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Speaker 1: Welcome Trillians. I'm Joel Webber and I'm Eric Beltunas Eric,

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Speaker 1: the markets have not been going completely like they've been

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Speaker 1: doing for the past ten years. Yeah, I mean sixteen

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Speaker 1: was utopiaen was utopia squared. This year's like reality what happened?

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Speaker 1: I mean, there's a lot of theories, a lot of

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Speaker 1: things going on. FED. The FED his raised rates on

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Speaker 1: the short end of the curve. That's been one thing,

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Speaker 1: which is trade war. There's a trade war, although I

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Speaker 1: think that's overrated. Earnings haven't been as good. I think

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Speaker 1: that's probably the bigger one. And I also think just

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Speaker 1: investors are under They acknowledge the market has been so

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Speaker 1: good for ten years, and I think that that weighs

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Speaker 1: on people. You know, you know what, I got a

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Speaker 1: nice amount of profits, so I think that all combined

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Speaker 1: probably equals this sort of um change in mindset. And

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Speaker 1: you can see this change in mindset in the e

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Speaker 1: t F flows with what we're calling regime changes. Uh,

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Speaker 1: it's not the typical year where you know, a good headline,

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Speaker 1: you see all this money rush into the SNPTFS bad headline.

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Speaker 1: It all comes out. You see a little of that,

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Speaker 1: but underneath you see some real different dynamics going on

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Speaker 1: that is very, very different, and it could be the

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Speaker 1: transition year to a sort of more rougher, different kind

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Speaker 1: of defensive future, not that we know, but we don't know,

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Speaker 1: but it the flows feel and look different. And joining

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Speaker 1: us for this episode Caroline Wilson, who's a reporter with

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Speaker 1: Bloomberg News covering e t fs, and Tom Sara Vegas

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Speaker 1: with Bloomberg Intelligence. Both of them have been on the

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Speaker 1: show before. Welcompareds this time on Trilliance Regime changes. Tom,

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Speaker 1: you do a lot of charts at Bloomberg Intelligence, Eric says,

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Speaker 1: this is a top five for the year. What did

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Speaker 1: you recently chart? This is a big year for e

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Speaker 1: t s. I think there's this chart shorter sort of

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Speaker 1: tells a few different stories. Is one, the market is

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Speaker 1: a lot more volader than it was in past years,

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Speaker 1: but overall ETFs are still taking in money, right, so

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Speaker 1: it's still positive on there. It's not like everyone's flocking

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Speaker 1: out of ETFs. But also there's a lot of like

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Speaker 1: sort of rejiggering going on, and I think that speaks

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Speaker 1: a lot to the way e t s are being

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Speaker 1: used right very actively. It's not just your buying sp

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Speaker 1: F a hundred. That's it just et F investors themselves

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Speaker 1: are being very tactical on how they're allocating money. So

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Speaker 1: what I looked at was, with all the volatility this year,

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Speaker 1: let's look at the more defensive areas of the market. Right,

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Speaker 1: so like boring sectors like utilities, low volley, tfs, etcetera.

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Speaker 1: Um As a percentage basis, everyone's been going into those areas, right.

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Speaker 1: Tech has been so hot for such a long time

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Speaker 1: the market genergist here sort of pulled everyone to go

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Speaker 1: to these more safer areas of the market. So on

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Speaker 1: a percentage basis, it's actually one of the highest flocks

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Speaker 1: of these defensive areas of the market that we've ever seen.

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Speaker 1: And was this a like a Q one, Q two,

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Speaker 1: Q three thing or like a Q three thing. It

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Speaker 1: was really in the second half of the year, it's

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Speaker 1: like Q three, right, and then also with October and

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Speaker 1: then even November, so that really helped accelerated to a lot.

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Speaker 1: And like even now in December, I mean, the market

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Speaker 1: has been pretty volatile, so it's it's we're still seeing

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Speaker 1: money sort of fall into these defensive areas. And Eric,

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Speaker 1: what did you think when you saw that. Uh well,

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Speaker 1: we discussed this and we thought, let's just group everything

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Speaker 1: into defensive versus more offensive. Gold is in there too,

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Speaker 1: by the way, that's been doing okay, is of the

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Speaker 1: flows going into e t f s in the fourth

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Speaker 1: quarter have gone into these defensive e t f s.

