♪ >> this is "etfiq," where we focus on the risk and rewards. ♪ scarlet: new incoming federal reserve chairman, say monetary policy could outsized stakes in real estate companies. republicans clear another hurdle in the quest to cut taxes. what is the tax reform etf play? and how the surgeon e-commerce is benefiting the timber and for street etf. whether you embrace or fear etf, there is no getting around their influence. our in-house expert is here to

get us started with a snapshot. >> you mentioned the fed and rates. this is a big deal, it has had a big effect on etf flows. we have seen what has gone on the bottom side of things, but it has also affected etf flows , in particular sectors. you would think tech would be number one, that it is real estate. rates yield is 5%, 6%, so the thirst for yield has pushed money into interesting places. -- our etf taking over the world? if you look at the sectors, it is way more owned by passive than other sectors. 25% of real estate etf's are owned by passive funds, very high. if we look at which stocks in this area, we see a company like

anger, which is 46% owned by passive funds. some of the stocks are like a canary in the coal mines. rates continue to stay low, some will be majority owned by passive funds. and if rates rise, look out. scarlet: just a matter of time. let's bring in the chief investment officer of caruso investment. he has a decade of experience in etf investment. great to speak with you. as eric was showing us, real estate is the most owned sector by passive funds. is this a problem? what concerns might this present? >> i think it is. there are a lot of headlines about the etf bubble. call it a red herring, there are tons of etf bubbles, but it is -- there may be bubbles in the overall market, but not caused by etf's.

it is not caused by etf's. or they are causing bubbles are places like rates. the fact that vanguard owns 14% of simon property group makes no sense. the big headlines are distracting us from the real bubbles. scarlet: would you assume the passive ownership would drop off once interest rates normalize? >> i think it is more about the demand. people want the yield and these things hit normal on multiple areas. if you look a stock like national retail properties, the biggest holders from vanguard, then you have sdy, then it hits the mid-cap sectors, and vanguard calls it a small-cap stock. it hits so many different areas. if it gets hurt in one of those, kicked out in one of those, you could see the dominoes fall rapidly. you could have a macro fall or a structural fall.

eric: to turn a little bit to the tax plan. big issue this week, and i love the etf you picked for tax reform. michael is the classic etf master, he is an advisor and he picks a little out-of-the-box. tell us about the etf's to play tax reform. michael: sure, there is a lot of questions about what tax reform will do for individuals. there seems to be a leveling, robin hood tax plan for individuals, but for corporate industry forward. -- for corporate it is pretty straight forward. when you asked me about it i thought about an etf we have used for years, it takes the s&p 600, relates it to revenue. net margins when you waited for revenue, 1%. slight increase in profitability from tax reform, method earnings enhancement. -- massive earnings enhancement. scarlet: it's not just looking at small caps, but small caps

based on revenue. michael: the revenue idea is interesting itself but in the world of tax reform, they can make a big difference on a net margins. scarlet: talk a little bit about btal, which goes along low beta volatility. how and when do you use it? i think you have to tread carefully. michael: it's my etf for protection. the reason i like it is normally when you buy an inverse product, your upside and downside are one 21, 222, or 6 to 6. what makes btal different is the structural factor, by having the the long be low data stocks and the shorts behind it is not that high data stocks, the margin is about 100% when it goes down. when the market goes up it is about -50. it pays you 50% for one dollars worth of protection. that is asymmetric risk reward. it is the type of thing you can

have strategic in a smaller position but build up as you have concerns. eric: one thing interesting about you is you use etf's but you have launched one. which is unusual. the one you launched is the etf etf. when it came out, everybody freaked out. they thought it was like cdo squared. scarlet: let's be clear, this is and etf whose holdings are directly involved in the growth of etf industry. michael: thank you for that clarification. eric: there are stocks in the financial sector that will gain from the passive trend. tell us about what it holds and why you think it is a winner. michael: my partner and i got involved in etf's as private equity investors. we said, how can we make this publicly available? we started the concept of an index that captures the ecosystem. the ecosystem is not just the issuers. jeremy was here a couple of weeks ago. it is also the exchanges, the

index providers, the backup. msci is a great example. msci has reinvented their business model. you have the back offices, liquidity providers, you take all five and put them together and capture the growth of the industry. scarlet: it is a little meta for our liking. but we like it. thank you for being here. new etf's need patrons and money backing ideas. so enter the seed capital provider. how does an early investor decide which etf's to back? our guest shares his decision-making process. and one etf that caught our attention this week, this etf took in a record $40 million last week, the largest in inflows and it began trading in 2009. it has a double focus on ian's -- em's and tech. it is the best performing non-leverage etf in the united states. ♪ ♪

