scarlet: i am scarlet fu. this is bloomberg "etf iq." we focus on the access, risks and reward offered by exchange traded funds. ♪ scarlet: trade driven risks, managing the renewed risk of a long drawn out trade feud between the u.s. and china through cross asset etf picks. from goldman to hedge funds, nancy davis has rode the wave of shipping investor cases. she explains why she is trying to etf her business. and next-generation vehicles. an etf on autonomous driving maybe shifting investor interest but it may not beat the stock market for now. whether you embrace etf's, there is no getting around their

influence. we know the breakdown in china-u.s. trade talks is driving prices and indexes. eric balchunas here now with a glimpse on what is going on with etf flows. eric: it has been a choppy couple 10 days, and the etf flows are reflecting that. we have seen eight billion come out in the last week and a lot of red. you would think, oh, retail investors are flipping out but that is not necessarily true. let's break this down. the etf seeing outflows are the ones used by traders, and i feel like a broken record. we decided to break out etf used by traders versus one used by allocators and retail investors. we did the weekly flows in these two categories going back for the past year, and if you look, you can see the allocator etf's have held up and taken in $1 billion through this week. here it is here.

the traders are the ones flipping out, right? this is a pattern we have seen over the past 52 weeks. a couple times retail gets skittish, but mostly they have been investing. this is smart. let's go back to when trump was elected and look at this on a monthly basis, the same pattern, and what you see is allocators have been investing the whole time. so through all the tweets, tensions, the mueller report, they have been sticking to it and gained 33% gain in the market, which is higher than historical averages. it might be time to start calling retail investors the smart money in the etf world. scarlet: buy and hold is working for now. let's bring in the cio of new frontier advisors, along with our cross asset reporter sarah ponczek. on any given day, there could be a breakdown in u.s.-china trade talks or an encouraging tweet that changes things completely. how are you thinking about the trade dispute? robert: well, risk has clearly

been on everybody's mind, and it is something to pay attention to when you are constructing a portfolio, but the trade dispute started over a year ago and risk has been elevated ever since then. in 2017, china was the best-performing asset class. in 2018, they were the worst performing. in the first quarter, they were the best, so you don't want to be looking backwards and thinking, we have been making a lot of mistakes. you certainly want to model the risks, higher than historical risks, and when you diversify your portfolio, you want to consider this. it does change your portfolio, but not like you should be selling in and out of it every day. scarlet: you wrote a story about how people saw that as a binary thing, where there could be an outcome one way or another, but clearly it has been anything but. there seems to be just as much insistence that logically, a trade war will have to get resolved somehow by g20. what is the risk in thinking that way?

sarah: the idea that a basic case is a trade deal will get done because logically it has to get done. it would get so bad for both sides if we don't get a deal. i was speaking with a market strategist at jp morgan earlier, and she made that brexit comparison, saying, frankly, the reason that is the logic behind our thinking is because it would be so bad. the problem is with this thinking is that everyone is on one side of the trade. if everyone truly believes a deal has to get done, on the off chance that it doesn't, then everyone is caught off guard. like you said with brexit, it was not just one binary vote that lasted one day. three years later, we are still dealing with it and seeing extensions pushed out further. eric: contrary to what i showed in the beginning of the wisdom of investing, no matter what, we had mike on here, and he said market is good for the whole

year and will shift to emerging markets. talk about that temptation or any potential wisdom in doing that. robert: i don't believe in investing based on a calendar year or anything like that, and there is no such thing as a top level of a market. it is really a misperception that markets, it is more risky to be investing in a market at high. we have done research on this, and what you find is market high with forward-looking returns are higher than during normal market periods. there is a little more risk with that, but it is not something you want to miss out on. in most cases, you never know what the future is going to hold, but in most cases, people are better off sticking with it. it is one of those situations where they are a little uncomfortable and that is a good thing probably. scarlet: there is a lot of movement into safe havens. but, there is also worried that perhaps china will dump treasuries. how is that playing out in flows?

