ETF Edge - Rise of Single-Stock ETFs – Big Bets on Red-Hot Names 7/18/22

Episode Date: July 18, 2022

CNBC’s Bob Pisani spoke with Greg Bassuk, CEO of “Access” Investments, and Dave Nadig, Financial Futurist at VettaFi. They discussed the ins and outs of leveraged and inverse single-stock ETFs ��� the first of their kind to launch in the U.S. The new suite allows investors to make huge bets on or against the most widely held names out there – like Tesla, Nvidia and PayPal. They covered the pros and cons, pitfalls and perils of trading such volatile products – and why the SEC has its reservations about them. In the Markets ‘102’ portion of the podcast, Bob continues the conversation with Dave Nadig from VettaFi. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQQ, 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 exchanged, traded funds, you are in the right place. Every week we're bringing you interviews, market analysis, breaking down what it all means for investors. I'm your host, Bob Bizani. He's back. I'm a nice trip for the Caribbean.

Today on the show, we'll discuss the ins and outs of leverage and investment. first single-stock ETS, the first of their kind, launched last week right here in the United States for the first time. They allowed investors to make big bets on or against the most widely held names out there, Tesla, Nvidia, PayPal, just a few examples. We'll cover the pros and cons, the pitfalls and the perils of trading these volatile products and why the SEC has its reservations about them. Here's my conversation with Greg Bassick. He's the CEO of Access Investments, along with Dave Naug, Financial Futurists at Vetify. Greg, this is the first single-stock ETFs in the U.S.

There's eight of them. Got to get this out of the way. Tell us how they work. What are you getting when you get these ETFs? Well, that's right, Bob. These ETFs are designed to provide amplified exposure on single stocks. Stocks like Tesla, Navidia, and some of the others that you mentioned, they're designed for active traders, traders who are making daily decisions based on earnings

and other corporate events. for which these tactical solutions are important. While this market has matured for leveraged ETFs, we're excited to bring the first single-stock ETFs here to the U.S. So we're putting up what these are here, with their symbols here, and I'm just struck by the fact that they're not all the same. Like you have Nike, two times bold, two times bare, and Pfizer, two times bold, two times bare.

But Tesla, you just have a bear. So I presume this means that if Tesla's stock is up 1%, this would be down 1%. it's the inverse of it but they're all different now how did you decide on the different degrees of bull bear what what made you decide on on what one you're doing here yeah no great question look the first thing that we decided to do was to come out with uh... et-fs that are based on stocks that

are very actively traded and and stocks that around these corporate events uh... tactical uh... experience traders want to make those kinds of decisions You know, with respect to ETF innovation, we've been doing that for many years, and it's always a balance between, you know, coming out with better tools for investors and doing it within the regulatory constraint. So you take a stock like Tesla, which happens to be, you know, very volatile itself. We thought rolling out the inverse first would be, you know, the best way to roll these. out and we've done that with other funds in our family as well, where we'll start with the inverse and then we'll move to either different leverage factors or other elements of the

innovation. Now, as always with these leverage and inverse products, we always qualify them. They reset every day, folks. So even over a few days, the actual return will differ. So the SEC, Greg, has not been very friendly to these products. Just last week, SEC Chair, Gary Gensler, said, I'm quoting him, they are risky products for investors and potentially for the markets as well. Other SEC officials have also expressed concerns. In your opinion, do these products pose some kind of risk to investors and to the markets? And what have you said to the SEC about this? Well, look, you know, as I said at the outset, these are definitely tools for active traders. These are not buy and hold investments. These are not building blocks for portfolios.

But one thing that is increasingly clear is that the market for these kind of strategies is very well developed. And the investor universe for these kind of ETFs, both here in the U.S., although before our launch, not for single stock ETFs, but you look to other major markets like Europe, and there's a very mature market for these kind of strategies. Now, having said all of that, we also agree with the premise that these products, you're like other investment products, investors need to know what they're investing in. And so we've, you know, gone to pretty great lengths to provide that kind of disclosure and education

so that these are used by the right investors as important tools for those traders. Yeah, Dave, how many years have we been talking about leverage and inverse problems? We're getting old. About 20 at this point, I think. So let me just take this up. We've seen leverage problems cause some problems in the past. Yeah, volatility. The volatility one that occupied your time so much three or four years ago, and mine, to my regret.

