ETF Edge - Summer of Ether? Plus, catalysts to convert sticky mutual fund money 7/8/24

Episode Date: July 8, 2024

There are indications that spot Ethereum trading could begin any day now this summer. What would a successful launch look like? Plus, ETFs could attract another record year of inflows… but there’s still billions and billions to be had stuck in rival mutual funds.       Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

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I'm your host, Bob Fazzani. Spot Ether funds. Could begin trading any day now, because I'm talking about Spot Ether. their ETFs, what would a successful launch look like? Here's my conversation with Matt Hogan from Bitwise Asset Management and Nate Tracy from the ETF store. So Matt, you filed an amended S-1 for Ether ETFs last week. Other amended S-1s are due today.

I think Van Eck also filed. How much did you need to amend your application? And when do you think approval might be likely? Yeah, great questions, Bob. I can't speak beyond what's in the filing. I think if you look, the amendments from the previous one were relatively limited. And that tells us that we're getting closer to the finish line. I think what you're hearing about this week or next, that makes sense to me.

This has been a very fast process. Remember, only two months ago, no one thought we were going to see these ETFs. Now it seems likely we will, and we'll see what the response is going to be sure. So just for people not familiar with this. The fact that you're, the amendments that you had, the SEC filed comments in response to your S-1, and you now filed amended comments. The fact that the changes you had to make were minimal is a good sign, right?

For people to understand this process. That's right. It's like a fine-tuning process. Sometimes it takes one amendment. For the Bitcoin ETFs, I think it took six amendments. We're on amendment two or three on Ethereum, but it were getting to the end of the road is what it looks like based on the scale of the changes.

You can't guarantee anything. You could get a curveball at any point, but it feels like we're getting to the sharp end of the point. You know, Nate, you've been commenting a lot about crypto. It's a very interesting moment for crypto enthusiasts. Ethereum is, I think, 25% off its March high. I think Bitcoin is similar, maybe 23% off the March 52-week high. Any thoughts on what's driving crypto prices now?

And is the spot ether ETF coming at all playing into the prices? Yeah, it's really interesting because if you look at the spot price of each, It's actually down over 20% since those 19B4s were approved on these spot E3 ETFs we're talking about. I think that just shows some general weakness in the markets right now. And as I think about spot ETHR ETFs coming to market and what the demand might look like and how that might impact the spot price of ether. If you look right now, the underlying spot ether market is about one third the size of the spot Bitcoin market. And I think that's a decent proxy for what to expect from Spot Ether ETFs, about a third of the demand of Bitcoin ETFs. If that happens, we would still be talking about one of the most successful ETF launches ever.

Spot Bitcoin ETFs were the most successful ETF launch in the industry's history when you take into account the 10 or 11 ETFs that came to market viewed cumulatively. I think SpotE3 ETFs could be the second most successful launch ever. And if that's the case, I would expect that to drive some demand and potentially positive price action. All right, Nate, I mean, I mean, a little bit of a sound problem hearing you, but I want to just turn to you, Matt. One thing is, I think, for sure, here, the launch of a spot Bitcoin ETF, this spot Bitcoin ETF has been a big success this year. In the first half of a typical year, maybe we'll put up the data here, most of the inflows into ETFs are typically plain vanilla, passive index funds. The S&P 500 ETFs, NASDAQ 100 ETF. That's still true if you look at the data.

Most of the inflows are passive ETFs. But two of the top ETF inflows this year have been into spot Bitcoin ETFs. So the I shares Bitcoin Trust, I think is number four there. One, two, three, four. Maybe I shares. Yes, there it is. 17.7 billion. And then the fidelity Bitcoin Trust is number eight.

So if those of you don't know, folks, that's pretty impressive for a niche product to be, in what may be a record year, to be in two of the top 10. I'm trying to figure out what's a method or way to look at this. That seems successful to me. I think it's a massive success by any measure, Bob. If you look at that, I-Share's product, it's the most successful ETF launch of all time. Even if you look at BitWise's product, the Bitwise Bitcoin ETF, BITB, we're growing faster than the gold ETF when it first launched in 2004. By any measure, these are the most successful launches of all time.

