ETF Edge - Russia ETF Trading & Commodity Markets

Episode Date: February 28, 2022

CNBC's Bob Pisani spoke with Jan Van Eck, CEO of Vaneck, Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors and Todd Rosenbluth, Senior Director of ETF and Mutual Fund Research at CFRA. They discussed the fallout from the freshly announced sanctions on Russia - what are the resounding ripple effects and how is all the turmoil affecting Russian ETFs, Commodities, European Markets and more? In the 'markets 102' portion of the podcast. Bob continues the conversation with Jan Van Eck. 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 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 are in the right place. Every week, we're bringing you interviews and market analysis and breaking down what it all means for investors. I'm your host, Bobazzani. Today on the show, we'll talk about the fallout from the freshly announced sanctions on Russia. What are the resounding ripple effects?

How's it all affecting the Russian ETFs, the commodities business, the European markets, and more. Here's my conversation with Jan Von Eck. He's the CEO of Van Eck. Matt Bartolini is the head of Spider-America's research at State Street Global Advisers, and Todd Rosenbluth is the senior director of ETF and Mutual Fund Research at CFRA. Matt, let me turn to you. Maybe you can help explain this to everybody. I was talking to Jan about how his fund, the RSX, is still trading here in the United States, even though the underlying stocks themselves are not trading in Moscow. And explain to us how those valuations are determined, how you get an estimate on what the fair value of any ETF is when the underlying

stocks aren't trading in their underlying country. Yeah, I mean, some of the funds that are focused on Russian equities, they do own ADRs and GDRs, which are still traded in the secondary market. And therefore, because there's prices in the secondary market on those, you know, ADRs and GDRs, that can filter back into the ETS. to provide a proxy value for what the basket of Russian securities could be. Overall, what we're seeing is that the ETF itself is serving as a secondary market price discovery tool where essentially risk can transfer. It's between willing buyers and sellers that are trading the ETF and the market makers

will price the ETF effectively on where they feel that that risk could be transferred, and they're going to be using a multitude of inputs, whether it's historical correlations in different marketplaces, or really what we're seeing now is just a dramatic haircut based on some of the lack of trading in the local markets and what we've seen in the CDX market for a Russian local bonds, but also from a currency perspective. So what I always say in these type of periods where you do have some dislocations is that the ETF will be serving as an efficient risk transfer tool and price discovery mechanism. Yeah, yeah, Jan, Matt gave us a very good little explainer about what was going on there, about how the

ETFs can still trade when the underlying stocks are closed. One thing that's very important here in determining prices is some of the stocks, for example, in the RSX, do trade as ADR in London, like Gazprom, for example, which is down dramatically. So there are ways of estimating, in the case of you have an ADR trading somewhere else where it can work. But what's remarkable to me on is how well these ETFs work, even when you don't have an ADR trading at another country,

how well they are they do in estimating what the ultimate fair value of these stocks are. Yeah, I heard that point. That's absolutely correct. About 75% of RSX assets are either GDRs traded in London or ADRs traded here in the United States. So the one point I would add as well to the conversation is that it's very hard to determine what the underlying value is of the stocks. when they're not trading. And even so, the ETF may trade at a premium or discount based on traders' willingness to take risk on, because ultimately they do have to exchange underlying shares into the ETF or not. And there are risks when the companies might get sanctioned or whether people in that delivery chain, including custodians, don't want to take custody.

Yeah. You know, Todd, this is a great teaching moment. You and I were talking about this, about the power of ETFs. This happened before. The Greek stock market, we were talking about this this morning, was closed for weeks in, what, 2015? But the Greek ETFs here just kept trading without them. And it turns out that investors are pretty good at estimating the approximate price of stocks, even when they're not trading.

I think the Greek market was closed for six weeks. That's right. We saw that with GREK, that's the Greek ETF. You were referencing. We saw this with the Irish Spring that happened with the Egypt, ETF. And we tend to see this quite regularly. The bond market is closed, but ETFs like JNK and AGG and other fixed income ETFs will be trading throughout the whole day. So the ETF is available to be able to buy or sell based on what investors are looking to do,

either to exit the portfolio. But they have to be aware of that the ETF is trading at a price that is often different than what the fair market value. those underlying securities are. ETS have liquidity that the underlying stocks don't, but that's the great opportunity for investors to get out or get in when they want to. It's remarkable to me to see the, we used to say the ETF tailwags the stock dog, essentially at this point. But let me just move on about this.

