Why investors should 'complement' their SpaceX ETFs with these other themes

Strategas Asset Management chief ETF strategist Todd Sohn explains what's in store for the exchange-traded fund (ETF) market in the third quarter.

Video Transcript

00:00 Speaker A

The broadening of market leadership away from the tech sector is seeing ripple effects in the ETF market. And for ETF investors, my next guest says low tech and low correlation funds are the way to go. Joining me now is Todd Son, chief ETF strategist at Strategas Asset Management for this week's ETF report brought to you by Pimco. Todd, I want to get to that tech ETF and what we saw there because you guys tracked that roughly $38 billion of inflows rolled into tech ETFs. That's the most out of any other category.

00:26 Speaker A

So what's the case moving into Q3? What exactly does that mean?

00:30 Todd Sohn

So, as you said, we think this is about low tech and low correlation exposure because, A, all the flows are all in on tech. B, a standard portfolio is already overweight tech via the S&P 500, large cap growth or thematic type funds. And so we want to find ETFs that are out there that can complement that tech exposure if and when they hit a speed bump, whether it's because of CAPEX, earnings, you name it. So we're looking at low-val, we are looking at alternatives like managed futures or long short strategies. We're looking at midcaps, anything else that's not tech heavy is key for this quarter.

01:00 Speaker A

Now, at the same exact time, some of the companies or rather the sectors that we've been talking a lot about heading into this year were precious metals. And yet we saw the most outflows within that particular category. So why did that sort of remain the picture when there was still so much uncertainty within the market?

01:17 Todd Sohn

Yeah, that's interesting. So ETFs are great barometers of behavior, investor behavior. Last year and into early this year, it was all about precious metals. Right, we we saw what we called metal Mania earlier in the year. You said massive spike in volume. That kind of reflected a little bit of a blow-off top. The dollar has strengthened, real rates have risen and that kind of takes gold off the playing field. Now, gold outflows are picking up pace, but I think it's interesting, maybe not ready for prime time, but if you're looking at again, low correlation, precious metals kind of fit in there as well.

01:45 Speaker A

Now, at the same time, we're just talking about leveraged ETFs. Uh the value there had half a trillion. So walk us through what sort of risks that could bring to this market though.

01:54 Todd Sohn

Right. So the levered ETF space is over 600 products now.

02:00 Speaker A

Wow. How does that compare to to maybe what we've we're at recently?

02:03 Todd Sohn

A decade ago, there was like 100. Okay. Maybe 200, right? We've we've grown massively. Wow. 200 billion in assets, and as you just said, when you take a levered product, it makes the notional value higher because you're adding the leverage. So half a trillion dollar in notional. That's causing market volatility into the end of the day. And I think if you're looking for a a kind of a hidden risk, it's leverage in ETFs, right? We usually talk about credit spreads or private credit. This is all sitting right here in front of us that these funds have grown massively and are and they're all tech-based for the most part. That's where all exposure is. Um I think if you're looking for volatility and an unwind potential, the leverage space is where it's at.

02:41 Speaker A

Now, I have to ask cuz another thing we've been talking so much about is this memory chip trade. So what have you seen? How has that played into the ETF market? Because I mean, we're talking Micron, SanDisk, Intel up up 200% year to date. So are you seeing similar similar demand in ETFs?

02:59 Todd Sohn

Yeah. Oh, of course. Um memory ETFs doing great. That's part of that tech inflows, all on tech, that's part of the leverage space. Uh within emerging market ETFs, what's interesting is EM was predominantly a China exposure. Now most EM ETFs are 50% Korea and Taiwan, also the memory trade. So everything's kind of tied together.

03:22 Speaker A

Right. Cuz Samsung, SK Hix sort of make up about 50% of the Korean Index.

03:27 Todd Sohn

Yeah. Hix, Samsung, Micron, SanDisk, uh Western Digital. All these are the same, which has worked out great, but leads me again back to my low-tech lower correlation. complement that if the momentum ever dries up.

03:41 Speaker A

Okay. And and also small caps. I mean the run up there, Russell two 2,000 surging 20%. Uh what sort of opportunities are investors turning to there? Is it too late?

03:49 Todd Sohn

No, definitely not too late. Um, what's interesting about small caps is the rebalance for that index just happened in the Russell 2000. Bloom Energy was 2% of that index. That's never happened before. Um so I I think now is a great time to look at actively managed small caps. So T. Rowe, they have a a TMSL is a great fund I think that investors take a look at. Uh it doesn't mean you should move away from plain vanilla exposure, but complement it with an active manager because those benchmarks are tricky, they're inefficient. They can get skewed by a name like Bloom Energy. So you want to find a manager who can get those kind of next gems from that space.

04:22 Speaker A

Now, SpaceX, we've been talking a lot about that. It's going to join the Nasdaq 100 on July 7th. So should investors consider sort of taking this back door into an ETF?

04:33 Todd Sohn

I think if you want space exposure, you're going to want to look for an ETF that has thematic diversification. We have one at Strategas SAMT. That that works out well. We do have space exposure, but because space is very volatile like SpaceX, you're going to want to complement it with other themes, whether it's infrastructure, power generation, AI, right? You will have SpaceX exposure in an index product whether it's now or from the Nasdaq 100 next week. So don't worry, don't don't get too much FOMO about SpaceX. You have exposure. Uh not in the S&P 500, but it's there. So.

05:07 Speaker A

What are some of your top recommendations heading into Q3? Just given what you had noted about the sort of low volatile environment opportunity?

05:14 Todd Sohn

Yeah. SPLV for low vol, TMSL for S midcaps, CSRE for REITs is another compliment. Uh and then FLSP for a quantitative alternatives that'll have zero correlation to the large cap equity space.

05:28 Speaker A

And are you thinking long-term? This is a long-term play here?

05:30 Todd Sohn

Yeah, I think these are good for the next couple of quarters if not longer, right? I try to take it quarter by quarter. Uh but they deserve a spot in your portfolio to complement all the tech exposure.

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