Give us your thoughts on these. Is there some, it's odd to me that Gensler actually tried to, not front run, but comment ahead of the products. Well, several folks at the SEC came out basically saying these products are very sharp tools in the drawer. And like all these leveraged and inverse products, you have to think of these as being razor blades in your toolbox. If you have a need for this specific use case, you've got to. an exposure like Tesla or Netflix and you're trying to play the event for some particular trading strategy, then these are going to be great. And I give access props for figuring out how to do the structure in a US regulated environment.

My concerns are that people don't read the labels well enough. They don't necessarily understand that you cannot hold these things for a week or two. It's really true with all leverage and inverse products. It's super true with these because obviously as a single stock around an event, it's going to be much more volatile than a basket of 500 stock. around an event. And that volatility kills your returns. So other than that, other than the usual warnings that nobody reads the labels and they'll get confused or that what you're really owning and all of that and the reset,

how about the specific issue of single stock risks? If these things get big enough, could they pose a problem to the individual stocks underlying? Could it cause volatility? And is it possible that there's even some kind of systemic risk, a broader risk to the overall risk? The risk here is, as we saw with the volatility products, if, for instance, one of these products got very large, let's imagine there's a GameStop one of these, and then the GameStop one gets to be very large, a significant percentage of the AUM of the underlying stock. Every day, the long and short versions have to buy with the market, meaning if the stock, if GameStop's up on the day, they have to buy more. If they're game stops down and they have to sell more, and that adds volatility to the end of the market. So you've got this bare Tesla. So, for example, what actually happens?

What's the mechanics of what happens at the end of the day? Every day when they reset, they need to reset that exposure. If they were short and Tesla is down, they actually need to lighten up that exposure. They need to be sellers of more exposure while Tesla's going down. On the opposite side, if Tesla's going up, they're going to have to be net buyers, or in that case, unwinding short, same thing. That can create that end of day, increased volatility. Greg, are we just being paranoid here?

I mean, these are, you use swap products, right, to work this out, right? But could there be a single stock risk if these things got too big? Well, I go back to the notion that this is a very mature market. And we haven't seen that with respect to these kind of products. At every step of the way, over, you know, over 15 or probably 20 years, as the ETF market has evolved to new areas of innovation, We always hear concerns about that with respect to volatility or systemic risk. One thing that gets us excited, you know, as we look to continue to innovate in the area of ETFs,

ETS as a vehicle has remained very, very resilient. One other thought I would share with you is that, you know, buying and using leverage, that's also been around for, you know, many, many years. and the traditional ways of doing that, such as buying on margin with itself, comes with some limitations and risks. For example, investors that buy on margin could potentially lose more than their initial investment, whereas this ETF, single stock ETF, in that regard, we believe is a better mouse trap in that investors can't lose more than they're investing. So it's another reason why we were really focused on innovating in this area. So just to extend my paranoia a little further on this, is there a systemic risk?

I mean, suppose this product was phenomenally successful. And all the entire S&P 500 had two times, you know, leverage, bull and bear leveraged an inverse ETFs surrounding. Yeah, so we've seen this in the case of volatility. When the VIX products became a significant part of the available. VEGA in the options market, the actual volatility we were trying to trade, it did become a problem. It became a tail wagging the dog problem. Now, we'd have to have enormous success. I think Greg would be happy to retire on the amount of success that might be required. Yeah, he's going to retire. We're going to have to clean up this method to explain it to everybody.

But the point is, like, there is some opportunity for these things to get out of hand. Now, we're talking about huge mega-cap stocks. He's right that this does have a point solution and difference for traders that are looking for that kind of negative exposure without taking that margin risk. Those are all accurate statements. In three or four years, if there's hundreds of billions of dollars in this complex, then we're going to have a different conversation. Yeah.

