I am sitting down with Todd Sohn today. He's the chief ETF strategist at Strategas, and we get into his favorite opportunities in the market right now, why he likes semiconductors, what's going on with the froth and the AI trade, whether it compares to the internet bubble, and much more. I hope you enjoy this conversation.
Todd, we have this unbelievable chart I want to start with. On a broad index level, stocks are absolutely ripping, and I think a lot of that we can trace to monthly ETF inflows, and we're at pretty close to record highs right now in April. What's going on here?
So, April for equity ETFs had their second highest intake in their history. Now, what's interesting about that is that's coming from what was a very lukewarm March, right? You remember March was a month filled with volatility, geopolitical uncertainty. And so that brought down the temperature of investor sentiment readings, whether it's surveys, options, flows, and as soon as the market bounced and has rallied since, right back into the pool. So it speaks to a, how fast the market can move, right? Trying to time things is really difficult. And b, the popularity of ETFs, right? Month after month we are setting some sort of record in the world of ETFs, whether it's flows, products, volumes. I suspect this will continue. But it's also partially because the market's doing so well, right? Things are, as you said, ripping between new highs. As long as that remains the word, flows will remain elevated.
Do you think it's fair to look at a chart like this and point to, let's say, investors climbing the wall of worry against everything? If you were to boil it down to one chart, I would think there's a pretty good case to make it for ETF flows by month. Does that make sense?
Yeah, I think that's part of it. Flows to me, there's two angles here. Flows can be a temperature barometer of investor sentiment, and right when you're coming off of March's restraint reading and then April is about re-engaging the market as things turned around. And then the other angle is there's this structural move from mutual funds to ETFs, right? So over the last 42 years now, net flows to mutual funds are negative. Right? That's a massive change from the way people used to invest. And it's all largely gone to ETFs. Of course, there's some other vehicles out there, but ETFs have grown substantially. They're 15 trillion in assets. They're almost as big as mutual funds. So, it's part the market doing so well and then part the preference of the way to invest for plenty of investors out there. The ETF is just far easier and convenient for a lot of people.
Yeah, I think that makes sense. And one of the things, exactly what you're talking about, this enthusiasm coming back in the market, you have another chart you shared that shows defensive sectors now represent less than 20% of the S&P 500. What's the significance of this? What are we looking at?
So this is fascinating to me, right? Because the S&P 500 is the most popular index in the world. It's the most tracked, invested index around. There are all sorts of products or benchmarking, and it always evolves, right? We are in a constantly evolving world. And what I find notable is that defensive sectors, staples, energy, healthcare, utilities, of which they've had their moments here and there over the last couple years, when you take those and add them up, they're only about 18, 19% of the S&P 500. That's a 35-year low. In a sense, this is all about relative strength, right? It's going to tech and growth companies. But on the other side, the S&P is becoming less and less diversified. It's not that it's a problem, but it now requires you to say, 'Okay, if I need to hedge or get more defensives, using the S&P isn't necessarily my way to do it.' Will this ever reverse? Who knows? Maybe. You know, energy's had its little bout, but it's too small to matter.
With defensives going down, is that also a read on sentiment? Could you just say people are getting more and more optimistic, so defensives go down?
Yeah, totally. This is a reflection of leadership in the S&P, and there's been no leadership from defensives largely speaking for the last few years. So it is part of the structural bull market for stocks, risk-on, cyclical leadership. I just think it's amazing how even 20 years ago, defensives were 30 or 40% of the index. It was a much different landscape, and now that we're in this AI era, they have just all dissipated.
And help me understand this. If we were to swing economically to, let's say, fall into a recession, would this chart start ticking in the opposite direction, or am I thinking of it wrong?
No, you would think so. If we're to think about markets and how people act in panicky environments, they will likely buy more staples and healthcare stocks, maybe energy and utility, traditional utility type stocks. So that should start to work again. But in an AI algorithm-generated era, who knows? But anytime there has been a recession or some sort of financial event, those sectors are what people go to because they're looking for lower and safety type plays.
Okay, I think that checks out. Todd, this third chart you're going to have to help us understand here, the collapse of energy and its beta to the S&P 500. Why did you choose to highlight this one, and what's going on here?
So beta is a measurement of how much an asset class moves relative to, say, the S&P 500, right? It's basically a measure of volatility. And so for years, energy pre-say 2020 was viewed as a high beta sector, right? If the S&P was up 1%, energy would be up 2%. If the S&P was flat, energy would be up 1%, right? Expect more volatility from energy. And then since the first wave of inflation, now that we've transitioned more to semiconductors and tech, energy's become a low beta sector. It's totally collapsed relative to the S&P 500. So what I'm seeing is for days that tech is up, energy is down. For days that tech is down, energy is up. Energy is becoming kind of the polar opposite of the S&P, of growth, of tech. And that's reflected in the beta. It's just a far different sector. It's become low-val. And as much as only 3% of the S&P 500, it's kind of this diversifier now because staples don't work. Healthcare has been frustrating, but they are in their own world in terms of thematic plays, right? Power generation. And so you're left with energy as this way to play the geopolitical events that are going on or days when semis are not working, right? It's very peculiar.
