ETF Regime Ch-Ch-Ch-Changes

think that's overrated. Earnings haven't been as good. I think that's probably the bigger one. And I also think just investors are under They acknowledge the market has been so good for ten years, and I think that that weighs on people. You know, you know what, I got a nice amount of profits, so I think that all combined probably equals this sort of um change in mindset. And you can see this change in mindset in the e

t F flows with what we're calling regime changes. Uh, it's not the typical year where you know, a good headline, you see all this money rush into the SNPTFS bad headline. It all comes out. You see a little of that, but underneath you see some real different dynamics going on that is very, very different, and it could be the transition year to a sort of more rougher, different kind of defensive future, not that we know, but we don't know,

but it the flows feel and look different. And joining us for this episode Caroline Wilson, who's a reporter with Bloomberg News covering e t fs, and Tom Sara Vegas with Bloomberg Intelligence. Both of them have been on the show before. Welcompareds this time on Trilliance Regime changes. Tom, you do a lot of charts at Bloomberg Intelligence, Eric says, this is a top five for the year. What did you recently chart? This is a big year for e t s. I think there's this chart shorter sort of

tells a few different stories. Is one, the market is a lot more volader than it was in past years, but overall ETFs are still taking in money, right, so it's still positive on there. It's not like everyone's flocking out of ETFs. But also there's a lot of like sort of rejiggering going on, and I think that speaks a lot to the way e t s are being used right very actively. It's not just your buying sp F a hundred. That's it just et F investors themselves

are being very tactical on how they're allocating money. So what I looked at was, with all the volatility this year, let's look at the more defensive areas of the market. Right, so like boring sectors like utilities, low volley, tfs, etcetera. Um As a percentage basis, everyone's been going into those areas, right. Tech has been so hot for such a long time the market genergist here sort of pulled everyone to go

to these more safer areas of the market. So on a percentage basis, it's actually one of the highest flocks of these defensive areas of the market that we've ever seen. And was this a like a Q one, Q two, Q three thing or like a Q three thing. It was really in the second half of the year, it's like Q three, right, and then also with October and then even November, so that really helped accelerated to a lot.

And like even now in December, I mean, the market has been pretty volatile, so it's it's we're still seeing money sort of fall into these defensive areas. And Eric, what did you think when you saw that. Uh well, we discussed this and we thought, let's just group everything

into defensive versus more offensive. Gold is in there too, by the way, that's been doing okay, is of the flows going into e t f s in the fourth quarter have gone into these defensive e t f s. That's up from what almost nothing right, And it's hit this point a couple of times in the past ten years.

When else did it hit about number sure, and it was sort of coincided with like in two thousand eleven the market was down right, we had the beginning of two thousand and sixteen the market was really volatile, but there was also a lot of other things happening to Like remember a couple of years ago, like the Taper tantrum was like a really big thing when rates would go up and the market was trading around it, um money would flock into like really short term areas, like

like the fixed income market. But most of the time this has been associated with with the market going down. And I think Tom brings up a good point, which is especially on Twitter, I hear this a lot. People's like, oh, wait until the passive bubble pops, or wait until the SMP or beta stops working. But passive and e t f aren't just equity beta. They actually make products to play or hedge against equity beta falling, like cash like ETFs,

hedge fund like e t f s, gold alternatives. So I think that's the two seventy into et f this year, and a lot of it going into defensive speaks to e t f s providing the tools for any kind of market, and the bigger area of that defensive is short term and ultra short term dead. Etfcs are very boring and they hold treasuries sometimes corporates Carolina um. In my opinion, this is probably the flow story of the year.

