tv The David Rubenstein Show Peer to Peer Conversations Bloomberg August 3, 2019 2:00pm-2:30pm EDT
scarlet: i am scarlet fu. this is bloomberg "etf iq" where we focus on the access, risks and rewards offered by exchange traded funds. ♪ scarlet: getting crowded. toke is the latest entrant to join the latest marijuana themed etf's. we talk about why it is early days for cannabis investing. the people hedge fund manager makes alternative investments accessible by charging zero management fees. pariah no more. greece's stock market goes from chronic under performer to
global leader. of course, there is an etf for that. whether you embrace or reject etf's, they are here to stay. the flows signal broader market trends. let's check in with eric balchunas for a snapshot of the flows and the theme is risky assets like the stocks. eric: thank you, scarlet. i'm starting to feel like a broken record. every week, i am saying people are excited about the fed being accommodative. it felt like about two months. another week of the same thing. $15 billion into etf's. that is a bomb. we have spy, the qqq's. you also have ibb and some vanguard funds. both major player types are buying in. i thought, this seems to have started in the beginning of june when the fed reassured markets. let's capture june and july. compare it to the rest of the year. the complexion of the flows is changing and this chart shows it is. look at the fact that june and july, etf's took in $85 billion. that is more than the rest of the year combined. that is a lot of money coming in. also u.s. equity etf's are
taking in three times more than they did at the beginning part of the year. more than fixed income. they are now the leaders, which is what we are used to seeing with etf flows in 2017. let's look at june and july versus other june and july's. just to give you an idea of how accelerated the flows are. it is the biggest june and july period on record. this is what $2.2 billion a day in flows look like. the etf's generally take $1 billion. when the trading crowd get excited, it is another $1 billion. with both hands on deck, that is why you are seeing this kind of accelerated level of flows. they should break the record if they keep this up. scarlet: making up for some lost time at the beginning of the year. let's bring in meb faber. he is founder and cio of cambria. in new york, we have annie massa with bloomberg news. meb, let's start with you. you saw the flows. how it exploded into june and
july. what part of the rush into stocks and risky assets over the last few months surprises you? meb: it does not really surprise me. it is a bull market. u.s. stocks are up 20%. the parking lot at bloomberg is an indication where there are only four people working and everyone else is on vacation. it is not just u.s. stocks. all asset stocks are having a romping, stopping year. real estate is up, bonds, even gold and some commodities are starting to pick up. it looks a lot like the exact opposite of the end of last year when everything was going down. the good news about the big dislocations and moves in the markets, it sets the stage for the next regime. we have been in one regime for the past decade, which is u.s. stocks cream everything else in the world. the flows make sense to me because everything has been going up. scarlet: we talked about everything going up. we keep talking about how we are at the late stage of the economic cycle. i keep hearing about it constantly. if so i wonder if what we are , seeing is the last hurrah. every asset class is higher in
contrast to last year. give us a rundown of what you are seeing. annie: you are seeing a rally in a lot of different asset classes. even some you might not expect to move in tandem upward like u.s. large-cap stock and gold. you are also seeing this in bitcoin. it marks a reversal from last year when you were seeing a lot of these asset classes, a downward trend in prices in a lot of these asset classes. with the more hawkish signaling then we were getting last year from the fed. we have seen that reverse. we have this everything rally. scarlet: this everything rally is one of the reasons we have seen value stocks remain laggards. eric: a lot of people pronouncing the death of value. meb, there was an article last week about the value versus growth ratio being the lowest it has been since the year 2000 . this got a lot of attention. i want to get your take on this. is now a good time to go into value given everything is up? how deep should you go? a lot of the flows that go into value tend to go to ones with a
lot of beta in it. can you give your take on that? meb: the nice thing about value, it is a pretty blunt tool. you do not need to do it to two decimal points. it should be a fairly simple decision. for example we wrote an article , this year called "the largest valuation spread in 40 years." it is looking at the spread between u.s. stocks, which are trading at a pretty lofty multiple. not a bubble like the late 1990's yet, but expensive. versus the rest of the world. four development is reasonably priced, foreign emerging, downright cheap. the cheapest stuff, things trading in the low teens and single digits, we are talking greece, which you mentioned, russia, a lot of europe. some of these stock markets are trading at a massive valuation spread to the rest of the world. we have been talking about this for years on bloomberg. we think it is a huge opportunity to invest a lot -- and a lot of these countries -- in a lot of these countries.
