Balchunas On Free ETFs & UFO Sighting

Balchunas On Free ETFs & UFO Sighting

Bloomberg ETF analyst discusses what’s going on with ETFs in 2018.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

Eric BalchunasEric Balchunas knows ETFs like no one else. He’s a senior ETF analyst for Bloomberg Intelligence and author of “The Institutional ETF Toolbox.” He has also recently helped launch Bloomberg ETF-IQ, the first and only television show that focuses solely on the ETF industry, and is generally one of the best sources for anything to do with exchange-traded funds. recently spoke with Balchunas to get his take on the developments in the world of ETFs so far in 2018. He will also be a featured speaker at the Inside Smart Beta Conference, June 6-7, in New York. U.S-listed ETFs recently crossed $100 billion in inflows for the year, which is 45% less than last year at this time. Why do you think we're seeing such a dramatic slowdown in 2018?

Balchunas: It’s the stock market. The S&P 500 is up 3% this year, compared to 8% last year at this time—and it’s been much more volatile. But I’d argue that $107 billion this year is more impressive than $180 billion was last year, which was a utopian environment, where everything just went up all the time.
Relatively speaking, I look at 2018 as a pretty good year. I expect to see the flows continue to come in, minus a punch in the face here and there. Fixed-income ETFs are pulling in a lot of new money this year, even though interest rates are rising rapidly. Does that surprise you?

Balchunas: It did at first; I remember the taper tantrum and how every little rate rise scared people out of fixed income. But I also think that fixed income flows are an optical illusion. Yes, relatively speaking, fixed-income ETFs are taking in more than equities. But year-to-date, they've taken in less than they did last year at this time.

It’s not like everybody is rushing to fixed income; it’s more “business as usual” for fixed income. U.S. stock market volatility suppressed U.S. equity inflows, and that’s what makes fixed-income inflows seem that much greater this year.

That said, where you do see the money going is ultra-short-term debt, which is a money-market-fund type of play. That's just people who were a little nervous after February and are just looking to park cash somewhere.

Then there's the iShares Floating Rate Bond ETF (FLOT), which is doing very well. That’s clearly rate related.

As for junk bond ETFs, all year long you’ve seen them riff off of the 10-year Treasury yield. You see outflows if 10-year yield goes up, inflows if 10-year yield goes down. Last year, we saw a handful of thematic ETFs that really caught the attention of the investing world after they surged and picked up hundreds of millions of dollars in assets. The ROBO Global Robotics and Automation Index ETF (ROBO) and the Global X Robotics & Artificial Intelligence ETF (BOTZ) come to mind. Are you seeing any home-run ETFs like that this year?

Balchunas: BOTZ is still doing amazing. I've never seen an ETF go from oblivion to the top 1% that fast. It's unbelievable. It's a total rare event.

Another one that had a great last year and continues to clean up is the iShares Edge MSCI U.S.A. Momentum Factor ETF (MTUM). The resilience of tech stocks has kept this thing outperforming the S&P 500. It's also dirt cheap, at 15 basis points. Over the past year, it's taken in $4.6 billion. In other words, it's seen 100% organic growth.
This is a real juggernaut; it’s putting momentum on the map. Momentum—unlike value, growth and even low vol—is kind of new to that whole factor ETF world. It’s the new kid on the block, and now it's the fastest growing on an organic-growth basis of all the smart-beta categories.

A couple of other ones we’ve covered that are seeing growth, but from a much lower base, are the Loncar Cancer Immunotherapy ETF (CNCR) and the ProShares Long Online/Short Stores ETF (CLIX). Regardless of flows, are there any launches or filings in 2018 that’ve really caught your eye?

Balchunas: One that I definitely noticed is the [Procure Space ETF (UFO)]. That reminds me of robotics in a way, where my first reaction was to laugh. But when I think about it, it’s possible that something like that connects.

It’s probably going to take a performance breakout, but the story is very easy to understand. If there’s a new mission that involves space, or Elon Musk does something, you can see that really being an interesting product. I love the ticker. It's just got all the makings of a possible hit-themed product.

The other ones that caught my attention were the quantum computing and the virtual reality ETFs that were recently filed. Those are a little harder to understand, but still interesting.
Some of those futuristic-tech-type ETFs probably have the best shot of thematic ETFs. When you're trying to go out there and serve up a slice of the tech area that isn't really covered by the Technology Select Sector SPDR Fund (XLK), those can probably do pretty well. You’re going to be on a panel at the Inside Smart Beta conference next month where you’ll be discussing tech and how artificial intelligence (AI) can help us better invest and capture factor exposure more easily. Can you get into what you'll be talking about in that panel?

Balchunas: In general, my main message on smart-beta panels is understanding the factor content of an ETF—how much factor you’re getting.
That’s really something that’s not on the label; it's hard to find, and you kind of need to be an analyst to figure it out. We need a label that tells you immediately that an ETF is on the far end of the spectrum in terms of delivering a lot of value or a lot of momentum, this one's in the middle and this one's on the left. There aren't any good or bad ones; it's just a matter of knowing how aggressive your smart-beta ETF is.

The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) is very popular, but it doesn't have much active share. It's a multifactor ETF. It's only got 25% active share to the S&P 500. A lot of advisors want that. They want something they can use for a core exposure. It won't deviate from the market much.
But then you could have somebody else who wants to take more of a gamble. In that case, that product would not be for them. They might go to the iShares Edge MSCI Multifactor U.S.A. ETF (LRGF), which has more like a 75% active share.

Active share, concentration of holdings, and standard deviation are some of the things that can help you understand how aggressive an ETF is.

On the AI front, machine learning is the greatest buzzword since smart beta. It conjures up all these movies you've seen in your head. But it’s probably a little overblown.
We've seen people with all the degrees and all the machines even before they called it machine learning, and they still underperformed the market. I don't know if having a machine on your side is all that great.

If we do a study in a couple years and it turns out all the machine-learning ETFs beat all the active and smart beta, I’ll bow down and give much more credit to machine learning. But as of now, I find it to be more of just a great buzzword capturing the moment. Are there any new updates on the bitcoin ETF saga?

Balchunas: It’s still a long shot. The SEC's 31-question letter was like a big bucket of cold water on the party.
That said, there are a couple of glimmers of hope. A lot of people from the ETF world seem to be defecting to the crypto world. They wouldn't do that if they didn't see some possibility of a bitcoin ETF down the road.
People are not giving up. There's a resiliency to bitcoin. That's why I respect it. The price is resilient and the people are passionate. I see them continuing to fight for it. At some point, they'll probably get a bitcoin ETF. I just don't know when.
If I had to ballpark it, I would say summer 2019. There’s a 50/50 chance we get one by then. Are there any big stories in the ETF world in 2018 that we haven’t discussed that you think people should know about?

Balchunas: Something I'm going to be talking more about is tracking difference. A lot of people ask, “When is the first free ETF going to come out?” But if you look, they're already free in many areas.
There’s some small-caps and emerging market ETFs that have positive tracking, meaning you're getting paid a couple basis points to hold them.

More and more, the securities-lending desks and the acumen of the passive managers will be something retail investors should pay attention to. We should start looking at ETFs in terms of their tracking difference as their true cost.

The reason that's a little harder to accept is because it changes a little bit, whereas the expense ratio is fixed. But I would like to see that conversation evolve, because then you don't have to worry about the free ETF thing; they're already here.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

Sumit Roy is the senior ETF analyst for, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for, with a particular focus on stock and bond exchange-traded funds.

He is the host of’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays,’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.