ETF Edge - This Year's Top Themes & 2022's "Shiny New Object"

Episode Date: December 13, 2021

CNBC's Bob Pisani spoke with Jay Jacobs, Head of Research and Strategy at Global X ETFs – along with Alex Shephard, founding partner at ETF Action. They discussed the lay of the land for ETFs this year – what the most pivotal themes and trends driving the action were – and what investors can expect as they prepare to ring in a new year for the markets. Plus, while the so-called hot “thematic” trends like ESG and crypto may appear to be all the rage, the flows may be telling a different story. In the ‘Markets 102’ portion of the podcast, Bob continue the conversation with Jay Jacobs from Global X Funds. 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, my heavens, you're in the right place. Every week, we're bringing you interviews and analysis and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on our last show of 2021, we'll get a read on the lay of the land for ETFs this year, what the most pivotal themes and trends driving the action were and what investors can expect

as they're prepared to ring in a new year for the markets. Plus, while the so-called hot thematic trends like ESG and crypto may appear to be all the rage, the flows may be telling a different story. Here's my conversation with Jay Jacobs, head of research and strategy at Global XETFs, along with Alex Shepard. He's a founding partner at ETF action. Jay, you know, I look at the ETFs with the biggest inflows in 2021. see global access fingerprints all over them. Your infrastructure, ETF, your lithium and battery

ETF, uranium, uranium surprise, cybersecurity, all inflows here, 800 million, 3.5 billion this year. I know it's early. What are you seeing, if anything, that is exciting investors going into 2022? But we like to look at this concept of inflection points where you're seeing several macro trends combined to power a theme going forward. Right now we have low interest rates. which make it cheap to borrow. We have rising labor costs, which is making labor more and more expensive. And we have disrupted supply chains,

which is making people want to move their manufacturing and logistics back to the United States. All of that is setting up for a huge surge in spending on robotics and artificial intelligence this year. This is a theme that was very popular in 2017. It hasn't been as much in the limelight recently as people focused on electric vehicles and infrastructure development.

But we think robotics and AI will be a key theme for 2022 as we deal with disrupted supply chains and rising labor costs. I want to talk about robotics, but can you explain why uranium had so much in the way of inflows? What is it thematically that's attracting people about uranium?

It's a play on climate change. As people look at different sources of carbon-free power, they look at wind, they look at solar, and increasingly nuclear power is a key piece of baseload energy production, and uranium is that key input. So people are thinking creatively and broadly about how we're going to reach net zero emissions by 20,

35 and nuclear is a key piece of that. Thank you. That helped explain that. Now, Alex, I hear all this great news. We're hearing about record inflows in 2021, depending on New Year's, 8,000 billion to one trillion. Yet most of this one trillion in inflows went into plain vanilla indexed ETFs. The S&P 500 funds had big inflows, NASDAQ, RUZAC 200, Triple Qs, Russell 2000 at big inflows. I see less than 5% here went into crypto, ESG, and thematic tech. those were the big three we kept talking about.

So what does this mean? Is it good news or bad news that the average investor seems intent on buying the broad market rather than picking winners or losers? Yeah, Bob, I believe that Jack Vogel and all of us is applauding those statistics. And I certainly wouldn't classify it as bad news. And the core beta portfolio is still on top when it comes to asset allocation and building that portfolio. The data makes that abundantly clear.

But that doesn't mean that theme still. don't have their place. You know, these types of strategies can provide investors with exposures and growth opportunities, satellite positions that one wouldn't necessarily find in their traditional portfolio. It helps tell a story about what that investor believes. So, yes, we continue to see the majority of flows moving towards these cheaper beta alternatives, but we're still seeing some flows into these satellite positions. Yeah, you know, I wonder, Jay, what do you make of these flows? You've followed this business for a long time. I mean, I was obsessed as everybody else was with crypto and the failed

or inability to get a Bitcoin ETF through in 2021. I was obsessed with ESG too. I was obsessed, along with you, about thematic tech, the big three. But if you follow the money, it really looks like investors are primarily focused on long-term investing in broad index funds and not on the shiny new objects. Well, these things take time. Thematic investing is still relative relatively new to a lot of ETF investors. We've seen about a third of thematic ETFs on the market launched in just the last year and a half. If you look at the crypto space,

