ETF Edge - Strength overseas versus “the vibesession” here at home 6/17/24

Episode Date: June 17, 2024

Money continues to flow strongly overseas – especially still in India & Japan. Ben Slavin from BNY explains why. Plus, we talk to financial educator Kyla Scanlon about “the vibesession” – a term she coined – that still grips the U.S.           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, exchange, traded funds, you are in the right place. Every week, we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. Money is flowing into international markets. While at the same time, we're dealing with a vibe session here at home. Here's my conversation with Ben Slavin, Managing Director and Global Head of ETF for BNY and Financial Educator, Kyla Scanlan. Ben, diversification still matters. We've got a rebalancing this Friday in the SEP I want to talk to you about, but I see money going into other parts of the world besides the United States.

I see very strong inflows into India. Why India? What's going on there? Well, we've seen investor sentiment turn positive on India. You know, just last week we saw over 450 million going into. into Indian ETFs over $4 billion on the year. And certainly performance is a big part of it. Now we saw some hiccups, certainly around the election, but India's rallied back and there is this sentiment

that, and a positive sentiment, that investors are looking for future growth in India based on the prospects post-election. And again, the flows have started to follow. And I also see nice inflows into broad European indexes. Why is that? Is this recent electoral chaos, particularly in France, been seeing is that going to impact these flows? Well we'll see about that. I think that we have

seen this trend start really this year and certainly we've seen the last few months have seen consecutively have seen inflows into European ETFs. Now ECB recently cut by 25 basis points, obviously impacting markets but also on the sentiment side we've just seen a shift towards investors allocating more to Europe given valuations but you really have to look at the impact of the dollar on those returns depending on whether you want to be hedged or unhedged, because it's a very important driver of where things will go for looking forward.

Yeah, this is what I tell people on international. The dollar really matters a lot. Currency plays can make a big difference in international investing. The yen's been weak against the dollar, as you mentioned here. The currency hedge Japan ETF, look this is up 22% year to date.

That's way outperforming the S&P, but the largest Japan ETF is only of 3% on the year. That's not current. hedge, 22% versus 3%, and the difference is the currency, essentially. That's exactly right. I mean, right there, it's really the strength of the dollar against the yen that's causing that performance differential. So that gap is all about the dollar and whether you have decided to hedge your dollar position or not. And again, you see that dichotomy there between those two ETF. So very important to make that decision about how to

allocate, especially as it comes to your views on the dollar. And ETFs have those different options available for investors to allocate one way or the other. Obviously, this can go either way. If suddenly the yen was much stronger against the dollar, that would close a little bit. But I know you're not an investment advisor. Would it make sense if you want to know where things are? If you want to buy just into the stock market and not worry about currency, a currency hedged, ETF would be the better way to go.

Well, certainly, you know, again, we've seen both of these products in the market and, you know, be able to hedge that currency, offers you an opportunity to say, look, I don't know where the currency is going. Therefore, you know, it provides me with that opportunity just to simply hedge off that exposure and just focus on the equity returns. I just want to move on. When you were talking about tech, the S&P 500 is going to rebalance this week. The S&P 500 tech sector ETFs are seeing inflows in the past week, in the past month.

That's certainly good. It's good to remind everyone that the ETFs do have limits on concentration. So here with this one, the combined way to market. Microsoft, Apple, and Nvidia will likely force a rebalance this Friday. We've been talking about this for a while. There's limits on it. There's the XLK. Your thoughts?

Well, you mentioned, you know, XLK. It's a huge ETF. I think it has more than $70 billion as of the last check. And obviously, that's going to cause a big change on the rebalance. But remember, Bob, this is not, and, you know, for a PM to make that decision about whether to get long or reduce their exposure to Nvidia. These are the index rules driving that. And what we're seeing though is that

Nvidia, it's not just about the XLK. Obviously the performance of Nvidia is impacting ETFs and benchmarks really across the spectrum. And certainly, as these index begin to rebalance, we're going to see that kind of ripple through the, you know, the ETF industry. It's important to know most of these rebalancing don't matter at all.

