ETF Edge - Semis Soar, But Not All Gains Are Equal 2/5/24

Episode Date: February 5, 2024

With the recent run, semis are challenging software as the biggest sub-sector of the S&P. But not all chipmakers are benefitting. In fact, most are not. So choose your ETFs carefully. Here’s how.    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 are in the right place. My friends, every week, we're bringing you interviews and market analysis and breaking down what it all means for investors. I'm your host, Bob Pisani. Big Gains, year-to-date. Macy's semiconductors soon overtakes software as the largest subsector of the edge.

S&P 500, but those gains are not all equal. Here's my conversation with the man in charge of the largest semiconductor ETF, Jan Vaneck, CEO Veneck, along with Todd Sone, the ETF and technical strategist as Stratigis Securities. Jan, everybody knows you run SMH, the semiconductor ETF, $13 billion. Market cap weighted, up 10% this year. We're at an historic high, or maybe just shy of that. I look at the gains, though.

I see five stocks here. I see Nvidia, AMD, Taiwan, Semi, A, Semi, A, Semi, Semi, Semi, SML and Broadcom, most of the gains here. Here we go. And it's a narrow rally, even in the semiconductor industry. I'm going to put up what's down, but it's going to be surprising the people. Yeah, if you look very narrowly, it's, there's winners and losers over a shorter time period. And that's, it's really interesting.

The semiconductor, you know, it's like a hardware sector, right? And it used to really go through boom, bust. Even Nvidia had two 80% drawdowns. And so the question is, are we in the golden age of semiconductors? where you have AI just driving unit demand and pricing power. And what we would focus on is the pricing power. Because NVIDIA's volumes didn't, unit volumes didn't explode last year. It's just that these companies have huge competitive advantages,

almost quasi-monopolis. Who competes against Nvidia for GPUs is a big example, or Taiwan Semi, or ASML, the equipment manufacturer. So they've got great pricing power, they've got AI. And I want to just show you, just I want people to understand how lopsided this is. There's 25 stocks in the SMH, right? Right. Look at the big names that are down.

I think only half of them are up this year. Intel's down. ST Micro, Terradine, Skyworks, Texas Instrument. There's a lot more. Explain these competitive moats, the wide moats that people, that's the reason we're seeing this bifurcation, right? Explain this. Well, it's a matter of IP. So who can design a GPU, a graphics,

better than Nvidia and what is their head start in terms of timing. So, and they're trying to build their remote by it now having software services and now they're building a cloud solution. But who can really compete with them? Or Taiwan Semi. It costs tens of billions to build a semiconductor fab plant. No one can, no one, you could bet a hundred billion to build one and compete. And then the risk is 18 months and two years, you're building.

behind them in manufacturing. So that's a huge bet, and people aren't really making that bet. Now, of course, it's like honey, competitors will come, right? So, Nvidia has, AMD is making a graphics chip. So they're going to try. But the lead is so big, and the profit margins are 50%. The return on equity is huge. Those of you don't follow these fancy terms for you. MOT refers to the competitive advantage that a company might have. So a wide moat essentially means they have a lot of protection against competitors, and that's your point. A company like Nvidia has a very wide mode, protection against competitors. Competitive advance.

Todd, I want to bring you in here. We had a couple problems here. First, obviously, what we just don't talk, growth is concentrated. Even in the tech area, you can say tech's got a narrow advance. It's all tech. But even in tech, it's a narrow advance. The other problem, of course, is the market is overall trying to price some rate cuts that the Fed doesn't seem to want to provide us any guidance on yet.

So where are we here in this whole game? You're paid to watch flows, essentially. Yeah, of course. I mean, you had a pretty good sugar rush in the fourth quarter of last year, whether we want to call it a catch-up trade or based on the idea of cuts, which there seem to be going away now. I think a lot of stocks are in extended positions. Semis are part of that.

Invidia's some 50, 60% above its 200 average, for example. Now, that can continue, that can persist. just be mindful. When mean reversion sets in, it can be very painful. I do like the idea, though, of viewing that the last two years were one of the more painful times in market history, right? You had the significant correction in 2022. A lot of corners are still down significantly from that, especially in the thematic areas. So you still want to, if you're an ETF investor, look at the more sickle corners opportunistically going forward. So, Todd, I'm not a technical guy, but the S&P was flirting with like a double top. And then it just broke through and made all

time highs. I personally bought more equities after that. So I get the overvaluation. It's crazy in a way. It's very uncomfortable. But technically we're okay, right? Yeah, I think so. I look at two years of nothing as a great setup for the next call it two to three years, right? In the near term, next one to three months, there's going to be speed bumps. That's usually what happens. We had it last summer from July and October, but don't lose sight of the big picture that a lot of stocks are now breaking out over those hives from the last year. So how do you address, again, this is a different way of saying, but is the overweight a problem?

