ETF Edge - Reopening Trades & Mutual Fund-ETF Conversions

Episode Date: August 23, 2021

CNBC's Leslie Picker fills in for Bob Pisani and speaks with Bryon Lake, head of Americas ETF client at J.P. Morgan Asset Management, and Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. They discussed resurgent reopening trades, consumer resiliency, mutual fund conversions and the rise of active management  Plus, Tina Herrera, chair of YWCA’s board of directors, shares the factors behind the Impact Shares YWCA Women’s Empowerment ETF (WOMN)’s success. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights 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 Leslie Picker, filling in for Bob Pisani. Today on the show, we'll be talking reopening trades, which are taking. charge once again today on the fuels of the FDA's full approval of Pfizer's COVID vaccine.

Plus, the rise of actively managed ETFs and women's equality. We'll be joined by the one of the brains behind the women's empowerment ETF ahead of Women's Equality Day. Here's my conversation with Brian Lake, head of America's ETF client at JPMorgan Asset Management. Todd Rosenbluth, Senior Director of ETF and Mutual Fund Research at CFRA and Tina Herrera, chair of the YWCA Board of Directors. Ryan, what's happening here? Because we are seeing so much kind of differing data.

You've got the high frequency data telling you one thing. You've got kind of more of the macro data telling you something else. It feels like we're at this inflection point where the cases are rising, yet more people are getting vaccinated. And of course, with the Pfizer full approval of its vaccine, seems to be like it would be some good news for the reopening trade. What's your sense? Yeah, you're right.

We are at an inflection point here, but I think it's important for us to kind of look for the signal through the noise. And when we take a step back, we can see that the data does continue to get better. Maybe we're at a little bit of a pause here. But I do think that there's a great opportunity for the reopening trade to be on. Obviously, today we're seeing the markets reflect that as well. I think what investors are really doing is they're really focusing on valuations. They're going to be looking at quality, balance,

balance sheets, making sure that they understand the companies that they own, maybe looking more towards some value names versus some of the growth names. But we do think that there's an opportunity for investors to continue to participate in the reopen trade through the end of the year. Todd, you hear, you know, the term investors focusing on valuation. I'm sure a lot of, you know, schooled financiers out there would find that to be a nice relief given what we've seen recently. Do you believe that to be the case, especially with the potential for some tapering activity? Does all of that kind of produce grounds for more of a value trade to come back into focus on a more sustainable basis? We think so.

So much of the first half of 2021 value outperform growth and the pure or more focused value-oriented strategies did even better. Growth returned over the summer. but we think we're going to see a rotation again back towards value-oriented ETF, whether they're the broad market ones like the I-Sharees-Russel-1,000, value, ETF, or the more targeted and focused ones. So Invesco has an S&P-500 pure value E-TEP, RPV, I-Share's has a focused value ETF, FOVL. Those really outperformed because of the strains of financials and some of the more value-oriented and cyclical sectors.

we think that's going to happen as we make our way into a return to school and a return to work for many people. Brian, do you think that the factor-oriented ETFs are kind of the way to go right now, or is it better for investors to be sector-specific? Are there other types of characteristics that you would advise when looking at investing in ATFs, given this kind of uncertain uncharted territory we're in right now? Yeah, you know, I think it's also an opportunity to look at acts. active ETFs. And I know that we haven't spent as much time talking about active capabilities delivered through the ETF vehicle over the years. But now we think that's something that's going to come to

the forefront of investors' minds. Dispersion between returns is going to be more pronounced, given all the uncertainty that you've talked about. And so investors looking to get outcomes through active strategies is really a way that they can enhance their portfolios. We're obviously looking at delivering some of our active strategies through the ETF wrapper. One that's been very popular lately where investors are really enhancing their income on their portfolios is equity premium income. The ticker is JEPI. This is an actively managed equity strategy where the underlying holdings are all quality names. But then we're doing covered call overwrite on that to generate income for investors that are really in an income stark world.

So active is maybe a way to be thinking about that. Of course, yes, factors are important. As Todd pointed out, the value factor is something that investors are looking at. as well as quality. We offer single factor strategies J-V-A-L and J-Q-U-A being the tickers there. And again, those are ways to isolate portfolios and tactically overweight some of those factors that may be able to identify some of those valuations or those quality balance sheets that investors will benefit from as we go in towards the end of the year and participate in this reopen trade.

Interesting. Very quantitative in nature there. Switching gears, JPMorgan just announced a string of mutual fund to ETF conversions earlier this month. That follows a pattern of similar conversions earlier this year, including Guinness Atkinson in March, dimensional funds in June, as more funds are choosing to shed the mutual fund moniker and embrace the ETF model instead. So what are the biggest factors driving this sudden rise of actively managed ETFs? And will we see this trend continue into 2022? too. Brian, is this a matter of tax efficiency? Is this a matter of fee potential? You know, what are some of the key drivers here? Well, we think investors are looking to get exposure to the

markets through a number of different vehicles. So whether it's mutual funds, separately managed accounts, or exchange-traded funds. Certainly the ETF does offer some features to investors, the ability to trade throughout the day in the instance of these strategies that we will be converting pending board approval in the early part of next year. These will be 100% transparent strategies. And at the point of conversion, we actually will also be lowering the overall expense ratios on these portfolios.

And so we do think that there's a client behavior point to be made here as well. If you look at 40-act assets or mutual fund and ETF across the U.S., now 25% of those assets are invested in exchange-traded funds, 88% of financial advisors across the U.S. use. ETSs in their portfolios. And so, you know, we're just being really thoughtful. We're being very client-focused as far as what our plans are. But we have announced the intention to convert these four mutual fund strategies into ETS pending board approval in the early part of next year.