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Speaker 1: That's up from what almost nothing right, And it's hit

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Speaker 1: this point a couple of times in the past ten years.

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Speaker 1: When else did it hit about number sure, and it

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Speaker 1: was sort of coincided with like in two thousand eleven

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Speaker 1: the market was down right, we had the beginning of

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Speaker 1: two thousand and sixteen the market was really volatile, but

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Speaker 1: there was also a lot of other things happening to

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Speaker 1: Like remember a couple of years ago, like the Taper

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Speaker 1: tantrum was like a really big thing when rates would

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Speaker 1: go up and the market was trading around it, um

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Speaker 1: money would flock into like really short term areas, like

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Speaker 1: like the fixed income market. But most of the time

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Speaker 1: this has been associated with with the market going down.

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Speaker 1: And I think Tom brings up a good point, which

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Speaker 1: is especially on Twitter, I hear this a lot. People's like, oh,

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Speaker 1: wait until the passive bubble pops, or wait until the

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Speaker 1: SMP or beta stops working. But passive and e t

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Speaker 1: f aren't just equity beta. They actually make products to

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Speaker 1: play or hedge against equity beta falling, like cash like ETFs,

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Speaker 1: hedge fund like e t f s, gold alternatives. So

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Speaker 1: I think that's the two seventy into et f this year,

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Speaker 1: and a lot of it going into defensive speaks to

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Speaker 1: e t f s providing the tools for any kind

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Speaker 1: of market, and the bigger area of that defensive is

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Speaker 1: short term and ultra short term dead. Etfcs are very

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Speaker 1: boring and they hold treasuries sometimes corporates Carolina um. In

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Speaker 1: my opinion, this is probably the flow story of the year.

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Speaker 1: Is the money into these really safe and boring? Why

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Speaker 1: the surgeon to these and which ones are seeing action?

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Speaker 1: This is something that you've written about too a lot,

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Speaker 1: and thanks for for setting this up to be so boring.

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Speaker 1: But everyone can doze off now. No, but Joel was

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Speaker 1: mentioning or asking is this a Q one, a Q

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Speaker 1: two or Q three thing? I mean, it's been an

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Speaker 1: absolute craze these flows into this area of the fixed

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Speaker 1: thing called market all year. It's been a hot spot.

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Speaker 1: I mean to give you a little size and scope

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Speaker 1: because it really just has been massive. Funds tracking not

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Speaker 1: a Bloomberg news story unless it has size and scope exactly,

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Speaker 1: and it doesn't if it doesn't have the word massive superlative.

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Speaker 1: Most since exactly, funds tracking ultrashort bonds have taken in

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Speaker 1: close to thirty billion dollars this year UM. So that's

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Speaker 1: not only a clear record for the category for any

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Speaker 1: other year, but it's also so much more than the

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Speaker 1: second most year, which was when they only took in

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Speaker 1: nine billion dollars. So we're talking about thirty billion this

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Speaker 1: year compared to that nine billion. And so why do

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Speaker 1: these funds learn so much cash? I mean, as the

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Speaker 1: yield curve flattens, bonds on the shorter end of the

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Speaker 1: curve are just more attractive from a yield perspective, So

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Speaker 1: why would you not opt for a strategy offering less

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Speaker 1: duration risk? And so investors race to the end and

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Speaker 1: howe how short are we talking? So I like to

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Speaker 1: call them the Fab five. These are the five funds

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Speaker 1: that I really can't write about flows into one without

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Speaker 1: writing about flows into all. Five of them were the

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Speaker 1: Fab five In e t F bill, that's the Spider

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Speaker 1: Barclays one to three month t bill very ultra short

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Speaker 1: g bill that's the Goldman Sacks that's zero to one year,

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Speaker 1: a little more exciting, JP s T, JP Morgan ultra

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Speaker 1: short income shy, the I shares one to three year.

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Speaker 1: Now we're going out in duration a little bit more

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Speaker 1: still short term but not ultra short and near the

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Speaker 1: A shares short maturity bond ETF and talk about near

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Speaker 1: a little bit. That one's active, right, So within this

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Speaker 1: rush to protect yourself from equity shocks to go short

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Speaker 1: term and also the yield you get, right, active has

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Speaker 1: these active has done well in these categories right, better

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Speaker 1: than other categories. And so that's interesting because from fixed

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Speaker 1: income more largely, I know that you like to bring

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Speaker 1: up this idea about active and passive in the space,

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Speaker 1: and these bond funds that have done well and they're active,

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Speaker 1: it's because they've dipped into high yield a little bit.

