What just happened?

Back in 2015, when the Federal Reserve prepared to raise interest rates for the first time in a decade, there were a few popular narratives in the financial media.

Would the market infrastructure, the “internal plumbing” at the New York Fed and other institutions, be ready? And: how would a generation of young traders, many of whom had never seen a rate rise, react?

We know how that went. Both the plumbing and the young whippersnappers were just fine, as were the legions of investors who love navel-gazing media about themselves.

In 2020, the financial markets face a slightly more serious version of the same question. The past few years brought a rate-hiking cycle, followed by a few years of cutting — and then another round of emergency stimulus. But inflation has stayed low for over a decade now, and the Fed Funds Rate only got to 2.25-2.5%, well below long-time norms, before markets threw a tantrum in 2018, forcing the central bank to start cutting again.

“This time is different,” many analysts say now, pointing to extraordinary stimulus from both the Fed and the government, as well as a huge amount of “pent-up” consumer demand for the past 10 months.

Investing themes are reflecting this sentiment. The 10-year U.S. Treasury note
TMUBMUSD10Y,
1.098%

is up nearly 30 basis points in the past month, the financial sector ETF
XLF,
+0.61%

pulled in the biggest haul among all ETFs last week, and small-cap stocks
RUT,
+2.05%

keep hitting fresh highs.

Time will tell, of course, whether this bout of reflation sticks, unlike the time it got whacked by the coronavirus, or when it fizzled after the 2017 tax cuts, or any number of earlier examples. Time will also tell whether we get that dreaded combination of inflation and stagnation. ETF Wrap doesn’t set out to be bearish, just realistic. This time may, in fact, be different. Or not.

Thanks for reading, as always.

Exchange-traded sundries
  • Capital Group, parent company of the American Funds and one of the world’s largest investment management firms, said Wednesday it plans to launch its first actively managed ETFs early in 2022. “We continue to believe that mutual funds provide great benefits to investors and will remain a core part of their portfolios,” CEO Tim Armour said in a statement. “Adding ETFs to our suite of solutions will help us meet the needs of a large and growing group of investors who want the benefits of an ETF vehicle in their portfolio.”

  • The Ark is setting sail… for space and beyond. On Wednesday after the bell, ARK Invest filed an application for a space-themed ETF with the SEC. That sent shares of Virgin Galactic
    SPCE,
    +15.24%
    ,
    one of the few true space pure-play stocks, up more than 13% after hours.

  • Gary Gensler, the likely nominee to lead the SEC, is so well-versed in Bitcoin that he’s actually taught a class at MIT about the topic. Bloomberg’s Eric Balchunas had a tweetstorm with some background materials and thoughts about what it might mean for a Bitcoin ETF.

Is there an ETF for that?

2020 was the year mutual funds started to convert to ETFs, and the early days of 2021 have brought what might be the first hedge fund conversion. The UPHOLDINGS Compound Kings ETF
KNGS,
+2.12%
,
developed by former Everlane CFO Robert Cantwell, launched Dec. 29.

The fund, which bears the ticker KNGS, has a straightforward investment thesis: it invests in a concentrated portfolio of what it calls “cashflow compounders: companies generating cash and reinvesting at a higher rate of return than the overall market.” Right now, KNGS’ top holdings are IPO rights to AirBNB Inc., Alibaba Group
BABA,
+3.60%
,
Facebook Inc.,
FB,
-0.96%

and Berkshire Hathaway
BRK.A,
-0.28%
.

The strategy did well as a hedge fund, returning 115.2% from
its launch in March 2019, through the end of 2020, more than double the roughly
39% gain in the S&P 500 in that time.

Cantwell was an investment manager before helping launch and run Everlane, the online-only fashion retailer. He told MarketWatch that his bifurcated background gives him a unique edge. “Spending half my career as an investor and half my career as an operator helps me see through a lot of BS in financial reporting. I can’t help but draw on that experience any time I’m considering a company for investment.”

Unlike some other active managers, many of whom have spent years trying to find a way to conceal their strategies while making use of the ETF wrapper’s other benefits, Cantwell embraces its transparency.

“I view the ETF as a publicly accountable investment vehicle,” he said, “And I really like the accountability of being a hedge fund manager in an ETF. A lot of ETFs today say we’re going to give you the best exposure we can to an industry or a geography or a theme, but the onus of which category or sector to pick is on the end investor. That to me has gotten a little too far away from the origins of investment management, of holding the portfolio manager accountable.”

In fact, Cantwell expects to follow the example set by one of the most famous and successful active ETF managers, Cathie Wood, by publishing his team’s investment research. “If our portfolio is public, why shouldn’t our research be public?” he said.

Visual of the week

Chart above courtesy of Visual Capitalist; original found here.

Weekly rap
Top 5 gainers of the past week

Global X Cannabis ETF
POTX,
+10.22%
13.4%

Cannabis ETF
THCX,
+8.14%
9.6%

AdvisorShares Pure US Cannabis ETF
MSOS,
+4.68%
8.4%

AdvisorShares Pure Cannabis ETF
YOLO,
+6.35%
8.4%

ETFMG Alternative Harvest ETF
MJ,
+8.27%
8.4%

Source: FactSet, through close of trading Wednesday, January 13, excluding ETNs and leveraged products

Top 5 losers of the past week

ETFMG Prime Junior Silver Miners ETF
SILJ,
+0.79%
-12.5%

iShares MSCI Global Silver Miners ETF
SLVP,
+0.05%
-12.5%

Global X Silver Miners ETF
SIL,
+0.25%
-10.7%

VanEck Vectors Junior Gold Miners ETF
GDXJ,
+0.50%
-9%

Global X Gold Explorers ETF

-8.4%

Source: FactSet, through close of trading Wednesday, January 13, excluding ETNs and leveraged products

Top 5 biggest inflows of the past week

Financial Select Sector SPDR Fund
XLF,
+0.61%
$2.92 billion

iShares Core MSCI Emerging Markets ETF
IEMG,
+1.54%
$1.82 billion

iShares Russell 2000 ETF
IWM,
+2.13%
$1.46 billion

ARK Innovation ETF
ARKK,
+3.50%
$1.27 billion

iShares MBS ETF
MBB,
+0.04%
$1.14 billion

Source: FactSet, through close of trading Wednesday, January 13, excluding ETNs and leveraged products

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