ETF Edge - Rising Rate Impact: The Deal with Real Assets 6/22/23

Episode Date: June 22, 2023

CNBC’s Bob Pisani spoke with Dan Foley, Portfolio Manager at C-B-R-E Investment Management – along with Tom Lydon, Vice Chairman of Vetta-Fi. They delved into why real assets just might be the key to diversifying beyond technology. As interest rates creep back up, they also took the pulse of the real estate business and other hard assets. Plus, they discussed the recent spate of new crypto ETF filings, including a new application by BlackRock. Why now? Could this be the shot in the arm the crypto bulls have all been waiting for?In the “Markets 102” portion, Bob continued the conversation with Tom Lydon from VettaFi. 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 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, exchange, traded funds, you're in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll discuss why real assets just might be the key to diversifying beyond technology. interest rates are creeping back up. We'll get the pulse of the real estate business and other

hard assets right now. Plus, we've seen a spate of new crypto ETF files, including a new application by BlackRock. Why? Why now? Would this be the shot in the arm the crypto bulls have been waiting for? Here's my conversation with Dan Foley. He's the portfolio manager at CBRE investment management along with Tom Leiden, Vice Chairman of VETify. So Dan, you launched this new ETF a month ago in the midst of a tech frenzy. Yep. Not great timing, but you did it. You say inflation makes hard assets a great investment. Can you make the case? Why now? Why hard assets? Yeah, look, we think investors are coming to the asset class to have inflation protection. We're seeing large institutions globally enter this space.

We think retail investors should be two. We think that the ETF market is lacking options in this space. And frankly, we just think there's a lot of opportunity here with secular changes in things like digital transformation, decarbonization, and then just frankly mispricing in the market. So the opportunity set offers a robust double-digit return potential, in our opinion. Does this track here we're showing this? Now, this is brand new, so it's got a month of history, but you've back tested it. Does this track things? Does it track reeds? Does it track commodities? Is there anything? What are you following? Sure. So at CBRE Investment Management, we have a history that goes back in the REIT space back into the mid-1980s.

We've been live with infrastructure strategies for over a decade. So we have quite a bit of history here. Of course, an investment management platform that is nearly $150 billion in scale operating within this real asset space. So we have a lot of history here, a lot of expertise and boots on the ground. We think this is important for investors. And we do think that over time this has been one of the most attractively positioned segments of the real asset universe.

And we think there are a number of opportunities that make that true in the go forward as well. So we've seen higher interest rates in the last week. It seems to be impacting real estate. Reets have had a rougher time this week. They're underperformers. We had nothing to leave on, the author of The Black Swan. He was on this morning on Squawk Box. He said, be careful about real estate because it can be unstable due to the higher rates.

Does it concern you? Are you in a different kind of space than he's talking about? Generic real estate space? Yeah, look, one I think, valuation. are very compelling. So I would take the other side of that and look at the opportunity on the other side, right? History has told us that when you get parts of the real assets universe, like real estate, trading at 20% discounts, the go forward provides, you know, 15 to 20% returns. That's a history lesson, but we think the, you know, elements are in place for a pretty strong total return going forward. And within the infrastructure space, you have a very different dynamic of very stable assets, right? You turn on the lights in the morning, you brush your teeth with the wall, you know, you get on an airplane or you ride the train like I did this morning.

You know, these assets have a very different cash flow, stable cash flow profile. And they're also the assets that are enabling a digital economy, data center, cell towers, right? Enabling decarbonization, right? You need these leading infrastructure companies that make that investment and it's driving growth that we think will drive a differentiated outcome. I want to get to what's in this fund. But Tom, I want to get you in here. Your thoughts on the hard assets, we've heard this play before.

here. Is there a case now for owning them or owning them still or continuing to own? Well, the last couple of years, Bob, as you know, as the market's been challenged, one-third of advisors have had 10 to 20 percent of their allocation in alternatives, in some of these areas. Obviously, energy was a great performer. It's come back down and settled. But if you look at REITs, for example, office buildings, retail, somewhat challenged. but also there's some other areas, and that's why I like, this is actively managed. If you have areas like healthcare or data centers or areas like residential, which is in demand right now, you can kind of pick your spots, is that right?

Yeah, well, look, if you think about, you know, I think it's a bit of a misnomer when you read the headlines, what is the REIT sector, right? The REIT sector today is a lot different from the REIT sector prior to the global financial crisis, right? Nearly 60% of the investment universe are what we call next generation type real estate assets, right, where the private equity players, where new allocations are coming in, that's things like self-storage, some of the areas that you mentioned, things like single family for rent, right? The cash flow growth and outlook trajectory of these entities very different. But they've all suffered with the REIT sector in a rate environment.