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Speaker 1: But it brings up a good question about whether or

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Speaker 1: not that's something that can be indexed, right, Like can't

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Speaker 1: we just index that instead of having to rely on

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Speaker 1: the actively managed strategy? I think mint and near right

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Speaker 1: are the two and jps T, yeah, those are all active.

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Speaker 1: I think they're all like what a duration of less

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Speaker 1: than a year. But they can do corporates, they can

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Speaker 1: go international. They're just trying to squeeze out like one

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Speaker 1: point five yield. So Tom, that maybe is not that

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Speaker 1: surprising that fixed income would be a place that would

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Speaker 1: get see a lot of inflows. Um as people go defensive.

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Speaker 1: What's something that was surprising to you? What, let's taken

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Speaker 1: fixed income right. So with so there was almost this

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Speaker 1: perfect storm this year for these products. You had interest

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Speaker 1: rates going up, right, so that hurt fixed income ETFs.

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Speaker 1: So people are trying to shorten the duration they went

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Speaker 1: into that. But also they go to these products when

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Speaker 1: the equity market is a little bit floppy, right, So

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Speaker 1: you sort of have two avenues that are feeding into

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Speaker 1: the short term debt products. But before this whole story,

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Speaker 1: if you remember, like everyone was saying, oh, rates are

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Speaker 1: gonna go up, Rates are gonna go up, So all

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Speaker 1: these products had come out before that saying hey, you

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Speaker 1: can still buy your bonds, but we're going to hedge

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Speaker 1: out all that interest rate risk. So these slew of

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Speaker 1: products come out that just interest rate hedge. I thought

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Speaker 1: these were going to take off, especially with like the

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Speaker 1: environment this year, those have been really underwhelming, like just

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Speaker 1: there's not a lot of interest in those products. I

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Speaker 1: think what's been happening is investors are just saying, you

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Speaker 1: know what, I'm gonna sell my long term that etfn't

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Speaker 1: just going to these short ones, because that's actually what's happening.

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Speaker 1: No one seems to be buying these ones. That it's

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Speaker 1: sort of like doing it for you, um, sort of

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Speaker 1: like a one stop solution. I was sort of just

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Speaker 1: moving money themselves a little bit shorter and let me

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Speaker 1: jump in. L q D H, which is the hedge

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Speaker 1: version of l q D is flat. L q D

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Speaker 1: is down four point four, so it didn't have the

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Speaker 1: it didn't have that breakaway that the currency hedged et

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Speaker 1: s did, were they almost like doubled the non hedged one.

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Speaker 1: I just think the breakaway might have to be a

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Speaker 1: little bigger. And you know, I don't shiny object ish

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Speaker 1: for for that. And you're right, there's more choices I

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Speaker 1: think for on the bond side to hedge besides the

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Speaker 1: interest rate hedge. But I agree these things were made

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Speaker 1: for this moment and they're not really getting much action. Yeah,

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Speaker 1: and it's sort of UM goes back to about the

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Speaker 1: currency hedge stuff. Like that's a package trade, right, so

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Speaker 1: it's doing it for you, same with these products. So

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Speaker 1: it's just maybe it's not like it's not enough juice

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Speaker 1: in the last like couple, you know, last year or

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Speaker 1: so to spark enough interest. And there's just so many

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Speaker 1: market concerns right now, right, I mean, raising rates is

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Speaker 1: one of them, but there's also slow and global growth,

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Speaker 1: there's trade war attention, so people are finding ways to

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Speaker 1: find safety depending on what which risks they perceived to

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Speaker 1: be greater. Yeah, I mean if you look at the

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Speaker 1: best performing ETFs of the year, these again these boring

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Speaker 1: ETFs that are short termed, they're actually like all in

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Speaker 1: the top best performing there, in the top quartile or

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Speaker 1: top ten percent of that, and so they're not really

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Speaker 1: boring in that regard there. And this is why Todd

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Speaker 1: rosen Bluth he has a problem with me calling this

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Speaker 1: a craze, like the way people went into currency hedgettfs

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Speaker 1: or low vall back. I do consider this a craze

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Speaker 1: because I think this is performance chasing in a way.

