ETF Edge - SPAC Boom, Top Tech Trends & Growth vs. Value

Episode Date: October 19, 2020

CNBC's Bob Pisani spoke with Tom Lydon, CEO of ETF Trends, Andrew McOrmond, Managing Director of ETF Trading Solutions at WallachBeth Capital and Paul Dellaquila, President of Defiance ETFs. They discussed standout trends fueling the flow into ETFs, the new generation of tech ETFs, the SPAC craze and value's struggle to win out over growth. In the 'markets 102' portion of the podcast, Bob discusses the SPAC boom. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights in all things, exchange traded funds, well, you're in the right place. Every week we're bringing you new interviews, market analysis, and we're going to break down what it all means for investors. I'm your host, Bob Pisani. ETF assets are approaching the $5 trillion mark this year. That would be a big milestone.

Today on the show, we'll talk about standout trends fueling those flows. We'll also hit on a new generation of tech ETFs, the SPAC craze, and values struggle to win out over growth, and it really is a struggle. Here's my conversation with Tom Leiden, CEO of ETF Trends, Andrew McCormand, the managing director of ETF Trading Solutions at Wallach Beth Capital, and Paul Delacquilla, he's the president of defiance ETFs. Tom, I want to start with you. The NYSC reporting ETF trends for the third quarter, just continuing to move along here.

We're approaching $5 trillion now in assets under management. I wonder, Tom, what sticks out to you with ETF trends? How are the flows looking? Of course, this has been a big year for active, non-transparent funds trying to get in on the market. Anything stick out for you in the first nine or ten months of the year? Yeah, Bob, it's been a great year for fixed income. You know, with low rates, lower for longer, you're seeing more investors, more advisors pushing into corporate and high-yield bond ETFs.

That's been huge, $175 billion there. On the equity side, the message has been traditionally in the last 10 years, it's been the low-cost beta strategies, but we've seen a huge shift to not only technology-weighted indexes like the QQs that's brought in like $25 billion. We've seen thematic strategies kind of go through the roof. And then when you mention active, active non-transparent, a lot of new company or companies have been around for a while in the mutual fund space are now getting into. the ETF business, companies like T. Roe Price, American Century, that are putting their stake in the ground in an active way, and that's been great. But there have been some other active strategies like ARC invests that two years ago was $2 billion. Now they're $12 billion, so they're seeing the love as well. Yeah, and Andrew, besides these active non-transparent ETFs, Tom was talking about,

the thematic ETF continues to be hot, the thematic ETF space. I want to your comment on last week's launch by Invesco of the junior NASDAQ 100. Here's a trend just capitalized on those who don't know it. Of course, the NASDAQ 100, the triple Qs is one of the most successful ETFs out there. It's the fifth largest one right now. But last week they launched a NASDAQ essentially 101 to 200, I guess you could call it, Andrew, that seeks to incorporate companies that are using tech and innovative ways, but that are also growing fast. Your reaction to this sort of new space?

of efforts to capitalize on the tech craze? Not surprised to see Investco, they're one of the biggest issuers, and they've always been very innovative. Like you said, the NASDAQ triple Q is a beast. But when you really think about that name, and that is the way to represent tech in a large-cap universe, it's 40% fang. So this serves to kind of take some diversity away from those names.

They're not even the first person really to come up with it. A month and a half ago, victory came up with the QQQQ, N, which is the next 50, or they call it, which is tech disrupt, there's Peloton CrowdStrike. That's up over 12% in a month and a half. But Investor is going to put that marketing engine behind that. I expect them to get some traction with this ETF. And look, we're in a pandemic-driven or pandemic, let's say, solutions-driven economy,

where the companies that are making people's lives easier are the companies that people are investing, the next generation are investing in. And I really think you're going to see some names have success, again, especially with the market cap of the QQQ, which will always get assets. And certainly there's a place for dollars in the fang, but they're coming under some fire, right? So I think this serves a different investor base and the next leg of growth. Yeah. And Tom, what's interesting to me is that this NASDAQ Jr. 100 ETM, or 101 to 200, I like to call it, has got your typical tech names. It's got Seagate and Z-Scaler in there, which is Internet Security firm, but it's also got non-tech firms in there.