Matt, there's been some wild trading in energy ETFs in the last week. Heavy volume in the S&P energy ETF, that's XLE, which you manage, heavy volume in the exploration and production ETF, that's XOP, the big, exploration of production companies. It's at a new high today. But I'm wondering if you can sort of differentiate it. The investors always want to know what's the difference. Where are the bets being made in energy right now? Yeah, I mean, so XLE broad-based energy sector ETF that tracks the S&P 500, market cap weight is going to have a heavy allocation to both Chevron and Exxon. You know, obviously, you know, those firms have some pretty substantial international revenue.

If we look at XOP, it's modified equal weighted. It just focuses. on, the oil producers. And that's going to have a little bit more of a domestic-oriented feel to it. And I think that's why initially on Thursday, when the news broke, we saw really a dislocation between broad-based energy and more domestically oriented energy stocks. I mean, X-O-P was up on the day while X-LE is down. But in both instances, we've seen heavy trading volumes increase over the last few days, but also inflows.

I mean, XLE is taking over more than half a billion dollars in the last two days. and we've seen ex-OP have inflows as well, as traders really start to position for what we're likely to have as an elevated oil environment, but also elevated oil volatility environment that's just supported by broad-based uncertainty around the whole entire commodity complex. Yeah, Jan, you're the commodity maven here.

For many years, I've turned to you for your expertise in the commodity space. You run the Van Eck Oil Services ETF, that's OIH. This is Slumberjee, Halliburton. It's all near a new high. All these stocks are up 30 percent this year. I guess a fundamental question. How much more can these stocks move up, given that a lot of producers, Occidental on Friday, they've not announced big production increases. Everybody keeps saying,

oh, they've got our increased production. They're being very conservative. That leaves you with oil prices. Can oil prices stay near $100 at this point? Well, I think the whole commodity complex, just to take a step back, you know, has generally been in a bare market for about 10 years because there was too much overproduction, chasing China, and all these companies need to get a lot more disciplined, and you've seen that. I think OIH, so oil services companies provide, obviously, services to the energy producers, and the energy producers have been very disciplined, to your point and to Matt's point. So I think we've got a lot more upside to OIH if we expect oil prices to stay high. eventually the majors and the upstreams will increase the capacity, and OIH will be a beneficiary of that.

Yeah. Let me move on here. I'm hitting you on several subjects here, but it's energy, Russia, and really gold I want to turn to now. Matt, I want to ask you about gold. You're the gold ETF, GLD. That's the biggest one out there. I believe it was a new high, a 52-week high on Friday. Very heavy volume there. And yet I'm kind of surprised it's not up more. I mean, we all hear about this gold's a safe haven story. This is like the greatest safe haven play potentially out there in many years. I hate to be cynical, but why isn't gold higher at this point? Well, I mean, gold is at a 17-month high right now. So there has been upward momentum within the spot price of gold.

And it's a result of, you know, what we've seen from this, you know, geopolitical instability, right? What's going on right now in Ukraine? And that has been a benefit to gold prices in terms of that, you know, long-term volatility, the mitigation properties it has. I think in terms of, you know, to your question why it's not higher, is, you know, there is some sort of counteracting forces to it. If the dollar continues to strengthen, you know, that typically is a headwind to the swap price of gold. Similarly, you know, we still don't know what Federal Reserve policy is going to look like. We're going to get a great indication on Wednesday when Powell speaks to Congress. But if the Fed continues on, as Rafael

Bostick had suggested, with a 50-based point hike, you know, that can be counteracted to the spot price of gold. So in any instance like this, there's significant market volatility, gold would be sought after as that potential safe haven asset to mitigate some of the volatility. But there are other macro forces that play here. And I think that just speaks to the type of volatility we're seeing where it's impacting the commodity complex. It's impacting the dollar. Policy decisions are in play. This is impacting pretty much every facet of the global capital markets. Yeah. Jan, do you buy into that? I mean, I hate to be argumentative. But you know, it is the great safe haven play. You run the gold miners' ETF, the GDX. You run the

