 2021. In the 'markets 102' portion of the podcast Bob continues the conversation with Doug Yones. 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, Invesco 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, just breaking things down. What does it mean for investors? I'm your host, Bob Pisani, and once again, we are back live from the New York Stock Exchange. Today on our first show back on the floor, we're honing in on the top trends in the ETF space, why the clean energy trade is losing steam, why equal weighted funds are suddenly getting more love,

and what the flows tell us about where the money is headed in 2021. Here's my conversation with John Hoffman, head of ETFs and index strategy Americas at Invesco, along with Doug Jonas. He's the head of exchange traded products at the New York Stock Exchange. Doug, I want to start with you. If 2020 was the big year for bond ETF inflows, 2021 seems the big year for equity, particularly plain vanilla S&P 500 type inflows into equities really large this year. What's driving these inflow and what other trends are you seeing? Give us a 30,000 foot view.

Yeah, it's been really interesting. The growth rate of ETFs just hasn't slowed down all through the pandemic. And as you mentioned last year, really focused on fixed income. This year, $331 billion coming into ETFs. Majority, almost 80%, equity ETFs. There's a few themes that are still running out there. First and foremost is adoption rates. BBH, Brown Brothers, Harriman, they put out an interesting report showing investor adoption of ETFs across almost every segment. And what's really fascinated to me, it's not just you and me as retail buying ETFs now. Advisors are more and more showing ETFs to their clients and putting them in portfolios,

institutions more and more adopting ETFs. And it's because the wrapper offers efficiency, tends to be a little lower cost, tends to be a much higher tax efficiency. Second key thing that I'm seeing, Bob, is active. Active ETS continue to grow over 100 different active issuers now on the market. Over 500 active ETSs now. 70-some launched already year-to-date. As if you're an active manager, historically, you might not have been interested in ETS. You'd have to show your holdings every day. That's now changed. We've got models that can fix that. So a lot of active adoption. And third is this sort of holy grail of ETS conversion direct from. mutual fund to ETFs. Guinness Atkinson did it first in March today, second ever time it's happened ever. Adaptive worked with Nottingham as a platform and they converted a mutual fund, 150 million converted today to the New York Stock Exchange in an ETF AGOX. So there's a lot of these really interesting moving parts, all of which are bringing together a lot of cash flow into the industry.

I want to talk more about sort of the plumbing and the ETF trends, but John, I want to turn to you and get your thoughts on sort of sector and individual ETF moves because you're one of the biggest providers out there. What I saw, John, was the slowdown in green energy in 2021. And I wonder if you can just sort of talk to us about that a little bit and what you are starting to see here. You run two of the biggest clean energy ETFs that are out there, the solar energy ETF, TAN, and the broader fund, the Green Energy Index, PBW. Both of them are 40% off of their highs that, interestingly, they hit in February as interest rates hit new highs. Can you just tell us that this was such a hot trend last year and CNBC viewers love investing in thematic tech and clean energy. Forty percent

off their highs is quite notable. What's stalling clean energy out right now? Yeah, Bob, I think let's widen out the lens a little bit here. And, you know, let's go back to last year. During the election, leading up to the election, flows started to really pick up in the space. In 2020, both of those funds were up over 200%. And when you think about the transformation to clean energy, we think about it over decades, not days. And so again, Bob, I joke that after 15 years, you know, this is an overnight success story in the space

and sustainable and clean energy. You go back to the early days when we launched these funds. It was a new sector, a new space, a lot of new companies. it's still a relatively new space. So you're going to see some of that volatility that you're pointing out. But when you, again, widen out the lens and look at the big picture here,

the move to sustainability, a move to clean energy. Again, it's not just a U.S. thing. It's a global phenomenon. And the money that's moving into the space is going to be significant. And so, again, a little bit of a pollback here, but when you widen it out and look at the trends,

and again, it's still a small market. We were looking at the market, of all of the names in PVW, the Clean Energy Fund, again, exclude Tesla, add up the market cap of all of those names, and you get to a company about the size of Johnson and Johnson. And so we think there's still a fair amount of headroom in the space, especially as this transformation to clean energy plays out. Again, driven by regulation.

I can't help, John, but think that a lot of this reason it topped out was at the same time that interest rates topped out in mid-February. A lot of these companies don't necessarily make a lot of money, and I think that certainly was an aspect in it. But it hasn't prevented people from launching new ETFs, particularly green ETFs. You've got a green building ETF symbol GBLD. You launched just a month ago. What's in that very briefly? Yeah, so again, we pioneered this space of thematics.

