ETF Edge - The ETF Flowdown: Commodities Conundrum & Battle for a Bitcoin ETF 7/6/22

Episode Date: July 6, 2022

CNBC’s Seema Mody spoke with GraniteShares CEO Will Rhind, Grayscale Investments CEO Michael Sonnenshein and Todd Rosenbluth, Head of Research at VettaFi. They drilled down on the bright spots amid the market’s dismal start to 2022 – and discussed what commodities are signaling about inflation and the global economy. Plus, the SEC rejected yet another bitcoin ETF proposal just last week – and Sonnenshein is fighting back. He offered more details on how he plans to sue the SEC to contest the decision. 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'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 Sima Modi, filling in for Bob Bassani. 2020 has been a tough slog for both equities and fixed income, but it hasn't been all bad. Today on the show will break down the brighter spots and drill down on what commodities are signaling about inflation and the global economy.

Plus, the SEC just rejected yet another Bitcoin ETF. We'll hear from the man who is now suing the SEC to contest that decision. Here's my conversation with Will Ryan, CEO of Granite Shares, Todd Rosenblu. Head of Research at Betafi and Michael Sonnenstein, CEO of Brayscale Investments. Todd, I'll start with you. Right now, growth is falling to the wayside, and there's a lot of talk about 2022 being the year of the dividend. Are you seeing that story play out so far? We certainly are.

We're seeing near-record inflows to dividend DTFs close to $50 billion in the first half of the year. And what we're seeing is that advisors are increasingly looking. to dividend strategies as a form of income. We recently did a survey of advisors at VETI, and dividend strategies were most popular in terms of getting income higher than corporate bonds, higher than treasuries, higher than more narrowly focused sectors like real estate.

We're seeing dividend to ETFs like HDV, which is the high dividend yield ETF from I shares, be popular. We're seeing Schwab U.S. dividend, the ETF, also gain traction. That's a more dividend growth, but we're also finding is that advisors are doing more homework to understand the differences between ETFs.

So for example, HDV is heavily weighted towards a handful of sectors, including energy and health care, but a more diversified high dividend yielding at ETF, the ticker is SDOG. It's the Alps sector dividend dog ETF. That's more equally weighted across the sector. So it's important to do the homework and understand the differences between these dividend ETFs, but they're really gaining traction this year. Yeah, and you're also seeing a lot of activity around ultra short-term bond ETFs as a safe haven play.

Tell us about that. That's right. So this category, which is as less interest rate sensitive as you can get within the fixed income universe, they're not cash, but they're cash-like strategies, duration or interest rate sensitivity less than one year. You've got ETFs that are index-based under the ticker BIL, which is a State Street product. you've got actively managed ETFs like JPST, which is a JPMorgan product.

Collectively, these ultra-short bond ETFs have pulled in $25 billion. For perspective, they only have $75 billion overall. So I'm sorry, $95 billion overall. So we're seeing this asset base grows significantly, and it's another one of those trends we're watching here at VETify. Will, any thoughts or reaction to these dividend short income plays? Yeah, I think it's understandable in the sense that a lot of dividend stocks tend to be synonymous with more value plays. And that's clearly been the theme in equity markets.

One of the main themes in equity markets this year is people getting out of growth names that typically don't pay much of a dividend, if anything at all, and into cash yielding names such as these value stocks. I think that's something that we've seen in our own business on the income side, that people are really, prioritizing cash and obviously potentially coming into a recession, that's going to be a lot more important. Of all the sectors bucking the trend, commodities were perhaps the brightest spot garnering $15 billion in inflows. Investors are getting a lot of mixed signals, though, from the economy. Painting a confusing picture around inflation, we have crude prices falling, but no sign of any real relief at the pump yet. And industrial metals like copper and aluminum are getting

crushed the Investco DB base metals fund, ticker DBB, has fallen to a 52-week low. Will, you've been tracking this one. What's behind the drop? And is this, in fact, a hopeful sign for the Bulls as far as the peak inflation story goes? Yeah, I think that, you know, clearly we've seen some softening in commodity prices over the last few weeks. And indeed, actually, if you look at all the major commodity prices around the world, all are now back or below where they were on February 22nd when Russia invaded Ukraine, with the exception

of one major commodity, and that's iron ore. So I look back at the broader trend, which started at the bottom of the market in 2020, when oil and the rest of the commodity complex bottomed out with the market. And if you look at the Bloomberg Commit, or our ETF, COMB, ComB, we're back down to where we were on trend. It's still up 10% year to date, which obviously is great compared to most things at the market. But I think a lot of that premium that we saw, particularly over Russia, Ukraine, has now come out of the market. Todd, where were some of the most popular bets

on commodity funds placed this year? Well, we saw demand for precious metals-oriented ETS, like GLD and IAU. Those are some of the examples of those pure gold-oriented ETS. We've seen also greater demand, perhaps, for the more broadly diversified. suite of commodity ETFs. You mentioned in Vesco earlier. Invesco has an ETF PDBC which is a diversified ETF. It has exposure to those precious

metals as well as exposure to agriculture, energy, a whole bunch of these different commodities sectors. You can get exposure to that. We're seeing advisors gravitating more towards that. We did another survey recently as part of a webcast that VETI and we're seeing advisors want that diversification. They like gold, they want exposure to that, but they also want exposure to those other bond sectors. Speaking of gold, Will, I want to get your thoughts on this. We're seeing the U.S. dollar hit its highest level in about two decades. Does gold have any hope of bouncing back here? No, absolutely, because really the question is on the dollar is how long can this last?

