ETF Edge - Top 25 ETFs, What's Driving The Rally

Episode Date: June 8, 2020

CNBC’s Bob Pisani spoke with Dave Nadig, Chief Invesment Officer at ETF Flows and Phil Mackintosh, Nasdaq's Chief Economist. They discussed the big ETF movers this year and prospects for the second half. In the 'Markets 102' section, Bob discusses the unique structure of ETFs and how they make you money. Hosted by Simplecast, an AdsWizz company. See 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 in all things exchange traded funds, you're in the right place. Every week we're bringing you interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll get the top 25 ETFs driving the action this month, everything from small caps and travel and leisure to the bank stocks.

But does this all signal about where the market is headed? Here's my conversation with Phil McIntosh. He's the chief economist at the national. and Dave Notick, he's CIO and Director of Research at ETF Trends and ETF Database. So let me start with you. You sent us a list of some of the top 25 ETF movers, not just by price action recently, but also by flows, which is also an interesting way to look at things. It's a strange group. So it includes airlines like Jets, which is attracting ridiculous amounts of attention given the size of it.

The financial services ETF like IYG, small capital. ETFs getting a lot of action, SPSM, you mentioned, and even ESG ETFs like ESGE ETFs, also are moving. Tie this into a bow for us and makes some sense of us. Airlines, banks, small caps, ESG, what are investors doing right now? Yeah, I mean, I think we've been watching this top 25 list since the coronavirus sell-off started, and you've really seen a cycling of investor appetite. Obviously, back in March, when everything was a rush for cash, there's a lot of trading

by the experts that use ETFs. And it's sophisticated retail as well as sophisticated hedge funds, looking at the bond ETF. And then we sort of moved as we realized that the energy complex was going to be suffering from a lack of demand into the energy complex selling off. But as we've started to get back to work and we've started to look at this recovery trade,

you've definitely started to see some different ETFs trading. So around about a month ago, we're looking at construction ETFs. Financial started to pick up just because financials, ETS had sold off and some of the provisioning that it came through earnings in Q1 was really pretty significant. And people were worried that the original coronavirus shutdowns would lead to credit crises. Now that we're getting back to work, that started to alleviate.

But what we're seeing, I think, in the last week or so, is actually some reversal trades of multi-year trends. So if you look at the performance of value over growth, growth has beaten value year after year after year pretty much since we came out of the credit crisis. If you look at US markets versus international, the same sort of thing over an even longer time frame. And then again, with large cap, like large and mega cap stocks have really led this rally. And so what I think we're seeing in some of the trends this week is some of the people putting on bets that those trends that actually stretched during the coronavirus sell off might come back. So we've seen value and we've seen small cap and we've seen a lot of trading into international markets because they've been stretched on the downside.

side, probably oversold. And as we see people getting back to work, as we see Europe's getting back to work and not seeing a case spike, it makes sense to start to think about whether those economies might recover a little bit more quickly than the U.S. market. Yeah, a lot to chew on there. Dave, Phil was mentioning retail. I'm loving all this attention that Jets is getting. This is the airline ETS, which, as you know, is ridiculously small, and whose assets under management has exploded in the last six weeks, largely around a publicity associated with Robin Hood, that the millennials seem to be trying to pick bottoms in certain things like airline ETFs. Explain the zeitgeist here. What's going on? Wrap up Robin Hood

and millennials and ETFs for us. Well, you know, this website called Robin Track came out, which lets us actually track the number of holdings, not the dollar value, but how many accounts hold different stocks. And we've seen things with USO, when people were trying to call the bottom in oil. We saw that with jets, when people were trying to call the bottom in oil. We saw that with jets, when people we're trying to call the bottom in airlines. Now, I think it's a mistake to think that the billion dollars that has flowed into this fund is all mom and pop investors. That's not what we see in the 13F filings. It's not what we see on the tape. It's clear there's some very sophisticated folks out there, most likely hedge funds using this. It's a well-constructed fund if you're trying to play the airline

industry. There's nothing to fault with it. So it's not surprising that we're seeing a lot of bottom fishing here. We're seeing it in every sector that got heavily beaten up. in the worst of it in March, whether that was in the energy, some of the financial services stocks. And all the trends that we just talked about really play into that. You know, small claps, we just had the Russell Cross that's 200-day moving average to the upside. You know, when we talk about financials, we're seeing a bunch of those stocks come back, value. All of these are, as Bill pointed out, these kinds of reversal clays. And sure, there's definitely some retail participation there, but I think it would be a mistake to think that this is just, you know,

John McPants traders. Well, you're right, Dave, of course. We point out that it's very likely that professional investors are using this to even as a shorting instrument for the airline industry. I think part of the problem is we can't really get our hands around retail participation. It's very difficult. We use partial data, anecdotal, not anecdotal, partial data like the Robin Hood data, which makes it available.

