Yahoo Finance’s Akiko Fujita and Dave Nadig, CIO and Director of Research for ETF Trends, discuss innovation ETFs amid election volatility and coronavirus uncertainty.
Video Transcript
AKIKO FUJITA: It is now time for our ETF report brought to you by Invesco. And today, we are honing in on innovation as an asset class. Certainly a timely discussion, given Tesla’s strong earnings that were out yesterday. We’re seeing that stock up nearly 2% in the session right now.
Dave Nadig is the CIO and director of research for ETF Trends. And Dave, this is an interesting discussion to me because I’m curious how you even define innovation. We can talk about the ETFs and what names are in there. But let’s start by how you even measure that.
DAVE NADIG: Yeah, I think that’s one of the big challenges here. And this idea of is innovation its own asset class really, I think, comes on the back, really, of one particular fund, and that’s got to be ARKK, which is the ARK Innovation Fund. That fund has sort of made a name for itself by really going strong on names like Tesla, hence why we’re talking about it today. And it’s pulled in close to $5 and 1/2 billion in assets so far this year. And it’s up 100%. So that tends to raise a lot of eyebrows.
So what we’re seeing is this sort of dissection of that thesis looking to invest in innovation, and trying to figure out sort of more, you know, index-y ways of approaching it, right? ARK is notable because it’s an openly actively managed fund. I think we can all get how you staff a bunch of analysts to go chase these exciting young companies that are being disruptive.
But how you take data and build an index around that has been, I think, really tricky. But we’ve got folks out there trying to do it. We’ve had some recent launches around it. They tend to look either at specific industries that are ripe for transformation, like, say, healthcare and telehealth or online retailers. Those sort of make sense. But I think other approaches are doing it– looking at things like R&D development and patents.
AKIKO FUJITA: I mean, to the point you’ve made about ARK’s holdings, I’m looking at names like CRISPR, Slack, Zillow, Roku, I mean, some of these names, yes, in fact, are doing very innovative things, but they’ve also had been quite volatile, especially during the last several months. When you invest in some of these ETFs, is there an inevitable part of volatility that comes along with that?
DAVE NADIG: 100%, right? I mean, almost by definition, what these kinds of funds are doing is they’re looking for specific corners of the economy that are in the midst of enormous change and disruption. And the reason we’re focusing on it right now, obviously, is we’ve got all these exogenous events that are making those changes happen even faster, creating what people have been calling the K-shaped recovery, where we have a batch of big winners and a batch of big losers.
But when you’re going to participate in some part of the economy that’s being blown up, guess what? There are going to be good days, and there are going to be bad days. That’s why these companies are exciting, but it’s also, as you point out, they can be very, very risky.
So we’ve seen a lot of different approaches to approaching the space. People have been leaning on things like the old Q’s, right? The NASDAQ 100, that sort of became a proxy all the way back in the ’90s for innovation and tech growth. We’ve seen huge flows into that fund this year as well, up something like 35%. So much so that they’ve launched a kind of junior version, looking at the next 100 stocks below that. You know, that’s one of the indexing approaches people are taking.
AKIKO FUJITA: How do you think people should be thinking about active versus passive right now? It seems like that’s a debate that’s really played out, especially given the volatility. Is active the way to go right now when there’s so much uncertainty, so many risks that could derail the momentum in the market?
DAVE NADIG: Yeah, it’s certainly an attractive time to think about active, right? It seems like an environment– it feels like an environment where active should have an edge. Things are volatile. Things are moving quickly. Nobody knows exactly how the next year is going to play– to heck with the election, just how COVID is going to play through the rest of the world over the next year– nobody knows anything. And that makes it feel like active managers who have an edge would be really great.
And in fact, we have seen a lot of launches in the ETF space for active. We talked about ARK. But folks like T Rowe Price have been showing up, you know, American Century. These are companies showing up with traditional active management. And there has been some interest from investors.
There isn’t a lot of evidence yet that, as a group, all of these active managers are going to outperform. Sort of, mathematically, that’s not how it works. But I definitely get the desire to try to do something a little bit different here. And sometimes the academic finance world, where all the indexes come from, doesn’t move as fast as the real world economy.
AKIKO FUJITA: And Dave, we had a guest on earlier that was talking about rotating out of the growth names, going back into value, which could potentially– where the election could potentially be a catalyst. What are you– how are you looking at those plays right now? Is it kind of time to maybe pull back on these big growth names and go back to the basics, so to speak, when we really don’t know where things are headed?
DAVE NADIG: Yeah, so I’ve definitely been hearing this sort of rotation back to value. This time, it’s different. I’m not even sure thinking about growth as growth as its own factor actually makes all that much sense anymore in the economy that we’re in. A lot of what we’re seeing in this K-shaped economy is about sectors and industries, not necessarily the growthiness of the underlying business that’s being built.
I have a hard time figuring that this is a time to lean in to say energy and financials and so many of these stocks that would show up in a big sort of recast of value because they’ve been sold off so hard. So I tend to be a little bit more fundamental than that. I’m not sure that a factor approach makes sense. I do think you need to be looking at the companies and the industries that they’re in right now.
AKIKO FUJITA: Yah, some really good takeaways there. Dave Nadig, the CIO and director of research for ETF Trends. Always good to talk to you.
DAVE NADIG: Thanks for having me.
