ETF Edge - With bitcoin surge are spot funds living up to promise? Plus, incoming weight loss funds 3/11/24

Episode Date: March 11, 2024

As bitcoin hits new highs, new spot bitcoin ETFs are playing along. But are they driving the surge or just following it? Plus, you knew it would happen: the applications for weight loss funds are now in.   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 InvescoQQQQ, 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 are in the right place. Every week, we're bringing you interviews, market analysis, hand-blinking down, what it all means for investors. I'm your host, Bob Pisani. Can Bitcoin investors handle the recent volatility and our spot funds helping? Plus, new is thematic.

It's a wave of weight loss. ETF's coming. Really? Yeah. Here's my conversation with Matt Hogan, who runs the Bitwise Bitcoin ETF Trust. Simeon Hyman is the manager of the pro-share's Bitcoin Strategy ETF and the Pro-Share's short Bitcoin strategy ETF. Todd's own is ETF and technical strategist at Stratigis Securities.

All right, Matt. They've been trading these nine new spot Bitcoin ETFs, including yours. I added it all up. Todd gave me the numbers. I see nearly 20 billion in inflows, including 1.3 billion into your ETFs. That's offset by Grayscale, which has had nearly 10 billion in outflows, but still, there's inflows. So just who's buying these ETFs? Is it a way to measure retail versus institutional? Do we get a sense of what's going on here? It's hard, of course, Bob, to get a precise feel for retail versus institutional.

But I can say a bit-wise, what we're seeing in BITB is a large, number of types of investors allocating. We're definitely seeing retail investors allocating, you know, self-directed individuals, but we have an increasing number of registered investment advisors who are allocating into our fund. We're having hedge funds allocating into our fund. BITB is being bought by venture capital funds and others, and I think we're going to see some other major unlocks in the future. So I can't give you percentages on retail versus professional. I know a lot of people wish we could, but of course an ETF's that difficult. But we can tell you for sure that there are a significant number of professional investors

buying millions and tens of millions of dollars of BITB, and I assume other ETFs as well. So it's both markets right now. Todd, you're an ETF strategist. You do this professionally. Is there any way to measure this? I'm just curious, institutional versus retail? It's a little bit challenging on the data front from my world. But the way I think of it is this is a access vehicle for institutions, right?

strategic allocations like Matt mentioned. And then when I look at retail, I say, okay, well, this is just another route for them to get access and availability to these Bitcoin. And I also take it in stride with what's going out within the equity market, right? You see leveraged ETF starting to spike in volume, some of Simeon's products too along with that.

And so in the near term sense, maybe retail getting a little bit offside, but I like this from the institutional, strategic long-term portfolio case. So, Matt, just what kind of institutional acceptance or resistance are we seeing? I mean, the wirehouses, for example, is Merrill Lynch or Morgan Stanley or J.P. Morgan. Do they allow it on their trading platforms? I think what we're seeing is different parts of the institutional community reacting with different levels of speed.

So registered investment advisors, independent FAs could buy it on day one and they were buying it. Hedge funds could buy it on day one and they were buying it. As you go up the chain to wirehouses or pensions or endowments, they have their own due diligence processes that takes weeks, months, sometimes quarters, sometimes even years. But I will say that from the day these launched to today, that process has moved faster than I expected. At first, people were saying it could take a year, then it could take half a year, then it could take a quarter, then it was a few months. And we keep getting calls every day. Can we talk today? Can we talk tomorrow? We have to accelerate this thing. So the wirehouses are still coming. Most advisors can't buy it on a

solicited basis there, but they're going to turn on, I believe, soon. Eventually, everyone will be able to access these ETFs, and that'll be great for flows. I think it would mean another uptick for flows in the future. Simian, the only one that's got a short Bitcoin product out there, those of you who don't know, put up the Simian's short Bitcoin ETF. When Bitcoin hit a new high last week, the short Bitcoin ETF, yours, hit a record in trading volume. That was interesting to me. And both the Bitcoin futures

ETF and the short Bitcoin futures have had strong inflows this year. So your business, which is that futures business, it seems only strengthened by this. To quote Mark Twain, the reports of our death have been quite exaggerated. Biddle on the long side has prospered.