I mean, Garmin, Lyft, Zinga, which is a social game developer. I mean, yes, obviously they use tech, but they use tech in innovative ways. I'm not sure they're necessarily technology companies. So there's sort of even the NASDAQ 100 is exclusively tech, obviously, but they're trying to include companies that are using tech in innovative ways, I think. Yeah, there are a lot of innovative healthcare companies, too, But back to Andy's point, the fact that the cues are stuffed with fang stocks. And that's done real well for investors over time.

However, the key is diversification. And going forward, especially as we're seeing rumblings of antitrust discussions, are we going to be as confident in those fang stocks going forward? Or here's an opportunity to maybe invest in the future fang stocks while you can diversify away and maybe catch lightning in a bottle one more time in the form of this next ETF. Yeah, I want to move on and talk a little bit about the SPAC boom, which is something I find endlessly fascinating. I think there are some very good things about it and some things that I don't particularly like about it. But of course, there's an ETF for that.

And Paul, you've launched the Defiant SPAC, E-T-F, SPA-K is the symbol. It's only been out for a few weeks. But I wonder if you could sort of explain to us what this is because the question I get is, how do you buy SPACs when essentially you don't know what they're going to own for? for two years. How does this break down? And I think that's the important thing to understand about this particular ETF. Yes, good question, Bob. And what we did with SPAK, which essentially provide investors with an 80-20 allocation, 80% being SPACs that have already, I'm sorry, companies that were private have already merged with SPACs over the last three years. So that's 80%. So you have a draft king to clarify that kind of fit that bill. And then the other 20% to your point, are those

IPO SPACs that have yet to merge. And for the investors who aren't familiar, Stacks are publicly traded even before they actually merge. So we're accessing the most liquid and the biggest in size in assets of those SPACs in our SPAC, ETF. Andrew, I wonder if you can enlighten us. Why are the SPAC craze now? We've had SPACs for several years, but all of a sudden they've blown up this year. Is there a particular reason? Is there a this has now happened? Is there a particular problem with the IPO marketplace that some famous investors don't want to bother any more going through the IPO process? Why SPACs now? Yeah, great question. I think it's a lack of access to RIAs and then their customers,

which tend to be unaccredited investors. Now, that's just a term used, you know, by investment banking companies to allow access. I mean, it's a real term, right? But that doesn't mean unaccredited investors aren't real dollars or have real ideas or have the ability to have diversification. And that is what they want, again, based on what we are seeing. And we're going to talk about right in a little bit with value companies kind of being on the back end. People want new access. They see the success they've had investing in companies like Peloton. So their next question is, what's next?

And how can I access that? And if draft kings is the next pen gaming, well, then, okay, I want to get access to that, right? And again, the beauty of ETFs, all ETFs since they were conceived, the ones that have been most successful were ones that offered a wrapper and a package of convenience to investors that otherwise could not get the asset class. And that is exactly what Paul has created here. He has given people access to this. And I only think it's going to further the craze. Like you said people talk about it, but can they get it? And can they get it without single stock risk?

Now they can do it? No, but Paul, is there really a lack of access to RIAs, registered investment advisors, as Andrew suggests here? I'm trying to figure out why this is happening now. It seems, can you, is it fair to say that this is an easier way to go public than the frankly difficult and arduous IPO route? Is that a fair observation? So I think it's two points, and I think Andrew did an excellent job, and that was really the genesis of the product. to answer your question, your first question, Bob, yes, certain RAA, certain investors. The IPO traditional process is a very close ecosystem. So if you're an underwriter,

if you're Warren Buffett, you know, if you want to buy Snowflick, you're at an $120 price. But once Snowflick actually hits the real market, the secondary market, you know, I'm paying $240 a share or essentially 100% premium on that stock just a day ago was at $120. So, you know, I think there is a little bit of a closed off environment to other RIAs to retail investors to be able to access those types of investments. The second part of it is for a company right now, and if you think about the traditional IPO process, it's really a roadshow type of deal. They have to go to city to city, investor, and raise capital, and they may seek out $10 billion of actual capital, but they're left with five at the end of that process. Then the company's faces the decision, do we actually

go public? Do we hold off for a little bit? So it's a little bit of an R2. process. But you overlay that with a COVID environment where travel restrictions are in place, where it's a little bit more difficult to be transient. suppliers like a Bill Aspen are stepping up with a plate with $4 billion pool of capital. That is a very appealing item for a private company to be able to negotiate with one partner, come up with the terms, and usually have a quicker action. Yeah, I certainly get the idea that COVID has created travel restrictions, make it a little more difficult. Go ahead, quickly.