these are brand new products with only a couple months of history. So while the flows are still low in the relative sense compared to the S&P 500s, the NASDAQ 100s, we've actually seen very quick uptake of these funds. And I think as we look forward, we're going to increasingly see crypto and themes being a key piece of people's portfolios, maybe anywhere from 10 to 20% of growth-oriented portfolios going to

portfolios going forward. Really? You know, I want to go back to the robo, because that was really hot, right? So I wonder a few years ago, I wonder if the right time to look again is when the public has kind of lost interest and they're distracted by some new shiny object like ESG, for example. So you had that robotic CTO, robo, right? And that was hot for a number of years that kept going up attracting not only the prices go up, but inflows kept going up. But has it attracted a lot of interest, lately. Is it worthwhile being on the lookout for themes that are not as popular as they used to be, but are still out there at this point?

Well, it's important to try to anticipate the changes that are happening before the rest of the market has picked up on it. And when you look at something like robotics, yes, it has had a fantastic growth story already for the first five years of our fund's history, the fund BOTZ bots. And what we've seen, though, is that it's just it's been a little quieter. People get distracted by some of the other themes. that are getting headlines. I mean, mobility. Elon Musk is man of the year. So everyone's talking about electric vehicles. They've been distracted from, you know, another more, another very powerful theme with robotics. And I think it behoves many investors to be early on that trend as we see it accelerate in the coming year. Yeah. You know, another way to look at this, Alex, is that the flows into passive or index ETFs and active. Put up this chart here, guys. It's 90%

passive and index, the total flows. Now, I know, of course, a lot of ESG flows and a lot of thematic flows are pegged to indexes, but we've been told about the rise of active for years. I mean, look at this, this is only through December 8th, you know, almost $740 billion into passive, $73 billion. I mean, that's 10 to 1 into active. What does this tell us? No, exactly. Active has been such a hot topic for the last, years, but if you look at the space, I mean, there's only about 300 billion in assets following active strategies. However, but I think it's more important to note that just because the majority of products out there in the marketplace are deemed passive, it doesn't mean that they're not

being used in an active way or in a core position. So, I mean, you look at the proliferation of the ETF marketplace. 10, 20 years ago, investors and advisors like didn't have the ability to get creative to trying to create some of these satellite positions. Now you're looking at over or nearly 2,800 U.S. listed ETFs. They now have the tools to tilt the portfolio one way or another based on their risks, their objectives. And it just, that hasn't been there historically. Right. And Jay, thematic tech can be both active and passive, right? My perception is much of thematic tech follows indexes, although some, like Kathy Wood is a good example, would, for example, be picking her own.

at this point. So there is a distinction. Does this matter to you, active versus tech and the whole thing, excuse, passive versus active in the whole thematic business? It absolutely does. The question is, where do people want to make that active decision? Do they want to make the active decision in allocating to the theme, picking something like robotics and artificial intelligence for 2022? Or do they want to make, do they want to have the active decisions being made at the security selection level, trying to pick those winners within themes? You know, a lot of our funds are are passive in index tracking, and we allow investors and advisors to use them as these building blocks in a portfolio where they make the decisions around which themes they believe it.

But we also have an actively managed product that K-E-J-I, K-E-J-I, Kegi, it accesses Chinese tech themes, and it's actively selecting the securities that are best positioned there. So there's certainly room for both. It comes down to where does the investor want to make that active decision, theme selection or company selection within those themes. Yeah, it's not easy to make that decision. I tend to think it's better, the old Jack Bogle in me, it's better to follow a rules-based system than have an active manager.

But that's obviously the core of this whole debate. Alex Kathy Wood is the intersection between thematic and disruptive tech and active management. So if you look at it, we just put this up. Some of her funds have had some of the biggest declines for the year. She is active and thematic, really disruptive technology. would be more accurate for her sense. Have investors seen some of this volatility all this year and said, you know, maybe that's not for me? Yeah, I wouldn't say investors are necessarily done and completely out of the game when it comes to looking at some of the thematic active strategies.

But I think part of it is thematics are still not fully understood by investors and the fact that there can be increased volatility and there can be increased risk. That is what you're chasing and you're looking for above average return. outside of these passive, broad-based indexes. So I wouldn't say they're necessarily out, but it's more important to have that plan in place, understand the risks that come along with some of these strategies before you actually decide to pull the trigger at best of money. Yeah, and what about some of those risks, Jay?