We can get Ameritrade sometimes to comment on flows in their, in their. their ETS, but we don't really have good data about who is exactly buying what. It's all a little bit piecemeal. Phil, have you had any success parsing this out? We're always interested in what the, you know, as Dave was saying, the professionals coming in who are either going long or shorting something like the airline ETFs versus, you know, everyday investors and what they're actually doing. Have you any success pulling apart that thread? Yeah, I mean, there's a couple of different ways to attack that. I mean, obviously, in the Q1 earnings, the retail brokers talked about the record numbers of new accounts that

they've seen open during the coronavirus. And they've seen a sort of increase in new accounts since they went to zero commissions as well about six months ago. But there's other data you can look at that's by ticker. It's a couple of weeks or to four weeks delay. But what you tend to see, actually, is retail like to trade less liquid stocks. It's the hedge funds that tend to trade the super liquid ETFs. So all of those sector spiders and spy and IWM and EEM that you hear about all the time are often really actively traded by market makers and hedge funds that are sophisticated. They may be long, they may be short, but they're pretty actively traded. But these days, there's such a huge complex of smart beta ETS with really interesting

thematic exposures, and you tend to see retail going in and out of those more. Dave, I haven't had a chance to talk to in the last few weeks since all the demonstrations for social justice have been going on. We're continuing to see inflows into ESG. I know that this is only tangentially ESG related to social justice issues, but it's the closest thing we've got. I'm wondering if you can comment on that and whether this will give additional push to ESG and maybe put a little more emphasis on the social and governance part of ESD rather than just the environmental, which a lot of people seem to have emphasized in the past. Yeah, there's no question.

You know, we talk to advisors every week in our practice, and we're hearing from them over and over again. They want to understand how to present ESG to their clients. They want to be able to have that conversation. And the honest truth here, Bob, is there's always a catalyst. The catalyst right now is what we're seeing in terms of the black lives of matter movement and the social unrest issues. And those are very real, and they do get some focus. But when we're talking about broad ESG funds, it's important to point out these aren't one-size-fits-all products.

Some of these funds are very much market-like with small tweaks. Some of them are very, very specific to women in governance or very specific environmental causes. So I think the important thing is the interest is there. We're seeing the flows for the first time. And like everything else, you really have to do your homework, whether you're an advisor and investor, to understand whether the values you're trying to project through your investments are actually captured in that strategy. Yeah, Phil, just give me 20 seconds on that and your thoughts. How do we get that the demand for social justice that is so prevalent today and so right to be concerned about?

How do we get that showing up more in not only stock picking, but I guess ESG in general. I'm asking the same question, more on the social and governance part rather than as much, in fact, or emphasis has been on the past on environmental. Yeah, and it's a chicken and egg debate in a way. What you want is so much money chasing those good factors that the, corporates themselves want to project better factors and behave better. In Europe, they're actually further along on that track. They've got a lot more ESG money tracking those funds. And once you get that, you start to get people buying the stocks because they've got good governance or good social or good environmental policies. And that's what you really need.

Yeah, I'm just hopeful that the people who construct the ESG, remember, those are constructs and there's weightings in them, whether the weightings on social justice issues become equally as important. As you guys know, you can construct these any way you want, weight them any way you want. I want to move on here. Dave, just talk about the treasuries. It's amazing, you know, the last few days we've had selloffs in Treasury. I still see inflows into the corporate bond ETFs, that LQD, the high-yield ETF, even AG, the broad one. Dave, they just seem to keep loving them. Yeah, if you look at the top 10 list for closed last week, almost all of them were bond ETFs. Now, obviously, some of this is still a reaction to Fed buying.