quietly, a lot of these countries are having monstrous years. russia is up almost 30%. greece's stock market up 40%. you have this scenario where people are no longer talking about these countries. starting to see some momentum shifting. they could have some strong outperformance for the next five to 10 years. scarlet: let's transition to something few people would argue are value stocks. which is pot companies. give us an update on the pot etf race. we are five or six in the u.s.? annie: five listed in the u.s. and then one more in the pipeline with global x trying to come in. the state that we are in right now is really -- there is a lot of excitement over pot etf's. it has been a big year. you have two new launches with yolo and thcx. that came recently. one new note is that the sec is asking for statements squaring away some of the legal issues that might be hanging over these funds. that has been a development as well. eric: meb, let me talk to you about this. besides the great ticker toke,
which is mount rushmore worthy already, and the cheap 42 basis points or .420, one thing i noticed, the thematic capture score is a little lower. your media market cap is higher. are you purposely going into some of the bigger names by design? the other ones seem to be going after smaller, more peer place. -- pure plays. meb: there's also a little bit of cash. here is the thing. we have launched 12 funds. never launched a thematic fund. in general, i would tell people the thematic funds do not offer any value over added benefit over the long-term. why are we doing it? we think there are times when thematic funds make sense like the cannabis space today. you can have value. you can have momentum. you can have mean reversion or you can have a situation where it is a structural behavioral trade. you want exposure to the entire industry. you want exposure for the next decade, but you still have to be price-sensitive. you cannot say i'm an unabashed
bowl about cannabis. run -- telling a everyone you have to buy cannabis. the way i approach it is, you need to buy a basket for the next 10 years. we wrote an article about this. a lot of people have picked it up. very similar to prohibition. we studied cannabis stocks in the 1930's -- beer stocks in the 1930's post-prohibition. they did 20% per year almost double the returns of the stock market. but it was lumpy. you cannot just say cannabis is great, you have to buy everything. we need to be thoughtful. you need to be mindful. cannabis stocks have struggled the past three months. a lot of these companies are pre-earnings. some of them are pre-revenue. you see some of the tilts maybe because of that in the portfolio and we don't like to talk specific names. having a basket approach eventually this industry will , mature. it will not just be u.s. and canada but global. scarlet: you need a discerning eye. meb faber along with our annie massa.
coming up, we speak with julian klymochko. he is the ceo of accelerate financial technologies. he is trying to democratize hedge funds and pe's through etf's. one etf that caught our attention, the ishares silver trust fund. its assets touched the highest since 2016. silver prices have been following gold's rally in recent weeks fueled by increasing geopolitical tensions and expectations the fed will cut rates. you can catch that and the other charts we feature on bloomberg on gtv . this is "etf iq." ♪
lifecycle. we walk you through the three main stages of the fund. step one is the filing. more annuity type etf's are coming your way. registrations for the best u.s. equity buffer etf's august and the deep buffer etf. annuity-like etf's have over $1 billion in assets under management. step two is the launch. looking to ride the u.s. rate curve. listing in london this week is elixir. ticker stpu. while there are similar projects available on u.s. exchanges, this is the first product for europe that allows investors to bet on a steepening 210 yield curve. the final stage is liquidation. remember when sanford bernstein made a splash in with a report 2016 titled "passive investing is worse than marxism." the firm followed up with launching a pair of etf's tracking its recommendations. bernstein is quitting after they failed to attract enough assets. let's get passive aggressive and track the tensions between active and passive investing. as passive products gain popularity, hedge funds and pe together have become the last
frontiers to be democratized by etf's. julian klymochko is trying to change that. he joins us from toronto. great to see you. my first question, can you copy hedge funds in an etf wrapper given the liquidity requirements of an etf? you have to be able to redeem shares whenever needed. whereas, a hedge fund is more flexible. julian: certainly. historically hedge funds have focused on liquid securities. what we are bringing to the market we believe is institutional-caliber hedge funds within the easy to use etf structure. we have been in the business of running hedge funds for about 10 years years with another firm. we really are bringing that model with liquid securities in long short strategy utilizing alternative etf's. scarlet: let's talk about the
