ETFs Have Come A Long Way (undefined:QTUM)

Listen here or on the go via Apple Podcasts and Spotify

Sylvia Jablonski, CEO and CIO of Defiance ETFs, shares why 2024 was such a great year of innovation for issuers (1:00). Quantum, thematic products, and single name leveraged funds (5:00). Passive index, fund holdings, monitoring new IPOs (9:10). Trump’s interest in tech and the quantum race (10:40). MicroStrategy as a crypto shell; volatility makes sense (11:30). Dividends, options and who should be buying ETFs (14:15). QTUM risks and advantages (17:00).

Transcript

Rena Sherbill: Welcome to the show, Sylvia Jablonski of Defiance ETFs, CEO and CIO. So a lot to do with ETFs and Defiance. Welcome to the show. Welcome to Seeking Alpha. Thanks for coming on.

Sylvia Jablonski: Thank you so much for having me. I’m happy to be here.

RS: It’s great to have you. We’ve been talking a bunch about various ways to boost income in various funds, be them ETFs, be them CEFs, BDCs.

Certainly for anyone paying attention to the evolution of the markets is noting the high number of and increasing number of ETFs specifically around themes.

I’d love it if you could talk to us a little bit about how you see ETFs in this moment, how you got to this moment in Defiance and where you see ETFs in the marketplace? I know that’s a lot of stuff, but if you could just kind of maybe ground us and where you’re coming from and where we sit right now.

SJ: I think ETFs have come such a long way. This 2024 was really a great year of innovation amongst ETF issuers.

I think companies like ourselves, for example, came out with products that use options within an ETF wrapper to generate income. There are single stock ETFs which use leverage to amplify exposure to different stocks. There have been more creative themes that have come into the market, or themes that have been picked up and recognized by the market this year.

And so you’ve seen a lot of new funds take leadership and flows this year. And I think just the whole ETF landscape is pretty impressive this year.

The global ETF market is valued at over 15 trillion by year end, which is basically like a complete record for ETFs. Each year we’re talking about when are ETFs going to take over mutual funds?

And you kind of see it going that way. You saw 1.6 trillion of net inflows coming into ETFs. Just under 1500 funds were launched globally. Active, saw 33% of growth. Levered ETFs have doubled about twofold from last year, 50% actually increased from the previous year, but 11x increase from the year prior in single stock leverage ETFs.

These are really big numbers. And I think that the ETF industry is just going to continue to grow and mature and like really adapt to investors and their needs. And we really saw a lot of that this year.

RS: In terms of your journey in the ETF world, what is this growth telling you? And are you surprised by the jump?

SJ: I’m not at all surprised by it. I think that COVID was an interesting turning point in ETFs. I think a lot of people were like working at home and you had younger people that started to pay attention to the market when you had stocks just crashing and those were great buying opportunities and stuff like that. And so I think a lot of that continued on.

I have been in ETFs for a really long time. I took my first ETF job in 2000, from the mid-2000s, I was pretty much trading swaps and working with ETF issuers, but I joined an ETF company in 2009. And I just really saw ETFs take off and evolve.

And I think at that time there was this huge focus on institutional clients and wire houses. And that’s very much still the case now, but there’s just been this huge growth within the retail space.

And the retail investor has really been dictating a lot of what ETF companies do, what kind of products we put out, how we market them, how we explain them, how we think about how they impact the end retail clients. And so that’s been a big change that I’ve seen in my career at ETFs.

And in 2020, I joined Defiance. It was founded in 2018 by Matt Bielski on the idea that the next generation is going to inherit the $60 trillion of wealth and what are they going to be interested in? Is it going to be the classic sector rotation style stuff, or is it going to be something like quantum, right? Or 6G or some of these innovative themes that we look at on our side. So it’s been a really cool time at ETFs for sure.

RS: Speaking of quantum and noting the themes, first off, what themes are you most paying attention to? We’re at the start of a new year, so lots of outlooks to be had, lots of visions to be said.

What are you most thinking about at Defiance? Is quantum (NASDAQ:QTUM) the biggest focus? Where is your focus these days and for the year ahead?

SJ: Our focus always is just where the clients are interested in and what they care about. And so we’ve had a lot of good successes this year.

So this past year anyway, in 2024, the hottest topics for sure were the single-name leverage funds. So everything from leveraged MicroStrategy (MSTR), leveraged Broadcom (AVGO), leveraged Eli Lilly (LLY), investors really have leveraged Super Micro Computer, investors really took to those products. And I think that’s for the trading, the trading crowd, the active client.

