ETF Edge - Trump Win & The ETF Industry 11/11/24

Episode Date: November 11, 2024

The ETF industry saw massive inflows immediately after Trump won the Presidency. But will the first winners be the longest-term winners? Or, are there still unrecognized opportunities… and risks?        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 InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge. The podcast, if you're looking to learn the latest insights on all things that's trading funds, you are in the right place. Every week we are bringing you interviews, market analysis, and breaking down what it all means for investors. I am your host, Bob Pisani. How will a Trump presidency impact the ETF industry?

We're examining it from all the angles. Here is my conversation with Matt Bartolini. of America's research at Chase Street Global Advisors, along with John Dobby, founder, and CEO of Victoria Portfolio Advice. Matt, I'll start with you. You are a, I like to call you the master of ETF flows. Don't want to twit your horn too much, but you tell me you've seen some very big moves in the last few days. What specific industries are we seeing notable inflows?

I think first and foremost, the U.S. listed ETF industry took in $22 billion in the day after the election. That is a record amount for post-election flows, shattering the record from 2020, which was just around $5 billion. And on a month-to-date basis, ETS are now at $60 billion of flows in just November alone, and are just under $900 billion for the year. Now what we've seen investors buying in the last few days has been very U.S. equity-focused, a lot into large caps. We have seen some flows into small caps, $5 billion on just the day after the election.

But you also started to see some cyclical exposures, too. have financials. Financials have three billion of inflows post-election. A lot of that's gone into regional banks and bank stocks that may be able to benefit under this new administration's policies around regulation, but also the potential for steeper yield curves. John, I've talked to you. You have sort of similar thoughts, but tell me what are you seeing here? What are the biggest ETF beneficiaries of a red sweep? Yeah, so I think going into elections, you know, very few people anticipated the red sweep. Now that we have one, I think that's a catalyst for things beyond the S&P and like the NASDAQQQ is to do better. So we're at a store

advisors, you know, we're tilting away from our cap-weight indices. We think equal weight, we think small-caps, we think, you know, cyclicals in general, industrials, you know, if you think about the cocktail of lower taxes, lower interest rates, pro-growth policies, pro-domestic policies, you know, I mean, that's a very different playbook the next three, four years compared to the last four years. Yeah. I want to talk about whether we're actually going to get lower taxes and lower interest rates. That's not remains to be seen. We're acting like we are though, but I want to hit on on some of these trades because it's remarkable to see some of these inflows, how the markets reacted. Now Matt, you State Street, your firm, you guys manage the

Spider Regional Bank ETF, the KRE is the symbol there. You would message me that last Wednesday the KRE had inflows that were 36% of the funds assets in a single day. And folks, if you don't know it, that's like, that's unheard of in a single day. That just doesn't happen. And I'm sure, Matt, it's a record. Telling what's moving all the bank stocks and ETFs? Yeah, I mean, that flow was a record, significant interest into regional bank stocks and banks overall. And then it just comes down to three central things. The first is earnings, the fundamentals are heading into the election, were strong.

And also you have the Federal Reserve starting to lower interest rates. And that could be beneficial because you have supportive loan growth. That's the first point is that the consumer remains resilient. Earnings and fundamentals are resilient as well in the banking space. The other two is around the election and the outcome or potential outcomes for lesser regulation for the financial industry. And then again, this inflationary policies that are being put forth on the campaign trail, that could lead to higher interest rates on the long end while the Federal Reserve is lowering

interest rates on the short end because that inflation policies actually have a lag effect to it. So you have wider yield curves. and that could be positive for net interest margins. So bank stocks saw that sizable sentiment shift right there. You agree with this, I gather. I mean, it is rather remarkable, though. I mean, a 10% move up in these bank ETFs almost in five or six days.

