ETF Edge - Q2’s top fund managers on what’s next 7/21/25

Episode Date: July 21, 2025

Now solidly starting off the third quarter, we’re asking how Q2’s top-performing fund managers are planning for the near – and distant – future.  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. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you'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 your host, Dominic Chu. So can the top-performing funds of the second quarter hold their lead heading into Q3. So here's my conversation with Eli Horton, senior portfolio manager at TCW, also Brett Winton, chief futurist at ARC investment management, and David Mann, head of capital markets at Franklin Templeton. Now let's kind of maybe start things off in a conversation with regard to the top performing funds, because there has been momentum, especially when it comes to things like the future of technology. I refer specifically to artificial intelligence, data centers, and all

of the derivative trades that go along with those. So let's start with fund performance. And perhaps we'll start here in the studio, Eli, about what TCW has found with regard to one of your top performing funds and how exactly it does fit into that kind of theme of the future of technology and just how much we will demand from it in the coming years and decades. Awesome. Thanks for having, Dom. Great to be here. So you're referring to TCW Transform Systems, powered. PWRD is the ticker. And it's a strategy that invests behind the energy transition. And I sort of thought about this with your opening comments and momentum. We are so early in the energy transition. We've been working on it for 30 years. But if you look at where power and electricity come from in the U.S., less than 20% of that power is from renewable sources. We're trying to get to 100% renewable states. It's requiring trillions of capital invested annually. That's growing. It's going to take us another 50 years at least.

So very long-dated theme. You mentioned AI and technology. That actually tangentially feeds into this strategy with regard to a sub-theme we're very excited about, which is power scarcity and the need for grid investment. I'm sure we'll get deep into this topic, but the entire growth algorithm for electricity demand is changing. We need a lot more of it.

One of those reasons is AI, but also remanufacturing, re-industrialization, of this country, electric vehicles, a variety of things. And so we're seeing a bunch of old economy, industrial companies, benefit from this theme. What kind of companies in that portfolio, PWR Deep? I mean, power, I understand, electricity, I understand, even some of the maybe fossil fuels that go into it, or nuclear power, I kind of understand. But what kinds of companies are the most heavily weighted in this portfolio?

and how exactly as a portfolio manager do you settle on these types of names? Right. So one really important thing to highlight with that question is we're stock pickers. We believe in concentration. So we own 20 to 30 companies, and these are individually diligent research. We're bottom-up investors. So I'll say that. In this power and grid theme, we own a few businesses that generate power.

So Vistra, Constellation Energy, Talent Energy. These companies have very large nuclear generation portfolio. natural gas, which we think is very critical to the transition. And then we own businesses all the way through transmission, distribution, and even a company like VIRTIV, which provides cooling to data centers, which consume a lot of electricity, of course. All right. Brett, I mean, no surprise that in times of upside movement

with regard to technology-type names, some of the ones that kind of permeate through the ARC portfolios tend to do some outperformance. They have been high beta for sure. But since the liberation, so-called liberation day lows that we heard after the tariff announcements, some of the ARC funds have been absolute stellar performers, high octane for sure. What exactly does that upside surge and some of the moves to the downside we've seen from some of the ARC invest portfolio companies tell you about what the overall investor landscape is like when it comes to the future of technology?

I think one thing that's happening right now is that these technologies that we've been talking about and dimensioning are actually landing on the ground and having real world practical implications for people. And so they understand that the technologies actually could build into very large businesses. So Tesla is launching robotaxis in Texas. People didn't think they were going to be able to do it and the assets are on the ground and operating. and we think that's going to be an incredibly valuable network. You know, drones are having a real clear impact on the world geopolitically. And so ARKX, our space fund, both orbital and suborbital aerospace, performed very well because people are beginning to realize that you need to invest in these technologies

and capabilities in order to compete in the world. And so the turnover in the administration really has provided a permission structure for financial institutions to treat crypto assets as real things that they need to embrace in order to compete in the modern financial ecosystem that we think is going to be built on top of that. And so, you know, the Circle IPO is an example of that where we were a very large participant in that and stable coins we think are going to be. you know, dramatically change the way the financial ecosystem works. You know, Brett, I think it's also interesting that among all of the things that you could have hit on or talked about when asked a question about transformative technology and the types of companies that go into it, that the bulk of your answer centered around what I would say broadly is fintech, right?

