Index Concentration, Precision Fixed Income, and Small Caps

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On this episode of ETF Prime, host Nate Geraci speaks with a trio of individuals discussing several different ETF-related topics. His guests include VettaFi’s Roxanna Islam, who discusses the “Magnificent Seven” and more. Geraci also speaks with BondBloxx’s Joanna Gallegos, who gives insight into the firm’s fixed income ETFs. To close this week’s podcast, Geraci brought on Goldman Sachs’ Greg Tuorto, who shares information on the Goldman Sachs Small Cap Core Equity ETF (GSC), and small cap stocks.

The Magnificent Seven

To open the podcast this week, Geraci brought on VettaFi’s Roxanna Islam to discuss several topics surrounding the Magnificent Seven and their relevance in the markets today. The duo began their conversation by highlighting the significant weighting the seven stocks account for in the S&P 500, and the Q’s. Geraci then asks Islam how she currently views the Magnificent Seven and if this type of strict concentration concerns her.

“The Magnificent Seven isn’t anything new at all, but I feel like all of a sudden I am hearing about this several times a day,” she said.

She highlights that what is most attractive about these names is that they have provided growth while allowing investors to feel safe. Islam believes that this is an important trait to investors now, because of the present economic environment. She shares that although investors feel these names are attractive, she has seen some concern from them about what would happen if tech were to take a downturn. However, Islam believes the concern of a potential “tech crash” happening shouldn’t be a problem for investors whose portfolios are fully diversified.

The Challenge of Trying to Diversify From the Mag 7

Geraci then highlights the challenges some ETF-specific investors face when trying to diversify their portfolios from these seven stocks. He mentions that these companies can end up in several different funds depending on whether the ETF is focused on industries, areas, styles, or themes. Islam reiterates Geraci’s point, and shares that she has seen that if funds focus on anything remotely close to disruptive tech, they will most likely include these seven stocks.

“When you’re looking at these disruptive tech innovation ETFs, you know a lot of the times you are in a new emerging industry,” she said. “And the issue with being in a new emerging industry is that many of the companies are private, and are not public yet.”

She also mentions that if these funds hold other companies, they will be extremely small ones. The lack of companies available to these issuers who are following disruptive technologies is what leads many of them to include some of the Magnificent Seven in their holdings. The firms will do this because these businesses tend to somewhat follow the infrastructure of disruptive tech that they are looking to include in their funds. Islam feels the way investors can combat this problem is to pay attention to what is inside an ETF before investing in it, and look at how its holdings can help diversify their broader portfolios.

In addition, the duo explored ETFs that follow the Magnificent Seven, alternative ETF options, cryptocurrency, and more.

BondBloxx and Fixed Income

The conversation shifted gears when Geraci brought on BondBloxx’s Co-Founder Joanna Gallegos to discuss fixed income and her firm’s ETFs. Before their discussion, he highlighted that the firm currently offers 23 ETFs, and has about $2.2 billion in assets under management in just under two years as a firm. The firm separates itself from others because it focuses solely on fixed income ETFs. Gallegos joined the conversation to share why her firm focuses solely on fixed income and the problem they were trying to solve when they began their journey.

“Around 2021, we anticipated that the bull market in fixed income would eventually change and that rates would eventually go up,” she said.

Gallegos mentioned that she and the firm expected that once that happened, there’d be a big structural shift in fixed income overall. She also said that the firm was anticipating a lot of new allocations coming to the fixed income space, because of the shift in the market. Gallegos shared that the growth they have seen thus far could be attributed to timing this shift well. However, she also feels that the firm is solving a problem in the market by offering unique fixed income products that hadn’t previously been there for investors.

Additionally, the duo explored why BondBloxx’s mission is resonating with investors and dove into the firm’s unique lineup of fixed income ETFs.

The Goldman Sachs Small Cap Core Equity ETF (GSC)

To close this week’s podcast, Geraci brought on Goldman Sachs’ Managing Director and Portfolio Manager Greg Tuorto to discuss small caps, and the Goldman Sachs Small Cap Core Equity ETF (GSC). Geraci highlighted that GSC was launched in October 2023, and is co-managed by Tuorto. Tuorto joined the discussion by sharing what his background is in, and what about small and midcaps excite him. Geraci then asked Tuorto how he is approaching managing GSC.

“It’s a bottom-up approach. That’s one stock at a time that we use to kind of find the best ideas from our growth and our value teams within small caps,” he said.

Tuoto also highlighted that most of the companies they hold within the fund are companies they have been familiar with and owned for a little bit of time before going into the GSC ETF. The fund will typically have less than 100 stocks, and Tuorto tries to avoid being sector-neutral to keep creativity in the fund-forming process. Furthermore, the pair continued to dive into the intricacies of the fund, as well as exploring the small cap space overall.