ETF Edge - Precious Metal Rally & Active ETFs

Episode Date: July 27, 2020

CNBC’s Bob Pisani speaks with Reginald Browne, principal at GTS, Harry Whitton, head of ETF sales and trading at Old Mission, and Renato Leggi, Ark Invest Client Portfolio Manager. They discussed the rallies in gold and silver and the impact from Covid-19 on ETFs. In the 'Markets 102' section, Bob discusses active ETFs. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged traded funds, you're in the right place. Every week we're bringing you interviews, market analysis, and we're breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll talk about how the ETF business continues to take off and drill down on what's behind the thematic success of one actively managed fund in particular. Here's my conversation with Reggie, principal of GTS securities, for anato Leggy, client portfolio, manager at ARC Investment and Harry Witten, head of ETF sales and trading at Old Mission.

Reggie, let me start with you. Gold's hitting all-time highs, silver's hitting new highs as well. Big inflows into those large gold ETFs, even the stock ETFs around gold and silver. What's driving the interest? Is this just a weak dollar story? Is it a sluggish growth story? Is it an inflation worry story? Is it all of the above? What's moving gold so much in the last month? Hey, Bob, thanks for having me on again. I think it's all the above plus an additional one. So one of your panel being a two-year low, that means that real interest rates are plummeting and there's no risk for interest rate risk.

And I think with the central banks around the world, with quantitative using and printing of new currency to support some of the coronavirus rescue measures, you know, I think we're seeing weak currencies across the board. But look, I think the biggest story here, I think you're seeing greater adoption of commodities and particularly gold and silver being put into allocation models. And I think that's, you know, a new trend that we're seeing as driving also the price of gold. Yeah. Yeah, that makes sense. Harry, you see a lot of trading. You specialize in trading and being a broker in the ETF business here. Even silver's rallying, the gold stocks rallying as well. I know silver has, you know, components of both industrial and a precious metal,

precious metal, not exactly the same dynamics of gold, but very, very similar. Can you explain precious metals as well as silver for the same dynamics as gold? Yeah, I mean, you look at the metals that it's just been in the last specifically silver the last couple weeks. I've been going up to, you know, nonstop creation units in the ETF's record volumes. I'm not sure if you saw this, Bob, but just last week, gold, GLD, IAU, and then SLV, Silver, with three of the top five for info that have all ETFs in the industry. So it's being looked at by a lot of people. And there's more opportunity people think in silver.

They think gold has run up a little bit higher. It's hitting all-time numbers where silver is still way. off its all-time high. I think people think it has more room to run. Yeah, Harry, old mission specializes in ETF trading and brokerage. That's what you guys do. Just generically, what kind of trading activity have you seen in the last few months? We've seen elevated equity trading volumes, elevated option and futures trading volume a little bit, not as much in July as there has been perhaps in April and May, but what are you seeing in terms of ETF trading? Well, lately, you know, we have seen more equity volume probably over the last month or so.

But if you go back all the way back to when the pandemic started, bonds have really been the king. More money has gone into bond funds than any other asset class in ETFs. Bond funds have done $85 billion in the second quarter versus equity funds, $20 billion in inflows. So it's really been, that's been the focus of what's been going on out there. I do know BlackRock last week just put out a number where they traded 5.1 trillion during the first half of the year, which is a record for them. So regardless of the product, you're seeing just record volumes all across the place. And if you really want to look down, something I found interesting, if you look at the top 10 year over year, last year's top 10, to be in the top 10, you needed to do at least a billion in net inflows. This year, the number 10 firm, right now is Invesco, they've done over $3.5 billion.

So just the growth of ETFs and the actual trading volume of ETFs. How do you explain the growth of the bond ETFs? I find a hard time with it. I mean, we're hit new highs today on the corporate bond ETF, the main one, LQD. AGG, the broadest bond ETF, I think you can own out there, is also at a new high. And we're getting ridiculously low yields on any of the. Is it because comparatively we still have yields and the rest of the world basically doesn't? I get this question all day long about the volumes in these things and the fact that it can't just be that the government is buying corporate bonds.

