ETF Edge - The ESG Equation & Bitcoin Futures ETF

Episode Date: October 11, 2021

CNBC's Bob Pisani spoke with Jan van Eck, CEO of VanEck and Todd Rosenbluth, Senior Director of ETF and Mutual Fund Research at CFRA. They discussed pending Bitcoin ETF proposals, fixed income ETFs as rates creep steadily higher and ESG-related products in the market. In the 'Markets 102' portion of the podcast, Bob continues the conversation with Jan van Eck on the commodity explosion. Hosted by Simplecast, an AdsWizz company. See https://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 and market analysis and breaking down what it all means for investors. I'm your host, Bob Fassani. Today on the show, we'll discuss those pending Bitcoin ETF proposals coming off a wild week for crypto, plus dive-ins. to fix income ETFs, rates creep steadily higher, bring you up to date on a new raft of ESG-related products on the market. Here's my conversation with Jan Von Eck, the CEO of Vanek, and Todd Rosenblut, Senior Director of ETF and Mutual Fund Research at CFRA.

Jan, there's more than a dozen applicants for a Bitcoin ETF, but SEC Chair Gary Gensler has signaled his support for a Bitcoin futures ETF. He seems pretty cold to a pure Bitcoin ETF without clear regulatory control. over entities like the Bitcoin exchanges. Can you handicap this at all for us? How is this going to play out? Well, I wouldn't say there's a zero chance of a Bitcoin ETF approval. The deadline for our application and these things can be extended, but this is an unexstendable deadline by statute is November 14th. So between now and November 14th or the Friday before, we'll know whether the SEC will approve Bitcoin physical Bitcoin ETFs or not. I would say that in the space, we launched the first pure play

sort of cryptocurrency company ETF called DAF in April of this year. So I just wanted to make sure that people know that we do have a product in the market. But as far as regulatory approval, I do think as well, you know, the SEC wants to have some visibility into the underlying Bitcoin markets. And I think they've got that a little bit when they asked Coinbase or told Coinbase not to list a product that gave interest on crypto holdings and Coinbase backed off. So they clearly have some control over players in the underlying Bitcoin market. So maybe that increases the chances from zero, but I have no idea what they are. Okay. So we now know November 14 the drop dead date for a Bitcoin ETF, thumbs up or thumbs down. But what about Bitcoin

futures? You've got an application for that as well. That's going to go live at the end of the month. I understand unless there is objections and they kick the can down the road. What are the issues around a Bitcoin futures, ETF? Can they kick the down the road even on the Bitcoin futures at this point? Yes. I mean, let me at least from an investor perspective, and this is not regulatory, The issue with the futures ETF is the dynamics of the futures curve, and without getting complicated and talk about contango too much, in Bitcoin rallies, Bitcoin futures strategies can underperform by even up to 20 percent a year. So that's a pretty big number. The regulatory issues around it are can U.S. ETS investing can use? Canadian Bitcoin ETFs. That seems unlikely now. That's one issue. And the other is that there are limits on how much any fund or fund company can own at Bitcoin futures that's based on the futures contract. So what if the Bitcoin futures ETF gets too big? So there are still issues out there that might cause the SEC to delay approval.

Yeah, 20% underperformance is pretty significant. Todd, we don't have a Bitcoin. ETF. But we're getting a raft of Bitcoin-related ETFs that are sort of buying companies around the crypto space. Last week, Investo started trading two ETFs that can own crypto-related companies and even Bitcoin indirectly. Now, tell us about this new issues by Invesco, SATO Sato, Sato, clever. They've attempted to partially fill the gap by launching the Invesco-Elarian Galaxy Crypto Economy ETF.

and Sato as well. Tell us about that. What's in that? Yeah, first of all, these are two of the longest names of ETFs that are around. But what they're owning are companies that are exposed to this overall trend of either crypto or crypto miners or other companies that are exposed to it. So Coinbase, for example, micro strategy being another one, square. As well as you mentioned, they own a trust that owns exposure to exactly what we'd find of Bitcoin products listed on other exchanges in Canada and in other markets. But as you mentioned, there's a growing number of these products. And Jan touched on one of his, DAPP. We've got BLOK, which is more blockchain-related. We've got

