Kristin Myers: Welcome back to ETF Rundown, the newest FINTECH.TV program on all things exchange traded funds. We are continuing our conversation with Bilal Little, Global ETF Strategist from Direxion.
Okay, so Bilal, just before the break we were talking about duration. We were talking about yield. Now, Direxion actually has two leveraged Treasury products. I want to make sure I get them right. It's TMF and TMV that you guys have.
Now, you say that these are ways for traders to express conviction around rates. Both, however, are trades on 20 plus year Treasuries, and the Fed doesn't directly control the long end of the curve.
So what exactly do you need to hear from the Fed tomorrow? What do you need to hear in those comments from the Fed chair tomorrow really to drive that trade?
Bilal Little: I think if expectations around inflation are anchored, I think that's a strong case for TMV, because that basically means, look, you have higher yields and possibly lower bond prices. That's a nice setup for the market to have some volatility.
I think on the other end of the side of the conversation is if you actually have lower yields and higher bond prices. Well, guess what? That's a strong case for TMF.
And if investors want to figure out what the market should be thinking about during that period of time, literally just watch that second half of the statement.
Kristin Myers: So clearly connect the dots then. Are you liking a bullish trade, that's TMF, or are you liking the bearish trade, which is TMV?
Bilal Little: Right now, I think it's a bit of a bullish trade.
Kristin Myers: Okay. All right. So I want to do a little bit of a, it's not a hard pivot, but let's talk about the energy sector.
We've got a chart on the flows and the performance for the entire energy sector. Performance has been spiking, but we've had outflows. So explain that disconnect.
Bilal Little: So the one thing that I want to point out is I think there's investors that have been taking some profits in the energy sector.
Really, the folks who are still holding energy and still allocating, I think it's the hedge in the marketplace today, especially the fact that everything is so interconnected, right?
What's going on with the Fed, what's going on with oil, what's going on with stock prices, it's all interconnected to what's happening in the Middle East.
And then obviously you have this heightened exposure with Saudi Arabia, and you're talking about that's the major bypass of the Strait of Hormuz with over 7 million barrels a day.
Well, the IEA is talking about 2.5 million in production. The U.S., no one is paying attention to this, and they probably are talking about it, since 1983 we're at our lowest levels as far as Strategic Petroleum Reserves.
I was born in 1983, just to tell you, right? So we're talking 40 plus years.
Kristin Myers: You look great.
Bilal Little: Thank you. I'm trying here.
But why is that so significant? It's because that's the hedge in the market right now that no one can really get in front of because it's so uncertain how much upside.
Look, I think you can, I can't call that. I'll be honest with you. I still believe it's, I think it's a hedge that you hold.
But I will say this: an interesting storyline that I think is starting to emerge is because the correlation between oil prices and yields are so tight right now, I think the market is trying to figure out, okay, will the volatility persist, and how long will it persist?
And that's going to be independent of what the Fed does and the Treasury.
Kristin Myers: So when do those higher oil prices that we have been seeing really destroy demand, start to erode that demand? Because right now we haven't seen that happen as yet.
Instead, right now we've actually just seen inflation spike, and we've obviously seen oil companies benefiting. When do you see that reversing?
Bilal Little: Yeah, sure. A few things.
I think if you look at what we saw with the PPI number a couple of weeks ago, what was really interesting is we haven't seen the cost of diesel and oil really start to seep through. But it's getting there, and it's going to go to other parts of the market.
When it comes to service and manufacturing, that's going to continue to get passed down to the end consumer. They're going to continue to have a tighter wallet.
What you're seeing right now is the bond market is saying, look, we've got tighter markets happening, tighter cost of capital. That's going to impact margins as well as multiples. And that's going to seep into 2027.
So if growth really starts to slow down, I think if you see, one, the disconnect between yields and oil, meaning the correlation, if you see that disconnect, that's one.
The second would be if there's some sort of resolution that comes out of the Middle East.
And third, and this is important, I think if you're looking at the market right now and oil prices no longer follow the headline, I think that could be a different signal as well.
Kristin Myers: And I like that, right? Really connecting that right back to the Fed.
Before we have to leave you, I want to talk about some more Direxion products. You've mentioned GUSH. You've mentioned DRIP, as well as ERX and ERY.
These are all bull and bear energy ETFs, although GUSH and DRIP are more specific to oil exploration, I believe.
When would an investor choose one over the other, one set over the other?
Bilal Little: Yeah. Well, I think it's, do you want to play the broad market energy sector, or do you want to play the entire energy complex, right?
So GUSH and DRIP are about the energy complex, more mid and small cap and then broad