We're talking about the future of financial technology. We're talking about cryptocurrencies specifically, you mentioned, and then kind of like the rise of stable coin issuance and perhaps usage going forward. Just how important will financial technology companies be as a theme for ARC's portfolios in the coming quarters, years, and decades maybe? Yeah, so we focus on five technology platforms and public blockchains is one of them that encapsulates digital wallets, you know, smart contracting protocols as well as cryptocurrencies, including stablecoin and Bitcoin. We also focus on robotics, AI directly, what we call multioomics and really biotech and next generation genomic tools, as well as energy storage. We do have ARKF, which is a fintech specific fund that's more on the digital wallets and cryptocurrency side of things. And there's no question that the financial landscape is going to be remade with these tools.

You can look at kind of the recent digital wallet announcements. you can look at circles performance in the market. And I anticipate that you'll see a number of traditional financial institutions finally bend the knee and say, hey, we need to adopt some of these technologies because it's no longer adequate or sufficient to offer consumers their money three to five days later when they want to transfer it from place to place. Mr. Mann, I got my question for you is your firm does a lot of active management,

active management of portfolios. And from a capital markets perspective, you have to have a pretty decent view of just where you see the interest is in this landscape, especially in the second quarter. What exactly does that do, seeing the landscape as you see it now, for positioning for how many industries or types of stocks you want to emphasize based upon what you've seen in the second quarter? And do you believe those same themes carry forward into the third quarter as well? Yeah. So, you know, just broadly from the winners, you know, it's interesting to hear. the big question because I was thinking like just broadly what's been happening within the active ETF industry overall. You know, I know we're talking about a lot of AI and themes, but really,

you know, going back five, six years ago, working with regulators on the ETF rule, thinking that, hey, at some point at this active ETF thing, active ETF thing will catch on and that investors will start understanding that they can get their ETF exposure to get active management. And we've seen it now over the last couple of years. And the, you know, the numbers are astonishing with, almost 40% of the net inflows. I think maybe if we continue on, we might get to 500 billion of net new business by the end of the year. There's just really this acceptance of getting active management within ETFs could be because of funds hitting one three and five year track records. We can now have much more nuanced conversation about how they perform to benchmarks.

And to the point that's come up already, Liberation Day, with a huge selldown, at a huge rally. I think there's been a lot of desire to have active managers navigate those markets. All right. Now, let's take a step back now for some perspective on what's going on here for kind of what's happening in this current quarter and beyond. We'll stick with you just to kind of give you the landscape. Do you feel as though, I mentioned the trend being your friend? Do you think that the trends do continue and how much runway do they have given the fact that there have been questions about things like valuation, just how far total addressable markets can be viewed to be going in some of these big themes around AI and technology. Do you feel as though it's still something where investors

can feel safe investing with the kind of runway that you anticipate for the next, say, maybe one to three years? So I would say two parts of that. So number one is, yes, from a U.S. equity perspective, we're still seeing a lot of investors who are interested in the markets, understanding where I should be on U.S. equities, technology stocks, etc. But we're having a lot more questions on international equities and a lot of the macro news and tariffs, etc., have really shown a light on how to get international equity exposure. I think currency all of a sudden has become top of mind again, where if the U.S. dollar index is down 10%, a lot of those international equity ETFs whose returns come from both the stocks and the currency have been really strong performance this year.

I'm looking at South Korean equity ETFs are up over 40%. German ETFs are up over 30%. So a lot of not just will it run, but how do I put together a thoughtful portfolio balancing stocks, bonds, and international equities together? Where do you think, Eli, the activity is going to be as a portfolio manager, your whole job is to kind of anticipate

where the future returns are going to be and then get in early to get that outperformance. Do you feel safe in the portfolio that you're in right now? In other words, what do you think the shelf life is before you really have to take a look at rebalancing or kind of reconfiguring the types of companies that go into the next generation of power and infrastructure? Look, the market will ebb and flow. That's what it does. And we think that one of our edges, our edge comes from really understanding what we own on a bottom-up basis.

