ETF Edge - Retail ETFs & Presidential Election Impact on ESG

Episode Date: October 12, 2020

CNBC's Bob Pisani spoke with Ed Rosenberg, Head of ETFs for American Century Investments, Simeon Hyman, Global Investment Strategist at ProShares and Todd Rosenbluth, Director of ETF and Mutual Fund Research at CFRA. They discussed the booming e-commerce space ahead of Amazon Prime day, dividend growth coming back and consolidation in the financial services space. In the 'markets 102' segment, Bob discusses the possible election impact on 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, exchange traded funds, while you are in the right place. Every week, we're bringing you interviews and analysis, and we're breaking now what it all means for investors. I'm your host, Bob Fassani. Today on the show, we'll dive into the booming e-commerce space ahead of Amazon's Prime Day. Dividendant growth is coming back and consolidation in the financial services space. Here's my conversation with Ed Rosenberg, the head of ETFs for American Century Investments, Simeon Hyman, the Global Investment Strategist at Pro Shares, and Todd Rosenbluth,

Director of ETFs and Mutual Fund Research at CFRA. Simian, let me start with you. It's Amazon Prime Day tomorrow. You have two retail ETFs that have done really well this year, but I want to get your thoughts on Amazon's prime sale. There's reports out there. We could be seeing 40% increase year over year for them. It's going to be quite a day, but other people are out there as well trying to do the same thing. including their competitors. What do you see right now for the retail landscape? Look, the acceleration driven by the pandemic is well in hand and likely to continue.

We saw a hockey stick in Q2. There was almost a 50% increase in online penetration over wall. By the way, that was only from 11% of total sales online at the end of the year to 16% in Q2. A hockey stick, but earlier than people think. Here's why that uptrial. and that acceleration is likely to continue to be sticky and reflected both in Amazon and some of its key competitors. One is penetration across previously under-penterated areas, like grocery. It may not be the huge thing on Prime Day, but it's an important indication of what's going on here. There was almost no grocery, even going into the end of last year, like 3% of total retail sales. That's now quadrupled. And so things that people never bought online, they're buying online now.

and I think Prime Day is going to see an acceleration of that. From competitors, you see something interesting, too. There's stickiness. 70% of Chewy's business is subscription. So, you know, a bunch of that uptick of they got in Q2 is likely to be sticky because they have ongoing relationships. And even at Etsy, 15% of Q2 was mass. So that's a very flexible platform.

And as they've now entered the S&P 500, you can be sure they're going to try to convert those extra eyeballs into greater share of wallet and more mainstream opportunities. Timmy, Todd, what impresses me is just the breadth of availability for retail ETFs that you could have. I mean, I'm talking about retail, the business retail. I don't mean retail trading ETFs. Besides Simians, we'll discuss in a minute, the ONLN, the online retail ETF, there's also his long online short stores one. There's the S&P Retail Index. There's the S&P Retail ETF, XRT, which is more of an equal-weight index. They're all doing well this year, although his strategy, Simeon's particular strategy of Clix, CLIX,

of going long, online and short stores is up 82%. So it's quite a move here that we've seen. It seems like it's been a successful strategy this year, Todd. It certainly has. I mean, and Amazon is the juggernaut within the consumer discretionary. to me talk about how it's gaining share and online spending is gaining share. It's Amazon is a 24% waiting in the pro-share's online retail ETF, O N-LN. It's about a 2.5% weighting within a competitor or a pure ETF from Amplify, I-B-U-Y,

I-B-E-B-E. What's interesting actually is Fidelity has the largest weighting. Fidelity consumer discretionary E-CF, FD-I-F, has more than 30% of its exposure. to just Amazon. So again, investors should know what's inside their portfolio, and it might surprise you how heavy the weighting in Amazon has grown, given how well the stock has performed this year. And I think the important here is you really have a wide choice here, like the S&P Retail Index, RLX, that's up 45%. That's essentially a market cap weight of what's in the retail part of the S&P. But XRT is up 18%. That's like an equal weight. Simions ProShare's online retail,

O-N-L-N's up 89%. So, Simeon, and Ed, weigh in, if you have some thoughts here on retail. I'm just hitting up Simeon here. But it seems like purely online actually would have been the perfect play for this year, although your strategy of long online and also shorting some stores, C-L-I-X, in that particular strategy, also has done well. It's up 82%. So it's basically online is where you want to be at this point.