It's broader than that, right? Yeah, absolutely. I mean, the government actually has stopped buying the ETF so, I said they have, and they've released those numbers. You haven't seen them really grow that much. but the, you know, AGG is closing in on $80 billion of assets under management. It's amazing. It's not only it's higher than before the pandemic, and it's a record high. People are yield searching.

You know, another product that's out there, yield searching, or, you know, BlackRock and I shares have the bullet share. BlackRock is the eye bonds and Investco has the bullet shares, which are, you know, maturity funds where they can build a ladder portfolio. And those are seeing record info also. Yeah. Renato, I haven't gotten to you yet, but let me turn to you. It's amazing to me to watch the ETF business keep growing here. We follow the quarterly and first half numbers here. Doug Yonis over at the NYSC put out his first half numbers here. 2,639 ETS, $4.3 trillion in assets under management. And he says 2020 is the year of active management. And we have 56 actively managed ETFs that have come to market this year. That's nearly half of all the launches. I've never seen that before. And of course, Arc Invest, you're sort of the leader in the active space, at least active equity space. Is it too much to say? You're the success story in active equity management this year. That ARKK, Innovation ETF you've got, ARKK, it's nearly $6 billion in assets. What do you attribute the success here? Is it you guys are a bunch of

geniuses? You are Kathy Woods over there? Or is this the year for active management? Or is it the right kind of selection? Why are you particularly successful versus everybody else? Hi, Bob. It's great to speak with you. We've had record-breaking inflows into our actively managed ETF so far this year, and ARC now has 40% market share of all the actively managed equity ETS, which suggests that investors want more than just active management. They want exposure to innovation.

And as you know, Bob, we're focused on five innovation platforms, DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology, all of which we believe will create multi-trillion dollar opportunities over the next 10 to 15 years. And these disruptive technologies are experiencing an acceleration in adoption in this current environment, and the companies within our EPS are gaining significant market share and outperforming the broader market. So the disruption that's caused by these innovative companies like Tesla and Square are making it critical for investors to allocate to innovation in their portfolios. And we see this is just the beginning of this trend. But it's no secret, Renato, that the reason ARKKK, your innovation ETF has been so successful this year is you have a really big bet on Tesla.

It's, what, 10% of the fund essentially? you have very concentrated bets. So the question is this, number one, you made the right guess on Tesla. Had you not, you wouldn't have been up nearly as much. But I think on a broader question, do you think investors want these kinds of concentrated bets? It seems like they actually do. There you see.

Look, there's 10% on Tesla. And Invite and Square and CRISPR and Roku are very significant holdings as well. But this is a pretty concentrated portfolio. Is that what investors want? Reggie, let me ask you. Do you get this sense of active management that they'll be successful if they make these kinds of concentrated bets and they live and die on whether they're right or not, Reggie? Well, I think there's always a room for active management, particularly in the ETF format. You look at all the non-transparent ETS that are brought to the marketplace recently.

I think there's six of them. I think they're picking up speed. There's always room for market's reverse, and I think you start seeing the use of the active manager. think you'll see a difference between active and passive. So just because ETSA here does not mean that active goes away. Yeah. But Harry, we get back to this old question. I know this is older than you and me,

but is there really any evidence that active management outperforms passive management? I don't see it. Certainly not in the long run. Vanguard was practically founded on this idea that it can't be done. It's wonderful that, you know, Kathy and Renato are doing so well over at ARC on a concentrated bet. but they are a very small group of winners there, Harry? Yeah, very true, Bob.

You know, the story has been for years, how passive has outperformed active. And I like the ARC story. I've been following it for years. And I think others are going to come, and they're also following ARC. I know as a market maker, we get asked a lot of questions by existing issuers and new issuers, and they're all talking about ARC and what they're doing. And I think you're going to see more active managers come. And we're going to get to see.

