ETF Edge - U.S.-China Tensions, Tech & Dividend ETFs

Episode Date: August 3, 2020

CNBC’s Frank Holland fills in for Bob Pisani this week and spoke with Todd Rosenbluth, Senior Director of ETF and Mutual Fund Research at CFRA and Jay Jacobs, Head of Research and Strategy at Global X ETFs. They discussed how U.S.-China tensions are impacting ETFs and how to choose the right tech and dividend ETF. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to the ETF Edge, your go-to place for everything exchange, traded funds. I'm Frank Holland and for Mr. Bob Pisani today. And joining me today, two of the industry's finest. Todd Rosenbooth, Senior Director of ETF and Mutual Fund Research at CFRA and Jay Jacobs, head of research and strategy at Global XETs. So much to touch on today, gentlemen. Let's get right into it. Apple and Microsoft, they're leading the NASDAQ to record highs and tech ETFs are following suit.

It's kind of like the markets are just forgetting, but really in the middle of a choppy economic recovery, or investors are simply ignoring that fact. We know the hunt for yield is on with bond ETF seeing huge inflows. Jay, we're going to start off with you. Any ideas on where investors should be putting their money with growth stocks at sky high levels? Well, we don't see this coming to an end anytime soon. I mean, if you look at technology, it's one of the two sectors that saw revenue growth during Q2.

It's technology and its health care. Both make a ton of sense, though. These are companies that we can't survive without. whether it's video constantly, whether it's chat functions, whether it's accessing data and being able to do remote work, cloud computing technologies are at the very center of every part of our daily lives, and they're proving it. They have defensive characteristics in this environment,

as people realize they can't be fired by consumers or enterprises, and they have growth characteristics as they're growing revenue 20% year for year. So these are very valuable companies that are just really beginning to take off for what we think is a long-term structural trend. So you really quick, we just saw your themes for ETFs during the pandemic. Just explain genomics for us very quickly. Well, genomics has been at the forefront of COVID-19. It took two weeks to sequence the COVID-19 virus versus about systems for SARS.

So using this really powerful technology, they can figure out what the virus looks like, figure out who has it, and figure out potential treatments. So this is probably one of the most critical segments in all of health care right now. Todd, switching gears over to you. Your thoughts on this is tech still a safe place to park? cash. So we at CFRA continue to recommend an overweight towards technology sector. It's important to be mindful how top-heavy the sector is. So Apple and Microsoft combined are about 45,

46 percent of the assets in XLK, the technology sector spider that's tied to the SP 500 is over 40 percent in VGT, which is Vanguard's information technology ETF. VGT has some small and mid-cap companies from within. So you have to really like Apple and Microsoft, as we at CFRA do, we have buying strong buy recommendations on those companies, or you need to make sure you're diversified in either the more thematic-oriented ETFs like Jay was talking about, or you're equally weighted ETF like RYT, which is the Invesco equally weighted ETF, has the same amount of exposure to Apple and Microsoft as all the other companies within the

S&P 500, which gives you much more diversification. In a normal environment, that diversification would be a positive. In 2020, it's actually been a drag. So, Jay, we're going to switch over to you. Can you tell us how Global X puts together its model portfolios, and especially now during the pandemic, has that changed at all? Yeah, absolutely. I mean, our model portfolios run by John Mayer are really looking to capture some of these very powerful, disruptive trends that are happening all around us. So we have two different models in the thematic space, one that looks at each sector of the economy and looks at themes are disrupting them. So if you think about financial

being disrupted by Sintech or technology being disrupted by the internet of things and the fast growth in that space, or looking at the impact of biotech and how that's changing healthcare. We're really trying to align these themes with the sectors that are kind of the winners of the past but might not be the winners of the future. And looking forward, gentlemen, and either one of you can jump in really quick. When we're talking about tech, we have to kind of differentiate between what's work from home, cloud, telephil in the bank, blank, whatever, you know, telemedicine, telemedication, whatever it is, are one of these sectors safer than the other one right now?

Well, I think if I can, this is Todd to jump in. I think it's important to know that if you're looking at things from a sector standpoint, these companies often will cross over. So Amazon is a consumer discretionary stock. Obviously, Apple and Microsoft we talk about is technology. You've got companies like Facebook and Google that are part of communication services. So if you're looking at sector ETFs, you really want to make sure you know what's inside. some of these thematic-oriented ETS will cross sectors.