No, I think that's right. and but both sides are important so the increasing penetration of online and the other side of the coin the retail apocalypse as people focus on is important too and you know here one of the takeaways is what one of the key points to observe is that it's not just the increase in the share of the wallet online but the profitability thereof that we just talk about a lot we talked about it a half hour ago on air but Walmart has grown to be the number two players so You say to yourself, okay, maybe this distinction doesn't matter anymore. But if you look at profitability, their reward has been declining margins.

And meanwhile, Amazon's margins have doubled over the same time period. So there are real hurdles, even for the select brick-and-mortar folks, that you are making a decent go of it online. And your observation is spot on. What we found in the performance of O&LN, which is long only, and then clicks, which is 100 cents long and 50 cents short, brick and mortar. You've actually gotten like over 90% of the long-only returns with 50-cent short with clicks. So we're really proud of that opportunity offering you both sides of the trade and the spread trade as well.

And Bob, if I can add. You want to weigh in here? Yeah. Go ahead. I mean, you see it, Bob, where you're seeing it, too, is it with active managers? I mean, if you look at one of our funds, focused dynamic growth, Within the last quarter, Amazon became the largest holding in the fund. So if you look at the 930, top 10 holdings, it's almost 9%.

And it's not on the growth trajectory in the portfolios going up. And so I think even the active managers recognize that in the retail space, Amazon is the play right now. And I think the other thing they're looking at is the downstream impact of something like an Amazon. Because if you're buying online, where else does that impact? And if you notice, and just using that fund as the example, one of the top 10 holdings is also MasterCard. And I think you're seeing some of the downstream impact of people using credit cards and seeing growth in that area as well, whether it's MasterCard Visa, American Express, to take advantage of what's happening with Amazon and Prime Day, as well as being online. Good point. Very good point. I want to move on. We've got a couple topics I want to hit today. Todd, I want to talk to you about dividends briefly.

And guys, feel free, Simi and Ed, feel free to weigh in here. We have all been worried that dividends would be cut down dramatically this year. And it seems like the worst case scenario hasn't happened. Todd, I'm wondering if you could comment on that. And this is good news for Simeon. He has the dividend aristocrats, E-T-F-N-O-B-L. We'll talk about that in a moment. But, Todd, what's the status of dividends?

And are we out of the woods on worries that we might see a lot more significant dividend cuts later in the year? Is that off the table? The second quarter of 2020 was the worst. We actually saw twice as many companies either cut their dividend or suspend their dividend than a more positive impact of either initiating or raising the dividend. In the third quarter of 2020, and this is using data from S.P. Dow Jones Index, we saw three times as many companies raise or initiate the dividend and took that negative action. We've seen specifically actually some more technology and growth-oriented companies,

companies like Accenture, Microsoft, Texas Instruments. These are all companies that raise their dividend in September. We're seeing a number of technology companies raise the dividend. You mentioned Simian's dividend aristocrats. That actually has a low weighting within technology, but they have a pro-share's technology dividend aristocrats, TVV, which focuses on companies that have raised dividends for the last. seven years in the technology space. And there's a lot of great companies there. We also see hefty

wadings within Vanguard dividend depreciation, VIG, and Wisdom Tree's U.S. Quality Dividend Growth Fund. That's DGRW. These are more forward-looking or shorter time period of a look back. And technology companies, as of late, has really been driving the dividend growth story. And I think that's something we're going to see more of heading into the fourth quarter. Well, the important thing, and that I'm hearing from you, is second quarter was the worst. And this, I saw this from the S&P. It doesn't seem like we're seeing any increase. Indeed, some people have reinstated the dividend.

