ETF Edge - Thematic Tech Trade: Getting Love Again in 2023 1/30/23

Episode Date: January 30, 2023

CNBC’s Bob Pisani spoke with Jon Maier, CIO of Global X ETFs, and Kevin Simpson, Founder and CIO of Capital Wealth Planning. After a dismal year in 2022, thematic tech is back in a big way – especially with the rise of new technology like ChatGPT. They discussed the thematic tech trade and got to the crux of what’s driving these gains – digging into whether investors are seeing any signs of a bottom in technology stocks and ETFs just yet. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

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 interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll discuss the thematic tech trade. After a dismal year in 2022, thematic tech is back in a big way, especially with the rise

of new technologies like chat GPT. We'll talk about that. We'll get to the crux of what's driving these days. gains and debate whether investors are seeing any sign of a bottom in tech just yet. Here's my conversation with John Mayer. He's the CIO of Global X ETFs and Kevin Simpson, founder and CIO of Capital Wealth Planning. John, most of these thematic tech ETS that you overseen are so famous for, they saw big outflows in 2022. Some of that seems to be reversing, certainly at least on the price side.

If you look at flows here, is there any signs investors are trying to call some kind of bottom in tech in 2023? Can we divine anything out of these movements? We'll get a lot of bad news in 2022, yet returns were terrible. And there was a huge amount of tax loss selling. In 2023, money is flowing back into the market. You are seeing thematic ETFs do rather well relative to the overall tech market, and that's because of this huge sell-up. Also, there's some tailwinds. You know, we're hearing a lot about chat GPT, the AI component. There's some tailwinds with respect to the Inflation Reduction Act and electric vehicles. So I think there's greater interest because of some of the beat down prices.

Valuations are better. And you're still seeing some top line growth, particularly like cybersecurity, which is actually underperforming relative to some of the other thematics in the space. I'm going to talk about cybersecurity in a minute. Now, Kevin, you use ETFs in your portfolios as a wealth planner. Tell us a little bit how you utilize ETFs. And what type of ETFs do you use? Are they plain vanilla index ETFs?

Is there a role for the type of the thematic ETF that John manages? Well, not to pivot too much on the introduction, but I actually am a manager of an ETF, and I work with financial advisors like John does who use ETFs within their practice. So I'll speak from the perspective and the podium and represent the financial advisor because those are in so many ways the clients that John and I call on. The advisors that we're working with today, Bob, are absolutely looking at diverse ETF exposure. And the thematic process is something that they're really benefiting from because ETFs in general, as you've done a great job for years talking about, provides so many opportunities for financial advisors.

But looking at what the performance, poor performance in some cases was for 2022 and how strongly these things have recovered out of the gate for 2023 is a hot topic of conversation. not just with financial advisors, but also with their clients. So tell me a little bit about how, I mean, thematic tech was a really hot topic. John and I, we talked about this. I had them on all the time a few years ago when they were all of the rage. As a, put on your advisor hat here.

Is thematic tech something you're advised people on? Is plain vanilla a better way to go? I mean, as an advisor, how do you, you feel about this kind of subgenre? Well, I think like anything, you know, financial advisors are using diverse portfolios and building these models and building these portfolios with exchange traded funds become so much easier. You know, when I got into the business 30 years ago and the concept of an ETF was not even on our radar. I know that SPY celebrated its 30th anniversary, but it wasn't something that we had really heard about. But absolutely over the past 10, 20 years,

we've just seen an incredible adoption. So financial advisors are looking at ETFs for every aspect of the asset allocation model, be it thematic, innovation, core equity blue chip, which is the world in which I live in, as well as inverse ETFs to hedge the downside. And I think very attractively right now, fixed income. So it really runs the gambit. And what I think that, you know, this conversation can really help advisors think about is in that asset allocation model, what should they be talking about to clients? What should they be building in right now? And are innovative ETFs and thematic ETFs, something that they should be revisiting? Yeah, you know, I have to say that the Jack Vogel in me, Vogel being the founder of Vanguard, I can hear him down up there

