ETF Edge - Spotty Bitcoin & ETF Alternatives to the Magnificent 7 1/29/24

Episode Date: January 29, 2024

Most of the money flowing into new spot bitcoin funds seems to be reallocated institutional money… not so much new retail money. Plus, find out which ETFs could be less-risky alternatives to tech’s top-heavy “Magnificent 7”.    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, Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged, trade of funds, you are in the right place every week. We're bringing you interviews and market analysis. Breaking down what it all means for investors. I'm your host, Bob Pazani. Today we're looking at Spot Bitcoin ETFs, seemingly more about reallocation than new money coming in. We'll talk about that. And there's a lot of ETF alternatives to tech's top heavy magnificent seven out there. We'll discuss that. And is it great risk on again for bond investors? Here is my conversation with Ben Slavin. He's the global head of ETS at BNY Mellon and Todd Rosenblu head of research at VETify.

Ben, I got, of course, it's by Bitcoin ETF. It happened. It looks successful. We've been talking about it. It looks like it's tracking all of them fairly well. Is that the case? And tell me about the first. flows. What strikes me as interesting is we're getting nice flows, but a lot of it seems to be

coming out of the existing gray scale into the nine new ones that are out there. Just characterize how the trading looks. First of all, from an infrastructure perspective, we are providing a large degree of the services to these products. So we look across the whole industry. And what I can tell you is, are the headline being they're working as advertised. They're doing what they're supposed to do. They're tracking. And we also see a healthy market in terms of liquidity, depth, spread, and obviously interest from investors. But to your point, it is interesting to look at the flows and try to unpack what's really going on there. And what we see is, yes, there's money coming out of GBT and on a net basis into the rest of the products. But a lot of

that money seems to be institutional investors versus retail investors who really haven't jumped into these products yet, at least in mass. They're not on models. They're not available, even on some of the platforms. So, again, our suspicion and the data seems to, indicate it's more the institutional investors playing here. And Todd, why is that? I mean, I see numbers something like $4 billion in inflows into the new ones, but most of that seems to be money coming out of grayscale. How would you characterize this?

I mean, it's $4 billion, and inflows is still nice to see, but most of it coming out of an existing product, to me tells me there's not a lot of necessarily new outside money coming in. Is that a fair characterization? I don't think it's fully fair. I think we're seeing people who moved into GBTC, the gray sale product, heading into an approval process for the broader efforts, knowing that the price of Bitcoin was likely to go up. And so there's some profit taking that's happening. But we are seeing money go into the BlackRock product.

We're seeing money go into Bitwise. Arc itself is buying the product that they have, ARKB. And what we're finding at is still early in education days. We had VETify hosted a crypto symposium. the day after it launched. And what we heard from advisors are they're looking to buy in the next three to six months. So not everybody was ready to go right away. They're still getting up to speed from an educational perspective.

Ben brought up a good point. These aren't on a lot of platforms, right? I mean, Vanguard made a statement. It's not going to be on our platform. But, for example, is it on Fidelity? Is it on J.P. Morgan? Is it on Morgan? Is it on Merrill Lynch's platform?

Has anybody actually, I haven't made the phone calls. I'm curious myself. So the wirehouses have not approved it. They all have some level of gatekeeping. An ETF needs to be there $100 million in assets under management, and now we have those products. I think five of them are more than $100 million plus GBTC. But it also is a six-month threshold.

An ETF has to trade for a period of time. But advisors that clear through Schwab, or what used to be TD Ameritrade, advisors that clear through Fidelity, some of the other independent broker dealers, you can buy it. And, of course, self-directed investors on most of that platforms, can't you? It's just still very early from an educational perspective. Yeah.

You made an interesting point. You said you do a large degree of services in the ETF business. I want you to explain that because one of the reasons I have you on is Mellon is not just the person. You guys don't just have ETFs. You have a giant ETF business. I call you guys the plumbers of the ETF business. You run a lot of the stuff underneath the surface, like calculating that asset values, for example. Explain what B&Y Mellon does, why you are sort of.

the plumber for the ETF business. What do you do? Yeah, as you said, we play a huge role as part of the total market structure, providing really a lot of the infrastructure that powers the entire ETF industry. So we are the largest and oldest player there in that space, and we do provide services ranging from accounting, calculating an asset value, financial statements, all the administration, and also custody, which is the clearing and settlement of trades. And on top of that, we are the front lines, the order taker, processing every dollar that comes through our client's ETFs via our proprietary ETF technology, you know, placing all the creation and redemption orders across the entire book of the ETF.