Is the money into these really safe and boring? Why the surgeon to these and which ones are seeing action? This is something that you've written about too a lot, and thanks for for setting this up to be so boring. But everyone can doze off now. No, but Joel was mentioning or asking is this a Q one, a Q two or Q three thing? I mean, it's been an absolute craze these flows into this area of the fixed thing called market all year. It's been a hot spot. I mean to give you a little size and scope

because it really just has been massive. Funds tracking not a Bloomberg news story unless it has size and scope exactly, and it doesn't if it doesn't have the word massive superlative. Most since exactly, funds tracking ultrashort bonds have taken in close to thirty billion dollars this year UM. So that's not only a clear record for the category for any other year, but it's also so much more than the second most year, which was when they only took in

nine billion dollars. So we're talking about thirty billion this year compared to that nine billion. And so why do these funds learn so much cash? I mean, as the yield curve flattens, bonds on the shorter end of the curve are just more attractive from a yield perspective, So why would you not opt for a strategy offering less duration risk? And so investors race to the end and howe how short are we talking? So I like to

call them the Fab five. These are the five funds that I really can't write about flows into one without writing about flows into all. Five of them were the Fab five In e t F bill, that's the Spider Barclays one to three month t bill very ultra short g bill that's the Goldman Sacks that's zero to one year, a little more exciting, JP s T, JP Morgan ultra short income shy, the I shares one to three year.

Now we're going out in duration a little bit more still short term but not ultra short and near the A shares short maturity bond ETF and talk about near a little bit. That one's active, right, So within this rush to protect yourself from equity shocks to go short term and also the yield you get, right, active has these active has done well in these categories right, better

than other categories. And so that's interesting because from fixed income more largely, I know that you like to bring up this idea about active and passive in the space, and these bond funds that have done well and they're active, it's because they've dipped into high yield a little bit. But it brings up a good question about whether or not that's something that can be indexed, right, Like can't we just index that instead of having to rely on

the actively managed strategy? I think mint and near right are the two and jps T, yeah, those are all active. I think they're all like what a duration of less than a year. But they can do corporates, they can go international. They're just trying to squeeze out like one point five yield. So Tom, that maybe is not that surprising that fixed income would be a place that would get see a lot of inflows. Um as people go defensive. What's something that was surprising to you? What, let's taken

fixed income right. So with so there was almost this perfect storm this year for these products. You had interest rates going up, right, so that hurt fixed income ETFs. So people are trying to shorten the duration they went into that. But also they go to these products when the equity market is a little bit floppy, right, So you sort of have two avenues that are feeding into

the short term debt products. But before this whole story, if you remember, like everyone was saying, oh, rates are gonna go up, Rates are gonna go up, So all these products had come out before that saying hey, you can still buy your bonds, but we're going to hedge out all that interest rate risk. So these slew of products come out that just interest rate hedge. I thought these were going to take off, especially with like the environment this year, those have been really underwhelming, like just

there's not a lot of interest in those products. I think what's been happening is investors are just saying, you know what, I'm gonna sell my long term that etfn't just going to these short ones, because that's actually what's happening. No one seems to be buying these ones. That it's sort of like doing it for you, um, sort of like a one stop solution. I was sort of just moving money themselves a little bit shorter and let me jump in. L q D H, which is the hedge

version of l q D is flat. L q D is down four point four, so it didn't have the it didn't have that breakaway that the currency hedged et s did, were they almost like doubled the non hedged one. I just think the breakaway might have to be a little bigger. And you know, I don't shiny object ish for for that. And you're right, there's more choices I think for on the bond side to hedge besides the interest rate hedge. But I agree these things were made

for this moment and they're not really getting much action. Yeah, and it's sort of UM goes back to about the currency hedge stuff. Like that's a package trade, right, so it's doing it for you, same with these products. So it's just maybe it's not like it's not enough juice in the last like couple, you know, last year or

so to spark enough interest. And there's just so many market concerns right now, right, I mean, raising rates is one of them, but there's also slow and global growth, there's trade war attention, so people are finding ways to find safety depending on what which risks they perceived to

be greater. Yeah, I mean if you look at the best performing ETFs of the year, these again these boring ETFs that are short termed, they're actually like all in the top best performing there, in the top quartile or top ten percent of that, and so they're not really boring in that regard there. And this is why Todd rosen Bluth he has a problem with me calling this a craze, like the way people went into currency hedgettfs

or low vall back. I do consider this a craze because I think this is performance chasing in a way. It just is performance chasing and something that doesn't seem like that. But I would argue probably half the money will leave if other things get better. I don't think this is sticky money. I think this is mostly temporary, and thus craze is apropos. But I could see why you would be like, how can it be a craze