I mean, we're all seeing, you know, Kathy Woods was catapulted into superstardom earlier in the year by making very bold bets, and everybody went along with her. I don't think anybody would disagree on the concept of disruptive technology really changing the world. I think everybody's bought into that idea. I don't think anyone disagrees with the concept of philosophy around it. I think the problem now is what's the price people are paying.

And obviously, you know, this stuff, particularly a lot of stuff that doesn't make any money or doesn't have the prospects of making money several years down the road. There are times when it's appropriate to buy-in and times when it's not. She has convinced a lot of people it was appropriate to buy-in. Now people are debating what's the right price. Well, I think the mistake that some investors might be making is thinking of thematic investing is only looking at technology. You know, we see disruptive technologies as a big piece of thematic investing, but there's

also trends being pushed by changing people in demographics. We have very powerful themes being pushed forward by the physical environment and our changing relationship with it. So just like we would diversify across asset classes, diversifying within thematic is key to avoiding some of these near-term risks. Actually, two of our most popular funds don't have very much technology in them at all. Our lithium and battery tech fund is mostly materials and industrials. And our U.S. Infrastructure Development Fund, our fastest growing fund this year, is mostly just industrial.

So looking outside of tech in the thematic space, I think, has been key for investors to find that diversification and not just bet on long-duration tech sector. Yeah, thematic. We say thematic tech, but you can have thematic without having tech in it, as you mentioned, on infrastructure. Sure. Pot last year was a huge. I mean, this time last year, pot ETFs were all over the place and pot investing. And look what happened to cannabis this year. It's sort of, you know, it's another shiny object that investors sort of moved on from at this point. They had a terrible year. They're among the worst underperformers. And yet, that's a thematic. It's not a tech thematic ETF. So there's my point, though, Jay. Some of this stuff will go in and out of fashion. And there's a there's your global X cannabis E-T-F, POTX. It's sitting essentially at a 52-week low right now. Absolutely. I mean, these funds are going to be volatile in the near term

and hopefully grow in the long run. And what we really try to educate investors on is expect that volatility, be prepared for it, and really be thinking, you know, decades forward with where this theme will evolve. We know cannabis is not going to be legalized federally overnight. We know robotics isn't going to be adopted across hundreds of warehouses in the United States overnight.

These things take time. And because these are concentrated portfolios that can be sentiment-driven in the near term, there's absolutely going to be volatility. So by diversifying across themes, diversifying across different areas, whether it's technology, whether it's infrastructure, whether it's people-in-demographic-led trends, I think that makes for a much more robust approach to thematic investing where we can weather these ups and downs in the near term. Yeah. You know, Alex, I note a lot of these thematic tech funds are definitely. down for the year. Put up something here. You can see some of these big names here.

It seems like there's a lot of tax loss harvesting opportunities out there. Do you think any of that is going on here? Here's some of the big funds that are down this year in thematics. Oh, absolutely, Bob. I mean, you look at across the thematics space. You've got a couple of examples up here, but I mean, there's nearly 100 ETS classified in the thematic space that are down at least 20% year to date. And even more so when you look at the enormous amount of flow,

that went into some of these themes in January and February of this year when they were peaking. If you're not looking at your portfolio right now when you have some of these positions and taking advantage of the fact that you can take that tax loss, you can possibly reallocate, it's something you should be doing. Jay, how do you address that theme? I mean, do you think tax loss harvesting is a factor? I mean, we've been noticeably weak in some of these thematic funds in the last. last week or so. And frankly, even stuff that was popular, individual thematic tech that was big

earlier in the year with the Reddit GameStop. GameStop is a good example here. It's down again today. It's near the lowest levels in many, many months at this point. To what extent does tax loss harvesting come into effect right now for some of these funds? Oh, it absolutely comes into play. I mean, tax loss harvesting is good portfolio management in a lot of cases. I would caution investors, though, is that within the thematic ETF space, there's a lot of ETFs that sound similar but have very different holdings. There's about six robotics ETFs out there. The average overlap between those funds is less than 20 percent, though. So if you're selling out of one robotics fund and getting exposure to the next, just be very

aware of what are the actual holdings you're getting in that fund because it could be very different from what you have today. But absolutely, I think investors should always be considering tax loss harvesting, especially at this time of year. And the fact that we're We have more thematic ETFs than ever before. It gives investors more options, and ultimately that's great for the market. Jay, you mentioned robotics that you're excited about potentially for 2022. What's the thing we haven't been thinking about? Is there something out there on the horizon, some new shiny object that's not quite gelled yet

