ETF Edge - The power of themes with Fundstrat’s Tom Lee 6/30/25

Episode Date: June 30, 2025

Is the concept of the “stock pickers” market being replace by a “theme-pickers” market? Plus, a crypto conundrum and some international ETF intrigue.       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 Invesco QQQ, proud provider of access to innovation for the last 25 years. 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 you, the investor out there. I'm your host, Dominic Chu. Now, with the S&P 500 at new record highs, and investors, investors reluctant to go risk off? Has the idea of the stock pickers market been replaced by a

theme pickers market? Here's our conversation with Thomas Lee, the chief investment officer at Fundstract Global Advisors, alongside independent ETF expert Dave Nadeg. I'll start with you, Tom, about this idea of stock picking versus theme picking. And in this case, you are actually putting together and advising on an ETF. product that goes into theme picking that then gets into stock picking. So take us through what your construct is for how to pick themes and stocks. I would be glad to. It really has its genesis and in FundStraat's approach to research. Our clients and we now 11 years and running know we're a thematic based research firm. So we do

long story arcs. We look at population trends and one of our initial white papers was the idea that there's generational traits to be made. So in the 80s, retail was a boom because women were entering the workforce. And retail stocks were the best performing subsector for 20 years, actually doing almost 160,000 percent return. And then in the 2000s, late 90s, 2000s, the big story arc was internet, which is the Mac because anybody who made money in retail would have thought the internet was a terrible idea. And so young people bought the internet story arc and they and internet stocks have been amazing and social media was the set the next wave so we said let's think about the themes that drive

markets for the next 10 years and we created a research portfolio called granny shots which identified these seven important themes and we update that every year but that initial theme-based portfolio was labor shortage because in 2018 we said there was a global labor shortage coming which equals AI We said there'd be concerns about cybersecurity that follow that, which was another theme. Energy security was another theme we thought about because we said, you know what, people are going to want to secure their power supplies. It's actually more important today with AI. And we looked at monetary policy, the business cycle, and then we layered in some tactical and style themes.

So these were the basis for what we said, like this is what drives investing. And then we said, okay, let's buy the best, let's find the best stocks in each theme. But if you buy the best stocks in each team, then you're hanging your hat on a single idea. So we said, let's be like Rick Berry. Let's do a correct physics basketball throw underhanded. You know, it's the correct physics way to do it. It doesn't look sexy. Oh, hence the granny shots.

Correct. That's the what, because you're talking about the underhanded free throw. And it doesn't look great, but it makes 90% of the shots. So we said a granny shot is one where a stock is tied to two themes, because now you're not sort of saying I'm putting it all into AI or all into cybersecurity. and ideally it's three or four. So our granny shot says a stock to be included has to be at least in two themes. And we end up with 35 stocks of the S&B 500.

And we're saying the other 465 are good, but these 35 are tied to the seven most important themes driving the stock market. All right. So this is a mix of qualitative fundamental analysis and quantitative box checking, if you will, things that meet certain parameters. When you think about the way, Tom, that you construct the portfolio, you're talking about under 10% of the entire S&P, which is kind of like your target. You're even less than about 7, 6, 7% of the S&P 500. When you look at that, how exactly do you come up with those ideas?

When they tick those boxes, right, what exactly do you look at in terms of the mix of qualitative and quantitative factors? And then what does that lead you down towards? What types of stocks make those seven themes ticking off at least two of those boxes? Well, the seven themes really are sort of the most important starting point because we're like, you know, this got to last for seven years. And we got to figure out who the winners are. So we find and make a list of stocks tied to those themes. In other words, the strongest names for any single theme.

But that is including what we call DQM. So we do a quantitative analysis. We're not buying junkie stocks. we want to make sure that they generate earnings and high ROIC. But then the process of ticking off and saying, are you in two granny shots, is actually mechanical after that, because we have siloed portfolios of 60, 70 stocks each.

