Nate Geraci, president of registered advisory firm The ETF Store and host of the ETF Prime podcast, has dedicated his career to developing exchange-traded fund solutions for clients. With ESG investing, cryptocurrencies and the fallout from the COVID pandemic complicating the landscape, he joins the ETF Think Tank to offer his take on where the industry is heading.
Not surprisingly, Bitcoin ETFs come up early in the conversation. While the SEC has been pretty consistent in its messaging that a Bitcoin ETF is unlikely anytime soon, Geraci notes that it sounds like they’re becoming more open to a futures-based Bitcoin ETF under the right circumstances. The problem is how well Bitcoin futures could work if the SEC is concerned about manipulation in the underlying. If one gets manipulated, the other is likely to follow and the SEC needs to reconcile with that. It seems more likely that a Bitcoin ETF won’t be approved until 2022, but this year is still a possibility.
How the SEC chooses which Bitcoin filings to approve and what kind of structure they can have is also a question. Issuers are now proposing “Bitcoin strategy” ETFs, which would likely hold some combination of Bitcoin futures, the Grayscale Bitcoin Trust and Canadian Bitcoin ETFs, to reasonably mimic physical Bitcoin exposure. Geraci believes that Bitcoin trusts and crypto mutual funds are less than ideal tools for investing in cryptocurrencies compared to what an ETF could offer. In terms of Bitcoin ETF approval, he says the fairest way is to probably approve them at all once, but notes there is some disadvantage to issuers who have been at it for years versus late entrants.
Environmental, social and governance (ESG) investing in the ETF space is another popular topic. Geraci says there are some problems in trying to define what qualifies as ESG and what does not, using the example of an oil company transitioning to a clean energy business. It’s important to look under the hood of ESG ETFs to see what strategy and criteria they’re using because every fund can be different. What shows up at the top of one ESG list can show up at the bottom of another.
Geraci says that while his firm offers ESG models to clients, there just hasn’t been much interest in it. His two biggest issues with ESG are that 1) many of these funds don’t look a whole lot different than plain vanilla index funds and 2) does ESG screening actually change the way companies operate. He notes people that may oppose Amazon’s business practices, but still use an Amazon Prime account. The best way to express displeasure would be to stop using the company. Investing may not be the best way to do that.
Turning to broader investing strategies, Geraci believes that bonds are the single greatest challenge to a portfolio today. With junk bonds offering record low yields and spreads, there’s just not a great deal of incentive to go way out on the risk spectrum for only a little extra yield. He says some advisors are considering things, such as cryptocurrencies and liquid alt strategies, as replacements for the poor risk/return profile of fixed income. The big question is are investors willing to stick with them in tougher times. If they’re unwilling to buy-and-hold some of these products that are either uncorrelated or negatively correlated throughout different market cycles, they may not be effective. Liquid alts have yet to gain any real traction, but it might take a major turn in the markets for investors to see their value.
The final question asked how small issuers can get noticed in an industry that favors the heavyweights. Geraci thinks the best way is to be a first mover and get noisy about a new launch. Small issuers can also take advantage of social media in ways that the giant firms can’t. If someone tries to pick off an idea, investors usually remember who developed the idea first.
This week our guest will be Kevin T. Carter, joining us to discuss China, regulation, and emerging markets. Sign up here.
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