bid-wise with a product B-I-T-Q. We've got Global X with a blockchain-related ETFs. There's a lot of these products that are trying to fill the gap because we don't have a... physical Bitcoin ETF, and it's possible. In fact, we think it's likely that we're going to see a delay of a Bitcoin futures ETF until 2022, until the regulatory environment is more clear, and they line up all of these potential products to start at the same time instead of giving a mover advantage because they filed one day earlier. Yeah, I want to know that SATO, the new Invesco ETF that started trading last week, is 15% invested in the power shares came Fund, which is, I understand, a Bitcoin fund. So indirectly, these funds are getting exposure to Bitcoin,

one way or another. I find that very interesting. Going back to the regulatory environment, Jan Bloomberg was reporting at the end of last week that the Biden administration was considering an executive order to coordinate regulation of cryptocurrencies and maybe even appointing a crypto czar. Is that where this is going? There's obvious confusion here on jurisdictional issues. Look, what's happening in the crypto space, the development of all the software solutions and applications is unbelievable. And it's a huge challenge for the regulators to keep up. I see blockchain competing against stock exchanges, against brokers, against payment systems. You now have Twitter accepting Bitcoin payments. So the level of innovation and the speed, is unbelievable and very difficult for the regulators to keep up with. So I envy them. But, you know,

some kind of high level like F SOC or, you know, ZAR, I think has a lot of trouble. I think the bread and butter is going to be the work with the agencies that are already staffed like the CFTC and the SEC, and the banking regulators, of course. Yeah. It just seems to me there are some very obvious jurisdictional issues. The SEC says a lot of tokens are investment companies. contracts, and that falls under their purview, but that's not entirely clear. Gensler's also said he's reluctant to act on a Bitcoin ETF without regulatory control over the crypto exchanges. Who's going to give him that? So you seem to make the comment earlier about Coinbase, and a power grab is not the right way to describe it, but nobody gave them the

jurisdiction. They basically went to Coinbase and said, no, you can't do this, and they backed off. So essentially, they have de facto jurisdiction here without anybody clearly granted. branding it to them. And that, you think, is what's going to happen. Yeah, I mean, I think it's, boy, they would never want to think of it this way, but it's kind of a light-touch regulatory approach. I mean, it's really, if you took the SEC at its word, it's very unlikely that all the cryptocurrencies listed on Coinbase and Gemini wouldn't be considered as security by their definition. So if they just require them to register as broker-dealers, that gets some jurisdiction. And look at Robin Hood. a regulated broker-dealer and they're listing all, and trading and offering all kinds of

cryptocurrencies. So that gives them a direct nexus to those exchanges if they're looking for one. So before I move on to, and I want to talk about ESG a little bit with both of you, November 14th, Jan, you mentioned the drop dead date for a thumbs-up or thumbs-down on a Bitcoin, a pure Bitcoin ETF. Is it really a thumbs-up or thumbs-down? If they say no, what happens after that? Well, I mean, their prior concerns are that it's not a deep enough and it's a potentially manipulable underlying cash market. And if they take that stance again, then it's a deep freeze.

If they give another excuse or reason to deny the application, I can't imagine what it would be, but that would be interesting and everyone's attention would pivot to that. But again, my main point is the disruption and investment and all this stuff is happening globally in a ton of different cryptocurrencies. You know, kind of Bitcoin is almost old school at this point. Yeah. Well, that's why I think it's so important to clear up the regulatory and jurisdictional issues. If they tell them, okay, this is a security.

These coins are securities, and the SEC will now have jurisdiction over this area. then they can make a clear ruling. I can't imagine him, given what he said, making, approving a pure Bitcoin ETF without the regulatory control he's seeking. That's why I think the chances are they're actually going to decline on November 14th. The futures are different.

I think there's a very good chance they're going to approve that. Just the unfortunate situation, Congress has bottled up dealing with the Biden agenda right now, and it's a lot for them to ask to, you know, create a whole new regulatory regime and approve that.

I just think it's going to be tough. Let me just move on, Todd. ask you this, a record number of ETF launches are happening this year. It's amazing. Theomatic investing, ESG, we talked about crypto. There's a lot of fixed income ETFs coming out. But I want to go back to ESG again, a subject you and I have talked about for many years. There's a whole raft of them just recently. Are these just copycats, or is there some new innovation in ETFs happening right now? Handicapped is for us right now. So we're seeing, yes, an explosion in the number of ESG-related products.

seeing growth in the amount of money that's going into these products. So there's more supply right now than demand, but the future looks great, we think, for ESG related products. And we're seeing companies take existing products that are quite popular and offering ESG versions of them. So EFIV is the Sage Street product that is a version of SPY, the S&P 500, ETF. We've got EAG, which is an ESC version of the ag from I-share's. We've got E-M-N-T. We're showing on the screen here from PIMCO, which is a version of their very popular, active,

short-term bond ETF, Mint. We think we're going to see more of these products. Invesco has filed for an ESG version of the triple Q's, we think is likely to come out by the end of the year. And as I think we'll talk about, Jan and his team launched a version, ESG version of their popular MOTE.F. This is just a trend that's likely to be here for a while. Well, let me pick up on that, Jan.