We get that data delayed, but we know that funds like LQD, HYG, Vanguard short-term fund, VCSH, JNK, these are the funds that are being used by the Fed. It's putting a bid underneath the entire market. We're seeing much less in treasuries, which is understandable. But I think it's also important to remember investors don't have much choice, right? Unless you're literally going to take all your money and stick it in a mattress, you're going to be looking for someplace to park that money. And so when this money is coming in off the quote-unquote sidelines from March, from April,

it has to go somewhere. So it doesn't surprise me we're seeing it into these more safe haven assets or these yield hunting assets when we're talking about corporates and high yield. Heck, we had a, you know, a billion dollar week last week in GLD as well. None of that surprised me. We're seeing this money come back to work. Yeah. I want to just move on, Phil. One new ETF just kind of caught my interest.

and that's the sports betting and gaming ETF, B, E, TZ. It's three days old, and yet there's all sorts of press surrounding this thing. It's basically a sports betting ETF. It's got Draft Kings and Penn National Gaming and GANN, the software company that does a lot of that gets its revenue from the gaming industry.

It's not that interesting to me, and yet it's been around three days. It's getting all of this attention, inflows, and of course the Robin Hood crowd is very interested in this. Can you illuminate why the world, world is so interested in game or just millennials like sports gaming. Maybe it's that simple. Yeah, I mean, it's definitely a defensive play, I guess, right now as well. But it just highlights to me how the new ETFs that are coming out are fairly active and really quite interesting

thematics. And so when you find a thematic that the sort of investor public wants to have exposure to, you get some money flowing into it. And that's one of the things we've seen with a lot of the smart beta ETS over the last sort of four to five years is they've been attracting a lot more assets relatively than all the boring index funds that were older and around for longer. I would just comment that, you know, I think this, like what we saw with the ESPO or the ESPORs, these are capturing investor attention in a way that very few other things do. Frankly, I could come up with some smart beta ETF based on a great quant model that might perform really well.

And it's not as interesting for an average investor than to say, hey, you know what? everybody's trapped at home. We're all trying to figure out what to do. We're all hopeful that we're going to be getting live sports back again. This makes a ton of sense to me just like the ESports ETFs have as well. And I think in a lot of ways, thematics are the new factors. It's how investors are thinking about dividing up the market. And with ETFs that can really invest globally, you can capture these things. Because if this was a US-only fund, this would only have two or three names in it, you know, Draft Kings and Penn National. That would be about it. But because it can capture, you know, Britain, Australia, Ireland, Malta, you name it, you really do get

a pretty pure play on what seems like a pretty narrow corner of the market. Yeah, I agree. They used to say invest what you know. That was that old saying in the early 90s, and thematics has sort of become that. So what do people want to invest in the market know about? Well, you know about airlines? They want to go places. You know about sports betting because that's what they want to do with their friends. And so it makes some sense. I don't want to, I think maybe we're over-analysis too much. The answer is fairly obvious, but I think you're right. Thematics is the way people play,

invest in what you know. I just want to move on, David and Phil. Talk a little bit about active, non-transparent ETFs. I keep getting these emails. Active ETFs are finally here. Non-transparent active ETFs are finally here. Fidelity became the third asset manager, I think, after

American Century and Lake Mason, to launch their own actively managed non-transparent funds out there. three of them last week, all essentially based, essentially on existing Fidelity, actively managed funds. They're not exactly the same, but let's not get too crazy about that. Phil, active non-transparent and just active ETFs. I know you're in the ETF business, but we've been saying for years something might happen. There's a few of them now launching. What's your take on this and whether or not we're going to see significant money flow into

this space at all? Yeah, I mean, it was an evolution of the sort of mutual fund industry that was a gap but needed to be filled for a long time. And now that they're approved, it really doesn't surprise me that there's people coming to market with these ETF products that are copycats of their well-known mutual fund products with a track record. It's a different distribution model, essentially. You've got these Robin Hoods and Robo advisors that are putting ETFs into people's portfolios, and if all you offer is mutual funds, you don't have access to that customer base.

So just being able to clone your mutual fund into an active ETF, I think opens up a whole distribution arm. But also, we've had active ETS for a long time. It's not like active itself is new. We've had transparent, active. We've had these smart beta funds. And they've protected investors. And they've been great ways to get exposure as well. Yeah.

Dave, are we, does anybody, is this a big deal or should we stop caring so much about it? I know the industry cares, the mutual fund industry does. They want a way to get out of those high-cost funds and into an ETF product. Go ahead. Sorry. Right. People who are selling them think it's a big deal. Look, the structural issues here are interesting for nerds like me, but they're largely solved now.

