ETF Edge - What’s next for Spot Ethereum… plus, tug-of-war in the semi trade 5/28/24

Episode Date: May 28, 2024

We talk with the first approved applicant for a Spot Ethereum ETF – Jan van Eck. Find out what’s to come following the SEC’s surprise decision last week. Plus, there’s a big tug-of-war around the highly profitable semiconductor trade. Is now the time for caution?         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, 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, you're in the right place. Every week, we're ringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm Pippa Stevens, in for Bob Pizzani. In a surprise move, the SEC approved spot Ethereum listing. What's next? Here's my conversation with Jan Vanek from Vanek, the first applicant for Spot Ethereum Fund, along with Todd Sown from Stratigas.

We also discussed the current tug-of-war in the semiconductor trade. Take a listen. So, Jan, I want to start with you because now that you have this approval, what can we expect next? Sure. We got step one, which is the exchanges have the green light to list Ethereum Spot ETS. Step two is our prospectuses need to be approved. So we're in the process of getting comments from the SEC to get it in line with what their expectations are. And I assume that's true for all the other eight other applicants for the spot ETF approval. And so then does this decision, you know, settle, Yon, the outstanding question of our crypto is a security or a commodity question? Does they provide more clarity on that?

This is really one of the most amazing things that I've seen in my career with respect to securities regulation. What happened is there was a bipartisan vote in the House of Representatives to give authority for what I call blockchain software or crypto or digital assets. But let's call it blockchain software, take it from the SEC and give it to the CFTC. Now, that probably won't be voted on in the Senate this year. The name of the bill is fit 21. But the fact that that got 60 to 70 Democratic representatives in the House meant that there was a real risk that the SEC was going to lose any kind of jurisdiction over digital assets. So the first reaction was to get the ETF, Ethereum ETF approval greenlighted.

But I think there's a bigger narrative. going on as well. Certainly seems like shifting wins in Washington. And now, Todd, I want to bring you in here because with all the retail hype aside, we've now seen institutional adoption of Bitcoin ETFs by the likes of Morgan Stanley and Wells Fargo. Will that kind of smooth out some of the volatility that we've seen in the past for cryptocurrencies? Yeah, it's a great question. And I think, first of all, this is a win for all investors, right, across the spectrum retail institutions.

You can now get different types of crypto. the ETF wrapper and I'm sure you'll start to see issuers address the space in different manners, whether it's cross-linking equity with crypto or different types of crypto and trend-flying strategies. Will it smooth out the volatility? I mean, crypto's always been a volatile asset. I don't know if these ETFs will ever change that. We'll see how the forward returns look like. I would be skeptical that all of a sudden you're going to start to see more short duration or equity-like volatility from the crypto space, just given the past history. So, On one end, a win for access in the ETF wrapper.

But on the other hand, if you're going to start to add cryptocurrencies to your portfolio, just be mindful of you're adding a very high dosage of volatility. I think that's really the most important message going forward for investors. All right. So a win for access. But, you know, Todd, do you expect the same type of reception for Ethereum as we've seen for Bitcoin? You know, they have a really different use case for each. And adoption by both retail and institutional investors, you know,

could potentially be slower here given just less. awareness of Ethereum and what that product is? Yeah, you might be on to something there. And the analogy I'm wondering if it's appropriate is if Bitcoin is to gold, then Ethereum might be to silver. Again, those are completely different investment use cases. But you look at something like the I share silver trust, that has about $12 billion in it, whereas GLD is upwards of 60.

So I would imagine there will be demand for Ethereum, especially those who may find the risk reward profile more attractive. but I do not suspect that we'll see the same hype as we saw with the original spot Bitcoin ETFs back in January. And you saw the same thing last year with the Ethereum futures ETFs, right? Bitcoin futures ETFs had pretty good demand out of the gate. And the Ethereum products kind of feel flat in their face. So it'll be up to Vanek.

It'll be up to other issuers to help explain the differences. But I suspect for a lot of investors, just getting Bitcoin exposure will be good enough for them in terms of their cryptocurrency sleeve of the portfolios. And Jan, I asked the same question here to you, you know, what kind of reception are you expecting for this future product? And how are you going to, you know, lead to bigger awareness for Ethereum and why this product is attractive? I think the biggest overwhelming thing is sort of what Todd alluded to, which is the education aspect of talking to investors. So there's the first piece, which you alluded to, PIPA, which is additional types of investors could now participate. And we saw this with Bitcoin and we're still engaged with a lot of investors about, you know, Bitcoin and how that fits in people's portfolios.

