UCLA Finance Professor: Importance of Intangible Capital
On this week’s episode of “ETF Prime,” host Nate Geraci was joined by Roxanna Islam, head of sector & industry research at VettaFi. Among other topics, Islam and Geraci discussed flows for both gold and spot ether ETFs, along with Tradr ETFs. Afterward, Andrea Eisfeldt, professor of finance at UCLA, joined the podcast to discuss the value of intangible capital.
A Longer-Term Leveraged Take
To begin, Geraci asked Islam what her thoughts were on the recently released ETFs from Tradr ETFs. Most leveraged ETFs reset their performance target on a daily basis. But these eight new funds instead opt for a weekly or monthly basis.
Looking broadly at leveraged ETFs, Islam noted that these products are often uncommon for retail investors to take on. With Tradr’s longer time horizon, Islam asserts these funds can mitigate a degree of risk from usual leveraged products.
As an additional valuable factor, Islam noted that stocks can see daily volatility spikes due to market factors instead of more predictable micro factors. “This sort of noise is less likely to happen with the longer time horizon,” she noted.
However, Islam also pointed out that the perception that Tradr’s products are less risky may lead to more investment risk. She noted that investors who view these funds as less risky may then feel motivated to take on more risk within their portfolio.
Examining Gold Flows
Moving on, Geraci pointed out that despite gold performing very well, physical gold ETFs have seen massive outflows over the last few years. However, Geraci noted that demand for these ETFs are starting to pick up. He asked Islam for her take on why demand for gold ETFs is suddenly kicking back up now.
Islam agreed that the case of gold flows has been a perplexing story. In particular, she highlighted a few theories as to why investors have suddenly become interested in gold once more.
She noted that due to the strength of equities such as the Magnificent Seven earlier this year, investors may have opted to place their money in those companies as a store of value. “Now that we’re seeing some pullback, I think investors are maybe looking at some of those relatively safer areas they avoided over the past couple years or so,” added Islam.
Additionally, she theorized that bitcoin may have been a factor in the pullback from gold. With comparisons between bitcoin and gold beginning to deteriorate, Islam pondered whether less investors are opting to use bitcoin as a store of value instead of gold.
State of Spot Ether
Pivoting off of Islam’s point on bitcoin, Geraci asked for her take on where spot ether ETF flows currently sit. Noting that spot ether ETFs are facing overall net outflows, Geraci asserted that spot ether has had an overall lackluster debut, save for a few funds with strong performances.
Islam assessed that the launch of these funds overall went “relatively well,” but she expected there to be more interest. In particular, Islam was surprised that the Grayscale Ethereum Mini Trust (ETH) did not get as much attention as she expected it would, along with Grayscale’s Bitcoin counterpart.
“Realistically, this was never going to be as big as bitcoin,” added Islam. She noted that many investors are simply fine with using bitcoin as their speculative instrument for now. Islam also noted that there remains a large investor education gap between bitcoin and ethereum that will take a long time to rectify.
“This is something that I think was really needed in the ETF market, and it’ll gather some inflows, but it’s not going to be breaking any records,” she explained. “I think this launch was just so impactful for many reasons that had more to do with the crypto ETF industry itself, rather than satisfying investor demand.”
Understanding Intangible Capital
To close out this week’s episode, Geraci was then joined by Andrea Eisfeldt, professor of finance at UCLA. Geraci noted that Eisfeldt is behind the indexes for two Simplify ETFs: the Simplify Next Intangible Core Index ETF (NXTI) and the Simplify Next Intangible Value Index ETF (NXTV). With bond funds seeking to provide exposure to intangible capital, Geraci asked Eisfeldt to break down what intangible capital really is.
She explained that intangible capital can be categorized into three broad areas. One area is knowledge capital, which includes patents, data, and trade secrets.
Another intangible capital area is brand capital, measuring customer relationships and corporate identities. Lastly, Eisfeldt highlighted the importance of organization capital. Organization capital is the value of management talent, along with corporate culture and practices.
“Intangible capital is going to be something firms invest in. It is something that gives them a competitive edge,” Eisfeldt added. “It’s something that’s going to increase their free cash flow. It’s important, and it’s hard to measure, but we have to measure it.”