How do you address the overweight in tech, particularly semis and software? I put up, we just put up something, and put it up again. The two groups together are 20% of the S&P 500. You throw in hardware as 8%. We've got it almost 30%. Of the S&P is software, semiconductors, and hardware, there you go. There's the groups for you. Is this a worry or has this happened before?

And in fact, this is the way the world always is in a rally. It is concentrated. It was 50 years ago with the nifty 50. It was with Internet stocks. Should we not be worried? As you always say, markets are a voting mechanism. The market is now voting on semiconductors as the next big thing within the index, right? A decade ago, semis were 2% of the S&P 500.

They're now nine. They're catching up the software, which is the largest. You go back 20 years ago with Cisco and Intel, right before the financial crisis. You had energy in banks were the top largest weight. They fell out of favor. You will have semis continue to gain market share, but just know at the ETF level, know what the product you're buying is, right? You go into a grocery store. There's six kinds of Rye bread.

There's six kinds of semi-EATs right now, including Yon's. So you've got to look at the ingredients. Is it market cap weighted? Is it equally weighted? Is it fundamentally weighted? That's really important now going forward. I think what's benefited the winners in semiconductors, because it used to be, what you don't want to be as in an industry where everyone's producing a commodity, because then you have no

commodity, you have no pricing power. And I think semiconductors, there were a lot of wars. You know, a lot of companies have lost. And so what SMH does is it buys the winners or has, because of its large cap orientation. And so that's, we're now, like Samsung is DRAM manufacturer, not in SMH, but also there's not many DRAM. Why is it not in SMH? I don't know. I should know. No, but I don't know. Should have a CEO. Oh, that's you. That's the guy who res.

Why is Samsung not technically the part of the computer, right? That's the chip, right? Really? No, it's the memory. But anyway, so, but again, there's only a few ways. They don't have a wide moat particularly. They do now, though. That's the point.

But they beat, they had these big competitive battles over, you know, many years, maybe decades. And these are the winners. And so, yeah, that's the situation. I just want to go back to this idea. show you how crazy this is. The SMH is market cap weight. So the bigger name, obviously, Infinity is the biggest.

It's up 10% this year. But you put up your nearest competitor. It's the XSD, which State Street runs, right? Correct. This is equal weight, XSD. I don't know we can put that. There's SMAs. Put up XSD.

It's down 7% this year. In fact, it's gone nowhere. It's zero in the last year. So in theory, these are two semiconductor... Look at that. There you go. These are two semiconductor ETFs. You say, oh, I want to buy a semiconductor ETFs.

This goes back to... You better. be careful about what you're owning here. And maybe it wasn't obvious a year ago that this was going to happen. That's part of the problem. Like, oh, duh, Bob. Of course, everybody should go buy, you know, the SMH.

But that wasn't obvious a year ago, necessarily. It's all about the due diligence. Now, I think from an ETF level, equating your broader index exposure can make sense at times, right? The SMP or mid-caps, small-caps. When you want to make a more concentrated bet, like the semis or even like a biotech,

I think that's when you want to know, Maybe I should go to the market cap. But now, in retrospect, we say, oh, wide mode, therefore, would it have been obvious a year ago amongst everybody? Not to me. But I would say that this approach has been a long-term winner. I mean, SMA, since we took it over in 2012, is up 12 times. I mean, that's just crazy. And it's the core, the chips and everything.

And it's just getting more so, right? In automotive, and obviously mobile, you know, definitely. desktop servers, there's chips everywhere. Yeah. They're in glasses, right? We're talking about glasses. Well, one of the reasons this show was founded was because the, this was seven years ago we started this show. The plethora of ETFs in sectors was confusing.