So we think the valuation dynamic today is incredibly compelling. You know, Tom, there are other hard asset ETFs that are out there. We've covered them here. Van Eck, our old friend, Jan, he has got a natural re-reactual. resources, ETF, that holds basic materials with an emphasis on energy that's out there. There's flex shares. They have a global upstream natural resources index. Another one I can't pronounce.

Gunner, right, G-U-N-R. They have water and timber. Look, here's a little list here, along with positions in companies in energy productions and metals extraction and agriculture. And then there's the old stalwart. There's the Vanguard Real Estate Fund. It's reeds. So there are other choices out there.

There are, Bob. And in ETFs, there are tons of choices. The whole idea is you've got to lift up the hood and see what's inside. I mean, areas like Gunner and VanX were very heavy on energy. So they did really well in the last couple of years. Recently, it's come down a little bit. So that's important to see. But areas like agriculture where you can kind of pick your spots, base metals,

there are ETFs out there that represent all those areas. So you can be very, very selective. but the idea is if you're going to have an over arching hard asset yet need to understand, A, as the manager, have a fixed index, or is there going to be an active strategy, and they've got a history of doing a good job as far as an active strategy. But this is a differentiator, though, when you mentioned energy, card commodities, essentially. That's what's not here, though. So I see infrastructure companies, say let's put up what we've got in some of this.

I see infrastructure companies like Crown Castle and those who you don't know. They do cell phone towers and fiber optics. I see real estate companies here like public storage. We all know them. They do storage. Then we have utilities. There is Next Era I see there. WC Energy is a utility company.

Equinix. We had the CEO on this morning. That's huge in data centers. Sun Communities is also there. They do manufactured housing, I guess. What I don't see here is commodities. I don't see Freeport Mac brand. I mean, it's a copper.

They produce it as a hard asset. I don't see oil stocks. Explain why commodities are left out of what would think of the natural hard asset. Yeah, I think when we approached the marketplace and we kind of looked at the landscape, what's out there, what can investors get? There was a very wide field of real assets. And not only what are they investing in, right? What segments of the universe are they investing in? but in what flavor? Are they equities? Are they dead? Are they a mix? How are they making these allocations?

And frankly, if you do the historical analysis, the risk and returns are so-so, right? And so we think that the opportunity, again, is more focused in these areas that have secular trends, like I mentioned earlier, with digital transformation. Equinix is a great example of a world-leading entity. Just had a great investor day yesterday. 7 to 10% growth, growing the dividend 10%. You know, that's the kind of assets you want. These are essential to the new economy, right? And you can get that, we believe, at a discount. So we believe that, you know, focusing on the areas of real assets that we are focused on provide more opportunity and a differentiated view from what's in the marketplace today.

So do you think, I guess, Tom, where, I'm just having a, it makes sense to hold infrastructure, for example. So you can argue in the REIT space, you don't want to own maybe a, apartments now, maybe, or you don't want to own office spaces, but you want to own infrastructure, you want to own equinics, you want to own public storage, they want to own warehousing. There's been sub-nitches in the REITs that we've been playing with for 20 years. I mean, the industry knows this, right? And you can actually have tactical asset allocation within the READ industry. Well, you're right. So you're mentioning tactical asset allocation. We're in surveying advisors, Bob, in the last couple of years, almost two-thirds of advisors have taken money off the

table in the traditional 6040. And what they're doing is looking for either stick it in cash, $6 trillion in money market funds these days, or they're buying alternative strategies. And in many cases, it's going towards active managers who've got a history of doing a good job in those areas, as opposed to individually buying indexes that happen to be thinly sliced. Well, you can make a case for base metals. They're great base metal ETFs that are out there, agriculture ETFs that are out there. However, you need to make the decision on that allocation. When things are tough, advisors love to turn to active managers, and we're seeing more of the flows going into those areas. It's more expensive. What are we charging for this? 65 basis points. That's not 10 basis points.

Right, right. It's not. At the same time, if you're an advisor and all you're doing is indexing, during those tough times and you look on your bench for helping managers, those indexes aren't going to provide that. So what we're doing now is we're seeing, hey, we've gone through some of these tough times. What's going to get us out of those? What does it look like a year from now is we've had rising interest rates? Where can you get good cash flow? That's real money that's coming in. That's really important. And then most importantly, where can you diversify that if we happen to see an equity pullback or as rates are rising and bonds still aren't making any money, where can you go to have some stability? Interest rates? You mentioned interest rates.

