ETF Edge - Sign of top or another pop? Rush of Mag 7 & weight loss offerings hit 3/18/24

Episode Date: March 18, 2024

We’ve seen it before in the ETF space – a slew of new ways to play a theme often signals a peak. But could it be different this time with Mag 7 and even the recent weight loss craze?   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 InvescoQQQ, Supporting the Innovators Changing the World, Invesco 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 Dominic Chu, and for Bob Pisani, it happens often in this business that a flood of new products perhaps signals a peak. But is it different this time around with the Magnificent Seven? So here's my conversation with Round Hill Investments Dave Mazza and betifies Todd Rosenblum.

Dave, we're going to start with you. Thanks to you, it's now possible to bet long and short on the Magnificent Seven. So please explain to us how the mechanics of this works out. What exactly goes into it and how exactly do you generate the kinds of returns that are either amplified from the long side or on the short side as well? Yeah, no, thank you very much. Pleasure to be here. So we think about the Magnificent 7. These are seven stocks that are in the news every day.

We launched last year on Magnificent 7 ETF, ticker mags, as you noted, which has done exceptionally well performance-wise, up 58% in less than a year. But we've been hearing from investors and from traders that everyone has a view on the Magnificent 7, some positive and some negative. So we introduced MagX and MagQ more for traders to take advantage of the moves that we're seeing in the Magnificent 7 stocks. So, for example, Magnax provides on a daily basis, and this is important, on a daily basis, two times the performance of the Magnificent 7 stocks. And Magu on a daily basis provides one times the inverse performance of the Magnificent 7 stocks. So these are tools that can be used for traders who have short-term views on the Magnificent 7, both

positive and negative to express that view. So again, if you're bullish, maybe look for that two-time amplified exposure with MagX, or if you want to hedge your position or take an outright bearish view on a short-term basis, there's Magu. Now, the key point here is that these are leveraged and inverse ETFs, and they do reset on a daily basis. explain to us what that means and why the returns can be very different if they are held for longer periods of time. Last week, both you and Amplify filed for ETFs for weight loss ETFs, all of these types of things, leveraged and whatever, you got to tell us about why you think

some of these particular ETFs don't necessarily trade the way that they would think if you look at a chart of, say, the Mag 7 index over the longer term and then over what your results would be over that same timeframe? Yeah, no, happy to do so. So if we think about Mags, which is the non-leverage version, this is a traditional ETF, although it provides concentrated exposure to those seven stocks, your return path is going to be similar to what an index of those seven names would be. But if you are resetting performance daily, which happen in leverage and inverse ETS,

and this is really important for folks to consider, you need to be able to view your positions on a daily basis. You can hold it for more than a day, but you need to be able to reassess, is this the right trade for me to be in? Do I want to be two times or do I want to be minus 1x, for example? And this would be the same for any leverage in a mercy T.F. And really the reason why is due to compounding and volatility. There's environments where compounding can be your friends. So let's say markets are just trending higher on a daily basis with low volatility. We were in one of those markets actually for a good part of last year, you might actually see greater than two times of return. But if you're in that opposite environment, markets are very choppy and sort of

directionless, then you're actually going to see kind of returns that degrade from that. So this is why it's paramount for anyone who's interested in leverage and inverse ETS, whether that's MagX or MagQ or others, to do so with kind of open eyes, understand the products, understand, as you note that they reset daily, so they're not intended to be held for longer time periods. Todd, let me bring you in just to kind of put a cap on this portion of the discussion. These are the types of funds that are geared towards what type of market participant. And I'll leave it open for you to tell me. Well, the leverage in the inverse is for very short-term traders, as Dave was talking about.