That's kind of what I'm trying to get at here. There was a real scare of five or six months ago. That seems to have passed now. You know, Bob, there's a, there, you have to dig into it, though. I think it's true at the broad market level that dividends, have always been more resilient than price, and that's one of the key advantages of being a dividendary or an investor. If you look here today to Todd's point, we calculated about 15 percent of dividend payers have cut this year, so it's not trivial, but it's not an unmitigated

disaster. But if you split it up, the vast preponderance of those cuts are from low-quality companies, whether they're levered companies, whether they're companies with high dividend payout ratios, high dividend yields, low credit quality. But if you look at the good quality stuff, you mentioned the S&P 500 aristocrats, the index that our ticker NOBL follows. One company is cut year-to-date. So there are definitely halves and have-nots

in the dividend resiliency equation. Right. And, Ed, one of the lessons we constantly point out about the dividend business is that in general, not all the time, but in general, you want to buy into companies that are consistently raising their dividends over many years, which was the aristocrats' ideology or methodology,

rather than buying companies that simply pay a high dividend where you could have a risk of the dividend could be cut. Would you agree with that generally, if you were into dividends, that's probably the way to go? So I would agree with that, with one quick exception. The only exception is you also want to look at the other side of the ledger, the debt. Are companies using debt to continue to run?

raise that dividend so they can stay within, whether it's indexes like Noble or just be quality overall, in the eyes of the investor. So you have to look at the company as well and how much is their debt increasing just to sustain that dividend. But overall, companies that are good quality companies, as Simeon said, that continue to raise their dividend without taking on debt, without cutting in environments like we just went through. Generally, they can be good companies to go for, but you really do want to look in what's happening with those companies just to make sure that they're not increasing any of their risk just to make sure that dividend continues to pay. Good point. Good point. Very good point. I want to move on and talk about consolidation in the industry.

This is something we talk about all of the time. We saw last week Morgan Stanley announced it was buying Eaton Vance. A week after closing the E-Trade deal was quite a roll of, quite a move for Morgan Stanley, rather aggressive. I guess, and I'm going to throw this out to all three of you. You're all involved in this industry. People kept messaging, why is this deal happening? And I kept saying, one, where I actively managed funds are losing clients that are out there. Number two, ETFs are putting downward fee pressure on the overall industry, and that's pushing people towards more consolidation. And finally, to survive, funds need to get more assets under management. It's quite simple. I wonder, Todd, you're an observer of this business. Are we going to see the number of e-trade, you know, online brokers is pretty small already.

I don't know how much consolidation we're going to have any more in that area, but there's still some financial services firms that are out there. Do you anticipate more consolidation and why? So we do. We think there's going to be more consolidation among the asset managers for the reasons you touched on. scale wins. You need to be able to compete at an aggressive enough price to get investor attention. At some point, the asset managers are going to need to lower their fees for mutual funds in order to realize that money is shifting towards ETFs.

But what's interesting to me about this deal of Eden Vance is Eden Vance does not have an ETF presence. This is an ETF show. You would think that they would want to be a part of the growing party of $5 trillion dollars and counting of the E.TF assets. In advance doesn't have exposure to that. Mortgage Stanley doesn't have exposure to it. The sweet spot for Eat in advance is twofold. They've got ESG-oriented mutual funds through Calvert, and they've got municipal bond mutual funds that are held more by mom and pop investors

that are relatively loyal. But it's a bit surprising that Morgan Stanley is just not going where the puck is headed towards the ETF industry. Why do you think that is, Todd or Ed or Simeon? Do you think it's a tactical error on their part? Well, I was going to give them one more piece of credit. I think parametric could be a little bit of an interesting piece of this puzzle, too. I'll be curious to see how they can scale that,

because that's a nice little differentiated business, even though it's housed in a legacy mutual fund complex. and that's always been a nice offering on mass affluent and high net worth platforms. So that might be a little bit of hidden opportunity for them to scale that up a little bit. Okay. Yeah, and Bob, I'll add that, I'm sorry, you just don't need ETFs now if you're Morgan Stanley. If you think about it, the shops that might get eaten up to create assets for them like an event that didn't have them.

But as you go forward, a shop like Morgan Stanley would have the ability to launch ETFs when they want, because they have a natural distribution arm, whereas someone like Eden Vance, who they bought, doesn't. And so it can create a platform. And why haven't they done that already? I mean, JPM Morgan did it, Schwab did it? Why is Morgan Stanley sort of ignoring this? I mean, who know?

You know, I would say that, you know, as you go with those big companies, there's a lot of hurdles to get through to launch any new product and any new structure type, and I think it's just a time for them, just to get through all of their hurdles to make sure that they check all the boxes. Who knows? But I suspect you're going to see not. not just companies like Morgan Stanley, but a lot more firms launching ETFs that haven't in the next five years than you saw in the past five years. Yeah. Okay, I want to move on. We've only got a couple minutes left, but I want to touch on the elections because I keep getting a lot of email questions about how it's affecting the ETF business.