I mean, we're talking about big companies here. This is not, you know, tiny little businesses here, particularly regional banks. Yeah, we like KBWB, the Large Cap Money Center Bank. So that's like Morgan Stanley, Goldman Sachs, you know, the big bellwetheres. And that was up prior to the 10% outperformance of the day after the election. That was up 40% in the last year. So I agree with a lot of Matt said. I mean, the fundamentals were leaning well for financials prior to it.

And now this is just a catalyst to catapulted even higher. Remember, the last three, four years, Bob, you know, 10 years, all people want to own is mega cap tech and growth. And, you know, you're starting to see changes on the margin. And again, the red sweep, which no one, you know, really kind of had in their bingo card, is a catalyst for you to rotate. Yeah. I want to move on and get a couple other sectors in here. Matt, you also mentioned to me big inflows into crypto ETFs. I know you guys, State Street runs the Galaxy Digital Acid ETF Deco.

That just launched a little while ago, folks, in September, a collection of various businesses involved in crypto. But it seems to me like the big winner here is Kathy Wood and her ARK-Invest ETF, ARKKK, and maybe ARKB. These have been called Trump proxies. She owns Tesla in this, in ARKK, she owns Coinbase in Robin Hood. Those are Bitcoin proxies. And the fund's now at a two-year high.

But she's also had massive outflows in the last two years. So yes, the prices are up recently, but outflows. And I guess the question is, the both of you, can Kathy get her and other people involved in speculative tech get their luster back with this? Well, I think if you just take a big step back and look at the industry overall, around. If you take a big step back and you look at the industry overall for digital assets, in the digital assets space, you have an administration that is going to be more crypto-friendly in terms of their regulation policies and potentially lesser hurdles for cryptocurrencies and other digital assets to start to receive broad-based financial institution support. So I think when we look at

this idea of transformational technologies or more speculative technologies that are developing in a fast-paced changing environment, the ability to utilize actively managed strategies to decipher the winners and losers around either regulatory-inspired headwinds or just ongoing usage and adoption of digital assets, I think that could be beneficiary. And that's obviously why we have our Galaxy partnership, because you need to understand how the cryptocurrency market is progressing, particularly around new administration policies. So that makes sense, though. I've had my issues with Bitcoin, you know, whether it constitutes money or is a separate asset class, but blockchain technology seems to be quietly advancing. I know most of the centers around Bitcoin and get-rich-quick

schemes, but blockchain is advancing as a concept, as an investable concept, not just as supporting a cryptocurrency, but to do real estate transactions, to settle contracts, to do defy, smart contracts, clearing even for stocks potentially. potentially very exciting technology. Yeah, for sure. I'm with you. I think that active management is probably better in something like very specific,

like crypto and digital assets. So again, I think there's certain things should be active, certain things should be passive, large cap equities, you know, probably go passive. But what Matt's doing with Galaxy, seems like it makes a lot of sense. I mean, yes, like pro, you know, Trump's, you know, cabinet will be pro-crypto.

I would just caution the viewers that a lot of it's in the price. I mean, Bitcoin is up 80% year to date. A lot of it was front run in the ETF flows. Yes, they've garnered a lot of assets, but in this business, entry price is everything, and it's rallyed quite a bit. So I would just be careful and tactical with your entry points if you choose to kind of go ahead and buy either Bitcoin asset or crypto equities. I want to just chat briefly about the other side of this trade, and that's the risk side of this trade, Matt. So where do things like tariffs fit in?