And then in terms of the thematic products, quantum hands down has just grown so quickly. It’s been out since 2018. Back then, we were thinking that AI, machine learning, and supercomputing, quantum computing would be the future of technology and the fourth industrial revolution. And we were like really talking about it a lot. And I don’t think, it was kind of a falling on deaf ears a little bit.

And then the ChatGPT moment happened last year for Microsoft (MSFT) and then the Willow moment happened with Google (GOOG) (GOOGL). And all of a sudden, investors started really looking at the quantum ETF and wanted to access to some of those quantum stocks in there.

And so we just believe that quantum is a very interesting theme that has legs and a potential return scheme and just great opportunities for investors to get into a pretty nascent technology and innovation space here.

RS: In terms of looking at the quantum space, in the quantum computing, we’ve seen a lot of volatility, a lot of highs, some lows. What are you, or how do you navigate that as you invest for the fund? How do you navigate your different holdings and what do you most pay attention to?

SJ: I would love to address this too, because there’s just been so much buzz about Jensen Huang and a couple of the big CEOs are coming out and saying that it’s too far away.

And then you have others countering that and saying, no, it’s already here whether it’s D-Wave (QBTS) or Microsoft or whatnot. And I think the way we look at it is twofold. So quantum computing it’s already being applied to niche problems in material science, cryptography, financial modeling, hybrid classical systems, and D-Wave already does real world optimization problems to things like this.

And so then there are companies that are newer to the game and they’re smaller cap. And there are companies that are steady eddy like Google and Microsoft and (IBM) and Honeywell (HON).

When we built this ETF, we thought to ourselves that this is a space where you really are going to need a mix of both because there’s going to be a quantum winter, just like there was an AI winter. And the stocks are going to soar and then there’s going to be pushback that like, no we’re not here yet. And then they will soar again.

And I think you’ll experience that volatility. But what we did is we said, if you take a look at the top, the mega cap companies that are invested in quantum and have a legitimate R&D in quantum, they have strong balance sheets. They have quality performance. They do other things.

So they’re a great ballast and safety position to have within a portfolio, along with the companies like IonQ (IONQ), Rigetti (RGTI), and QBTS some of these smaller quantum companies that are a little bit less known, but also at the end of last year were up 400, 500, some over 1000%.

And so you’re going to get access to both. And how this played out was that when Jensen Huang came out and said, quantum is far off, a lot of those companies like D-Wave, IonQ, Quantum Computing Inc. (QUBT), they fell 35% to 45%. Our ETF just fell a couple percentage points.

It’s rebounded since because you have again that mix of including Nvidia (NVDA), right? The large cap companies that are involved in quantum mixed with the small cap companies that are going to kind of be the revolutionary companies to power this theme.

RS: And how often are you playing with the weightings or how often do you navigate or what makes you tweak the percentage of the holdings from let’s say an Nvidia to a smaller player? How do you navigate that? And how often are you tweaking things?

SJ: This is an index based product. So it’s basically replicating a passive index, which is great. So you have that transparency, what’s in the index and things like this. And so there are about 70 names or so, it’s equal weighted.

It gets reconstituted a couple of times a year, but we also look at new entrants. We look at new IPOs, we have the ability to change the index if we think other names should be in there. And basically we’re always actually actively monitoring our index data and what we do with this.

But yeah, I mean, it’s pretty much going to look at the eligible universe in terms of free flow market cap and descending order. Companies that have 50% of their revenue are more from quantum computing or kind of quantum related activities.

They basically have to be legitimate quantum companies. And then what we do is we take those 70 names and we equal weight it, and then it’ll kind of like run up throughout time, and then it gets reset. It gets reset and kind of like free floats again. So that’s more or less how we do it.

RS: And what would you say in terms of navigating for this new administration? Are there specific thoughts that you have as there’s perhaps a new approach? You see a lot as this pertains to the tech sector in general. How much are you focused on that, paying attention to that side of things?

SJ: Yeah, I mean, I think that this president will have a lot of interest in investing and propelling forward the quantum race, particularly because he’s big on domestic policy, America winning the game.

And there are a lot of countries that are currently, arguably ahead of us in quantum research and things like that. And so I think that you’ll see, I think you’ll see a lot of investment. There’s already been government investment in the quantum field, but I think you’ll have a supportive administration that wants to invest here. And I think that certainly helps. That certainly will speed things along.

