Why most are likely to lose picking tickers right now, and the ‘unheralded stars’ of ETF industry

and welcome to ETF Edge, your go-to place for all things exchange traded funds. I'm your host, Dominic Chu. As tech takes a hit and we head into the thick of earnings season, where are investors looking for relative value in this market? Joining me now for the conversation are Victor Hagani, the Elm Wealth founder and CIO. also Valerie Grimba, RBC Capital Markets, director of global ETF strategy. Thank you both for being with us for the show today. I'd like to start maybe from a ETF perspective, Valerie, with you on this. We have seen a lot of girration over the course of the past 3 or 4 months, arguably even more so since the start of the Iran war going back to late February, early March. But the last couple of months have caught a lot of investor attention because it has been the leadership group that's been leading the rally that has been suffering the most volatility. AI, tech, semiconductors, software, you name it, in that tech ecosystem. What exactly has the recent price action shown you about just what's happening with the marketplace right now and the leadership that's been in place? It's been a bumpy ride, but I would say that ETF investors overall have shown a healthy bias towards reinvesting in the themes that they believe have value and theme long-term trajectory with. And this has really culminated in another it's going to be another record setting year for ETF fund flows. And I think it's just really at an access point or a vehicle of ways for investors to express different views. And of course, now with the additional ETF product proliferation, there's uh, you know, an entire new wheelhouse or tool set where these investors can get much more specific almost surgical-l like precision with how they invest using ETFs that was never available before. >> Are you finding though, Valerie, that there is more use of this more surgical like precision and the tools that go along with it? Because it used to be in the early days of ETFs, you bought the S&P 500 index fund or you bought the Dow index fund or you bought some maybe if you wanted a sectorbased fund. These days there are specific industry ones, thematic ones, even small basket ETFs that capture just maybe a few stocks that give you that kind of exposure. Just how much more prevalent is the usage of the more surgical experience versus just buying an S&P 500? Yes, I would say it's a key driver of growth. Of course, index funds are still continuing to to gather assets, but I think it has been a key driver of this next level of growth that we've seen. And you know, I think DRAM, we're talking about semiconductors, is a perfect example of this. Investors do their research and they're like, I don't know exactly what company is going to be the Amazon 20 years from now, but I know things are changing and I want to be involved in that theme and here's 10 companies. I don't have to pick the specific one, know geographically where it is. I can get a very narrow ETF that holds 10 to 15 names and know that I've captured that theme. >> Now, Victor, an interesting part about the use of these types of products, the more surgical ones, if we're going to call it that, is that from an investor or trader standpoint, you have to be relatively more knowledgeable about not just the products that are being used, but the underlying exposure that you're taking on. You have seen a lot in your career going all the way back to kind of back at your early days in in bond analysis at Solomon Brothers and in the hedge fund business. How much more sophisticated is today's investor and just how much are they having either problems with or navigating effectively the kind of market environment we're seeing visa v AI and tech. >> Sure. So I mean I think that we have this kind of dichotomy of investors where you know we just continue to see massive flows into market cap weighted index funds you know a big channel through 401k and IRA investing and then you know at the same time this massive growth of you know very specific idiosyncratic type of investing. Um you know I'm not sure that uh investors are that much more sophisticated than they were uh you know 30 years ago in the sense that I think we still are human beings and we're subject to certain kinds of biases you know particularly extrapolation bias where whatever has happened recently in the past we tend to believe that it's going to continue into the future. So, you know, I think um when you were asking that question earlier, Dom, it got me thinking about how um you know, recently stocks have been all individual stocks have all been moving to their own beat, right? The dispersion um has been very high among stocks. The correlation between stocks has been very low. And this was supposed to be a time when active managers when stock pickers were just going to have a field day because that's what they needed. If all the stocks are moving in lock step, it's hard to beat the market. But these last two or three years, according to Morning Star and S&P, uh active uh fund managers have continued to do poorly. In fact, probably a little bit more poorly than on average how they've done over the last 10 or 20 years. And so I think in indeed, you know, investors are seeking out