going into treasuries? What else have people been doing when you look at it from a strategic level, where else are they going other than sort of the short term duration fixed income stuff. So let's go to equities, right, So even though the market has been down and pretty void, moneys still sort of been shifting even within equities. Um, let's talking about factors, so like lovall, so these are gonna be stocks that are gonna drop blessed in the

market or whatnot. It's sort of expected. We see it in other years when the market goes down, money sort of poles into these products. So that's been happening to And then also like value, like there's this whole thing about value has been under performing for all along, and when the market goes down, people sort of switch and saying, hey, maybe I'm gonna go buy the cheap stuff, right the

more like attractively valued stuff. So there's been a pretty substantial uptake and value, like the value factor value focused ets too. Um so value is one, and then you've also seen some action into quality and low volatility factor et f s. Right, so if we go those are more of the sort of conservative factors and growth e t f s have seen outflows and even momentum had a good first start but has been struggling a little

bit in the in the second half. Yeah, exactly. Momentum it was like tooken so much money early in the years, so still on the year, I think it's the best, like has taken in more money in the end of the factor, but sort of in this last quarter it's been a brittick shift. And just a quick note on this, Momentum is just performance chasing. So momentum is actually starting to rebalance into value stocks because they're getting hot. Growth is looking at more tech stocks, higher p ratio stocks.

Growth has beaten value for ten years, and that if value starts to outperform growth, that could be a regime change they could lock in for a decade. I mean, that's I think the kind of regime change that could happen. We don't know, but that would be a major one. Does it wear a yellow vest that's a third rail? Yeah, sorry, there you go. Definition third rail right there, curly and

what else has caught your eye? Well, momentum sideways nicely into what I was gonna say about healthcare, because there's my word massive again, the massive mode could get some size and scope you a little size and scope. All thetfs tracking the healthcare sector have taken in more than eight billion dollars this year. So that's a record year

of influence for the sector. And back to my momentum point, m t U M, the the big I shares momentum ETF really boosted in its recent rebalancing its exposure to healthcare. So you have some of these drugmakers Mark Fiser, Eli, Lily all having their shares explode to the highest level

in more than seventeen years. And all of those names were added recently to m t U M. So there's another example of investors looking for a traditionally defensive sector like healthcare, but also going there for the performance chasing for that yield play. And let's talk about utilities, right, talk about I mean, if we're gonna talk boring, that's

probably the most boring sector. Que we all agree with that, yes, okay, but they're hot, right, They're out performing tech um and we're seeing money go there right right, Also a lot of money going into that. Xl U is sort of the poster child there. That's the spider utilities E t F and also consumer staples another very sort of safe sector. And what's in that when you look at what utility e t F holds, what where do you see them putting the most of their money? Uh? Well, XLU will

be a pretty concentrated portfolio. I think it's about thirty stocks. I can name name a couple, but just real quick, xl U is up ten point six percent this year, I mean considering the markets flat and it looks like tech is up three percent. That some major outperformance there. Again back to if utilities start to permanently outperformed tech and communications, which have destroyed it for ten years, that again would be an amazing change of events. One more thing, Um,

I want to go to Tom on this. So Tom, you actually looked, and I love this deck you did where you looked at the non cyclical sectors like utility, staples and healthcare for the took in the most relative to the cyclicals. Right in the what was there? What was the superlatical that most in a couple of years. Yeah, And that's good context because I would like to look at relative to each other, right, because you can just

throw out an absolute number. So I looked at it relative to like tech, uh, like the really cyclical sectors versus the defensive. And it's been three months in favor of the defensive. So it's been like this total buzz kill for the last like three months. But the spread has been really wide too, So it would be really interesting like sort of unwinding because so much money has gone into tech ETFs in these other sectors. We'll see how much of that shifts back into utilities because those

sectors from an asset perspective is still pretty small. But it be interesting to see how much money sort of reallocates from tech and some of these other sectors into into staples and whatnot. So a lot of this stuff has been US centric. What about international? So we just wrote about this yesterday because there are investors that are just over the US market altility and they are piecing out and they are going global. How's that for headline writing? Um?