And what we're seeing is a bifurcation in the market between the companies, the haves and the have-nots. And the companies that I put in the haves category, they fit into huge structural trends, big themes. We talked about power and grid. Sure, there's some softness in the economy, but we are coming into an awakening that our country is increasingly short power. Look what's happening to power prices. Take nuclear, for example. Nuclear prices have more than doubled in the last 18 months. They're scarce.

the need to arguably triple the size of our grid by 2050, that is structural. That is something we have a high degree of confidence in. And when we look at the businesses that benefit from this, they're not the 10 companies that make up 40% of the S&P 500. They're companies in the industrial or utility sectors that really haven't, they've been somewhat neglected by investors. Most investors are under-exposed to them.

So you see this re-acceleration of growth tailwind from the capital is being invested. And then many times we can find very attractive valuations. And the two of those things is a great combo for us. Not to be cliche about the baseball analogy, but we do it all the time. So what inning are we in with regard to that? I don't know the inning, but less than 20% of our power in this country, as I mentioned earlier, is from renewable sources. We're trying to get to 100. I don't know if we'll make it. We'll get close. We've done this for 30 years, more, actually, and we're only at less than 20%. So, I don't know what any of that is, but that's a long ways to go.

Brett, it's been maybe a well-known or well-documented kind of thesis for the Ark Invest kind of philosophy, if you will, that many of the companies that you invest in are ones that have a, I guess, an investment horizon or window that is much more long-term in nature, that this is about transformative type technology and that some of the ebbs and flows, the drawdowns and surges are to be expected with the types of companies. companies you invest in. Is that a message that you think resonates with a certain type of investor? Do you think it's more universal? Do you think that more investors are coming around to the idea that there is a certain amount of volatility that you tolerate for investing in

what you think are secular long-term trends in transformative type technology or industries? I think if you're taking equity exposure, it has to be money that you're not using for like paying for lunch next year. You know, it has to be long-term money. And on that basis, the best way to actually approach it is to say, this is money that I'm putting aside to compound wealth over the long term. And disruptive technology is by its nature volatile, particularly because people, if you look at the biotech space, for instance, and cures for diseases,

there are assets that are more underpriced than any I've seen the course of my career right now. even still. And it's a combination of COVID hangover, you know, a lack of M&A over the last three years really hurt innovation companies. And now we think that AI is going to reduce the cost of developed drugs by 75 percent and a cure for a disease is the net present value worth 2x more than even a precision treatment that totally abates the conditions of the disease. These assets are not priced as if that's reality, but we think it is and we think that the, you know, it, it will play out into the financial statements if the market doesn't anticipate it. And so we see our role is to steward long-term capital investing and disruptive technology.

And to the question on what ending we're in, I think we're in the first pitch. We're not even, you know, we're still in Wormouth. We're still singing the national anthem here. The investment in AI data centers is going to explode. They're going to build data centers that are 10x the size of the current largest data centers. And that's going to yield a performance advance in AI that's going to be mind-blowing, even relative to what's available today. It's within the next year you should anticipate it'll get a lot better. And that'll translate into these other technologies.

That means that robo-taxies will get better. Autonomous drones will be more efficient and able to deliver packages nearly instantaneously to end users, that drug development will get better, and that humanoid robots will become a reality by the end of the decade in our view. And so we are in the earliest stages of a massive technological transformation here. And there's going to be bumps along the road, but we think the right thing to do is to lean into innovation over the long term. So would you make the case, Brett, that this is about an allocation in whatever way you see your risk profile? I mean, you'll work on one with your investment advisor and that the, I guess the allocation, if you will, hypothetically, towards transformative technologies is something that will over the long term,

be a use case for the types of companies that you invest in? I think it's important to have a strategic allocation to innovation because people have unintentional innovation shorts in their personal lives and in their portfolios. If you own a small business and you're worried about the impact that AI will have on that business, you sure better own the assets that are going to appreciate a lot on the basis of advances in AI to risk protect yourself against that potential disruption. If you own a core S&P portfolio, you own retail bank branches, you own freight rail, which is going to be disrupted by EV autonomous trucks, you own a lot of things that you own traditional auto manufacturers that could be really decimated

by what's going to happen with autonomous mobility and robo taxis. So there are a lot of unintentional innovation shorts people have in their portfolio. So just to risk complete your portfolio, it's important to have a strong innovation position. Notwithstanding that we think that there's remarkable compounding potential in innovation measured over the course of this decade. All right, David, one final point to you, and it'll be to each of you guys. I'll ask the same question, so it'll be kind of one where you have to do it on the fly. What do you think you're going to be paying attention to most with regard to investment