We continue to provide more precise ways to get exposure to the space. And so this is about, look, this conversation on decarbonization, you can't have it without looking at the real estate sector. 38% of the carbon emissions come from buildings. And so this is really about providing investors a precise way to invest in the real estate sector as it relates to cleaner and greener buildings. And so this is the full ecosystem of green buildings. Every stage, construction, redevelopment, retrofitting. Bob, it's a continuation of the same team here.

You can't help but think, Doug. This was the hottest thing in 2020. It's cooled off a little bit. I think he's right about the long term, but you know, it's tough when you're 40% off of the highs. It is, but at the same time, I mean, John's breaking new ground, whether it's the green building ETF or other ESG-related ETFs. I mean, there's now almost 100 ETFs here in the U.S. Europe's really dominated the ETF space in ESG investing, but we're catching up, and we've got $11 billion in investments coming into these thematic, if you will, ETFs here in the U.S.

And it is a combination of conversation. I think, John, you're absolutely right. Some of the advisor conversation now is, should this be part of my core and not just thematic? And I think we're starting to see that, again, some of the response rates and surveys, some of the conversations we're having at the exchange are investors are starting to take a little bit of a tilt. You know, BlackRock joined the fray, if you will, earlier this year. They launched two ESG ETFs and actually broke the record on first day assets under management. So more and more investors are really turning on to the idea. of, hey, maybe this is my core portfolio

and not just a thematic or a satellite. Another thing that I've noticed, John, is the reflation trade is very much in evidence, particularly commodities. You've got it a commodity index tracking fund, the symbol is PDBC, Peter, Dog, Boy, Charlie, that's a basket of commodity futures contracts. It, of course, rolls over.

Big inflows, I see, outperforming the S&P 500 this year. Tell us about what kind of people or buying these commodity funds, and how do you protect against that negative role? We all know about that problem with owning futures contracts, particularly commodity futures contracts with that negative role. Yeah, thanks, Bob. So first of all, address the role topic. This strategy actually uses a smart role technology.

It looks at the curve of each of the underlying commodities and finds the most optimal place on the curve to roll. And so it is seeking to get ahead of issues around contango and backwardization. But let's back up a second here. number of analysts think we are entering a new super cycle in commodities. Again, we're not sure about that. But when you look at, you know, the inflation, the commodity fundamentals, the discussion around that, what's happening from the administration as it relates to infrastructure, clean energy spending, electric vehicles, this is what's prompting these client conversations. How do I participate in these movements? And so at Investco, as you point out, Bob,

we pioneered that space with commodity ETS, broad exposure. this particular fund has doubled from $2.7 billion to $5.4 billion just this year, just since January of this year. Again, a simple way to get broad exposure to your metals, your ags, your energy, in a single solution with a smart role technology built into it. And yet commodities as an asset class, we've recognized commodities as an asset class for decades, and yet given what's been happening in the last 10, 15 years,

nobody owns them. It's hard to tell anybody, you know, you should own 5% of your portfolio in a commodity ETF even, just like it became hard to argue about having gold. It's a tough call, and yet that would have been the smart call. It, you know, it is interesting, right? There's an academic science here that does show having commodities as part of a portfolio does reduce overall volatility of a portfolio, and, you know, but you're right. Usually that's played out in the form of gold. Nothing wrong with that. Gold's performed really well over the last few years and maybe even decade if you start to chart it out longer term. But at the same time, we look at commodity flows this year, Bob,

and what do we see year-to-date, almost $10 billion, leaving gold ETFs. But what I think what John and team are doing, right, is they're starting to say, hey, maybe we look at commodities at a broader lens, maybe we take a step back, and John's team putting together multiple commodities in one place, historically really hard to access that market. You'd have to be trading your own futures, become almost a sophisticated institution. What's great about ETFs is they're now bringing that and democratizing that, space and bringing commodities, futures they're able to put a nice clean wrapper on it,

bring it to an end investor. I agree. Divisification is really a key to success in any portfolio. It's hard to argue about what you should buy in commodities, but a simple strategy would buy a broad, diverse commodity fund like this one that holds it. John, you're making a point? I was going to say, yeah, and even going back to why the flows are so strong, it's about providing the technology providing very efficient exposure to these to this return pattern in this instance we're talking about commodities which have low correlation to equities and bonds and so when you think about building bob to your point a diverse portfolio having an allocation to commodities we've seen a number of large institutions keep that as a strategic allocation long term not trying to