junior gold miners' ETF, the GDXJ. And they have outperformed in the last couple of weeks, but do you think gold should be higher, or do you think we're trading fine here? No, I liked what Matt had to say. Gold competes against real interest rates. But my point is these commodity cycles are multi-year cycles, and so just like it took 10 years to get into this spare market, we're not going to be out of it after eight months or whatever you want to count it. So I think we've got a lot longer to go. And if you look at the 1970s and the 2000s, gold actually was a second half player. One of my colleagues says that for the first five years of those big bull markets, gold underperformed commodities. But in the second half, it really shone. So if you think

we're in a longer cycle, definitely keep your gold and add. Yeah, that's the question. Are we in a longer cycle? Todd, where else can investors turn beyond just the GLD? Are you seeing demand elsewhere in the gold space? I'm talking about gold ETFs. Is money coming in here to this space? Yeah, so gold, ETFs, and other precious metals ETFs have been extremely popular. Combotted ETFs in general are about 10% of the overall net inflows that we've seen year to date.

They represent a much smaller part of the ETF pie. In addition to GLD, which Matt's team runs, which is the heavyweight within the space, it trades the most. We've seen some cheaper or lower expense ratio products, a GLDM, which is also from State Street. We've seen AAU, which is a Goldman Sachs, ETIF. We've seen I shares, IAU and IAUM. These all have lower expense ratios. They're more for the buy and hold as opposed to the trading audience that's going to benefit from the the liquidity that GLD has. So we've seen broad-based demand for gold DTS. GLD has been the heavyweight, but we are seeing some of the more moderately sized and cheaper products gain ground.

So, Matt, GLD is kind of like the SPY for the gold business. It's got a higher expense ratio, but it's used by the active traders because it's liquid like SPY is. If you actually want to be a long-term buy-and-hold guy, you wouldn't own SPY necessarily. You'd own something cheaper. If you want to be a long-term buy-and-hold gold, you wouldn't necessarily own GLD, right? I mean, it seems like you've kind of got it both ways here. You've got a high liquidity, slightly higher-priced product in GLD and SPY, but you also have other products that are cheaper, not as liquid,

but, you know, are more long-term buy-and-hold vehicles. Or am I characterizing that right? Well, no, I mean, much like Spy, G-L-D, they can both be held for strategic long-term asset allocation decisions. You know, the liquidity properties can be really beneficial to large institutional buyers who are moving in size. Because when you are making those allocation decisions, liquidity can be extremely important, particularly if you're moving in a large size. But I think you're right, you know, GLD is, you know, no pun intended, the gold standard in terms of allocations with respect to gold and the ETF market. And, you know, I think it's going to continue to be heavily utilized by a multitude of investors, whether you're in short-term tactical because of that liquidity profile or long-term, just given.

its heritage in the space being around since 2004. And I think what we've seen in the last few days, Scores speaks to that credibility of GLD. As we saw a volume spike, we saw a multitude of investors utilize it to make those allocation decisions. And I sort of continue to see that as long as this volatility stays in place. Yeah. Yon, I want to go back, I'd just revisit this Russian ETF question because I didn't get,

because we had audio questions, I get to get your comments at the top. The Russian ETFs are trading, even though the Russian stocks are not in Moscow. Is there any issues around creations and redemptions? This seems to be a critical issue for obviously ETFs. I assume because the net asset value is frozen, it's trading at some kind of discount to the NAV. Are we able to do creation and redemptions right now? And what would make it problematic to continue trading the ETF? Are there any issues around whether or not that could continue trading?

Yeah, the, the, the, the, the, F, is open for business. I think the real thing, the question is, what percentage of stocks in the ETF, and you can see them on our website every day, are sanctioned or somehow permanently untradable? Right now, it was only the local market, and that was only 11% of the ETF, and I think we expect that market to open at some point. So, but that's the thing that we're keeping an eye on. And obviously, when index firms change what's in the index or stocks are halted, like you mentioned, those are all public announcements. Everyone knows at the same time.