And sometimes we wonder, are we going to end up with like five granny shots, but we always end up with like 30? All right. And we rebalance every quarter, but it is very fortunate. And it starts to pick up some really important themes. Like when we started to think about, millennials, then it had us focus on things like Robin Hood. And, you know, InVideo, because of

labor shortage was included since 2019. And Tesla was an AI automation play at the time. So Tesla and Nvidia are examples of, we told our clients, these are granny shots, don't think about trading them because they're tied to really important story arcs. All right, Dave, the idea of thematic investing is not new at all. In fact, the ETF market and ecosystem is the perfect play. to talk about real-world examples of thematic investing, thematic-based ETFs. Maybe some context here from your side of things about the evolution of thematic investing. Tom has laid out kind of where the rubber meets the road as a sub-advisor for a fund, taking us through the methodology.

But maybe you can provide us a little bit more of that kind of story around just how thematic investing has gotten to where it is today and where maybe the origins were. Yeah, I mean, we started the ETF market with narrow exposures. We think about these big beta exposures that now have all the assets. But, you know, ETFs 2 through 16 were targeting small emerging markets countries. And very shortly after that, we had the select sector spiders, which was really the first place thematic investing kind of got packaged up. And those are passive and they don't have an active manager picking and choosing sectors or themes

or picking and choosing the stocks. It's just raw GICs classification. The big evolution we've seen very recently, and Tom's very much a part of it, is the move towards active management. Active management, while it's less than 10% of the assets in ETS, is starting to look at like 30 to 40% of the flows, particularly in things like equity, where over the last three months, we've had 40% of the flows into active equity into funds like Tom's. I think that's a really logical and natural expansion of what we've done in ETS, especially as it seems like the markets are accelerating. change happens even faster. And so I think having an active management overlay, both on the stock selection and the thematic part, can make a lot of sense for investors. It's certainly easier for investors to understand. My question to you, Tom, would be, I love your approach. I love the themes that

you're in. What would it take for you to recognize that a theme is no longer valid? For instance, you have like loosening financial conditions. I'm not sure that's the word you use. That's one of your thematic sort of silos. At what point would you say, you know, know what, we were wrong. That theme isn't really what's going to drive markets or this is exhausted. We've exhausted the potential revenue from this theme. We need to now come up with another bucket for those granny shots. Yes. Well, that's where Fundstra's research team comes into play. We have about 20 research analysts and we know there's expiration dates. I mean, think about biotech in 2016. If that was a granny shot theme that had an expiration date, we never did something with COVID or the GLP ones.

We were thinking about that, are these 10-year story arcs or these one or two-year? And we decided these were sort of one or two-year. So to us, there is going to be expiration dates. One thing is very obvious to me is when I look at the wireless industry, I grew up as a wireless analyst, and I covered that industry for 17 years, went from 34 million users to 9 billion. So hyper growth, exponential grower. But those stocks peaked relative to the S&P one-third into the cycle. Every sector, infrastructure, handsets, spectrum.

So it tells me that at some point, even if we say AI is going to last 20 years or cybersecurity, one-third into the cycle of that growth cycle, the stocks are going to become market performers. So we are really aware that relative performance is something we have to be mindful of. of and that's where our technical research team is very helpful. Mark Newton and we do something called Super and Sleeper Granny. So we review the lists every month and think about the top five, bottom five. And Tireless Ken is our data scientist and we're constantly reviewing themes. And, you know, stay tuned. We have seven themes. Maybe we'll go to eight themes, but we might delete a theme. And, you know, for now, I'm comfortable that energy security, you know, these are durable

themes. There is one that we're almost positive we're going to launch with. And I mean, what's it going to be? That's the, your tease, you got to beg, what begs the question? What is it? Well, you know, we're trying to be, you know, looking at, had 10 years, and there is something very obvious to everyone here. So I don't mind sharing it because the way we express it might be unique is that, well, there's two.