That always fascinating me, like, just calculating the net asset value is such an important function, and yet, you know, it's important for somebody like you guys to calculate for other people. Do mutual funds outsource calculation of net asset values? It's pretty much the same in terms of the services. What's used? unique for ETFs is really the ETF services. It's the creation redemption mechanism that's unique. And all the services that are attached to that are really different for ETFs. But a lot of the net asset value administration services are common across pretty much any pooled investment vehicle. And you said you serve a custodial's function for a lot of this, not for Bitcoin, though,

mostly, right? Coinbase is the custodian for most of them. Exactly. So there are a few exceptions. And Bitcoin ETFs are one of them. So we provide all of the, those services to the Bitcoin products except for custody, which, as you said, Coinbase does provide the actual custody of the Bitcoin for most of the products that are out there. Todd, there's a lot of buzz in the ETF world about emerging alternatives to the magnificent seven stocks. We're looking, everybody's looking at the tech sector is, what, 30% of the S&P 500 now.

Semiconductors are a quarter of the tech sector. So I see people looking at the equal weight, RSP. I see inflows there. I see the equal weight tech ETF as well. There's equal weight everything, folks, including sector breakdowns. That got significant inflows.

The equal weight tech, ETF. Are investors getting nervous about how top heavy tech has become? That seems to be the message when I look at the flows here, but what are your thoughts? Yeah, so investors are getting nervous that too much money is concentrated

in a handful of stocks within the broader ETFs that they have available that's tied to the S&P 500. or even NASDAQ 100. So you're right. The Invesco suite of equal-weight products. RSP is the equal-weight S&P-500.

RSPT is the equal-weight technology sector. RSPT is the equal-weight tech. Thank you. Right. And so those ETFs, you spread that risk around. So you own the same companies that you'd find within the S&P 500 or in the technology sector. But instead of it being dominated by Apple and Microsoft and Nvidia,

you spread that risk around to the other companies. We're also seeing greater interest in actively managed ETFs. In fact, at the exchange conference that you're going to be at with me and Ben in a couple of weeks. We are having a session on how to get exposure to equities outside of the Magnificent 7. And we have Tiro Price and Morgan Stanley that are going to be joining us to talk about that and how you can use those ETFs to spread that risk. And so is it a fair interpretation, Ben, to say that the flows sort of imply, the flows into these equal weight products, implies some nervousness about the top heaviness of tech.

I keep asking because it's always difficult interpreting what flows really mean. People ask me all the time, oh my gosh, well, this seems to be a logical explanation for why they're getting flows at this point. And yet, you can make an argument, Nvidia is big because of what it does and what it has managed to capture in the AI space for a reason.

So market cap-weighted products work because it's a voting mechanism. And the public has voted that Nvidia is going to be a huge share of the AI business that's motivating this. So it's not like it doesn't matter, you know, market cap weighted indexes. You can be top heavy for a reason. I'm trying to argue both sides of right. This is what's annoying about this. Look, you could see a little bit of both, right? And I'm going to argue a little bit of both sides as well.

When you look at the flows and what we've been seeing this year is certainly there is more money being allocated there. Obviously, you know, there's momentum. and you're seeing, you know, not only the broad-based, you know, S&P 500, etc., traditional ETFs get money, but also the tech sector products as well, and certainly semis, and those that play that theme are clearly attracting investor attention. But you step back, and you see the flows are pretty sluggish, really, to start the year, and you see some signs of where some of that money is starting to go to come off the sidelines. And you look at things like small caps that at a big rally in the fourth quarter,

still getting some traction. And then you're seeing some sectors that have been less loved, at least less loved last year, like financials, even a little bit of real estate, some industrials that are starting to pick up some money. And you're starting to see a picture. And again, in our conversations with advisors are looking for somewhere else to go and are starting to get nervous based on valuations. The problem I have with the equal weighting is it goes against the weight of history. Because we know that basically there are a few winners and mostly everything is sideways to down when you look out past. one year or so. You can get rallies where everything moves up. But in the long run, you know, we did the study last year. I talked about 64,000 stocks over 30 years studied, and 2% of them

account for most of the gains that you see. And so the problem I have with equal weighting is the weight of history argues generally against the idea that the market always goes up equally. But if that's the case, do you know which of those companies are going to be the winners? So if you don't, then you want to spread that risk around and you own just as much of everything within the broader portfolio. And so if it is an Apple and Microsoft that's going to lead the market higher or be the winners going forward, then you'll have enough exposure to it. And so that's the benefits of equal waiting to me. We've had covered call ETSs were hot last year. JEPB was huge, actively managed core ETFs were still big as well.