fee structure. you call yourself the people's hedge fund manager. running hedge funds for about 1n because you do not charge a management fee. you only charge performance fees. instead of say 10 and 20, or two and 20, you've got zero and 15, zero and 50, and zero and 20. zero and 50 is high. explain your thinking here. julian: it is 50% above the index total return. our benchmark is the total return. it is only 50% of the alpha or outperformance above the equity index. scarlet: i see. i got it now. the thing with hedge funds in general especially of late is as a whole, hedge funds have seen the correlation with the s&p 500 increase. it is now at a record, about 92%. what do you make of the increased correlation? have they lost their way or are they being dictated by investors who are rewarding the ones who looked the most like the s&p
500? julian: i think you are right. number beta has been doing one, exceptionally well in the u.s. with the s&p 500 up 20%. investors are rewarding that. hedge fund managers want to be longer than they probably should, which could hurt them in a downturn. as you saw in q4 of last year, stocks took a hit with the s&p 500 hitting a bear market. i think that if you are running a hedge fund, you should run it with low correlation. low beta with compared to the index. if you are an investor in a fund that is exhibiting high beta, high correlation to the index, perhaps they are not offering you a naturally hedged structure. scarlet: the knock against etf's is that they have struggled in the u.s., even with brand name issuers like jp morgan. as a group, they have gathered some $3 billion. what is the bigger obstacle to
quicker adoption of investment etf's? julian: one main thing is education. getting out the fact that stocks and bonds in this day and age do not truly offer a diversified portfolio. you are seeing record equity valuations in the u.s. you are seeing almost $14 trillion globally in negative yielding bonds. in europe, 2% junk bonds with negative yields. i think investors really need a third uncorrelated asset aside from stocks and bonds. i think alternatives provide that. what we are bringing to the market is the endowment-style asset allocation. if you take yale, which runs $30 billion. they have 55% in alternatives. 26% in hedge funds. 14% in private equity. only 4% or 5% in domestic equity. they have had strong long-term returns under the endowment model. i think that is only going to be copied more in the future not just by other endowments and
institutions, but increasingly advisors and smaller institutional investors. even retail investors. scarlet: i get what you're saying about uncorrelated. one of your funds attempts to copy private equity returns through publicly traded companies. one of our guests last year voiced skepticism on the strategy. he said it is hard to capture the real liquidity premium you get from a 10-year lock up. to do that synthetically is very difficult. that make sense to me. you mentioned that people like alternative investments because they are not correlated. but if you are mimicking p.e. returns through listed stocks, aren't you correlated with the broader equity market? julian: you have a point. specifically our private equity replication strategy would exhibit a high correlation to the broad equity index than a traditional hedge fund strategy. our hedge fund strategies exhibit lower beta. they have long and shorts but
our private equity strategy -- i disagree with the notion that private equity returns are due to this illiquidity premium. i think they are more so due to four factors. by private equity, we're talking about leveraged bio. if you're looking at what drives returns, these four factors are size, quality, value, and leverage. we put together a multifactor model to mimic that within liquid public securities. scarlet: julian in toronto, thank you so much. coming up, the disclosure of a hack of capital one raises some eyebrows about putting financial information up in the cloud. we dig into one of the main cloud computing etf's next. this is "etf iq." ♪
scarlet: i'm scarlet fu. this is "etf iq." for every etf that offers exposure to a theme, it is not long before others promise the same. jay jacobs knows this well. his global x funds has been out front in identifying emerging trends whether it is robotics or fin tech. before we talk to him, eric balchunas is going to give us a drill down into the latest fund. clou. eric: the reason this caught my attention is it's got $508 million. it only came out three months ago. it is the third best selling etf out of 135 launched this year. what is interesting is there is