sarah: we have seen a shift in flows. in the beginning of the year, it was all about cash flowing into longer data bond funds, and outflows forward dated out flows, so we have seen them slowing down a bit and flows into shorter dated bonds picking up. for example, the shv, ishares short treasury bond etf, had a duration of one month to one year, and it was up with the largest inflow of the year. if you think of that safe haven aspect, just last week, and this is really spanning the gamut of the yield curve with total bond fund, however, we saw the largest weekly inflow since last year's february event. that just shows you the extent that investors are looking for safe havens. eric: tlt is used by traders and flows come in and out. you called it broccoli for your portfolio and you want it in there at all times, why? why do you use it? robert: it is one of those

things that you hate that you love. it is always there, and i have been answering the questions about it for a decade. it is a great example of an etf that is very different when you think about it in the context of a portfolio as opposed to when you think about it in the context of in isolation. in isolation, i don't have too much to say about it, but as a portfolio, recent times have shown it continues to be a great hedge against equity risk, it has a persistent negative correlation with other asset classes, and it helps diversify the portfolio and let you have more of the things that you think are going to drive return over longer time periods. scarlet: very quickly, schwab came out with the survey and it made it clear that cost was once again the number one concern of most etf users. you are a master etf user, how do you think about cost and how much is it a driver in your decision-making? robert: a lot of that is grounded in a good place. for a long time, expense ratios

were too high, especially in the mutual fund industry, and it was right for investors to pay attention to the cost of things they are investing in. but at some point, it is not the most important thing anymore. you want to make sure that you are thinking about the liquidity and how the quality of the etf and most importantly it is it the right fit for you? is it trying to capture the risk characteristics you are looking for? and then all you need to do is put it together in a framework and we like to use optimization to give you the right balance of the benefits of the etf versus its expense ratio. scarlet: robert, thank you for making the case, and of course, sarah ponczek. coming up, we will discuss etf's and business. and one etf that caught our attention this week. the i-shares emerging market etf. as the trade war heats up, we are tracking equities and how it is bleeding money at the fastest pace, yanking more than $1 billion of funds on monday alone. you can find that chart and others we feature at gtv . this is bloomberg. ♪

♪ scarlet: i am scarlet fu. this is "etf iq." it is time for this week's etf lifecycle where we cover the three main features of an etf. step one is the filing. aberdeen starts the paperwork for three etf using artificial intelligence. one fund focuses on u.s. equities, another on international development and a third on em. step two is the launch. the amplified peer-to-peer lending and crowdfunding etf creating under the ticker lend. the first one to focus on this space. unfortunately for some, the final stages liquidation. blue sky asset management will shutdown a trio of etf's after a group struggles to overcome the relatively high expense ratios.

let's get passive aggressive now and explore the tensions between active and passive investing. with active managers struggling to outperform past products, some investors are better than others at changing with the times. one particularly adept investor is nancy davis, cio of quadratic capital management, which specializes in macro strategies. she just listed her first etf this week and joins us now. great to meet with you. nancy: thanks for having me. scarlet: let's talk first about your career path because it really captures the changes in the industry. you began as a credit derivative trader at goldman, now you pivoted to your own firm, and now you are using that making your business etf'ed. nancy: i have always been a derivatives person. i started in equity derivatives and moved to credit in the early 2000's, late 1990's, and i think

always looking at convexity and looking at a different way of portfolio construction has been a theme throughout my career. i would say in any role i have had, whether founding quadratic or at my other firms, i call myself the convexity sniffer because we are always looking to exceed that asymmetrical profile, where most fund managers create a portfolio, whether cash bonds or whatever it is, and then they risk manage around the periphery with the use of stop losses. i think that is backwards because if you think, for you, what does a stoploss mean? it means first they lose scarlet's money and then they start to manage risk. i think that is backwards in the order of operation. i have done the same thing my whole career, which is sizing positions based on option premium and having the asymmetric pay-off when you are right and risk managing to take profits rather than doing it to

stop losses. it is a little bit of a different approach. scarlet: let's talk about your new etf. it is not your typical etf. when you look at the composition, it holds tips and fixed income options. what is the objective and what does it do? nancy: we are so excited about bringing something really innovative and unique to the etf world. this is the first product out there to trade otc fixed income options. it is giving access to a market that whether you are an institutional investor or retail investor or family office, whoever, it gives access to a market that you cannot trade on your own. we are really excited about bringing something different to the etf universe. if you think about most etf's, they are dominated in equities and credit that trades credit spreads, whether it is