And that's why I think many people, including Nate and myself, think there's going to be significant demand on the Ethereum side if we see that as well. So these Bitcoin ETS were huge. Well, I'm trying to figure out how to judge this. I mean, for example, this is a niche product. Okay, so we're dealing with crypto ETFs. In 2016, 17, 18, we had a whole rush into tech ETFs, for example, specialty tech ETFs like cryptocurrencies.

And we had significant inflows back then into these specialty tech ETFs. And it was about the same, right? I mean, I'm trying to figure out the numbers indicate that this has been successful by any measure. Right? Yes. I think that's what the numbers say. I think what you're seeing is the sort of the birth of a new asset class. I think the right analogy to make is back to the original gold ETF approval in 2004. And the thing I find interesting there, which people forget, that was one of the most successful ETF launches of all time. It pulled in a billion and a half in 2004. But guess what in 2005? It did more than $3 billion. In 2006, it did more than four. In 2007, it did more than five. It kept building year after year. And that's what. what I don't think people realize about these Bitcoin ETFs, this was a huge first half. But I think the second half could be bigger. But I think next year could be bigger than that.

Right, but you're using the gold ETF as a model. Is that necessary, what basis do we have for believing that's going to happen? Yeah, well, if you think about gold back in 2004, it was a niche commodity that wasn't in mainstream portfolios, and it was hard to buy. You could buy gold miners, you could buy closed-end funds. That's the same with Bitcoin. It's a relatively niche commodity. It's not yet in mainstream portfolios.

It was hard to buy. But all of a sudden we get a Bitcoin ETF. All of a sudden, Larry Fink's talking about Bitcoin on CNBC. And now it's moving into the mainstream. And I think that's going to be a multi-year story. Nate, does that make sense to you? Is a gold ETF launch in 2004 analogous to what we might be seeing with Bitcoin and eventually with ether? Yes.

I do think that's the case. just to add some context around the debut of spot Bitcoin ETFs, if you look this year, 300 new ETFs have come to market. The top four in terms of inflows are all spot Bitcoin ETFs. And again, I just don't think there's any way to categorize the first six months of spot Bitcoin ETF's existence is anything other than a monumental success. There's been about 15 billion in net inflows into this category. And overall, assets are north of 50 billion dollars. I think it's remarkable. And just to dovetail on what Matt is saying,

I'm pretty bullish on demand moving forward. And the reason is very simple, which is that financial advisors and institutional investors have really only begun waiting into these products. You have to remember, many advisors and institutional investors are very rigorous with their due diligence processes. They're going to crawl before they walk and walk before they run. And I think this cohort of investors is actually

still learning to crawl. But as they get more comfortable, I think we're going to see a meaningful uptick in demand for these products. And again, I just don't think there's any way you can categorize what we've seen as anything other than a monumental success. So Matt, spot Bitcoin. We've been talking about the flows here. We have about $15 billion in total inflows. This gets a little complicated, folks, because Grayscale had some outflows. But we've had altogether about $15 billion in inflows since launching five months ago. Here's the... inflows overall. By any standards, this looks like a pretty successful launch for a niche product. There you see Bitcoin Trust, 18.4, and there's, there you are, Matt, 2.3 billion there.

At gray scale, as I mentioned, had a pre-existing fund that converted to an ETF. That saw some outflows. But that was more than offset by these significant inflows into the other major players like I-Share, Fidelity Arc, and BitWI is here. So total assets now is 51 billion. Of course, this includes gray scales numbers as well. And again, I heard estimates that people would be delighted if we got $5 billion a month in the very beginning back in January, and we seem to have exceeded that. I think that's right.

And what's even more remarkable is the flows have been steady, whether Bitcoin's price has been going up or going down. There was this worry in the market that these would be weak-handed buyers, that they would panic the first moment Bitcoin's price hit a period of volathinged. which of course it always does. But guess what? We had flows in Q1 when the price was going up. We've had flows in Q2 when the price is going down. We've had flows in the last week. What is happening again is people who are starting from zero are starting to build positions in Bitcoin. And as Nate mentioned, they walk and they crawl and they walk and they run. And we're just getting to the walk and the run part.