Let me ask you the 30,000 foot question. Interest rates are creeping up. What if any impact, is this going to have on the overall ETF market? Where do you see? We're not blowing out, but you see one and two year yields. They're trading towards the high end of their recent ranges. People are a little concerned. It might break out, and that could slow down the rally we've been seeing, the overall rally.

It absolutely can, but a couple of things that we're seeing. You can see this by the flows. The average advisor today feels a year from now rates will be lower. So what they're doing is although you're getting 5 plus percent in money market funds or short-term treasuries, that's great. They don't think that's going to be available a year from now. So they're going longer duration. They're going into higher credit quality types of ETFs. They're using more active managers as well with the idea that, I mean, it's tough to believe,

but we're actually going to see appreciation in bonds once rates start going down. But that date of when rates will start declining keeps getting pushed out as far. inflation is still something that's not under control, right? Dan, CBRE is a long history. I was the real estate correspondent for CNBC 30 years ago, more than 30 years ago. Yes, I am that old. Thank you for asking. I used to cover.

This is Colwell Banker, you know, all those old companies that are out there. Is this your first CBRE's first foray into ETFs? You've got a label here. I know you're partnering with Index IQ. Yeah, we've partnered with Index IQ. index IQ and New York Life investments. It was our distribution partner. This is our first active ETF.

We did launch a passive ETF roof last year. So that's dedicated specifically within the real estate space. So yes, relatively new. But we, again, think that there is an opportunity here because real assets in the ETF market are, you know, a pittance of where the capital is, right? mostly still sitting in open-end mutual funds in the market. Again, as I noted, somewhat mixed return and risk profiles over time. So we think, one, you need to be active.

There's an opportunity in the ETF market. And you need to be active because policy risks, you know, thinking about just real estate. Yes, there are risks. How can you avoid those risks and go after the right opportunities globally? And how do you think about infrastructure assets which do have a regulatory and policy? dynamic that you have to understand, right? That's where you want institutional level expertise, and that's what we bring to the table.

Yeah. I want to ask a completely different question for you, Tom, because he's our overall ETF maven here. We have seen a spade of new Bitcoin ETF offerings recently, including from BlackRock. Even though everybody knows the SEC and Gary Gensler is completely hostile to the idea. Everybody said, well, they're going to say no to a Bitcoin ETF,

just like they said no to everybody. else. But I'm wondering why now? What is what does Black Rock think they're going to get out of this effort? You can't get away from your favorite subject here. People ask me about it and I don't have an easy answer for it.

I always think I'm missing something here. I think you're right. I think your sniffer. You think I'm missing something? No, no. I think you're on to something. I think your sniffer is always really pretty good, Bob. If Black Rock all of a sudden has filed for a

Bitcoin ETF that's not futures based, it's spot Bitcoin, okay? And Gensler said, no way that's not going to happen. But at the same time, they're bringing together some pretty good partners from a custody standpoint. They've got Bank of New York Mellon, they've got Coinbase. They've got an agreement, a surveillance agreement with NASDAQ to help with the security aspect of it. So they're trying to show the SEC that they're putting all the safety provisions in place to give them the confidence to give them that acceptance of their application. I think the big thing we know, as Gensler said, we're not going to do anything there unless we have the exchanges regulated and Coinbase is not regulated.

But that's my question. Do you think this is going to change their mind? I can't, without the clear regulatory authority and they're not getting a bill through Congress, So now he's just resorted to essentially suing everybody. He's trying to regulate essentially by filing complaints. Yeah. I don't see how this changes. If anybody can get it done, would you bet against Black Rock? No.

You know, they're the BMOth, right? That's why I'm thinking I still don't quite get. How are they going to change his mind? I mean, if they can partner with Coinbase and say, look, you agree to get regulated, what would that do to your business? Imagine institutional investments, just 1% allocation to Coinbase and what that would mean.

We're talking about a lot of money. So there are a lot of people like you that are saying, huh, is this finally the time? Is it going to happen? We're going to follow this very carefully, folks, because, again, they're not going to waste their time. Trust me, BlackRock isn't. If they don't think they have some chance

of doing something here, we'll have him back. It's some other people back to talk about this. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Market's 102 portion of the podcast. We'll be continuing this conversation with Tom Leiden from VETify. And Tom, always great to see you again. One of the reasons I stay in touch with you is you've got your fingers on the pulse of what RIAs are talking about,

the registered investment advisors. We all know there is an enormous move away from the old bold bracket firms. Morgan Stanley's and Merrill Lynch's. Many of those guys have decided they want to strike out on their own and become RIAs, registered independent advisors. VETIFIECA caters to that. I always say VETIES a giant educational alarm for RIAs. So what are RIAs thinking about right now?

