MicroStockHub
By Mike Larson
Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, discusses the state of the ETF industry in 2024 – including all the new and exciting products that investors can choose from.
Transcript
Larson – Hello, and welcome to our latest MoneyShow MoneyMasters Podcast segment. I’m Mike Larson, Editor-in-Chief at MoneyShow, and today I’m pleased to welcome back Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, to the show. Eric, how are things?
Balchunas – Hot. I’m in Philly and it’s 100 degrees. It’s like Texas up here for the past couple of days. The markets and the ETF market are equally hot. So, I’m sweaty and busy.
Larson – Got it. Sweaty and busy. All right, well, let’s start there. It’s been about ten months since I’ve had you on the podcast, which is kind of an eternity in this business. So, let’s talk about your corner of the market. What are the two or three things, the biggest development you’re seeing in the ETF space right now that are most noteworthy to you?
Balchunas – Yeah. Look, the big blob of flows, like 70% of it, still goes to S&P 500. The Qs. The total market. So, this sort of passive wave is alive and well. We just don’t cover it a lot because it’s boring. What else can you say about VLO? It tracks the S&P. It’s three basis points. Like we got to move on.
But the S&P is up 18% this year. That is enormous. I mean, it only averages 8%, 9% a year. So, I’d say the number one trend is just the chunk of money going right into cheap beta. As usual. We just take it for granted. Now the other 30% is what we cover the most, which is where else is the money going?
Because everyone wants to know – our clients in particular – like what works, what doesn’t. Investors want to know what’s hot, what isn’t. So, our two big themes are “Boomer Candy and Hot sauce.” So, I’ll explain. Boomer Candy is like ETFs that use options to target your outcome and make you sleep at night. Like if you’re older investor, you want to be in the market, but you’re nervous that you don’t want to lose your principal, and because the aggregate bond index, like the AGG, has not really hedged stocks – like in 2022, it went down also, and it hasn’t kept up with inflation. And I think it’s flat over ten years. People are like, what can I put in the 40 to help hedge my 60?
So, they’re turning to these option-based strategies that limit your downside. Either through targeting the outcome, through flex options, or writing call options on top of exposure to the S&P, which gives you a huge income for the option premium, which buffers your downturn if there’s a downturn; that’s like a JEPI. So, those two things are very popular in terms of finding a niche, and also a lot of issuers are jumping in now. So there’s like 12 issuers now who have these sort of buffer and/or covered call strategies.
And then the Hot Sauce is more for the younger crowd and maybe the older crowd, but it’s like, okay, I got my 60 and my 40. I’ve got the whole nest egg taken care of. But it’s kind of boring. I got to sit here and just wait. It’s like watching grass grow, or maybe even paint drying. And they want to have a little fun. So, there’s this 2% to 15% of the portfolio that people use for stuff that gets their blood flowing. So, this would be like — Ark was a good example of that. Thematic ETFs. Leveraged single-stock ETFs have been a big hit. Crypto, I would put in the Hot Sauce bucket.
And these are just things that are highly volatile and have nothing to do really with your core. And there’s a big legit market for those. And in both those cases, Hot Sauce and Boomer Candy, the issuers can make much more money. They don’t have to compete with Vanguard or anything, so they charge well over 50 basis points, if not close to 1%.
And so that’s where the bulk of the products have been in those two areas. But still the bulk of the flows are in the boring beta stuff. That’s from Vanguard and BlackRock. That’s been around for 20 years. But it’s kind of boring to talk about.
Larson – Let’s unpack a few of those things. You mentioned the fee issue. I know that you Tweeted recently about how high-fee ETFs or high fee, relatively speaking, meaning those charging 50 BPs or more were proliferating. And is that what it really is, just funds that are geared at those types of investors you’re talking about?
Balchunas – Absolutely. Nobody’s launching a cheap S&P 500 ETF to challenge VOO and IVV. I mean, it’d be like a suicide mission. The other thing is, when it comes to the core of the portfolio, advisors have shown they love brand names. So, it’s not enough just to be cheap. You’ve got to be cheap and a brand name.
So, they’re just going to pick BlackRock, Vanguard, or State Street, probably. So, you can’t win there. There’s no cheap ETFs being launched. I will say there are a couple of cheap ETFs from like DFA and Capital Group that are like “low tracking error active” and cheap meaning 35 basis points. So, active has gotten lower-fee, and I’d say they’re cheaper, but the average fee of a new ETF is well over 50 basis points.
And that’s because of the Boomer Candy and Hot Sauce. Those areas, I’d say the average ETF that’s Boomer Candy, comes out at like 70 to 90 basis points, and Hot Sauce can be like 80 to 120. The only caveat there is the Bitcoin ETFs, which are ironically really cheap, probably because they did have BlackRock and Fidelity in the mix.
Normally, those are the two places you don’t get those big guys in there lowering costs that quickly. But BlackRock entered the Bitcoin race and there was a huge fee war before they launched. So, that’s a rare case where you get Hot Sauce on the cheap, which is partially why I think they’re so successful. You can get those for 20 to 30 basis points.