They don't have any impact. But there is an unusual situation here with Nvidia. It's gone up so much, you know, these ETFs, those you don't know are these particular ones are rebalanced on a quarterly basis. So right now, NVIDIA is 6% of the XLK. Well, NVIDIA is a lot more of the S&P 500 now in the last quarter because the price has gone up so much. So what's happened is the XLK is underperforming the S&P 500 because NVIDIA has a smaller

weighting that in the S&P it's going to rebalance this Friday. That'll be corrected. But in the meantime, there's been quite a performance difference between the XLK, which is the supposedly representing the S&P 500. and the S&P 500 tech itself because of the fact that it's got a smaller weight. So what's going to happen here essentially is they're going to have to, there's a limit here. You can't be more than 22.5% of the weighting in any individual stock. Put up that again, if you can, the weight of all the stocks.

Those over 4.5% I think can't exceed 50%. So here you add these numbers up here with the top four here. And what's going to happen is they're going to buy. and increase the weighting of invidia and they're going to likely decrease the weighting of Apple and possibly Microsoft here so that's what seems to be going to happen again driven by the index rules and there's these diversification rules built into many indexes but it's again very important where the S&P 500 is a market cap weighted index and by default so is XLK being a piece of that but certainly there

are many indexes out there that have different rebalance frequencies and different ways that they actually reweight the index. It could be by a factor like dividends or, you know, by momentum or growth, etc. So very important for investors to really understand how they're positioned and how those index rules work. And again, most of the time, this doesn't matter. This is a fairly rare situation where you actually have some significant movement in the ETF. But this is why we're here to let you know about this. Elsewhere, you are providing the servicing and the custody for the majority of the pending spot Ethereum ETFs. as well as the spot Bitcoin ETFs,

they're scheduled to go public sometime maybe this summer. Can you tell us anything about the timing? Yeah, certainly look, you know, these ETFs have been really the story of the year. On Spot Ethereum ETFs, we're in a wait and see mode, just really like the rest of the market. So we'll kind of see what happens on timing.

Certainly we've seen some comments, come back from the SEC, across all of the issuers. You know, that is a step forward, but again, no explicit timing really has come forth yet. And as you said, we are providing the infrastructure to the Bitcoin, many of the Bitcoin ETFs, and we're going to do the same and planning to be the same based on a violence for a lot of them, right? Yeah, we're providing the asset servicing for many of the digital asset ETF products. And that's a range of services from accounting administration.

And again, those fund services are a piece of what we offer to the ETF issuers. Great. Ben, Stay with us. I want to pivot now. I want to bring in my next guest. Kyla Scanlan is a financial educator who makes videos across social media platforms. She writes a monthly newsletter and she hosts a podcast. She recently wrote the book, In This Economy, How Money and Markets Really Work. It's just out. It's a guide to everything one might need to know about the economy. Kyla, you have developed a very large following on social media. I've been watching your career. It's very impressive. You're breaking down economics in a very accessible way.

particularly for younger people. Not many people can say that they coined a popular meme phrase, but you have. You coined the now popular phrase, the vibe session, which you defined it as a period of temporary vibe decline where economic data such as trade and industrial activity are relatively okay, but people still feel bad.

So there's my lead. Why is the economy doing well, but many people don't seem to feel it? Yeah, yeah. So the vibe session is this idea of a discount between consumer sentiment and economic data. And part of the reason that people feel bad is that things are hard. Like there are structural affordability problems, like a housing crisis,

elder care is very expensive, child care is very expensive. But the Bob session is this idea that people are feeling far worse than would be expected considering where the economic metrics are. Yeah. So when younger people talk about how they experience the economy, they're usually referring to housing. And you wrote a great piece on this right now. a lot of people feel pretty poor because of the cost of shelter.

And so what's your solution? How do we build more housing? How do you look at housing? How should younger people look at housing? Housing is really hard because it is the American dream, right? Everybody wants to own a home one day. And part of this problem is that we just simply have to build more homes. There's a lot of policy solutions that are being put into place to try and fix that.

You can look to Austin, Texas, to see, you know, building homes actually does reduce the cost of housing. But we kind of have to reconsider what housing means in regards to the American dream. And I think that's something that's going to be extremely difficult to do. Well, I guess there's all sorts of solutions here. I mean, here in New York and Philadelphia, where I go back and forth, there's a lot of talk about converting commercial real estate into residential housing, for example. That seems to be one piece of the puzzle here, but not the only one, right? Yeah. There's been about $35 billion allocated to convert commercial properties into residential properties.

And it's a great thing to do. It's just a little bit complicated because office spaces have different bathrooms and residential spaces. Like there are costs to the conversion. But it's an important thing to do because we do have a lot of commercial real estate that is struggling in the post-pandemic era. A lot of the other policy solutions come around with the idea of redoing zoning. allowing for mixed-use properties, just basically allowing people to build in places that they haven't historically been able to. So a lot of people believe owning your own home is desirable. This was the goal for my generation, for example, and I certainly think it still is.