scarlet: this is "etfiq," a time for the etf lifecycle where we run through the three main stages of etf's. first, filing, vanguard registered seven factor funds to begin trading in the first quarter of 2018. the funds come with the firm's signature low fees, undercutting competition. a programming note, we will speak with vanguard founder next week. then you have the launch, the jpmorgan event etf will package a traditional hedge fund strategy. it goes by the ticker jped. event driven funds speculate on potential events like bankruptcies and m&a. those etf that don't get enough interest, the final stages liquidation. the restaurant leaders fund

closed last month just shy of its first birthday. it invested in the restaurant industry and failed to attract enough assets to be cost efficient for its provider. the goal is to avoid liquidation. a critical part of the lifecycle is how a new etf finds traction. that is where mark esposito, founder and ceo of esposito securities comes in. thank you for being here. >> thank you. scarlet: you provide seed capital to new etf's, kind of like a venture capitalist for etf. talk about your role. mark: we are a broker-dealer. we have gotten calls from clients on etf's to bring to the market. and to help grow the industry overall. that's what we provide, you need products and services and where the big firms have left off. scarlet: do you take the place of a market maker? mark: indirectly. sometimes we do that when there

is not a lead market maker, and there have in more and more cases with no lead market maker in etf space. scarlet: if you look at the back drop, we see a pick up on etf closures. it is an interesting time. why is seed capital drying up when there is more than one new etf launching every day in the u.s. and more than three a day globally? mark: i think there are many reasons for that. one is the cost to seed is expensive. it takes a lot of capital on the balance sheet. i think competitors have made a conscious choice to back out of the space and leave, and therefore that has played into our hands well, we can grow the etf space with new and existing issuers, and that's what we love to do, help clients grow. scarlet: you have independent insurance but also you have vanguard and seed tree, do they struggle for seed capital? mark: i don't think it is an issue for them with their size. they can do it themselves. a lot of issuers have decided to

sell seed. that is ideal, but when they can't, they will come to a sell side broker or the open market defined seed capital. scarlet: let's talk about process. what are your criteria? do you have red flags where you say no thank you? mark: really it is based on relationship and who we are working with. there are some firms we have chosen not to work with. it is really on a case-by-case, mark: really it is based on we have an investment committee that looks at that, senior management of the firm. putting out capital is expensive and time-consuming. we look at that quite closely. we have a 40 point grid that we look at with each new issue in order to see it. scarlet: that is due diligence. what sort of things are investors seeking right now? mark: a lot of thematic place. aieq, and artificial intelligence fund has done well and is already over $70 million. scarlet: but it underperformed last month.

mark: i think it will catch back up on the performance side. i think you're seeing high demand for that and they are first to market. scarlet: do you think media buzz plays a role? there is a lot of excitement over the ibm watson platform making a pick. mark: on the launch, ibm had earnings of 10%, i think that helps a lot. thematically, that's what you need to grow with etf's, that buzz. scarlet: how important is a catchy ticker here? it is kind of like a vanity license plate, it is good for building buzz. mark: i think brand recognition of the symbol is huge. that is the discussion we have had with issuers before lunch. -- before the launch. we launched txr as well, a tax reform etf, and that has traction just by the very symbol. we find that a lot. you cannot underestimate the ticker symbol. scarlet: do the ticker symbols come first and then the idea?

or do they generate ideas? mark: sometimes. it could go the other way, too, where you have an idea and you have to back into a ticker that is available. a lot of tickers are taken. scarlet: i was thinking about solar etf's that launched the same day, and one did much better in part because the ticker was so smart. mark: i think it is an important part of the branding process. i think issuers understand that more and more every day. scarlet: there are 750 as it -- asset managers in the u.s., but only 100 issuers. there is a pretty big gap there. do you think more will get into the etf game? mark: we are a strong believer in the space. i think you will see the active managers jump on the etf train in the form of an etf wrapper. scarlet: will they need the seed capital? mark: they will, but the bigger firms will find themselves because of their size. traditionally, we are working

with big, but also small and medium-sized asset managers. scarlet: good stuff. mark esposito, founder and ceo of esposito securities. coming up, we go inside the etf wood. it is up 30% this year. all this is the tip of the iceberg. we drill down into all of bloomberg etf content, you will want to check us out. bloomberg.com/markets/etf. this is etf iq. ♪

