What's up, guys? On this episode of Full Signal, we have Todd Sohn. He is the chief ETF strategist at Strategas, and we get into the sectors he's watching in the stock market right now. What's going on in healthcare, energy, software, crypto, Bitcoin, and much more. This is a fantastic conversation that is packed with charts and data. I learned a ton, and I think you're going to love it.
Todd, I'm so glad you're here today. I got to ask you about the exposure to trillion-dollar companies. We have Eli Lilly joining the club, Walmart joining the club, and pretty much every major fund and ETF is heavily weighted to trillion-dollar companies. What is going on here?
So, first, you inspired me to update this table because I think you wrote about Walmart joining the trillion-dollar league in your Opening Bell a few weeks ago, right?
So, thank you for that. That's the value I get from you, which is great. Secondly, okay, so this is not a bearish argument or take anything like that. This is not about participation because by most measures participation in the equity market is really strong right now. This is about over-ownership of a small cohort of names. And I try to tell this to our clients, to advisers and whatnot, that if you own large-cap blend funds, S&P 500, large-cap growth like the Russell 1000, if you own say a thematic AI ETF, and then even in some other cases in the factor world, quality, momentum, some rotation-type strategies, they all own a large chunk of these names. And while that has been beneficial over time, you may just want to look under the hood of your portfolio and say, 'Wow, do I have too much exposure here? And should I be paying attention to the other stuff that is not heavily influential in the benchmarks?'
It's almost like you're having too much ice cream, right? Too much ice cream, too many cherries on top, whipped cream, all that stuff. Especially now that some of these names have corrected a little bit, I think it makes a lot of sense to look under the hood of your portfolio and understand where you have too much exposure and where you need to up the allocations to.
Well, some of these funds, we have the table here. SPY, 39% exposure to trillion-dollar companies. QQQ, 48%. IWF, 56%.
I don't think most people realize that. I certainly didn't realize it until I looked at your charts, honestly.
Is there a way to even diversify in this market? Because if all the most popular retirement account ETFs are so heavily weighted, right? What do you do with this?
So, there's a few routes. You can go international, which apparently people are doing based on the flows, whether that's developed international like Europe and Japan, Canada. Emerging markets, that's going to be more volatile, but that's starting to work again as well. And then you can look to lower-correlated assets. So when I think about this, I think of natural resources, right? You're going to be more heavy into metals and mining, energy, drilling-type stuff. Some people may not love those. That's going to be a little bit more higher beta to an extent. Or you can go to managed future strategies, right? Those are going to be systematic. They're going long or short currencies and commodities and they will work in certain environments. It's all about going less correlated than adding more US-type equities. So I think that's the way to do it. You could add tilts to certain sectors like healthcare and energy and materials. That's a little bit more challenging for most people without being really hands-on in the markets. So that's where I think you look to that developed international, natural resources, and then alternatives like managed futures just to water down the exposure you have to these companies.
Something I've been writing about a lot to start the year is Latin America exposure. I talk to a lot of investors, love Latin America. I'm very bullish on Latin America. Is that something you're seeing in flows where LatAm specifically is picking up?
I think to some extent, yes. And especially because they get the metal and mining exposure as well, right? Argentina, Chile, Brazil, Mexico, all that stuff. And those will ebb and flow depending on certain catalysts, you know, elections and whatnot. But I think that's part of the EM story where folks woke up this year and really to some extent last year realized emerging markets are good on the valuation. Maybe they're an AI beneficiary for what that's worth, or they're also part of this resource hoarding story, right? Everyone wants the natural resources and all the metals and whatnot. And I think they're being a benefit of that. So investors, after quite some time of being all in on tech and growth, are now starting to diversify out, which is good.
Okay. Todd, you had this hilarious chart. Hilarious but also maybe troubling. The Metal Mania chart, which shows daily trading volume for precious metals, has just gone probably more than parabolic. I don't even think parabolic describes it. What is this chart?
A crescendo. Yeah. The fun part about ETFs is majority of the time it's just into steady passive funds like we were talking about, which can have their flaws. And then every once in a while when an event happens, an ETF focused on that, in this case silver or gold, platinum, just take off and everyone flocks to it. And that's one of the beauties of ETFs, you can get access to something extremely quickly and efficiently. If there's no exposure to it, someone will create it and it'll be out of here in three months. So, what happened with the metals? I mean, gold's been on a tear for quite some time. And then somehow it just translated over to silver, whatever the reason might be, and there's just been a massive momentum play into silver. Now, you wonder, okay, well, how overdone are we? When I start to see record volumes in silver like we have on that chart, record volume into levered silver ETFs. When you see the whole spectrum taking in volume and flows, that tells you maybe we're getting a little overdone here. And now that's kind of corrected here. It's been violent, right? And who knows where it goes in the next six months or whatnot, but I just look at the activity here. Say if you've been long, maybe have a plan to get out. Or I think it's interesting in the ETF world, there are funds that do covered calls on commodities, right? There's a gold covered call fund, which is super interesting. So if you think that the juice for metals is kind of capped from here out, you can still participate but gain income from selling calls on the ETFs that are underlying them.
