ETF Edge - Two biggest drivers through year’s end 9/15/25

Episode Date: September 15, 2025

Choose your adventure: fed decisions or tech dominance… or maybe, both? A nuanced game-plan is in order, and we have two novel ways to play.  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, exchange, traded funds, you are in the right place. Every week, we bring you compelling interviews, thoughtful market analysis, and breaking down what it means for investors.

I'm Contessa Brewer, in for Dominic Chu. Likely, the two biggest drivers of the markets between now and the end of the year, Fed decisions? and technology dominance. Here's my conversation with Nick Churny, head of innovation at Janice Henderson, along with Nicholas Frasay, product manager at Vanette.

I want to start with Nick and fixed income innovation. So here you've got Janice, the second largest provider of active fixed income ETF products. You've got investors really positioning or trying to ahead of the Fed decision. What are the flows telling you? Yeah, well, what we see is a lot of investors, you know, realizing that as the Fed cuts rates, right, the absolute yields are coming down,

and that excess yield starts to matter a lot, right? When money markets are yielding six or seven percent, maybe it's a little bit easier. And as we're going to start seeing those spreads, our yields compress, excess spread starts to matter a lot. And so we're seeing really significant investor interest in all things securitized, really, is really the biggest area that we've seen. in particular in highly rated products. So AAA CLOs is certainly one of the largest winners, I would say, in terms of asset allocation, really over the last five years.

But in particular this year and even in the last couple of months. And again, I think it's pretty simple. If you see interest rates kind of trending down towards two or three percent, that extra one or two percent of yield that you can get out of these products starts to matter a lot more. And so it continues to be really that focus on high quality yield.

You were pointing out to me that there are all these new ETFs, but the top five are still, or the top 10 largest ETF still make up about 30% of assets under management. Which trends do you see really developing as key themes when you're looking at the ETF space overall? Yeah, it's really been interesting to see that the evolution of the industry, there's been a huge proliferation of new products, right? So we have 4,500 ETFs about in the US today. Half of those were launched just in the last five years. But we continue to see an extremely top heavy market, right?

So the top 100 ETFs, about 65% of the total market. The top 10 ETFs, alone, are 30%. Just the top three ETFs, they're all S&P 500 products. They're two trillion out of the 12 trillion. And so there's been really a lot of growth in terms of the big getting bigger. But if you look at the categories, say, those new products launched the last five years that have really been able to break in, it's only a couple things. There's one fixed income product.

There's two that are in the Bitcoin space, right? Not too surprising. And then you have some things around the queues, right? So a little bit of tech. And so it's a pretty narrow market. And it's really the theme of this show, right? Which is what's happening? It's yield, it's tech, and then it's a little bit around crypto and Bitcoin.

Let's talk a little bit about government regulations and how quickly that's changing and sort of accelerating the pace of change. For instance, tokenization, an area where Janice Henderson is launching it. Yeah, I mean, we see tokenization as potentially the most transformative technology to hit financial services, really maybe in decades and certainly potentially more impactful than AI. AI is clearly the dominant tech that's going to transform the economy. But in the subset of financial services, blockchain is really transformational. And so we're trying to build the asset manager of the future. And if we want to do that, we need to be a leader in blockchain. And so we've started by taking some of our core flagship strategies.

So I mentioned AAA CLOs, what we've done with J.TRIFF in the ETF space. We've launched a tokenized version of that, as well as treasuries. and we really see the potential for this technology to increase the efficiency of how we deliver to our clients. Why do you think it's more transformative than AI, though? Well, because so much of what happens in financial services requires layers upon layers of intermediaries. And many of those intermediaries are incredibly valuable, right, for delivering high services to clients, but some of it's just cost and some of its time. And so blockchain can really reduce a lot of the cost layers, a lot of the steps in the middle,

and help asset managers like ourselves or other ETF providers to deliver their services more efficiently, more cheaply, more fast to more people. And that's, I think, really going to transform the way that industry works. I feel like it doesn't matter which industry, I cover a lot of different industries. And what I hear, whether it's cruises, whether it's travel services, whether it's gambling, whether it's insurance, is AI dominating. So, Nicholas, when you are looking at VanEx SMH, it's been the benchmark ETF for some, semiconductor space now and you've got a new variant SMHX which is just past the general industry accepted benchmark of longevity with assets under management of a little more than a hundred million dollars. So when you're looking at semiconductors and AI and the push for the future,

what separates this from its predecessor? When you look at, or when we were reviewing the success of SMH and determining what was driving the long-term performance and what were the key drivers of performance largely. You know, you start to bifurcate the holdings and start to look at, one, SMH was largely well constructed because of the fact that you have this team of winners, right? So, Nvidia leads the charge with systems and GPUs. Then you have their TSMC, which does all the manufacturing, ASML buys all their equipment from TSMC, et cetera, et cetera, and it's become like this oligopoly down the stack. But then when you start to dissect that and look at the parts of the portfolio that may be the drivers of scaling AI forward, we looked at the FABLIS names, right?

