Tech flows blow off higher rates… with one major exception
And welcome to ETF Edge, your go to place for everything Exchange Traded Funds. I am your host, Bob Tazani. Despite persistent worries about higher for longer inflation and the negative implications for technology stocks, the big money continues to pour into technology ETFs. All of the biggest tech funds have seen significant inflows this year with one exception from a former tech darling. Why are investors continuing to put their faith into tech? Let’s talk with Nature AC. He’s head of the ETF store and an independent investment advisor. Also joining me. John Davi from Astoria advisor, Astoria Advisors also joining us shortly. Jim Davos, Portfolio Manager at Horizon Kinetics who runs an inflation ETF and I want to talk about that as well. But Nate, let me turn to you what, what’s the reasoning here with these strong tech inflows? I see every broad tech fund from the Spyder technology, the XLKQQQ van card technology has seen inflows this year even though higher rates usually hurt technology. Yeah, and you could even broaden that out to the S&P 500 ETFs which are all in the top ten of ETF inflows. Those obviously are very concentrated and mega cap growth in in tech. But I think what this gets back to is investors are viewing mega cap tech as a quality play. These companies have tangible earning, they have cash on the balance sheet and if you go back to when we were in a zero interest rate environment, there was no hurdle rate and it was much easier to take speculative bets. But now we have short term treasuries yielding north of 5%. I think that causes investors to rethink making bets on companies with earnings that are far out into the future. Investors want earnings and cash flow they can see now. And in general, that’s what you’re going to find in tech ETFs. It’s almost as if it’s a quality approach. Yeah, that makes a lot of sense to me now. I noticed one exception here when I was looking at flows, and that’s Kathy Woods, Ark funds. They’re continuing to see outflows like they did in 2023 and and and what’s the difference here? What why are investors pouring money into broad tech funds and not into Kathy Woods. And by the way, I it’s not just Ark, I see the robotics fund, I see space exploration fund, Ark space exploration outflows, Fintech outflows, next Gen. Internet, Ark fund outflows right across the board. Well, again, I think investors want earnings here and now they want to see cash flow. And if you look at the types of companies that are in, for example, Ark’s products, these are very speculative bets and you’re betting on something way out into the future. Investors aren’t comfortable with that right now. We could have higher for longer rates. Obviously, rates are elevated right now. I think it remains to be seen what happens with rates moving forward. We have had some inflation data that has been hotter than expected and so investors are shying away from those speculative bets like you see in something like ARKK. John, weigh in on this. This seems to make some sense. I’m trying to figure out why is Kathy Wood seeing outflows and big cap tech are still seeing inflows? And his point is the emphasis is not just on technology but on quality and technology. And for those who don’t know, quality is generally what, high return on equity, stable earnings growth, low debt to equity, There’s a whole series of criteria for for quality. But does this make sense what he’s saying? I think so. I mean, I think you usually get like one bite at the apple. So if you buy like some unprofitable technology TF, if it goes down 70%, you know you have a problem explaining that to your end client. Whereas tickers like Qualmsi quality ETF, you know you’re going to get, like you said, companies with stable cash flow, low debt to equity kind of stable earnings growth. So those are tried and true kind of measures. So I think investors in a new interest environment like Nate said, when fed funds like 5-5 and a quarter, I think it changes the game for the last classes. So you actually you run a quality ETF, right, Roe is the symbol there put up, put the put that up. Maybe we can just talk about that a little bit. This is 100 large and midcap stocks all equal weighted. How do you decide what’s quality? OK. So we are looking for companies that you know pay dividends, stable cash flow, low debt to equity, good ROV, good ROI are issue though and we sector optimize. So if tech is 30% of the S&P are we going to have 30% you know technology exposure. Our issue with these broad market cap weighted indices is that you’re putting a lot of eggs in just a small select technology stock. So we just say, look, we want to give each stock 1% weight and pick 100 of the highest quality stocks and that’s what our fund does ticker ROV. And we’re looking here about your biggest holding Super Micro NVIDIA, these are all well known names. Sincora tell us about that. Yeah. So we, you know because we are optimizing against ESP tech sector weight, we’re going to have like 30 technology stocks and each stock is going to have 1%. If a stock goes up a lot until the next rebalance, you may see some size trip. That’s why Super Micro compute is 2.3%. But it was like very important for us because of you know what you’re talking about with flows. People don’t want to be on the way. Tech, right. Tech is projected to deliver 40% of this year’s earnings growth in S&P and next year 35%. So tech is the market, the market is tech. So that is why I think like if you look at the S&P equally weighted index or the Russell 1000 equally weighted index, those will only give you like 15% technology exposure, whereas we’re going to give you the S&P’s tech sector weigh 30%. Yeah, because that’s quality weights towards earnings growth too, right. That’s a very important tilt that you’ve got here. Nate. This word quality we’re throwing around, I I follow the academic research on this, it’s often mentioned as one of the few factors that outperform the market. You get size generally small cap outperforms, big cap over time, value generally. Value outperforms growth over long periods of time, profitability and momentum as well. And and quality is one of these factors that people seem to pay a lot of attention to these days. Yeah. And again, I think it just goes back to the environment we’re in where there is some uncertainty moving forward. It’s to whether or not the Fed is going to get this right. And it is possible we have an economic slowdown in that scenario. Investors want earnings, they want cash flow. They want things again that they can see and and feel and touch. Right now I really think it’s that simple. What’s what’s interesting to what John was saying is if you look at flows into some other ETFs, we have seen a pick up of flows into something like the Invesco S&P 500 equal ADTF ticker RSP or the iShares quality ETF ticker QUAL. And so you’re seeing investors hone in on these sorts of factors, the.