Tom, did you say something? Yeah, so a couple of things. What Andy was saying as far as financial advisors, they work off of platforms like a Fidelity or Schwab. Pre-IPO or private companies really aren't available to be able to buy them on those platforms. This opportunity gets us closer to that, and frankly, clients are asking for it these days. And public companies just aren't happening quick enough. So the SPAC kind of speeds up the process. And it's really good. You can just kind of see with the flows right now, there's definitely a demand. Yeah.

I can definitely see in certain circumstances smaller RIAs. I think Andrew's right, would have trouble accessing it before it goes public and they feel left out. But the bottom line is it's easier to use to go public. It may be cheaper. It may be less arduous. Whatever the reason. There's a reason people are utilizing. that. And I think there may be a bit of an oversupply somewhere down the road here. We have 124 SPACs

launched this year, still haven't found a target. Okay, it's still early, but 27 from last year still haven't found any kind of target. I want to move on, Paul. You also have the next generation connectivity ETF, FIVG. That's essentially a 5G ETF. That thing's been raking in some money. I wonder if you're going to update us on what's going on there. I mean, we've got a whole bunch of stuff going on with that. It's tier-weighted. It's a little bit tough to explain, but you own a whole different groups of companies here. That's what I find very interesting out there. You own cellular networks, cell phone tower reeds in this, broadband modems, fiber cables. This is pretty elaborate for an ETF, actually.

Well, we appreciate that, Bob. That was the intent of the product. What we tried to do with SIVG was capture the entire ecosystem that was going into the 5G build out. So you are correct. year-to-date we're up about $400 million in assets so the EETF has about $550 million in AUM or assets under management. And we use a four-bucket approach. What we're trying to do is ensure that we have every stock or every stock that we possibly could that is really going into this 5G rollout. And I think that's the ultimate difficult question for investors. How do you play 5G? In our eyes, an ETF like F-I-D-G is the perfect way because we give you everything from companies they're doing the high-end routers,

or the stuff that's actually going to the data centers. We have the mobile network operators. We have the REIT with the infrastructure play. And then we have everything down to the chip manufacturers, like the Qualcomm, that actually goes into the cell phones or the devices that people are going to hold in their hand and actually connect to the network. Yeah, it's very, very interesting. Tom, any thoughts on this particular one?

What I notice is the assets under management keep going up. So obviously they've hit on a hot topic. I guess the question is, you know, do we see other? people coming into this space. You know, I mean, Tom or Andrew, following the release of the new, the 5G phone, I mean, the Apple phone, are other, are we going to see mobile carriers actually following suit here? Or is this going to be all for another two years? Well, I think that, and I'll let Andrew jump in in a second, you know, the, the new iPhone is absolutely going to help this out tremendously. I think Paul should put them on the payroll because it's just going to do nothing but talk about 5G.

Unfortunately, right now, we only have FIG in 30 cities around the U.S. It's not being built out quick enough. But if you've got an Apple 12 and you can get that 100 times speed on your phone, and you can show that to your friends, you can imagine the people are going to start talking about it. The more people talk about it, the greater demand, the greater innovation. Andrew, what would you add? Yeah, I think we've seen, I think we've shown, and we'd all agree that in the last, you know, let's say 10 years, and then I'll add the last nine months specifically with a point.

But in the last 10 years, we've seen that people are willing to pay for the best, right? You could call it anything you want. You could call it, like I said, you'll get to Peloton again. They're willing to pay up for the best. They've always been willing to pay up for Apple products because there were the best. When there was plenty of options, the Samsung has the same technologies, right? But people pay for the best. On top of that, I would layer that in this COVID,

pandemic economy, people have discretionary income that they are not using to go out to dinner. You wait to see how fast that goes to 5G products. Yeah, yeah, I would agree. I want to move on here and talk about something that's attracted my attention last week. I'm going to call it the value debacle. A very famous value investor, Ted Aronson ran a big fund, a $10 billion value fund, basically decided to close the whole thing up. just said, value's not working. And I spoke with him, you know, very briefly. And he said,