You'll have a mixture of comm services and technology or comm services and consumer discretionary. So you really want to look under the hood. Got it. We want to switch gears now to U.S.-China tensions. They really remain a missing piece in the global puzzle to recovery. We have Zoom halting product sales in China today. And, of course, Microsoft racing to buy TikTok from Chinese tech giant bite dance. Todd, we're going to go back over to you.

How do you see China tensions impacting the markets? and specifically ETFs in the near term? So we hear from many investors that they want to be careful how much exposure they have to China within their portfolio without fully being aware that roughly 40% of emerging market ETFs have exposure to China. So these are leading ETFs like I shares, IEMG and EEM and VEM and Vanguard's VWO.

So you are heavily weighted towards China directly, whether you want to be or not, or you have to make a conscious decision to choose, use ETFs, like there's a freedom-weighted E-TF, F-R-DM that's offered by Alpha Architect, that happens to exclude China because of the freedom exposure or how China stands from a freedom waiting. So it is a heavyweight. That said, China is actually performing quite well. So the leading ETF, or one of them, MCHI from I shares, was up 12% year to date through the end of July. It was up 8% in just July alone. It actually is leading the broad

our emerging markets. So it's been good to the portfolio whether people want to have it or not. So emerging markets are definitely something a lot of ETF investors are looking at. Jay, your thoughts. Any way that GlobalX is kind of getting around all this U.S.-China tension where investors can find ETFs that mitigate the potential downside? Well, at GlobalX, we probably have one of the biggest China suite. We have 11 different China sector funds, each targeting one of the major sectors in China. And we think it's not a question of do you want China or do you not want China? It's a question of what part of China do you want?

Do you want the old economy that includes energy and financials and industrials where it was really about industrializing China very quickly? Or do you want the new economy that is really led by technology firms and communications firms? Because we see a massive shift from an export-led economy to a consumption-led economy. But I think, you know, taking a step back, there's a misconception here that U.S.-China trade relations or something, up by Donald Trump and President Xi Jinping, this is a structural change. This is something that's going to happen well beyond Donald Trump's presidency. As we look, you know, a decade ahead, we're just going to continue to see two economic powers competing in a world that has only so much growth around it.

And so these technology names, I think, are going to be budding up, budding heads just more and more going forward. So with so much uncertainty about U.S.-China tensions would now be the time to invest more in the U.S. or more into those emerging markets? Well, we see a lot of opportunity in the emerging markets on the United States. Frankly, what we're seeing is a bifurcation of the entire technological world, where you're going to have Western technology and, you know, eastern technology with China and Southeast Asia quickly rising.

So we think investors need a foot in both sides of that equation. I mean, some Chinese technology names are some of the fastest-growing companies out there and are, you know, creating very disruptive platforms very quickly. And I think it would be a mistake. for investors to not be playing both sides of that trade. Todd, any other quick thoughts? Investors need to stay diversified. So the U.S. has been a safe haven for investors.

That's where the focus has been. But emerging markets, and specifically, China has outperformed, or at least China has outperformed the U.S. equity markets this year. So you want to make sure you're broadly diversified across the globe, not just targeting one area or one sector of the market. All right. Well, lastly, you mentioned the hunt for yield. There's always a hunt for yield.

out here on Wall Street, investors hunger for income put dividend ETFs front and center right now. So back over to you, Todd, you're really flagging an important distinction when it comes to choosing the right dividend ETF. Can you just kind of break down what people should be looking for? Sure. So we at CFRA view things from a dividend growth perspective and a dividend yield perspective. So ETFs tend to be focused on how the company pays a dividend and how that yield is part of the portfolio. So dividend growth ETFs are more forward-looking. These are companies with either earnings power to have historically paid a dividend

or the earnings power to continue to grow and raise that dividend as opposed to the more defensive-laden dividend yield ETS. So ETFs such as NOBL, which is a pro-shares ETF or SDIY, which is a spider ETF, those look backward at the last 20 or 25 years of companies raising dividends, an ETF like EGR. The GRW is a wisdom tree ETF is actually more of a projection. That DGRW ETF has more tech exposure than those two other ones. As we touched on, tech is growing, but also the dividend base is growing.