Yeah. I think the important thing here, you see that list of ADRs there, that stocks like Gazprom, which I think is your biggest single holding, does trade as an ADR in London. So it's not really a complete stab in the dark. There are situations before, like the Greek stocks, where, you know, essentially they were real estimates here. Here, a good part of them are trading in London, so we do have some sense of where it is, even if that's not, even if that's an ADR, right? I think that's a very important point to make. I think the real dividing line, right, is the financial companies, some of the banks have been

punished through sanctions, but the energy companies continue to do business. And frankly, you know, Europe needs Russian oil and if they're in gas, excuse me, and if they're going to use it, they need to pay for it. So as long as that continues, then these ETS should, for the most part, you know, operate, you know, successfully in the market. John, you have been saying for years, largely by yourself, that we are about to enter a new commodity cycle. I don't know if you've ever used the word super cycles, so I'm not saying that you did. But we're certainly seeing an explosion in commodity demand. the question is, at these prices, are we going to see demand destruction occur? I mean,

sometime this summer, if gas prices keep going up, somebody's going to stop driving or resist, just like used car prices are under a lot of pressure right now, because some people walking away from the high prices. Is that at all a concern, or do you just see this commodity, let's say, super cycle continuing regardless of demand? Look, there's certainly a sort of risk premium built into oil and gas prices right now. There's no doubt about that. But I think the real question, and Jeremy Grantham raised this issue of, you know, we're near all-time highs in copper prices. And copper is a great indicator of, you know, kind of the global economy.

And my view is I am super bullish. I think that we can see because of supply constraints through ESG and capital discipline, and continued global growth, although it'll be a little bit slower, you're going to have a lot of pressure on prices going forward, and I think we'll be looking at those prices in the rear-of-view mirror. I mean, that's the bull case. And also, to buy the stocks and not the commodity futures because the commodity companies are still trading at unbelievable valuation discounts.

Todd, I'm going to give you perhaps the last word. Maybe Matt wants to chime in on this about the teaching moment for ETFs. say way till things really get crazy the markets are going to go nuts and the ETFs aren't going to be able to trade because the underlying stocks are going to freeze up how many years we've been hearing this well here's a crisis yet another crisis and it turns out the ETF business trades very well underneath it what does this teach us again I'm going to you Todd you're the ETF educator what are we learning after all these years of people saying wait till things get crazy the

the ETF market's going to seize up? Well, we've seen time and again that when the market gets crazy, investors turn to ETFs as the vehicle of choice. So RSX, despite the fact that it's down sharply for understandable reasons because the Russian stock market is trading significantly more than it ever did beforehand. We've seen it with high-yield bond ETFs. We've seen it with emerging market equity products. ETSs become the vehicle of choice because you can get out when you want to. You can get in when you want to. markets or other vehicles, which is why we continue to see record inflows for the ETF marketplace.

Matt, anything you want to add? Yeah, I would agree with that. I mean, on Thursday, when all the news broke, ETF volumes, you know, they basically went, you know, almost double what they historically have been on a 20-day average. So liquidity rushed into that. So investors utilized and gravitated towards ETF structure to make portfolio decisions. They did not shy away from it. They're actually using it in a much more concerted fashion than they, you know, would on average on a daily

So, ETS are a really efficient vehicle, particularly in times of prices, and that's been proved year and year again. Another example, another crisis, another example of ETS acting very officially, and in fact, becoming the pricing vehicle, I don't like saying the ETF tailwags, the stock dog, but in a sense that it's exactly what's happening. It's a great teaching moment once again about the power of ETS. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast.

Today we'll be continuing the conversation with Jan Von Eck. Jan, thanks for sticking around. I made several inquiries with you about the trading in the Russian ETF, the RSX, and I'm wondering what could make it a little more problematic or what, if anything, you're concerned about. It seems to me if Russia closed its market entirely to foreign investors, which would be pretty drastic, but it could happen. that would be a problem, right?

I mean, ADRs couldn't trade at all at that point, and the receipts, the ADRs would have to be delisted at that point, wouldn't they? I mean, I'm trying to figure out, is there another step here where this could get more serious and even the ETS might have trouble of trading? It's certainly possible, Bob, but just to recap, RSX, which is about a billion dollar, you know, or was yesterday, it's a little less today. Russian ETF has its assets about 11% in the Russian listed stocks, and then 75% in the GDRs, ADRs, and then the balance are literally companies that are either just directly listed in London or directly listed in New York.

What you're asking about, I think, is a great question, which is that 11% that trades on the local Russian market. And absolutely, if the central bank or other regulators make that inaccessible to foreign investors, then that portion would be illiquid in our ETF. There are procedures of dealing with that, and we have to come up with a price that would indicate, you know, what it's valued at at 4 o'clock on the close, and that's what people would create and redeem the ETF at. But that's at risk, and I think you're right, that's probably the biggest risk. Is there any risk of being, of the ADR, say, in London? Now, gas prom trades in London as an ADR, could that be delisted in some way?

