00:00July was really a blockbuster. We saw active ETFs rake in $58 billion, and I think the milestone is pushed
00:05to $2 trillion.
00:06This is definitely a big deal, and it really signals that maybe this once-niche investment product is now becoming
00:13mainstream.
00:13Talk to us more about how active ETFs have grown in the past years.
00:16Yeah, I think it's absolutely active ETFs are mainstream.
00:19They're about 86% of all the launches.
00:22You certainly see J.P. Morgan, as well as some of our competitors, actively going into the space, no pun
00:27intended.
00:28And what I find most interesting is that you're starting to see, and this has probably helped driving the flows,
00:33a lot of these active ETFs are being put into models.
00:36And models really drive assets and help explode the overall flows.
00:40Because if you think about it, clients who are long-term investors, who are 3, 5, 10, 30 years, they
00:47want to be invested in a strategy that's going to earn them wealth and not be subjected to kind of
00:52the quick ups and downs of the marketplace.
00:55What about active fixed income ETFs?
00:57They're growing roughly twice their rate of passive, and they're capturing around 40% of the flows.
01:01Do you see more demand between active fixed income versus active equity?
01:04Well, overall, flows for active are roughly 37% to 40%.
01:08So fixed income is slightly higher.
01:10We're starting with a smaller base.
01:12Now, the overall active market, fixed income is largely an active market, whether it be ETFs or mutual funds or
01:20SMAs.
01:21So probably 75% of the overall market is active.
01:24So thinking about how do you outperform with the ETF structure or give a better structure, why not put these
01:31into models?
01:33For example, we just converted an ETF, JPRF.
01:37It's a preferred fund.
01:38It typically outperforms its passive peers.
01:41It has a 4.8% duration, JPRF.
01:45I think people are going to buy this all day long as part of their extended fixed income allocation.
01:50It makes sense to me.
01:51You have more product.
01:52Okay.
01:53Let me, when I think about bonds today in this environment, I relate to the people going to money market,
01:58mutual funds, and SGOV, which is T-bills.
02:01Because you have no risk, really, and you have 3.8% yield.
02:06Until that goes lower, why not?
02:08You're saying active fixed income, and I know people are buying these.
02:12What would be the, how would you sell me out of this more stable cash position into something that's active
02:19when we have seen that the ag and other bond ETFs has not hedged stocks when there's a downturn?
02:24Yeah, and that's a fair point, and you brought it up earlier about the widowmaker, TLT.
02:29Yeah, there's been flows there, but that's the long end of the curve.
02:32You know, I think the intermediate and slightly below intermediate portion of the curve is where it makes more sense.
02:39And when you have an active manager, you can manage duration.
02:41So, like, JPRF, what I just talked about, has a 4.8% duration, whereas some of the other preferred
02:47funds have a higher duration.
02:49So, you're bringing down your duration in that instance.
02:51If you're looking at other fixed income, you can manage that duration, where in a passive instrument, you really can.
02:57Let's talk about bond managers versus stock pickers, because David Cote on my team, he puts the mutual fund flows
03:03out every month.
03:03It's the same story.
03:05Stock pickers, total outflows every month, big time.
03:09Everyone else kind of treading water, taking in cash.
03:12Are bond managers just lucky to play against an inferior index, like the ag, versus the stock pickers who have
03:20to play against the S&P, which is full of momentum?
03:23Or are they really just better?
03:24Well, you know, in our business, let's say, hope is not really a strategy.
03:29Luck, you know, I guess some people have it.
03:31But fixed income is typically, and it's ingrained in us institutionally, that is part of our overall allocation, whether you
03:37agree with it or not.
03:39So, when you have an instrument that's cheaper, and it's going to immediately help you outperform.
03:46If you're going to access 50% of the outside of the ag that's not in the ag, you have
03:53the ability to outperform, the securitized portion of the market, other portions of the MBS or the ABS market.
03:58So, an active manager, I'm not going to say it's easier, because our portfolio managers would not agree with me
04:04that it's easier.
04:05But the odds are higher that you're going to outperform.
04:09I want to talk about models.
04:10Eric and I earlier in the call, we said John Mayer is the guy to ask, because he had models
04:15in his career.
04:16They make up, ETFs make up around 55% of model portfolio allocations.
04:21Talk to us about how maybe financial advisors are using ETFs as a shift in how they allocate assets.
04:26Is this becoming the new norm?
04:27Similarly, we always talk about in the team that, you know, distribution is the hard part when it comes to
04:31ETFs.
04:32But some are like, I just want to get into a big model, and that will help me already.
04:35Well, you know, distribution for models is actually pretty difficult.
04:38And the assets tend to be sticky in models.