You, as Todd mentioned, you've got a new Vanek Morningstar ESG moat ETF. We've got to change these titles. MOTE is the symbol. These are companies that Morningstar believes possess long-term competitive advantages or moats that have been screened for ESG risks. And we've got Alphabet, Microsoft, Applied Materials, ServiceNow, Salesforce, very familiar companies in the ESG. space right now. What do you think you can add to this whole ESG story?

Well, we try, you know, I like to say that we offer ETFs like handcrafted beers. We take everyone, you know, on its own merits, and we don't have a blanket ESG data or approach. But on the Morning Star, we think it's an extremely strong offering. Morningstar acquired Sustainalytics, which is one of the leading ESG research shops. And And we've been working on this for quite a while to apply, you know, the moat investing philosophy, which is investing in companies with a competitive advantage and then doing this sustainability ESG overlay on that. Unlikely to include fossil fuel companies.

And so, you know, really what I think people expect from ESG, it has more of a growthier flavor than the traditional moat fund. So it'll be interesting to see what people think of it. You know, not to get all philosophical on you, but I was talking to you earlier, and you mentioned you'd read Bill Gates having a book out on climate change that you read this summer. And the message seems to be, and I haven't read the book, but based on your takeaway, that we need a lot of change. And I'm wondering, is there any amount of ESG that really is going to make a sufficient difference? Gates seems to imply we need some really radical change, not just ways that we're screening companies. Yeah, I mean, look to radically oversimplify.

which I like to do. There's six billion humans on this planet, and we're messing the planet up like crazy in a lot of different dimensions. And I think he, I like it because he wrote it at what I call a high school level, which was perfect for me, to understand all the different things that we need to do. Energy production, of course, is something that we focus on transmission, vehicles, transportation, but also like agriculture. Agriculture is responsible for about a quarter of all emissions. So without a lot of technological innovation, it doesn't matter what the government does, and a lot of times it's counterproductive, we're not even going to get there. So I think ESG is good as a coherent investment approach on a fund-by-fund basis to make a difference in its good signaling, but to put it in perspective, it's not going to change the end result of where we need to be.

Yeah. You know, Todd, you mentioned that there's an EST flavor for everything now. We have an ESG version of the S&P 500. We have an ESG version of the bond funds like the PIMCO fund. You mentioned Invesco has filed for an ESG version of Triple Q at this point. And I guess I get the same question to you. Is this how much of a difference is this really going to make, given that we still end up owning substantial parts of the same? same companies. Triple Q, ESG, Triple Q, you're still owning a ton of Microsoft and a ton of Apple and a ton of of Invidia. Right. So there's a few different ways we're seeing ESG. We're seeing broad ETFs that offer exposure to companies that are doing well from an ESG perspective.

We're rewarding those companies that are relatively strong. We've got ESG where it's more clean energy related. You're investing in companies that are trying to help solve the energy. crisis that we're in and making clean energy become a priority. So ETS like ICLN would be an example of that. And then we've got a couple of other different related ETF. So vote VOTE, which I know you've spoken to them beforehand, which is actually working with companies to make changes to the ESG priority. And I would just slip in one last one. A product launched last week, the ticker is P-I-N-K, pink. And it's a healthcare-related E-T-F from Simplify. And it's, it's, it's, it's,

It's giving all of their proceeds and all of their profits to the Susan G. Coleman Foundation, so to be able to help fight breast cancer. That's more of a societal benefit. But that's a good thing. That's different ways asset managers are working to be able to tap into the ESG trend. Yeah. So just going back on to what we were talking about before and your interest in real climate issue and ESG in general, are companies really moving on these ESG issues?