And I think he said a good example for you really need to go in with your eyes open and understand that every day these could perform really well or really poorly. I like to think of leverage and inverse ETFs in playing baseball, swinging for the fences. You're going to hit a couple home runs. You're going to strike out a lot. If you like the mag seven stocks, but you want to have it in a broader portfolio, there's, of course, other ways to do that. There's actively managed ETFs. Tiro Price has a strong one. The ticker is TCAF. This is a Tero Price, Capital Appreciation, equity fund, it holds some of these Mag 7 stocks, not all of them, within top weightings, but holds some of them, and then also holds other growth stocks that management at Tiro Price

finds to be attractive. And of course, you can take a more equally weighted approach. Now, the Mags ETAF, Dave's talking about, is equally weighted across the seven, but the Invesco, S&P 500, equal-weight ETF, RSP, that's equal-weighted across all 500 companies within the S&P 500, and that, of course, you're going to get, there's companies, we're going to talk about Eli Lilly in a bit, there are companies outside of the Mag 7 that are shining this year. All right, Todd, that's a good transition point, because I did mention that last week, both Round Hill and Amplify filed for ETSs around kind of this weight loss theme. These weight lost ETFs are not off far in the horizon.

For Roundhill, when do you think yours might launch, Dave? And what would be in it? I mean, Eli Lilly seems like a logical choice. it's the biggest biopharma, pharmaceutical company in the world these days. Are there enough companies in this industry to make it a so-called diversified ETF when I can only think of maybe three or four names off the top of my head that are really part of this weight loss craze? Yeah, no, it's interesting.

We're seeing really kind of, as you noted, really two themes play out on the markets today. It's generative AI, of which the Magnificent seven stocks are leaders in that space, then GLP1's weight loss of these. drugs. And the reason why we believe that these are attractive themes and they're playing out now is that revenue is able to be earned today, oftentimes with thematic investing, that may not happen years or even decades in the future. When we think about the opportunity, though, specifically for GLP1, weight loss and weight loss drugs, that really is just a handful of names. Those are well-known, your Eli-Lillies, your Novos of the world, coupled with some lesser-known

biotechs. I think it's going to be important to kind of keep an eye on this space. We're going to see some rapid advancements in drugs. We're already seeing rapid advancements of those leaders launching new drugs and new opportunities in the market. Right now, the anti-obesity drug market only generates about $6 billion in sales annually. Goldman Sachs research recently said that could be up to $100 billion in a short period of time. So I think what we're interested in is identifying those names that are earning those revenues today, and then likely a few others that are going to be coming along with them as investment moves into that space. And Dave, just to put a timeline on it, do you have an anticipated days, weeks, or months

before this thing comes to market for your product, at least? Yeah, with any new ETF, there is a regulatory clock or calendar that is typically followed. So we filed recently. So hopefully sometime, I'd say maybe later in May, you could expect more from us. But we'll keep investors posted on that because I do think this is going to be an interesting opportunity as the theme continues to evolve. Thames, themes and themes, Todd, I mean, this is just another sign, right? That ETFs in this business, they never missed an investing theme or craze even,

whether it's cannabis, whether it's cybersecurity, whether it's cryptocurrency, thematic technology, artificial intelligence, you name it, right? Isn't there a tendency for some of these ETFs to come to market just at what some investors are called the top of whatever investment craze is happening at the moment? Well, I think that there's a duration of time period for thematic ETFs. I think we may come back to talking about artificial intelligence ETFs, which came to market a few years ago, some of them, and then they become extremely popular last year in 2023 and in 24. I want to stick if I can on the obesity theme because we do have a product that's in the market

today. It's a TEMA ETF. The ticker is HRTS that launched last year. And as you mentioned, Roundtail has a filing. Amplify has one as well. That VETify happens to be the index provider behind. So we at least can see what's inside that index behind the Amplify ETF. And you mentioned a handful of stocks. Yes, today that are benefiting from the obesity drugs. But there are other drugs that are in the pipeline, companies like Viking, for example, that are still in clinical trials. And we also see enablers. So companies like Thermo Fisher Scientific is benefiting from this overall trend, and we think could be a beneficiary. So we think there's enough stocks to have a broader thematic strategy. But I would also mention themes take a couple of years to play out.

As Dave mentioned, by 2030, this could be a $100 billion industry. That's certainly worthy of having a slice of the portfolio dedicated to it. It's an important perspective here, Todd, because you mentioned some of the runway that was needed there with regard to seeing some of these themes play out. And for those people who did invest in artificial intelligence-themed ETFs a year or two ago, they're starting to reap those benefits. So let's talk about those AI-themed ETFs. They're getting inflows this year. Of course they are. They did last year as well. Which ones are the ones that stick out to you with regard to that AI kind of thematic investing ETF approach?