We're going to see that they really can do it going head to head. You know, they've been shying away from the ETF platforms. Right. And so the secret here, Renato, is really you have hit upon the right methodology for the times, disruptive technologies that are altering the way we work. We now have a pandemic that is accelerating the way we work that are benefiting the specific stocks that we had talked about as just what we broadly call disrupt. technologies. So you're picking stuff in a growth area with a lot of disruption that's changing the

way we work and live. I guess that makes a lot of sense. If you were working at another space, defensive or industrials, it might be a little harder to do that kind of outperformance that you're seeing here with your funds right now. Is that a fair way to characterize this, Renato? Yes, absolutely. I mean, we're focused on these transformational technologies that are disrupting and disintermediating existing sectors in industries that make up some of the ones that you just mentioned and may dominate these broader-based indices like the S&P 500, and most investors have exposure to those broader-based indices. So this is providing kind of your forward-looking exposure. You know, the names, you know, we have zero-fang exposure right now in our portfolio. These are the next group of selling stocks, we believe, that will be part of the broader base indices. And it also serves as kind of a hedge against the potential disruption happening in those core

portfolios. Yeah. The other thing I note is you really are a little unusual in that you're far in a way, the largest actively managed equity ETF. I guess the question here, and anybody can handle this, why is there so much more active management, we have, you know, ETFs like Mint out there, and JP Morgan one's pretty big, but why is there

so many more active managed bond ETFs than stock ETFs? Or is that about to change dramatically this year? Is it just harder to pick stocks than it is to pick bonds? Yes, this is Renato. I'll comment on the non-transparent active ETF. You know, that's where we're seeing

a big push on the equity side. And, you know, we're fully transparent, but we think that asset managers that are coming on board and bringing those EPS to market, or actually educating the market on how investors can buy these actively managed strategies in a more kind of tax-efficient and lower-cost wrapper compared to mutual funds. So we think this will help accelerate kind of the transition away from active mutual funds to active ETS.

Well, Bob, if I can jump in, I think invest will I just have the opportunity to pick the vehicle of choice? and the managers are going to deliver their views, whether it's for a 4DAC open-ended mutual fund or an ETF, investors will have the choice vehicle to utilize. So I think that to bring active management equity into the market and traditionally, ETS are just catching up to it from an equity standpoint. So I think you'll see a lot of growth in the active equity space

utilizing either a transparent vehicle to deliver those views or a non-transparent view. Yeah. How are you going to have the last word here? I gather you too feel that active equity is finally here to stay. I guess the problem I have is very simple. If you're a mediocre active manager in a mutual fund wrapper, you're not suddenly going to become a genius

by suddenly throwing it into an ETF wrapper. You may charge lower fees. You may have a more tax-efficient structure, even if it's non-transparent, though, it's not going to turn you into some kind of genius. That's my concern. ARC would be successful in a mutual fund platform because of the space that they're in and perhaps their methodology. But would you agree, Harry, that just switching to an active non-transparent ETF wrapper

isn't going to change anybody's track record? You're dead on, Bob. It's whether it's active, non-transparent or active transparent. transparent, you still have to perform. And you still, if you're going to be active, you're going to have to pick the right stops, you can have to trade them properly. And, you know, that's the big difference. So as I said before, if they're going to come out with an ETF and they think they can do better an ETF wrapper, well, they're still going to have to prove it. And it'll it'll be great to watch. And it's going to be good for the ETF industry because more and more

people are going to get into it and it's going to be a lot more visible. Yeah, yeah. I agree with that, Harry. Okay. Thank you. Thanks very much, guys. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs with our Market's 102 portion of the podcast. Today we'll dive a little deeper into the world of active ETS. My producer, Kristen Chang, joins me. What are the key characteristics of an active ETF besides having to disclose their holdings

on a daily basis? Are those expense ratios typically higher because they require more bandwidth on the fund manager's part? You know, we've talked about this before, Kirsten, the key characteristic of actively managed ETF is the manager or the team is making active stock picking decisions. What's that means? It means they're not relying on a passive investment strategy. They may be benchmarked to some bogey like the S&P 500, but they're not trying to track it. They're trying to outperform it. And they have to pick stocks in some combination to do that. They can, can weight them in different ways. They can have a very broad portfolio that may have hundreds of

