ETF Edge - The ETF Flowdown: Bitcoin, Cannabis & September Swoon Ahead? 9/6/23

Episode Date: September 6, 2023

CNBC’s Courtney Reagan spoke with Tom Lydon, Vice Chairman of VettaFi, and Christian Magoon, CEO of Amplify ETFs. They broke down the latest ETF flows, talked standout summer trends and tackled what’s ahead for the markets in September. Will there be a September swoon ahead? They also did a deep dive on thematic ETFs like bitcoin and marijuana, as recent regulatory developments are making big waves in the ETF business on both fronts.  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, Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange-traded funds, you're in the right place. Every week, we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm your host, Courtney Reagan filling in for Bopasani today on the show. We'll get the latest flow down on ETFs, talk standout summer trends,

tackle what's ahead for the markets in September. Will there be in September swoon ahead? We'll also do a deep dive on thematic ETFs like Bitcoin and marijuana as recent regulatory developments are making big waves in the ETF business on both fronts. Here's my conversation with Tom Leiden, Vice Chairman of Vettify and Christian Magoon, CEO of Amplify ETFs. So Tom, we actually saw outflows in August for the first time since February, but demand for fixed income actually appears to be pretty strong. Five billion dollars in fixed income. inflows last month. So what's the big story for September? It's a great point. Usually the equity flows dominate all flows by a big, big amount, but we did see almost 50-50 so far this year as far as

flows in fixed income. I think the key here is the Fed's doing a decent job in tackling inflation, but there's a lot of money that's on the sidelines, either in short duration or in money market funds, $6.2 trillion. And with that in mind, we're hearing from advisors that we're surveying at VETify all the time. They're starting to unleash that money on short duration, going to longer duration, not just in treasuries, but also in corporates and high yields with the idea that a year from now, if we do hit a recession and the Fed comes in, starts shopping interest rates, they're not only going to get that higher yield for longer, but participate in some of that appreciation as rates start to come down. If you're just sitting there in money market funds and the

Fed comes in and starts chopping, you're not going to have that 5% yield anymore and it's tough to make that up. Interesting preparation for what may be coming. Christian, it seems like fear of the growth trade is fading, though investors still favoring a little bit of a risk off approach. What are you seeing in inflows? Yeah, I mean, Tom said it best. People are really mesmerized by a four or five percent return from fixed income. In our side, I'd amplify, we're seeing the income strategies be appealing, but these income strategies are yielding 5, 6, 7, 10% across our lineup. So we're definitely seeing inflows looking at income products that can give you some type of market participation, but don't rely on total return that have an income element to it. So for example, our

ETF of discounted closed-end funds, YYYYYY, yields around 10. We have another international dividend ETF that yields around 6%. This again gives you the market participation, but also gives you that income. And, you know, the bar has been raised now for material income. You kind of got to do something bigger than 5% to get money to move nowadays when it comes to equity income strategies. So if we're talking risk off, Tom, do you think that the mega cap tech trade has faded? Are we less interested in some of those magnificent seven names? It looks like we're seeing a little bit more flows into small caps and equal weighted indexes. I mean, does this suggest a renewed sense of bullishness for the broader market?

Well, there is for sure, especially in the last three months, where at the beginning of the year, that magnificent seven, and really throughout the year, was responsible for almost 80% of the growth that we saw in the S&P 500. However, if you look at the equal weight, which Invesco has an RSP, it's called RSP, which is their Invesco 500 equal weight ETF, that's up almost as much as the S&P 500 is in the last three months. Also, the Russell 2000 is up a little bit more over the last three months. So with that and the flows that we're seeing around that, we've seen almost $8 billion come into RSP, which, which says people are looking to spread the love a little bit outside of those mega-cap stocks, and also from a valuation standpoint, boy, small-cap valuations look real cheap compared to the S&P 500 right now. You can get them for 40, almost 50% off from a valuation standpoint. And then on top of that, overseas markets aren't seeing a lot of love, but valuations in the same way.