The first one is what I'd call sovereign security. I think it's now evident to me that the mechanisms are in motion for companies to really fix their supply chains within a sovereign border. And that's a change, right? That's not going to just be one or two years. And so there's a lot of opportunities there. And the second thing is, is that, you know, when we first started writing about these themes, this was seven years ago. So millennials was the engine. You have to remember seven years ago, companies like Snapchat had to convince advertisers to focus on millennials. And now they're very mainstream. But that means we need to be focusing on gen Z and then Gen Alpha.

So we might have to evolve our demographic theme to kind of orient towards the younger cohorts. And so these are important adjustments that we're playing with. But when we turn it on, it may not be for a couple years, but I'm kind of sharing our thought process. It's interesting too, Dave. The thought process that Tom just shared took us through the real world evolution of how you evolve or actively manage, if you will, and invest.

strategy, speaking to the point about actively managed ETFs taking more and more market share. The active management philosophy is that one that can get as much traction, five, seven, 10 years from now as the passive management side or indexing side of things had in that first five, 10 years of the ETF life existence in and of itself? I think we'll get some traction. I think it's very hard to compete against three basis point beta as the core of a portfolio. And I think most long-term investors are going to continue to have a passive core. Where Active has gotten a lot of traction, has been in the edges. I would call this a little bit on the edge. You're probably not going to take the entirety of your

portfolio and put it in Tom's fund. No offense, Tom. I think most people will be thinking of this as an explore strategy against their core, which is going to be cheap beta. And I think that's true, whether it's fixed income, whether it's emerging markets, whether it's country allocation, whether it's currencies and commodities and cryptocurrencies. I think people will be looking for what is the base case cheap way to get exposure and are there opportunities to engage an active manager either for raw outperformance or just for better positioning on a risk or reward spectrum? That's the smart way, I think, to think about active management. And it does seem to be how most of the market is adopting it. All right. So the active management portion is also about

actively, actively seeking alpha, right? To find that outperformance, you have a core and you're trying to explore certain places where you can get some of that added edge outperformance. So another big theme certainly has been around finding alpha in cryptocurrencies. It's been volatile, but, you know, Tom, maybe I'll direct this to you. You've been out there in front as well on this. Money seems to be going into Bitcoin funds. For instance, the price of Bitcoin itself, though, is looking rangebound from here. Take us through why, even even with more allocative instruments, especially in exchange traded products, that we are not seeing as much of a price improvement in Bitcoin when there is an actual construct for actually

putting money into it? Yeah, that's a great question. I mean, we know Bitcoin ETFs are the most successful product launch like in history. And then someone says, well, if you're going to collect that much money, Bitcoin goes to the moon. But it turns out Bitcoin's risen, but it's kind of churned. I think what happened is a couple things. One is a lot of these ETFs may have been receiving in-kind exchange. So people have their crypto keys, give it to the ETF provider, and then they just stepped up their basis. So that's not going to push up the price of Bitcoin. It adds to their AOM. Yes, it's a wash. And the second is that

the ones who aren't involved in ETFs, but maybe they have $10 Bitcoin, we have clients that have bought Bitcoin at $100, and now it's $100,000. They're not looking to, they don't care if Bitcoin goes to a million. They are probably sellers at around $100,000. So we're churning the base now because 95% of the institutional world doesn't own Bitcoin, but a very significant portion of Bitcoin holders are sitting on huge gains. So I think this is the churn that's happening in Bitcoin now. But of course, the companies that serve Bitcoin, like Coinbase or Circle have seen huge growth and they've been the best IPOs and the best stock. So it's almost like maybe you won't make money trading Bitcoin, but look at the infrastructure

providers. They've been great stocks. Dave, the question then maybe goes to you from a macro perspective when it comes to exchange traded products versus cryptocurrencies, what's the next big thing? Is it going to be maybe Ethereum-based funds, Solana-based funds, or do we kind of diversify? out into some of the companies that are involved in the Bitcoin ecosystem, Dave? Well, I mean, it's hard to know with a speculative asset like Bitcoin where a top is and where the flows are. In this one case, I'll correct Tom, there is no current creation in kind for Bitcoin. So nobody's been able to magically transform their low basis Bitcoin into new basis ETFs.