So I really think that consistency is an important part of this flow story. Yeah. Nate, take out your crystal ball here. What can we expect from the spot Ethernet launch? So what would be a victory? So if we had 25% of the flows of Bitcoin, would that be a victory in three months? Would it 50% be a victory? I mean, how are advisors and investors going to compare this to Bitcoin ETFs? Yeah, I think a victory would be if we see the demand for Spot Ether ETFs, be about a third of what we saw from spot Bitcoin ETFs. I just go back to what the current market cap is of the underlying. Now, there are a couple of potential headwinds that could limit demand to a certain degree,

at least initially. One would be the crypto market that we talked about earlier. It hasn't performed well recently. And perhaps that negative sentiment blunts demand initially. The other thing is that these ETFs won't offer staking initially. And there's a case to be made that perhaps. perhaps that pulls some demand away from spot ether ETFs.

But again, I would say both of those potential headwinds would be shorter term in nature. Staking allows you to make money essentially off of your investment. The SEC specifically excluded that. Why did they exclude it? I think it's an added complication. And the SEC itself may have some concerns around whether staked ETF qualifies as a security or not.

But if you look at it's an added complication, and the SEC itself may have some concerns around whether staked ETF qualifies as a security or not. But if you look at the Ethereum market, more than two-thirds of all eth out there is unstaked. Most people investing just want to get exposure to this asset, which is up thousands of percent over the last five years. The staking would be icing on the cake. We're not getting it in this V-1. I think we and others hope that in the future we'll be able to add it to ETFs or add ETFs that staked.

But this is a great first step. Has it been settled that ether is a security or not a security? Well, you don't get a pronouncement. That's unfortunately not the way regulators work. I think a lot of people take comfort in the fact that we are getting, or at least we hope to get a regulated ETF. That would remove some of the regulatory obscurity around Ethereum and move us forward. But you never get a firm pronouncement that it is one thing or the other.

And the market cap of Ether versus Bitcoin is about 25%? Yeah, it's about 25% to a third. So Nate, that was the point Nate was just making that if 25% of the volume would be a victory would be on par with Bitcoin's market cap then. So that's a reasonable number of 25%. That would be a huge success. I do think we will get there, but to contextualize that, remember that the Bitcoin ETFs were by far and away the most successful of all time. The number one ETF before those gathered $5 billion in one year. So if we get five or ten or fifteen billion dollars in the first two years of these Ethereum ETFs, that is a massive runaway success. Now I do think that's where we're going. It could take a few months to build, but it would be both achievable and remarkable, and I think would set up Ethereum to do very well. Yeah. And of course, Ethereum is essentially smart contracts, too.

And it's a different technology, really, than Bitcoin. I find that personally, I know we haven't talked about that, but I find Ethereum far more interesting than Bitcoin as an intellectual concept. I think a lot of people do, and I think that's going to drive demand. When people say Bitcoin, they think digital gold. When they say Ethereum, they think token is. They think stable coins. They think defy. If you want to invest in those things, if you want to invest in the growth of tokenization Ethereum is like the picks and shovels play. It underpins all of it. You can't have

tokenization today without Ethereum. You can't have a robust stable coin market and I think that is going to appeal to a lot of people excited me because defy is much more exciting to me than the idea of a new currency created X-Neil out of nothing, essentially, because with smart contracts now, you have the possibility to do real estate transactions. You could do stock settlement. You send money to a friend in England. You can do almost anything with that. That is exciting because that essentially utilizes the blockchain concept. You can make everything faster. You can make it cheaper. You can make it more efficient. We just got all excited about moving stocks from settling two days to one day. This is 2024. It's still taking a day.

ETH could make that effectively instantaneous and effectively free. So I agree that there's a lot to be excited about in terms of what Ethereum tokenization can do to improve finance. Nate, I want to just move on because you're one of the great ETF flow experts out there. We've got the first half is in the record books. We have nearly $420 billion in inflows. This is your number, Nate, I'm using. This looks like the second best year ever if we continue this into the second half. And we've got an outside shot of breaking 2021's record.

So $420 billion in June. Look at these huge ones. $90 billion. So Nate, tell us a little bit about why this is happening. I know maybe you can put up our prior full screen that we had with the top 10 inflows. Most of this is still plain vanilla ETFs. But riff on this a little bit. Tell us what's going on here.