And what's exciting is that we finally saw investors return to dividend ETFs. They've been out of favor for the first half of 2020 in July. There were net inflows to these ETFs, probably because companies stopped cutting the dividend the way that they had been since the pandemic first emerged. We were actually speaking earlier, and you said to me, history is just that. It's history. If that ETF, the one you mentioned, the NOBL looks back with so much uncertainty, can investors fail a lot of confidence that they're putting their money into an ETF that will continue to see those dividends? But we at CFRA are big believers that you need to look inside the portfolio and look forward to what's inside.

So just because the company has paid dividends for the last 20, 25 years, it doesn't mean it will continue to do so. And so there have been companies that were part of that dividend aristocrats ETF. that were removed because they cut the dividend. But thankfully, the vast majority of the companies that have a long history have continued to do so. But certain sectors of the economy, specifically energy and consumer discretionary, has been hard hit in 2020. Those kind of companies have been cutting or suspending the dividend, and that's not a good sign for investors.

Absolutely not. Jay, over to you, GlobalX. They have a few dividend ETFs of their own. You guys have a few, including a super dividend ETF. what's your take on all this hunt for you? Well, you have two things happening right now. You have no yield out there. The Federal Reserve has lowered the federal funds rate to zero,

and corporate spreads are trading very tightly. So just looking at bonds is giving investors very little yield. And then on top of that, you have the retiring baby boomer generation that is looking to transition their portfolios from more of the growth focus to an income focus. I mean, you combine those two things that put the huge emphasis on trying to find a yield and more narrowly sliced corners of the market. We think equities are a great place to find it, whether it's high dividend payers.

We think there are certain strategies that can generate very significantly yield, like covered call strategies which buy stocks and sell call options on top of it. And then lastly, the area that we're very bullish on right now is preferred stocks, which have kind of a middle place between bonds and equities. They pay pretty high yields, and these are largely U.S.-based financial firms that are showing pretty strong strength in this environment right now. All right, excellent. Really quick before we go, just a few words from both of you on commodity ETFs, especially ones that focused on precious metals. Is that something that investors should

start looking at? Well, they certainly have been focused there. Gold and gold and silver-related ETFs have been extremely popular. In July, certainly punching above their way, GLD was the leading ETF. That's the spider gold ETF. This is the largest, most liquid ETF. We saw retail demand for ETFs in gold. Also, GLDM is another spider product. Some of the other cheap products as well, BAR is another one that saw inflows during the year. You also want to pay attention to the mining plays of this. So I know Jay can touch on the silver miners, but GDX and GDXJ are the gold mining

ETFs that are performing quite well. There hasn't been the same demand, but obviously if the price of gold goes up, that's a good thing for those that are producing it. Janney, quick thoughts. I know that GlobalX has a silver ETF, right? Yeah, and I would agree with what Todd said. I mean, I think it's easy for investors to forget about precious metals, because when you're in a great bull market, you know, sometimes you look at your portfolio and those gold and silver position, not be as high flying as U.S. equities, but they prove

their worth in troubling times, and right now is certainly a turbulent time for the markets. We like the mining space. We do have a silver miner's ETF. The mining, the mining, the mining space provides more leveraged exposure to the underlying commodity. So if gold or silver's up, the miners tend to be up more. That means you can carve out a smaller portion of your port, and put it into the mining space and still get similar notional exposure to that gold or silver trade. So we like that as a long-term position that people, you know, might have to forget about for five years, but it'll play a handy role when the time is right. I would add that the mining space of the material sector tends to be pretty small. So if you believe

this theme, you want a more dedicated ETF, the materials, ETFs like XLB, the State Street ETF, has 70% of its weighting in chemicals companies. So even though we tend to think of gold and silver as key materials, they're significantly under-exposed within some

of the broadly diversified sector ETFs. All right, we certainly covered a lot of ground, gentlemen. Thank you so much, and that does it for this week's ETF Edge. I'm Frank Holland. I want to thank Todd and Jay for joining us today. And of course, we're going to see you next Monday, same time, same place. Have a great week.