04:41Building a model business is not easy.
04:43Selling an ETF for a financial advisor is probably a lot easier.
04:49But if they sell the entire model, it's stickier assets over time.
04:54Now, I started with models when I was at Merrill.
04:57Those grew because they were open architecture.
04:59I think everybody likes to kind of see different parts of the universe and not stick to one company.
05:04And I think that's where you see a lot of success.
05:05Some of our competitors are, you know, just proprietary, and they may have the right ETFs, but really most don't.
05:13So that's why looking at an open architecture, I think, makes a lot of sense.
05:17Putting whether it be passive or active into a model and adjusting, whether it be quarterly or monthly, you know,
05:25you're getting institutional investing, you know, made for retail.
05:29And I think that's only going to grow as the advisor community shrinks and you have a scalable solution like
05:36models.
05:37You put thematics in your notes here.
05:39You used to work at GlobalX, and they're big in thematics.
05:42JPMorgan doesn't do a ton of that.
05:44Thematic ETFs are now up to, I think, $160 billion or something.
05:48They've had kind of a renaissance soon.
05:50And I want to get your take on those.
05:53They seem to me like they're a good complement to a cheap beta or cheap active core.
05:57And you can participate in areas that are a little younger and the stocks aren't in the index yet.
06:03Yeah.
06:03So what's wrong with that?
06:04I don't think there's anything wrong with it.
06:06I mean, you love to talk about hot sauce, Eric.
06:08So it's like I would think thematics are hot sauce.
06:10But if you really break down what thematics are, and also like photonics.
06:14Do you even know what photonics are?
06:16Recently.
06:16I've learned what it is.
06:18I had to Google it the other day.
06:19I think I got it.
06:20I have to Google every fourth ETF file.
06:22It's crazy.
06:23That's why I like doing it, though.
06:25Yeah, it's fun.
06:25It's fun.
06:26Yes.
06:26Every day is a new day.
06:28But thematics, it changes over time.
06:31So like electric vehicles, you know, six or seven years ago is kind of ingrained in like
06:37the broad indexes today.
06:39So in terms of thematic investing, we at J.P. Morgan do thematic investing.
06:43But it's built into kind of our growth allocations or our technology allocations.
06:47And an active manager gets to select what's inside or the specific company they're going
06:52to use and look at those companies based on fundamentals and valuation versus being in
06:58an index that is somewhat arbitrary in terms of kind of creating the rules to encapsulate
07:02these companies to put in those indexes.
07:04So sure, people love to get into the latest FOMO trade.
07:09The people who get in early often are beneficiaries of that trade, as we've seen recently.
07:14Speaking of FOMO and hot sauce, which, Eric, I think you should really trademark.
07:18You should really work on trademarking.
07:19Well, it's a pretty universal term.
07:21But you have popularized it.
07:22I need to make money on this somehow.
07:23Yes, you do.
07:25Talk to us about your thoughts just in general on leverage ETFs.
07:28I mean, they've taken the world by storm.
07:30It used to be that it's only me and Eric and a couple of us obsessed about leverage ETFs.
07:34But now even the so-called mainstream are concerned because it has been moving markets.
07:38Well, you know, leverage ETFs are, what, roughly $200 billion.
07:41And the single stocks are about $50 billion, I recall.
07:44Would you ever wade into that space?
07:46J.P. Morgan, that's not really part of our DNA.
07:49But it's certainly, you know, the great thing about the ETF structure,
07:51and if it falls into 6011 or the ETF rule, you can do a lot of things.
07:56And the SEC allows for it.
07:59There are people who like to trade.
08:01And those products may be appropriate for them.
08:04I just hope they understand the risks that are involved,
08:07that they're only getting the return of an index geared for one day.
08:11And the average holding period, and I can't quantify this, is probably four days.
08:14Yeah.
08:15So it's fast money.
08:16I think I saw Eric talking about it on another podcast.
08:19It's like money machines for some folks.
08:22ATM machines.
08:23ATM machines.
08:23ATM.
08:24And these semi-leveraged people are, they've made, I mean, honestly, $40, $50 billion.
08:30It's incredible.
08:31Yeah.
08:31So I think there's a misconception that they're all just getting hosed.
08:35I think the reason they're so popular is they are making money.
08:38But to your point, you've got to trade them.
08:41You don't want to hold them because weird things happen.
08:43And you just have to be educated.
08:44Yeah, because of the effects of compounding, you're not going to get what you expect over
08:48a long period of time, particularly in a shopping market.
08:50Like in a trending market, you'll get fairly close.
08:53But you are buying leverage.
08:55So understand what you're buying is kind of what I always say.
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