You know, we've now got multiple structures that are out there trading. They're all trading well. They're all trading close to fair value, and they're all trading with decent spreads. So the question about whether or not these products would, quote, unquote, work, I think is solved and is no longer interesting. Now the question is, does anybody actually want these strategies? You know, you look at Fidelity's recent launches. You know, two of them are blue chip growth and blue chip value. Those are such vanilla strategies, even if they're actively managed right now,

that it's surprising you'd even bother to put them in a non-transparent structure. I mean, is Fidelity really worried people are going to front run their position at Salesforce.com? I mean, that seems a little silly, right? Where it does make sense would be, frankly, much further down the spectrum. or with something that's really a name brand like a Magellan or a Contra fund. So I think what's next here is the marketing angle. I'm dying to see one of these companies come out with a real big brand name fund that people will really understand.

Like we need a growth fund of America and an ETF wrapper to really understand whether that's going to drive flows because right now we haven't seen big flows into those funds that are out. Yeah, I would agree with that. and my position on these actively managed or non-transparent actively managed. I don't care what you call them. If you have 30 mutual funds that are underperforming their benchmarks, and you turn them into 30 ETFs, just because you charge 25 basis points less,

it's not going to suddenly turn them into winners. What they want is people who are actively actually really outperforming and have a following. And I agree with Dave, I think is what you're saying, Dave, is if you could find people like a famous Magellan fund, like a Peter Lynch or somebody like that, that is out there that is actively outperforming, and you can put them charging 150 basis points into an ETF that is charging 50 basis points, just as an example,

then you might have something. But en masse moving whole mutual funds classes into ETFs is not going to necessarily create a lot of new inflows. Guys are going to have to leave it there. A very interesting discussion. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Today we'll be discussing the unique structure behind ETFs and how they make you money.

My producer Kirsten Chang joins me now. Bob, we've talked about the tax advantages of owning ETFs, but can you talk a little bit about capital gains and how they work? Do the same rules that apply to individual stocks apply to ETFs? Yeah, you know, Kirsten, ETFs do generate cash. capital gains and they're transferred to shareholders usually about once a year, and that is typically a taxable event. So, ETFs are structured like investment companies. They are passed through conduits. That's sort of a technical word, but essentially it means shareholders are responsible for paying capital gains taxes. So holding these ETFs in a taxable account will typically generate a lot

smaller capital gains when compared to mutual funds. We often say this, that ETFs are more tax-efficient, and this is the simple reason why. You don't necessarily have to sell any of the underlying securities to finance any investment flows and outflows. In an ETF structure, you have these authorized participants. They can create or redeem units, which are essentially the blocks of assets that represent ETF securities. And the important thing is they can do it on a big scale.

And here's the key. They don't typically expose their shareholders to any capital gains when they do that. So in a mutual fund, if you have a situation where, somebody has to buy or sell units, they're selling stock, and that creates a situation that is a taxable event. And the mutual fund has to notify the shareholders. With an ETF, you don't have that. You only have a capital gain at the end of the year that you have to actually deal with. Now, occasionally an ETF might incur a capital gain due to some unusual circumstances.

Typically, it happens when you have a rebalancing for the underlying benchmark, and then you might have to do something. But other than that, as a general rule, ETFs are more tax-efficient than mutual funds. Along the same vein, how about dividend payments? We think of ETFs, of course, as baskets of individual stocks. So is it just a matter of paying out the full dividends tied to those underlying securities? So, Kirsten, if you own shares of an exchange-traded fund,

you'll get distributions in the form of dividends, typically. And these can be paid at different intervals. Some are paid a monthly. some are paid in other different kinds of time intervals. You can usually choose to reinvest them. You can use them to acquire more shares of the ETF that you have. That's what a reinvestment is. But it's your choice. The brokerage firm, in terms of how it gets reported, has to annually report to the IRS and to you the payment of any dividends that are paid out by them. That's on a form 1099 form, 1099 dash DIV, the dividends and distribution form, it's what it's called. You should obviously talk to your tax planner to make sure that you're actually getting that form if you're getting any distributions.

By the way, a dividend ETF is made up of dividend paying stocks. They usually track a dividend index, believe it or not, and this ETF pays the dividends to the investors as well. That's it for today. I'm Bob Bazani. Thank you for listening. And make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC.