>> this is bloomberg "etf iq." we focus on the access, risks, and rewards offered by exchange traded funds. ♪ scarlet: the america first trade. investors have been loading the boat with u.s. stocks at the expense of the rest of the world. so where does the crowded trade go from here? a shakeup in the back office for mj. is this a red flag for the highflying marijuana fund? we get the view from an etf custodian. the house always wins. we go through the highs and lows of the only etf providing exposure to the casino and gaming industry.

whether you fear or embrace uts, -- etf's, there is no ignoring their influence. eric joins us with a look at flows. >> the great divergence trade is what everyone is talking about. this is u.s. stocks, and here we have emerging markets. u.s. is pulling away from the rest of the world but emerging markets is most extreme. that's a 20% gap since april. that is extreme. people wonder will there be a convergence? let's see if the etf flows can give us any clues as to whether there will be. on the u.s. side this is a chemo -- this is a cumulative flow chart. you can see investors filing into the u.s. just like the performance chart shows, going from 35 billion to 70 billion in a few months. on the emerging markets side it's different. there was a huge chunk of outflows here, 6 billion, but since then it's stabilized. even saw some inflows here and

has held up. if it were to fall below performance chart, we would be in the red. i would argue this is a good sign or a divergence within that divergence. which etf's are helping keep this stable. let's look at the top five are emerging-market etf's that have taken inflows post a divergence. the big one is this low cost emerging-market etf. retail investors coming in here. that is a ton of money considering how bad em has done. then you have to china etf's, emerging markets low vol, these are more value oriented. emerging-market investors, at least the allocators, are not as freaked out as everybody else. the fact that china is there is interesting. china is a huge way, that is a good sign there could be a convergence. scarlet: we will see if that comes along anytime soon. let's bring in ben lavine. also with us is sarah ponczek

, who is attending the futures of investor conference in boston. ben, you say investors are underestimating u.s. growth and overestimating x u.s. growth, especially china. how long does this divergence last, what would make you change your mind? ben: we need to see the earnings track differently with the u.s. versus emerging markets. as performance is diverging, so is the expected earnings. if you load up emerging markets, u.s. equities within bloomberg graph fundamentals and you pull in the estimates for both regions, you can see the u.s. earnings continue to increase at a healthy clip but they have rolled over since march, and they continue to drop. the issue that investors have caught on, this is not just a sentiment driven trade that sees money going into the u.s., out of emerging markets because of what trump and china are doing

on trade war rhetoric will but -- trade war rhetoric, but also a reflection of the earnings growth outlook for both of those regions. it looks a lot better in the u.s. than in emerging markets. >> i have always said trump news is overrated but underrated in terms of moving etf flows around. i looked through your fixed income holdings, you have some unique picks. how are using etf's to deal with rights that have gone from 2% to 3%? ben: we benchmark of part of our portfolios against bloomberg barclays act. that has a duration profile of 6, 7 years. is the benchmark to that from a duration standpoint, plus or minus a certain range. right now we are underweight. we have been underway for close -- we have been underweight for close to two years on duration. we feel this is an environment that favors having more short duration floating rate exposure, so we are doing that in three

-- we are doing that in two ways. investment grade, libor-based exposure, and high-yield loan exposure. scarlet: serra, you are in -- sarah, you are in boston attending a conference on capitalizing on growth and etf . one of the discussion points was the future of indexing. what did you learn? sarah: there has been a lot of talk about where indexing is headed. one of the speakers were saying passive investing is works then -- is worse than marxism. she said, i grew up in a communist country and i can tell you indexing is not. rather, it has brought transparency. going forward, what we have to think about indexing as you may as a blueprint. indexing is not just a way of benchmarking but rather a blueprint for etf strategies, other strategies. there was a lot of talk about

self indexing. people say this is an area that is probably right for growth, will probably see more of it going forward. self indexing is an area that is probably worth looking for. >> we have seen a huge trend for self indexing. is that a red flag for somebody like you, or do you find it companies convert to their own companies convert to their own index? >> there are two rough that we -- there are two routes we have seen companies take to save costs. one is self indexing, the other is a white label provider. we are fine with the self indexing route as long as the rules are transparent to the end user. whether it is msci s&p, or another, as long as the transparency is there, we are fine. what investors need to be aware of is just to play devil's advocate, there is valuable ip to be had with msci and s&p. they put a lot of research into those.

msci with the former team, that is what powers a lot of the smart beta factor based etf's that you can find with ishares. there is some ip that goes with those in the provider that you may not find with self indexing. scarlet: no conference is complete without discussion of fees ad nauseam. what is new on that front? sarah: everyone is talking about fee compression. shannon supposed to, the cio over at boston profit says that fees are really important when deciding what product to use. on the other end, we also heard from dan draper at invesco. he says a lot of people are probably mixing out. -- he said a lot of people are probably missing out. people are paying too much attention to the fees. they are not the end-all, be-all. we have heard of before, but you have to look past the fees to see what is going on beyond the loan cost expense ratios.