ETFs to get more diversified holdings, whether it's the broad market cap weighted ones or as Valerie was saying, um, you know, other ones that still are giving you 10 or 20 different stocks, um, you know, rather than, you know, really the most idiosyncratic type of stock picking. So, I mean, Victor, to your point, you made a career at at one stage in your in in your kind of market existence of trying to find were some of those notable statistical anomalies, the convergences and divergences, the dispersion, the correlations were actually either trending in a a direction where you could capitalize on it or or finding arbitrage opportunities. I is is this a kind of market where active stock picking, active industry or sector level picking, even asset class picking is one where you can find ways to add alpha or outperformance, or are you better off just buying that index fund because overall it seems to be masking a lot of the underlying kind of issues that we're seeing from a dispersion standpoint in the components of each of these individual markets. I I think it really depends who you are that when I was doing that kind of alpha seeking activity, you know, I was working at Solomon Brothers or a hedge fund endowed with lots of resources and lots of intel and, you know, we did okay at that for a period of time, but today what we're seeing is that professionals, you know, whether it's Citadel or Jane Street or Hudson River Trading, you know, they're just minting money every single day. So, it's a it's a um it's an opportunity environment if you happen to have a billion dollars to spend on tech each year. But if you're a retail investor sitting at home and trying to find opportunities, you have to realize that probably on the other side of your trades is Ken Griffin or, you know, or whoever and and it's probably not going to end all that well. Well, I mean, you might get lucky and things go well, but you know, I think it's I think it's an environment that um, you know, continues to be tough for, you know, individual non-professionals to uh, to generate alpha. It's a really, you know, the markets are just so efficient and it's so tough to do it without a lot of resources, a big team, a lot of data, a lot of tech. So, um, you know, as I say, I think it really depends who you are. certainly seems like a super opportunity rich environment from what we're reading about how I mean trading firms are making more in a higher quality way than we've ever seen in the past. Um you know it's just unprecedented. I don't know how much longer it goes on, but um you know on the other side of that has to be people that are underperforming and this proliferation of um you know zero date expiration stock options and you know leveraged ETFs and all these different things is you know the the channel through which you know money is getting siphoned out of the the um you know retail investors I think and they're just very well served by having some exposure to broader index funds overall which again is a is a really big theme happening at the same time as this other theme of more speculative idiosyncratic trading is also quite elevated. >> Valerie, those are some interesting points because there is maybe a difference right between the types of investor, the types of trader that are in the marketplace right now and the objectives that they have. But there is no doubt that there is a retailization of the markets right now and a lot of that is being driven by access to tools like exchange traded funds, lowerc cost trading vehicles, no commission type trading environments. All of those things have democratized if you will the markets. But it also means that there can be a lot more movement because there are so many more different types of participants in there. Have you noticed trends that are showing you that maybe there is either similarities andor differences between how retail traders and investors are approaching this market versus the institutional ones that you track yourself? >> Yes, absolutely. And we kind of track the retail investor through fund flows, through what we're seeing in the channels, but we're typically on the phone talking to institutions when they transact an ETF. So, we do get this unique lens where we kind of straddle the line and see both sides of this. Uh, and I would say when it comes down to the democratization, great word, but I also like to use the other D-word, which is due diligence. So, it's more important than ever for an individual investor to understand what they're buying. And I always like to colloquially say that you should be able to explain to your friend what it is is in the ETF and what you're buying. But I think more than anything, the ETF is a technology and it's it's a vehicle and technology that's bringing these more sophisticated strategies that were once impossible for the individual investor to access like you mentioned. And I think that more choice is ultimately a good thing for the end client, the end user. It's not, you know, behind big walls or impossible to reach, but it's about uh education first, people knowing what they're buying. And listen, we're in a four-year bull market. you know, people getting burned or getting sensitive. There's a little bit less of that that's happened recently. Uh, and so we'll see how this