ETF Edge - Schwab's New ETF & Bitcoin ETF Pitfalls

Episode Date: November 22, 2021

CNBC's Leslie Picker spoke with Tom Lydon, CEO of ETF Trends, David Botset, Head of Equity Product and Strategy at Schwab Asset Management, and Dave Abner, Head of Business Development at Gemini. They discussed the cyclical trade as the reopening story loses steam … how do investors set up ahead of the holiday season? Plus, two of the ETF community’s favorite themes – ESG and crypto – and why one guest actually thinks a pureplay bitcoin ETF could be just around the corner. 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're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm Leslie Picker, filling in for Bob Vasani. Today on the show, we'll be keeping a close eye on the floats and tracking the trends to get a sense of how the cyclical trade lays out as the reopening story loses steam.

How to investors set up ahead of the holiday season? Plus, we're tackling two of the ETF community's favorite themes, ESG and crypto, and why one guest actually thinks of pure plate Bitcoin ETF could be just around the corner. Here's my conversation with Tom Liden, CEO of ETF Trends, David Botset, head of equity product strategy at Schwab Asset Management and Dave Abner, head of business to business to at Gemini. Tom, markets have shown plenty of optimism about this recovery story. It seems like this week is really an inflection point.

Do you think that they've been too complacent that the pandemic was over? Or is this sector rotation really overdone from here? Well, it may be a little bit overdone. Healthy pessimism is great for the markets, as you know, Leslie. And we've seen markets at all-time highs. We're seeing greater earnings than expected, which is been really good for the market. And it's been more of a story that we saw coming out of the financial crisis for the 10 years following. It was those fang stocks, along with Microsoft and Tesla,

that really have those heavy cap weightings that push those market indexes higher. I think last year we saw an equal weight S&P 500 do better than the cap-weighted S&P 500, but it's back to the old story before as we continue to see these Fang and Microsoft and Tesla stocks continue to do well. The ones that have suffered are those go-go work from home stocks that did so well last year. Coming off of the February high, they had some big corrections. Yeah, that is absolutely true. I think Zoom is actually set to report earnings as well. David, what are the flows telling us so far about how investors are setting themselves up for the end of the year? Well, I will tell you, Leslie, flows this year and ETFs have been just off the charts.

It's another record-breaking year in 2021 after we've seen record-breaking years and years passed. I mean, all accounts, we will be over a trillion dollars in total ETF flows in 2021, which is just a remarkable number to think about. There are a couple of aspects we see there. One, we've talked about the growth in ESG investments, and we're seeing that category take off with flows over 50% greater in 2022 than we saw last year. We're also seeing investors looking for income. You know, Tom mentioned the fang stocks, but at the same time, you've got a huge number of individuals that need income

that are transitioning to retirement, and in a low interest rate environment, it's challenging to find that income. So we're looking at income-oriented strategies. We've seen dividend strategies absorb over $30 billion in flows in 2021. And finally, low cost. I think about low cost is really being the trend that never goes out of style. 60% of the flows in 2021 so far have gone to ETFs with expense ratios of 10 basis points or less. So it's great to see investors continue demand low cost.

So you're saying that nobody wants to pay more to invest in ETFs then. Makes sense. Who wants to pay more? We're paying enough already, given the inflation picture out there. No need to pay more for ETS. But you bring up a good point with regard to ESG. And I want to talk about that undeniably hot trend that's really taken the ETF world by storm. That's environmental, social, and governance.