I own my own home. But how does it rate as a strict investment long term against, say, stocks and bonds? I know you've been doing some writing on that. Yeah, it's not a very good investment, at least relative to the stock market. I think a home has returned like maybe a little bit over 100% over a certain time frame. I can't remember the metrics exactly, but it's like minuscule compared to if you had invested, you know, that down payment in the stock market. But the problem is, you know, the bottom, there's a chart from the Federal Reserve,

the distribution of financial assets, and the bottom 50% of Americans, all of their wealth is tied up into their home. The top 10% have equity ownership and business ownership, so they do own stocks and they do own a business. And I think we kind of have to figure out how we, you know, stop treating the home as a speculative asset and instead allow people to invest in the stock market, help them do that, and help them navigate that kind of confusing land of markets. Yeah, this is a complicated subject. Obviously, we want to try to figure out a way to get people on the lower end of the economic spectrum to invest in stocks longer term. and yet a lot of people, as you said, on the lower end, that's their primary asset.

They own the home, and they feel very good about the fact that they don't have to pay any rent anymore. They don't pay any mortgage anymore. So I guess the question is how do you get that kind of financial trade-off? I always said I was the real estate reporter 30 years ago for CNBC and always said that if you're going to be in their home more than six, seven years, it's worth it economically to look at it. The biggest problem it seems to me is people underestimate the actual true cost of owning a home. For example, they stumble on the maintenance. My wife is a real estate agent for 35 years, and she knows exactly why people are going to spend $25,000 to put in kitchen cabinets in their house, and what's that going to do to the actual price of the home?

You're not going to get that back likely there. So it's hard to do the metrics on this. But is home ownership any more or less desirable in the younger generation? In my generation, it was extremely desirable. It was really a financial goal. Yeah, I think the younger generation definitely wants that because you do have, there's a lot of financial benefit to it, having equity, et cetera, not having to pay rent,

being able to build towards something. But, you know, there are all these hidden costs, quote unquote, hidden costs of home ownership. Like insurance is sky high in a lot of states now. You know, Florida is one example. You have all sorts of maintenance costs. And so I think people are grappling with that. it's a lot theoretically cheaper to rent.

But over the long term, yeah, if you're going to live somewhere for a while, it probably makes sense to try and own a home. And people are just trying to figure out how to do that financially right now, considering where mortgage rates are, considering where home prices have been. It's difficult. I enjoyed your book. I read it over the weekend. And it seems to be your big attempt at financial education.

And I lodged you for that. My age group, the Baby Boomers, made a lot of financial mistakes. I did too. I wrote about it in my book, including waiting way too long to save for retirement, which I think was the biggest mistake my generation made. I made this too. Are younger people any smarter than we were?

And how do we up the ante on financial literacy? I know you have a very strong presence on TikTok. Maybe that's good news. I don't know. What's your thoughts? Yeah, I mean, I think that now it's almost like how do you sift through all the information that's out there? I think for baby boomers,

kind of like, how do you get the information that you need to make the right financial decisions? And now it's a little bit overwhelming for the younger generation because you have so many people telling you what to do all the time. And so you're just trying to figure out what's right and what's wrong. And so my book is kind of a comprehensive overview of the economy. I think it's really important to know how the Federal Reserve will impact your life. It's really important to know how a housing crisis would impact your life, how the labor market works, etc. And so I think it really just is giving people the tools that they need to understand the world around them so they can make better decisions. Financial education is I think always going to be an uphill

battle just because money is such a personal subject. But it's important that we give people the tools that they need to start somewhere. But being able to do this online, I think is a really, the educational tools, I think is a really big thing. It seems to me the numbers indicate that young people, for example, are, we didn't even have 401ks that came in literally in the early 70s, just when I was starting my career, but easier to save money now, easier to invest. There are signs, it seems to me, that people in their 20s, for example, are certainly saving more and investing more than we did when we were in my 20s. Now, that's the 1970s for me, but it seems that way, or am I just kidding myself. No, I mean, I think that a lot of younger people are taking advantage of the various