So as you said, this is an environment where we have a really strong dollar, but historically, your gold prices have responded negatively, and it's one of the main reasons why gold is down today. But if you look at other currencies in the world, which are not doing as well as the dollar, you see gold up at highs or even in some cases all-time highs depending on the currency that you're looking at. So I think that this is really a question of gold that's done well in my mind to hang in here at these levels, given the pressures that we've seen from the dollar in this rising interest rate environment. But I think that the longer term picture here is rates start to come down or at least to be stabilized from these levels.

And if you see some dollar weakness, I think gold is well positioned. All right, let's switch gears here. The battle for a Bitcoin ETF rages on. Last week, the SEC rejected yet another proposal for a pure play Bitcoin ETF, blocking a move to convert Grayscale Bitcoin trust into an ETF, and Grayscale is now suing to contest the SEC's denial. Michael Sonnenshai is the CEO of Grayscale, and Michael, you believe the SEC is being inconsistent

and unfair. Make your case. Well, Seema, first of all, great to see you and thanks for having me. You know, when we look at how the SEC is treating Bitcoin investment vehicles, the evolution of that has gone from not allowing any Bitcoin products on the market to allowing Bitcoin futures products on the market under two different sets of rules and regulations, but continuing to deny spot Bitcoin ETS from coming to market. In the case of GBTC, which is today the world's largest Bitcoin investment vehicle, we were simply asking the SEC to hold this product to a higher standard to give it greater investor protection and give greater risk disclosure for investors and converting would unlock billions of dollars of unrealized shareholder value. So the fact that

the SEC has shunned the opportunity to do so is really disappointing and obviously we vehemently disagree with this decision. And honestly, it would be their chance to bring Bitcoin further into the U.S. regulatory perimeter when you consider that these markets that underpin both the futures and the spot are in fact the exact same Bitcoin exchanges we're talking about. We've, of course, Michael, seen consistently the SEC being concerned about fraud and manipulation when it comes to a spot Bitcoin ETF. So why do you think your case should be different and why do you think you should get a different response from the SEC? Well, again, we now have several Bitcoin futures ETFs on the U.S. market. We actually also have

the first short Bitcoin futures ETF on the market. Now, underpinning those ETFs are, in fact, Bitcoin futures contracts, and their pricing and valuations are derived from several spot Bitcoin exchanges. It is those same exact spot Bitcoin exchanges on which GBTC and lots of other Bitcoin spot ETF applications are relying on for their pricing and their valuation. So the inconsistent treatment here by the SEC allowing the futures products to trade, but denying the spot products to trade is not looking at what is essentially the same exact market through a like lens here. In fact, the treatment is quite disparate. Okay, interesting. And Michael, if the SEC does not budge, is there an opportunity to bring these ETFs to other markets,

international markets where the ETF could be accepted? Certainly. I mean, what we've seen is countless other jurisdictions around the world launch spot Bitcoin ETFs. You've seen them have a lot of success in Canada and Brazil, parts of Europe as well. And ultimately, I think what we're going to see and what we intend to see is working proactively with the SEC and other regulators here in the U.S. to really answer that White House executive order from earlier this year to engage on crypto issues and ultimately develop regulatory frameworks that create consistent treatment and develop frameworks that can actually allow businesses to grow and not squander innovation here in the U.S. as it relates to crypto. Let me turn to Todd. We've certainly watched this battle play out for seven years. years now, what will it take to get the SEC to finally change its mind on approving a crypto ETF, in your opinion? Yeah, I think the SEC needs to gain comfort and believe that there is not going to be fraud

and manipulation tied to a physical spot Bitcoin product. And they don't feel like there's enough clarity related to that, whereas they believe there is investor protections within an ETF through BITO. Michael was talking about one of those Bitcoin futures-based ETFs. They've made a distinction between a futures-based product and the regulations that are tied to it and a spot-based. And I think it's hard to be able to overcome those challenges. I wish Michael best of luck in the lawsuit, but it's hard to convince the SEC that there isn't going to be fraud and manipulation when that's what they're clearly asking the asset managers to disprove time and time again. Well, this is certainly a developing story. Michael, keep us up to date on what you hear.

We'll be tracking your progress. That does it for this week's episode of ETFEDs. I'm Simam Modi, filling in for Bob Bassani. Thanks to everyone for tuning in, and just a reminder, you can always find all of our latest shows and podcast episodes online at cnbc.etfedg.com. InvescoQQQQQ believes new innovations create new opportunities. Become an agent of innovation.

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