SVB’s ETF Impact, Roundhill’s “BIG” ETFs, & Crowdsourced Investing

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In the latest episode of ETF Prime, VettaFi’s vice chairman Tom Lydon discussed a grab bag full of topics, from the ETF impact of SVB’s collapse to oral arguments in Grayscale’s SEC lawsuit, to year-to-date ETF flows, and a Vanguard milestone. Later in the episode, Roundhill’s chief strategy officer Dave Mazza previewed the firm’s upcoming lineup of “BIG” ETFs, which offers highly concentrated exposure to specific market sectors. Plus, Tobin McDaniel, head of SoFi Invest, talked about his firm’s approach to ETFs, including the “crowdsourced” SoFi Social 50 ETF (SFYF).

Banking ETFs “Did Exactly What They’re Supposed to Do”

The big news over the past several days was the collapse and bailout of Silicon Valley Bank. This led to banking stocks and banking ETFs to decline, and some individual stocks to be halted. Despite this, Lydon noted that regional banking ETFs “did exactly what they’re supposed to do.”

“When you translate it to ETFs, the great thing is they did exactly what they’re supposed to do,” Lydon said. “If you were buying individual issues and you were looking at opportunities in Silicon Valley Bank, you’re very disappointed.”

According to Lydon, it doesn’t seem that SVB managed their cash properly. The bank bought longer dated treasuries while at the same time saw redemptions, “which was not a good mixture.”

“But when everything was said and done, here we are today, and you’re looking at First Republic Bank, for example, the stock [is] back up to where it was a couple days ago,” he said, before adding that those “regional bank ETFs basically made back what they gave back yesterday.”

So, while this may lead to more regulatory scrutiny over cash management in the banking area, Lydon said that “the ETF industry again did very, very well.”

“There was no halt in any of the ETFs and liquidity was there, and they performed exactly the way they should have,” he added.

Grayscale Makes its Case for a Bitcoin Trust ETF

Prior to the SVB blowup, the biggest story Geraci tracked last week was the oral arguments in Grayscale’s lawsuit against the SEC regarding converting its $14 billion Grayscale Bitcoin Trust (GBTC) into an ETF. Last Tuesday, judges on the U.S. Court of Appeals for the D.C. Circuit heard arguments from both sides.

“It’s really clear that the Commission is not a big fan of cryptocurrency,” Lydon said. “In fact, I think they regret approving some crypto-related assets.”

From Lydon’s perspective, last week’s arguments from Grayscale “bought forth the idea that there are responsible investors out there who are investing in this space,” and that these responsible investors are treating cryptocurrencies in a similar way that they treat the futures market.

“So, they made a strong case for being able to have that conversion, being able to provide the liquidity, which was very important, and the fact that there was little chance for manipulation, which was the big reason for the SEC having trouble with this,” he said.

Later, Lydon argued that the crypto marketplace could benefit from a little more adult supervision. “There needs to be more supervision of this marketplace, and it’s not as if the crypto industry is against that,” he said. “So, let’s step up and figure out what’s needed and provide a little bit more oversight.”

VettaFi’s vice chair also pointed out that the best performing ETFs so far year-to-date are crypto-related. “So maybe there’s something to this,” he added.

ARKK’s Long, Storied Arc

Geraci and Lydon switched gears to discuss Cathie Wood’s flagship ETF, the ARK Innovation Fund (ARKK). While ARKK is up nearly 30% since the last week of December, the fund has seen nearly $500 million in outflows over the last three months. This is a reversal from last year, when ARKK took in money when it was down 65%-70%.

Lydon said that ARKK likely brought in a lot of money from speculative, short-term investors in the fall who were “bottom fishing.” When the market died off a bit, some specific ARKK-related stocks pulled back.

“This is going to be a longer-term story. Cathie Wood and ARK and the stocks that they play in are not going away, but we’re not necessarily going to see them being the fare haired child that they were in the past,” Lydon said. “It’s going to take a long time for that to come back.”

One issue here is the overall lack of investor confidence, due in part to high inflation and the fallout of SVB effecting the banking sector.

“We’re going to have to see a lot more confidence before we see the flows that we’ve seen in the past,” he said.

The “BIG” Idea Behind Roundhill’s ETFs

Later in the show, Dave Mazza from Roundhill discussed the firm’s upcoming “BIG” ETFs, which offer highly concentrated exposures to sectors. According to Mazza, the idea behind these ETFs is that they “address the challenges with sector and industry ETFs” by offering exposure to “the top five or six names in a particular industry.”

“They’re really going to be concentrated,” he added. “They’re not diversified.”

The BIG ETFs are designed to gain that exposure of the biggest names in an industry or sector will be through a combination of equities and swaps.

“Introducing the swaps with the individual equities allows us to balance some of those regulatory requirements and implement the exposure that folks are looking for,” Mazza said.