stocks in it, or, and we saw this in the case of ARC investing, they may have a very concentrated portfolio with really essentially only about a dozen stocks or even less in them and essentially bet that a few big names are going to win the day for them, which is what happened with ARC-Nvesting today, ARKK, that stock's been phenomenally successful. That ETF, I should say, has been phenomenally successful up 60% this year, primarily because they have a huge bet on a single stock, and that's Tesla. And they won big on that. Tesla's about 10% of the portfolio. And the other, there's four or five other stocks that are six or seven percent of the portfolio. So, you know, you have, you know, five stocks, essentially, that are 40 to 50 percent of that portfolio. And because they pick the

right name this year, Tesla, that stock, that ETF, excuse me, has done very well and attracted a lot of money. But that's the downside of this thing. If you look at it, had Tesla not been a big winner, they would not be nearly performing as well. They certainly wouldn't be up 60%. And they likely would not have attracted as much money. The other issue you have here is this whole question of the fees that are charged.

Generally, actively manage mutual funds and actively manage ETFs charge higher fees. So, ARC, for example, the ARC innovation fund, ARKK is the symbol, charges 0.75%. Now, historically, if you were an actively traded mutual fund, actively managed mutual fund, that's not very high. Actively managed mutual funds often charge 100 to 200 basis points. That's 1 to 2%.

But 0.75% is fairly high for an ETF. And of course, the idea here is they have higher costs associated with the fact that they have more people working. They're not trying to just stay with an index. they're trying to pick funds, and that, of course, requires more research and more people. So, Bob, today on the show, you talked about the rise of active management. Now, we heard Doug Jonas of the New York Stock Exchange, say, 2020, is looking like the year of active management, but are the returns there to back that up?

How have they done so far this year? The problem we're talking about returns of active management for equity ETFs is there aren't many of them at all. In fact, the ARC Innovation Fund, we keep talking about ARKK, is far in a way the biggest one that's out there. It's almost $6 billion in assets under management. That's far and away the biggest actively managed stock ETF that's out there. They were successful because they made a very big outside bet, as I said, on one stock, but particularly one particular sector, what you would call disruptive technologies, where they feel that the growth is occurring.

And they feel they can get the most outperformers. So they're essentially buying very extreme growth parts of the business of the market. In Vite, for example, another big holding that they have, very big in the medical space, Square, does payment processing, CRISPR technology and biotechnology, Roku, big, of course, in deciding what you want to watch on television as a platform there. So that happens to be a successful paradigm this year. pardon me, but it may not be every year. As for whether or not the outperformer don't,

well, this year, ARC did outperform, but overall, active stock pickers historically underperformed their bogeys. The evidence is overwhelming. This was one of Jack Bogle's principal thesis is when he was at Vanguard. Vogel saw very early on decades ago when he was running Vanguard

that the average fund manager does not outperform their bogey. that it is difficult and almost impossible for an active fund manager to consistently outperform year after year. They might outperform one year or two years, but when you get beyond three and certainly five years, very few actively outperform. It's just really hard to predict the future. You might think so, but you can't. So Bogle found a Vanguard largely around the idea of passive investing and particularly buying into the S&P 500. He had active managers. They were very good. He had Wellington. Some of them were excellent. But by and large, his point was keep the cost down. Even active managers, he noted, tend to underperform because they charge too much for their services. So even ones that are good, the amount they charge that one or two percent more over years makes them underperform their bogies. So if you can find good active management, keep the fees low. That's kind of.

kind of like the vanguard secret. Jack was not against active management. He just felt it was really hard to do. And for most people, passive investing and staying with indexes was the way to go. And indeed, Harry Witten, when I talked about this on the show today, about the fact that most of these active managers don't underperform. So remember, just because you're a mutual fund active stock picker, you're not going to suddenly turn into a genius turning it into an ETF platform. I'd be very, very careful. If you've got one that you think does outperform and they're charging a lower fee in an ETF wrapper, then in a mutual fund wrapper, well, heck, yes, go with that person.

But otherwise, don't go switching to active management just because it's in an ETF wrapper. That's a sure way to lose money in the long term. That's it for today. I'm Bob Bizani. 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 Fedge, CNBC.