So I don't know. The public, it's hard for me to say that there's a really clear trend right now. I do see money going into equal weight, but it's not an overwhelming amount of money. No. It's noticeable. You can see it, but it's not overwhelming. I want to move on to talk about bonds. There's been some signs.

ETA bond investors are moving out of the short end of the curb. Maybe you can weigh on this a little. Can you explain why they would be moving out on the short end and what that's? might imply. Where would they be moving into? Longer end? It certainly was the story of 2023. You saw a lot of money go into that short end of the curve. These are the ultra-short or short-term government ETFs. Certainly money market funds was a huge story. But also we saw a little bit of a change really in the fourth quarter and into this year where we saw a lot of money start to move out of that short end of the curve into intermediate duration. And you started to see that

picture start to emerge where advisors are looking and retail investors are looking to capture or lock in those higher yields and also potentially get some capital appreciation as rates back up and, you know, they could look to profit as the Fed, you know, starts to ease, you know, assuming, you know, you're anticipating that happening at some point later on this year and we're starting to see that show up in the pictures and the data that we're looking to see. So, Todd, is there an argument that can be made? Is there a fixed income discussion as to whether is the market too optimistic about Fed rate cuts and the timing? A lot of advisors have told us they're expecting just two or three rate cuts. So the consensus is four to six, depending on who you ask. What's it telling us?

Is there anything we can see here that the market's telling us? So that's what's surprising to us. We survey advisors at Vetify on an ongoing basis during our webcast, and we ask them what do they expect in 2024 in terms of the number of rate cuts. You're right. The Fed has put out some guidance. The market overall has been talking about four to six. We actually saw the majority of advisors that told us at VETify, they're looking for one or two rate cuts in 2024.

So that argues that you should stay relatively short term if you're not going to get rewarded in intermediate term products. So the point is there'd be a, if the Fed cut rates six times in 2024, the longer end would benefit more. Correct. So TLT is the ICERS 20 plus year treasury TIF. That will get the biggest bang for its buck. Some of the intermediate term products like VCIT will get some bang for the buck. And the short-term products that were very popular in 2024 will largely tread water or earn a little bit more than their overall income. If we get fewer cuts than the market is expecting and that even that the Fed is originally guiding to,

then you're not getting rewarded for that. you're actually just taking on more risk. Nobody in fixed income wants to take on more risk than they feel is necessary. Well, I would just add, you know, TLT, which is that 20-plus year duration ETF, Treasury ETF, really was a top flow getter in 2023, even though for the vast majority of that year was unprofitable. And so you saw a lot of that, you know, positioning start to, you know, occur. But I think a lot of the, you know, investors that we talk to are worried about.

the reinvestment risk. So Todd's exactly right. You do get, it will tread water or close to it in that environment, but you really have that reinvestment risk if the Fed cuts rates, as those yields trend down. And so investors are looking for a way to capture that or lock in those higher yields. I can't tell you how many people just message me. I'm perfectly happy in my money market fund, which is still pulling, what, 4%? Yeah. With no risk, or essentially no risk. Well, the risk is if it moves quickly, you're not going to get 4%. Right. There's no, you know, one year from now we're going to get 4% on anything.

But they seem very happy with this. I keep telling people, you know, you think that this is something you've signed onto for the rest of your life. And you have not a clue that this could be three months from now. This could be 2%. Exactly. And they don't seem to be, that kind of risk doesn't seem to occur to them that's there. There's no, you know, there's no real, you're not locking in anything when you do that. Right.

It's not a one-year CD or one-year T-Bill ETF. And I'm kind of surprised people do that because if you want to lock it in more, a two-year CD is a much better instrument because you know what you're going to be getting for the next two years. They're telling you what you're going to be getting. You have no idea what you're going to be getting in a money market fund, and yet people seem delighted by this. And not even just a two-year CDs. We have these products that came from bond blocks and FM that offer you exposure to the single,

Treasury and now even the corporate products with a fixed time horizon as well. Elsewhere I see inflows into quality. This is a phrase that I think is vastly overused. Quality basically refers to companies that have strong cash flow, growing their earnings, strong balance sheet. We've used these phrases for 30 years. The academic literature generally indicates that that is one of the factors that tends to outperform. You know, people talk about small cap tends to outperform big cap.