I don't know when it is. So guys, let's just weigh in on this. Value was underperformed for years. Growth versus value debate has been going on for ages. But for the last decade, it certainly hasn't worked at all. The SEP growth ETF, IVW, is up almost 300 percent in the last 10 years. Value is up 100 percent. That's a pretty big outperformance overall. And we're talking about, you know, just 10 years ago. And you can say, you can see, see how notable that outperformance has been. Guys weigh in on this. The big cycle guys say, you know, this could take decades. Value outperformed in 2000 to 2010. It did all right in the 1980s. It didn't do very well in most of the 1990s. I guess the question in, does it value versus

growth matter that much anymore? If you're just going to own the S&P 500, it doesn't really. But is there any mean reversion that might actually happen here? Would we see 2020 to 2030 see a value renaissance? Right. I don't think there's... Andrew Wayne. Yeah, I don't think there's a, well, I'll give you a macro kind of idea away from, and then we can obviously talk about what's going on currently. But look, the economy is going to kind of like, hey, investors, you can do this yourself. Hey, you know, there's there's robo advisors that give you models, right? So asset managers themselves, and this is a point people don't often think about, like Mr. Oranson, right, they have to stay in business. They have their own goals.

They're trying to grow. They just can't survive year after year not performing and not even getting to data, right? So I think a lot of them, unlike Ted, who maybe didn't see it coming, maybe he did, and that's why he closed it, or going, you know what, I just can't do this value thing. I won't be able to keep raising assets. So this has been kind of like a race to performance, and you just can't leave growth out. So I think that's one big part of it. And then obviously the second big part, what we were speaking about the entire segment, is younger investors, new money, new goals.

I mean, how many younger investors, and I mean, I don't mean kids, I mean people in their late 20s and early 30s are interested in investing in Chevron, right, and energy names. They're just not interested in it. And I think they're willing to leave that out, and they're not thinking about balance performance. They're thinking about what drives their lives and what they believe in, ESG and things like that.

And frankly, growth is overweighted in names like that and value, I'm sorry, overweight into the tech names and value is overweighted in those older names that don't drive change. Yeah. You know, Tom, I'm sort of tempted to think, here's a famous value investor who throws in the towel, and you must think, is this ringing a bell?

Is this the bottom at a good time to buy value? Remember, was it Julian Robertson in 2000 who threw in the table? Natal on tech said he didn't really understand what was going on. Of course, that was the absolute top for the tech market. I don't mean to drag in Julian at all. You know what I'm getting at, Tom. Yeah, everything always reverts back to the mean and you just have to be able to wait. But as Andy's saying, during times like this, young investors, also this work from home economy where companies have had to be really, really innovative, not just that. The average investor, the average person that's working from home,

the average person that's running a business had to embrace technology that much more. So all these go-growth companies have sped up their timelines tremendously, which has made value stocks even that much more unattractive. So at one point in time, we're going to see value pop. The big question is who's going to be the first one or which street is going to start putting their toe in the water first. Frankly, you don't want to be the first one doing that. If you think about it, I'll give you the last word there, Andrew. What is the stock market? We define it as a discounting mechanism for trying to figure out a future stream of earnings. So it would make sense that companies that could grow their earnings more aggressively would

command a higher price. The question is, how much are you willing to pay for that growth? Can you, the whole decade's been a search for growth at a reasonable price. And certainly some of these tech stocks don't seem to be growth at a reasonable price. So what this tells me is that growth has been fairly hard to come by and that people are willing to pay a lot of money more than growth at a reasonable price for a lot of these companies to get that kind of growth that's out there. So I think it says more about the scarcity of real growth names than it does about how awful value is. Maybe I gave you the last name. You have any quick thoughts on this? Yeah, sure. And I think Tom did a nice job of kind of summarizing the next generation of investors. And I think they are much more passionate about, they want to invest in things that they're passionate about. So whether it be ESG, whether it be these growth names.

But I think if you just think about the market in general, everyone really thought 2019, you know, 10 years before that was really growth oriented. And then you see the tech name this year, 2020, with a pandemic, with this move to more remote work. We've had to embrace technology that's what we did in 2019. So everyone's doing Zoom calls, everyone's connected to the Internet, much more than they did of last year. So I think right now it's a very topical time for a Pelot, for Zoom, for these days, because we're living it every single day. I think that has a lot to do with it as well, but I agree with the sending of Andrew and Tom. Eventually, value will have it today.