And the SEC will probably get more active, right? I mean, look at the comments they're making with nothing. There's no real volume in these things. There's not a lot of assets under management. And already they're making comments. Like anything else on Wall Street. When there's no volume, there tends to be no systemic risk. the volume gets out of hand, that's when you start to look for the cracks in the system.

You know, last week, Dave, I had on Bruce Levine from Nightshares, formerly from Wisdom Tree, a friend of ours, and he started a whole company that's essentially out there tracking overnight returns. They're buying at the close, and they're selling at the open. And it seems to me now we have funds chasing single stock returns here. Is this a sign that speculative products are becoming more commonplace? So is this a natural evolution? It's not even an evolution.

It's old home week. I mean, remember, back in the 90s, the first ETF products were exclusively trading vehicles. Nobody used them for buy and hold. They were used by institutions to do overnight cash management. What we're seeing now is this rise of a new class of trading products. It makes a ton of sense. We've had a new class of retail trader come into the market in the last couple of years. Of course, we're going to get product chasing that market.

At the same time, I'd point out we still have traditional buy and hold low-cost beta being released by issuers every day with great opportunities for expansion. So we're going to continue to bifurcate this market. Some products are going to be appropriate for retail traders. Some products aren't. Right. And just move a little bit here. Most of the inflows continue to be boring, plain vanilla, S&P 500.

I mean, I know we focus on these little niche products because intellectually, they're interesting to you and me. But the truth is, most of the world doesn't pay any attention to this. Right. So there are, just summarized, I have Dr. Notic here who knows all things unflows, money's still going into it. Money's still going in. It's still going in predominantly 80% of it's still going into cheap, low-cost beta. It's going into fixed income. It's going into treasuries. It's going into international and developed equities, exactly like you would expect. And during this last six

months, we've seen investors use tools to do things like get exposure to dividends again because they're looking for income sources. Get exposure to inflation plates like Greg's own product, PPI, right? Great product mixing in commodities and inflation sensitive equities and tips. All sorts of great products out there that are long-term buy-in hold, very different than inverse Tesla. Yeah. And I want to ask you about that, Greg, before we go, about your new products. But I just want to note there's already single stock leverage in inverse ETS to trade in Europe. How long have they been trading and what kind of history do they have in terms of influencing

volatility? Yeah, great question. So the market for these products happens to be quite mature. They've been trading in Europe for a number of years. And the growth in assets also is very reflective, we believe, in the demand, again, by these kind of more active traders. The other thing I would share is that we have not seen those kind of systemic risks and the other challenges that you pose for these single states. stock ETFs. In the U.S., I would make the same comment, which is that while single stock ETFs had not been available before our launch last week, the market has really matured.

You know, it started out with broad-based indexes, then sectors, then industries, but even 2x and 3x leveraged single commodities like oil, you know, had been available previously. We just really took that structure, the leveraged ETF, and we provided. as Dave put it, another tool in the toolbox for active investors. Yeah, now you got approval for 18 of these, as I understand, but you only launched eight. Can you give us a preview? What are the other 10 and when are they going to launch? Yeah, no, absolutely. All of the ETFs that we got approved and that we're excited to bring to market here in this first tranche all go back to being very actively traded, but particularly of great interest among traders. when there are different news and announcements, things like earnings.

And so the other single stock ETFs that we included in that tranche represent other industries. So Conoco Phillips, another leader in the space that it plays in, but where investors want to make tactical decisions on a daily basis with respect to those kind of developments. And so to your point, we have 8. in this first tranche and to be honest we're most excited about the pipeline behind those not only in the single stock ETF areas but other areas where we

believe there's still a lot of white space in ETF development like what well look you mentioned PPI before you know this is the first ETF that in a single investment you get both exposure to a range of asset class that in a single way, tips and commodities, had been used as inflation hedge, while at the same time you also have investments that tend to do well in rising price environments like cyclical stocks. So we look at areas where investors have certain challenges and where in the efficiency and ease