apps that are out there to allow them to save money. I think it's sort of a bifurcated world, though. Like, you do have these people who are, you know, maxing out there 401ks, they're doing everything they can to plan for retirement. They're saving for a house, one in four, Gen Z, do own homes. But then I think you have the other side, which is an element of financial nihilism, where people don't want to save for retirement. They don't want to save money in general because they don't believe that the future is there. And I think it's kind of these two ends of the extreme that are happening. And there's maybe not a lot of people in the middle. Yeah. Ben, what do you think about all this? I mean, you're one of the younger baby boomers. Let's put it this way. I'm one of the older

baby boomers. But here's a woman's got a great following who's trying to educate her generation of people around her a little bit more. And I can't help but applaud this, these efforts, because we were so poor. When I graduated from high school, I literally couldn't tell you what a stock or bond was. I certainly couldn't tell you what the Federal Reserve did in 1974 when I graduated from high school. So are we getting any better? You're in the finance business. Are we getting better at educating people? Look, Kyla, put forward a fascinating perspective. I think we're maybe at the very early phases of getting better, but I mean, we still have a long way to go in terms of financial literacy and really being able to educate investors. and certainly the younger generation falls right into that without a doubt.

Interestingly, by the way, you know, the data shows that on a greater percentage, a lot of the younger investors, certainly millennials and even younger generations are using ETFs more and more compared to mutual funds and other investments. But getting that investment advice, getting financial literacy, and educated on how all that works, we have a long way to go for sure. And this is, you know, these kind of books. this kind of content is exactly what's needed. Kylo, where do young people go for a financial education?

I keep throwing out that you're on TikTok a lot. Have you had success there? Do young people spend time looking at TikTok videos that you've been doing on financial literacy? Yes, yeah, yeah. I think you have to go where young people are, and that's why I'm on social media, is because people do use TikTok.

They use TikTok to get their news. They use TikTok to do elements of education. And so I think that's been a really big platform for a lot of people to learn about financial health. And you just have to go where people are. And that's why I make my videos there. Yeah, you go where people are. It makes total sense at this point. I do, I am much more optimistic.

I think young people are more savvy than we were. I think people in their 20s today are more savvy than I was in my 20s. Well, they certainly have more access to information. Yeah. Without a doubt. Yeah. But again, there's also a lot of noise out there as we've talked. about many times before.

Yeah. It's, it works both ways. How do you cut through the noise on that, Kyla? I mean, there's a lot of baloney out there, a lot of nonsense, a lot of bad advice, frankly. I know you tend to fall on the more traditional side of advice and be very steady and down the middle about that. But how do you cut through the crap? Yeah, I mean, it's hard.

There's a lot of studies coming out where people really love negative news, and that's like, why the news can sometimes be overwhelmingly negative. And it's kind of the same with talking about the economy. Like, people really like to hear that everything is really bad when, you know, there's data supporting the idea that maybe it's not. And so what I try to do is just be as nuanced and explanatory as I can in the pieces that I do and give people the facts and citations and everything they might need to know to go a little bit deeper on the subject. And I try not to hyper-sensationalize anything because, you know, the economy. is an extremely personal experience, and you just have to be mindful of the idea that everybody does have a different circumstance, but you do have to talk to averages as best you can.

So it's challenging, but you try not to freak people out, right? You just try to take care of them. Well, by any measure you've been successful at that, Kyla, thank you very much for coming on. Kyla is the author of the new book in this economy out now in bookstores, and also, of course, in electronic form. 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. Ben Slavin is managing director and global head of ETFs for B&Y.

He continues with us now. And Ben, two things we didn't get a chance to talk about in the show. We talked about inflows into international, ETFs, particularly India, Europe, Japan. We talked about inflows into technology ETFs and the rebalances. in the S&P we're going to see this Friday. We didn't get a chance to talk about active ETFs. Money, what I see here is money is continuing to flow into plain vanilla indexed ETFs like the S&P 500. That's where most of the money is going. But a significant chunk is now going into active ETFs. And that's continuing now for a second year in a row.

Well, active's been a topic for a while, but what we're seeing this year is an acceleration of investor interest and flow into actively managed ETFs. 8% of the industry's assets, it's been bouncing between 25 to 30% of the flow. So three to four times its weight in terms of flow just this year. And there are several reasons for that. Some of these products really have started to build their track records for sure, and that three-year number is very important demarcation for investors to start to allocate meaningfully to some of these ETFs.