That trend is still going strong. It's really remarkable and flows into sustainable ETFs are up roughly 50% from where they were this time a year ago as more and more companies attempt to weave ESG into the fabric of their DNA. Just last week, Charles Schwab joined forces with aerial investments to launch Schwab's first ever ESG ETF and first ever active fund, the Schwab Ariel ESG ETF, ticker symbol SAEF. David, tell us a little bit more about what sets this fund apart from similar products that are out there. there. And what does it mean exactly to take an active approach to ESG metrics through an ETF? Yeah, I think there's a couple things that set this ETF apart. First is our partnership with Ariel investments. One of the oldest and largest minority-owned investment shops in the world. They have nearly $20 billion in assets. And Charles Schwab has been working with Ariel

for around 20 years, really dating back. in the early 1990s to doing a survey on investor attitudes, especially black investors, which has been very telling to understand the dichotomy of investors in the universe. So we take that partnership in the formation of the Ariel ETF, the Schwab Ariel ESG ETF. And Ariel really brings a unique investment style where they look at a value-oriented approach in the ESG space and looking at small and mid-cap names. And small and mid-cap ESG strategies are really hard to come by. So we think it really serves a really strong point in investors' portfolios

combined with many of the more traditional large-cap growth-oriented ESG strategies that are in the marketplace today. Value might be hard to come by, too, somewhat argue, given just the amount of flows that have gone into ESG and what that's meant for the multiples of companies that are seen as ESG-compliant. Tom, what are your thoughts here? Is there room for new ESG offerings given all of the trend surrounding this area? Are we starting to get oversaturated here?

Well, it's surely a popular area, Leslie, and there has been some discussions about maybe standardizing ESG as far as the research. However, the horses already left the barn, let's just say, because there's so many choices and all the management companies and index providers look at this in. so many different ways, which is good for the average investor. You look at the unique approach that Ariel brings and the fact that they've been at this for decades where there are a lot of companies that can't say the same. However, it does require more research for the average investor and most importantly, the average advisor, because the average advisor's clients out there is expecting, not just requesting, but expecting some type of ESG overlay. And that might come in a lot of different shapes, sizes, and colors. And that's going to be really important going forward.

Yeah, they're expecting that overlay without sacrificing returns, which of course is the tightrope the managers have to walk. Now, I just want to switch gears a little bit to talk about crypto. The SEC has approved three Bitcoin futures ETFs this year, but has thrown cold water on the notion of a pure play Bitcoin ETF most recently rejecting VanEx proposal for a spot Bitcoin ETF two weeks ago. Let's bring in Dave Abner into the conversation. He's still with us. Despite all the naysayers, the SEC's latest move, he believes that the crypto community will get what it wants, and that is a pure play Bitcoin ETF. He believes it's imminent. Dave, you head up business development in Gemini Crypto Exchange. Why are Bitcoin

future ETFs the answer to SEC's crypto conundrum? Great question, Leslie. Thanks for having me on today. The, the SCE The SEC is moving very meticulously in the Bitcoin and the crypto ETF space. They've thought about this. They've worked very hard. They've obviously been paying attention and reading a tremendous amount of work that's been produced on the subject. The futures funds are interesting. The future strategies funds were a great step forward for the SEC if you think about it, right?

And why would they do that? So the CFTC oversees the Bitcoin Futures. SEC oversees 40 Act funds. So the approval of a futures-based fund that fits within the 40 Act is a perfect next step for the SEC. What they're saying is this is no longer actually about market maturity. I think the SEC would like to have more oversight and clearer regulations over the entire crypto market. They're not there yet, but I think that's coming. And so I think they've really sort of been paying attention to the market. They are taking steps because they acknowledge that, you know, the future strategies funds, they show investors that crypto is an investable asset class.

And so they are, the SEC is taking these progressive steps to move us forward. I really, I thought we were going to be there by the end of this year. I actually thought the Vanek physical fund would get approved. I'm still very bullish. I think the SEC knows exactly what they're doing, and I think we're on that way, on that patent. Hey, David's Tom, just really quick. You know, with Cameron and Tyler Winklevoss being your founders and having the first application for an ETF way back in 2013, I'm sure you're encouraged to see the futures-based ETF, especially with the record amount of money that came in over a billion dollars just

in a matter of days. What's it going to take? Because there's surely demand from individual investors and especially financial advisors. what's it going to take for us to get a physically backed ETF? Well, like I said, look, I think the SEC is just moving on a path. I think they are continuing to develop the ecosystem as well. So you're right. Tyler and Cameron filed for the first Bitcoin ETF in I think it was 2013.

