B (3:04)

Yeah. So it's, let me kind of like frame it how, what's going on? There's about $14 trillion in ETF assets in the US. About 89 or 90% of those assets are passive. About 10, 11% are active. Now you just mentioned that around 38% of all the flows this year and about 32% of all the flows last year have been into actively managed ETFs. So I think there is a sea change that's going on in the ETF marketplace that we haven't experienced in a long time. There's things that are happening, including many of the funds, active funds out there have three and five year track records that enables them to get on different platforms that provides access to the end client where they previously didn't have access to those strategies that were only available in mutual fund form.

A (3:58)

Wow. I think that's an amazing detail that I certainly didn't know. The, the number of ETFs essentially qualifying to suddenly get a lot of inflows is just increasing. When you look at the rise in active, let's say, do you think that has to do with the favorability of being a stock picker's market?

B (4:19)

I don't think it's directly linked. I think what the ETF marketplace started off as a passive market. So you think back SPY and I've been involved in since almost the beginning, not since SPY, not that old, but SPY came out in 1993 as a vehicle to absorb liquidity in the marketplace. Six years after the market crash of 87. Over the course of the next 30 years to get to now, many different types of ETFs had been brought to the marketplace, whether it be sector ETFs, bond ETFs. The first active ETF in 2008. Then there was a regulatory change that occurred in 2019 that essentially rolled off all of the exemptive reliefs. And then it made it easier for if you, Phil, wanted to come to the marketplace with an etf, or JP Morgan wanted to come to the marketplace, we had the same barrier, barrier to entry. So given that most indexes were already replicated, most indexes that were created to create an etf, a lot of that has been done. The next evolution really was actively managed ETFs because the ETF structure is just a better structure. Than the mutual fund structure. From my perspective, it's liquid. You know, it's inside it. It's. I mean, it's transparent. You know what it's inside. It's liquid trades all day, typically less expensive. And the tax efficiency, which has been the superpower, particularly for equity ETFs and has really brought investors to the ETF structure. And you can invest in almost any different part of the marketplace. Gold, silver, platinum, palladium, large cap growth or derivative income.

A (6:02)

So one of these ETF stats I've seen tossed around all year. There are now more ETFs than single name stocks. Is that something that concerns you or should we be worried about that?

B (6:14)

Are you concerned that there's more mutual funds than there are single stocks? That's been going on for a long time.

A (6:19)

I guess no one talks about that one.

B (6:21)

No, I don't think it matters now if you actually drill down. A lot of these ETFs are two, $3 million, some are $200,000. So does it matter? What is it? I think it's somewhat irrelevant.

A (6:35)

Okay, that's fair. One of the Most popular active ETFs as far as a category has been derivative income strategies. And so when I see that it's a niche product, but that tells me that investors and clients are looking for yield. But the other way to see that is that investors getting more defensive. Am I thinking about that the right way?

B (6:58)

You know, for a long time bought stocks and over several years stocks and bonds were correlated. The correlation has returned more recently around this Iranian conflict. What I think investors are looking for that, first of all, there's a demographic shift. Investors are getting older and they're looking for income for their retirement. So the derivative income space provides an opportunity to provide income and mitigate the downside to the extent of the income that's received. You're not completely mitigating your downside and you're capping your upside down. There's all different types of products. We, we have many different products. We have Jeppy and Jeff Q. Which are some of the largest actively managed ETFs that exist. But investors are looking for this extra income and this gives a definable way to provide that income at lower volatility.

A (7:58)

Hmm. I think the, a lot of the younger investors I speak with, maybe in under 35, let's say no one's looking for income products. I would say most, mostly they want extremely high upside. They're probably looking for volatility. And a lot of the interestingly Most popular active ETFs are just not that it seems like, at least in the data. So let me ask you about the international versus US stock story this year. We've seen a lot of rotation out of, let's say, what's been winning in the S&P 500 last year. And a lot of those flows can be going to emerging markets, international, large caps. What are you looking at when you hear that story?

B (8:40)

Well, diversification is something that at JP Morgan or any that we espouse and any investor really should think about diversification at any age. That's just from my perspective and being in the Marketplace for about 30 years now, international has underperformed, underperformed for a very long time now. Valuations had gotten rather high in the U.S. particularly some of those top 10 names that everybody knows and have been buying now. International valuations have been much lower. So there's been that opportunity to switch out of these high valuation stocks into lower valuation stocks when the dollar was weakening. Those international stocks have done rather well in contrast to overall US performance. So flows often follow performance and that's what we saw probably over the last 12 months. And there's nothing wrong with diversification. And we think that the story on international investing is going to continue. It's not just a one off year because historically you could argue that it has been a one off year. I've been invested in this international fund for 20 years and it's always done provided less returns than the S&P 500. I'm not going to do it anymore. But the valuation story, the differential in valuation in the U.S. and outside the U.S. i think really has shifted the story.