thematic investing or, you know, in terms of themes for the second half of the year? what exactly has you the most, I guess, excited or focused on in terms of what those kind of developments will be? Yeah. So, you know, as I listen to our conversation here, a lot of focused on AI technology. And, you know, I keep going back to building the broad portfolios for investors. When I think about our best-selling fund, it's a large-cap value fund. You know, so it's one of those as we think through wealth and strategically allocating assets. diversification is key. I don't disagree with anything that anyone said in terms of identifying those trends,

but when we talk to investors, they're still trying to be thoughtful of, hey, how do I build a well-diversified portfolio? How do I get exposure to international equities? Now, there's an overlap between the international equities and the tech story. One of the reasons we think South Korean equities have been so popular this year. But I don't want to lose sight as much as we're talking about all the innovations where there's still room in portfolios for income generating strategies, value stocks, etc.

All right. And Eli, what's got you the most in tuned in terms of themes in your particular type of industries for the second half of this year? I'm excited about a regime shift. So the market for a couple decades now has been driven by a certain type of business, asset light, high growth, and some of the transformative themes that we're talking about today, whether it's rebuilding the grid, whether it's adding manufacturing back to the U.S., whether it's some of the transformative technologies like AI, these all require more molecules,

atoms, physical goods, and capital investment that the world has been starved of, or is that many of these old economy companies have been starved of. So I think there's a regime shift taking place where these businesses have had headwinds for decades, and those headwinds have now shifted into tailwinds, and I guess we've talked a lot about innings, but I think we're quite early. All right. And Brett, the last one do you hear the biggest thing you're watching in the second half of this year? I'm looking for, you know, robotaxies to roll out in multiple cities from Tesla. I'm looking for the commercialization momentum behind cures for rare and not so rare diseases like sickle cell disease to accelerate. And I'm looking for, you know, continued AI performance gains and frankly to use those tools

internally to do better and more innovative research. So far, AI is, the performance per cost in AI is moving faster than anything we've ever studied. And in fact, it's accelerated, you know, considered like a 50x cost decline per performance over the course of a year. And that's resulted in rapid market expansions. I'll be curious to see if these companies

are able to move from a $200 per month price up to a $2,000 per month price point, as has been rumored, and what that means for enterprise software as a whole. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. David Mann, the head of capital markets at Franklin Templeton, continues with us now. David, it was a big conversation, meaty. I wish we had like hours to flesh out the topics that we talked about.

But one of the things I found interesting from your perspective during that conversation was about just where you think some of the activity will be in the second half of the year and the types of trends or themes you're watching. Let's go a little bit deeper into that part of the conversation and get you to tell us what you think will be the maybe two or three biggest investment themes that you'll see play out in the second half of this year and maybe the first or second quarter of next. Okay. Sure. So, you know, as I touched on this, the growth of active ETFs has been fantastic so far in 2025. And it's still hard to even wrap my head around the fact that there's now more active

ETFs than index ETFs, which I, which I still, I can't believe it. But I think one of the interesting conversations to your, to comment on themes is there, the, the, active nomenclature kind of is this catch all of, okay, let me pick stocks, let me outperform, let me beat benchmarks, et cetera. And really active is just means there's not an index. And so what we're really seeing and what we're most excited about is, okay, yes, it's stock pickers, but it's really active managers that might have tracking mandates. They might have low volatility mandates, able to manage portfolios with risk-adjusted returns when there's drawdowns and rallies. And I think just the overall investors just being excited to get active exposure in ETSs,

just really exciting across international equities, U.S. equities, and fixed income. One of the things that has developed increasingly so in just the last few years, but has been in play arguably for maybe the last 10 or beyond, is this gradual shift. I wouldn't say away from indexing because passive investing, index investing is still going to be a very large part of the landscape. But just how much more, to your point, relative market share has been taken on by active ETFs, not just than the number that are on the market right now, but there seems to be a legitimate move by investors, retail and institutional, towards allocating money to people who kind of pick and choose stocks as opposed to just going straight to a benchmark. Is that something that has a secular tailwind?