I mean, it seems like things like industrials and maybe consumer staples that have deal with prices overseas could be hurt by tariffs, importing stuff. And yet I look at broad industrials last week flows. I look at transport ETFs and you've got some of them. They all saw inflows here. Can you sort this sort of contradiction out for us, Matt? John, I'll get your thoughts too. Yeah, I think on the tariff-related impact, still we don't know where the tariffs are going in place. Again, a lot of these are proposed policies, and there will be a lag effect associated

with them. I think on balance, the losers of this idea of more onerous tariffs around the world are non-U.S. equities, and we saw that take place quite significantly in terms of market returns, but also flows, non-U.S. equity exposures have had outflows ever since the election. I think internally in the U.S., I think all else equal, those policies are, here to say protect U.S. manufacturing and that should impact the sort of reshoring trend that we have seen and bring more domestic lines of support and supply chains which could be beneficial on balance to all of small caps on a sectoral basis transportation stocks that do have those U.S. dominant supply chains the more mid and small cap exposures in the transportation network not these large conglomerate

transportation firms those mid and small ones might be able to benefit from that reshoring and more domestic spending and more domestic manufacturing. But it's still a little left to be desired in terms of how impacts industrials writ large. I would say that the biggest loser, though, of these tariff potential policies would be just non-U.S. equities because there's a lot of history and precedent in Alaska around. We were just hoping that overseas might open up a little bit more, but you can't help but agree with them. So Mexico, there's, what is it, EWW, the Mexico ETO, the Canada ETF, maybe the China ETFs, there are many of them out there. Those are obvious concerns that are out there.

And yet, I don't know, we've seen, they've been terrible performers this year. Any of the China ETFs have been terrible performers. Can we make any case for owning any outside? Basically, the world just flees to the United States for everything. Europe's underperformed again this year, even though it hasn't been terrible, but it's still underperforming. I'm trying to figure out where does an international portfolio fit in in the age of potential tariffs. Yeah, it's been a long way for U.S. equity markets.

I mean, I sort of agree. I think that, you know, the tail risk is that, you know, obviously, you know, Trump, a lot of these policies could be very inflationary. You know, I think you have to pick and choose. And I kind of, I'll point to what Matt was saying. I think small-cap industrials make more sense than more large-cap industrials. Listen, it's been a tough way that, you know, the last five, ten years for non-U.S. equities, but you can't help to think that, you know, pro-growth, pro-domestic policy, you know, by a red sweep, you know, will benefit more kind of small caps.

You know, I would just caution, you know, bond investors, too. You know, the deficit's already pretty big. When Trump was in office in 2016, GDP was 3%. as a percentage of GDP was 3%. Now our deficit as a percentage of GDP is more 6.3%. So ironically, a lot of what is being talked about about what he wanted to do will be inflationary in general. So I think you have to be careful if you own bonds for sure.

But we're overweight to US. I think that's the playbook, the right playbook in the next few years until the midterms. We have two years of kind of where he can control a lot of the narrative. Right. Matt, what about John was mentioning bonds? It seems very tricky right now. We saw inflows into the broad bond categories last week, like AGG, which is the broad one, the biggest broad ones, the Vanguard total bond that were inflows there.

Long-term treasury ETFs, like the 20-plus ETF, saw inflows, but flattish on the shorter end of things. This is kind of tricky to figure out right now. What's the right way to look at this right now? Yeah, I mean, this is a market where you have evolving. monetary policy meeting with new fiscal policies from the administration that could prove to be quite inflationary and have an impact on interest rates. And that's why we still see interest rate volatility relatively elevated. I think in this type of marketplace, because you do have tight credit spreads too, where they're essentially 40% below long-term historical averages, this actually reinforces the case for active management within fixed income, to manage that rate volatility,

but then also to use security selection to identify those credits that may have potential further upside from a credit spread valuation perspective. And I think on balance, though, what we've seen investors do in ETS from a sector perspective has been piling into credit exposures because of the market environment that is still somewhat risk on and could be beneficial to those that are taking on risk in the form of credit, which is a sort of implied equity bias to it as well. But in the core, using Active, I think makes the most sense going forward to manage some of those risks.