$400 million of inflows this year. And we think it's part a testament to the efficacy of the approach. Our premium to discount to NAV is de minimis, and there's still a gap there in the spot folks that have launched. So a very important attribute there, strong, strong flows, and of course you mentioned the short side, so BITI is seeing flows as well, and we're happy to be here and we think we're serving as a key alternative. And I'll ask you the same question they ask them, and I don't know if you have a better answer. Do you have a sense of who are owning

these, or are these short-term ownership? Institutions, retail, what? None of us really know. As best we can gather, we think there's a pretty broad range of folks out there. You know, it's funny, people have been talking about this rally and pointing to whatever they can to get their arms around it. Maybe it was the launch of the spot folks. But I always remind people that this rally started last year. I mean, this is the month of the anniversary of the collapse of the CryptoLink financial institutions. Last year, Bitcoin was going up then, too. So I think there are longer-term folks who are starting to come in for asset allocation and diversification purposes. but of course they're shorter term folks, and we're happy to be on the long and the short side. And Matt, the halving, which we're talking about that's coming up in April, how much is that moving the price?

I don't want to attribute this rise completely to all of a sudden Bitcoin ETFs. There are other things going on here, right? And there is a smaller and smaller a number of these, you know, the amount available is getting smaller here. We're going to cap out of what, 21 million Bitcoin here, and we've got, what, almost 19? You know, Matt, better than I do, already out. That's right, north of 19 million. And as you mentioned, the halving is coming up in April. What the halving is, is when the amount of new Bitcoin produced each day falls in half.

Right now, Bitcoin creates about 900 Bitcoin a day. And after April, it's only going to be about 450. A way for, you know, listeners to think about that is the total amount of new supply of Bitcoin coming into the market will shrink by about $10 billion a year. starting in April. What's driving the Bitcoin market right now is a simple demand supply imbalance. We have this huge new source of demand from these ETFs, and we have supply that's inelastic. And actually, in April, that new supply is going to fall in half. That means, you know, if these things stay the same, the price has to adjust upwards until we

unlock some long-term holders who are willing to sell. Well, this makes perfect sense on an economic theory point. We have inelastic supply and higher. demand, duh, I mean, prices go up, right? I mean, it makes some sense, right? It's not insane, like, what are these people's nuts in a certain sense? Matt, I want to just ask you about the due diligence, because this intrigues me a lot. So you're sitting there, it's hard to get on Morgan Stanley's platform or JP Morgan. You know, there is requirements, and among them, you mentioned this word, due diligence, but one of the things I keep here when I talk to

RIAs is this suitability concern. Gensler fired a shot at all. of the investment community when he conceded they had lost on the Bitcoin debate but said, may I remind everybody that under Reg. Best Interest, Reg. B.I., you have suitability requirements. You can't give Bitcoin to Grandma if it's not suitable for Grandma to have Bitcoin. And he suddenly implied, not suddenly, subtly implied, that they could be open to lawsuits at all. I'm sure this is part of that suitability. Is the industry out trying to figure out what the legal standards are at this point for suitability. That seems to be a critical issue. Well, the good news there, Bob, is that advisors have been doing this for years. Here at Bitwise, we've been serving financial advisors,

helping them access Bitcoin and other crypto assets for more than seven years. So there are well-established ways to solve that suitability question. As you mentioned, Bitcoin may not be for everyone. It's a very volatile asset. It moves around a lot. Some people find it difficult to understand. but for advisors who understand it, who study the market, who know their clients, who understand the risks and opportunities, and can document that, then they can find a way to solve for that problem. Again, they've been doing it for years. But that's part and parcel of that due diligence. There's also due diligence on the funds themselves, on the custodians they use, on the liquidity ecosystem.

But importantly, this is the same for every asset. It's just this is opening up a new asset class. And so we're having to do it. The good news is people are doing it quickly. You know, Todd, a lot of these new investors coming into Bitcoin through these ETFs may not be used to the kind of volatility. This stuff seems we were $39,000 in January. What are we $72,000 today? Is there any correlation Bitcoin with any other asset class?

It's certainly not correlated with inflation, which is not an asset class, but is it correlated with technology? Is it correlated with nothing at all? I would, if I had to place it somewhere, it's high beta growth to me, right? these names that get going, especially if you get lower rates or lower dollar, right, these risk-seeking assets. I don't know if it has a perfect correlation of tech specifically, but when I think of Bitcoin, I think of ARC. Yeah.

Right? And ARC is high beta growth, non-profitable tech type. There is some loose correlation. Yeah. Maybe I'll come back. I think that that's sort of interesting, but I'm going back to last year because everybody's focused on the last six months. There was so much.

Up until the last quarter of last year, there was bad news everywhere, not just the crypto bank demise, but also the FTX trial was in the news every day. And in the beginning of the year, interest rates were going up, and Bitcoin was rallying. So I'm tempted to throw up my hands and say it's early days we don't know. But the one thing we do know. We don't know about correlation. We don't know about the correlation. But the one thing we do know is it's somewhat uncorrelated. And we know the math.