You know, different sizes, small cap tends to outperform big cap overall. Value tends to outperform growth. Quality tends to do a little bit. These are one of these factors that we've seen. So Q-U-A-L has had inflows recently. There's a cash flow ETF,

the cows, that's been doing very well. There's a small-cap version. of that calf. Love the tickers. C-A-L-F. Yeah. That's small-cap stocks with strong cash flow, right?

Correct. So small-cap quality. We're seeing continued interest in these higher-quality investments due to market uncertainty, due to earnings uncertainty going forward. And we've seen those products continue to be popular,

even though we've seen new competition. Victory shares launched V-Flo and S-Flo in the last six months. We've seen Amplify offer some of these products as well. This is a hot area to launch products and also to invest in the ETF space. Quality makes perfect sense to me because in a sense that's what you want. You want a company with a strong balance sheet, growing earnings, good cash flow.

All of this makes perfect sense. And yet, people still chase the moon. They still chase silly ideas and crazy little ventures or companies that don't make any money. and small tech startups that are a long way from making money. It's exactly right. I mean, quality from a marketing standpoint is exactly what you want and makes a ton of sense. But again, you see the flow picture. Is it because it's boring?

It's basically boring, right? It's sort of like... I think you could widen that out and say it's really passive to some degree in general. It's boring, but it works. I mean, if you look at even a product in the tech space like, you know, the QQQQ, right? That product has been, you know, pretty much a world beater from a performance. standpoint. And, you know, in that space, it is pretty boring relative to other options, but it works. But you still see investors, you know, attracted to some other thematics,

active and some other more narrow slices of the industry, despite the numbers. 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 Rosenblum, head of research and Medify, stays with us now. And Todd, you and I are going to go to an annual event, which you happen to be running. It's the ETF Exchange Conference in Miami Beach. It's at the Fountain Blue in two weeks from now. It is the big event for the ETF world. Tell us what we can expect. Yeah, so we expect there'll be about 2,000 people on site for the conference, many of them financial advisors, many of them returning to the conference to hear

from experts, to hear from each other to network. And there'll be two plus days of great sessions. So we're going to kick it off with ETF education and some ethics training. We'll do, have some fun down there with the game show that I'm running with some of our peers in the overall industry. And then on Monday and Tuesday, we dive deeper into individual sessions. One of the things I like about the conference is on Sunday, you essentially have a boot camp for RIAs. That's kind of what it is. Young or even, you know, older RIAs who are out on their own for the first time, can come down and go through several hours of real fundamentals on what not just ETFs are, but how to run them. And advice from people who use, from RIAs who use

ETFs completely in their business or largely in their business. And what I noticed there is the turnout is pretty good for that. There's a lot of young people going into the wealth management business, younger RAs, and there's also a lot of older ones, old Morgan Stanley guys, Merrill Lynch guys who don't want to be with those firms anymore, want to go out on their own, and need refresher courses. So it's an interesting mix of people on the Sunday afternoon. Right. So even though we're 30 plus years into the ETF industry, the pie is going to grow when we have newer adopters, younger advisors or advisors that are shifting their practice from traditional mutual funds to ETFs, we want to make sure that if we're going to have a

conference that has ETF in the name, that people have enough grounding to then make it useful all the rest of the days. So we are, yes, talking to advisors about how they build models using ETFs. We'll do some ETF trading. Tips 101. We've got Eric Bautchunis of Bloomberg and Elizabeth Kashner of Faxett in the nature ratio of ETF store to offer their own tips on how to do analysis of ETFs. Just a great opportunity for people to hear from experts and ask what may be a silly question, but they're doing it in a smaller setting. And then on Monday and Tuesday, we'll dive deeper into more ETF-centric areas, hearing from industry experts or having panels with other asset managers like Morgan Stanley and Tiro Price. Yeah, I'll be interviewing Jeff Gunlock from

Doubleline, always interesting to hear what Jeff has to say. He's a stalwart on CNBC and always has great observations. So we'll be talking about the Federal Reserve, the interest rate scenario. Jeff always has great insights on that. But I'm wondering about what you think of the ETF business in general, because you and I have been around for more. than 20 years covering this. And one thing that strikes me in the last few years is how the industry is maturing in the best possible way. All of the easy money has sort of been made. If you're in the index, there's every index in the sun, that passive index that's out there. The industry is still evolving, still trying to figure out how to bring in more assets.