But just one thing on that. Even though the average fee of a new ETF is going up, the flow-weighted fee – if you flow weight or asset weight the fees – that’s going down. That’s how much money is flowing into three-, four-basis point beta that it is bringing the flow-weighted average fee down. So, the average ETF fee now is around 50 to — 55, 60 basis points because of some of those Hot Sauce funds.
But the asset-weighted fee is about 19 basis points. And the flow-weighted fee is going to be around 15. Big cents. So, the more you weight it by like what people are buying, the cheaper the average gets.
Larson – Do you think this trend of people playing around in the active space a little bit more is going to continue? I saw Morningstar just had a report that said actively managed ETFs got about 25% of the flows in the first half of the year, even though by their account, active ETFs only account for about 7% of assets.
Balchunas – Yes, but it’s not your grandfather’s active. This is not Peter Lynch picking stocks, he’s so smart, active. A little bit of that, I’d say a quarter of it, is just straight stock pickers. Like a Capital Group is having some success. They’re like classic stock pickers. But like the buffer ETFs, JPMorgan, JEPI, JEPQ, those are active even though they kind of have this like system that you could probably make into an index.
Like no one’s buying JEPI for the PM’s stock-picking skills. They’re buying it for the covered call strategy, which gives them that big income. So that’s one. And then, the single stock ETFs are all active. So, some of the flows into active have been these more niche, structurie kind of products. That said, the traditional active stock picker is doing way better than it ever has.
And largely it’s because it finally got below the all-important 40-basis point threshold. If you’re not going to be Cathie Wood and Hot Sauce and trying to shoot the lights out and vying for that small percent of the portfolio, but you’d rather actually try to be the core of somebody’s portfolio and you’re active, you’ve got to get cheap.
So, what we found is that as they gotten cheap, they’ve re-adjusted their fee to account for how much beta is in the fund. So, for example, if you are mostly holding like S&P stocks, but you have slight tilts, you have to have a low fee because the advisor looks at it and goes, I can get beta for free. Why am I paying you to hold Amazon, JPMorgan, Google? So that’s DFA and Avantis. They have really lowered fees because they have low tracking error.
JEPI is kind of in the middle at 35 basis points. But it’s got a little more active share. And then Cathie Wood’s probably a good example. She’s at 75 basis points, but she has 95% active share. So, if you beta-adjust your fees, it’s starting to work. I think advisors just want to pay for the active, not the beta. And now anybody who readjusts has a fighting chance for flows.
Larson – Let’s shift gears here for a little bit to this market rotation. In the last week or so, this “out of tech, into a lot of other things” move, small caps in particular. Do you think this kind of rotation is going to continue? And what do you think that’s going to mean in the ETF space? Obviously, so much money has been flowing into these concentrated ETFs and tech, right?
Balchunas – Yeah. It reminds me of the Eagles. This is definitely going to be the Eagles’ year. I’m a Philly fan. I feel like we’ve been saying this about small caps for 15 years. Same with international. At some point, it will be like a regime change. But it’s hard to tell.
My boss, actually, who runs all of the equity strategies, Gina Martin Adams, has this phrase called the 4-9-3, which is the 4-9-3 that aren’t the Magnificent Seven in the S&P 500 and how their earnings growth is actually growing. If they can keep this earnings growth trend, and consensus says it will happen, that’s a good sign that the other stocks will catch up to The Magnificent Seven. That’s good for value. That’s good for other sectors. That’s good for equal weighting, right? Because now the only thing that’s really worked is heavy market cap weighting with Mag Seven like overweight. So if the 4-9-3 can get going with their earnings, that should help, honestly.
And the 4-9-3, I would say are small large caps, but that would apply to the small caps as well, the mid and small. But I’m actually watching the equal-weight S&P 500 because that would give every stock equal weighting. So, if the 4-9-3 play catch up, equal weight should outperform the S&P market cap weight, like SPY, in the second half.
Larson – Okay. Let me ask about a couple of other kind of semi-niche categories. Gold ETFs, fund flows, they’re interesting to me. You’ve had a great year for precious metals. But unless it’s happening now with this latest move, there hasn’t really been much excitement or money flowing into that sector, those ETFs, right?
Balchunas – Yeah, not really. I mean, I got to look real quick. What is gold up this year? It’s probably up, what would you say, 10% maybe?
Larson – Yeah. I mean, we’re…
Balchunas – 16%. That’s not bad. The problem is the S&P is up 18% and Bitcoin’s up like 38%. That’s the problem. So if you took Bitcoin off, you might see some gold people, people hedging just in case there’s a sell-off. But now gold has this sort of “Young Buck” competitor for a store of value in Bitcoin, which I consider to be gold as a teenager.
It’s like gold in year 600, when it was like stealing your car and talking back to you and like very volatile. Gold is like an ancient old man now. It barely moves. Bitcoin is all over the map, but they serve the same purpose. So, I think that’s part of the problem. Gold’s just being outshone.