What would we force? Yeah, they're at risk from sanctions, because I think, you know, we've talked through these various cycles, as you've pointed out, ETFs have been through this before, so we've talked to Treasury, we've talked to the SEC, and they're kind of aware of how ETFs function for sure, but they still may want to. to sanction individual companies. And like, for example, today, there were the VTB Bank in London never traded. That was halted. And there were several names in New York that were halted as well. We don't know how long that will be, but those also would become more difficult to trade for the ETSs. Now, sometimes there's a time delay to the sanctions as well, not to get overly complicated.

So it's all available. It's all transparent. That's the beauty of ETFs. Yeah, it's remarkably fluid, and yet it amazes me how well ETFs trade. I still marvel at it. I want to just get back to your comments on commodities. You've been a bowl for a long time. You're one of the great experts on commodities, and of course, Van Eck has made its name on trading commodities. But your basic thesis has been supply constraints that are out there, particularly in oil, and very high demand. I'm wondering on the demand side, given prices being so high,

could we see any demand destruction, for example, with gasoline? And what about China? It seems like that's a big swing issue here. China demand also remaining high. Are you making an assumption that demand in China's going to remain high? Well, demand globally for commodities only goes one direction as the economy grows.

And it's almost like a flat straight line. So I think there are risks to, like, the global recession. I think there's going to be a global recession concern in the markets, Bob. This is kind of something that we haven't talked about before. But the market likes to get scared by things, right? And what's blown up, if you look at OIH, it's had some up and down swings. And what's hurt the downswings has been concerned about global recession and prices. I just think that there will be that concern, but there's going to be that demand, and the demand will continue.

And there's still so much political desire to move to renewables and all those kinds of things, number one. And there's so much Wall Street pressure on these oil companies to pay their profits out in dividends and not to reinvest them in new capital expenditure. So, I mean, maybe that'll change. Bob, you know, we talked for a long time. Usually it takes three to four to five years. and then five years we'll say those damn energy companies are overproducing again. It'll be the beginning of a multi-year bear market. I have to say, I kept waiting for these oil companies to mounts major production increases, and they didn't.

I looked at Occidental on Friday. I think EOG said the same thing. I was amazed they're not going to increase production much at all. They seem very happy to get oceans of cash returned. Occidental is paying down debt. It's increased the dividend dramatically. it's doing another buyback program. The only thing they're not doing is increasing production.

And you think, my heavens, why not? And I don't know, it's kind of amazing to me. I think their argument is they're being disciplined in not going all. They're being disciplined, but it's also, I call them the tobacco stocks, right? Because the ESG investors and the huge institutional shareholders like BlackRock are saying, we want you to move away from energy production. reduction, right? So there's just a lot of demand for pressure, I can say, on management of energy companies to not overput money into CAPEX. So was this a miscalculation that a lot of people have

made? There was a headlong rush to get into renewables. Everybody supports renewables, it seems to me. I don't have anybody against them. And yet the argument, what seems to be happening now is in a headlong rush to do this, particularly in Europe. We had the Germans not only sort of get away from fossil fuels, they went away from nuclear energy, and now they're stuck. The transition is taking longer than they thought, and we're in a situation now where we really do need fossil fuels a little more than we thought. I wonder if you think there was a mistake made in the transition, or that it was too a problem. I'm really looking, well, definitely, look, people forgot about energy And energy independence means you have access to, you know, fuels when you need it or energy when you need it.

And Germany became very reliant on Russia. Jan's opinion is we won't know Bob until a year or two from now, right? Because in the heat of the moment, with this war going on, of course, people are going to talk about stuff. But let's see where they spend their billions of dollars. Are they going to get the nuclear plants going? Are they going to spend it on renewables? I don't think we know yet. Yeah, it's going to be very interesting watching.

After years of you talking about this, as a new commodity cycle coming, super cycle coming, it's finally come. And your moment's here, Jan. It's always here with me, but I appreciate your thoughts on this, as always. Jan Von Eck, folks, is the CEO of Von Eck, one of the great commodity firms in the United States. John, thanks very much for joining us. Thank you, everyone, for listening to the ETF Edge podcast. InvescoQQQ believes new innovations create new opportunities.

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