Wow. You know how many people are asking me, should I buy gold? Should I buy silver still? I mean, do you have a view on how much further you think these metals can go this year?
I personally think they're probably a little bit capped, but I've been wrong.
I have to admit I thought it was done a few months ago and it just ripped higher. The trend is obviously higher, but once I start to see this volatility and the volume, this Metal Mania, which we took the WrestleMania logo and turned it into Metal Mania, that makes me a little wary that things are way overdone on the sentiment front. And there's other ways. We've had plenty of conversations, anecdotal observations, and then there's investor survey data we get too, and all of them read super bullish metals. So, I don't know. I like the idea of going the covered call route just so you can stay involved, get income just in case this falls off, and you can still participate. You won't get the max participation when you're using covered calls. But that's the route I'm going forward. I think more interesting, the more timely stuff is in the industrial metal space. You know, copper, aluminum, tin. So we'll start to see if that translates over too.
And is there a way to get exposures through those with other products that aren't touching silver?
Yeah. So, well, funny enough, there was an Industrial Metals ETF that closed late last year, right before this move might take off, but there's still a few out there like Invesco DBB is base metals. SIL is literally the metals company in terms of those, and they have closed-end funds that'll get you copper and platinum-type exposures.
So, there are ways to get these physical exposures without using futures, which is the great part. So if you're looking to do that, I mean, we could always talk about that and whatnot. It's just a matter of what's the vehicle? Is it an ETF? Is it a closed-end fund? Is it an ETN, right? There's a silver covered call ETN, which is going to be different than an ETF. There's all sorts of stuff here, but they all exist.
It's so niche and I think it's so off people's radars mostly, like finding these single commodity or a few commodities in one fund. So you had this other chart you published. It shows how silver ETFs have become bigger than energy ETFs. And I think what you highlighted, there's only two silver ETFs, but now they are bigger than like 30 energy ETFs.
This was how crazy the silver move got, right? There's been energy sector ETFs have been around for ages and yeah, there's 30 of them or so from all different issuers. iShares, VanEck, State Street, all these energy ETFs and they've languished over the last few years because performance hasn't been that great. So you've had outflows, assets really haven't grown. And then there's these two silver ETFs, SLV and SIVR, that most people are familiar with. And this move has been so wild that between flows and price appreciation, they were larger than the entire energy sector, right? So that's just another breadcrumb to me that says if you've been long, you know, consider your plan to get out or reduce exposure, right? It's just wild. It also tells me how low the bar is for energy as well, right? Maybe we'll see an energy move, which kind of has happened the last few weeks.
Wait, talk to us about energy a bit more because this is one of the sectors that I think from a high level it seems obvious because we're short on energy for all these AI buildouts, but the stock reaction hasn't made it an obvious trade, right?
So why do I like energy? Why am I more bullish on energy than maybe most others? I don't know what the street thinks to be honest. Since JBT launched three years ago, three years and a couple of months, energy and healthcare have had the most outflow from sector ETFs. Tech's been all in, most influenced by tech. That makes sense. I also couple that with energy just being in its bottom decile relative to the S&P 500 over the last three years as well. So, really bad performance. I mean, stay away, massive outflows. But then if I put on my technical hat, I look at some of the charts in energy and they've been this sideways range for months. And so that to me presents an interesting risk-reward. It's like an Exxon. Exxon sideways massive range. It's finally got some momentum. And when the bar is so low based on those flows and performance, you can get real fast momentum to come in. I think that's what you're seeing with energy. And it's also this part of the movement away from some of those trillion-dollar names. Energy was down to about 3% of the S&P. That means nobody really owns it, right? They don't have a lot of energy exposure. They haven't needed it. But when the top of the index goes through a speed bump, you're going to want to look to those other areas to say, 'Hey, where can I get a little more exposure in?'
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Energy's the new favorite. Healthcare's had a very good run in some cases and what's interesting is you are seeing money try to kind of chase back into both of them to be honest in the near term. But I still like the idea of healthcare. There are parts of it that are sloppy like managed care that's still under fire for whatever the reasons are. But big pharma has worked out really well and biotech to some extent. So I would still put energy and healthcare as two of the favorites there, right? Just yes, it's been a little bit of a sugar rush. But just think about how bad they've been for the last three to five years and that's a long way to go before normalization.
When I look at the news or speak with investors, no one really talks about sector flows in ETFs. You're pretty much the only guy I talk to who pays attention to this stuff. What is the data telling you as far as, okay, here are the opportunities that maybe people aren't paying attention to, or maybe they are paying attention to but for the wrong reasons?