A (10:12)

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B (11:35)

Yeah. You know, we're looking at funds that have, you know, China and Taiwan and Korea and Latin American countries. So I'm not looking at individual companies. I'm looking more broadly at these funds. It doesn't necessarily preclude underperformance just by your. In the US if you're. It's not necessarily just a seesaw, but the valuation differential has been rather stark.

A (12:02)

That makes sense. So we've seen the VIX extremely elevated. We've seen bearish sentiment kind of coming out of every corner we could possibly expect it from. It's in the media, it's in conversations, it's in a lot of these sentiment indexes. Do you find that a lot of the conversations you're having, perhaps with clients or internally at JP Morgan, are people looking to hedge their positions?

B (12:26)

Right now, I think clients are looking to mitigate some risk. And by doing that, you can invest in value. And if you look at this year, industrials, materials, utilities, consumer staples and energy have had positive returns, have done rather well. So the value story is really playing out. And that really goes back to my story on diversification. You should hold value, you should hold growth, you should hold, I believe, some derivative income for income. So it becomes a overall diversification story. And I think people have gotten used to these extraordinary outsized returns they received in 24 and 25. That's not necessarily. That's not common. So I think looking at a portfolio over a course of 10 years in different market cycles is really what an investor should look at. And value really has underperformed over the past several years, but it has its day. At the moment.

A (13:28)

We have so many investors that joined the market during the pandemic and they downloaded, let's say, a trading brokerage app. And they've only seen essentially soaring markets if you join in 2020, and we haven't seen any real prolonged pain since that new era of independent investor has come in. But I think this year, and even with Liberation Day last year, a lot of people got shaken out of the market. And one of the stories, I would say, is what's going on in tech and tech has really pulled back and I think that surprised a lot of at least younger investors because I was also in that camp to an extent where I'm still very bullish on tech. I'm bullish on US markets. And the thing about ETFs though, ETF flows have slowed in tech, but the ones that are continuing into tech are largely active management ETF funds. Is that right?

B (14:28)

Yeah. So overall flows in tech this year have been about 5 billion, which is about half of the amount last time. This year. If you look at actively managed technology stocks, excuse me, ETFs in terms of flows, they've done rather well. The performance is certainly down. Obviously software is down 30%. We have a fund called Jtech which is underweight. Software still down for the year. But looking at we can find those opportunities in these companies that, whether it be AI, is AI improving efficiencies in non technology companies that are still included in this growth technology type portfolio. So looking how certain themes are playing out in the broader economy, in the broader company ecosystem is what an active manager can do versus buying the S&P 500. And you're top heavy on 10 names which are roughly 35 to 40% of the portfolio.

A (15:32)

Yeah, I'm with you on that. What do you say to investors right now who are nervous in the market and they might be feeling wow, should I just go all into cash right now? How do you respond to that?

B (15:47)

Well, first of all, I think it's always nice to have a little bit little dry powder on the sidelines. But cash, cash yields are low and they've gotten a lot lower recently. There's different ways to play to increase your yield. There's fixed income where you can get a higher yield than cash and fixed income flows have been very strong. And it's an area like whether it be short duration, intermediate core or core bond plus adding a little bit of high yield, you're getting in the, you know, the four to five and a half percent range in terms of yields. So that's been attractive. More more recently there's been a correlation with equities and fixed income. So there's. They've both declined, but I think that's a short term phenomenon. The correlation or the 6040 portfolio has been working over the past several years now. Staying in cash is certainly an option, but you're not even growing with inflation necessarily. There's opportunities when there's market sell offs. If you look at some of these conflicts, and I think I mentioned earlier but 18 to 24 months past some of these conflicts, the market has always been up. So take that as some advice. It's not always easy to withstand the volatility, whether it be personally or professionally talking to clients. But it's the right thing to do. But diversification is also the right thing to do.

A (17:20)

So John, if I had suppressed you a little bit, I know stay invested is the, that's sort of the saying on Wall Street. You're not going to find any institution that's recommending anything else other than stay invested. If I had to press you to lay out a worst case scenario, let's say for stocks this year, what do you think would have to happen in the macro for cash to be suddenly a much better idea?

B (17:47)

I mean, the worst case scenario is that energy continues to go up, that causes further inflation, that prompts the Fed to increase rates, then you're going to get higher rates on your cash. Right. But there's still other opportunities where you can be, you can be in limited duration, which still give you a higher yield with low volatility and you know, parts of the fixed income market certainly kind of on the shorter side would make sense.