There are mutual fund conversions that are still going on. But a lot of it is, last year was active management coming in. And a lot of it was new forms. like covered call ETFs, where you own the S&P 500, but you buy a call in it and you pull in essentially money, premiums. So there's new strategies and new ideas that are out there, and the industry is always evolving. They are, and I think we'll see that trend continue at this conference in 2024 with some newer entrants that are gaining stronger footing. So we've seen some of the traditional asset managers like Capital Group, I mean, mentioned Tiro Price earlier. Fidelity has increased its presence. Eaton Vance has a larger presence

now in the ETF marketplace. Many of these firms people have known in their mutual fund days are going to be at the conference and educating advisors and investors. And yes, we talked about crypto earlier during the TV portion of this that folks listen to. We will have sessions about crypto because we now have spot Bitcoin ETFs. So we've got Grayscale and Galaxy and Bitwise on stage talking about ETFs and being able to educate the broader investment community about the potential merits

of investing in one of their ETFs or just crypto in general. And where, I mean, if you have some thoughts about where ETFs go from here, we have, what, $7 trillion in asset under management, but it's still small compared to the mutual fund business. Mutual fund business is essentially $20 trillion, somewhere around there.

So it keeps creeping up every year, but the rate of change is slowed down a little bit. I'm wondering And what's the next catalyst for movement into the ETF space? Is it the 401k business or is that fairly safe? I'm trying to figure out where is it, where's the next move for the ETF business? So I think the near-term thing, so yes, 401K is if and when we get that to happen. But I think you mentioned conversions earlier.

We are likely, we believe, to have ETF share classes of existing mutual funds by the end of 2024. We've seen Fidelity and dimensional funds, among others, that are trying to get approval of that. That will open up the door. But the SEC has to approve that. The SEC has to approve it. Just like Vanguard had it exclusively, and now that exclusivity has expired, and now the question is, will the SEC approve this for everybody? Correct. And what's different about some of these that are looking to convert is that it would be actively managed products that are going to get,

that hopefully are going to have a share class, event. for ETFs. Could they adopt passive products now? So nobody has submitted a proposal for a passive product. Most of the passive products are in the mutual fund space are run by firms that already have ETFs. They may not have an ETF share class, but Fidelity has indexed base. There's not a lot of incentive for them to do that. Correct. Whereas most of the money is still in actively managed, and certainly most of the products are in actively managed. So for Fidelity, to be able to offer an ETF version of some of their well-established mutual funds

and not have to convert it or not have to launch a clone-like product as an ETF would be a significant advantage. And dimensional funds is now crept up to be the largest active manager in the ETF space. They could only be so much bigger if they were able to offer ETF versions of all of their products. All right. So the key is you're going to get two, thousand people here. What percentage of them are RIAs that would attend something like? So we already have over 700 people and counting that are advisors that have a CRD, which means

that we can verify that they are an advisor. We would expect we're going to see more of them in the next week or two that are signing up or that will sign up on site. So it'll be close to a 50-50 or 45-55 percentage of advisors to those of us in the industry that want to talk to advisors, but so advisors that are coming will find peers. They'll get to learn from those peers. They'll get to network with those peers. And hopefully they want to learn something too from old guys like you and I. Yeah. Well, the important thing is if you can get half of the people there, RIAs, or what we call buyers of the products, buyers of ETFs, that would be a victory. One of the problems I've seen with these conferences is vendors and people wanting to sell them

things, kind of overwhelm them at some point. But 50% is very much. very respectable number. If you can get that, we hope so. Yes. Out of 2000, that's not bad. And that'll be February 10th in Miami Beach. Excited to see there. Excited to see many of the listeners there. Come stop and say hello to Bob and I directly. We'll be there covering it with

ETF Edge, Monday and Tuesday of both of those days. Todd, thank you very much. Todd Rosenblum, the head of research at VETify and one of the organizers of the upcoming ETF Exchange Conference. And thank you, everyone. That does it for this week's ECF Edge, the podcast. Thanks for

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