in the heavens saying, you know, Bob, I know you like talking about these thematic tech ETS, but there's mean reversion in all of this stuff. Eventually, the stuff comes back down to earth, it goes up and it comes back down. This is why Jack was such an indexing guy. And I keep hearing that, even though I talk about it because people are interested in this. People are interested in trying to buy the next winter and figure out where things are and people are interested in tech. But you understand the point. Jack Bogle in me says we've seen these movies before. Well, you have to think about it. Thematic is innovation. You think about robotics, you think about video games and cloud computing and cybersecurity, these are things that should be included

in a portfolio because they're forward-looking. They're basically taking the view that next time it's going to be different than the last. But the question is, how do you put that and contextualize that into an overall portfolio? So at Global X, I run 13 different portfolios. Several of them are asset allocation models. We put a small amount of thematic disruptors into, say, a moderate portfolio of five or six percent allocation because you want to be exposed. You said media reversions. Yeah, some years are going to have great performance. Some you're going to have poor performance. And with an ETF, you can't, you get a collection of companies. You get 10 ETFs, like in the portfolio that I manage. You have 600 underlying companies. You put this

into a broader portfolio. You add a little bit of risk, but you're also providing that exposure for when, say, right now, we're talking about GPT, where robotics and artificial intelligence are playing out. John, do you do this, too? I mean, he's, excuse me, Kevin, John runs some model portfolios out there. He's got a thematic ETF model portfolio. There's, I think, 10 ETFs in him, eight of them are yours, and they're available on different kinds of platforms.

Is that kind of where this industry is going, sort of figuring out off-the-shelf solutions to these kinds of things? You want a thematic tech? Okay, here's a broad, you know, a bunch of thematic tech. buy it a single product off a different platform, Merrill Lynch, for example, or something like that. I think any time you can get some of the heavy lifting done for you, you know, it helps financial advisors focus on what is so important to them, which is serving the client. Financial planning is a lot more than just making investment decisions. In my world, I, like you've got John Bogle,

you know, I kneel to alter of Benjamin Graham. So we invest in 25 to 30 stocks. Some people say you have a concentrated portfolio, I would argue as he did, that that's well diversified and, you know, getting too far away from that, you start to see over-diversification. But at the same time, the financial advisor who's able to utilize these thematical ETFs as a portion, and it sounded like John's explanation, some of these represent a smaller piece of the puzzle, which is probably extremely appropriate. So where I might live in a very boring world of a blue-chip dividend growth, I know for a fact that all the financial advisors that we're lucky enough to work with don't have every penny of their asset allocation with just R1 style box.

So moving in the direction of Global X and what John's doing with building models of ETFs, I think is absolutely where the industry continues to trend. And sometimes we're lucky enough to be part of some of those models. And it's really neat to see how asset allocators and other financial advisors who may be building these models themselves are you to be doing these models themselves are you to see. utilizing the different portfolios, whether they're innovation strategies, whether covered call strategies, or whether they're passive index based. I think it's the next generation of ETF investing is absolutely asset allocation and model-driven.

Yeah, watching the development of model portfolios is really wonderful to see. You mentioned chat cheap EBT. I'm going to go down this rabbit hole with you because I just find this endlessly fascinating. I've been playing with this since it came out in November. you've got a couple of ETFs that interact with the AI theme of the cloud computing ETF there's the robotics AI ETF as well

I'm wondering if we we've been talking about the software as a service been around for 20 years AI as a service this concept of being able to set up an AI

system or an AI piece of your technology and then charge a subscription for it after you have you know, essentially subscribe to it for ChatGPT. This has been talked about for years. Is it actually now becoming feasible? Can we have companies that will utilize ChatGPT or something like that as part of it,

its service and charge a subscription can make money off it? The quick answer is yes. So think about ChatGPT came out, was launched by OpenSSI in November. In five days, there were a million subscribers. And that's with no advertising. My son tried to sign up yesterday. He couldn't get in. He's on a waiting list.