♪ scarlet: welcome to "etfiq." for every etf that offers exposure to an asset class or style, it's not long before others promise the same. socially responsible investing is generating a lot of interest. here with us is the ceo of impact shares, the first and only nonprofit etf platform. before we speak with him, eric is back to give us the drill down. eric: esg is a popular area, at least in terms of media attention. i have a ratio i keep where i look at media hype to assets. some get no media attention but a lot of assets, the opposite extreme is something like esg, tons of media but no assets.

it looks like a good run of assets here, but let's overlay a chart of low volatility etf assets, that's just one category. you can see how dwarfed it is. if i did all etf's you would not be able to see it. esg is struggling for a couple of reasons. we look at products that have done well, the etf that have taken in money, you have to dig into what they do. they are not that clear. these two are doing good works, these go long in index and then carlisle companies -- and then carve out companies that have a big carbon footprint. this is the gender diversity, committees that have a lot of presence of women in executive positions. esg has a lot of potential, but the assets are yet to follow. scarlet: we've heard that there is a lot of demand or interest

in esg. back with us is the ceo of impact shares. you filed to bank -- you filed to bank -- you filed to etf's along with the naacp and why. -- and the ywca. how do they come about? ethan: i think eric hit the nail on the head when he talked about the lack of asset growth. a lot of strategies that retail investors have access to fall into one of two buckets, exclusionary where they screen out certain companies, or the asset manager is the arbiter of what a good corporate citizen is. i think that's where the strategies fall down. if you look at the naacp and ywca, these organizations have been fighting for the rights of constituents for hundreds of years. they bring a great deal of credibility to the space and have very specific social outcomes they have in mind from a company perspective when

determining what metrics to track and how to gauge corporate responsibility. that is what we're doing, we are bridging capital to caused by partnering with leading nonprofits and allowing the investing public to co-invest alongside these leading nonprofits. eric: one thing i felt was interesting about your firm is that you are a nonprofit. beside vanguard, which is argue is somewhat of a nonprofit, that is very rare. it is a for-profit business. tell me why you decided to start a nonprofit in this industry? ethan: it is really about credibility. for us, we view impact shares almost as if utility, we are bridging capital to cause. whenever you introduce the element of profit margin and, let's face it, wall street has already been painted with a broad brush as being greedy. whenever you introduce that element, you lose a lot of

confidence from the perspective of nonprofits, and from our perspective, we thought it was the right thing to do and it resonates with the nonprofits we were working with. scarlet: it's almost like aligning your interests in many ways. let's go under the hood of some of these new etf's. how is it going to be different? the other gender pdf is underperforming. -- etf is underperforming. ethan: if you look at she, it was effectively underwritten by calpers, who gave them significant seed capital. they used three perfectly valid social screens. best sga -- ssg is a great eight organization, i'm not sure they're the best arbiter of what a good corporate citizen should look like when it comes to woman empowerment. for us, it was harnessing the expertise of the ywca and a

gender diversity firm out of the netherlands. and creating a strategy that focuses more on appropriate social outcomes relative to company policy and products and services, versus, you know, having what i would say is having thin expectations from social outcomes and were they marginal employees. it's important we are aligning our interests with the ywca, the leading nonprofit in the space. eric: you talk about ywca and you have the naacp. are you planning to work with other nonprofits? ethan: yes. as i said, we are a utility to be used by nonprofits, and we would like to have every social issue represented a leading nonprofits accessible in a separately investable etf, so

the investing public can create bespoke socially responsible investment portfolios that are reflective of your individualized values. we are working on affordable housing, affordable health care, arts, and lots of other health related issues. there is more to come. scarlet: are you working with the american heart association on an etf? ethan: we've had some conversations. scarlet: we will wait to see how that shakes out. what is the ticker going to be? ethan: i just heard mark esposito talking about the importance of the ticker. i like hart, there is lots of potential. scarlet: good stuff. ethan powell joining us remotely. thank you. etf industry has something for everyone, and this week there is an etf for that, we highlight a paper etf that keeps on shopping. -- chopping. the ishares global timber for -- timber and for history --

forestry etf is known simply as wood, up 30% this year and 70's -- 70% since launching in 2008. it is driven by the band for timber. supply disruptions from wildfires also a factor. has $350 million in assets, with 26 holdings. two thirds are linked to forest products and paper. including warehouses and paper. north america makes up half of the etf, followed by brazil and japan. wood has about half of its holdings in small caps, which could result in volatility. it will have wider trading spreads than typical etf. scarlet: the ticker is memorable, wood. eric: there is also cut. scarlet: it always comes back to

the tickers. be sure to catch us each wednesday at 12:30 new york time. 5:30 p.m. in london. this is bloomberg. ♪

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