You just got to stay solved and wait it out to be able to get there. Yeah, it wasn't good enough for Ted, for Ted Aronson. The wait was a little too long. Ten years is a long time to wait for anything. I'm going to have to leave it there, guys. Appreciate it. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand. ETFs. This is our Markets 102 portion of the podcast. Today we'll talk more about the SPAC boom. My producer, Kirsten Chang, joins me as always. Bob, it's no secret that the SPAC craze special purpose acquisition company has taken the investing world by storm. This year alone, we've seen more than

140 SPACs go public, raising more than $50 billion in proceeds, shattering previous records. That's a lot of money raised. But a lot of these SPACs have yet to put the money to work and actually buy companies. Now we have Defiance launching the first ever SPAC IPO, ETF, ticker SPAK. We heard from the president today. Do you expect that to be a game changer? We always used to joke, Kirsten, you and I, that once you see a trend, there will be an ETF for that eventually. And indeed, we've seen that. And this is the beauty of ETFs. Okay, yeah, sometimes you get attempts to jump on a trend that's a little premature. Remember the attempt with Bitcoin ETFs in 2017 and 2018? That was a bit premature. But I think the SPAC craze is starting to reach a critical mass. So it's not surprising to me that we've got an ETF. And I think it's a great idea. The problem is what exactly is happening? Why are we having a SPAC craze? And if you look at it, there's some reason to be a

little bit concerned about this. If you look at what's really going on. So what are you doing with the SPAC? Essentially, you're turning around and taking over an existing company. So rather than have an idea, how about this, let's start with the company that's already up and running. Okay? And I have an idea. Instead of going through all the headache of actually doing an IPO, let's just take over an existing company. What's my brilliant idea? I don't know yet. I don't have one. So I aspire to have an idea somewhere down the road. I have advisors that'll tell me what the right idea is, but I'm pretty famous. I'm famous in the oil business, in the telecommunications business, the whatever business, but I'll find something down the road. Essentially, trust me, we'll find something that's worth your while. So you go down the road and you find one worth investing in, and the question is, okay, that's nice. Is it actually worth investing in? Are there other investors or SPACs out there that are competing? with that idea to take it over? We don't know.

I can tell you this, the more SPACs that are out there, there is not an infinite number of ideas that are worth investing in out there. There are several hundred SPACs looking to buy things right now. That strikes me as an awful lot of SPACs to start buying things. So just remember that. With that said, there's a couple reasons why I think SPACs make sense. Number one, the small investors have been angry for years

years over the fact that if you look at the IPO process, when it actually happens the night before and they actually announced the price of the IPO, the allocation generally goes to really big institutional investors. Your small companies, your small registered investment advisor, RIA, doesn't really get in on the company until it starts trading and it may and typically does trade higher. So there's a certain amount of resentment on the part of the small investor. Gee, how come the big guys get in and I don't? SPACs can get around that by essentially offering people to get in, even if you don't know what it is. So I could see why that exists.

That makes some sense to me. But the simple fact is, and don't kid yourself about this, it's easier to go public using a SPAC than it is with an IPO. The IPO process is arduous. It's difficult. It's full of pitfalls. It's expensive. And it should be, arguably. Remember, you're selling stuff to the public here.

There's been a lot of bad stuff sold to the public over the decades. And there's only so much you can say, oh, buyer beware. That doesn't cover up every sin. So the IPO process is meant to be fairly difficult because people are supposed to know a lot about what's going on. This process, the SPAC process, is somewhat less arduous than an IPO process. So given how difficult it is to go public, a lot of people are saying on the other side, the people who are not buying it, the people who are selling it are saying, hey, this is a a lot easier to use. Now, some people are also arguing that there's been COVID travel restrictions

that make going on an IPO roadshow difficult this year. That's true, but I can assure you it's likely, given the opening for SPACs, that this would have been a big year even without the COVID travel restrictions. So here's the bottom line. I like the idea of SPACs. I like the idea because I'm in favor of companies going public and getting more companies going public. I think it's a tragedy that so many companies have elected to stay private for so long and missed all the early growth stages. Investors, public investors have missed all the early growth stages for a lot of companies because it's just easier to stay private. They've got the money. There's a lot of private money floating around. Interest rates are low, easy to borrow. Why deal with going public when you can stay private?

So I'm in favor of any way to put more public companies in the hands of people, including SPACs. I'm just telling the buyers out there to be careful. There's a glut of SPACs out there right now looking for a lot of deals. And to me, that means that some people are going to buy into deals that are not going to work out very well. I think people need to be very aware of that fact. That's it for today. I'm Bob Bizani. Thank you for listening.

And make sure you tune in. next week and in the meantime you can tweet us your questions or topic ideas at ETF Edge CNBC