So if you actually look at the interface in the playground, it's very innovative. You type in an ETF versus a mutual fund. It gives you a very cogent answer. If you think about how this is going to be used, it could be basis for papers. We can't quantify how good that information is because it's scraped from the web.

But I do think this is like the very beginning of the services, and it's going to be, you think about Microsoft is investing, billing $2 into this. They're not doing this out of their heart. It's going to be integrated into what they do. The question is, can you get a significant revenue stream from another company by licensing this? That's what I'm not sure of. It seems like you could.

Playing with this for the last six or eight weeks, it seems very obvious to me. There's going to be some stories down the road about people doing stupid things. So I asked that simple things, like give me an itinerary going to, you know, uh, northern Italy and it makes suggestions. It's, it's already suggested hotels that are not there anymore. Just don't put your tax return. A lot of crazy. Well, that's what I'm thinking of, like, what, I'll bet you there are crazy people who submit their tax returns and say, could you organize this more efficiently? Can you get me more tax deductions? And they, of course, this is all kept, right? This is all stored. So people submitting private information on

their personal life, their tax returns. All of this is stored, right? There's got to be a story down the road about this. You know, John Smith submitted his tax returns to chat GPT and said, could you get me more deductions? And now they have all of his tax returns, essentially. There's no question. People are going to put information in there. There's malware already being created because of the inputs in chat GPT. That's why you need cybersecurity. And that's going to be an area that's going to continue. I mean, that's a recurring revenue stream in cybersecurity. Has underperformed this year relative to some of the other themes. Why is that? Why have, I look at some of these cyber security stocks, and they're not doing that well this year.

This is the one cybersecurity ETA bug is underperforming the S&P. It's the only thing in your portfolio here that's kind of underperforming. Yeah, and it's the top hole. You're seeing revenue growth, top line revenue growth being very strong. In the third quarter, you saw private equity activity slow. In the fourth quarter, it started to pick up. Why is cybersecurity stock underperforming everything? I mean, electric vehicles are up 18%.

Cybersecurity is up 4%. You know, we believe you were in somewhat of an economic slowdown. You know, where can companies save some money? Think about it. You have gates. You have sentry guards. You have weaponry. You have moats and alligators.

What can you? And what are they doing now? They're just having a man with a whistle. As soon as they're a cyber attack, all of these needed expenses are going to continue, and you're going to see more spending. So is chat GPT going to be a new sub-industry for cloud computing, essentially? I mean, is that literally, does it have that potential? I'm trying to figure out who's going to make any money off of this.

A lot of data is going to the cloud. It can all be stored locally. So, of course, there's going to be a lot of cloud services that are going to be required, another recurring revenue stream. So I do think that when other companies like Amazon, like Apple and Google, of course, they are going to create their own bubbles of AI, and certainly, They're going to need more services. Kevin, you have any thoughts on this?

I mean, what seems rather obvious to me is AI services replacing TV reporters. We already have some basic services. You know, I don't know if you've noticed this, but AP already has a service that will take basic economic data, and it's an AI that will turn it into two paragraphs, and it's actually pretty good. I mean, it's as good as I would have. If you only have two paragraphs and say what you have to say, it does as well as I would do, actually. It doesn't have deep analysis, but it doesn't. And what about replacing financial advisors in the future?

We already have rudimentary programs that do that, Kevin. Any thoughts here? None of the paragraphs that I've seen Bob have come close to your work, so I think we've got a long way to go before we need to worry about it. I'll say that in the next contract negotiation. Make sure we make that clear. Thank you, Kevin. Number two, from an active management standpoint, you know,