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Speaker 1: It just is performance chasing and something that doesn't seem

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Speaker 1: like that. But I would argue probably half the money

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Speaker 1: will leave if other things get better. I don't think

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Speaker 1: this is sticky money. I think this is mostly temporary,

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Speaker 1: and thus craze is apropos. But I could see why

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Speaker 1: you would be like, how can it be a craze

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Speaker 1: going into treasuries? What else have people been doing when

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Speaker 1: you look at it from a strategic level, where else

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Speaker 1: are they going other than sort of the short term

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Speaker 1: duration fixed income stuff. So let's go to equities, right,

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Speaker 1: So even though the market has been down and pretty void,

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Speaker 1: moneys still sort of been shifting even within equities. Um,

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Speaker 1: let's talking about factors, so like lovall, so these are

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Speaker 1: gonna be stocks that are gonna drop blessed in the

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Speaker 1: market or whatnot. It's sort of expected. We see it

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Speaker 1: in other years when the market goes down, money sort

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Speaker 1: of poles into these products. So that's been happening to

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Speaker 1: And then also like value, like there's this whole thing

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Speaker 1: about value has been under performing for all along, and

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Speaker 1: when the market goes down, people sort of switch and saying, hey,

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Speaker 1: maybe I'm gonna go buy the cheap stuff, right the

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Speaker 1: more like attractively valued stuff. So there's been a pretty

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Speaker 1: substantial uptake and value, like the value factor value focused

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Speaker 1: ets too. Um so value is one, and then you've

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Speaker 1: also seen some action into quality and low volatility factor

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Speaker 1: et f s. Right, so if we go those are

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Speaker 1: more of the sort of conservative factors and growth e

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Speaker 1: t f s have seen outflows and even momentum had

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Speaker 1: a good first start but has been struggling a little

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Speaker 1: bit in the in the second half. Yeah, exactly. Momentum

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Speaker 1: it was like tooken so much money early in the years,

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Speaker 1: so still on the year, I think it's the best,

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Speaker 1: like has taken in more money in the end of

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Speaker 1: the factor, but sort of in this last quarter it's

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Speaker 1: been a brittick shift. And just a quick note on this,

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Speaker 1: Momentum is just performance chasing. So momentum is actually starting

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Speaker 1: to rebalance into value stocks because they're getting hot. Growth

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Speaker 1: is looking at more tech stocks, higher p ratio stocks.

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Speaker 1: Growth has beaten value for ten years, and that if

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Speaker 1: value starts to outperform growth, that could be a regime

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Speaker 1: change they could lock in for a decade. I mean,

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Speaker 1: that's I think the kind of regime change that could happen.

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Speaker 1: We don't know, but that would be a major one.

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Speaker 1: Does it wear a yellow vest that's a third rail? Yeah, sorry,

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Speaker 1: there you go. Definition third rail right there, curly and

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Speaker 1: what else has caught your eye? Well, momentum sideways nicely

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Speaker 1: into what I was gonna say about healthcare, because there's

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Speaker 1: my word massive again, the massive mode could get some

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Speaker 1: size and scope you a little size and scope. All

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Speaker 1: thetfs tracking the healthcare sector have taken in more than

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Speaker 1: eight billion dollars this year. So that's a record year

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Speaker 1: of influence for the sector. And back to my momentum point,

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Speaker 1: m t U M, the the big I shares momentum

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Speaker 1: ETF really boosted in its recent rebalancing its exposure to healthcare.

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Speaker 1: So you have some of these drugmakers Mark Fiser, Eli,

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Speaker 1: Lily all having their shares explode to the highest level

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Speaker 1: in more than seventeen years. And all of those names

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Speaker 1: were added recently to m t U M. So there's

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Speaker 1: another example of investors looking for a traditionally defensive sector

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Speaker 1: like healthcare, but also going there for the performance chasing

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Speaker 1: for that yield play. And let's talk about utilities, right,

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Speaker 1: talk about I mean, if we're gonna talk boring, that's

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Speaker 1: probably the most boring sector. Que we all agree with that, yes, okay,

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Speaker 1: but they're hot, right, They're out performing tech um and

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Speaker 1: we're seeing money go there right right, Also a lot

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Speaker 1: of money going into that. Xl U is sort of

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Speaker 1: the poster child there. That's the spider utilities E t

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Speaker 1: F and also consumer staples another very sort of safe sector.