I know we've got this nice ranking that we keep doing, but I know we've got Tesla out there. They're developing and building green technologies that maybe could power the future. They're doing hydro, solar, wind, geothermal. You know, they're talking about it, and so Elon Musk is talking about it, but is everybody else doing it on a sufficient scale

that's making a difference at this point? I'm asking a philosophical question, not an investment-related question, but I can't help but think about that with the CSG story. Yeah, I mean, look, I think, Where the real lift is going to come is break through technologies, like, you know, rice that needs very little water to grow or other kinds of dry farming solutions as one example, right? There's lots of different kind of technologies. So you want to own, like Todd was saying, some of the companies that are really investing in having those technologies, that would be number one.

Number two, there's a lot of companies in the middle that are just, they're going to try to do the right thing. But they're not going to really change the curve on climate change. And then they're the orphans, what I like to call the, you know, what about fossil fuel companies? They're going to be like the old tobacco companies in some kind of, you know, investment purgatory. So, you know, it's really the technology companies and technology investing, whether privately or with public companies, it's going to really bend the curve here, I think. Yeah, it's really biotechnology. You think about a rice that uses less water. I mean, that would significantly, that's a green revolution right there.

I just got back from California wine country in Santa Barbara and Pasoblez and Monterey. And boy, they could use some grapes that can withstand drought. They've got some very serious drought issues there. And the wine industry is trying to cope with that and develop new techniques like dry farming that are sustainable in that work. But they're entering three or four years of drought. So it's a serious issue that we've got to address. 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. Today we'll be continuing a conversation with Jan Vaneck. Yon, thanks for sticking around. I wanted to just hit on something we didn't have a chance to talk about in the show, which is your take on the commodity explosion. You are one of the great experts in the United States on this. Your firm was founded on this many years ago. I guess we're seeing a sort of inflation-induced anxiety. around commodities right now. We've got eight-year highs on oil, 13-year highs on natural gas.

Where do you think this is going? Well, there's a lot of different trends going on here, Bob. But number one is what normally happens after a 10-year bare market in commodities. All the commodity companies have stopped increasing the supply, but the world economy keeps growing. And so out of this horrible bear market we have, I'd like to point out that gold shares from 2011 to 2016, Bob, went down 90%. And you know that energy companies have really been a disaster area over the last five years. So really, what you just have is, you know, the world economy continuing to trudge forward and tremendous supply constraints because of just a natural supply and demand. On top of that, and I know you hate to hear this because we talked about a lot already, is ESG, because it's so hard looking forward to increase supply. So not only is the world economy growing,

but it takes years for a lithium mine to get going or a copper mine to get going, and just even restarting some projects that were mothballed over the last five or ten years is painful. So the way I look at the markets now, the downside on commodities is extreme, in my mind, very limited. And you can name the price. I mean, there are not prices that I would think would be crazy. Could you have copper go up, you know, another to $8 pound? I don't see why not. You know, if you just have a lot of supply constraints, you see that all over the world economy now.

So I don't focus on that because the companies are so cheap on the price to earnings basis. It's just incredible. If I can go on for one more minute, gold shares five years ago used to be more leveraged than the S&P. Now they have almost no debt and their cash flow yield is better than the S&P, but people hate them. Now, maybe it's gold has lost. it's allure, but it's just amazing to me how cheap some of these companies are. With fossil fuels, we all keep talking about geothermal, we all keep talking about solar. And I do see solar getting cheaper every year.

The cost for solar panels keep getting cheaper. They can store more energy on them. And they seem to be garnering a larger portion of the world's energy supply, but not nearly fast enough, right? So everyone who says, oh, we got to stop doing, you know, coal or we got to stop doing oil, and move to solar and renewables, that's happening, but it's not happening fast enough. Is that the right way to look at it? Two points. Number one, that is the area that Bill Gates talks about where you have a cost

advantage now. Because government pushed solar subsidies, you actually have solar cheaper than a lot of other areas, and that continues to grow like crazy. But, you know, that, that to me is, you know, is dramatically interesting. But what people don't talk about, my second point is that the world has pulled the rug on nuclear power. Even here in New York State, they decommissioned Indian Point. And that's what's putting all the pressure on natural gas prices. So, you know, the government can help, the government can hurt. That's kind of where we're at right now.

Yeah, it's, you know, for all the problems people had with nuclear power, it was very, very steady. So I agree with your point here. I think the problem with investing in energy is, energy stocks at least, is just how small it all is. Energy is 3% of the S&P 500. You know, back in the 90s, remember when Exxon was the biggest company in the United States at one point. And now it's, you know, it's in the top 20, but it's, it's, it's. certainly not any superpower anymore. Part of the problem, the energy space is it's so small now that you get a few people,

like in the last few months, buying into it, and it just blows the whole sector up. You get stocks moving 30% in a month because they're so cheap. The market cap is so small, and the prices are so low on it. I think I'm not. They get so much further to go if people treated them like normal investments. But I don't think people will treat them like normal investments, right? So if you took their profitability and a normalized price-to-earnings ratio, they have a lot further to go. But I'm questioning, are they going to have a normalized price-to-earnings ratio or people are just going to treat them like tobacco stocks?