A (18:17)

Okay, I think that's fair. So if we were to project one or two years from now, do you expect we'll see active ETFs outpacing, passive?

B (18:29)

Outpacing in what sense flows? Well, you have to Remember there is 90, 90, 89, 90% of the $14 trillion which we project to be $25 trillion by 2030. That's in passive. So the flows right now are 38% into active. So I think it would take a bunch of years before active starts outpacing passive. But active, I wouldn't have expected active to grow as quickly as it has. It's growing at about a 50% CAGR since 2016 to now. So that's a pretty high rate. And the overall ETF market is growing at about a 20% rate, which does include Active, but includes passive as well.

A (19:19)

What do you think is fueling the attractiveness of ETFs? Do you think it's just because people want to set and forget and they want to not really be that involved in their portfolio or how do you think that's come about?

B (19:31)

First of all, active is a catch all term and you have to really break down active. So there are single stock levered ETFs, those are active, they don't follow an index. There are systematic ETFs that follow a set of rules, not dissimilar to an index, but they're not an index. Then there is active discretionary is what I would call what we're doing and some of our other competitors. So what we're providing is access to existing portfolio managers that have been around for 20, 25, 30 years. At JP Morgan those strategies are now available or similar strategies using some of the same portfolio managers that now have track records that now clients have access to. So I think that's a difference. And they have access to them in this really, this better structure because capital gains, which I haven't talked that much about is a really big deal. So with a mutual fund, say you bought it in September, in October you get, you get a, you didn't realize it. In October you get a $5 capital gain. You have to pay taxes on something that you didn't get at any upside on at all. An ETF because of the in kind redemption process. More likely than not, no capital gains.

A (20:57)

Real quick, we'll get right back to the interview. Just wanted to pop in and say if you like this content, I write a newsletter every single morning called Opening Bell Daily. I cover macro, the stock market ass prices, why things are going up, why they're going down. And if you want to get that for free, you can sign up at the link in the description. Let's get back to the interview. So John, how does the pullback this year? I think the S and P is down about 8%. How does this compare to previous pullbacks that you've seen in your years observing markets?

B (21:31)

Well, I've been in the market for about 30 years now, so I've lived through the financial crisis and Covid some were quicker to return than others. I guess I was even involved in the dot com bubble. The NASDAQ took quite some time to return there. But many of the companies, the technology companies right now they earn a lot of money. So perhaps their free cash flows are declining because the capex spend has been so high and some companies are accessing the debt markets and the market is a little concerned there will the capex pay off. But these companies are real companies that produce a tremendous amount of cash flow and earnings. But perhaps the valuations could be too high. So what we've been seeing more recently is that the recovery has been shorter than other recoveries in the past. Even 2022 the market was down 20 to 40% depending on what you earned. There was a pretty fast recovery there.

A (22:39)

You know, when I write about or even if I'm posting on X charts that show how quickly Markets can rebound from geopolitical shocks or oil shocks and it's almost always a double digit gain 12 months later. Those are the charts and data that get the most pushback online because people almost hate to hear the optimistic side when you're feeling like you're entering a bear market. So that's always something I observe. John, where can people find your work online?

B (23:13)

Sure. What I haven't talked about and what I do, one of the main jobs I have at J.P. morgan is I head up our guide to ETFs program. Now, this was a program that we launched 18 months ago. It's the fourth educational program we have at J.P. morgan, behind the guide to markets with Dr. Kelly, the guide to Alternatives and the Guide to Retirement. And now we have the guide to ETFs. We have it in the U.S. we have it in EMEA, and we have it in APAC. And it's designed to educate the entire marketplace. It doesn't talk about any specific products. It's broken out into six different chapters talking about flows and trends. Then we have an active chapter. We talk about fixed income, different trends in the marketplace, like model portfolios, which is part of my past, as well as operationally. How do ETFs work and how to best trade ETFs. We iterate on this guide all the time, but we update the data on a monthly basis and we put in new slides on a quarterly basis. So it's designed to again, educate the marketplace. The go to source for insights, which is what JP Morgan is known for. Given the size and scope of the market, both here as well as outside the US we thought it was time to do that. And it's. This program's getting a lot of traction.

A (24:41)

Wow. Where can people find. Is that public for anyone?

B (24:44)

Yeah, it's free to everybody. You can find it on our website. You can Google guide to ETFs. JP Morgan pops up right there. Yeah. And you can find all 57 charts.

A (24:55)

Amazing. That's a lot of charts. John, I really appreciate you taking the time to do this and we'll have to do it again soon.

B (25:01)

Thanks for having me, Phil. Awesome.