RS: And what would you say about MicroStrategy (MSTR)? Speaking of volatility in that space, how do you contextualize how you’re thinking about MicroStrategy (MSTX)? It’s a big name that was touted many times throughout the year.

SJ: MicroStrategy is interesting because MicroStrategy gives you that cross section of, you know, it used to be kind of like this known to be this AI company, software company. And obviously now it’s crypto, it’s a crypto shell, right?

And so the volatility there is, it makes sense, right? Like if you look at how MicroStrategy performs when crypto is doing well, it tends to be performing like 2x, 3x, 4x, 5x, 6x that. And when crypto is doing poorly, same thing on the other side.

So it’s certainly a volatile stock, but I think what it does is that there’s this massive interest in cryptocurrency, particularly in Bitcoin, and investors have different ways of doing it. They can have their crypto wallet, buy direct. A lot of institutions have chosen to use Bitcoin tracking ETFs because of the wallet issue, right?

You can buy it on an exchange and you have that ease of use and things like that. But and so we saw that, you know, there’s so much interest, these ETFs are all taking off. And we thought to ourselves, like, what is missing?

And what was missing is, MicroStrategy, which is just basically this company that’s buying up as much Bitcoin as possible. And represents pretty well the performance of crypto. And so that’s just been wildly interesting. Like we actually rang the opening bell for Nasdaq on this one yesterday. It’s an ETF that’s grown to over a $1 billion in less than half a year.

So it’s been a real success story. And I think anything like it, like we launched RIOT (RIOX) and it’ll be interesting to see if that picks up. But I think anything related to crypto is very interesting to investors right now.

RS: Any thoughts to share in terms of the evolution of ETFs in the crypto space or how you see it evolving?

SJ: I think, well, again, like the administration question that you had before, like that’ll be interesting, right? Because you have a new administration that I think will be more favorable to like different ideas and less regulation, things like that.

So I think it’ll open up the types of funds that people can file for. I also think that, yeah, there’s just people – like ETF issuers and clients are just going to get creative about the crypto space and how to participate outside of just Bitcoin. And so you think about all these stocks out there that kind of represent — crypto, they could really have an interesting year this year.

RS: And in terms of the ideal, we’re talking about mostly retail investors in the ETF space. But what would you say is, or is there an ideal buyer of an ETF?

The typical kind of talking points around ETFs are those that are less interested in getting to the minutia of specific stocks, and so somebody that can help them navigate a certain theme or a certain sector or a certain space.

What would you say or how do you articulate to the investing community who should be buying ETFs or what investors should have in mind when looking at ETFs or thinking about them?

SJ: I would urge investors and retail investors to really reach out to ETF companies because the people who work here know the products better than anybody else and can give you information. They can also help you execute your trades well and play a role in capital markets.

You guys do awesome pieces on different ETFs and stories that are popular. I think there’s just so much good information out there in terms of like how to access particular themes, which ETFs are doing it well and are the most efficient.

But I think there’s just a lot of information out there in terms of what you’re getting. And I would say look out for things like the actual holdings, just because a theme says it’s something, look at the holdings and see if they kind of match up with that theme.

Look at pricing. I mean, a lot of like our thematic ETFs are half the price of a lot of the ones out there. You know, you don’t want to kind of like overpay for things that you can get more cheaply.

So just compare different funds that do the same thing on costs. But a lot of it is like, just the ETF issuers is putting this product into the market. Like ask us for whatever information you need to give us feedback. You know, we take feedback too.

That’s the other thing, like we have income products and kind of the crowd spoke and they wanted weekly dividends instead of monthly dividends. And so we changed it to weekly. So, I’d say your readers and the retail investors out there, institutional investors out there that have strong opinions, like we’re open to them.

RS: In terms of the dividends that you mentioned and the options, can you talk us through a little bit in terms of what you’re seeing from investors?

Who’s using the options more or what is that best used for? And what is, in terms of the dividends, what can investors be looking towards the future? Do you think that there’s growth on the horizon? Or how do you think about that part of the market?

SJ: Investors, there are now billions of dollars of assets in these income generating funds. And so I think we’ve learned that investors really like income, certain types of investors really like that income. And they want the exposure to the underlying index, but they also like the income that comes with it and they’re either living off of it or they’re reinvesting it elsewhere.

So, I just think that there’s so much opportunity in this space. Like the space is still fairly new and a lot of it has been just kind of like the broad-based index stuff and a couple of popular names, but I think there’s so much more that ETF investors could get from income products.

