Tom Lydon, CEO of ETF Trends, discusses rising interest rates and bond ETFs as well as bitcoin funds with Michael SonnenShein, CEO of Grayscale, and Matt Hougan, CIO of Bitwise, on this week’s “ETF Edge,” hosted live on CNBC by Bob Pisani from ETF Exchange in Miami Beach, Florida.
Lydon opens by discussing advisors’ overwhelming concerns regarding inflation and rising interest rates, which are greater even than their concerns about geopolitical risk, as worries around Fed tightening impact bonds and bond ETFs. A balanced portfolio of 60/40 split between stocks and bonds has long been considered the traditional way to invest, but in the current economic environment of rising rates, advisors are beginning to question that allocation percentage to bonds.
Advisors are “not as concerned about volatility in the stock market — in fact, numbers show they continue to buy on the dips, but, as you point out, inflation and rising interest rates is a real worry, and the last time we saw this was the late ’70s,” Lydon says.
According to Pisani, Bond ETFs continue to bleed as advisors and investors allocate away from the space in the face of rising interest rates, with some of the largest bond ETFs hitting new lows.
So where is the money going instead? Lydon explains that money is currently flowing into commodities at an unprecedented rate, with more flows going into commodity funds than into fixed-income funds so far this year. Investors are also keeping their money at home instead of investing.
“There’s $5 trillion in money market funds, there’s $15 trillion in bank passbook accounts. People, and advisors especially, and they’re telling us this, would rather keep it safe or very, very low duration,” Lydon says. “There’s a lot of fear out there in fixed income.”
Advisors are leaning heavily into diversification for their portfolios through commodities, dividend strategies, and alternative strategies such as options overlays to seek income. The reallocations of portfolios that are happening as advisors and investors move away from more traditional bond investments means there is an enormous amount of money currently in flux.
“Today, there’s more money in motion than we’ve seen in 10 years in the ETF space,” Lydon explains.
The ETF Exchange conference, which runs April 11–14, offers advisors a chance to hear experts talk about current markets and options moving forward. It also allows them to network face-to-face for the first time since the pandemic.
Bitcoin ETF Seems Inevitable
The discussion turns next to a bitcoin ETF and the current state of the bitcoin economy. Sonnenshein explains that Grayscale currently has a filing before the SEC for a spot bitcoin ETF that the regulatory agency had previously delayed. Both Sonnenshein and Hougan believe that the bitcoin economy is robust, and Sonnenshein points to the recent passage of the 1933 Act bitcoin futures ETF by the SEC as a reason to think that a spot bitcoin ETF approval is on the horizon.
“The fact of the matter is that bitcoin is now an institutional market — it’s a market with institutional service providers, institutional investors, a large and robust regulated futures market,” Hougan says. “Maybe five years ago, the bitcoin market wasn’t ready for an ETF; now it’s more than ready.”
Lydon explains that in annual surveys conducted with ETF Trends and Bitwise, advisors consistently demonstrate growing interest and demand for bitcoin funds that can be incorporated into their traditional platforms.
“Right now, there’s not really that many choices,” Lydon says, and believes that demand isn’t going to decrease. “It’s going to move forward, and with gentlemen like these that understand how to work with regulators, I think they’re going to get it done.”
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