One of the hottest ETFs of the year is the solar ETF. T-A-N, it's up 150 percent, something crazy like that this year. And the obvious reason is a lot of people, you see the growth in the last couple of months, the obvious reason is there is a belief that a clean energy agenda, should Biden win, would be very much on the overall agenda here. And I think that's the main reason it's moving. I just want to ask any of you, all three of you, very briefly, is there any area, should Biden win, is there any area that you think would particularly in the ETF business? We don't have a long time for a long discussion.

This will happen in the future. Just give me something quick here on where you think might move. Should Biden win the presidential race? So, Bob, if I can jump in here, I would say the first place is they've talked about, obviously, Biden wins infrastructure. And at the high-level sector, you're either going to buy infrastructure or look to industrials to take advantage of that once they win. And if it's a blue wave, I think you'll see investment across the board and infrastructure,

which will lead to industrials, which is where most of those companies lie, start pushing forward with better prospects and better earnings. I'm going to second that motion and do a shameless plug for ticker TOLZ, which is our infrastructure ETF. And in that ETF, we actually hold the owners of the infrastructure asset. So they have stable cash flows and a ticket to extra to an uptick in spending, so you're not sort of left holding the bag just in case we're wrong. So since I'm not working for an ETA provider, I'll just add global assets.

has a U.S. infrastructure development ETF, PAVC, which is another strong competitor in the infrastructure space. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is our Markets 102 portion of the podcast. Today we'll talk about the possible election impact on ETFs. And as always, here's my producer, Kirsten Chang. Bob, wanted to get your thoughts on the possible political ripple effects from various outcomes of the presidential race. the makeup of Congress. Some analysts predict if we get a Democratic sweep that would benefit the more

cyclical sectors like energy, materials, and industrials, and arguably consumer discretionary if we get a vaccine. So what do you see as the implications for ETFs under this scenario? Well, if you're talking about sectors, the first thing that really stands out, Kirsten, is just look at the solar ETF. The symbol is T-A-N, tan, get it. It's been an absolute monster. It's up like 150% this year. And that's because there's a lot of perceptions that clean energy would get a real boost under the Biden administration. There's other obvious things that are going on. If you look at the material spaces, anything that's involved in the crushed stone business, for example, has been doing fantastic. Martin Marietta is a good example. And it's a belief that material stocks and

industrials would benefit from a massive infrastructure program that would likely come under the Biden administration. There's also other things going on that I think are very important out there. The reason the market is rallying so much is that stimulus is really critical. Stimulus is the bridge to the vaccine. That's why it works. So whether it's pre-election or post-election or it's partial or comprehensive, whatever, the markets believe stimulus is important because it is perceived to be the bridge to the vaccine. And stimulus has worked to hold up the economy most traders believe. The other thing is this vaccine and reopening story. This has been generally positive. Remember, earning season is about to begin, and the earnings trend is really

positive. The companies that are reporting early have beaten by a very large amount, and a lot of that is because analysts have been underestimating the strength of the recovery. The problem with all this is the story, the whole earning story, the market's going up still very much hostage to the reopening story, the vaccine story, and to a large extent, the stimulus story as well. That's why there's a certain tentative feeling to all of this, including on the volume. It's not very high, even on today. Worries about a contested election a little bit lower on the concern list. And there are people debating whether there was a, if you had a Democratic sweep of the Congress, would that be bad for stocks? That's very hotly debated, although a lot of people insist that any attempt to raise

taxes in a pandemic would be a very bad idea. There would be a lot of pushback. So people were saying, oh, wait a minute, he's going to raise taxes out there on richer people. He's going to raise taxes on the stock market, on capital gains. There's a lot of people are pushing back saying, wait a minute, in a pandemic, highly unlikely, and they point to what happened to Obama after his administration, how tough it was to get a lot of his plan through. So there's a lot of debate about that blue sweep that we may have. or may not have. I think what's really important is there are some bets being made that stimulus programs are going to be around for quite some time. And that's going to be what matters for the

markets in the next few months. 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 Edge, CNBC.