So the other interesting area, right? So healthcare and energy, they have some characteristics in them that are similar called low volatility, right? So that's a factor. You have size, quality, momentum, profitability, low vol is another one, and there's a small cohort of low vol ETFs out there and since 2019 they've had pretty substantial outflows too. Part of that argument is because there are other solutions in the ETF world that have taken their share and part of it's just been the performance hasn't been there. But in this environment where volatility seems to be picking up, right? Especially from the software space and big tech. I think it's a very low bar for low volatility strategies to work again. So, you're going to get pharma, some energy because energy is actually transformed into a more lower beta sector. Consumer staples, which have been terrible, but are seeing a little bit of a momentum play here. And then insurance, which I guess is also getting caught up in some of the AI stuff too. But I like that idea that, you know, if you're worried about the market and a midterm election year, which is a whole other animal, low vol strategies could make a little bit of a comeback here. And I wonder if you'll start to see money come back into those strategies.
Would it only be the most sophisticated investors that can seek out low volatility strategies? Because I don't think any retail investors would know to look for this.
So true. The other route is to use a model portfolio. Right? So there are these big asset managers who have ETF models and they'll say based on our research, based on our thoughts, we're going to shift out of momentum and into low volatility. And so they'll automatically put the people who are following their models into it. It's, you know, it's an outsourced investment team. But for retail, yeah, that's going to be a little bit trickier. They may not be as in the weeds and maybe they'll go to the options market instead and buy puts for whatever reason. But so I think for the low vol to return you have to see the models really embrace them again.
Wow. Then it becomes more of an algorithmic trend. Is that right?
Yeah. Yeah. So you'll get flows and I'm convinced as much as there are other products like structured outcome and buffer ETFs which could steal their thunder. I'm convinced if market volatility really picks up, algorithms will say, you know, if market is declining, if volatility is higher, buy consumer staples. And that as much as those businesses are challenged, like I don't drink much anymore. I don't eat cereal. What kind of bread you buy? No one's getting white bread as much as it tastes good. The algorithms will buy those stocks because they know they are traditionally, historically very defensive and work in hard environments.
How much do you think these algorithms warp the market? Like maybe value is not going to where it should be going. I don't have any data on it, but I got to imagine it's hefty, right? We're in a computer-driven world now, AI-driven world.
And so the definition of what's value could be massive. And you see that in value funds, too, right? There's probably a couple hundred different value ETFs out there, and they go from the blandest of the bland, you know, the price-to-book stuff to much more complicated, like our friend Kai Wu with intangible value, right? So, that definition is definitely changing and I don't know. I think it'll continue to evolve, but I imagine the algorithms are probably playing around with that, too.
Yeah, I think it distorts so much of what we think is really hot versus not hot because, you know, especially from the retail side, you have no visibility into most of this stuff unless you're, you know, extremely sophisticated. But generally, you have to go by momentum and that's what it is. Okay. So, let me ask you about Bitcoin and crypto. We've seen huge outflows in crypto to start the year. Bitcoin's been down. I think it's down almost 50% from its all-time highs. What are you seeing in the data as far as the flows for ETFs?
So, there's definitely been some cooling on the flows, right? For the last what, two years since the Bitcoin ETFs launched and then Ethereum, it was pretty substantial demand. Really impressive. And so there's two interesting angles. Number one is you have massive wealth companies opening up access on their platforms to crypto ETFs. Vanguard, Bank of America, I think Morgan Stanley maybe too. So they're saying, all right, you can solicit crypto ETFs for your clients. You can buy a small allocation. I wonder maybe if that would put a little floor on crypto. That has not been the case. Now the other angle is I have felt that crypto flew a little too close to the sun. Right? We went from having spot Bitcoin and spot Ethereum to really exotic exposures. And maybe I'm naive because I don't understand what Chainlink is and Avalanche and all that. I'm sure it's world-changing. This is just me being stupid. But the amount of product that was getting shoved into the system to me reflected a little bit of exuberance in the near term. And that has coincided with this decline, right? We had 2x Dogecoin coming out. Nobody needs that. It's fun. Speculate, you know, but that's more gambling to me. And now it's translating into outflows. People are cooling on Bitcoin. I do wonder if there at some point when things can finally settle down, maybe there's a short metals, long crypto trade brewing somewhere. We'll see. But if you're just talking about mean reversion of things that have been oversold versus super overbought, those are your prime candidates. But I think if you want to stay in the long run, you can still buy and hold crypto to some extent, but keep the allocation small because we don't know. We don't know what the future is. I mean, it's been a crazy even just two months into the year, a few weeks.
One thing that I'm watching specifically is Bitcoin hovering below 70,000 and that, you know, I don't know exactly, but the ETF demand for IBIT and other related products that must have some role in that. I mean, I don't know, do you have any knowledge or insight into how much that correlates?
I don't honestly, not to disappoint everybody here. I look at, you know, I look at, so I forget what was the, whatever the price was. I'm sure you're floating around there when IBIT launched and the Bitcoin, all the other nine other Bitcoin ETFs launched. I'm sure some folks might say, 'Hey, I'm below zero now. I got to sell,' right? Maybe they're just worried about losses.
