Kristen: We're going to turn now to Bilal Little, global ETF strategist at Direction. Bilal, happy Tuesday.
Bilal Little: Good morning. Happy Tuesday. Good to see you.
Kristen: I love, I know it's a red day today. Markets are in the green, but we've got a bit of a red day today. So I want to start with, as I was just talking about in that chart, AI trade, we had tech stocks really taking a leg lower last week. So we've spent most of the year, most of the past couple of weeks, you and I talking about the AI trade, but you're actually looking at something a little bit different. You're actually looking at credit and the credit market. AI related bonds. What is that story telling you right now about the economy and about the market?
Bilal Little: Yes, so first is the market isn't, we're not seeing a rotate. We're seeing a rotation. The market, the money isn't leaving the market, right? That's important. The second thing is because of this AI buildout and the spend around it, obviously it's heightened sensitivity around who's going to pay for it. So the barometer is the credit default swaps from Oracle that everyone's watching, but they just reached an 18-year high. Basically that's a derivative on the debt. The challenge with that is because spreads are so wide, that's basically an indication that investors feel somewhat weary about where things are right now. There have been several headlines about the data center buildouts, right, and the possible delays associated with that. But at the same time, again, investors want a return on investment. So that's why it's become such a critical topic and what people are paying attention to, especially where interest rates are.
Kristen: Yes, so let's dive into that just a little bit more because that seems to put a lot of emphasis on earnings, particularly this week. You kind of just mentioned it, but say a little bit more about this because are we at the point right now where the free cash flow really matters a lot to investors rather than just earnings beats, right, because to that question it's like who's going to pay for all of this, right? The investors want that return on their investment. So what do you think that investors are actually going to be looking at in this earnings season that they're actually going to want to see in some of these quarterly earnings?
Bilal Little: You know, we talked about this a couple of weeks ago, guidance, right? It's that guidance of when I will get a return on investment. This week, obviously you have Meta, you have SpaceX, you also have Netflix, you have Tesla. These are going to be great indications of what's going on within that AI spend. At the same time, later this month, literally within two weeks, you also have Amazon, you have Intel, you have several others that are going to be reporting. So people are going to be paying attention right now. I think the challenge though, and again I keep laying this out, it's not that they've gone away from that trade. It's capital goes where it's loved most, so value, and you indicated this earlier in your comments, the Dow is actually up, right? It's actually held up pretty nicely. Consumer staples, which we talked about last week as well, those have been doing OK as tech, particularly the semis, have sold off. And remember we were talking about hedging tech because of this volatility where rates are. So because of where rates are, the cost of capital is more expensive. And then who's going to pay for it and what's the return on investment is the theme, is the story, bar none, full stop.
Kristen: So we also have the Fed coming up next week. Inflation is still hot. Oil back around 100, $10. Yeah, yields, multi-decade highs. You love coming on here and talking about, talking about the yields. We were talking about how sexy fixed income is right now. What do you think this mix, this macroeconomic picture is telling us about what the Fed decision is going to be because they're in a blackout period, so we're not going to get anything from them?
Bilal Little: First, I think investors have already priced in that we'll get this sort of move in rates even if they pause right now and they're still going to likely hike in December. Inflation is still too high, coming in at 2.6% on the core. That's up. PPI came in hotter. So the fact of the matter is that is the landscape that we're in. But again, I look at what is capital doing. So we always look to the top five inflow categories in ETFs. Three out of the five categories actually were equities: US large value, US large growth and US large core, which means 68% of the S&P stocks actually performed positive last week, although tech was the big driver pulling things down. What that means is dispersion, at the same time opportunity in the rest of the market, and I think that's what investors are paying attention to.
Kristen: OK, so to that point, because you've said dispersion, not direction, correct? So what does that divergence really tell you about how investors...
Bilal Little: Well, one, I think it's a bit of a trader's market. So let's be very clear on that. So dispersion meaning within sectors and asset classes. So let's just look last week we were talking about the banks. What happened with the banks? Well, you had some banks that did OK and some that didn't do well. So we said, what, trade the banks. The same is going to be happening inside the tech, at the same time other sectors, consumer discretionary, industrial and some other areas. So every company is not going to do well and that means investors are going to pay for the ones that actually present the opportunities to them. I don't think you just hold the broad market in this case. I think you'd be very selective, and if you do hold the broad market, it would be much more like equally weighted S&Ps or equally weighted Q's.
Kristen: I was going to say, do you think investors are moving away from the most crowded parts of the AI trade? And to your point, it feels like there is a broadening that is happening, but where are you seeing those pockets of opportunity even within the AI trade, because you can't ignore it. Betting against tech for a very long time would be essentially betting against your own portfolio.