They've grown in size, which is a factor. And honestly, there's just more choice in the market. But you have to look under the hood with Active and see what's really going on. It's not just stock picking type ETS. It's also a lot of these rules-based quantitative or algorithmically backed products that are also taking it a big, big chunk of the flow. By some measures, almost two-thirds of that active flow are going into just those type of products. But is that active? So for example, JEP Morgan product that owns the S&P 500 and then sells options against it to collect the premium.

Is that really active? I don't know. In the sense of you and I understand old school active stock picking is alpha-generating stock picking. No, it's not. And yet it gets thrown into that bucket. So your point here, I think, is very accurate. Well, it's hard to, you know, when you get into it, it's hard to really kind of consider active without looking at it as a big tent. definition, right? So that's why you kind of break it down, but you're exactly right. Look,

the whole active market actually has evolved, right? So it started out actually in the fixed income space where some of the first, you know, active fixed income products started, you know, more than 10 years ago. It's evolved to more of the stock picking type of products, right, like ARC, then you saw Jeppie, which you just mentioned. And now you're seeing really that concentration in those top products start to reduce. And we're seeing the top five on our data showed more than 50% were concentrated in those top five active ETFs. Now that's down closer to a third. So the money is starting to spread out throughout these products. So number one, active ETF is, it seems bigger because we have a big tent definition of what active is, number one. Number two, I agree with your

point. There's more product available. And remember, it's off a very small base, too. That is a great point. I mean, look, passive still dominates from an asset standpoint, but you're exactly right look it really depends on how you define it one way you know when you look at that big tent definition is to you know sort of pull out those stock picking funds I sometimes like to call them active active versus just a rules-based or quant active but however you define it you really got to look under the hood and kind of figure out what's going on but there's certainly flows across the board so that is part of the story and remember too most of you know the

business has mature the EETF business what's their nine trillion dollars in the business right now all the most of the index and ETFs that have been created, have been created. So people keep putting money into that. And when you have a bunch of new products around active, it's going to suddenly stick out because, well, there's more new product out there. Yeah, look, that is exactly the case.

I believe, depending on the rate of new product launches, soon, there'll be more actively managed ETFs than passive in the market. Again, assets tell a different picture, but there's a lot of noise. But products keep coming to the market. And most of those products that are being launched are active, not the passive variety anymore, or at least it's the minority.

The key to understand about this active in the old school way that I think of, alpha-generating, Kathy Wood kind of thing, is a mediocre stock picker in a mediocre mutual fund is going to be a mediocre stock picker in an ETF wrapper. So it's not, that's the way you and I understand traditional alpha-generating stock picking is not going to be any different in an ETF versus a mutual fund. The wrapper makes no difference. Bad performance in a mutual fund will be the same, certainly in an ETF. And, you know, again, though, that those ETF market is incredibly competitive. From a performance and a fee standpoint, the passive benchmarks sometimes are really hard to beat. And all that's kind of laid bare for investors to see and ultimately make their decision on where to allocate.

I want to ask you about the sort of game stop and mean little mini spurt that we've seen, because at BNY, you guys run a lot of the plumbing behind things like ETFs, your custodians, you see a lot of flow yourself. I wonder what your thoughts were watching this GameStop thing. What was interesting to me is that only a few months ago, one of the only ETFs around meme stocks, closed because there wasn't any interest in it, essentially. It was a flash in the pan. I saw these big moves up in GameStop.

I saw Roaring Kitty, you know, discuss it in a certain way, but the echo seems smaller each time. I mean, this last round here, was there a lot of retail investors involved or was it institutions involved? It seems, the echo seems smaller than in the first big meme rally we had in 2021. It seems to be getting smaller and smaller every time they try to move this thing. Yeah, look, we have a large platform at B&Y, you know, we provide that infrastructure for more than 2 trillion ETF. So we have kind of a wide purview across the industry. And that's really consistent with what we're seeing for sure. And you mentioned, first of all, meme, great ticker, by the way, closed, right? And that is something. Mean was the, the Tickr for the ETF, which closed.

Now, since that time, you know, look, if you look at the trading volume, certainly it's muted from the peaks we saw the last time around. But, you know, it is something that we are seeing, you know, again, look across certain ETFs that are holding these stocks. And again, we're seeing, especially ones that are used as more trading vehicles, tend to get some of the more volatility, have attracted some attention. But again, nothing like what we saw, at least from our seat, what we saw really the first time around in 2021. Okay. Thank you. Ben, appreciate it. That does it for this week's ETF Edge, the podcast. Thank you for listening. Join us again next week, or head to our website, etfedge.cnbc.com.

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