time it but you know the benefit of that diversification and your question around who's buying this and Doug's point, it's individual investors, it's retail, it's wealth managers, and it's some of the largest institutions in the world getting this highly efficient return pattern delivered through the ETF. And so I think all very valid comments there. Yeah. I want to move on to talk about one interesting trend, of course, is the move into plain vanilla ETFs, equity ETFs like the spy. But at the same time, I notice, John, your equal weight ETF, the RSP, which is very popular out there, attracted a lot of inflows. In fact, the assets under management, the shares outstanding are 30% higher in the last five months. That's quite a move for such a big fund. Of course,

the RSP equally weights the S&P 500 as opposed to the market capitalization weighted S&P funds, which are far in a way, the more prevalent one. John, why is equal weight suddenly more attracted to some class of investors obviously has been very interested in putting money to work in that space in the last four or five months? It has. And Bob, look, I'd use an analogy here. When you go to the doctor and they're checking you, they look at your vital signs, your temperature, your pulse, your blood pressure, they listen to your breathing. They get a quick gauge on your health. Starting about eight months ago, we started to hear from clients that they were concerned with some of the vital signs on these large market cap weighted indices. And it was around two things. Concentration and valuation. The big tech names have gotten even bigger. They're dominating. the indices. In some cases, you know, they were up over 25%. The top 10 names were making up 25% of the cap-weighted exposure. And so you've got to go back to 1975 to find that level of concentration. And even then, it was more diverse. It wasn't highly concentrated in technology.

So, Bob, we had a lot of clients come to us looking to get a more balanced approach. They wanted to stay in U.S. equities, but they wanted a more balanced approach. Top 10 names in this, 2 and a half percent, not 25 percent. So a balanced approach to the market, and that's what was driving a lot of those flows over the last period. Bob, I mentioned, though, it's not just a recent phenomenon. This fund goes back to 03. Had you invested a dollar in the equal weight, S&P 500, in 03, you'd have $6.7 today versus $5.4 in cap weighted. So it's a trend that is relevant now, but it's been important for a while. Yeah. It's a close, call. From a classic investor perspective, I'm a Jack Bogle disciple, Burton Malkyel guy, so you want to have

broad diversification, of course. The question is, does equal weight give you truly broad diversification? A traditional guy might say, well, market cap exists for a reason, because bigger companies have more important weight, and therefore they should have a bigger weight. It's a tough argument, but I get the whole equal weight idea. It does. And you know my background, of course, having lived and breathe the market cap weighted world for most of my my history. But there's also a conversation to be had right of, well, if I'm overweight, maybe as my core portfolio and market cap weight, and I start to believe in midcap or small cap, do I have to go pure midcap, pure small cap, or can I take something like an RSP or an equal weight and actually add it to the portfolio and give

me exposure to new places? So even someone who's a purist on the market cap weight and can still look at something like an equal weight and say, hey, is this an interesting way to start to add other parts of the investment experience or the other parts of the mid and small cap market at a different weight than maybe going pure. So it is an interesting blend, and it all comes down to, look, ETFs give us this option. ETS give us a nice, easy way to do this versus going out and buying hundreds of stocks and having to cross-bid that spreads, et cetera. The old school guys would say, look, you certainly have five stocks or 20 percent of the S&P. Okay, you're right. And yes, There's all these other things like energy and banks that have underperformed for a long time,

and you haven't done anything with that. But now we see value outperforming. We see energy doing better. We see banks doing better. And so those guys, if you're a market-cap-weighted guy, you're now getting the benefit of those that move up in value and energy, and tech is moving down. So the market's rotating, but you own the S&P 500, so you're in good shape. That's the old argument of the market-cap-weighted guys, and I get it.

But this is a fascinating discussion about equal weight. But I want to move on, John. Leisure and Entertainment, I want to talk a little bit about the reopening story here. PEJ, you have one of the big ones in this space. And this sort of buys stuff that's right across the whole leisure and entertainment space. So you own Disney, you own Chipotle and this thing. You own Airbnb at the same time. Have we, yet it topped out in early March? Have we pushed the reopening trade about as far as we can right now?

is all the optimism now essentially in the reopening and the entertainment, you know, everybody's going to go out and have a good time to trade. Yeah, you know, look, this was a fund that we launched over 15 years ago. It sat very low capital for a long period of time. Actually, about a year ago, it was $50 million. It ended 2020 at $700 million. It's a billion six now. So it was a way the clients looked at to position for this reopening trade, if you will.