Bilal Little: But I don't think you bet against tech. I think you just be patient in this market. You don't chase this market, right? And I think that's the difference right now. So let's use an example. One of the things we talked about value is where's the value in the US and where's the value outside the US? Emerging markets are trading at 13 times forward earnings, even though the S&P is trading around 20 or so times. There are pockets of value, although we've had a slightly stronger dollar, which obviously makes international markets somewhat challenging. At the same time, you look at Korea, you look at different areas. These markets have seen some pretty significant sell-offs. However, these businesses aren't going anywhere. So a great example would be the memory trade. We've been talking about the memory trade which peaked back in June. The backlog of 100+ billion dollars between SK Heinrich, Micron, and Samsung. The point is there's some opportunity.
Kristen: Let's talk a little bit about the ETF industry because I want to pull back from markets for just a second. So I'm going to read some pretty interesting facts. US listed ETFs took in over 1.5 trillion through September. That's insane. That's more than the record that we had set last year. So essentially we're looking at an industry going to be more than 1.6 trillion in assets. Do you think that the ETF wrapper has pretty much just won? These are incredibly high numbers, and I feel like every single year we keep asking, do ETF inflows break the record, and they have year after year after year after year. I'm trying to think of how many years going back we have consistently set these records, but talk to me about what you think some of these numbers say about the market and about investor sentiment to the wrapper.
Bilal Little: The first is I think the market's embraced this innovation of an investment vehicle, so I don't think it goes away. The second point is I think we continue to find new ways and discover new opportunities for how the wrapper can be used. And then thirdly, I think there's innovation to the mutual fund wrapper which continues to be adopted. So obviously they will share, and some other things. So that's why I don't think we see this go away, and I do think you do see a bit of a slowdown because innovation does obviously take time to develop when you have to identify new opportunities.
Kristen: OK, so I love that you mentioned that innovation. I feel like it's a word that I hear a lot when we are talking about ETFs. Everyone is saying every new ETF, oh, it's innovation, it's innovation, it's innovation. OK. About 5,700 US listed ETFs. We have added more than 500 since the end of April, so let's just call that May. We are opening about 5 ETFs for every 1 ETF that closes. So I mean the question kind of says, do we actually need almost 6,000 ETFs right now? I mean, everyone's saying innovation, but it feels more like saturation. I keep saying consolidation has to happen at some point, at some point.
Bilal Little: Well, you're seeing, you're seeing some of it, right? Goldman acquired two money managers. You saw Victory Capital acquired Steagall. I think you could see some consolidation. That's one. The second point is a third of the ETFs that were launched since April were leveraged inverse ETFs, right? So many of those were relying on single stock names. So you also actually see a spike in the close ratio. So we're now at, you know, January levels as far as open-close ratio, meaning when an ETF opens, does one close? That's around 5% or so, so you're actually seeing some consolidation in the space.
Kristen: Yes, I'm glad you mentioned leverage inverse. It's about a third of all the new ETF products that we saw in the first six months of the year. We've got single stock leverage. We've got inverse income strategies, buffer products. We have some funds that are launching 200 plus funds at a clip, almost like an ETF factory of some sort. So are you thinking that where we're going right now is, I mean, yes, ETFs are still a long-term product, but are you seeing that interest that these are actually going to now be trading tools because now we have coming up the binary ETFs that are going to be coming, the call sheet, the predictive market ETFs?
Bilal Little: Look, I'll tell you one thing that's at least on my reservation for the ETF wrapper is at the end of the day, math still has to math, right? It's got to work. So if you're bringing, if you're launching products and they, you don't see assets going into these products, you'll see a continued, I would say, spike in closures, at the same time consolidation if these products do not garner new dollars.
Kristen: OK, so let's do little by little. Let's go for our last minute. OK. Hit us with your calls of the week.
Bilal Little: All right, look, so you got to keep it straightforward and simple in this market. Do not chase it, Kristen. That's been the number one theme that we've been talking about. So the first thing I'm looking at is where's value? Gold and Bitcoin, I think, offer a nice alternative allocation in this market given where they're trading right now.
Kristen: Second point, I never thought I'd see the day where Bitcoin.
Bilal Little: I'm just telling you right now I think it is because if you look, you want to diversify away from the dollar as well as rates. The second thing is buy value both home and abroad, so they're trading at steeper discounts than the US market. It's a great opportunity to diversify your equity portfolio. The third piece that I'm calling is continue to hedge tech again. We talked about this going into last. You saw the sell-off in semis. I know we're going into an attractive earnings season, but again, you're going to see diversification, I mean bifurcation, as well as divergence in a lot of these tech names.
Kristen: You know, for those ETF Rundown viewers that have been with us at least for a couple of weeks, we definitely talked international. Last week, huge valuation discounts when it comes to international, particularly in the emerging markets and last year, 2025, international was the winner compared to the US equities.
Bilal Little: You know, and you know we talked about this, but if I'm going to leave anyone with anything, I think you continue to put an asterisk as a sort of recurrent theme: income, income, income. No matter how you're going to get it, it's OK to get paid in this market. 5% plus yields.
Kristen: All right, Bilal Little, global ETF strategist at Direction, thank you so much for joining us as always.
