5 Key ETF Stories, Morgan Stanley’s ETF Entrance, & Sticky Inflation

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On the most recent ETF Prime, VettaFi’s Todd Rosenbluth offered his take on five key ETF stories Nate is tracking. Morgan Stanley’s Tony Rochte discussed their recent ETF entrance with Calvert, and VanEck’s David Schassler explains why inflation is here to stay and spotlights two potential inflation-fighting ETFs.

Geraci had tweeted the five ETF stories he is tracking, and kicked the podcast off by giving Rosenbluth an opportunity to dig into them.

Morgan Stanley Calvert Enter the ESG ETF Space

With Morgan Stanley entering the ETF space with six ESG funds, Geraci sees these funds as the final test for ESG, and though the funds are only a few weeks old, according to Geraci, flows have been mild.

“Patience is required,” Rosenbluth said. He pointed out that getting the products live in advance of Exchange was critical and “now marketing and distribution efforts are starting to be ramping up, and that doesn’t happen in a day.” Rosenbluth shared that Capital Group, a candidate for 2022’s issuer of the year, saw no meaningful flows until about four weeks into their products’ life.

“I’m very bullish on Morgan Stanley ETFs as a whole,” Geraci said, confessing his more tepid views on ESG.

Grayscale Oral Arguments

Last year, Grayscale sued the SEC and next week the D.C. court of appeals will hear arguments from both sides. Geraci asked Rosenbluth if these arguments could put pressure on the SEC.

Rosenbluth shared that GBTC is still trading at a 45% discount, which to him could indicate that investors don’t anticipate that these arguments will have impact. Rosenbluth proffered, “I think the SEC has been consistent. I don’t think they are going to be swayed by public sentiment.” That said, Rosenbluth thinks that, “for a narrow audience, this matters a lot,” and it provides people interested in spot bitcoin ETFs another chance to hear the investment case articulated.

Vanguard Share Class Patent Expires

A story with many potential ramifications, Vanguard’s share class patent is set to expire in May. PGIA is filed for active funds using this structure. “I think we’re going to see more ETF share classes, because it just makes sense to offer the ETF option,” Rosenbluth said. “I really hope we see more asset managers enter this route,” he added.

Mutual Fund to ETF conversions have been common, but 401K holdings have long been a road bump. This share class structure could offer a way around some those 401K obstacles.

Roundhill Goes Big

Roundhill has some upcoming “big” ETFs that aim to be highly concentrated and focused on areas such as tech, defense, airlines, banks, and more. Single-stock ETFs haven’t garnered much AUM outside TSLA-related products, but Roundhill’s new strategy could be different.

“I’m really excited about these products,” Rosenbluth said. “You don’t get the single stock risk, I think there’s a broader use case for these products.” Rosenbluth also thinks that the 29 basis point fees make these products quite affordable.

Geraci concurred, seeing these products has both interesting long term holding possibilities as well as perfectly appropriate trading tools.

Active ETFs Flow

Active ETFs have taken in 35-40% of ETF flows this year, Geraci noted, crediting Eric Balchunas for breaking that stat.

Though quite a feat, Rosenbluth doesn’t think that this will necessarily hold. Funds like the JPMorgan Equity Premium Income ETF (JEPI) continue to rake in the flows, and advisor interest in active remains high. Rosenbluth observed that, “we’re not seeing demand overall for core equity ETFs.” Without core equity ETFs pulling their weight, active is taking a seemingly larger piece of the pie. “Every quarter we’re going to see consistent inflows into active ETFs,” Rosenbluth said, adding, “but I think we’re going to see passive gain ground as the year progresses.”

Morgan Stanley and Calvert

At the start of February, Morgan Stanley rolled out its first ETFs: the Calvert US Large-Cap Core Responsible Index ETF (CVLC), the Calvert US Select Equity ETF (CVSE), the Calvert Ultra-Short Investment Grade ETF (CVSB), the Calvert US Mid-Cap Core Responsible Index ETF (CVMC), the Calvert International Responsible Index ETF (CVIE), and the Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (CDEI).

These ETFs leverage Calvert’s brand as leaders in the responsible investing space and have about $140 million in assets. “We’re excited about the communication plan, the branding, and the digital marketing,” Rochte said, adding, “we’re excited out of the gate!”

Geraci called back to Rochte’s appearance at Exchange, where he answered criticism about Morgan Stanley being “late to the party,” on ETFs with the quip, “how long is the event?” Morgan Stanley was actually involved in the early days of the ETF space, back in the 1990s. Rochte sees now as an ideal time for Morgan Stanley to make a return. “It was clear we need to meet clients where they are,” he said.

Despite a focus on U.S. ETFs in this initial suite, Rochte noted that Morgan Stanley will be looking more globally in the future. Speaking to why Calvert, Rochte said, “they are an ESG pioneer. They’ve been doing it over 40 years.” Rochte sees this new suite of ETFs as complimenting Calvert’s mutual funds. “We heard loud and clear, specifically from institutions and advisors that they would like an ETF wrapper with the Calvert engine focused on ESG,” Rochte said.

With their active fund, CVSB, Rochte shared, “we really envision complementing our active mutual fund capabilities and not cloning.”

Two basis points in CDEI will be allocated to DEI initiatives. “We knew this was an important area, secondly it was very important to Morgan Stanley as an organization – something we believe in,” Rochte said, sharing that advisors will make donations annually to certain DEI initiatives. Priced at 14 basis points, CDEI is the lowest cost of the six new ETFs and 30% lower than the next DEI focused competitor.

Geraci asked Rochte why Morgan Stanley started with ESG, given the controversy in the space. “Interestingly, if you look at the first quarter of 2022, ESG saw inflows to the tune of 10 billion as a category,” Rochte said. He also praised Calvert’s expertise and leadership. “If there’s an investor, be it institutional or financial advisor, that implements ESG into their portfolio management process, who better to provide that capability than Calvert with over 40 years of experience.”

Inflation Could Haunt Economy For a Long Time

For the final segment, Geraci was joined by VanEck’s David Schassler, which recently launched the VanEck Commodity Strategy ETF (PIT) which, along with the VanEck Inflation Allocation ETF (RAAX) provides investors with tools to combat inflation.

According to a blog post Schassler published, high inflation can take a total of 18 years to resolve. With high inflation being one of the four possible regimes (low inflation, high growth, and low growth being the others), Schassler pointed out that, “inflation above 5% happens over 20% of the time.” Schassler thinks stagflation is likely, given the high amounts of debt. He pointed to the ’40s and ’70s leading to periods of inflation that last a long period of time.