shakes out. Say if some kind of tail risk event does happen, but for the time being, trading has been orderly, fund flows have been sticky, and if anything, this is kind of vouching for the ETF structure overall. >> Valerie, could I follow up there with another point, >> please? >> Because of that, >> yes, >> there have been I I guess stories of increased and even data. >> Yes. to support increased usage of these relatively more sophisticated products. We have seen a massive amount of growth in actively managed ETFs. But then even within actively managed, there are things like buffer related products. There are autoallable type features, you know, derivative use to income generate that kind of thing. Have you seen more of that kind of usage for that kind of product? We know that the listings are booming. Sure. new products are coming to market, but do you feel as though in an environment where people are more cautious of the index level event and what could happen from a broader basis that they're flowing into some of these more kind of I don't want to say niche because they're beyond that now, but more idiosyncratic products that target certain types of returns. >> I think I often say that this this 2026 ETF market was was built out of the wreckage of 2022. And you know, Victor talked about recency bias, right? We haven't seen bonds and equities moved in the way that maybe the textbooks have told us. And in 2022, we had a bad year for both asset classes. I think that made a lot of advisers and a lot of retail investors sit up in their chairs and think, how am I getting my income? Why is my income acting like it is and looking for alternative sources for that income? And that really has been I think a key driver of the product proliferation of buffered products of other dividend or sorry derivative based products like autocallables is about providing investors with reliable income uh and generated in a variety of different manners. But again it's very important with these products to understand what you're buying. But I think like anything in finance there's trade-offs and Victor alluded to this too. So, it's understanding what you're trading off, but I think there's reasons for and against these products. >> Victor, as a former hedge funer yourself, I I mentioned the types of products that are being brought to market these days, you know, within that active subset. These are almost you could characterize them realistically as hedge fund mimicking strategies, right? We're talking about things like managed futures ETFs. We're talking about kind of macrodriven type strategies wrapped in an ETF. We were talking about maybe some of these things that that people didn't really have access to unless they were accredited investors in the past. Is there a role in your mind for some of these types of products within an allocation in a retail investors portfolio or are they just better off buying some kind of a more index based product and then kind of riskmanaging their exposure to it on an allocation basis rather than going to these multiple kinds of strategies. So, so first I mean I would say that you know I agree Valerie with what you were saying you know the ETF is just a terrific structure. I mean I've given some talks where I say and probably I'm not the only one who said this you know the ETF is to a mutual fund the way that the telephone was to the telegraph. And to begin with you know people didn't realize how great the telephone was relative to the telegraph. I think now we're seeing, you know, just how uh how much better ETFs are as a structure than the old 40act mutual funds. So, you know, I think that ETFs are giving us uh a better way to get exposure to um to to a lot of different things that before this were either going to be in a mutual fund or a hedge fund or heaven forbid in a structured note from your uh from your lo from your happy broker. you know, like you might have, you know, that that all these structured notes are now mostly going the way of ETFs, which is so much better for investors than being locked into, you know, a a um a structured note from uh from your broker. So, you know, overall, you know, we believe in using lowcost broad market ETFs to do most of your asset allocation, but you know, I think there is a place for some other things. I mean, managed futures for one that you mentioned is uh is something that's really hard to get access to. It's something that you can't do yourself and to the extent that we can get that through a lowcost ETF, you know, that's terrific. Um, you know, in fixed income, many of the ETFs that we're seeing are also terrific. You know, it's very difficult to trade individual bonds yourself. You don't want to do that. Whereas ETF fixed income instruments have so much liquidity. I mean, one of the unheralded stars of the ETF world, I think, are Treasury Bill ETFs, um, you know, which is a longer conversation, but I think, you know, that that ESG and V bill are fantastic, uh, innovations, you know, so simple and yet so great for people managing uh, you know, their cash and fixed income exposure on a really effective basis. So, yeah, I think it's more than just VTI. Um, but, you know, I think that, you know, it can also kind of go too far sometimes. Okay. So, let me take the last few few minutes that