ETF Edge - Power plays & international intrigue 8/25/25

Episode Date: August 25, 2025

Amid geo-political waves, smart money is diving below the surface of two markets sectors to find calmer, potentially more productive waters.    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 Invesco QQ, proud provider of access to innovation for the last 25 years. Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights in all things, exchange traded funds, you're in the right place. Every week, we're bringing you compelling interviews, thoughtful market analysis,

and breaking down what it all means for investors. I'm Julia Borson, in for Dominic 2. Outside of the major domestic indices, a shifting geopolitical landscape is also impacting energy and international markets. Here's my conversation with Malcolm Dorson, head of active investment team and senior emerging markets portfolio manager at Global X, along with Paul Bayachi, head of fund sales and strategy SS&C Alps advisors. Malcolm, after more than a decade of lacklesser performance, established international and emerging markets are having a moment. So tell us what is driving this change? Thanks, Julie. Thanks for having us.

I think you made a key point right off the bat that EM and international have underperformed for a decade plus. And that means we're coming from a really low base of positioning. Coming into the year, the advisors that we spoke to had a roughly 2 to 3% exposure to emerging markets versus roughly a 12% recommendation coming from MSCI. So we saw a significant underweight in the face of deep value, outsized growth, and some really,

really significant, compelling catalyst coming up. But bigger picture, if we really want to dumb it down, why is it going well? It's a weaker dollar plus an easing Fed, plus a rebound in China. That all combines to create a flashing sign saying buy emerging markets. So Malcolm, Paul just laid out why it's going well.

Do you agree with him? And what do you think could derail this kind of investor enthusiasm for international? So I think what we've seen from advisors echoes a lot of what Malcolm said in terms of coming into 2025 advisors being off of neutral, both in terms of their emerging markets and their developed ex-US exposure. And so what could derail it is a counter-rally in the dollar. That is typically a significant tailwind for emerging markets, given how they manage their debt profiles. And international or developed ex-US markets, say the

IFA index, a lot of these companies have done okay in local currency terms. But once you bring those back to the United States for U.S. investors, the period of outperformance for U.S. versus developed XUS was going on 16 years. So a lot of investors, I think, were a little bit gun-shy coming into 2025 in terms of allocating the EM, allocating to developed XUS. But what could derail it, of course, is ongoing uncertainty around the tariff negotiations, whether it's with Europe or other parts of the world. I would say the dollar having a countertrend rally would also be a significant headwind to developed XUS and EM outperformance that we've seen so far in 2025. The other thing I would ask Malcolm as well is in terms of relative positioning to say the

IFA or MSCI emerging markets, investors seem to be getting a little bit more creative and thoughtful in how they approach those markets, moving off of cap weighted either into an active strategy or maybe a factor-based approach. Yeah, I think that's a, yeah. Sorry, go ahead. Please, go ahead. Yeah, I was just going to say, I think that's a great point. If you looked at emerging markets, when a lot of people, the last time they looked, as you mentioned, maybe 16, 17 years ago,

used to buy emerging markets and kind of just buy the index. And it wasn't that attractive. It was 80% Asia. It was 35, 40% China. It was 26, 27% state-owned enterprises. And it was kind of hairy, and you weren't getting the diversification benefits or the value benefits of the exciting stories in different pockets of the asset class. But today, I think investors are are demanding more and you know we have global ex are trying to offer a lot more as well in terms of regional strategies country specific strategies thematic strategies and both active and passive per you know depending on how you want to approach it yeah Malcolm speaking of country specific strategies we've seen big performance and inflows in two pretty surprising countries Greece

and Argentina what has changed in those two countries and what's going on there Well, both massive value opportunities in different stages of political and fiscal turnarounds. So from evaluation perspective, Greece trades just above book value now after running up about 70% year to date, still super cheap with a 6% dividend yield and 10% earnings growth. And it's kind of just a boring, overlooked story with fantastic corporate governance. Sovereign ratings now are investment grade. And there's a really compelling catalyst or a story that Greece might get upgraded to MSCI develop markets next year, which would really create a flow of capital coming into these stocks.

So that's one reason why a lot of people are looking at Greece. And then Argentina, on the other hand, is kind of a more recent turnaround. Greece has been fighting a battle, you know, since the Greek financial crisis and the banking crisis coming out of 2008. Argentina had a long history of, you know, almost, I think, seven sovereign defaults in the past 60 years. And a long history of really hyperinflation and economic suffering under paganism and Kirshnerism that turned around last year when President Javier Malay was elected. He has brought monthly inflation down from 25% to less than 2%. GDP growth last year when he was elected was about negative 3.5%.

It should be about positive 5, 5.5% this year. He's liberated the currency. He's created a better than expected deal with the IMF. and things are kind of seem to be off to the races. But there's a key catalyst coming up in September and October in the form of midterm elections, which we're all really keeping a close eye on. Because if that goes in his favor and in the favor of his party, it really firms up his mandate to continue these economic and fiscal reforms

through the rest of his term. And from a valuation perspective, Argentina trades at 11% market cap to GDP. That is compared to about 38% for Brazil, which we see is very cheap, about 45, 47% for Chile and close to 200% for the U.S. So if you kind of put on your Berkshire Hathaway hat on and look at it from that perspective, Argentina looks compellingly cheap. And we have to keep an eye not just on elections, but also on tariffs as well.