-- the low cost expense ratios. as we heard from then about the smart beta ratio, this is probably why those products will find a place in the future, even more so going down the line. scarlet: thanks to ben lavine of 3-d asset management, and sarah ponczek. coming up, shawn mcninch walks us through the process that active investors need to take to enter the etf world and the pitfalls to watch out for. one etf that caught our attention this week, the select sector fund. it took in $135 million last week, the most since it launched in investors starting to shift june. their cash before indexers reclassify some big-name tech stocks next week. you can see that chart and all the others that we feature on the bloomberg on g tv . this is "etf iq." ♪ scarlet: this is bloomberg "etf

iq." i'm scarlet fu. let's go to the life cycle where we run through the three main stages of an etf. step one is the filing. the sec is doing paperwork for companies that generate most of their revenues from online purchases. this is the sequel to i by which focuses on u.s. listed names. step two is the launch. the vanguard effect about to hit esg funds. sgeuard is launching the invest, and vsgx to invest globally. for some, the final stages -- the final stage is liquidation. hartford fun" if on the last week. an aggregate bond fund that focused on ingressive grade -- investment grade bonds. it is time to get passive aggressive, where we track the shots fired between active and passive investing in one of the longest bull markets in history

has investors migrating to low-cost passive funds, prompting some managers to adopt the etf wrapper. shawn mcninch advises them on that shift. the firm has $4.5 trillion under assets in custody and administration. we will get your advice on what active need to get to to get into the etf world. i want to get your thoughts on the highflying pot focused etf in the u.s.. mj changed its custodian to when bush, a newbie in the space. what does this mean, does that raise any red flags? >> i cannot speak to what the motives were. when we look at looking at etf sponsors as well as what product we want to support, a lot of considerations. we need to look at some of the legal ramifications in the regulatory process. this is a unique situation. it is not legal from a federal

perspective, but in certain states, marijuana is legal. when you are launching a product that goes cross jurisdiction , there is uncertainty as to how the federal regulators would take any action on these types of products. that is definitely a consideration for us as we look at which sponsors, products we want to support, as well as some of the brand considerations. scarlet: taking a step back, what do investors not realize when it comes to the importance of the custodian role overall? >> we do a lot of work with our managers. we do a lot of the space keeping -- safekeeping of assets, corporate actions perspective, settling trades, we do fund accounting striking, net asset value, as well as some financial reporting, tech services. in addition we do a lot of consulting with our mutual fund clients looking to enter the etf space. scarlet: that is where i want to go.

only half of the 30 biggest asset managers have etf. seems like there would be more. where do you see the number in five years? >> we are having a lot of conversations with active mutual fund managers out there. they have seen the flows into etf's. i think their mindset has changed, that etf's are not just for passive vehicles anymore and they can launch active etf's in that structure. more of a mindset change into looking at etf's more from a distribution agent from a wrapper perspective. scarlet: one concern investors have is they don't want any kind of front running. they don't want to disclose their holdings, they don't want to show their holdings to everyone. what are their options for entering the etf world? are they limited to the shares? >> a number of active etf's out there that are fully transparent. managers need to look and what

types of strategies are they comfortable disclosing their holdings out to the marketplace. there are about 55 billion of those active etf's in the marketplace today. the vast majority of those are transparent where they are disclosing holdings. there is also a solution approved by the sec that is approved by the sec that is nontransparent, getting a little less of an update from an acid -- asset gathering perspective. scarlet: you conducted a survey of advisors. the expense ratio came up as the single most important criteria when picking an etf and when you look at active etf's, they have not engaged in a fee war. do you think this will change? will we start to see single-digit fees for active etf's anytime soon? >> i think there is fee compression in the industry all over, passive or active. probably started with the passive vehicles. you will see that coming into the active space as well as more and more managers come into the marketplace, creating more competition.

one way that they are computing -- competing is through price. scarlet: what is the biggest misperception that active managers have on making it in the etf jungle? >> they need to focus on how they will differential their products and how importantly they will disturbing them. -- and most important, how they would distribute them. a lot of managers think because it's trading on the exchange they effectively will sell themselves. they need to be taking about how -- they need to be thinking about how they will disturb you -- distribute those products and how it will either complement or compete against their existing products. scarlet: so partly marketing as well. >> definitely. scarlet: and a cool ticker helps. thank you. we highlight an etf hoping to cash in on the gaming that's being made around the world. this is "etf iq." ♪ scarlet: i'm scarlet fu.