we have here because we want to kind of provide a little bit of actionable insight for people out there who are looking for ideas. And Victor, I'd like to start with you for this one here. >> If you take a look at the the the universe that you scan for for investment opportunities and as a wealth manager, as somebody who actually has an ETF, you're an ETF sponsor, you've brought one to market. When you go through your fundamental technical process for identifying opportunities, are there specific places that stand out to you right now as places where you can be opportunistic about trying to find some of that outperformance? Because we know that there's likely an ETF we can find out there to track some of those parts of the market. >> Yeah, I mean, I think that uh you know, there's the question of whether non- US equities are offering better long-term returns than US equities, but I think that's a that's a tough one. I wouldn't say it's like a special opportunity anymore to own non- US equities. You know, I think the the best thing that investors can do is to think about their overall asset allocation. How much do they want to have in risky assets and how much in safe assets? And really give that thought, you know, under the current conditions. We have long-term interest rates or much more attractive, particularly real interest rates through tips relative to the long-term expected return of the equity markets. And at the same time though, we have, you know, we're we're kind of in this transition from being in a relatively low risk environment. Maybe we're heading into a higher risk environment which would warrant having less exposure. So I think monitoring those two things, expected risk premium of risky assets and uh the riskiness of the risky assets and and and kind of moving your asset allocation accordingly. You know, we think that's the way to to do best with your savings. And you know I would just say that people don't need to be thinking about oh should I exit you know is this a bubble should I exit how do I get out at the top that if we are going into a big bare market or when when we do eventually you know these markets decline for you know 6 months 9 months 12 months and you don't need to sort of sell out at the top in order to protect some of your savings. you know that you can reduce exposures on the way down if you're really seeing uh you know the signs of much higher risk combined with low relative expected returns and and dial down your exposures and wait until things stabilize and expected returns are higher. So yeah, I don't have any great insights about, you know, specific little areas other than, you know, maybe I would say tips, uh, you know, is kind of a I think that's a a decent place to be parking your safe assets for long-term investors that are thinking about turning their, you know, how their savings are going to support their spending for the rest of their lives. >> And tips have certainly been a place people have been looking at visav what's been happening with the inflation outlook and pictures since the Iran war and everything else. So certainly I think a popular topic. Valerie, I'll I'll turn to you for this one here to kind of conclude the conversation. You you mentioned before you have a a a slew of institutional clients that you speak to on a regular basis. Throughout those conversations, have you been able to link any kind of theme or or or thread that kind of tells you from a broader basis if there are places that investors are focused more on or are staying more away from in this kind of a market? In other words, are there places where people are buying dips more often? Yes. Or and or selling rips more often? >> Yes. I would say like if anything the bias has definitely been towards buying and it's about staying invested and I think again these key features that us deep in the weeds of the ETF industry know and love the transparency the intraday liquidity the flexibility these are things that have existed for decades within the ETF structure but more now more than ever institutions are even waking up to that so they're creating their own liquidity sleeves their own ways to kind of tactically go around the margin of say a core portfolio core holdings and use ETFs as well. So I think that's something for the individual or adviser to think about because we're seeing institutions really lean in to ETFs as this kind of liquidity vehicle. Uh and then I think same way Victor uses his analogy but I also say taxi to Uber and we're finally getting the institutions to kind of wake up all these different positives that they can use ETFs and transact using that as the vehicle of choice. >> Okay. All right. It's a crazy market these days. Certainly one that people are navigating a little bit more nimly thanks to the ETF business. All right, so my thanks to Victor Akani over at Elm Wealth. Also Valerie Grumba over at RBC Capital Markets. We've asked Victor to stick around for the ETF Edge podcast. You can catch that and all of our other content over at ETF Edge. Thanks for watching and we'll see you next week. Get the ABCs of ETFs with the ETF Edge newsletter. Your weekly update on the hottest trends, expert analysis, actionable ideas, and exclusive insight from top industry experts. Sign up now at cnbc.com/etfedge newsletter.