On the latest episode of ETF Prime, Nate Geraci and VettaFi’s head of research Todd Rosenbluth discussed recent filings for two ETFs based on stock picks from CNBC personality Jim Cramer and offered perspective on 2022 ETF flows. BlackRock’s Abby Woodham and MSCI’s Anil Rao went in-depth on minimum volatility strategies, while Distillate Capital’s Tom Cole spotlighted his firm’s unique approach to value investing.
Cramer vs. Cramer
Tuttle Capital Management, famous for creating the AXS Short Innovation Daily ETF (SARK), which shorts the ARK Innovation ETF (ARKK), has some splashy new funds filed. The Inverse Cramer ETF (SJIM) and the Long Cramer ETF (LJIM) are set to become a reality soon. Rosenbluth set the context up, noting that “Jim Cramer is perhaps the most famous – or for some people, infamous, financial pundit. He’s got a strong following. Many people root against him. It’s ironic, actually, he has for years argued that ETFs are harmful to the overall markets, and now he might reluctantly become part of the ETF industry, indirectly.” Rosenbluth noted that neither ETF is managed by Cramer. LJIM will own two dozen stocks and sector ETFs based on Cramer’s recommendations and sell them when he stops commenting on them. SJIM, meanwhile, will bet against his recommendations by going long on stocks where Cramer is bearish.
“Does some poor soul out there have to watch Mad Money every day?” Geraci asked, trying to ascertain how these funds will track Cramers stances and translate them into positions. Rosenbluth noted that CNBC does recap the episodes.
Geraci also sees a potential for a sticky situation in how these funds essentially use Cramer’s intellectual property to generate profit. Though both Geraci and Rosenbluth lack a background in IP law, Rosenbluth did note that Cramer himself seems fine with the existence of these products. “I think CNBC is more likely to have a problem,” Rosenbluth also pointed out that though SARK has the word “innovation” in the name, it doesn’t directly mention Cathie Wood’s fund. Tuttle’s products do use Cramer’s name.
“I personally have mixed feelings about Cramer. On the one hand, he’s done a lot for investing,” Geraci said, referencing Cramer’s storied career and the amount of interest in investing that he personally has generated, later continuing, “the problem here is he’s serving another master. His job is to get eyeballs and clicks.”
Rosenbluth pointed to another issue with these funds, apart from a somewhat muddy use case, “I have concerns about rooting against a person or a firm as an investment approach. I think it’s too emotional.”
ETF Flows
Only 6% of ETFs have positive returns in ETFs, but flows are telling a wildly different story. Despite what many would acknowledge as a bumpy market, ETFs are potentially seeing their second-best year ever in terms of flows. “Through the first three quarters, using the data we source through VettaFi, over $400 billion of new money into ETFs,” Rosenbluth said, noting that ETFs typically see a strong fourth quarter, making $600 billion a possible target. “What I find compelling is not only is money going in – but where’s it going,” said Rosenbluth. Low risk equities, treasuries, and short-term bond ETFs are all seeing big flows.
On the equity side, Rosenbluth thinks a record year for dividend strategies is highly likely, with ETFs like the Schwab US Dividend Equity ETF (SCHD) and the Vanguard High Dividend Yield Index ETF (VYM). Both ETFs have gathered $7 billion in the first nine months of the year.
According to Rosenbluth, lower volatility funds have also benefited from the rocky market, with the iShares MSCI USA Min Vol Factor ETF (USMV) and the Invesco S&P 500® Low Volatility ETF (SPLV) together have a combined $5 billion on the year.
Another type of fund doing well is covered call funds like the JPMorgan Equity Premium Income ETF (JEPI). “Investors want to be part of the equity market if there is a recovery, but with downside protection,” Rosenbluth observed.
Rosenbluth also pointed to the strength in value ETFs as outlined in his most recent piece. The piece digs into value’s big year, noting how the Vanguard Value ETF (VTV) was down just 11% as of October 5, compared to the 30% decline of the Vanguard Growth ETF (VUG), while the iShares S&P 500 Value ETF (IVE) was outperforming the iShares S&P 500 Growth ETF (IVW) by more than 1,400 basis points in the same timeframe. “Value is holding up much better, and there’s room for potential upside,” Rosenbluth said.
Additionally, Rosenbluth’s recent Chart of the Week also pointed to some interesting places where investors are finding income.
On the Fixed-Income side, there are also flows going into short and long duration. The SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares Short Treasury Bond ETF (SHV) each had more than $10 billion in the first nine months of the year – But each was outgained by the iShares 20+ Year Treasury Bond ETF (TLT).
At the end of his segment, Rosenbluth also pointed out that registration is open for the upcoming February 5 – February 8, 2023 conference Exchange: An ETF Experience.
Minimize Volatility
BlackRock’s Abby Woodham and MSCI’s Anil Rao joined the podcast next to discuss the historic market. Given stretched valuations, geopolitical uncertainty brought about by the Russian invasion of Ukraine, inflation, rising rates, and a host of other issues have made for a challenging market.
“Our clients have been contending with a number of fast-moving challenges this year,” Woodham said. “This means that resilience has really been at the forefront for many investors.” Investors are looking for solutions beyond the traditional 60/40 portfolio and experimenting with downside protection. Low volatility funds have been quite popular this year as well.
The iShares MSCI USA Min Vol Factor ETF (USMV) is Blackrock’s flagship minimum volatility ETF. Rao believes there are several ways to reduce risk, each with its own drawbacks. “This is what we do at MSCI – identify lower risk stocks but also take into account the core relationship between stocks.” In this way, they might hold higher risk stocks with business models with built-in hedges countercyclical to another firm in the index. “Take, for example, an airline and an oil extractor. Both might be high risk independently, but one does relatively well as oil prices go up, and the other one – the airline – does well if oil does poorly, and oil prices go down. That would be reflected in their correlation.”
Finding Value
Distillate Capital has three ETFs currently, the Distillate US Fundamental Stability & Value ETF (DSTL), the Distillate International Fundamental Stability & Value ETF (DSTX), and the recently launched Distillate Small/Mid Cash Flow ETF (DSMC).
CEO Tom Cole joined Nate to talk about the quiet rise of DSTL, which went from $35 million AUM in 2019 to $750 million. Cole believes DSTL has really begun resonating with investors. “Value became an incredibly popular category of investing because it did better than the market,” Cole noted that if you had purchased the best value stocks between 1960 and 1990, you would have outperformed the market eight-fold over that time period. He sees the 90s as a sea change for the economy. Cole observed, “we moved from an economy driven by physical assets to one driven by intellectual assets.”
Cole sees the rise of intellectual assets as potentially obscuring on the books how valuable a company actually is as research and development become expenses incurred, even though they are the drivers of what a company is worth in the modern era.
According to Cole, Distillate funds are a return to first principal investing.
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