Curious to hear from both of you what your outlook is on the impact of tariffs. I mean, I'm watching the expiration of the de minimis exemption coming up. How do you think the tariffs are going to impact these trends? And we'll start with you, Paul. So I think what investors and advisors operating on their behalf have to think about is specifically within their developed XUS or EM exposure, which companies or which countries have disproportionate exposure to the impact of tariffs and how that translates to the outlook for profitability.

And I think Morgan and I agree in terms of trying to get advisors and investors to move off of beta in these categories. And whether that's individual countries, as Morgan laid out, or even repurposing the universe toward significant sectors that are underweight in your major market indexes or toward sectors that maybe are a little bit more insulated from the impacts of tariffs. And if you just look at EFA, which is the definition of developed XUS for most investors, it's where a lot of the flows go at the passive ETF level. those indexes have domination by large multinational companies, which in theory might be impacted by tariffs,

but specifically when you think about, say, IFAA and its exposure to financials, it's 25% of the index. There's 55 banks in the index, which means you have this long tail of some good, some not so good banks. They might not be as impacted by tariffs, but they get the knock-on effect of the illiquidity in the marketplace, driving profit outlooks for these banks lower as a result of some of the multinational companies within that index that are impacted by tariffs. And so I think it's not necessarily just look at a tariff basket or a non-tariff basket and then invest based on that.

It's really look at the factor exposure that you have. IDog is an example of a developed XUS portfolio that focuses on a more balanced sector exposure, ideally with dividends as a factor that the companies are screened upon, when you think about that breakdown, a more balanced sector exposure, insulation from some of the knock-on effects of tariffs, that is how advisors and investors are trying to reconcile with muting the impact of tariffs on the companies in their portfolios while also benefiting from some of the tailwinds that Morgan laid out.

Yeah, certainly a very nuanced issue there. Now, shifting gears over to energy, oil and gas, the raw commodities, also subject to a lot of geopolitical policy shifts. So Paul, for investors looking to maintain energy exposure, you say infrastructure is a safer way to play it. I believe that wholeheartedly. And we're going to celebrate the 15-year anniversary of AMLP tomorrow with the closing bell at the New York Stock Exchange. That's the largest most liquid MLP ETF, which plays in the energy infrastructure space. But we've seen investors start to take notice of some of these trends. So if you look at year-to-date XLE, which is the largest most liquid energy ETF,

on the market. It's had more than $7 billion in net outflows this year. It's had more than $13 billion and that outflows over the course of the past three years. And yet if you look at energy infrastructure as a category, which includes AMLP and other more diversified energy infrastructure strategies, $1.6 billion in net inflows into the category year to date, $950 million and net inflows into AMLP so far here in 2025. And I think that speaks to the fact that advisors and investors are starting to think about energy more in terms of power. as opposed to crude oil and natural gas. And when you think about it in the context of the electrification theme

and how you can get exposure to rising electricity demand and understanding that our electricity mix is evolving before our eyes. We're talking about incorporating nuclear in a way that we really haven't for decades. We're seeing that natural gas not only is at 42% of our electricity generation now, but is likely to rise alongside solar and wind and the mix of what generates electricity is evolving. And the way that investors play, quote unquote, energy is evolving. XLU has $2.7 billion in net inflows year to date, the sleepy old utility sector, which, by the way, had the best performing stock in the S&B 500 last year. And so I think the conversation about

energy is evolving beyond simply, I have to own the large majors, the diversifieds, and I need to actually start to position for the companies that are going to benefit from rising electricity demand and get a mosaic of exposures to capture it. And of course, there's so much projected AI power demand tied to all of these AI giants exploding. Tell me here, Malcolm, how are you looking at Global X in the ETFs you have to serve that kind of part of the equation? For sure. So, I mean, big picture, as Paul mentioned, you have the kind of traditional energy side if you're thinking about oil or more.

recently if we're thinking more about what's power and power is central to almost all technologies of tomorrow. So not only artificial intelligence, but electric vehicles, large factories, and big picture, the U.S. is sort of not ready for all of this. Cumidively, the U.S. needs to produce about 45% more electricity than it produces today by 2040. After almost two decades of stagnant demand, it's really starting to pick up. So we've launched a, electrification ETF under the ticker ZAP, ZAP, that is really focused on solving this issue and providing an investment vehicle for investors to take advantage of this theme. But it's really a lot more U.S. focused, despite my kind of international mandate.

From a U.S. perspective, we think this domestic theme is really interesting. How does InvescoQQQQR rethink possibility? By rethinking access to innovation and the NASDAQ 100, let's rethink possibility. Invesco Distributors, Inc.