that you think could turn into a fabulous ETF in 2022? Well, I really like the ag tech and food innovation theme. You know, we've already started to see it coming up as we think about climate change and droughts and wildfires and storms that are disrupting our food production already. On top of that, you have hundreds of millions of people entering the middle class in emerging markets, which is creating all kinds of new demand for more expensive foods like milk and proteins. And at the same time, we have these incredible advancements in technology that are allowing us to use drones in field management and crop management, autonomous tract tract. There's genetically modified seeds that can be more resilient to disease. So I think we are about to hit an incredible inflection point in ag tech and food innovation as we come out of this pandemic and we reassess the supply and demand drivers of our economy at the most fundamental level, which is food and water that people need to survive. Might we see an ag tech ETF from Global X in 2022? You seem to be, I'm trying to let you set something up here.

We already have one, Bob. We have crop, KR&P. We launched it at this. year but it's still very early in this theme and I think investors it's not front-page news and that's a good thing because we're still able to go to supermarkets and buy the foods we want but there's a world where that could be more challenging going forward well the wonderful thing about this game is if the ETF game is and thematics is we don't quite know and the ETF business can set itself has set itself up to very quickly move into whatever is an area of interest for investors we don't

I don't know what it is going to be, but it's going to be very exciting 2022, and I agree technology is going to keep going, and I for one, want a lot more of it. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. Today we'll be continuing the conversation with Jay Jacobs from Global X funds. I like to call them the master of thematics and thematic techs. Jay, thanks for sticking around with us. You know, the one thing that's amazing to me is watching thematic tech.

I love thematic tech because it's easy to understand and it's easy for investors to understand it. I always joke, nobody ever buys consumer discretionary ETFs. Maybe if you're a gigantic, you know, institutional investor, you might. But people buy in terms of themes. They want to buy cybersecurity or they want to go buy semiconductors. And thematic tech provides a way to do that. And yet, I can't help but think that Jack Bogle, who's the guy who's the biggest influence of my life, sitting next to me, the founder of Vanguard, would shake his finger at us and say,

you know, Bob, you keep encouraging these thematic ETFs, thematic tech ETFs, and you know what's going to happen? In the long run, there's mean reversion. In the long run, most of them, if they're really interested in growth areas of the market, why don't they just buy a growth tech ETF, and these companies will eventually go into it? rather than trying to pick winners and losers. Is there anything to that idea? Or how do you deal with people who point, like a Jack Bogle type, that would point that out?

Well, I think there's room for both in a portfolio. What we see a lot of people doing these days is they have a core part of their portfolio that's going to be low-cost, plain vanilla ETFs tracking the S&P 500. But portfolios, some people are managing their portfolios and want higher growth. They want exposure to those themes that are going to benefit over the next several. decades as we are in a very disruptive part of our economy right now. So there's room for low-cost, passive indexing, and thematic alongside each other in a diversified portfolio.

And that's how we're seeing it implemented most broadly. So that's how you position thematics. You know, Jack used to call it slicing and dicing, which is the belief that somehow you can pick certain winners and losers. And he noted that it didn't matter whether you were picking winners and losers in individual stocks or even in mutual funds. So Jack always used, Jack recognized this and used to say, fine, if you want to take it, you know, 90 percent, most of your money should be in indexed, broad indexed ETFs. And if you want to take a certain amount, pick a number, 10 percent, and scratch the itch,

go ahead and do so. And you're saying thematic tech fits in with Bogle's philosophy because that could be the part that you use to scratch the itch, for example, to make the bad. I think it does, but we've also been in an environment where passive indexing has worked phenomenally well for the last 10 years or so. We don't know if that's going to be the case going forward. I think it's likely, and all the research shows that low-cost passive indexing is very good over the long run. But we are in a really disruptive time.

We saw it during the pandemic, how suddenly the entire economy basically ran on cloud computing when we were all stuck at home, how all of commerce, turned into e-commerce overnight as we couldn't go into stores. And all of entertainment went from, you know, primarily live entertainment to playing video games online to streaming on Netflix and watching Tiger Gang. So we live in a world where this disruption is happening really quickly. Yes, you can get some of this exposure already

through passive, diversified indexes. But a lot of these companies are small cap companies. They're international companies where you're probably getting very minimal exposure through those broad indexes. The thematic investing lets people tilt the weight of their portfolio towards these disruptive companies. And I think that's a really good idea during this environment where we're seeing a lot of disruption in the economy. Yeah. I like your point that you made in the show about the fact that there's plenty of non-tech thematic investing that exists.