And I think that ETF issuers will put a lot of that stuff to market. And in terms of who’s using the options, it’s a broad spectrum. It’s definitely ETF companies, it’s retail investors, it’s institutional clients. The birth of the zero day to expiration option really opened up a lot of opportunities for people.

RS: Getting back to specifically the Quantum ETF, (QTUM). It’s really highly rated by our Quant rating system on Seeking Alpha and also by analysts on Seeking Alpha across the board.

What would you say are some risks that you feel like investors in terms of something that looks very nice, what is something to pay attention to, to make sure they have the full picture in their mind?

SJ: You kind of saw this happen, right? You get an influencer like Jensen Huang coming out and saying that perhaps quantum is far away, and then you have another CEO saying it’s not, it’s here. I think that with any kind of innovative, disruptive type of technology that takes time, you just have to have patience and you have to understand that it’s going to be volatile.

And actually, it’s a really good reason to use the ETF, right. It tempers the volatility by putting in some of the larger cap names in the space. But if you’re looking at like the single stocks and stuff, you just know that they’re going to whip around, right. And so having that active eye on your portfolio is really important there.

RS: And in terms of fees, how do you think about that as somebody who’s in charge? How do you think about and share with the investing community how you think about fees?

SJ: So we try to be cost friendly on our thematic ETFs. We are kind of on the lower side. But on the income funds and the leveraged funds, they tend to be higher because they’re complex portfolios to manage. And there’s kind of like more risk and more work involved and things like that.

Investors should think about what they’re buying and the complexity of the strategy and things like that just to make sure the fee matches the intent there.

RS: Anything to say in terms of strategizing or your philosophy for 2025 and maybe a little bit beyond how you’re thinking about things or what you would share with investors?

SJ: Yeah, I think that it’s going to be a really interesting year in the market. And the next couple of years are going to be interesting.

We have a very strong economy. We have a consumer that continues to spend, rates are, you know, rates have been coming down, they’re going to come down less quickly, but that’s also because the economy has been resilient and we’ve gotten that soft landing.

So there isn’t this panic need to cut rates as much. We’re in a pretty decent Goldilocks type of market this year. And I think that investors are going to have a lot more opportunity in equities than they will in sitting in the 4% to 5% money markets.

And so I just think, buy the dips and experience the rips. I think it’s a great year for dollar cost averaging when you have these volatile days and getting into some of these new themes that are starting to catch wind. But I think it’s going to be a good market this year.

I think it’s going to be a good and interesting market and a good time to be in equities and to be in defensive, you know, disruptive technology.

RS: And anything sector specific that you would care to share that you feel like we may have left out of the conversation, anything to highlight there or pockets of the market you may be interested in?

SJ: Yeah, I don’t want to say too much, but you’re going to see a lot of launches from Defiance the next month or so, which will really cover the different parts of the market.

Just think like broadly from us like we think about AI and like what hasn’t been done yet, perhaps there’s an AI power type of play out there. Perhaps there are more quantum ETFs that could come out, more single stock leveraged ETFs and things like that. So we’ll be coming to market with a lot of that type of stuff.

RS: I guess as a final question, what pushes you to create something? What are some of the metrics you’re looking at? Is it total addressable market? Is it the stocks that are in the sector, what are some things that push you towards a theme and make you pull away from a theme?

SJ: So I think if something seems like it’s fleeting, if it’s just kind of like hot for the moment, we’ll probably stay away from it. But if something looks like it has legs, which like when we launched 6G and quantum, we knew that like AI, connected technology, robotics, machine learning, supercomputing had legs. Then I think that’s something that we would probably pursue and we did pursue. So it’s just like things that have staying power.

RS: And how would you contextualize what has staying power? What are some of the things that you would point to?

SJ: I would point to AI has staying power, right? And we’re starting to see it. We all have ChatGPT now. We’re starting to use that stuff. You’re starting to hear on earnings calls companies talking about like how they’re using AI to optimize their businesses and things like that.

So I think just a theme that actually starts to play out in terms of like earnings and like actual revenues and like a productive business and things like that.

RS: Well, I appreciate the conversation Sylvia. Anything that you would care to share with investors that you feel like is pertinent for them to be aware of or how they can get in touch with you or find out more about Defiance. Happy for you to share that now.

SJ: Definitely reach out and check out Defiance ETFs. We’re all over social media. We’d love to share information and love to talk to our investors.