of the ETF wrapper, we can bring that new development to the market. Yeah, you know, I guess my question would be, sort of Pfizer to me is not an obvious choice for a leverage and inverse ETF. I mean, Apple maybe, AMD. Is there, do you choose based on beta or what is it, what is the decision process there? Make it simple because I'm a simple guy. Bob, this one is a great case study. So Pfizer is a category leader. You know, it is a very actively traded. stock for those that want exposure to that sector. But interestingly, in a situation like we just saw, the FDA looking to give pharmacists, the ability to give out the COVID pill, there are active traders that might, you know, express a view on Pfizer, bullish or bearish, but want to trade on that news. And so that's a great case study of why these single stock ETFs,

represent important tools for traders that want to go down to the single stock level. Yeah. You know, so I guess the question is how much of an appetite? Is there a vast appetite for these leverage and inverse? These guys, thank you. I'm here all week. These guys' access, I have to say, have been pretty innovative. Yeah, they have.

Besides the PPI who's mentioning this inflation, they've got the long short, Kathy Wood. Yeah. I think the challenge is going to be staying ahead of consumer sentiment, right? because it may be that people want to be trading Pfizer-FDA announcement. It makes total sense to me. But tomorrow, it could be an Apple earnings announcement. And three weeks from now, there could be something going on at 3M that we haven't talked about in years, right?

So being ahead of that, so these products are available and liquid and have vibrant markets before investors really want to turn to them is going to be a challenge. I think what it means eventually, Bob, is we're going to end up with every stock in the S&P 500 with a set of two or three products against them. Probably with two or three competitors, which means we're going to get thousands of these tickers over the next decade.

I already got too many of these things up there. You're retired. They had a long short, thanks. They had a long short K-Web, right? Long-short to China, ETF, our friend who runs K-Web. So, you know, Greg, I have to say you've been fairly innovative, you know, about figuring this out. One of the things that Dave and I always like is how quickly ETS pick up on the mean, the zeitgeist in the air, remember four years ago, was pot.

stock stocks and then it was crypto and we were buying, there was nothing to buy. But they were still creating ETFs, you know, buy Nvidia. There we go. Amazing how creative the ETF business. Well, yeah, I mean, it's, you know, as our friend Matt Hogan used to say, it's almost like a manifest destiny of ETFs. There shall be an ETF for every exposure. But in a way, like, okay, we're running out of all sorts of ideas.

Well, then let's do long short of everything. We got enough China ETF. A couple thousand more of those to go. You can multiply this infinite. We're just running risk through the transmogrifier and spinning it out in other packages. I'm still concerned about single stock ETS. I'm sorry. But great, congratulations on getting the products launched.

Direct soon is also got the products coming up soon and Granite chairs coming behind that. Grandin chairs is coming to. All right. Well, I'm sure we'll talk about them as well because, well, that's what we do here, folks. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS. This is the market's 102 portion of the podcast. Today we'll be continuing the conversation with Dave Naughtick from Fedify. Dave, I was struck over the weekend.

MSCI, one of the big indexers, had an article about indexing out there. And, of course, everyone has discovered that big asset managers like Vanguard and BlackRock own a lot of stock. And therefore, they control a lot of shareholder proxy votes. Right. Stunning. Yeah. Shocking nobody. They had a study out saying Vanguard is actually the largest shareholder in most of the major names.

Apple, Microsoft, and Vita, Visa, Johnson, and Johnson. And BlackRock was the second largest shareholder in most of the big names, and that they have more than 5% of the stock in something like 300 stocks in the United States. Yeah, absolutely. So, none of this is terribly surprising. I guess what people are interesting is the politics of this around proxy voting. So they voted for years and nobody said anything. And now that some of these are starting to get a little political,

like climate change that people are for or against, people have started noticing this and saying, wait a minute, do we want to have these people have so much power? Right. Particularly since people like Larry Fink have had positions on climate change. Over the weekend, you made a prognosis for this year. You'd say, I'd be shocked, this is you talking, if we don't see at least some trial balloons floating in the next year

on severely limiting or altering how asset managers vote proxies. Yes. How would that, is that desirable? And how would it work? Personally, I don't think it's desirable. I wouldn't be a fan. But I think it's worth backing up a little bit and thinking, about what all this means, right? If I'm an investor and I buy my Vanguard fund, whether it's an