So we wrote about the I Shares Fund with the ticker a c w X. So the e t F gives investors exposure to like virtually every corner of the globe except the US. Almost seventent of the holdings are in Japanese equities, a chunk in in the UK. And so traders say the US market is overvalued, right, so they want to take their bets elsewhere. Just a quick stat there, I V that's the I shares SMP value E t F. The average PE ratio there seventeen for a c w X, the x U S E t

F the HP there is about twelve point five. So international stocks according to PE ratio is cheaper than US value stocks. And how much? How much? Were we talking from a flow perspective there? It was a record I don't have scope, alright, alright, I'll take it a c w X by the way, so we're talking everything about the US versus the US. The s p Y, which is the US is up six in the past five years.

A c w X is only up eight percent. So you could see how this five to ten year period has been a one regime and it's been all basically tech US bullish. This If this flips in growth, you could see, you know, five or ten years and it might not. But that's why I think this is a very fascinating year. I've thought things were going to change before and they snap back to this sort of fang raw raw thing. But I don't know. This year feels

different to me. Eric. You also think that there's a bigger backdrop to this, right, there is regime change going on, but there's something else. Yes, I do, because there's really two types of flows in my opinion. There's the trading crowd and there's the allocators. The trading crowd is gone. They have been spooked, and that's why you see money out of spy E M and E F A. Those are very liquid but a little more expensive. Allocators don't like them. They want the real cheap stuff. That's what's

leading the flows. Even though some of that stuff is down like I E F A, I E M, G I V V, so allocators are still pouring into this the cheap etf So if you clear out the trading crowd, that's why the flows are a little down from last year. You have two dred and sixty five billion in flows, and then you add in index funds which took in about another one fifties, So your four hundred billion in

quote passive flows. We looked at that number of those dollars are going to products that charge twenty basis points or less. That's the highest on record. In other words, the more volatile and wild it is out there, the more the trader trading crowd leaves, who buy the more expensive products, and the more cost matters to the allocators.

And so this is a bigger climate change type issue for the asset management industry and probably speaks to why asset management stocks are struggling is because it is insatiable the obsession for cost that advisors and allocators have. And you don't see that as clearly until the trading crowd leaves, But when they're gone, that's all there is. And this is a This is the big, big trend that sort of has been going on the whole time, the vanguard effect.

What have you. I feel like we could take a tour of the Natural History Museum and there'd be like a little diorama and you would like describe like, Okay, here are the hunter gatherers leaving the scene and there's a new regime taking over. This to me is a permanent change. We call it the Great cost Migration because it's great. It's about cost and it's migration, meaning it is permanent and high cost to low costs. Arguably the bigger or the more dead on trend and active passive

I think active passive can be. It's a there's a lot of gray area in that. What do you guys think about this sort of cost thing? Is anything surprised you about that? No, it doesn't. And I think it's probably only going to accelerate, right because as these as these companies scale up, like they're gonna products gonna get cheaper, right, So they're gonna keep getting bigger. As money keeps going to the cheaper products, they're just gonna keep scaling and

bigger and bigger um. And that's why they can offer it cheap, right, So like Vangor can offer really cheap. But as some of these other newer sponsors are taking in money um, their costs are probably gonna come down too. So this trends probably just gonna keep accelerating. And we

even see the migration with hedge funds. I mean we sort of pour into the thirteen F filings to see how hedge funds are changing their et F exposures, and you see them out of E E M, which is the traditional I shares Emerging Markets fund and into i MG. So that's the cheaper core like smaller emerging markets. Even hedge funds are like they are, they go cheaper. Carolina, Tom, thanks for joining us and Trillion, Thanks for having thanks,

thanks for listening to children. Until next time you and find us on the Bloomberg terminal, Bloomberg dot com, Apple podcast, Spotify, and wherever else you'd like to listen. We'd love to hear from you. Ron Twitter, I'm at Joel Weber Show. He's at Eric Fall Tunes. Tom is at t P S A r O F A g I S Bonus points if you can say that out loud. Carolina is at C A r O E. Wilson. Trillions is produced by Magnus Andricksen or Jessica Levy is the head of Bloomberg Podcasts like