If it's a volatile thing and it's sort of uncorrelated, you can sprinkle a little bit. traditional asset allocation and increase the efficiency or portfolio? Well, that's a good question about what you get when you add a new asset class. So, Matt, is this volatility going to dampen over time, or is just all this silly speculation and we should not worry about it? Yeah, you know, volatility has actually come down substantially over the last 10 years, over the last five years, and over the last three years. I think as we add new types of investors into the Bitcoin economy, as we add sort of long-term investors,

institutional investors, people who rebalance, who allocate every month or every year, that should serve to dampen the volatility. But it is still an early stage asset, right? We are early in Bitcoin's journey. That's great. It means it has a long way to run, right? It's still only 10% of the gold market. Many people think it could potentially be bigger in the future. It's going to be volatile. But yeah, I think it'll be a little bit less volatile than it was pre-ETF. And I think you may already be starting to see that emerge in the data a little bit. So let me get to the subject. You were sort of touching on just a moment ago,

Simeon was mentioning. And that is, what criteria should be used generally when adding a new investment class to your portfolio? What should it do? And I put up the full screen here, because these are like the standard points people bring up about this. Should it make you portfolio more diversified if he adds something? Should there be a lower correlation to other asset classes?

Should it improve your risk-adjusted returns? Should it provide more liquidity? Should it provide lower volatility? These are like sort of standard things when you say, okay, I'm going to add Bitcoin to a stock, bond, cash, real estate portfolio. Does it do anything like that? Simeon, is there any, I hate to make you the Bitcoin advocate here, but is there any, this would one of, this is this criteria you would use about why would I add this? That's exactly right. And when you get back to this sort of prudence thing, it's about the asset allocation, not just about the asset.

Of course, on a standalone basis, you've got a very volatile asset class. And there isn't anybody saying it should be 50% of your portfolio, but it doesn't take a lot when it's that volatile to increase that efficiency. And that's the right measure. What is the right measure? The increased efficiency of your overall portfolio. So in other words, the ability to create higher returns with a little bit lower volatility when you add it to a portfolio of stocks and bonds. Does it lower volatility?

To the overall portfolio? Because it's so uncorrelated. Here's the problem I have with this. Tell me I'm wrong on this. This is how Wall Street drags you into this stuff. Bob, we're not saying it should be 50% of your portfolio, but it should be 1%. You've heard that argument? Oh, Bob, it's only 1%.

So if it blows up, you only lose 1%. But think of it if it doubles. Now you all of a sudden you have 2%. Then they'll argue you should have 5%. You see, so they drag, this is how it starts. Start a little and then get you back, get you more involved. Or am I just being paranoid? No, I think that's correct in a way.

Listen, I think it gets overlooked at Treasury Bonds. TLT has the same volatility as SMP 500. And people are always vouching to put more bonds in a portfolio. Yeah. Hey, Matt, let me just, I saw British regulators gave the nod to to crypto ETFs for the first time. Can you just talk about for a minute in global

trading and where we're at? We're just talking exclusively U.S. here, but maybe you can tell us a little bit more about global. Yeah, absolutely. You know, we've had Bitcoin ETFs and other jurisdictions for a while now in Sweden, in Germany, in Brazil, in Canada. And as you mentioned

this morning, we learned that the FCA in London will allow Bitcoin collateralized ETNs, which are our ETPs that have provided. exposure to Bitcoin. That's a big breakthrough. The UK has been behind the curve. And I won't say that the U.S. moving forward and the huge success we've had here pushed them forward. But one thing that regulators should see anywhere around the world is that when ETFs get involved in a new asset class like Bitcoin, costs come down, security goes up, and investors have a better experience

than they did before those existed. I think we're going to see Bitcoin ETPs, Ethereum ETPs, and eventually other crypto asset ETPs in every jurisdiction around the world. It's part of the normalization of this asset class, and it's strictly a win for investors. Here in the U.S., we lowered fees for Bitcoin products by about 90% from pre-ETF to post-ETF. It's great to see the UK following suit, and that's good for this asset class. Yeah, I completely agree with you. I've been neutral on Bitcoin for many, many years. a big backer of blockchain, big backer of smart contracts and Ethereum, neutral on Bitcoin,

but a big backer of Bitcoin ETFs for exactly what you said. For those who want to own it, it's a far safer way for owning it. I want to change subjects because this is an ETF show, and you knew this was coming, folks, weight loss ETFs. So last week, both Roundhill and Amplify filed for ETFs on weight loss. This is another sign ETFs never miss the craze. Remember pot ETFs, cyber ETSs, thematic tech, whatever. Todd, you're the expert here.