ETF doesn't really matter, it doesn't matter whether it's index or active, any of that, but I use Vanguard. Part of what I'm doing is entering a contract through the fund with Vanguard to become my proxy voter. It actually says that, right? It's written into the documentation, right? So this isn't a surprise to anybody. There is no legal or structural mechanism that I've ever found that allows me as an individual to go to Vanguard and say, you know what, I think Tesla is a terrible company and I don't like the CEO. I would like to vote to have Elon Musk kicked out. There's no vehicle to do that right now. So the only way that this can happen is one of two things. The 40 Act actually says the default is you can't, the asset manager can't vote.

And then there has to be an explicit handover of that authority, which in every case there is. In every case there is. So they could tweak the 40 Act to come back and say, well, okay, now the default's going really have to be no. And in order to say, yes, you can vote these shares. We'll put some restrictions on that. That would take literally an act of Congress, though. They'd have to change the 40.

They would have to change the rule. It would be a regulatory thing. Right. That seems very unlikely, obviously, because Congress isn't passing any laws. So there could instead be some additional scrutiny about how these things are done. There could be some requirements in regulatory. form by the SEC, suggesting that it's because these are registered investment advisors, that they have certain standards of care to look through to those end customers, maybe by

polling them and asking their general opinions on things like voting with management or compensation or ESG proposals. So there could be proposals about those types of things. Most of the proposals I have heard have been simply, let's just cap the amount that any one voter is allowed to vote from the asset management community. I've heard the number 5% kicked around before so that BlackRock, for instance, couldn't vote more than 5% of the shares of Exxon. I'm not a fan. That's disenfranchising investors. That's exactly right.

So Vanguard owns 7.7% of Apple. If we kept it to 5%, 2.7% of Vanguard shares would essentially be invalid. That's wrong. Totally disenfranchised. Right. So the long-term correct solution from sort of an ethics standpoint is there should be some mechanism for me as an individual to express my desires on corporate voting. But there's going to be a ways to get there. There's some tech solutions folks are working on there to try to pull and look through.

What about the companies themselves? Could Vanguard or BlackRock or anybody simply say, we would like a mechanism whereby our shareholders can vote on certain proposals? How would you even do that? Could they out of it? Yeah, well, BlackRock's been pretty upfront about doing that on the institutional side of the business, where it's much easier because it's mostly and separately managed accounts, right?

Or in collective trusts where they have more ability. to identify those end investors. Imagine them trying to figure out who owns every share of IVV. They never do it, right? It's a nightmare. The way the system works, it would never happen. So there's a desire. I mean, honestly, I've talked to most of the asset managers that want to do this.

They would like to be able to carry those shareholder preferences forward. There's just not a technical or a regulatory mechanism to do it. But to your point about us getting some activity on this, this is one of those rare issues where you get sort of Bernie Sanders and Ted Cruz mad at the same thing for different reasons. And if you can get both of them mad at BlackRock for different reasons, the likelihood something's going to happen. Let me move on to crypto. Of course, Gensler and the SEC just recently turned down Gray Skills application for a pure play.

Bitcoin ETF, it looks like they're going to continue turning down. And one of the reasons is we don't have regulatory control over critical aspects of the crypto infrastructure. particularly, for example, exchanges. And Gary Gensler constantly says, come on in and talk to us. You know, come on in. Everybody come on in. But he's specifically talking towards the exchanges.

So you wrote this weekend, and this makes a lot of sense to me, I'm going to quote you here, the path towards approval that seems most likely remains a crypto exchange of significant U.S. scale like Coinbase or Gemini, working proactively with the SEC to get over the surveillance requirements that the SEC keeps highlighting in its rule rejections from exchanges.

So you seem to be predicting somebody's going to come forward and make a deal with the SEC to get regulated, and all of a sudden that's going to bring enormous business and they're going to approve. Is there a path for that happening? I think there's a path. I don't think it's an extremely likely one. To me, the most likely case scenario here, if I'm just crystal balling the whole thing, I mean, I guess it's a vet-fied financial futurist. I have to pull up the crystal ball once in a while.