And that makes a lot of sense, although we don't think about it. The most obvious, I keep hitting on in the last week or so is pot ETFs. Last year, everyone was obsessed with it. We were doing the whole shows on this. And yet it's fallen off the investors' radar this year because, well, it's just difficult to invest in as a group. And it's small and as investors moved on, the shiny new objects, particularly in January and February, when everybody got obsessed with GameStop and Kathy Wood at the same time. And now briefly, investors became obsessed with infrastructure, ETF.

Your PAVE, PAVEE, was one of the most successful of the year based upon at least inflows overall. I'm wondering what else might be out there in non-tech thematics for 2022. Absolutely. I mean, there's two other major segments of thematic investing. We call it people in demographics, which is really kind of the changing consumer habits and changing demographic pressures around the world, as well as physical environment, which is a changing relationship with our world around us. If you're looking for themes outside of tech, aging populations is a demographic trend that's investing in, you know, health insurers and health care providers around the world that are treating advanced AIDS-related diseases. We have consumer trends like the rise of the millennial generation, which has a little bit of a tech flavor to it,

but it's really playing this theme of people entering their 30s and 40s who are forming families and maximizing their income. Or you can look at physical environment. We have themes like clean water. There's not an ounce of technology that's really in clean water infrastructure right now. and it's still a very important theme because we see droughts and water distribution being very critical for 2022 and beyond. So you can absolutely create a thematic portfolio that extends far beyond the technology sector. Yeah, good point. I'm glad you mentioned that. It's funny because you talk about aging population, and, you know, there are health care ETFs that enable you to do that. So there are thematic, there's thematic ETFs that already, you know, exists, but you don't think of it that way. You don't think of it thematically, but that's in fact what's really going on.

A trillion dollars, we're approaching it. We don't have the exact number, but we're approaching a trillion dollars in inflow. I mean, that's a truly staggering number. Considering we started the year at about all ETS had about $7 trillion in assets under management in the U.S. And now we've got another trillion dollars that are just going in. And it's important for people to know that this is not prices. Sometimes we talk about inflows and people don't understand. We're not talking about how much assets under management that there are.

That's approaching $7 trillion. We're just talking about new money that's been coming in. Usually we look at it in terms of creations and redemptions. But do you have any reason to think, suppose the market's not up as much next year. Do you have any reason to think that was slow down? We keep noting it's mostly plain vanilla, but it's truly a staggering number, a trillion dollars, new money essentially being created. Well, there's several trends that are causing this at the same time.

I mean, one is the reduction of transaction costs in ETF. So you used to have to pay five or six bucks on Schwab to trade an ETF. Now it's free on basically every platform. It's amazing how much those $6 can change just the friction of investing one's money. I think in, I think ETS are frankly a part of popular culture now. People talk about it on Reddit. We are watching it on TV on your show or listening to podcasts about it like this one. People are absorbing this information much more broadly than ever before.

ever before and I think the financial environment has just become much more inclusive, especially with self-directed retail. So the flows we've seen this year are phenomenal in the context of the industry. It's the best ever. But I don't have a ton of reason to think it's going to slow down given how many people are participating in the rise of ETFs this year. Yeah, I'm certainly anticipating some mean reversion for the markets. The S&P has been up an average of 16% a year for the last 12 years since the Federal Reserve has really been dramatically pumping money into the economy. I can't help but think that there's got to be some mean reversion.

But even if we're flat next year, this Tina thing is very real. It sounds like a cliche, but there is no alternative to stocks. It's a very real cliche. Even if the Fed fund, even if the 10-year yield goes from 1.5 to 2%, or even 2-5%, or even 2-5%, that's still not a bad. big return, given what you could potentially get in the stock market. So I'm sort of with you. I think the inflows will still continue at this point. Jay, I'm going to have to leave it there. Thank you very much. Have a happy holiday. And I'll look forward again to chatting with you

in 2022. Jay Jacobs is, of course, with Global Exit, one of the great fomatic experts in the United States. Everybody, thank you for joining us for the ETF Edge podcast. Invesco QQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at investco.com slash QQ, Invesco Distributors, Inc.