You're an RIA. You know, the average person going through this, would you recommend they change their portfolio? I mean, an average person whose aggressive portfolio might have 70% stocks, 20% bonds, and 5% or 10% other kinds of investments like cash and gold. Would you make a sudden move out of bonds or into bonds or anything like that? It seems like the best advice is almost to do nothing right now if you're confident in your allocation right now. Isn't that the most important thing? Yeah, sometimes the best thing is to do nothing. What I would say is that my inbox has been flooded from RAs, advisors,

and retail investors what they want to do. Our message has been consistent. We went into this year very constructive. We said, look, the earnings recession we had last year is over. The earnings environment has improved. Matt talked about that a little bit. Fed was going to cut. And then the average stocks valuation actually was not that expensive.

So we've been trying to get advisors to kind of get out of bonds and money markets. There's still $6 trillion in money markets. They love those money markets. They love those money markets. But what has the SEP done in the last two years? It's up 60%. Now it's being driven by MAG7, but there's so much emphasis on bonds and a lot of products being issued on bonds.

But equities, we want advisors to own more equities, right? Maybe you're 7030 shouldn't be 730. Maybe it should have been 80-20. And those are the conversations we're starting to have. So be careful with bond. The other risk we were talking about, tariffs, but the other risk is valuations that are out there. I know you've spoken about this. President-elect Trump is going to inherit a stock market, the very top end of its valuation range.

I mean, isn't it fair to say the easy money has been made in the S&P 500? I mean, how much? 50% in 18 months or 19 months? I don't know. What else? I've been 34 years at CNBC. I've rarely ever seen anything like this. So, you know, you're, You've been trying to get advisors to move ahead with this. You've called it a market clearing event, essentially. So that's the problem I have at this point. How much more are you actually going to throw at this price into the market? Yeah, for sure.

And if you look at the earnings growth of the, let's say, the non-Mag 7 versus the MAG 7, you are starting to see incrementally the non-MAC 7 actually have higher earnings growth than the max 7. If you do any sort of quality filter on mid-caps, small-cap stocks, you know, you're looking at 13, 14-time's earnings, S-NP at 22 times. So, you know, that's kind of what we've been telling advisors too, is like you don't have to go internationally and own Chinese equities, European equities, which still have a lot of risks, whether it's the Ukraine War, you know, tariffs in China. You know, there are value stocks, value themes in the U.S. So I think, you know, my sort of prediction in four years after Trump's presidency is that we're going to look back and say, okay, you know what? Small caps actually did outperform large cap stocks. Matt, we've talked about the stuff that's seeing flows, banks, small caps, industrial, cyclicals, crypto, non-Mag 7.

What about 2025? Any surprise 2025 trades that are going to be we're not talking about now? Yeah, I mean, I just listening to this past. conversation, you'd maybe say the outside chance that maybe non-U.S. equities are the sort of contrarian idea. Maybe folks want to pile into non-U.S. equities for valuation reasons. I just think that's also sort of hard press to think that will come true, just given the growth advantage within the U.S. I do think that you will see more flows into non-tech. I think you will see a broadening of earnings. You've already started to see that. I think you'll see more small-cap, mid-cap, more

cyclically oriented industries, financials, industrials, consumer discretionary. So nothing really mostly a big, big surprise. I just think it won't be such a heliocentric market led by tech stocks. I think we also see broader depth in this sort of U.S. dominance. And, you know, again, that could be beneficial to the U.S. listed ETF industry. We're starting to see more and more capital going in because money market, or sorry, mutual funds are net outflows this year. Yeah. That makes a lot of sense to me. I want to talk about that in the podcast that's coming up In just a moment, this has been a great discussion, folks. You see stuff, how fast things move in this business.

Pay attention. When you see KRE, a big, big bank ETF, have 35% inflows of its total assets on the amount of it. In one day, 35% of it in one day came in for that. That's how fast these things move right now. And you need to sort of have a plan to be on top of all of that. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs.