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Speaker 1: And what's in that when you look at what utility

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Speaker 1: e t F holds, what where do you see them

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Speaker 1: putting the most of their money? Uh? Well, XLU will

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Speaker 1: be a pretty concentrated portfolio. I think it's about thirty stocks.

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Speaker 1: I can name name a couple, but just real quick,

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Speaker 1: xl U is up ten point six percent this year,

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Speaker 1: I mean considering the markets flat and it looks like

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Speaker 1: tech is up three percent. That some major outperformance there.

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Speaker 1: Again back to if utilities start to permanently outperformed tech

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Speaker 1: and communications, which have destroyed it for ten years, that

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Speaker 1: again would be an amazing change of events. One more thing, Um,

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Speaker 1: I want to go to Tom on this. So Tom,

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Speaker 1: you actually looked, and I love this deck you did

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Speaker 1: where you looked at the non cyclical sectors like utility,

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Speaker 1: staples and healthcare for the took in the most relative

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Speaker 1: to the cyclicals. Right in the what was there? What

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Speaker 1: was the superlatical that most in a couple of years. Yeah,

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Speaker 1: And that's good context because I would like to look

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Speaker 1: at relative to each other, right, because you can just

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Speaker 1: throw out an absolute number. So I looked at it

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Speaker 1: relative to like tech, uh, like the really cyclical sectors

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Speaker 1: versus the defensive. And it's been three months in favor

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Speaker 1: of the defensive. So it's been like this total buzz

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Speaker 1: kill for the last like three months. But the spread

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Speaker 1: has been really wide too, So it would be really

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Speaker 1: interesting like sort of unwinding because so much money has

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Speaker 1: gone into tech ETFs in these other sectors. We'll see

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Speaker 1: how much of that shifts back into utilities because those

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Speaker 1: sectors from an asset perspective is still pretty small. But

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Speaker 1: it be interesting to see how much money sort of

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Speaker 1: reallocates from tech and some of these other sectors into

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Speaker 1: into staples and whatnot. So a lot of this stuff

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Speaker 1: has been US centric. What about international? So we just

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Speaker 1: wrote about this yesterday because there are investors that are

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Speaker 1: just over the US market altility and they are piecing

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Speaker 1: out and they are going global. How's that for headline writing? Um?

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Speaker 1: So we wrote about the I Shares Fund with the

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Speaker 1: ticker a c w X. So the e t F

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Speaker 1: gives investors exposure to like virtually every corner of the

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Speaker 1: globe except the US. Almost seventent of the holdings are

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Speaker 1: in Japanese equities, a chunk in in the UK. And

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Speaker 1: so traders say the US market is overvalued, right, so

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Speaker 1: they want to take their bets elsewhere. Just a quick

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Speaker 1: stat there, I V that's the I shares SMP value

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Speaker 1: E t F. The average PE ratio there seventeen for

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Speaker 1: a c w X, the x U S E t

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Speaker 1: F the HP there is about twelve point five. So

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Speaker 1: international stocks according to PE ratio is cheaper than US

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Speaker 1: value stocks. And how much? How much? Were we talking

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Speaker 1: from a flow perspective there? It was a record I

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Speaker 1: don't have scope, alright, alright, I'll take it a c

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Speaker 1: w X by the way, so we're talking everything about

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Speaker 1: the US versus the US. The s p Y, which

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Speaker 1: is the US is up six in the past five years.

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Speaker 1: A c w X is only up eight percent. So

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Speaker 1: you could see how this five to ten year period

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Speaker 1: has been a one regime and it's been all basically

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Speaker 1: tech US bullish. This If this flips in growth, you

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Speaker 1: could see, you know, five or ten years and it

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Speaker 1: might not. But that's why I think this is a

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Speaker 1: very fascinating year. I've thought things were going to change

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Speaker 1: before and they snap back to this sort of fang

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Speaker 1: raw raw thing. But I don't know. This year feels

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Speaker 1: different to me. Eric. You also think that there's a

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Speaker 1: bigger backdrop to this, right, there is regime change going on,

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Speaker 1: but there's something else. Yes, I do, because there's really

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Speaker 1: two types of flows in my opinion. There's the trading

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Speaker 1: crowd and there's the allocators. The trading crowd is gone.