this is "etf iq." for every etf that offers exposure to an asset class or sector, it is not long before others promise the same. matt tucker is blackrock's head of americas systematic fixed-income strategy. he joins us now. before we talk to him, eric balchunas will talk about the drill down into blackrock's iusb. >> this is the ishares core

total bond market etf. this is my top 10 most underrated etf. you may say is it underrated at 2.3 billion? i say yes, because the aggregate bond products have about 100 billion. everyone likes to use the act as -- the ag as a benchmark. this is a better view of bond market beta because it covers more and does more what active does. also only six basis points, so just as cheap as the ag. let's see how it compares to the ag. you can see here the big difference, with the ag, 42% treasuries. this one has less, high-yield in it, which the ag does not have. internationalof bonds, which the ag has less of. this is the most successful active bond etf. look at how overweight it is to high-yield and international. it benchmarks to the ag, which is arguably absurd. this is why most bond managers

beat the benchmark. there benchmarks are this and they use high-yield. this would be better. let's look at active managers beat rate. if we go to agg, 60% of them beat it. it is an outlier for the rest of active. if you replace it with iusb, only a third beaded, making it more in line with equities. i cannot believe how isub has slipped through the cracks like this. scarlet: let's talk to the guide -- let's talk to the guy that can make a difference. with us is matt tucker of blackrock. eric just made his case for usb, better replacement for the act. >> most investors benchmark to the barclays aggregate. that is the most popular out there. our fund has $56 billion in agg. if you look at the mutual fund universe, 90% of managers use that. a lot of investors use that as their home base for fixed income. a lot of investors these days are including high yield, e.m.. we are seeing the universal and

iusb become more popular as investors broaden their investments. scarlet: let's talk about hyg, another blackrock specialty. i don't want to fixate over the debate over potential liquidity. the bigger issue is it performance. here is what we heard about the performance recently. >> it has been a disaster for the investors. particularly in high yield, hyg, j and k, they have woefully underperformed acquisition funds. there is this perception that going passive beats active. it may be true in segments of the equity market but it's the exact opposite. more than 10 years since these have come to be. 85% of actively managed funds have beaten these things. scarlet: maybe not a great way to own high-yield debt. >> we have people say that hyg is great for high yield, a good trading tool, not good for long-term. >> i'm not sure about the stats

referenced. this represents the liquid part of the high market. if you look at active managers, they invest in less liquid securities. you are comparing apples and oranges in some ways. if you want to measure how index funds have done against the broad market, look at u.s. hy. it is our broad high-yield fund. it has outperformed 2% of active managers. that represents the smaller less liquid bonds. hyg for liquidity but may be hyg is better for your holdings. eric: over the past 12 months, rates are up from 2% to 3%. the best way to do it has been interest-rate hedged etf. lqdh is doing better than the floating-rate etf. why is it underutilized? it has not taken in the flows that the others have. >> it gives folks pause. hedging uses interest rate swaps. investors are not comfortable

using derivatives. it's a great way to buy the corporate bond market and not have interest-rate risks. we see folks using that, especially in tandem with ltd. i can buy the market, have none, or all of the risk, or use them together to find any point in between. scarlet: i want to go back to the ag. it is 15 years old, you were there at its formation. walk us through launching it back in 2003. what was the reception like? >> it took a while to get going. i spent a lot of time on the road talking to portfolio managers. you go to the office and say have you heard about this corporate bond fund? are you using it in your portfolio? they say we are not because we just buy bonds. but i use it in my personal account. a lot of these folks were introduced to it on their personal accounts and then later they realized what putting looks like an equity in their bond portfolio was useful. scarlet: eric, you always call blackrock the apple of bond etf's.

always cultivating the next hit. eric: so many gadgets coming out, what is your new favorite gadget coming out of your lab? >> hydb, high-yield defensive bond. we are taking factored in size and creating a portfolio of high yield bonds that we think has a better risk return profile. you can take a lot of things that active managers do anyway and tie them using a factor approach. scarlet: matt tucker, thank you. the etf industry has something for everyone, including those seeking vice over virtue. this week's etf highlights one, it profits when the house wins. game on, the gaming etf tracks a the global gaming industry. we are not talking about video games or military simulations. we are talking casinos, sports betting, lottery service, and

the technology behind them. trading under the ticker bjk. it tracks a market cap weighted indexing company that generates the remnants of a gaming activity. 40 names including las vegas sands, galaxy entertainment, and wynn resorts. the u.s., australia, hong kong are all represented. as for returns, it kept up with the s&p 500 in its first six years before trailing off. even so, the fund made a record high in 2018. it has following -- it has fallen off following the sexual scandal following wynn director. the fund has almost $30 million in assets, costs 67 basis points, and gets the green light from bloomberg. i talked about this being a vice etf. a couple of those out there. >> you have mj, ect. they have done ok. they tend to have good performance, but people are weary of investing. scarlet: i was going to add another one but it liquidated.

that does it for "etf iq." this is bloomberg. touches each wednesday at 1:00 p.m. new york time, 6 p.m. in london. this is bloomberg. ♪

>> coming up on bloomberg best, the stories that shaped the week in business and around the world. more tariff trauma as the u.s. and china escalate the trade spat. >> we are here in china will not engage. truth or dare between donald trump and the united states. >> north and south korea hold nuclear negotiations and the dot -- blg on stimulus. >> the boj would be looking at whether tesla broke any fraud laws. >> the ceo of ubs says his bank is planning for the worst. >>