You know, something that even though they'll still be operational in 20 years, people want to pretend or not give them credit in their PE evaluations. for their earnings potential. And so, you know, a lot of people, Bob, just can't buy them anymore. Like in Europe, to have a non-ESG fund is very difficult. So a lot of investors are just are not going to look at them. And so they're in that kind of purgatory. So their eternal value plays, essentially. It's sort of like China.

You know, there are people now say, oh, you shouldn't be buying in China because you can't tell what's going on. There's no transparency. Yet the value guys, they don't care. The value guys are waiting for Shanghai to change to trade at 14 times forward earnings, and the U.S. to trade it 20 times forward earnings, and they just buy China at 14 times. I mean, is that what energy becomes? Eventually it's just a value play where you buy it when it's really cheap?

But who's going to buy it? I mean, ideally, you could take some of these companies private, but what pension fund, what college endowment is going to say, I want to own. But that's my point. That's my point. The value guys who don't give a rat's butt, excuse my language, about the whole ESG debate, are just looking to buy stuff cheap. And there's a great play there. If you're just purely a value guy, you don't want to get involved in the whole debate about it. It makes a lot of sense. Come on, Jan, there's got to be somebody out there who's a value player who's willing to pick these up at some point, right? I agree. I'm just saying you'll make the money on the profitability, but you're not going to make money. on is an earnings revaluation. Or that's my question. You know, I'm a little bit of a skeptic.

Some of my colleagues are an optimist, but I just don't think you get that earnings revaluation. So they're just at this permanent, you know, kind of value. You mean by an earnings revaluation, you mean will they'll accept a higher multiple for these? Exactly. Exactly. I mean, you have like base metals companies that are doing, they're so profitable, they're doing special dividends, right? Backwards looking, they've yielded. yielded, you know, if you add just out their dividends, 13% in a world where you have almost no interest rates. People should be piling into those companies. But, you know, even some of them are what we call green metals companies.

But they're still cheap. I think they're still cheap. Yeah, they've run up. Give me an example. Well, I mean, you look at Valley, Glencore, just the biggest names, right? Yeah, biggest ones. I guess they've run up, but I don't know. I look at them and I say, look, I think that I guess my core assumption, Bob, is that the downside

on these commodity prices is very limited. Now, the big risk, I got to throw it in there, is a China recession, right? If you have a recession at the China and people, they're definitely, you know, the economy's sloggy, sure, then you keep having these growth risks priced into these stocks, but, you know, I don't know, from a longer term perspective, that's not something. Let me ask you an investment question, then. What's the right way to play this? Would you own an ETF?

I mean, they're investors watching. They're intrigued by what you're saying. What would you advise them to do? I love the commodity space. I would do selected shots. I would do some alternative energy. I like this green metal's idea. But then I would also just own commodities directly,

because you just might not get the revaluation and the equities. That's all I'm asking people to be prepared for. When you say own the commodities, you mean like own a commodity ETF that owns copper or, you know, oil or something like that? Or a mutual fund. We don't have an ETF, but like, you know, our CMCI mutual fund or DBC or whatever is out there. Yeah. Yeah. And they own futures, though, right?

Yeah, but you can mitigate the better constructed ones like ours, sorry, you know, can mitigate. the futures roll risk. A lot of products, because they keep rolling all the way out the curve, and they've reduced those effects. Yeah, okay. John, as always, I appreciate your wisdom and your insight. Good luck on the Bitcoin ETF. When did they have to give a ruling on the Bitcoin futures? There's four of them out there for the end of the month, right?

Yeah, in a couple of weeks, some of our competitors would normally go effective. So, but again, like Todd said, they can be delayed. But on the physical, we need, there has to be a statutory answer by November 14th. Okay. All right. Thanks very much, Todd. That's it for today. Thanks, everybody.

I'm Bob Fazzani. Thank you for listening. Make sure you tune in next week. And in the meantime, remember, you can tweet us your questions or topic ideas at ETF Edge, CNBC. InvestcoQQQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at Invesco.com slash QQ, Invesco Distributors, Inc.