I'm not convinced that we're going to be put out of business tomorrow. either from an index-based analysis. I'm sure they can do a really good job. You talked about how the story ends, and we know how it ends. We've all seen the Terminator, so I would be very reluctant to be putting too much of my personal information anywhere. You know, we've been taught that for so long that with this new and fun technology, to John's point, it's just a, it's ripe for hackers and pirates and thieves. So I would be extra careful. Now, from an investment thesis, we own Microsoft in our exchange traded fund. In Devo, we own a 5% position in Microsoft. As John mentioned, they've allocated a tremendous amount of money towards this technology. So we're paying attention

to see how they can monetize it. We also own Apple, which I know is as with Amazon and Google, kind of working in that same cloud space to build their own islands of this technology. So, you know, how do you make money on a neat thing is always a great question mark? But for us, We're going to focus very heavily on these companies that are really producing revenue and maybe not the ones that are the exploratory, hoping to be the next Microsoft. We're going to stick with Microsoft. I want to move on and talk to you about Devo in a minute, but I just want to finish my final point about chat GPT.

And that's the sort of other downside to this. It creates an environment for individuals to create malicious software with very little coding skills at all. You can essentially tell her what to do. I would think the cybersecurity threats would actually increase under this, under ChatGPT. And yet, as we mentioned, the cybersecurity stocks are underperforming this year. Maybe that has nothing to do with ChatGPT. But you get my point here. I mean, you can create malicious code now out of this thing.

And it's surprising, I bet, how buggy some of the software is that you can find exploit. Yeah, I'm sure. I'm sure it's already being created. And I don't know if they're necessarily tied. I think that cybersecurity was kind of, you know, with the beginning of the Ukraine War, which is about a year ago, cyber security did very well. And that kind of fell off the radar. As soon as there's a big cyber attack, I do believe that companies will continue to spend. You know, we are going into a weakening economy.

I do think companies are trying to preserve capital where possible. But they're going to have to spend where necessary. And as soon as you see that attack, as soon as you see the threats to continue, spending will continue. I have no doubt. It's a longer term play. We always say themes take five to ten years to play out, and I expect that to happen. Yeah. Kevin, I want to go back to your point earlier, a slightly bit of a left turn here, but you run the Amplify, Enhanced Dividend income ETF. DIVO, DVO is the symbol. So this is actively managed. We've talked about these kinds of actively managed ETFs last year a lot. They provide income. You select stocks from the S&P 500 index, and then you overlay it with a call right. strategy, essentially collect income. This was a big hit in 2022. You outperform the market and

others of these covered call strategies outperformed as well. How do you feel about it in 2023? I mean, the obvious point here is if the market keeps rising, you give up upside at that point, right? Yeah, yeah. I mean, we run a very conservative covered call strategy. It complements the covered call strategy that John and his firm manage as well. I think they're there are a lot of synergies between the two. You know, I've been doing this for a really long time. So to me, it's not a question of because something worked last year. There's going to be a different theme next year. We're not really expecting there to be a whole lot different economic outlook in 2023, as we saw in 2022. You guys had a great discussion at the start of the show talking about

the enthusiasm here out of the gate in January, repositioning, window dressing, technical trading, getting some positions back on that were sold for tax loss purposes, maybe some of these things were grossly oversold last year. But from our lens, it's not a story of year to year what's really happening over the short term of the economic cycle, but just really investing in blue chip companies, paying dividends. And that's where you get most of your return. I mean, you had a statistic that you put out a week and a half ago. I even used it in some of my commentary because it was so powerful. Looking at the S&P 500 from 1926 until today, and that revision to the mean if you're getting a 10.2% return on the S&P 500 and to John's point, some years it might be

up 30, some years it might be down 30. But that's what we're all in this for. If we can get a good solid double-digit return. But what was most fascinating about your piece was that 39% of that total return, almost 40% came from dividends and distributions reinvested. So if we can generate dividends and option premiums for clients, we've done half the heavy lifting, whether we get a soft landing or a hard landing or we go into a recession or not. We own companies that have EBIDA, we look for low multiples. We want cash on cash to shareholders. And we want those dividends to be increasing every year. Because if you give me a raise on my dividend, that's a hedge against inflation. So I don't look at this as something that worked last year but won't work this year. Just like you with