So a FABLIS is a company that designs the chips, but they outsource all of the manufacturing. So as we look at AI and are trying to look over the long term of where there might be opportunity, you know, silicon touches everything that is technological in our lives. And that's no different for AI, right? And the fabulous names, having the low-cap-ex and being able to take that excess cash flow and invest it in R&D, hiring better people, just look like it was going to be a big driver of performance and where the opportunity lie for semiconductors moving forward. Not to say that, you know, the broad-based basket of top semiconductor names isn't going to continue to drive the market forward. But looking into the semiconductor space, we believe there was just an opportunity

set there. And as you guys talked about before, right, there's a lot of ETFs in the space. It's very hard and difficult to try to find something new, differentiated, and also be a strategic opportunity for our clients. And we really believe that the Fabulous space was checked all those boxes. Okay, so I'm just going to run through some of the top 10 holdings in this fabulous semiconductor ETF in the SMHX. Invidia, Broadcom, Estera, Synopsis, AMD, cadence design, monolithic power, Rambus Qualcomm arm holdings. You say these firms are solving for bottlenecks, for interconnectivity and efficiency and power.

In those subcategories, which one has the most growth potential? I think interconnectivity, the movement of data, as these systems become more and more complex, you're gonna have to be able to move the data faster in more nuanced ways. Our view is that AI is probably going to splinter right. you're not going to have large language model, one large language model do everything.

You're already starting to see that with some of the foundational models out there. But even more importantly, I would say that the power, and being able to be more efficient, is extremely important. So if you look at monolithic power systems, they're gonna be a supply chain, or they're gonna design chips to help

with the power consumption of these different models and of the data centers. So I think primarily the two of those, making the products more efficient and be able to do that. And in the same breath, making them more power efficient is extremely important as AI continues to grow. And the use cases continue to stack up. You mentioned the deceleration. If it's sort of like we saw this initial gold rush, everybody's going there to stake the claim.

They don't know whether it's worth anything, but they're just going to get there and own the space first. If we're seeing that rush decelerating, will that affect the fabulous semiconductor company? as well or are they still playing catch up? I think you have to look at the, and we do this specifically as ETI of asset managers, right? We really want to have a long-term perspective. Are you going to have specific price pullbacks inside of this AI growth? But we believe this is a super cycle, right?

And that AI is not, you know, we're in the very early innings of this. You still have these major players developing the foundational models, throwing hundreds of thousands of GPUs to make compute even better, right? the more compute we throw at it, the better the model gets is essentially what's still happening, right? So we haven't even seen that come to fruition or a law of diminishing returns when it comes to that. So we have to look at it and say, you know, first you have this foundational layer where they're still continuing to build out data centers, but then you take that one step further and you look at the application layer, right? And how much compute is going to be needed as we start to push that application layer out.

You start to move out to the edge. And then you start to look at the designers, and they're the, ones that are creating these efficiencies, right? They're the ones helping move AI out to the edge. You can't put a GPU in a smartphone, right? It just, that's not the way it works. So you need Walcom. You need all of these different fabulous designers that are going to help the Silicon move closer and closer to the end user so that AI becomes even more prolific in everyone's lives. And we believe that's essentially what's going to happen. And it's just a matter of time. And is that five years, 10 years, we don't know. Given the outsourcing component here,

here, how do you think of tariffs and the threat of more tariffs? I wouldn't comment on what I think a lot of it is rhetoric, ultimately at the end of the day. And maybe that's, you know, personally, subjectively my opinion. I think at the end of the day, we want to be the leaders in the United States when it comes to AI and we are. And if you look at how the leaps that Nvidia are taking and you can hear Jensen on his most recent earnings call talk about how far ahead they are, the purchase orders they have, you know, you look at the tariffs. largely these are US companies and I think what makes them even more attractive if you look at Nvidia's business model you know five years ago six years ago they were a gaming GPU company that's what makes this attractive right is their ability to pivot and be nimble and design and not have the

infrastructure associated with their buildouts right and that they can design new chips fix new bottlenecks and help continue to drive the technology forward so I think if you look at the long-term opportunity set the designers you know largely make more sense if you're looking at it from a risk perspective with Terrace. Okay, so Nicholas, Nick, because you're both so focused on innovation, and that's what you're sharing in common, what's the next innovation you think we're likely to see within the broader ETF industry within the next few years, Nick? In terms of new innovations, I think what we've seen, obviously, in the last year or so,

will continue, so around blockchain, around securitization, et cetera, but probably the area where I think there's the most new product development coming down the... pipe is really on a lot of the option-based strategies and the evolution of those. There's been a lot of growth there, but there's still huge areas of option-based income strategies that have been yet to be brought to the ETF investor. And I think there's going to be a lot happening there. Nicholas. Yeah, I would agree with that.

We definitely are consistently watching the option space, you know, when we're doing research, etc. But I would say to your earlier comment, Nick, the tokenization, right? We have it as regulations start to unwind and we start to get a little bit more freedom to operate within that space, and there's a little bit more regulatory clarity around tokenization. I definitely think that that's going to be a driver of ETF innovation moving forward. How does InvescoQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100.

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