And to your point, Bob, there was not a lot of leisure. and entertainment during the pandemic. These names, you know, were beaten up pretty good during the pandemic, but to your point, you've got a basket here of 32 companies focused in the leisure and entertainment, names that have been benefiting from the reopening trade, and we continue to see clients add capital to the portfolio, again, a precise way to get exposure to these names that have been beaten up so hard. It can't help but think, you know, how would we?

more optimism. We had a joke for the last few weeks, peak everything. You know, it's basically the earnings are just blowout. You know, they're 20% above what the analysts thought. They've been wrong again. They're bringing up second quarter and third quarter earnings numbers. The economic data up until a few days ago has been killing it much better than anticipated. So this thing evolved sort of like peak everything, like how much better could it possibly get? We now know about the reopening store. We all know there's going to be a giant party of sorts this summer because everyone's going to want to get out. Yeah, I mean, we talk about that excitement, but even you and I, right, walking in the building this morning, felt amazing,

right? Seeing each other, being a part of it, how great is it going to be to experience some of that and actually go out and attend these things and go be a part of the opening economy. So a lot of it has been focused on it's coming, but a lot of it hasn't really been focused on we're actually going and doing it. And so I think there is a bit of a natural excitement about bringing people back together and then going out and actually being able to do these things. And so maybe that parlays into the next level of growth. Yeah, well, I'm very excited about being back myself. The New York Stock Exchange is sort of emblematic, I say, of what's happening around the rest of the country. It's been open, closed in March, opened in May, and it's been open ever since.

But it's been on a fairly small staffing level. You've been doing a lot of work from home, everybody else. But now everybody's slowly coming back in. And I think the NYC is being a leader in that. And slowly but surely more people are going to go back to work over the summer. Some people, there'll be more work from home, but I'm a good example. Here I am. I'm back. We've got to show some leadership, you and me and be back to work with people. So I'm delighted to be back, and I think it's going to be a wonderful summer.

I'm very excited to be back here at the New York Stock Exchange. 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 Doug Yonis from the New York Stock Exchange. And Doug, you were talking on the show about trends in ETFs, of course, inexorably. More money keeps coming in year after year. We're, what, near $6 trillion in assets under management in the United States? Over $6 trillion, pushing closer and closer to that, $7 trillion.

Yeah, and cash flow just continues to dominate to the positive side. You know, year over year, we always talk about where things are going. This year, equity ETFs seem to be gathering the majority of the cash flow. If we look at the $331 billion out of that $262 billion is equities. It's about 80%. The majority of the remainder is in fixed income. So even with fixed income, continue to gyrate and fluctuate, they're still bringing in assets, but it's really going into equities. I mean, that's where people are excited about.

It's where people are investing. And what I see in the mutual fund industry is, of course, obviously, continuing concern about that because the model works better for ETF. So we're starting to see conversions, actual conversions of companies who run mutual funds and then converting them into ETFs. There's only been a few, but are we going to be, are we going to see this as a real trend? And is this a genuine threat to the mutual fund industry? It could be. I mean, if you think about it, we've talked about the idea of this conversion, almost like a holy grail for probably over a decade. And there was all these stumbling blocks and hurdles.

And look, a lot of really smart people out there have worked really hard on it. And now here, I can tell you at the New York Stock Exchange, we did our first. our first conversion with Guinness Atkinson that was at the end of March. They converted to funds directly to ETFs. Today, via the Nottingham platform, was the second time it's ever happened. And that was through adaptive investments, ticker symbol AGOX. This morning, we converted $150 million direct from a mutual fund to an ETF. So the answer is, yes, if you're an active manager and you're looking at the ETF space and saying, oh, wow, there's potential efficiencies for taxation, potential efficiency to reduce my overall cost of investment, and I can get

right into the ETF space. I don't have to give up my track record. I don't have to give up my assets and start at zero and compete against the big guys. Boy, what a great way to do it via conversion. Efficiencies in taxation, I completely understand because of the ETF structure, but what about lower fees? So just so the viewers understand this, if I own XYZ mutual fund that's an actively traded equity mutual fund, and it is charging, pick a number, 1.2 percent, or 120 basis points. Is it probably the case that instead of 120 basis points, I'm going to have the same mutual fund, except now it's an ETF wrapper, but it'll be, what, 30 basis points?

I don't know. Are they going to be lower? More often than not, they're going to be lower. The reason being the infrastructure itself tends to have about a 20 basis point. point cost that's usually able to be overcome by the asset manager and then immediately given back to the investor. So our expectation is yes, you'll see this drop. If we look at active, if we just sort of carve up the ETF industry and say, well, what's

going on in active in general? On average, active ETFs have about a 56 basis point expense ratio. If we look at just the active ETF industry. And you compare that to active mutual funds, typically over 100 basis points. So right out of the gate, we know ETFs as a structure. tend to be much lower costs. So we do expect there to be a cost savings for the end investor. There's also then the cost savings of new money coming in, right? So if I'm a long-term holder, if you buy and hold a mutual fund, all new dollars coming into a mutual fund, what happens?