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Speaker 1: They have been spooked, and that's why you see money

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Speaker 1: out of spy E M and E F A. Those

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Speaker 1: are very liquid but a little more expensive. Allocators don't

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Speaker 1: like them. They want the real cheap stuff. That's what's

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Speaker 1: leading the flows. Even though some of that stuff is

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Speaker 1: down like I E F A, I E M, G

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Speaker 1: I V V, so allocators are still pouring into this

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Speaker 1: the cheap etf So if you clear out the trading crowd,

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Speaker 1: that's why the flows are a little down from last year.

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Speaker 1: You have two dred and sixty five billion in flows,

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Speaker 1: and then you add in index funds which took in

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Speaker 1: about another one fifties, So your four hundred billion in

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Speaker 1: quote passive flows. We looked at that number of those

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Speaker 1: dollars are going to products that charge twenty basis points

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Speaker 1: or less. That's the highest on record. In other words,

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Speaker 1: the more volatile and wild it is out there, the

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Speaker 1: more the trader trading crowd leaves, who buy the more

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Speaker 1: expensive products, and the more cost matters to the allocators.

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Speaker 1: And so this is a bigger climate change type issue

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Speaker 1: for the asset management industry and probably speaks to why

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Speaker 1: asset management stocks are struggling is because it is insatiable

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Speaker 1: the obsession for cost that advisors and allocators have. And

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Speaker 1: you don't see that as clearly until the trading crowd leaves,

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Speaker 1: But when they're gone, that's all there is. And this

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Speaker 1: is a This is the big, big trend that sort

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Speaker 1: of has been going on the whole time, the vanguard effect.

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Speaker 1: What have you. I feel like we could take a

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Speaker 1: tour of the Natural History Museum and there'd be like

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Speaker 1: a little diorama and you would like describe like, Okay,

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Speaker 1: here are the hunter gatherers leaving the scene and there's

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Speaker 1: a new regime taking over. This to me is a

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Speaker 1: permanent change. We call it the Great cost Migration because

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Speaker 1: it's great. It's about cost and it's migration, meaning it

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Speaker 1: is permanent and high cost to low costs. Arguably the

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Speaker 1: bigger or the more dead on trend and active passive

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Speaker 1: I think active passive can be. It's a there's a

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Speaker 1: lot of gray area in that. What do you guys

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Speaker 1: think about this sort of cost thing? Is anything surprised

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Speaker 1: you about that? No, it doesn't. And I think it's

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Speaker 1: probably only going to accelerate, right because as these as

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Speaker 1: these companies scale up, like they're gonna products gonna get cheaper, right,

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Speaker 1: So they're gonna keep getting bigger. As money keeps going

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Speaker 1: to the cheaper products, they're just gonna keep scaling and

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Speaker 1: bigger and bigger um. And that's why they can offer

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Speaker 1: it cheap, right, So like Vangor can offer really cheap.

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Speaker 1: But as some of these other newer sponsors are taking

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Speaker 1: in money um, their costs are probably gonna come down too.

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Speaker 1: So this trends probably just gonna keep accelerating. And we

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Speaker 1: even see the migration with hedge funds. I mean we

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Speaker 1: sort of pour into the thirteen F filings to see

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Speaker 1: how hedge funds are changing their et F exposures, and

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Speaker 1: you see them out of E E M, which is

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Speaker 1: the traditional I shares Emerging Markets fund and into i MG.

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Speaker 1: So that's the cheaper core like smaller emerging markets. Even

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Speaker 1: hedge funds are like they are, they go cheaper. Carolina, Tom,

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Speaker 1: thanks for joining us and Trillion, Thanks for having thanks,

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Speaker 1: thanks for listening to children. Until next time you and

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Speaker 1: find us on the Bloomberg terminal, Bloomberg dot com, Apple podcast, Spotify,

401
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Speaker 1: and wherever else you'd like to listen. We'd love to

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Speaker 1: hear from you. Ron Twitter, I'm at Joel Weber Show.

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Speaker 1: He's at Eric Fall Tunes. Tom is at t P

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Speaker 1: S A r O F A g I S Bonus

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