The Markets 102 portion of the podcast, John Davy, Astoria Portfoli, advisor, and CEO continues our discussions with us now. John, we had a great discussion about how the Trump trade is going to impact, and already we've seen amazing moves. What's amazing to me is how fast things happen now. We've discussed the regional bank, ETF, the KRE, Matt Bartolini, who sort of heads up the research there at State Street, told us 30, 5% inflows of the AUM in a single day. I've never seen that. I mean, we're talking billions of dollars just snap going in. And it strikes me that there already were Trump trade ETFs out there.

There was one called MAGA, the Point Bridge America First ETF that started in 2019. There's on-shoring ETFs that also started in the last couple of years. So it's amazing to watch the ETF industry already respond. I think they'll probably come out with a few more. that'll be out there right now. But what strikes you about what's happened in the last week? I think no one predicted a red sweep. It was not in the bingo cards for many people.

You know, a couple of days before the conference, you know, my company had an RA advisor conference. We had 163 people. You know, you spoke on it. We had some of the biggest and brightest adult leaders speak. Not a single panel said red sweep. So I think the reaction the day after the election is indicative of how people were kind of caught off-sides. So I'm not really surprised about all these post-reaction moves.

You know, what I would say is that obviously you stuff to actually implement the policy, but with a red sweep, it's hard not to get constructive on equities. I just would not own, you know, the S&P or the NASDAQ 100. I would go into sectors and themes beyond that. And I think that's how you play the Trump election. We briefly touched in the show on active versus passive. In particular, what strikes me as interesting, is long term, we know that active stock management generally does not outperform the

bench marks in equities. And yet there's been a slightly different opinion on bonds. And I'm wondering how you feel about it. Do you think there is some evidence that active management in the bond market might be more useful than active management in the equity market? And if so, why would that be? Well, I think the numbers show and the stats show that, you know, active fixed income does beat, you know, the benchmark over time. I think some of it is like the composition, you know, the ag has, you know, 10,000 bonds. You know, GE can have, you know, 40, 50 different bonds. And an active manager can pick and choose and do their fundamental credit analysis.

Whereas, you know, in the equity, large-cap equities, it's just a lot harder. There's too many analysts that cover Apple stock. I think within equities, once you go into small caps, alternatives, very specialized areas, active management could make more sense. But, you know, the fees have to be, you know, low enough on an apt-fee basis that they actually have performed. You know, active fixed income, Bob, you know, the last two years, the S&P is up 60%. All I've heard about is T-Bill and Chill. You know, how many target duration, fixed income bond ETSR launch? You know, equities is your long-term wealth manager, you know, wealth management.

tool and you know our message has been own more equities right that's how you power through high inflation and that I think is what I'm trying to do at a story is to get advised us to get out of the money markets a six trillion of money markets going to equities and I think with the red sweep you know I think there's a catalyst for owning more equities and so we were we were doing five five and a half percent on a money market and that you know people love these money they don't want to move out because they perceive it's safe and they're correctly perceiving that they are getting an inflation adjusted real return, which is true, but they're giving

up a lot of upside in stock market. But how do you convince them to move? Give me 20 seconds in an argument of why somebody who's 65 years old should move out of their comfortable 5 and a half or 5 to 5.5% money market and tell them, well, what are you going to tell them? It's going to be 4% soon. Is that what you're going to tell? Is that an argument? Is that going to happen? Well, I would say go to the grocery store and tell me if your 5% coupon is justifiable enough. I think your grocery bill is still 10 to 15% higher. So if you own more equities, you would have outperformed, you would have had your network grow. So I think there's a difference between Main Street inflation and Wall Street inflation.

Whereas the economic numbers show CPI is at 3.3%. real Main Street inflation is still 10%. So even owning a 5% T bill is not going to, you know, you're still going to lose on a purchase and power basis. Yeah. And yet people do. It's understandable. I published a book a number of years ago and published what I actually owned.