So as you look towards the end of the year where people are starting to set their portfolios up for, in a lower rate environment, expect more flows that might be outside of the S&P 500 and those mega-cap stocks. Okay, that makes some sense to me. Christian, you run an enhanced dividend income ETF, DIVO, your top asset gathering ETF this year. Walk us through what's in it. What kind of market environment and strategy does this work best for?

Yeah, so this is a blue-chip focused stock ETF that's actively managed. It's essentially owning companies that are growing. earnings, but also growing their dividends. So it's fairly concentrated in these top quality names. In addition, the manager has the ability to not only harvest dividend income, but Wright covered calls. That manager is capital wealth planning. Kevin Simpson and Josh Smith manage it, and they've done a great job. It's a five-star rated fund. And, you know, unlike many covered call ETS that just give you high current income, this is actually delivered in terms of total return with a three-year annualized total return of 13%, which is right around where the S&P's been over the last three years.

So you get that high floor of income, and you don't miss out on market participation. We think that high quality approach, especially coming into September and with some of the uncertainty, also adding some of those value names to your portfolio, makes a lot of sense right here. Tom, what other standout themes do you see this summer? It seemed like AI was all the rage for a while. Is it still? Is that fizzling out? I mean, obviously part of that tech trade.

Yeah. Now, AI got a lot of attention for all the right reasons. And there are a lot of different AI opportunities. We just ran an AI symposium, and there are three different ways that you can invest in AI type ETFs. First, companies that use AI to help get profitability to the bottom line. And it may be with some of those mega-cap stocks, the Googles, the apples, the Amazon's of the world. There are also a slew of ETFs that invest specifically in companies that their business is AI. It's all about the profitability and the bottom line and the growth of AI.

And then finally, there are some companies that have adopted some AI systematic investment strategies within ETFs. What stocks to buy, when to buy them, when to sell them, how much money to put in them, all within a strategy in an ETF. So there are a lot of choices. But with that being said, it's still in the early stages. There's not a ton of money that's gone into the space. But Courtney, it's not going away. It's going to be here for a while. It doesn't mean investors aren't interested, just because it's in the early stages.

That's when you want to get in, right? Well, gentlemen, stick with me because we're going to switch gears here a little bit. And gray scales, Bitcoin battle last week, may have tipped the scales in favor of the crypto bulls for now. But the SEC is faced with another batch of Bitcoin ETF application deadlines. Right here before Labor Day, six in total. and the Wall Street Watchdog opted to punt on all six of them, delaying them until mid-October. So, Tom, I guess walk us through maybe a little bit of what happened first and then talk about if it's a big win for Grayscale and the Crypto Bulls, now that the ball is in the SEC's core.

Sure. So Grayscale has a trust fund. It trades like a closed end fund, GBTC. They apply to the SEC to convert it into an ETF. Spot Bitcoin ETF. Now, understand that there are some Bitcoin ETFs out there that are futures-based that were approved by the SEC. And there's proper surveillance for manipulation and fraud that goes along with that. However, when they were declined by the SEC for that conversion, they were sued. The SEC was sued by Grayscale in circuit court and actually recently won. Big move for Grayscale. And with that, now the SEC has...

has 45 days to either appeal or grant at one point in time the conversion of GBT. That may happen. It's going to be very interesting to see if Gensler and the SEC actually fall on the sword here or actually fight back, which they can. If they do approve it, what we're also going to see is a landslide of additional applications come in. We've got a bunch now, Black Rock's in there. wisdom trees in there. Kathy Wood and Arc are also in for applications for Bitcoin spot

ETFs as well. What's going to happen? I think you'd say that things are tilting towards us getting a spot Bitcoin ETF and not giving the nod to specific issuers like a BlackRock, but really bringing them all to market at the same time. Level playing field, everybody gets in at once and GBT gets exactly what they're looking for, which is, look, $18 billion in that fund, they're going to be the biggest player in the marketplace. Wow. Christian, I know you don't have a Bitcoin ETF out there, but you do have the Amplify Blockchain ETF, B-L-O-K.

That's taken off of 38 percent so far this year. On the back, of course, of all the crypto buzz. What are your thoughts on the spot Bitcoin ETF going forward? Do you think that all of the players will be granted approval to enter this market? Yeah, Courtney, we're pretty bullish about Bitcoin, spot Bitcoin ETF coming to the U.S. We think it makes sense. We're really behind many of the most of the developed nations in terms of having a spot Bitcoin ETF. Canada has almost half a dozen of them, for example.