But that doesn't mean we haven't seen a lot of folks take their exposure out of a wallet situation and put it into an ETF where, let's be honest, it's a whole lot easier to transact. It's actually much cheaper. Buying the cheapest ETF right now is cheaper than most direct cash to Bitcoin transactions you could make in any crypto exchange. I think that's been very attractive. So I think that's a lot of it as we've seen effectively Bitcoin moved from one wallet to another wallet, the wallet now being on the ETF.

The next big thing to happen in crypto ETFs is probably going to be staking. We'll certainly get some stable coins. ETFs, although I don't think you'll expect to see a huge amount of performance out of those. That's not really what they're there for. They're transaction vehicles. But we have two filings present right now for Cayman-based Solana and ETH staking products. That would allow people to participate, not just in the growth of the coins value, but in its use in the D.5 ecosystem, where you can actually generate significant yields, often a few points above what you might get in a regular, sort of more normal fixed income type instrument. So we'll see those products launched this year, I'm fairly certain.

And then from there, there's a long tail of smaller coins, smaller crypto applications, real world assets, NFTs, pudgy penguins. They'll be product launched there. I'm skeptical we're going to see huge demand like the $150 billion we've seen show up in Bitcoin ETF specifically. All right. So that crypto theme is another one. Let's talk about one more, a final one here. And that theme has recently taken hold is whether international.

markets have been underperforming for so long that it is now maybe time to get into some of those. We're actually seeing even more tailored thematic investing like small cap international ETF exposure. Dave, how nuance can we get about certain places that have underperformed and maybe are expected or predicted to outperform? Yeah, it's tough to get really excited about international as investor because we just went through a multi-year period where anything but the U.S. was a terrible bet. Now we're sitting here if you look at a year to date or since the election or really over the last year, the S&B 500 is actually the worst performing market you can pretty

much find. It's worse performing than all of the core emerging markets. It's worse performing than all of the core developed markets. Now, does that mean everybody should pile in? No, we can explain that deviation. A lot of it has to do with the dollar being down more than 10%. A lot of it has to do with some international allocations themselves moving. out of the S&P and back to domestic allocation. We're seeing a lot of talk in Europe in the UK about redomiciling their retail and retirement assets to de-emphasize U.S. investing. That's a marginal bid on all of those external markets and a marginal sale on the U.S. markets. So we're going to see that kind of pressure. I think it's very tough to make the case that people should be

piling into international markets and abandoning the S&P 500. But if you have to have an extraordinary amount of home bias. If you are 100% U.S. invested, this is a good reminder that international diversification is good for a reason. It helps you zig a little bit when you zag like we have been this year. All right, Tom, the last word goes to you. When it comes to international investing, are you excited about it? Is it something where you feel as though there is notable outperformance to be had, or are you going to be more measured in some of this kind of international versus U.S. type trade philosophy? Well, you know, I'm a stock analyst by my career, right? I start off as an equity analyst, and we have clients in 26 countries. So we visit all these

countries with local exchanges. Over 95 percent of international markets are smid, small mid-cap companies. Of the 25 largest companies in the world, 21 are domiciled in the U.S. There's a reason the U.S. is the sort of the marquee most liquid market. Because once you go outside the U.S., you don't find there's not like a meta in every country, there's not a palanter in every country. These are uniquely American businesses. So I think that if someone's making a bet on Europe, it's might as Dave says, it's probably cheap beta or it's a factor bet. And I don't have a problem with anyone diversifying that way. But if someone says the U.S. exceptionalism is over, so I'm going to be long Germany, that's a real tactical mistake because there's no fang in

Germany, you know, MagSep. Well, now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Independent ETF expert Dave Nadegh continues with us right now. Dave, one of the things that I want to kind of dovetail off of our conversation with Tom Lee about was this investing construct that we're in. For many folks out there who can remember the days of zero interest rate policy or ZERP, Another acronym came to the forefront.