So what's interesting to me is that energy and tech, you're saying that their beta has sort of inverted. Energy has still been a top performer this year. Is there any correlation between performance versus beta?
It depends on the environment, right? So high beta has typically outperformed low beta this year. There's a high beta ETF, SPHB, a popular one that's predominantly technology type stocks, and that's going to be your semiconductors and whatnot. And then low beta has historically been staples, insurance, boring type utilities, your dividend plays, right? Staples type companies. Energy's never really been a part of that. And it should be because when you measure that beta versus the S&P 500. So I think if you're looking for lower beta type stuff or just something uncorrelated to technology, it's going to be energy type plays going forward. I think that's where energy fits into a portfolio for folks going forward. I mean, we'll see how the sector acts going forward. It got massively overbought. A lot of money chased it in this cooling off period. So I still think though it makes sense going forward, especially given what's going on overseas. We have no edge on that. But just purely the statistics of it's lower beta, it's uncorrelated to everything else.
I mean, if you look at the demand from the AI side, I think that's a huge tailwind for energy. The geopolitics, huge tailwind for energy. And I've talked to a lot of people, including yourself, for months at this point that have been pretty bullish on energy going back to third quarter last year, I think. So we're in this interesting moment where the geopolitics, I think, scare a lot of people on the energy side, but I'm still pretty optimistic.
Yeah. And the other way to play it is if you're like, 'Okay, I don't want to go full-blown energy,' you can buy a natural resources ETF, and that's going to be your mix of energy and materials, right? And real asset type stuff. So you're not getting 100% energy, you'll get 30 to 40% energy and then balance it off with all the metal and mining names too.
So that's like a Strait of Hormuz play.
Not pure, but it's more expect more events like Strait of Hormuz in the future, right? It could be a copper issue. It could be some sort of other industrial metal issue where there's supply shocks, and ideally that helps the equities run up. So you're going to get the best of both worlds.
Okay. Do you, wait, can you share a ticker example of like what's an example?
HAP, that's from Van Eck Natural Resources. TUR from Tortoise, and CSNR from Cohen & Steers. Those are... two are two. Those are actively managed. MGNR from American Beacon. Yeah, all these natural resource ETFs I think are the way to go. If you're looking to play the energy material space.
You know every ticker, it's unbelievable. Okay, Todd, you have this next chart here. Tech is pretty much getting all the headlines right now, right? Tech, AI, everything. But the data points to infrastructure and industrial is actually picking up quite a bit right now. And, you know, to me, this makes sense because for AI to work and fulfill the promise of AI, we need a lot of power. We need a lot of infrastructure. What's going on here? You have two charts next to each other.
Yeah. Okay. So, most of the flows and volume activity have been to semiconductors recently, rightfully so, right? That's kind of the center of the universe. The adjacent semiconductor play, AI play, is the industrials, right? The power generation type companies, infrastructure, the building out of this whole thing. For me though, some folks ask, well, hey, what else besides tech might have some red flags in terms of sentiment risk? I do think it's industrials and infrastructure because the amount of flows that are going to these products is absolutely vertical. And I don't use flows, they're not a signal necessarily, but again, as we were talking about before, they're a temperature barometer. So the temperature towards this area is extremely hot. Everyone's in on it. You're seeing more types of ETFs come out focused on the power and infrastructure space. And then also part of that industrials flow is defense companies. So there's plenty of money going to defense, playing defense ETFs, and yet stuff like European defense has really gone nowhere for a year. So I just wonder, are we getting over our skis in terms of that, right? That's the risk for me.
I mean, I wonder also if we are in the early stages of AI, this might be the new normal, just having a huge boom in infrastructure, even defense. I know President Trump's trying to rebuild the Navy and military arms. So those to me, it's not that surprising to see charts like this where the flows look pretty vertical, right?
Yeah. I don't disagree with you, right? This is a change in the way the whole economy works. I guess I'm more near-term, right? That could be like a three to six month period for all I know. And then what happens is the stocks can correct, consolidate, and then eventually resume higher, right? It's not like we're calling for the end of a structural bull market. Of course, when you're looking for just near-term risk, what could cause a speed bump for some of these groups?
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Okay, so speaking of speed bumps, let me ask you about these semiconductors. This has been just an unbelievable last couple months. Semiconductor ETF flows or daily trading volume keeps hitting new record highs almost by the day here. This is an insane chart, and to me, I'm very bullish on AI and semis, but seeing the daily trading volume makes me a little nervous. It's going through the roof.
And here's the thing about ETFs. Every few months an ETF becomes the center of the world, the center of the universe. Two months ago it was USO with oil. Cyber security 10, 12 years ago, ARK back in 2020, even USO back then too, covered calls a few years ago, gold last year, right? And so now we have semiconductors. And it's just these moments people are trying to get onto a quick trend, right? Chase performance to some extent. And so for me, I see the behavior, the volume spiking in not only semiconductor ETFs that we all might use, but also the leverage space, right? So people are getting very aggressive. I have no clue when any of this stuff ends, right? I mean, we're in a room right now. How many semiconductors are in this room? I don't know, a lot. Between the phones, the cameras, the televisions. So they're clearly part of this world. But all the statistics out there, whether it's volumes, flows, performance, are at massive extremes. So, what do you do if you're long? Have a plan to get out, an exit plan, right? What's your stop loss? What's your pain threshold? Or use the options market to buy protective puts. I think that's a great idea here. Just to protect your gains if you've been long or if you're chasing here right now.