So this will be a good thing for investors where they will be able to own spot Bitcoin in the form of an exchange traded fund, which has its efficiency, transparency, and flexibility, or offer them more cost advantages, ability to buy in a brokerage account, it will give institutions access. We think that the SEC is likely to allow many of the firms to launch at once, so you have the choice. You could go with a kind of a general subject matter index expert, maybe like a BlackRock, or you can use a specialist firm that's very deep in the crypto space like Bitwise to get extra insight. So this will be a great battle to watch. Hey, we love it because as the largest

blockchain and the first blockchain ETF to launch back in 2018, it's actively managed. This is bullish for blockchain as well as crypto. We own spot Bitcoin ETFs in our block ETF already. So we're riding the wave with our block ETF and certainly having a great year this year outperforming even the NASDAQ 100. We will follow this news and probably have you all back to discuss it if and when we get a resolution in some degree. But finally, we're going to switch gears one more time. Make waves in the marijuana business. Cannabis stocks surged last week after the drug enforcement agency agreed to review its classification of marijuana and consider reclassifying it as a Schedule 3 drug instead of a high-risk schedule 1 drug. So that would put cannabis in the

same category as testosterone and ketamine rather than in the same group as heroin and LSD, where it is now. The move is sparking optimism among cannabis, TF bowls and it could clear a path for broader medicinal approval and fewer regulatory hurdles for funds that hold U.S. multi-state cannabis operators. Certainly a lot of regulation issues still exist. Christian, you have the Amplify Seymour Cannabis ETF, CNBS. That's run by our own contributor, Tim Simor, and you also now own the ETFMG alternative harvest ETFMJ, which you recently just acquired from the ETF Manager's Group.

So what kind of impact do you expect for cannabis businesses and the ETAFMG? that own them if some of these, or if marijuana rather, is reclassified? Yeah, so this is big Courtney. I mean, we've seen most cannabis ETS rally over 30% since the news broke last week on this recommendation. And here's the key. If you become a Schedule 3 substance and you have a business there, you can now write off your business expenses where you couldn't be for if you're a Schedule 1 or a Schedule 2.

So that really increases the cash flow and profitability. of cannabis companies immediately here in the U.S. Secondly, that also means that it's more likely that the Safe Banking Act could be passed in Congress, which would get cannabis companies, the ability to bank and participate in capital formation activities that are more like traditional companies, which that's huge news as well, if that kind of comes as the second kind of fall-on event. And then finally, as Tim Seymour would say, this is a consumer packaged goods store, ultimately that, you know, cannabis can disrupt health, wellness, the atestritional alcohol industry, even pharmaceuticals.

And consumer package good and pharmaceutical companies are going to be able to now look at these cannabis companies as M&A targets, to partner with them, et cetera. So we think the best is yet to come in this story. This is just an initial rally on the news. And we think that there could be a lot more upside in the future for this very disruptive industry that's based on a plant. Yeah, it's wild. What's going on for sure?

And I think the banking aspect is really, really key, very important, knowing that many of those businesses are not able to bank because of the current regulations. I mean, Tom, way in here, do you think there's a spark a wave of interest in cannabis ETFs,

leading them to become more popular? Or do you think, too, it's a consumer package good and maybe it'll be part of the healthcare sector? Well, the great thing about the ETF industry is there's a lot of opportunity. And we're going to have our ears of the ground, see if there are additional cannabis filings,

ETF filings, and we're looking at Edgar all the time. However, that being said, as Christian and the folks of the Amplify know, there's a great first mover advantage. And there are two options that they embrace and they offer, and they've had them for a while. I think we're going to continue to see more assets flow into that space as it's more widely accepted. We were talking off-camera earlier,

the whole idea about federal, regulation being less in the cannabis space. It was something that was going to be happening over time and now it's here. I think that's going to be very good for that industry, but it's going to be also very good for the ETF industry. There's more choice. InvescoQQQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQQ, Invesco Distributors, Inc.