Well, first of all, you're right in that the industry is on pace to at least challenge 2021's record haul. It'll be a stretch, but regardless, the current pace is substantially ahead of 2022 and 2023. And what's interesting is historically inflows tend to accelerate in the second half of the year, especially in the fourth quarter. So however you want to slice it, this is shaking up as another banner year for the ETF industry overall. But you look at the ETFs taking in the most money. You're right. It's primarily the broad-based market-cap-weighted products, which, of course, those products have been dominated by the biggest individual names in the market right now.

Invidia, Microsoft, Apple, investors continue pouring money into these broad-based ETFs. And I would say, who can blame them? The S&P 500 is up about 18% year-to-date. The NASDAQ 100 is up 22%. These ETFs continue to work. And so unless something significant changes with the economic outlook or perhaps how the Fed approaches the market or some outside event, I would expect flows to continue into these products in the back half of the year. And of course, that's the beauty. You're an old ETF guy yourself about indexing in general, that you don't have to wonder about what the right sectors are this year. You don't have to do market timing. You don't have to pick the right sectors. It's true. Tech is dominating everything this year.

but if you own the S&P 500, that's not a concern of yours because you're going along with the whole ride. Here's, you know, Jack Bogle's idea 50 years ago in action. That's exactly right. And now in these extraordinary low-cost ETFs, it's no mystery why they're pulling in that kind of flows. The smallest investor can gain access to the same portfolio, a large institution would for effectively zero. They're incredible tools. So we'll continue to see that. Yeah.

And yet, when you look at the numbers, Nate, 19 trillion in mutual funds and still only 9 trillion in ETS could go a long, long way, obviously. There's an awful lot of money locked up in mutual funds. It's amazing how sticky people. It's like grandma's fund there. She's paying 1.5%. And yet, you know, makes you wonder, like, is her grandson looking at this thing? You're paying 1.5% at this point?

I keep waiting. There seems to be a lot of sticky money that could be unlocked if people paid a little more attention, Nate, to what their portfolio. is paying out. Yeah, I view that as a tremendous opportunity for the ETF industry overall. And we have some interesting stories to track. We have the potential ETF share class of mutual funds. That could be a catalyst. We're seeing the largest asset managers continue to get involved in the ETFs.

They're offering their best strategies, their best portfolio managers. So active ETFs overall continue to be a huge tail win. There's just so much momentum right now. So with that neutral fund number that you offer, again, I just see that as a tremendous opportunity for the ETF space moving forward. Yeah, the beautiful thing is it really doesn't even matter that much if the S&P is lower by the end of the year than it is this year. It's still for long-term investors, that's not going to change much. So the flows still come in, even if the S&P is lower this time in December 31st and it is right now. I don't see how that is going to fundamentally change.

This has been a great conversation, folks. Of course, we're going to keep an eye on the Ether, Spot Ether, ETFs coming out. We'll let you know as soon as that looks imminent, but look forward in the next week or so. 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. Nate Geraci from the ETF store continues with us now. And Nate, we were talking about some of these remarkable inflows in the first half of the year. two of the top 10 ETF flows were Bitcoin ETFs.

But more importantly, these numbers are really impressive. $420 billion in total inflows into ETFs. That's the second best year ever, maybe the best year ever, depending on how it looks like in the second half of the year. Break this down for a sector-wise. I presume tech continues to dominate the flows here. Tech does continue to dominate nearly $15 billion. into the tech sector, which absolutely blows away the numbers from any of the other major sectors.

But if you broaden out and just look at the types of products that are taking in inflows, we have the Vanguard S&P 500 ETF at the top of the leaderboard, over $44 billion in inflows year-to-date. This thing is on pace to shatter the record for an individual ETF inflows in a calendar year. As you start moving down the leaderboard, it's the same types of products. you have IVV, the I-Share's core S&P 500 ETF. You have SPLG, the spider portfolio S&P 500 ETF, QQQ, the investor QQQEETF. What this tells me is that investors are still really interested in and salivating over mega-cap tech and mega-cap growth.

And yet when I look at the list, it's true. Most of those top 10 are plain vanilla S&P 500 funds and triple Q's. the NASDAQ 100. But yet I also see some fixed income. 125 billion in inflows of the 420 have been fixed incomes. And yet the main benchmark, the ag, which is your benchmark consisting of all the major fixed income sectors, is basically flat on the ear. So people are still putting money into bonds, even though the performance is flat. Is this because people, love for 5% yields, even if we're not seeing any price appreciation? I think that's part of it.