FTX U.S. has been really aggressive in trying to directly interact with the U.S. regulatory system, right? I mean, Sam Bankman-Fried's been up on Congress talking, me put on a tie, right? So they're really trying to engage. They're not one of the giant players. Coinbase is substantially larger, I believe, in terms of daily flow. But FTX seems to be much more willing to try to get themselves regulated. If they're successful, I think that that could start cracking this open. The challenge, of course, then becomes this thing of significant size with air quotes around it.

And what that means is that relative to all Bitcoin that's trading in the world? Is it relative to all trading in a certain window of time? There's still a lot of hoops to go through there. But I think that's the path. It's that proactive regulation. That makes the most sense. That answers the question. I mean, they've repeatedly said we don't have control over this thing.

It's not even control. Just surveillance. They just want to be able to look at it. And why doesn't somebody talk to us about doing it? Now, the problem, of course, is, doesn't this go kind of contrary to the whole spirit of crypto? Wait, we're going to be regulated. You're going to crawl up our, you know what, and find out everything about it, and doesn't, I mean. Is that a problem?

Absolutely. And there is definitely a class of crypto maximalists who hate the very, like, they hate FTX. They hate that they're engaging so directly with the regulators. They hate these sort of centralized players because these exchanges are centralized exchanges are the ones moving the needle. But at some point, if you want to create a bridge from the traditional finance system and the decentralized finance system, those two systems have to talk to each other. You've got to build that bridge.

We're not going to have an anarcho-crypto system that's going to be right. No, we're going to have a system that's got bridges. And I think that that means we'll get the best of both worlds in both ecosystems. Finally, ESG, environmental, social, governance. Gensler has also come out and said, let's try to get closer to, can we all agree on what this is? Is that a good thing? And are we going to make any progress than that in the second? So, you know, so far all the SEC has really done is talk a little bit about labeling

and then talk at the corporate level about data disclosures. Those are perfectly legitimate things to focus on. I'm generally a fan of more corporate disclosure of anything that's easy to get. Easy to get is an issue because a lot of the stuff on the ESG checklist is expensive for small companies to get. So there's a little bit of Sarbanes-Oxley look back there in terms of unintended consequences. The labeling issue is a real one, and it's one that not just the SEC, but the industry has to deal with. There's a huge difference between a net zero fund and a corporate governance fund and a fund that's focused on women representation on boards. We put them all in the same bucket, and they have nothing to do with each other.

and further part about, and even carbon neutral, what even that exactly means? Exactly, and increasingly, it's companies that you would not expect that are actually doing the most work. Microsoft's been a huge leader here, and everybody's like, they're not a green company, they're more green than almost everybody else, you know. And yet, because it's difficult to define, doesn't mean we shouldn't make an attempt at it. Exactly. In the last 10 years, it's been enormous strides in more quantitative measurements as opposed to a lot of this used to be qualitative.

Yeah. And they're getting better. Every time I start looking at the nerds who really look at it on a level below deeper than I am. It's getting great. It's getting quite... As an academic, as a walk on this stuff, the data is getting really great, whether it's the carbon stuff coming from companies, or whether it's just the proof in the pudding around things like controversy scores and regulatory compliance and things like that. There's real meat on the bones here. It's going to be a really interesting year or two for ESG.

Well, I'm a big backer of this whole concept. and I'm totally with everyone who says it's too fuzzy. There's a lot of politics floating around this thing. That's one thing you've got to be very careful of separating the people who don't like it, period. I just don't like the whole concept. And those who say, well, there are issues around what it is. And, of course, there are issues around defining what it is and how we implement it. But those are to your point.

Those are the conversations. All right. Thank you, old friend. Dave Nodig is the financial futurist at VETI and the all-round professor of ETFs, as I like to. everybody thank you for joining us on the ETFA podcast. Invesco QQQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQQQ, Invesco Distributors, Inc.