Yeah, so I imagine Dave's going to be able to talk about one of his ETFs, chat, CHAT, so I'll set him up for that in a moment. But some of the other popular ETFs, BOTZ, is a GlobalX Robotics and Artificial Intelligence ETF that's seen strong inflows. There's also a robo-global artificial intelligence ETF, THNQ, that perform very well in 2023 and is starting to see demand in 2024. We think that the thematic trend towards artificial intelligence is still in the early stages. Inviti has obviously been the poster child for the success, but we think there's room for small and mid-sized companies as well to be a participant

in this, and we think the revenue growth is quite strong. So this is a theme that started a couple years ago. It picked up last year. It's carrying on with the legs. We expect we'll see investors continuing to buy throughout the year. Dave, let's talk about that offering that Roundhill has with regard to kind of advanced tech artificial intelligence. What kind of investor interest are you seeing? Just how rapidly are the flows shifting around? Do you view this as something where things are consistently moving towards this theme of AI? Or is it become a little bit more choppy?

Or, again, maybe short-term traders and investors are taking more volatile views and managing their risk around these positions in those types of ETFs on a more day-to-day or week-by-week basis instead of, say, for the longer term? Yeah, it's interesting. There's been a lot of talk about whether the market is actually broadening out from just the magnificent seven stocks that were clearly the leaders last year. And we're starting to see some of that play out, of course. But what's interesting is when we think about the AI theme and at least the flows that we're

seeing in our chat ETF is it's most certainly broadening out. The performance of those companies, it's not just Navidia. It's super micro, another company that's doing. really interesting things in the generative AI space. And now investors are beginning to turn their attention, not just from the picks and shovels, but from companies that are able to benefit from the use of generative AI in their application. So names like Salesforce or a service now come to mind where they're integrating that to make users more productive. So one of the benefits that we see with generative AI is it can make everyone a power user, everyone a super user. And it's

not just one or two folks who may be able to leverage that technology or be skilled in that way. So we're seeing it performance-wise with our ETF. The focus using active management to identify these companies has paid off with really strong performance relative to the NASDAQ 100 and the S&B 500 by, again, focusing on the well-known names, your Navidias of the world, those picks and shovels and the enablers, but also beginning to dip down to some smaller companies, companies based outside of the U.S., that are also benefiting from the move for consumers and enterprises into generative AI. All right. We've taken a lot of micro approaches to some of these themes right now. Todd, I'm going to give you the last word here. As somebody who watches all of these ETF flows across the entire market, can you take us through what you're seeing in terms of those flows, activity, trading volumes that may indicate to you a direction for this market? I know there's no crystal ball,

but are there more people that are still now bullish on the market, or people going long this market a little bit more often? Or is there a pickup now in some of these kind of inverse-related ETFs or ones that are more conservative out there with regard to the next growth story in the market? So what's interesting is in 2023, the market climbed higher and then ETF flows started to pick up in the fourth quarter. We didn't see the same level of demand.

This year, equity ETF demand has been quite strong. We saw two of the strongest months that we've been. seen in recent time periods in January and February to start the year as the equity markets have climbed higher. We've started to see also demand for some quality oriented ETF, so higher quality ETFs like QAL from I shares or SPHQ, which is an Invesco ETF that shows that investors are slightly nervous about the equity markets, but still wanting to have exposure given the strong earnings trends. I don't think we haven't seen the same level of demand in people, betting against the market. It seems to be people are betting for the market using equity

ETFs in the first couple of months. All right. Dave Mazza at Roundhill, thank you very much for joining us. Todd Rosenblut, the Vetify, thank you as well for your insights. We'll see you again soon. That does it for ETF Edge, the podcast. Thanks for listening. Join us again next week or just head over to etfedge.cc.com. InvescoQQQQQ believes new innovations create new opportunities. An Agent of Innovation. InvescoQQQ, Invesco Distributors, Inc.