But what's interesting is if you look where these flows are going, for example, on the Treasury ETF side of the equation, flows are really across the curve. And even here more recently, there's been an upt into flows into a longer dated Treasury ETF, such as TLT, the I shares 20 plus year Treasury ETF. That's amazing in and of itself, because TL. is still in the midst of a 40% plus drawdown going back four years. Here's what I think is going to be interesting. Right now, there's over $6 trillion in money market funds.

And if the Fed does ultimately cut rates and perhaps if they do so more aggressively than what the market is expecting, I think we could see a tidal wave of flows come into fixed income ETS as investors look to lock in rates further out on the curve. So it's a really interesting dynamic. I think what we've seen thus far in 2024 is investors attempting to position ahead of anticipated federated federal rates. Yeah, most people know this if you explain it to it, but they don't think about it. The money market funds is almost, it's entirely short-term paper. It's usually 30 days, right? And it's usually, usually government. There might be some other

if it's not a non-government account, right? No, that's exactly right. And there was a trillion dollars that will That went into money market funds last year. But you know, when I think about this, it's beyond even just fixed income because there's an opportunity cost if an investor put money into a money market fund, say at the beginning of 2023, and that money came out of perhaps the equity sleeve of their portfolio. They've missed this entire up move in stocks. And so I do wonder with how stocks have run over the past 12 to 18 months, if that will also be a

catalyst for some of that money to come out of money market funds. Yeah, but nobody's expecting us to go back to, you know, one or two percent on the 10 year. We're, you know, in the four and a half percent range, I think a lot of people are very happy with that. They see a real return, inflation adjusted. And to me, that accounts for why we're still seeing inflows, even with the overall price action on bonds flat this year. People just love getting that four and a half percent. After getting 0.3 percent in their checking accounts, it's a big difference. and I think people are happy.

And I would note the flows are pretty broad right across the Treasury curve, right? I mean, I guess people are still into ultra short, but hasn't there been an upt in TLT recently? That's the 20 plus. There has, yeah. And that's what I was alluding to earlier where I do think investors are seeking to lock in the current rates in anticipation of a potential Fed rate cut. But I want to go back to a point that you were just talking about regarding how quickly rates may come down. generally agree with you that I don't expect rates to come in aggressively. However, that assumes that the Fed gets this all right. And if we think about inflation in 2021 and into 2022, the Fed was

behind the curve the whole way. And they had to raise rates much more aggressively when the market was anticipated. That theoretically could go in reverse if economic data starts coming in weaker than expected and the potential for an economic slowdown looks like it could be worse. Theoretically, you could have rates coming quicker than the market expect. So, again, not my base case, but I can see how investors might be positioning for that. I got to just ask again about tech here. So I guess the question is whether Big Cap tech, the invidias, Microsoft, Apple, et cetera, can continue to drive the market.

I mean, because that's impacting flows as well. So could Investa start thinking of going somewhere else if rates begin coming in? Yeah. I mean, I think this is the question that every investor is grappling with. You look at Nvidia this year, it's up 155%. And really look across the magnificent seven stocks. You have Microsoft up 25%. Apple 18%. Meta 53%. The question is can this continue? And right now, if you look at the broad market indices, the S&P 500, the top 10 holdings represent 37% of the overall index. Earnings only represent about 24% of that top 10. So yeah, that's a question. Can this continue? And look, there's a case to be made if rates do come back in.

That could actually be beneficial for growth. So there's a lot of plug-in-point in the market what worries me is when I see Vanguard growth, which is VUG in the top 10 of inflows, at a time when if there's anything that speaks of a market, top, it's when that's sort of leading the markets right now. And we know historically investors throw money into stuff at the top. And that's what worries me. When I see that, and I own that fund for many, many years, that's a sign to me of a little bit of a concern. I wish investors wouldn't be doing that, throwing money into the top, but that's what people tend to do. Nate, thanks very much for chatting with us. And Nate Gracie is with the

EPF store and appreciate that as always. That does it for ETF Edge, the podcast. Thanks very much for listening. Join us again next week or head to ETFedge.c.com. How does InvestcoQQQ-Q-Rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investorbiters, Inc.