Like, you know, dividend ETFs. There was 20 dividend ETFs and people didn't know the show was founded this show to help people make that choice. Here's a very good example of like, it really a shocking performance differential. They're both called the semiconductor ETS. conductor ETS. And it's a shocking performance differential. I think sitting here today, I could argue that it's very unlikely, and that's what this competitive advantage research shows, that you're going to get a small cap that can really compete against NVIDIA. It's just super hard. It has to be the giants competing against each other, and I just, I would keep the bet on that not happening,

but I don't know if you should have. You just keep the bet on market weight on this large cap bias. With certain industries, I think it makes sense to keep going the market cap route. And I think this is a trend why you're seeing these more niche concentrated type products come out again, right? Get rid of the excess small cap names and just stick with the three to five largest, whether it's using derivatives and whatnot. It's the Kathy Woods thing, make big concentrated bets on a few things here. And, you know, you roll with the winners and the losers. I want to broaden this out. But these companies are gushing cash.

Yeah. That's the difference. This is sort of, you can call it disruptive technology, but they're financial profile. is insanely different from Arc. I want to broaden this out a bit. Your ETS is a lot bigger than semiconductors, folks. Van Eck is the 10th largest ETF Fund family? I think it is.

See, I know this and you don't. All right, never mind. Just believe me, trust me. Call me and ask me. But you have two big gold miner ETFs here. The traditional gold miner ETF, that's GDX, that owns all the big gold miners. And you have a junior gold miner,

because I've always found intriguing, GDXJ, right? Yep. And I know Matt Bartolini at State Street made a point about this a couple days ago. Gold ETS have had outflows in the last year. And yet gold hit it all-time high a little while ago. Gold's what up, eight, seven, eight percent or something in the last year. So this is an example, it seems, of investor interest not matching the direction of the markets. Gold price is up.

You think, heck, people love that. And yet inflows have been down. Can you explain that? Yeah, easily, because the ETS are not. the only thing happening in the world. So the big demand for gold bullion has come from foreign central banks. After the U.S. kind of sanctioned Russia, most of the rest of the world, we may not like it, said, that's great the United States, but we don't want to have our central bank reserves, our central bank reserves, at risk of political wins in the United States. So there's been

huge buying by central banks of gold bullion. U.S. investor, you're right, outflows out of the bullying ETFs, not a lot of interest in the equities. And the investors are not as interested. No interest. No interest. Why? Usually, retail investors see prices going up. It brings some inflows traditionally. Why don't they care? Well, you've got NASDAQ 100 up 50% last year. And now I get 5% on cash. And does Bitcoin compete? I don't know. I think it does. Bitcoin too. So your gold is kind of left in this abyss of where do I put it? Like old guys, you know, in their basement on gold? But there's also been headaches, even for those gold mining companies that really restructured in very great financial situation. Now they have political risk.

So in West Africa and even in Panama, it's not just gold mining, but different kinds of resources, major political issues in getting production and profitability at those countries. So there's now a premium for North America for lower political risk in Australia, of course. Yeah. Okay. I want to move on. You've also got, Jan has a wealth of great ETFs. You have one of the largest oil ETFs, the oil services. OIH is the symbol here. And those you don't know, this owns all the big guys. It owns Schlumbergeret and Halliburton and Baker Hughes. But energy has bad, energy stocks have badly lagged the S&P as oil prices have been trending down since September to everyone's shock post, you know, the Hamas is rarely, Israeli-Humice war. So tell us a little bit of what's going on there. I've sort of answered the question about what's going on, but it's an unloved sector. Yeah. And earnings estimates are coming down for the energy right now.

Yeah, so, I mean, look, the bullish case for energy to me is that you're at all-time highs in global oil demand. So it's 100 million barrels a day. That's still growing at 1 to 2 percent a year. Wait, not the U.S. The bullish case is what? Oil consumption, globally. Is it 100 million barrels a day? And it's still growing.

It's not growing at invidia rates. It's growing at 1 or 2%. But that's global, that's in the world where China is in a recession, let's call it. So other growth drivers in the world, and I look at Brazil and India, kind of those are my favorite countries to talk about, have not yet picked up the demand. So it's a weak demand, but it's a growing demand supply situation globally. And energy companies can do all right.

There is growth in that sector because the world, remember, with depletion, you do need new discoveries, new services, new production globally. That's the best I can say. And the EMP is there. I mean, the bare case, the supply keeps matching any U.S. We're pumping 13 million barrels of oil a day. The supply's there. The companies are arguably the next best cash flowing companies and the semiconductors.