Is that something that you see having legs for years to come? Because there is a catch-up trade for active versus passive management. Yeah. We think so. I mean, I would, you know, if I go back over now 20 plus years in the industry, there was this default association that ETFs were index tracking mandates. And, you know, I touched on the ETF rule of 2019. I can't stress enough how important that was.

to be able point to regulatory stamp of approval from the SEC that said, operationally, these are the same. Okay, and we say that and it kind of, okay, now what? And then think about the conversations we have on ETFs, the trading, the liquidity, the transparency, all the things that we've come to love about ETFs and why they brought in a trillion dollars last year, they'll bring in a trillion dollars this year,

applies to active strategies. So then when we can have a different conversation, which is, well, okay, large cap value, I want to figure out my allocation to large-cap value, but now I can decide, oh, you know what? Maybe I'll now use an active manager or broad fixed income. Now I can use an active manager. So it's really the whole conversation's evolved to your question. I think this is just the beginning of active management.

It's been almost 40% of net inflows. I think that'll continue on for some time. How does that kind of reconcile with this whole school of thought or notion over the past, I mean, arguably 20, 30 plus years now, about the idea that it's very hard, if not impossible, to consistently beat benchmark indices. One of the reasons why passive ETSs have gotten so much money over the years is because it's kind of like that Warren Buffett School, right? Just put your money in an S&P 500 index fund, and I doubt a hedge fund manager, you know,

after fees and everything else can outperform that. How exactly has the conversation changed with regard to investors' thought processes about just kind of paying very low cost and going into an index fund that will be very hard to outperform long term to one where, hey, you know, I'm going to go into something where there's a dynamic component towards managing money. Sure. So two parts of that. So first is, you know, talking about the Franklin Templeton active managers. We have a dozen different investment teams who are studying and researching and analyzing all of those stocks. And let's have the conversation. I can put our large cap value against the index funds,

and I can put our high yield fund against the index funds and prove why over one, three, and five years, our active strategies are worth a look. More broadly, and this is touching on more asset allocation, is these decisions, okay, how much do I want to allocate to large cap? How much do I want to allocate to large cap value, large cap growth? How much do I want to allocate to international equities? Is the next iteration of that conversation?

Now, whether investors want to use index or active, and we offer both, you know, that's the decision we can have the conversation if they just want, you know, give me the market cap, do it cheaply, and I'll move on with my day. Or actually, hey, here's what we're doing. We think you might be very interested. We can have both those conversations. But in general, it's that asset allocation conversation that we're having more of, the Franklin Solutions team is having, that really is driving a lot of the returns in investors' portfolios. And where do you think, as we kind of close out this conversation, where do you think some of the allocation trends are moving? In other words, not just say with your family of funds, but more broadly speaking in the industry, where are you seeing some of the most magnetic-type

flows going to? What parts of the market are, quote-unquote, allocators allocating more to now, maybe relative to where they have been over the course of the last, say, decade plus? Sure. So more recently, I think international equities, I'll come back to that one again, where, you know, investors often will have a very U.S.-centric view of the world. That's fine. But with, you know, Liberation Day, which you talked about, tariffs which are impacting different markets very differently, just to be somewhat obvious there. And the impacts on currency with the weakening dollar has really shown a light on the importance of international equity diversification. We've seen that both with, our single country ETF lineup. So if you want targeted exposure to Indian equities or South Korean equities or Japanese equities, you can do that. Or if you want more of just a broad, hey, you know what, I'm interested in international equities, but I want to manage to volatility. I still want some income. We have an international low-vol high-div fund as well. So really, you know, to your question, the international equities is really, you know, a lot of folks are looking at their screens

and seeing some of these markets up 30, 40%, and it wouldn't shock me if that continues. I mean, first of all, I guess many of our listeners and viewers and consumers know we've had multiple conversations now over the past several of months about the diversification into international equity. So maybe it is a theme that we should watch because you're not the first guest to tell us about the international equity side of things. All right, David, thank you so much for the conversation. That's David Mann over at Franklin Templeton. We appreciate the conversation. Thanks, I appreciate it. All right.

That does it for ETF Edge, the podcast. Thanks very much for listening. Join us again next week or just head over to etfedge.cnbc.com. How does InvescoQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investorbiters, Inc.