ETF Prime: Flows, Volatility, and Diversity

Later, Geraci is joined by Matt Bartolini, head of SPDR Americas research at State Street Global Advisors, to talk about flows in the first quarter of 2022 and take a look ahead for active ETFs. Closing out the show is Mamadou-Abou Sarr, president and CEO of V-Square Quantitative Management, who discusses the V-Shares U.S. Leadership Diversity ETF (VDNI).

The discussion opens with the recent launch of the 2x Long VIX Futures ETF (UVIX) and the -1 Short VIX Futures ETF (SVIX) and the acknowledgement by Crigger that they are volatility funds along the same lines as the VelocityShares Daily Inverse VIX Short Term ETN (XIV B+), which lost 90% of its price in a single day when volatility spiked four years ago. The primary difference between UVIX and SVIX compared to XIV is that they are ETFs and not an ETN like XIV was.

“That matters because they’re actually holding the volatility futures themselves in their portfolio,” Crigger says. “That has all sorts of construction implications that we’ll get into, but one of the big ones is since you’re holding futures contracts, you are getting a K-1 tax form, just as you would with a commodity futures product.”

Another key difference is that when investing in an ETF, there isn’t counterparty risk if the issuer suddenly goes under or the fund closes abruptly. UVIX and SVIX also utilize a different method for calculating price by averaging the prices of the futures contracts over a defined time period, in this case the last 15 minutes of trading each day. Taking the average eliminates any anomalies or last minute fluctuations that can be reflected in settlement prices alone.

“These are not products meant to be held for the long term, sat on for months at a time; you’re going to get killed in the fees if you do that,” Crigger says. UVIX carries an expense ratio of 1.65% while SVIX has a 1.35% expense ratio and can be a good tactical hedge for volatility.

The conversation goes on to cover the mysterious issuance of $15.2 billion more in notes by Barclays and the subsequent closing of two of their ETNs, the risks that ETNs can carry, Morgan Stanley entering the ETF market, and the launch of the direct indexing platform at the end of this year by Charles Schwab.

Up next is Matt Bartolini, who explains that ETFs brought in $195 billion in the first quarter of 2022, $97 billion of that in March, the third-highest month for ETF inflows on record.

“Overall in general, flows have been equity biased; equities made up about 80% of the overall Q1 flows, and then within equities it’s mainly been U.S. equity exposure,” Bartolini says.

Most U.S. investors are choosing to invest domestically, likely due to geopolitical risk and fallout from the Russia-Ukraine war. Emerging markets investment is a tough sell in the short term, Bartolini believes, given all of the geopolitical risk, but it continues to be a diversification potential for portfolios in the long term and historically offers higher yields.

Bartolini also discusses the performance of gold, fixed income, and active ETFs.

Last on is Mamadou-Abou Sarr, who talks about the V-Shares U.S. Leadership Diversity ETF (VDNI) and the fund’s focus on diversified human capital. Human capital is the foundation for every system, and Sarr explains that intelligence, gender, and ethnicity all fall within the same distributions within populations, and by not hiring broadly across the gender and ethnicity spectrum, companies miss out on talent potential.

The ETF is constructed with the broad universe of the Russell 3000 and from there is filtered down through a partnership with ISS ESG.

“We start by actually identifying companies that display at least 35% diversity at the board of companies and for NEOs, non-executive officers,” Sarr explains. Other requirements are at least three distinct individuals of diversity between the board and NEOs as well as well as three women within the same group.

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