What would be in these ETSs, and is this a sign of a mark at top for weight loss drugs? I joked with our friend, Dave Mazza at Roundhill, after this filing came out. I said, of course you guys just put the top in Lilly and Novor Nordis, likely in now. And this happens every once in a while, right? ETS are always looking for ways to innovate

because passive indices are so saturated. We have plenty of vanilla indices. We have plenty of sector funds. So we're always looking for the new thematic play. Every once in a while, those hit. Weight loss has been around for a couple of years now, and now we finally have the funds. I mean, the main holdings are going to be Lillian Novo Nordisk.

And probably one or two other big names I can't think of right now, along with some of the manufacturers down the supply chain. But ultimately, it's up to those big behemoths that are playing those drugs. And I don't know. I mean, we'll see. I think thematics are a little bit on the backburner right now,

especially the way they performed the last couple of years. I think there's room for them, but more than one, it's going to be tough. See, this is what is great and what is not great about ETFs. ETS are really good at catching the wave and getting out very fast in front of it. The downside is ETFs are really good at catching the wave and getting out in front of it. So how many times have you and I seen this? Social media, okay, Reddit's going to go public, all right? Reddit's time was, never mind, three, four, or five years ago, arguably at its height.

But the social media ETF has been around more than 10 years. It peaked 2018, 2019, 2020. You know, right there was the big wave. And that's when all the buying occurred. That's when all the people bought in, essentially, at the top. You're looking at me like, what's wrong with that? What's wrong with buying at the top? But I think one of the challenges here is when you see these innovations,

AI. A lot of those benefits are going to the longstanding dividend-paying technology companies. And here we are with the weight loss drugs and the big players are long-established health care companies. I think that's one of the challenges whenever you see an innovation like this. If the benefits going to incumbents, then maybe there isn't a theme per se that needs to be exploited. Well, good point there. Matt, you're an old hand like that. I know you're in the Bitcoin business, but you're an old hand at this ETF game. You've seen this many times before. This doesn't surprise you, right? It doesn't surprise me.

As long as these are well-structured funds that really capture the theme, I have no problem with it. Investors would just pick one or two stocks on their own. Now they can get a diversified exposure. I think that's fine. But it is important to look under the surface of these to make sure they really are focused on the theme. To me, that's the bigger deal than whether they're chasing trends. Because investors will find ways to chase those trends anyway. If these are just a better approach, then that's a win.

And if they're not, that's when I get concerned. Go ahead. Simmy and I were just talking about this right before the show that a few years ago we had the obesity, ETF. It took it was slim. And it was way too early. It closed. So now this is the second bite of the apple here. Yeah.

Well, again, my concern here, first of all, Matt's right, make sure they actually are in the business that they're in. And they're not throwing in a lot of other things on the side that have nothing to do with it. You know, the revenues aren't there for the product they're selling. That's number one. But number two, my point is watching this for 25 years is these things come in and they buy at the top. And so afterwards they tend to underperform for you. This happened with the social media ETFs. They all topped out in 2020, 2021.

Yeah, the inverse of that was coal a couple of years ago, right? All right, the ETF closes and the energy goes on a run. So, look, I'm happy it's happening. Well, we just want to let you know. Buy low, sell high, okay? What else do we need to know? They're compounding interest. I'll get a list of three things you need to know when you were investing here.

Great show, as always, three of the top people in the business, folks. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. Let's continue the conversation with Todd Zone from Stratigas. And, you know, we were talking about Bitcoin a lot. We talked about some of the weight loss ETFs and in file two of them. I'm wondering about your thoughts on flows. It seems like tech ETFs are still getting a lot of inflows.

You were messaging me about some of these leverage and inverse tech ETFs, three times semi-ETF, which is obviously three times the daily return of the... Is it the SOXX? I have the semiconductors, yeah, the Philly Semi Index. So that's seen a big spike. Yeah, so ETFs are this great reflection of market emotions, right? And you can measure it through flows, or in this case, volumes. On Friday, the triple leverage semi-eatifted about $7 billion in trade volume. That's a record,

and was among the top securities traded, including equities, that it was also seen in the triple leverage QQQQQ, TQQQQ from Simeon's team there. And so I think when you start to see big spikes in volume and leverage products, along with the underlying stocks being very extended, as tech and semiconductors are right now, it's running. It means motions are running probably a little bit off-sides, there's going to be a cooling period. I don't think it's any surprise to say that tech could spend the next couple of months doing nothing going sideways. It's such a great run. And then I pair that off with sector flows. And over the last year, it's been tech versus everything else, right? Some $18 to $20 billion into tech related ETFs, whether it's semi-software, broad-based tech.