Bogle and myself with Benjamin Graham, you know, these things work for decades. And that's why, you know, we're so passionate about how we are active managers, especially in the absence of the zero interest rate environment. Yeah, and do you want to say something? Yeah, to Kevin's point, these covered call funds, they're consistent. They provide high dividends. Investors like them. They don't typically sell them easily. We don't see meaningful outflows, even last year. So the investor sticks around because of the dividend. You may not get the full upside, but say if it's on the NASDAQ, you've got a very high 10 plus yield, a little bit of a little bit less on the S&P 500 or small caps, but it's consistent. And people like consistency of the

dividends. Good point. And those you don't know what Kevin was referring to, I did a story a couple of weeks ago about total returns on the S&P 500 since the 1920s. And if you look at total returns, which is price plus the dividend, 39% of the total return was provided by dividends, providing they were reinvested. And what happens in reinvesting the dividends is you harness the power of compounding interest, which when I talk to students who come down here, high school students, I say if there's one thing you want to understand, it's the beauty and the power of compounding interest. There really is a big difference between 1% and 2% returns a year over decades. And the numbers get very large. They don't look like much in the beginning, but over decades,

they look really, really large. Kevin, I wonder if you can just give us your thoughts on the stock market right now. There's a lot of debate about we've had a nice rally, and yet The market's trading at 17 and a half, almost 18 times forward earnings. That's traditionally a fairly high multiple, certainly not a recession multiple at all. Your thoughts on the market right now? Well, I tend to be a little bit more pessimistic as I'm looking out over the landscape after what we've seen in January. To your point, multiples are a little bit higher than maybe they deserve to be,

considering the fact that the Fed's not done raising interest rates yet. Now, every time you see another interest rate hike, it puts compression on multiples. So that's a problem. As far as earnings are concerned, you know, I don't know that we've seen every one of these interest rate hikes really priced into earnings. Earning season has been better than feared. But when can't we say that? I mean, most of the time, we set the bar so low that we can come out and beat it.

So I'm a little bit concerned that we might be a little bit more optimistic on earnings and a little bit more inflated on multiples. So when you project out at the end of the year, it's almost like I feel the market's trading where it should be in December of 2023, not necessarily January. So we're probably in store for some volatility, range-bound market.

And the thing that could change that, the thing that could be the start of the next bowl market and really thrust it forward would be the Fed decreasing interest, would be that actual pivot. Markets will get excited when there's a pause, but a pause isn't a pivot.

when they start lowering rates, that's when the market takes off. And I'm just not sure I see that in this calendar year. Well, there's certainly not this week. I can guarantee you that Jay Powell is not going to say, Hi, folks, we have won against inflation. And by the way, you can look forward to us reducing rates later in the year. Guarantee you he's not going to say that. So what is he going to say this week?

Well, he's going to raise 25 basis points. And he's going to say that there's still inflation in certain portions of the market, wage growth. There's less good spending, but more service. spending. So inflation, you know, if we hit a recession, it'll be a shallow recession from my perspective, but this is a very unique situation because we're coming out of this pandemic. I do expect that we'll experience volatility around the debt ceiling. That's going to be an issue, and that's probably an opportunity to buy the market when it goes down because it's certainly

going to be a discussion point in a few months down the line. I do think the market looks out about four quarters. A lot of this negative information is in the market. interest rates are going to stay elevated for a period of time because they have to bring inflation down. It doesn't mean there's not pockets of opportunity. I do agree with Kevin. This is probably a range-bound market. Covered calls is probably a good place to be in that market. Okay.

We've covered a lot here today, folks. Theomatic tech and dividends and market prognostications. That's what we do here every week, bringing you more interesting news on the ETF market and everything around it. That does it for this week's ETF Edge. My thanks to John and Kevin. And remember, you can see all of our shows on our website. that's etfedge.cnbc.com, and you can hear the show on our podcast as well. Now, next week, I'll be at the ETF Exchange Conference in Miami Beach, Florida.

I'll be talking with the cream of the crop of the ETF industry as they gather for the largest ETF conference in the world. Stay tuned for that. Everybody, Aba Healthy, happy and safe trading week.