On this week’s “ETF Prime,” host Nate Geraci was joined by Lara Crigger, editor-in-chief at VettaFi, to talk about the backstory behind the SEC’s approval of derivative single stock ETFs and why there is so much mixed messaging coming from the regulatory body around their approval as well as looking at their use case looking ahead. Later Phil Huber, CIO at Savant Wealth and author of “The Allocator’s Edge,” talk about alternatives, and Tim Johnston, partner at Blue Horizon Capital, close out the show by discussing the energy transition and the Blue Horizon BNE ETF (BNE ).
Leveraged and inverse single stock exchange traded products have been trading in Europe for some time now, with leveraged offerings up to five times in some cases, and have yet to have any discernible impacts on the underlying assets. It’s a concern for many with these products, but Crigger is clear to point out that the leverage on the funds launched by AXS Investments are minimal. AXS filed for bigger leverage and inverse, but the SEC only approved up to 2x leverage on several of the securities and less on the inverse.
“What this tells me is that the SEC is factoring in the volatility of the underlying stock into this decision-making process — Tesla is more volatile than Nike, so it’s allowed a smaller leverage factor,” Crigger said.
Crigger believes the funds will hold appeal for investors, but only a small subset and with specific use cases that could include playing market shocks, taking a perspective on earnings, or potential tax-loss harvesting.
The funds were able to come to market because of the ETF Rule (6c-11) passed in 2019, which meant that ETFs that met the qualifying criteria would bypass the need for individual approval by the SEC. The SEC is still able to use some mechanisms to filter funds that they deem pose an excessive risk to investors through their ability to make rules targeting specific fund types, but they didn’t in this case, and Crigger believes it was because of an empty seat on the Commission at the time.
“There was a gap on the Commission, and that majority on the Commission in favor of rule-making was no longer in place so Gensler… may not have had the votes in that window of time that this particular proposal was before them,” Crigger explained.
The conversation also covered the future of these types of funds, currency hedging, and the Japanese yen, as well as growing interest in alternatives and managed futures in particular in 2022.
Alternatives and the Energy Transition
Next on was Phil Huber, CIO at Savant Wealth, who talked about the inspiration for his book and wanting to help educate advisors and investors about alternative assets and what they can offer portfolios, as well as his outlook on allocating to alternatives going forward.
“There’s kind of two parts to the argument for alternatives: there’s the market environment side,” Huber explained. “There’s also the kind of evolution of asset class availability in the sense that as allocators, as financial advisors, we just have a larger opportunity set and a greater toolkit to build portfolios with.”
The traditional 60/40 portfolio has always carried a level of risk to certain market environments, but because of the strong performance for so long, it was largely a matter of not fixing something that remained unbroken until it was. Alternatives are an asset class that can help to mitigate the pain points for bonds within a portfolio in the current economy.
Last on was Tim Johnston, partner at Blue Horizon Capital, to talk about BNE and the new energy economy. Blue Horizon defines old energy as energy that is carbon producing, and new energy is free of carbons, but believes that it’s more a story of energy evolution.
“From an investment standpoint, we really see that it’s not a bright-line test,” Johnston said. “We see the old energy and new energy economy as really a transition: we see this transition taking place over the next 30 years.”
BNE is a fund that invests across five segments and focuses on the energy transition and finding the right companies that are going to lead the energy transition and innovation.
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