And the market, if the S&P tanked, I think that would help gold a little. It’s interesting, though. If the market tanks, it’s possible Bitcoin tanks with it. Bitcoin is kind of a risk asset still. Gold is a legit alternative. It has zero correlation. And it’s possible that would really help gold, if everything just went in the gutter, including Bitcoin. That’s when gold could sort of come back. But right now, it’s just overshadowed by everything.
Larson – Yeah, okay. And since you mentioned Bitcoin, obviously it makes sense to kind of segue into what you’ve been saying about the Ether ETF situation there. What does this signify in terms of crypto’s acceptance? Is this going to be a process that continues throughout that space, or how do you think that unfolds?
Balchunas – So, the Ether ETFs are launching next week, and they’re going to be another like Kentucky-Derby style race with like eight issuers. And to me, that’s good. The competition – all these issuers are now going to get on the horn and call their friends and family and say, “Hey, can you buy our ETF on day one?” Because they all want to get out of the gate looking good. So, that competition I think helped the Bitcoin ETFs raise money early. And I think it’ll help Ether. But I just don’t see Ether getting as big as Bitcoin. Our estimate is maybe 20% of the interest. I think it’ll have a relationship of silver to gold.
Ether is also more complicated to explain. Bitcoin is digital gold. Done. Boomers get that. So, we’ll see. But it’s interesting now that Ether is out, there’re files for Solana ETF. That to me is going to depend on the presidency. If Trump wins, I mean, the floodgates could open even beyond Solana. If Biden wins, and we get Gensler part two, it’s over. Ether will be it for a long time.
So still, though, having two – Bitcoin spot and Ether spot – is really good. I mean, especially under this SEC that it actually happened. It’s good it happened, in my opinion. How far do we go? How far should we go? Those are open-ended questions beyond that.
But I do think that the thing that people are underrating, in my opinion, is someone like Larry Fink. BlackRock is going to have a Bitcoin and Ether ETF. He goes on CNBC and Fox Business regularly and says like “Bitcoin, I wasn’t a believer, but I’m into it. Here’s the purpose.”
He gives a lot of regular people, 60/40 types, Boomers, advisors cover and comfort. And Fidelity. Even Franklin, Jenny Johnson, the CEO of Franklin, is really into this. So, the more of these like traditional five, legacy, gigantic asset managers that sort of come around to Bitcoin, I just think it’s hard to really be bearish on that because they have so much distribution firepower and they really give advisors cover.
If there was only the ProShares Bitcoin Futures ETF, you know that’s a little more risky for an advisor to go into that. And it goes down, and then, like, what is he — who is even ProShares anyway? Now that it’s got BlackRock or Fidelity in the name, that’s a lot more security for those advisors. And I think that’s an underrated point and why we’re pretty bullish on the category.
Larson – Before we get to wrap things up, you’ve talked about Larry Fink. We talked about BlackRock here. They had record ETF flows, 83 billion bucks or something and 57 billion in June. Is there anything that stops the big from just getting bigger here? And are there any implications for investors in the space?
Balchunas – Yeah, so we have a theme called The Other Guys. And if you look, ETFs that aren’t the big three took in 45% of the flows last year. That’s a record for them. They took in 20% five years ago. Because the other guys are now getting Morgan Stanley, JPMorgan, Capital Group, right? These are gigantic companies.
So the other guys are probably going to keep a lid on BlackRock and Vanguard at 66% market share. I don’t know if that will go down because they tend to take in — they punch within their weight. They used to punch above their weight. But I think they’re going to punch within their weight or slightly below it in the future because the other — I think there’s like 350 other issuers now and there’re 600 brands because some of them have two different brands.
So, those 300 issuers will go to 400 and some of them are big, and they’re going to put a ceiling, I think, on BlackRock and Vanguard. The market will handle this to a degree. But I don’t I just don’t see Vanguard and BlackRock not getting theirs on a consistent basis. Because like I said, if you poll advisors, the two most important things to them are fee and brand. And those two firms have both of those in spades across your whole 60/40. So, it’s going to be tough. But these other firms as a unit, the other guys, are going to get theirs.
Larson – We’re talking because you’re going to be joining us for the Orlando MoneyShow event that’s coming up in October. Obviously, it’s three months out. Anything can happen in the markets between now and then. But any sneak peek you’d like to give or a suggestion about what you think you’re going to be covering there?
Balchunas – Yeah. So I talked to you about what the two big trends this year that happened outside of beta. And so, I’m focusing just on the Hot Sauce, and I’m calling it the “many flavors of ETF Hot Sauce.” So I’m going to go into leveraged, thematic, single-stock ETFs; these max yield boosters, which give you like 100% yield a year; crypto; and I’m going to tell you the good, bad, and the ugly.
The Hot Sauce is where all the innovation is happening. So, I figure that’s good value of my time there. It go through some of the tickers, what they do, and just let people know what they’re getting into. Because every flavor of Hot Sauce does have risks that people should know about. I’m fine with it. I’m okay with it. I just want to do something that gives people the full range of things to think about before buying some of these products.
Larson – Perfect, Eric. Thanks again for your time. Appreciate it.
Balchunas – Yeah. Thank you.
Originally published on MoneyShow.com