That was Tina, not Tina Turner, but the there is no alternative, Tina, trade. It had to do with finding assets that could give you anything above and beyond a zero return that you got on your money in a bank. So is the Tina trade still in effect now? Interest rates are significantly higher than they were during ZERP, or is there a new Tina trade, if you will, Dave, that's developing? I think that it's difficult to convince most folks that getting 4 to 5% on their bonds, depending on where you are on the curve, is really covering you on inflation. So I think for a lot of investors, the current bond market looks pretty zero return as well, because I don't think people really believe we're headed for a really sanguine 2% inflation

environment for the next four to five years. So to that extent, I think we are still pretty on the low bounds. Yes, we might get some cuts. That's a possibility. But obviously, that's going to be because other things in the economy are concerning. To me, the new Tina trade is there is no alternative to just staying long in the U.S. equity market. I think it's very difficult to argue the combination of geopolitical issues we've got going on, the political environment we're in, even things like the, you know, 12-day dalliance we had with war in the Middle East.

the markets have been so unwilling to sell off for a substantial period of time because there really is no alternative. If you go back to the sort of tariff tantrum in April, where we actually did manage to sell off for a couple of days, we did see a little bit of selling. But I think investors learn the lesson. If you sell in one of those situations, it's going to snap back and you're going to regret it. That's exactly what happened. I think it's tough to create a case that there is an alternative to a core exposure. to the U.S. equity market right now. All right.

So if that's the case, there is no alternative to investing in America. America is the place to be. Yet during your point, earlier this year, we did see some aspects of a move away from that so-called American exceptionalism trade. Now, it was at least at this podcast taping short-lived, right? We are back at record highs in the market overall. But is this something that can keep going? And if it were to keep going, Dave, the big macro question is, what are the catalysts and

what are the factors that go into keeping that so-called American exceptionalism trade intact for the medium to long term? I think you have to ask yourself what would cause a significant number of significant holders to sell, to actually liquidate their U.S. position. I'm not talking retirement plans. I'm talking the Saudi wealth fund. I'm talking about Nordic sovereign funds. I'm talking about the major pension plans of the world. I'm talking about China. For them to sell the U.S. hard, it would imply that there is someplace else they believe will be a better safe haven while still taking some sort of economic risk. I think it's very tough to paint that case anywhere in the world right now. Now, look, there are plenty of problems that the United States faces as a country and as a financial market and I think we should not just roll over and say it doesn't matter that the dollar is down 10%. The dollar being down 10% really matters. That does change the nature of geopolitical and global economics. So yes, I think it's tough to sell against the U.S. but largely because where else

are you going to go? That's why it feels more like a TINA market than a U.S. exceptionalism market. I don't have a bull case where I think the U.S. markets up 20% for the next three or four years over and over again, but I definitely don't have a bear case where I see a selling down 50% staying there. And if you don't believe that, I think it's really tough to argue that you should be parking money and cash in an environment that's probably looking more inflationary. All right. And Dave, one last question before we let you go. What do you think is going to be the next big thing in the ETF market over the next six months as we close out the year? We are going to get a raft of mutual fund share classes coming into the ETF market.

It's going to be a big deal not because thousands of investors want to pile their money into an old Putnam fund or something like that, but because we've got 60 plus firms that are going to be trying to convert their mutual funds into ETFs or spoke off these share classes all at the same time, all over the next year or two, that's going to mean hundreds, if not thousands of new products investors are going to have to to wade through, it's going to start looking like the mutual fund market where you can get 37 flavors of the S&P 500 from 2% on down. You're going to have to be very careful as an investor. I think that's really going to be the story for the rest of this year. What we're going to talk about is a lot of the crypto distraction, but a lot of that's not going to get any assets. It's just

going to be fun to talk about. All right, fun to talk about for sure alongside share class ETFs. Dave Nadeg, independent ETF expert. Thank you very much. We'll see you soon, sir. Cheers. All right, that does it for the ETF Edge podcast. Thanks for listening. Join us again next week or just head over to etfedge.cmbc.com. How does InvescoQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100.

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