But what I'd like to say is, look, this is software. And if you're an investor, sure, you need to know the macro, you know, Fed policy and all that with respect to Bitcoin and our ETF Hoddle, HODL. But you also have to know how there's their software networks and how is usage on those networks changing. And so that kind of information, even though it's totally transparent on the internet, is very hard for the average investor to kind of analyze. We try to do that through our research, but there's an overwhelming amount of education around these digital asset softwares. And I also think that, you know, kind of what's the shorthand for it? So is it the silver or we like to say is at the app store? you know, what are these different, what's the defining characteristic of these different software

platforms? So much to watch in the crypto world, but I do want to switch gears here because, Jan, you also run the benchmark semiconductor ETF, that's ticker is SMH. It's up almost 70% in a year. So how much more can we reasonably expect in terms of gains, given how, you know, blockbuster of a trade this one has been? It's crazy. And SMH is up again today. I looked before I got on the show. It feels like a locomotive that won't stop. But, you know, listen, I think investors need to know, and we've gotten a lot of inflows this year, by the way, over $4 billion into SMH. But investors need to know some of the risks around some of the big constituents like Nvidia. Invidia's margins are in the 70% range. And some semiconductor companies have more been historically in the fifth. 50% range due to competition and other things. TSM, which makes a lot of Nvidia chips, is likely to increase prices. They've said so basically publicly.

So I think that's one of the things that investors should keep their eye on. And to that point, you know, Todd, semis have been driving the overall market, but we saw last week that with Nvidia's strong quarterly results, the major indices seem to have sort of hit a wall. So how do you interpret this, make sense of this? Can the markets keep on rallying with or without semis? Yeah, and listen, I would echo what Jan just said. It's crazy. Invidia is now greater in size than the S&P 500 consumer staples sector,

just to show you how much heft it throws around the index. So going forward, I'm watching what leveraged volumes look like into 3x semiconductor ETFs into the 2x leveraged Nvidia ETF. When I start to see that go, So multiple standard deviations above a few months moving average, and I start to get a little concern that maybe retail and institutions are getting off sides. The other way to look at it is semiconductors are 11% of the S&P 500 now. That's up from 2% a decade ago.

So they're extremely important to the economy, to the index. Of course, the S&P can continue to rise without them, but realize they are now just uber essential to the way that index works. And so if you're trying to gauge the health of the rest of the ETF market, look at all the equal-weight indices, look at equal-weight semiconductors, look at equal-8 SM-500. That's kind of my guide now going forward since Nvidia and TSM and all these companies have really taken over the macro environment. Again, I'd finish it with just the crazy description that Jan used again. So of course things can continue higher, but just know that they are hitting extremes,

especially around the semiconductor space. Well, on that note, it's hard to go ahead, Jan. Well, I was just going to say it's hard to say it's just in the bubble because SMH has been outperforming for a decade. I think it's like the best performing ETF in the industry for a decade. So a lot of these are structural shifts towards the importance of semiconductors because of AI, but also kind of more of a winner takes all because SMH only has 25 stocks in it. So there are a lot of companies that have fallen away because they weren't able to compete with these winners. So there are good dynamics, but yeah, there's, it seems to be a lot of inflows. Yeah, well, you know, a lot of inflows and, of course, so much buzz around AI is driving all of this. But, you know, Todd, if an investor is nervous about this run and maybe whether or not it will cool off a little bit,

but also concerned about persistent inflation and a Fed in a holding pattern, you know, what to you looks like the most appealing next best place for growth? I personally am looking at health care. I think health care is interesting, A, because there's been a ton of outflows from that sector, so maybe a little bit of contrarian play. And then health care's relative to performance to the S&P 500 is in its bottom desicile historically. So we are in so bad it might be good territory. And I tend to wonder, does AI and what the chips are doing, does that somehow eventually leak itself into a health care type narrative where it's helping whatever medical type advantage?

there would be there. But I think if you're just looking for something timely, and that's not as heavy on the MAG7 in terms of index exposure, I think health care is a really interesting place, especially away from the GLP1 type funds. I know we just had a couple of GLP1 ETFs launch. So the rest of the space has been decimated over the last few years. So I'm looking for that as something that is a little bit more contrarian and perhaps a little bit dash for trash in a way. So investors should take a look at that space too. That does it for ETF Edge, the podcast. Thanks for listening. Join us again next week or head over to etfedge.cnbc.com. InvescoQQQ believes new innovations create new opportunities. Become an agent of innovation.

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