And my ownership vacillated between 70 to 75% stocks, 15% to 20% bonds, and 5 to 10% alternatives, including cash, and that kind of varied. But the core holdings always was large passive index funds, stock index funds. And I presume you still recommend that's the core holding for everybody still. I guess what I'm trying to figure out here is there's a sort of mad dash for everyone to reevaluate the portfolios under Trump, but I'm not sure we necessarily need to do that if your equity allocation is enough. I mean, if you're not in stocks at all, that was kind of a bad idea, but that's why you have financial advisors, right? Exactly. You don't sit there and just

crazily try to predict where the markets are going. You have a plan, and the plan, you might want to play around the edges with it. You might want to say, I'm not going to have 5% in money markets anymore, but, you know, if you have 70% in equities already, you're already participating in the game. Exactly. I think within the 70% is, where you should be rotating as opposed to like making some drastic move from 70 to like 80 or 85 percent within that 70 percent bucket you know S&P NASDA 500 they've had incredible incredible rallies the last five 10 years you know if you look at the Cape Shillap P ratio 2008 2009 we were like a 10

Cape Shiller ratio now we're at 35 I mean large US equities on a mark cap weighted basis are just outright expensive any way you look at it so we're trying to get advisors to say okay maybe be tilted away by small caps equally away your exposure. I mean anything you do going away from like the benchmark is obviously going to have track and error and risk but that's what I would recommend first and foremost before going into like you know 85 90% equity just because of a red sweep. I sort of agree with you. I mean it sounds great now you still have to implement the policies but you know stocks are forward-looking instruments right so they're forecasting that you know in the next

few years that a lot of this stuff will get passed and everything will be great. So, you know, our jobs is RAs is, you know, to coach advisors and investors to not make drastic moves, you know, absorb the data and think through it. Just look here what happened last week. Having not being able to predict a red sweep, all of a sudden, the KRE moves, you know, in a few days, you know, 10%. It's already happened. So it's not like you're going to say, oh, let's get up this because you think momentum is going to keep pushing this thing up another 10%. That's unlikely. You see the RSIs, the relative strength indicators.

When they get up in these territories, they're in the 80s. I've seen a couple of stocks in the 90s. This just doesn't happen when the RSI gets up that high. It generally means historically they stop going up because they can't keep doing that. The fundamentals get completely out of whack and people start selling them on fundamental basis. So this is why I keep emphasizing, have a plan, because you're already invested. If you own the SEP, you already own bank stocks. Okay, for you to turn around and say now, oh, I'm going to buy the KRE, you know,

you've missed the best three days in probably five years last week that happened, Wednesday, Thursday, and Friday. Yeah. And for you to turn around now and say, buy the KRE, I don't know, that doesn't make a lot of sense to me at this point. We look at KBWB, which is a large cap money center banks. So Morgan Stanley, Goldman Sachs, these are like 8, 9% of the ETAF. I haven't tracked the KRE as much. But that KBWB was up 40% in the last one year, which is a pretty big number relative to like the S&P. So yes, it's been trend in that way.

Some of the fundamentals and earnings for banks have been good. People buying it, you know, the day after the election. I think you just have to be careful to your point. Yeah, I don't think it's going. Like I said, just having a plan is really the key. That's what really matters. So we were at, the KRE was $58 on election day. It's now $67.

I mean, we're talking 16, 17, 18% in three, four days. You're not, how is it going to pull that? You think it's going to be up another 18% in another two weeks? It's not. Yeah, most of the money's been made. That's right. So that's why stay invested, folks, and don't try to sit here and time markets. doesn't work very well. There's a free broadcast piece of information I learned from Jack

Bobwell 30 years ago. But that's in my book, folks. Shut up and keep talking. You can buy it on Amazon. Enough of that. John, thank you very much. So always a pleasure to see you. That does it for ETF Edge, the podcast. Thanks for listening. Go to us again next week. Or remember, you can see all of our shows. ETFedge.cdbc.com. How does InvescoQQQQQReworthability? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investco Distributors, Inc.