They're trading a double-digit cash flow yields for EMPs and sectors in the oil market. No one cares. No one cares. We should just take them private time. Well, that's why they still have great dividends, right? Because of strong cash flows. I agree with Yon that on the idea of them being, the sector being unloved, you had pretty large outflows last year. And if tech were to take a hit at some point in this quarter, I would guess the more tactical folks rotate into stuff like energy or even health care, right? Those are the more unloved corners in our work, just in terms of look at the flow data.

Yeah. But I agree it's unloved despite the great yields. Yeah. And no sign anybody's cutting any dividends at all, not a peep out of anybody. And that's what people care for. I mean, you look at some of these yields where, you know, OIH, this company's 4%, 5%, there's an integrated that made $3 billion in just trading energy last quarter. You know, they're situated just to bid cash.

Yeah, yeah. Shareholders don't care. You also run a small fund that owns uranium and nuclear stocks. This is NLR. People want to write down Nancy, Larry, Robert. Just hit a new high the other day here. This is a curious fund. It owns nuclear stocks, but also owns utilities,

owns Constellation, PG&E, public services. I guess these are utilities that own nuclear facilities, right? Exactly. It's leverage to the use. It's really a full spectrum play on if you think that use of nuclear, it has, you know, is in the secular growth market. Isn't the problem, though, if it's just owning PG&E, that's a tough way to get leverage in nuclear on that.

Isn't that the problem? Yeah, the most leverage is a pure miners play, and one of our competitors has that. We think those companies are very volatile and, you know, I'm not sure they make a fully diversified portfolio. So we include a healthy chunk of them to get the upside in the bull market. But there's also, you know, profits to be made now. Nuclear has been challenged occasionally on the operating side, the regulatory setbacks, right? So there has to really be, I think for me, I don't know if you agree, Todd, but a real policy reversal.

and you still have Germany shutting down all its nuclear plants, you know, Japan being very hesitant. But I think investors are starting to say that's changing. The problem here, again, this is the example of owning stuff where you can move. The utilities get hit when rates go up, independent of whether they're heavily in nuclear. So it's hard to get that as a pure play. It's a problem we have a lot of these sectors where other things kind of influence them. But it's not a utility.

these fund. These utilities are really leveraged to new... Any thoughts on... Well, Siyan mentioned the policy risk, right? The way that some of these funds are trading would suggest maybe that's the doors opening for that, but they're also such high flyers right now that any sort of mistake on that side will send them tumbling, I'd say. So that's the risk going forward. And I think you're also starting to see volumes really climb for some of the uranium-type

products. So that suggests to me that maybe we're getting a little overcooked. overdone in terms of the sentiment there. But it's the best place in energy right now, as the rest of the sector is still trying to figure out where it's going next. Yeah, well, it makes some sense, though. I mean, hydrocarbons are, you know, in theory,

not going anywhere, but there's plenty of supply. Demand is a little lower, partly due to China. That's a tough one to play right now. I mean, and the whole, you know, solar space is a tough one to play still. and wind and offshore has been tough recently. Nothing irrational is happening here in terms of the prices. It makes sense that what little pieces there are in nuclear are outperforming energy, which is magnitudes of order bigger.

Yeah. I think the support we need is just better global growth. And I think China's recession is really weighing on that. And frankly, I think we're doing better for the whole commodities spectrum. I know it's underperforming a lot of other things, but not really badly, considering the driver for global growth, is really on its back right now. It could be for a couple of years. Yeah, China.

A great discussion, folks, wide-ranging. That's why we have all these people here. 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. Todd Stone, ETF and Technical Strategist at Stratigis. Stades with us for more. Todd, we talked about a lot of different subjects today, the semiconductor ETF. The gold ETFs, nuclear ETFs, oil service ETFs, but we're in a new month.

Floes in January, we always like to look at the flows. It looked like it was somewhere around $40 billion. We're at new highs on the S&P, but break down the flows. What is it looking like? I think January was a little bit of a pause, pretty standard month overall for ETFs. A lot of the inflows, a lot of the activity came during the fourth quarter of 2023. at a huge run-up in the markets, really strong finish the year. And you saw the persistency and magnitude, especially on the equity side, really rise, right?

Over $100 billion, over a three-month period, even more than that to some extent. And I think that's a little bit more reflective of optimistic attitudes, maybe a little bit frothy, but not to the extent of, say, 2020, 2021, when every which way was about equity markets. So I look at January as a pause. You're seeing some corners of the market, some corners of the ETAF market pause here, maybe for the first quarter. It's a softer seasonal stretch. I'm okay overall with seeing some sort of consensus.

Is it fair to say that it's quite possible that November, December, we're so strong, not just in price gains, but inflows, too, that it may have pulled forward a lot of demand already. Absolutely. Perhaps even at least the first quarter of this year, maybe even the first half, right? And you think about some of the events on the horizon, namely the election. That always causes investor anxiety. They did a lot of repositioning in the fourth quarter and now just kind of sitting tight to let that process play out. There's always a tenuous environment leading into an election, just given the way the last few have gone.

And I don't think the flows were that bad. I'm looking at, oh, 20-some billion in equities, 20-some billion in bonds, 40-some billion total. I think what do we have in the flows last year? It's $500 billion? Yeah, I think it was a great year overall. It started pretty badly and ended really strongly. It was lethargic. All the money was going to money market funds.

You and I have talked about this a ton. All the attention was on 5% yields. That's finally started to shift away. Still very much in the background, though. And I think if there's one corner that seems a little bit aggressive, it's tech. We just talked about semis, and there's been a lot inflows to some of those products. So maybe focus away from tech and look at some of those unlove corners, like a health care or energy. And yet energy is getting, it seems, no love at all.

I mean, we're talking to Jan Vaneck about that. Consumer Staples are doing nothing. Most of them seem to have pricing issues, pricing lower, volumes lower. They're not doing very well. The only thing I see upward revisions and earnings in is technology and communication services, which is a technology group to me. That's what's powering the S&P right now. The S&P is turning into this tech semi-type index,

kind of like you see overseas in Asia, where they're dominated by semiconductor and hardware names such as the Samsung or Taiwan. The S&P is kind of evolving into that over the last few years, and you're seeing names like Nvidia. They're larger than energy now. Meta with its gain on Friday. Nvidia itself is larger than the entire S&P energy sector. Correct.

Including Exxon and Chevron. They're both 3.5% weight, basically, in the S&P, which is incredible. Yeah. That is not far behind. So, I'll say, as we talked about the magnificent sense. last year. It's basically turned into the sensational six now because the Tesla's decline. Meta is now 2.6% or so the S&P, so that's almost going to be bigger than that energy in due time. And yet, I know this sounds like it's all a little bit boring, but it's not. I mean,

I'm looking at every month, there's generally equity inflows for almost two years now. And it's mostly indexing. It's mostly S&P inflow still. So I know it's boring, but plain vanilla indexing continues to get money month after month, year. year after year. How about we at $8 trillion yet on total of assets under management? So there's always going to be the drip, right, into Vanguard and Spy and IVV type funds. Because investors know the S&P is the best index in the world. It has been, it'll go through its own speed bumps, but it's historically the best one right there. What I like to look for is the breadth of those flows, is it starting to go to other esoteric products. That, to me, tells

that retail might begin a little bit more aggressive. But for ETFs overall, I I think it's super healthy. They are now 33% of industry AUM between ETS and mutual funds. Bonds are almost a quarter. That's a huge change that's going on. No, wait. Say this again. What was 33%? Equity EATF AUM as a percent of EETF and mutual fund AEM.

That's a new high at the end of 2023. So that's going to continue to grow. And the big change is that bond ETFs are now a quarter of industry AUM. That's up meaningfully from the past few years. You have about $800 billion out of average. actively managed bond mutual funds since about the Fed liftoff two years ago. That's another significant change that's going on. So we talked about $500 billion last year, $40 billion for January.

These are all healthy numbers and progress, progress for the ETF industry. Yeah, and finally, just a lot of noise about active management. And yet, as we always say, a mediocre active manager in a mutual fund is a mediocre active manager in an ETF. Right. A lot of this active stuff is sort of Smart Beta Plus. I mean, what would you call it? It's not necessarily people picking stocks. It depends on the manager. The other way to look at it is you have defined outcome ETFs, buffered ETFs. Those are technically active in a sense. But are they really active? They're not your fidelity of old days active, but they're listed in the databases is active because of the way they're structured. But I think the way you look at it is you see whether they're stock pickers or quantitative solutions. they all see these charts that show

ETFs are eating up share by the month. All right, Todd, going to have to leave it there. Thank you very much for joining us. As always, Todd, Sone, of course, at Stratigas Irregular on ETF Edge. And that's all it for the podcast. Thanks for listening. Join us again next week or head to etfedge.cmbc.com. InvescoQQQQQQ believes new innovations create new opportunities.

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