ETF Prime: Islam on Tech ETFs, Spot Ether, and More

To begin, Geraci asked Islam to break down what happened to the Technology Select Sector SPDR Fund (XLK A). He added that attention was turning to the popular tech fund after it sold billions of Apple shares and purchased billions of Nvidia shares in return. Islam explained that the fund has capping rules on how heavily a single holding can weigh on the overall portfolio.

While the top two holdings for XLK can hold roughly 20% of fund assets, the third highest holding has to be closer to 4.5%. Therefore, as Islam explains, XLK simply sold enough Apple stock to move it to the third highest holding while replacing its position with Nvidia stock.

“That’s a pretty big change, but I think it’s even more of a big deal because of how significant Nvidia is in the market right now,” she noted. Previously, Islam observed that other tech ETFs were offering more exposure to Nvidia.

Looking at XLK’s weighting methodology, Geraci asked Islam if she thinks the fund’s holding weights are causing it to fall behind other big tech ETFs on the market that evenly hold shares in Nvidia, Apple, and Microsoft. She said that, as an example, the iShares U.S. Technology ETF (IYW A) holds the big three tech stocks at relatively even weights and had a slightly higher performance than XLK in the same time period.

However, Islam dug deeper and highlighted how investors may be looking at these tech stocks as safer options then they actually may be. She noted that investors have flocked to Nvidia, Microsoft, and Apple for name recognition, scale, and outperformance potential.

But she added that “they can also fall pretty hard, especially when there’s a lot of additional excitement around the name that’s boosting valuation, like with Nvidia.”  As an example, Islam highlighted how both Nvidia stock and XLK have seen some drops since the rebalancing occurred, despite continued investor enthusiasm for Nvidia at the time.

Moving on, Geraci pivoted to the upcoming spot ethereum ETF releases, asking Islam what she expects in terms of release date and investment demand. On a potential release date, she noted that she expects them to “come probably before the Fourth of July holiday.”

However, Islam anticipates that demand for spot ethereum is not going to be as robust as the market witnessed when spot bitcoin ETFs launched. As for why, she noted that demand for ethereum is vastly different than bitcoin, which is a far more mainstream product. While she doesn’t expect spot ether ETFs to have the same showing as spot bitcoin ETFs, Islam remains excited to see what happens next for spot crypto ETFs.

“I don’t know if the excitement is going to die down, or if it’s going to keep going, because I already hear people talk about Solana. So, I’m interested to see if we’re going to keep going down this rabbit hole of crypto ETFs, or if the SEC will draw a line somewhere, which I think it probably will,” she added.

To close out this week’s podcast, Geraci welcomed Dhruv Nagrath, director at BlackRock. Observing that the issuer is making a push into actively managed ETFs, including on the fixed income front, Geraci asked Nagrath why active management is becoming more important at this moment. Nagrath noted that while BlackRock has extensive experience in managing active fixed income ETFs, the firm has accelerated its active management operations.

Nagrath highlighted how ETFs can promote a wide variety of investment styles past equal indexing. By using active management strategies, Nagrath asserts that fund managers can provide “greater access to specific markets that might be harder to reach otherwise for investors.” Additionally, he noted how demand for active management for fixed income strategies has continued to grow.

“We’ve been doing this for over a decade, and we think that there’s a role for really efficient index portfolio management, really efficient value add, and active management alongside each other,” Nagrath added.

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