And then roughly the same amount out, $20 billion out of all other sector ETFs, namely energy, health care, staples, utilities. And so there's this kind of lusty, for technology stocks, and it's been the right call, but I just wonder if it's overheating right now in the near term. Yeah. You know, the problem I've had with the leverage and inverse ETFs is they'll show up on the momentum, and then two days later, they go away. All of a sudden, they just go back down again.

I'm not sure they're indicative of anything except short-term, it's like fever. It's short, yeah, exactly, and that's why I use the volume on that. It's a short-term craze. I would not use it for any sort of long-term strategic allocation, but if I'm just looking at the underlying flows, where some of those stocks have run to, right? You have Nvidia's 80% above which 200-day average. That's pretty extended. And then all this talk about how great the stocks are, how great AI is.

And this kind of adds up. The breadcrumbs start to make a bigger scenario here. Maybe it's time to take a step back. In terms of what's not hot, international investing doesn't seem very hot. We saw some modest flows last year in India, maybe Mexico, maybe a little in Brazil. But China is just seeing big outflows. All of China ETFs. What's happening there?

So China's been so bad for so long. We've talked about this, right? 30 years, basically a 0% return amazingly. And now you're starting to see China ETF closures pick up. Issuers are throwing in the towel. You won't see big names like FXI, MCHI, and K-Web closed because there's still billions of dollars in those products.

But some of the more supplemental marginal stuff is closing. is closing. And you're also seeing some issuers pivot, right? Crane shares coming out with a Saudi focused ETFs, some buffered China internet type ETFs. And I wonder if things are so dower that maybe there's some sort of short-term China trade building here. I would not necessarily advocate for a long-term allocation. But these are getting lost. Normally I would say, yes, it's by low, sell high, and the returns have been dismal. But the returns have been dismal for ages. I mean, you can go back. Other than the big blow-up in the mid-2000s for China, nobody's made any money in China for decades.

It's not a good investment. This is for... And why do you think that is? Is it because the nature of the Chinese capitalism as practice in China is not satisfying to Western capitalist investors? Why? It's an inconsistent country, right?

You think they're opening up and then they're kind of closing the country back again. China's also gone through a lot of what I would call index evolution. It was big in energy and financials during that run in the mid-2000s. Now it's morphed into this consumer tech space with Tencent, Alibaba, Baidu, and it seems like the government is cracking down on them because of the access it gives to their customers. I don't think they like that.

It's cracking down because of the access it gives to the customer. Yeah, they don't want them on Facebook or Google and whatnot. I think that somehow leads into communications and uprisings against the government. Well, also, you know, when Financial wanted to go public out of Alibaba, remember the... They were able in a message app to apply for a mortgage. Talk about a non-bank, you know, systemic financial risk. The government had no way of monitoring any of that. And as much as I disagree and dislike the Chinese government,

the regulators had a point there. They were about to approve and financial, which would have become possibly the largest non-bank bank there. And they had very little information on exactly what the risks were and the exposures were. That's a contagion issue, which... Yeah. We were to experience that here. Almost, what the bottom was 15 years. Going back to your point about, gee, it's been so bad, you might as well dip your toe in the water here.

In theory, you would be right if it was a normal asset class, you know, as a stock, it was Caterpillar or something. But this hasn't worked. History is... By, you know, by when it's down, hasn't worked. History is against this. If you really wanted to dip your toe in, I would do it through options or something where you. your risk is far more limited. Yeah. It's a very good point.

The problem I see here is that we have now essentially decided that the political risk for China is so high that it's almost a separate asset class, that it's not like investing in the global stock market. Remember 10 years ago we were all debating like, oh, we should all invest by market capitalization. So if China is 12% of the global market capitalization, then you need to own an ETF that was 12% of China.

And that kind of debate has kind of gone way because the political risk is too high. The new-ish theme in emerging markets is doing it by social freedoms, right? FRDM, that's weights by social freedom in emerging markets, and that's been a much better result so far. Yeah, yeah, I think so. All right, Todd, always a pleasure. Thank you for joining us.

That does it for the ETF Edge podcast. Thanks for listening. Join us again next week. We'll head to etfedge.cnbc.com. InvescoQQQQQ believes new innovations create new opportunities. become an agent of innovation. Invesco QQQ, Invesco Distributors, Inc.