They've got to go out, they've got to go buy the stocks they're going to own. So they've got to cross-bid-ass spreads, pay commissions in an ETF that all happens outside of the fund. And so for you and me as an end investor in an active mutual fund versus an active ETF, we're going to tend to be better off based on even these sort of intrinsic costs we tend not to think about. And people say to me, well, all right, so it's 120 basis points for this actively managed mutual fund, and now I'm going to get the same management, and it's going to be in an ETF wrapper, it's going to be 60 basis points. That's a 60 basis points difference.

Is that really a big difference? And the simple answer is maybe not if you do it by a one-year basis, but over decades, the power of compounding interest, the great power of compounding interest, the answer is, Yes, that's right. It is, it does matter. And you've always talked about being a Bogle disciple, right? In Bogle wrote books about this idea that all, if you just remove a little bit of cost into your portfolio and add up that over time, the geometric compounding is pretty dramatic.

We can just Google it, anyone listening in. But you're right, any amount of growth that we can add to the portfolio through reduced expenses are going to be great for the end investor. And it's also access, right? You and I, as an investor, may not have access to every single. single active manager just due to platforms, platform fees, but everybody can access the New York Stock Exchange, and that's global. So for end investors, this sort of revolution, if you will, of conversion is dramatic because now all of a sudden we can start to tap into the best active

managers out there. People have been excited, and for good reason about Kathy Wood, but what about some of the biggest asset managers in the world that maybe you haven't had access to, like the Dodge and Cox of the world or the DFAs of the world? They're now coming into the ETF ecosphere, right? You've got Putnam coming in in the next few months. So these are big name, big asset managers have done fantastic work in the active space, are now going to offer ETS. And of course, Dodge and Cox and DFA, two very famous value managers, very highly respected in the business, and that's very excited to see that. And remember, now you're getting access to world-class management now at reduced cost. That's what it means to me. That's what I tell people. What does it

mean? You're getting the best people out there to reduce cost. And if you're an advisor, Let's say you are outsourcing and you're using models. We're seeing more and more these strategists add models together. One of the issues has always been settlement, right? We've got a time settlement of stocks with ETFs with mutual funds, and mutual funds have a different settlement cycle. And so it's been hard for them to package up a full model using both ETFs and mutual funds.

Well, all of a sudden, if the mutual fund is wrapped in an ETF, I can time that. And so there's also this idea that some of the strategists and growth models are now going to wrap more and more active ETFs in where they may not have done that with a fund. You've talked in the past about the network effects of ETFs.

Network effect, this is more people adopt whatever you were talking about. In this case, ETFs, they become more efficient. Network of models come into place. So I think of what, $5 trillion in equity ETFs out there and the U.S. stock market is, I don't know, $40 trillion, something like that.

So it still seems small, and yet it's growing, every year. What is the effect of this? Of more people moving into ETS? How does it change the stock market? Describe that network effect. Sure. Well, the good news is it really doesn't change the stock market. We can measure that today. We look at trading today, and we see that, you know, on average, about nine out of ten trades in the ETF world have no net impact or no net effect in the underlying stock market. So we measure it. We make sure that everything continues to trade accordingly. The net effect is really on the other side. It's you and I as an investor. It's an institution as an

investor. Our overall costs of investing go down. It becomes easier to invest. It becomes cheaper to invest. It becomes more tax-efficient, which broadens out the interest in investing. That's great news, right? That helps those who maybe have been left behind in the investing revolution come on board and actually participate. You know, we always talk about democratization. It brings people to the table faster earlier. You know, even at the retail level, there's been whatever we want to call it the Robin Hood effect, right, of people putting a little bit of money into individual stocks. They can do it in ETF, so you can buy one share of an ETF and have exposure immediately to hundreds of underlying securities. That's been really powerful. It's that

next wave that we're seeing now where it's the advisors. Advisors saying to their end clients, hey, we're not going to own a mutual fund. We're actually just going to buy the ETF. It's better for you. Or an institution who used to go out and buy it all themselves is now saying, hey, we're going to just own the ETF. It's cheaper for us. Yeah, the ETF, the conversion from mutual funds to ETAF is very exciting to me because now you can show wholesale. And I think that that's going to turn into a major event this year. Doug Gionis, head of ETS at the New York Stock Exchange. Thanks very much for joining us.

Really appreciate it. And I am very happy to be back in a place I have been since 1997 on the floor of the New York Stock Exchange. Doug, thank you very much for joining us. As always, thanks for having me here, Bob. Great to see you in person. Thank you. That's it for today. I'm Bob Bazani. Thank you for listening. And make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC.

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