And we think that this is a good outcome for investors for all the reasons that we mentioned, the benefits of active management delivered through the ETF vehicle, which offers a lot of features for investors. We think it's a win-win. What do you think this means for the mutual fund product? I mean, Brian made a really good case as to why this conversion is necessary and beneficial for clients. You know, what does that do to mutual funds? Well, we're seeing investors rotating away from actively managed equity, mutual funds, and rotating either to index-based equity ETFs, which they've been doing for years,

or actively managed ETFs, actively managed equity ETFs in particular. They're punching above their weight this year. They've got about 9% of the overall flows to the equity space as opposed to just 2% of the assets. And we're seeing it in a couple of different ways. We're seeing firms that are new entering the ETF market, like a firm like Horizon Kinetics, that launched an inflationary beneficiary ETF INFL. That's been very popular launch this year and is over 600 million in assets. We're seeing firms that are doing semi-transparent structures, Fidelity, launched in,

a Magellan version of semi-transparent version of Magellan. And then we've got the fully transparent products like Brian's talking about with JP Morgan. And we've got a couple of others that are lined up. Federated announced their plans to be launching ETFs probably in 2022. And we're waiting on Capital Group, which has said they're going to be coming to market with actively managed equity ETF in 2022. So those are some big players entering into the ETF marketplace and shifting away from their only focus on mutual funds.

Now, it's interesting, Todd, just to follow up on that, it sounds almost like an oxymoron, active ETF because historically we've thought of ETFs as this kind of passive product. How frequently are these active managers trading with ARC, which is kind of the most well-known example, perhaps, of an active ETF strategy. They're trading quite frequently. Is that the same to be expected for a lot of the names that you just mentioned? So, right. ARC is doing things where they're fully transparent and there's discretionary and there's trades happening every day, that they're buying and selling based on what's happening in the market and what's happening to some of their favorite stocks. These strategies like what JP Morgan has launched and plans to convert as well as what we expect from American funds, what it currently exists from Fidelity, these are more buy and hold longer term investment strategies.

So there isn't as much risk in front running because of the nature of the investment strategy, moderate turnover. So the manager can still make the trades they want to. But they can react to the marketplace. You know, we have big news today with the Pfizer vaccine. That is likely causing active managers to make discretionary decisions that you wouldn't find within a S&P 500 index-based EPF. Huh. It's all so fascinating. and definitely something we should be watching,

especially given the amount of assets that are flowing into these categories. Moving gears or switching gears, the nation will be celebrating Women's Equality Day this week, a day that will commemorate women's suffrage and equal rights, and the impact shares YWCA, Women's Empowerment ETF, ticker WOMN, will be celebrating its three-year anniversary on Friday. That fund is up 17% this year and 68% since. inception. What's behind that fund success? It's remarkable. Let's ask Tina Herrera,

chair of the YWCA board of directors. Tina, what exactly does your fund look for in making investments and why do you think it's been able to produce such strong return numbers thus far? Thank you, Leslie. This is a really excellent question. For those who do not know, the YWCA has been involved in women's empowerment issues for 160 years. We have partnered with impact shares to create this social investment fund that allows us to really do a detailed screening of those that are included in the fund itself. So we use almost 20 different filters to evaluate companies on the environment that they're creating to empower women. Having that level of rigor, almost, I hate to use the word guarantee, but we certainly

provide some assurance that the companies that are involved, the over 200 companies, that are involved in the ETF are doing the right thing to empower women. And as we know, companies that have a focus this intently on their workforce tend to be very well run and do well in other places. How active are you with the companies you invest in in ensuring that they meet your standards and meet your thresholds for investing? Is it one of those things where if they do something that you believe isn't furthering women empowerment, then you just sell the equity? Or do you have an active dialogue with management to try and effectuate some changes there? Right. So this platform gives us that opportunity to engage companies in just the way that you're

saying, Leslie. It's very important that as we know, things do change over time. And since ETSs, in this case, they're evaluated and rescreened on an annual basis, things can happen during the year. And we do have an active filter that continues to run to look at when there are things in the news that could be indicative that things have changed at that company. It does provide an opportunity for us to engage with them and help them through situations that may not be the best for women. And Todd, we've seen just this huge rise in ESG and gender diversity, ETFs, and in ways that investors have been playing these tremendous amount of net inflows into these categories

over the last year or so. So how does this tie into that broader conversation? More of the assets are in these broad, diversified ESG products that cover all three of the pillars, environmental, social, and governance, where the more narrowly focused products focus on women's equality or gender diversity, those tend to be less popular, but not for the right reasons on our opinion. So WOMM, I'm sorry, WOMN, the EETF we're talking about, has actually outperformed the Russell 1000 in the past year. She, which is the Spider-S-S-SGA Gender Diversity Index E-TF, has also outperformed. So you cannot just feel good about what you're doing, but actually add value to your overall account by investing in some of these more narrowly focused ESG products. One just follow-up question on that front, Todd, is that there is a school of thought that, you know, these ESG products are kind of the byproduct of a bull market phenomenon. And, you know, once things do turn, if they do turn eventually, that people will sell these off because they've risen so much in value.

Do you agree with that notion? So the more broadly diversified ESG products, we don't. So those tend to have exposures that are similar to the broader market. So ESGU, which is the largest one of these products from iShares, tends to have the same sector exposure towards technology, towards financials, even towards energy, as you'd find within the Russell 1,000 of the S&P 500. So they're going to perform largely in line with the broader market, but with a higher quality tilt based on its focus on some of these governance

and other environmental characteristics. That's it for today. I'm Leslie Picker. Thank you for listening. you tune in next week and in the meantime you can tweet us your questions or topic ideas at ETF Edge, CNBC. Investco QQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at investco.com slash QQ.

Investco Distributors, Inc.