I mean, what do you make of the bulls who say, look, even though let's say Micron is up 700% in a year, the forward PE is so cheap, right? Because of the demand, right? How do you think about that?
So, and I would go to our buddy Ryan Ginsky on this. He would say, 'Yeah, the earnings support the story.' And I totally agree. I'm not going to disagree with that. For me, it's more just about the timing mechanism of, 'Hey, are you buying it now that it's 150% above its 200-day average and that Micron is the, I think it's the 10th largest stock in the S&P 500 right now.' Like a week ago, it was number 20. And maybe that's deservedly so, but do I think there's some corrective risk just given how extreme some of these momentum characteristics are? Yes. So you let it reset like most other things that get too hot and take it from there, right? You almost have to wait a quarter or two. And again, if you're long, use the options market to protect or have some sort of stop loss and whatnot. This is all about keeping what you have.
Of course. I mean, to me, the bear case on Micron is more based on price action than the actual story.
Yeah. Yeah. That's why I told you the story makes sense to me, especially what you're saying about the earnings, and it's more just, it's not a new idea. Every single person out there is talking about this.
Yes. If you right now, if you post any type of chart related to Micron, it almost immediately goes viral because everyone's got an opinion on it for one. But people, you know, all the bulls will just repost it and gas it up and say this is so spot-on, but then you have just as many detractors that say this is essentially a house of cards. So you have this other chart that I want to share. This might be the best chart I've seen all month. Levered long single stock ETFs. This is like the degenerate chart here. What's going on?
So the levered long space is fun. And I feel like I've shown this in different variations of where this is a category that's three and a half years old. We may have even talked about this. I always forget, but you can buy 2x leverage on certain single stocks and it's growing by the day. There's over 300 of them now, about 30 to 35 billion in assets, something like that. And now what's happening is issuers are going further and further down the cap scale to put leverage on names, which it can be rocket fuel, lotto ticket type stuff, but sometimes I don't even know what the tickers are now. Like we're getting real fringe, which is fine, and there's nothing wrong with that. I find it more interesting if I'm talking to clients and I say, 'Hey, there's now a 2x levered product on one of your stocks that you thought might have been under the radar.' It's not exactly under the radar anymore. But the challenging part for issuers though is out of those 300 or so, 70% of that industry is in what I would deem zombie territory. Basically less than 25 million in assets. You know, it's just an ETF that trades each day, but there's not much money tracking it, until it turns into a story, right? And there's some volume coming and volatility for the underlying name, if that makes sense.
Yeah. And we can see it in the chart. I mean, most of the dots are really tiny. And you also have, you know, here, we have a bunch of stocks for sub-10 billion names. Which is not the Microns, right? 700 billion, 800 billion. These are names probably most people have not heard of.
Exactly. I mean, you're talking the more recent ones have to do with space, like SIDU, space, SIDU I think might be the ticker. Never heard of it. I have no idea. So I don't, those will just kind of live in their own zombie territory for a while. But what's interesting is Tesla, Coinbase, Nvidia have been popular among those. And now before I came here, 2x Micron, MU, was among the most traded ETFs today.
Holy crap. So people wait for the story, the catalyst to play out and then they go, you know, the algorithms, whoever's doing this. If there is a 2x ETF, buy that one. So you might see a good example a few months ago was 2x Hims and Hers. They had this massive volatility after earnings. I think it might have been down or up, probably down, and it collapsed, and then another time I think it actually went up 50 or 60%. So they, you know, these quick money traders look for this stuff. Is there any case that you can make to buy into one of these other than like a very near-term momentum thing?
For me, no. If you have extremely high conviction that some sort of episode or catalyst is going to end up happening for a stock, that's it. But the waiting game is the opportunity cost, right? Because if the underlying name just treads water and chops around, that's going to hurt the fund performance because of all the leverage built in and the swap exposure. So you need a trend to happen for these. So that's why if you have a very high conviction that maybe they'll beat earnings or some drug will be approved or some product will be a hit, that's when you have to play it. But it's all timing, right? These are not necessarily buy-and-hold instruments.
Yeah, these make me very nervous because they're, you know, some are like 300% moves per day or whatever. And it's so absurd because it's also capitalizing on, you know, the boom in prediction markets and the boom in DraftKings and, you know, all these different apps that allow you to put bets on literally everything. Now we have it.
This is like that you're going to get 2x memory ETFs pretty soon, right? Those are going to come out. So putting leverage on the memory stuff that's out there. Besides Micron just by itself, the whole cohort of those. 2x SK Hynix will be there, there's a whole slew of those getting ready for when they list their depository receipts soon. So more and more of this. Now they're a tiny, tiny sliver of the entire ETF industry, right? Of 15 trillion. They're only 30 to 40 billion, but they get a lot of attention because they do such massive trading.