What sort of keeps them up at night right now? Well, Bob, you're absolutely right. RIAs make their own decisions. They don't have to report to the mothership and the mothership at most of the wirehouse firms have specific models that their advisors are supposed to dictate to. RIAs are independent. They make their own decisions, do their own research. And through that, we provide a lot of education, strategy, and most importantly, get feedback from them on what they're thinking. And as far as what keeps them up at night right now, it used to be inflation just 12 months ago.

Today, they feel that the Fed's done a pretty good job getting it under control. They feel confident a year from now, inflation will be under control, and rates will actually be lower than they are today, which is tough for most individuals to see because the Fed has signaled that they're not done. However, most advisors feel we're going to go in some type of recession. Most feel it will be a soft landing, and there have been many periods of time, as you know, you and you and I have age on our side. that we've been through experiences that recessions doesn't mean it's going to be bad for the stock market. Advisors feel they can get out on the other side of that. So with that in mind, even though money market funds and short-term treasuries are paying five plus percent, they're starting to go longer duration into high credit quality, corporates, even high yields,

with the idea that not that they're going to top-tick rates, but more importantly, they can protect from lower rates longer by getting those going on, longer duration on those rates and even, God forbid, have some appreciation. So there's a bet here that essentially these higher rates, 4 to 5% on 1 and 2 years, is going to stick around. But remember, we were all wrong on this. Remember a year and a half ago at the ETF conference you run? Everyone confidently predicted the 6040 portfolio was dead.

And then all of a sudden a year later, we were dealing with, you know, my mother literally pulling money out of her savings accounts to put in one-year treasuries. and the story sort of changed. She's so smart. Well, she top-tech the bond market, that's for sure, or at least the yield part of the bond market. But the important thing is this is a hard game to play. I'm a lot more comfortable, frankly, with one-year yields at,

or one-year yields at near 5%, because now there's an alternative for people. There wasn't any before. So the 60 portfolio, 40 portfolio, isn't necessarily dead. I don't think it should be 60-40, but it's not dead. There's actual money. And what you have to do is convince us, people to look at things in terms of real terms, not, you know, nominal terms. Just because you're

getting 4% of inflation 7, you're still real terms losing money here. Okay. So what you don't want to do is have a whole lot of cash in short-term treasuries and all of a sudden the Fed to be done. Because what happens, if at that point in time we actually are in a recession and the Fed has to go in the other direction, they're not going to do it at 25 basis point bips, you know, here and there. it's going to be 50, 100. In the past, it's been 200 at a splot. So if you miss a big rate cut and you're sitting there in cash, all that appreciation that you could have made in that,

you've missed that opportunity. Unless you actually own that one-year treasury and you're just before, then you're still going to get that 4% or 5% yield. Correct, right. But when you think about it, you don't want to get greedy. And if you feel that the Fed's almost done, it makes sense to go longer duration at this point. And we're seeing that, not just an indexed fixed income ETS, but a lot of money, as you know, is going to active fixed income.

Look, we're going to get into a situation where defaults are going to come into play, right? We've all been talking about the Magnificent Seven. CNBC launched the Magnificent Index this week, which consists of course Netflix, you know, Apple, Microsoft, as usual. And what does it mean that it's so dominant here? I can't help but think that, you know, we all know, the minute we start late. things, it's usually a top of something. But what happens here from now? And what are RAs doing about that? They have to be worried about the concentration risk. They are. So volatility and valuation are the two things that are keeping them up at night right now. And when you

look at the correlation to the S&P 500 that the average investor has or the average client has, it's a little bit scary. If you were there, great. But if the top 10 stocks account for 30% of the waiting and two-thirds of the performance year-to-date, that's a little scary. Where, on the other hand, areas like the Dow, the Russell 2000, not only have they not performed as well, however, their valuations are much more in line. So the average advisor is a lot more responsible and said, look, over time, the Russell has actually outperformed the S&P, but we're in another situation where we're battling the old fang stocks.

And mid-cap and small caps, we keep waiting for them to sort of move forward a little bit here. I think the important thing right now is we've got to move forward, and yet the advanced decline line's been very modest there. It's really S&P 500 and even the S&P 100 that's really been the move. The good thing is we're seeing some upticks overseas. So for the first time in a while, we've had such a home country bias as far as U.S. investors, they're starting to push some money overseas, and we're seeing that in flows. Yeah.

Tom, I'm going to have to leave it there. As always a pleasure talking with you. Tom Leiden is the Vice Chairman of Vetify. And thank you, everyone, for listening to the ETF Edge Podcasts. Inves QQQQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQQ, Invesco Distributors, Inc.