already cloud computing. it is hard for a me too product to do that. it comes down to the holdings. if you look at the holdings, it is going after software companies that are selling their software selling their software through the cloud. if you notice, a lot of these companies might not be big, giant cap companies. that is what makes it unique and different from skyy, the first trust etf. it has microsoft and oracle at the top. let's look at a tale of the tape between skyy and cloud to get an idea of this. the key metric is the median market cap. this one is going to be much lower. here is the market cap. $7.2 billion. look at skyy. much bigger companies, and that gives it a lower thematic capture score. in a way this is more pure. this one less so. this one is up 10%. this one is flat. that performance is part of the reason. it also shows you how you have to look under the hood. they are named the same have while differences. scarlet: very different components. still with me is jay jacobs. how did you get up to half a
billion dollars in assets so quickly? jay: it was clear to us that investors like the cloud theme, but they felt like they needed more purity to the exposure. it's hard in thematic investing to really kind of zero in on those companies that are getting that triple exposure. -- p are play exposure. -- that pure play exposure. especially in something like cloud where you have huge players like amazon and microsoft involved. we crafted an etf to downplay the exposure to the major hyper scalars and up-play the smaller mid-cap names. scarlet: that gives you probably more bang for your buck as things are going up. what about the recent cloud hack of capital one? for years, the credit card lender was beating the drum on how the cloud is better and faster and safer. this certainly highlights the risk of being cloud forward. jay: putting data anywhere is a risk. if it is locally on your desktop, there is a risk. if it is in the cloud, there is
a risk. we see these themes being very closely related to each other. cloud computing and cybersecurity go hand-in-hand as partner themes. eric: i want to turn to one of your popular etf's. there is another one from inspire. these bible etf's are punching above their weight. they have almost $1 billion. they have ramped up in assets. can you talk about -- there are while differences between them. the difference between cas and bibl? jay: with cas we are tracking an s&p 500 index. it starts with one of the most famous indexes in the world. it is screening out companies that donate to the conference of catholic bishops. on the index committee, they have bishops and consultants who are in tune with what the catholic religion is trying to convey through their investments. it is very broad. it is not screening out tons of names. it is trying to give the s&p 500 flavor. scarlet: we mentioned earlier about the pot etf race. you guys are coming in sixth to
the pot party etf. what are you learning about watching everyone else's effort at dipping their toes into the water? jay: i cannot talk too specifically about an etf in filing. as we saw with cloud and bots, as we have seen with a few thematic etf's we have launched it comes down to the exposure and giving good exposure and supporting it with research with sales from marketing to tell the story in an effective way. scarlet: jay jacobs, thank you so much. i feel like global x funds is an embodiment of there is an etf for that. let's check out one of the best performing etf's of the year overall. ♪ scarlet: the global x msci greece etf is known by its ticker. it invests in the largest and most liquid companies in the country. it is one of the best-performing etf's this year, outpacing thee. it took off in late may. investors tiered evidence of new
political leadership. as a first and only u.s.-listed etf to directly target greece, the fund offers access to a broad basket of more than 30 market cap weighted greek names mainly in the banking, telecom, , and transportation sectors. top holdings include hellenic telecommunications and euro bank. grek held up well in the 2015 financial crisis with investors using it as a liquidity hub and price discovery vehicle when greece closed the stock market for five weeks. today, the fund has amassed $400 million in assets. it has an expense ratio of 59 basis points, and gets a green light in the bloomberg intelligence traffic light system. global x ahead of the curve with their thematic etf's. they have great tickers. i wonder what they are going to use for their pot etf. toke will be hard to top. i did a poll. that was instantly voted as the best all time. scarlet: ufo is good.