The market, Gemini didn't even exist at the time. So the market for regulated custodians was not developed. They've now since developed robust custodians. The market for trading has really evolved. And like I was saying, I think the SEC allowing the futures ETFs is them signaling the markets. We think this is an investable asset class. We think the market has matured to a level that we, with all of our investor protections, are comfortable with them achieving access.

And I think they are just sort of waiting to take that next. step, they're potentially looking for some greater, clearer regulatory guidelines around the industry. And maybe, so maybe we see that in Q1 and then we see an ETF right after it. I think there's a little bit of movement in that direction, I think. Tom, do you agree with that? Do you think that the SEC is moving toward a spot Bitcoin ETF approval process? Is there a risk that they don't? I wish I was as optimistic. I think some of the hunger has been satisfied with this the future strategy for sure,

but there is concern about the pure volume and availability of Bitcoin futures. But it's one of those things that we're not going back. Cryptocurrency is here to stay, and individual investors and advisors have huge demand. We do a survey every year among the advisor community, and it just gets going more and more. And for the average advisor out there that is managing a diversified portfolio for their clients, not being able to buy Bitcoin or spot Bitcoin ETF on a brokerage platform is somewhat of a handcuffing nature there. So if your clients go rogue and they go off and open up a coin. base account, they potentially could shoot themselves in the foot as far as the volatility and

that type of thing. So I think this is something they devise a community is pushing for. I think we'll eventually see it. I wish it was going to be Q1, but I would say fingers crossed by the end of 22. Just out of curiosity to follow up on that, Tom. What does that mean from a short selling standpoint as well? Obviously, institutional investors tend to use ETFs as a way to hedge or to showed, you know, a directional bearishness toward a sector or theme, do you think that an approval of a Bitcoin spot ETF would further allow institutional investors to short the price of Bitcoin? Well, it's just another form of liquidity. And shorting the market is a great opportunity to provide greater liquidity. And the market as a whole is held up very, very well.

We haven't seen any chinks in the armor on the future side. And would it help to add to liquidity if we saw some spot ETFs? I think so. And although we've had a little bit of a pullback recently, there are a lot of people feeling that come 22, we might see Bitcoin up to $100,000. If that were to happen, you can imagine the glowing demand. I tell you, I'm a baby-bormer. I'm a baby-baby boomer, but all my friends I talk to now just finally are asking me about cryptocurrency.

And I'm just scratching my head because it's not as though they're late. They're going to continue to maybe dip their toe in the water, but they like to do it on their brokerage account as opposed to going to do a Coinbase account or something like that. Sorry, Leslie. I don't know about exactly the way you phrase it, Tom. But I would go back to that piece with investors being able to short the market as well. Look, I think it's really important to remember what ETFs have done over the last 20 years, right? They are a centralized liquidity place for all types of investors. So they bring together long-term holders, traders, hedge fund managers that need to short the market for their strategies, potentially.

They add liquidity in general. So whether it's a Bitcoin futures ETF or a Bitcoin physical ETF, both of them will continue to help the ecosystem grow. And, you know, with the strategy, the Bitcoin Future Strategy ETFs, some advisors will be able to use those funds. And that will bring them into the market. It will help them answer client demand. So all of these things are good. And even on the short side, Leslie, these probably ETFs, generally ETFs, enable two-way markets, they increase liquidity, and they help investors.

So it's all a good thing in that sense. And let's see, if I can add one more thing, the great thing is you have companies like Gemini, but there's so many other very high-profile companies that are pushing for the same thing. They want to spot Bitcoin ETF. And the cool thing is they're working together. They're sharing information. They're working closely with the SEC meeting regularly. And it's very, very healthy because we've got this ecosystem that's building where,

although there's healthy competition, they're all kind of doing it together. And it's quite admirable. Yeah, it's not seen as a zero sum, especially not in the ETF world. At least that's my take. Thank you guys so much. Great conversation. That's it for today. I'm Leslie Picker.

Thank you for listening. Make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Ed. CNBC. Invesco QQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at investco.com slash QQ. Investco Distributors, Inc.