investment grade, high yield, loans, all things sensitive to credit spreads. this is the first product really out there that is trading inflation expectations, the shape of the yield curve, and is owning fixed income volatility, so we make money when vol increases in fixed income. scarlet: does money come out of fixed income or equity in a portfolio when you own ivol? nancy: when people allocate to it? scarlet: yes. nancy: it is a fixed income etf, so instead of owning -- you know, if you own tips in your portfolio, this might be a good replacement. if you own any sort of protection product like a volatility product, this might be a good replacement. it is also great for fixed income investors because think about the big risk. if you have a portfolio that is long-duration, your risk is that inflation expectations, which are currently below realized, where five-year, five-year is 1.75 and right now it is two, your risk is to pick up an inflation expectation, which you get from the steepness of the yield curve.

scarlet: when it comes to etf's, advisers are drawn to simple, cheat, and passive. -- cheap, and passive. ivol sounds complex, and at 1%, you could say it is expensive and it is actively managed. why not keep this as a hedge fund to serve to show investors? why etf it? nancy: first of all, it is a long only strategy. secondly, i think the whole passive-active thing, there's nothing wrong with passive or active, but when you are doing something new for the first time, and we are not replicating anything else, there is no index to benchmark. that is one of the challenges as an active etf, it is not as common to be put on platforms because they don't have a bucket looking for inflation expectations and fixed income volatility, and treasury inflation protected yield. it is not in the mean bucket, so i think active-passive, i don't really have an opinion there,

but we are active because we are doing it for the first time. scarlet: nancy davis of quadratic capital management on this front. coming up, we look at an etf hoping to put a charge in the etf industry. cars focusing on the potential for electric and autonomous vehicles. this is bloomberg. ♪

♪ scarlet: i am scarlet fu. this is "etf iq." for every etf that offers exposure to a theme, others are quickly to follow. one goes one step further to use science to discover an emerging trend. his company has teamed up with goldman sachs to package them in etf's. one of those funds aims to capture the changing face of manufacturing and eric is here to give us the drilldown. eric: thank you. g-man is very new, it came out recently, and it tracks technological changes in the manufacturing industry. that is the goal of this. it is the greatest hits of themes. robotics, drones, clean energy, 120 stocks. let's look at the sector breakdown. as you would expect, it is a fusion between tech and industrial. you see electronics, cars, machines, aerospace, semiconductors. also note, only 50% u.s., so very global, only a 7% active

share to the s&p. a lot of unique exposure in this thing. it is new, so i have no performance chart but i have the index, so i took the index and looked back against the industrials etf, which is somewhat close, and you can see it is moving in and out. if tech has a better run, that might help gman. if tech does worse, it could hurt it, but one of these etf's that is trying to redefine or progress the sector we love and know into new areas. i think the performance breakout will probably be necessary to get it some looks. scarlet: we will talk about this right now because i am welcoming steve sachs of goldman sachs asset management. we have a president who touts make america great again. he wants to revive the u.s. manufacturing capabilities. is gman a way to participate in the narrative? >> it is. it is 50% rated to the u.s., but broadly what we think about and manufacturing is long-term. for us, the inspiration around gman was the factory of the

future. what does it look like? the factory of the future will have new sources of energy, so people ask why is clean energy in a manufacturing product. we think that will be a competitive advantage. 3d printing, robotics. it is not just the creators but the adopters. future mobility, autonomous cars, 70% of the industrial robots are consumed by this industry. we wanted to capture the creators and adopters. scarlet: got it. next-generation too. steve, talk about goldman's relationship and how it came about because goldman was an earlier investor in motif, and was the idea to get into the booming etf business this way? steve: we launched our etf business for years ago with active data, our u.s. large-cap active data fund. we launched it with a couple of core tenants for what we want to

do in the etf business. first and foremost, the reason we got in, client demand. clients were asking for it. when you think about what else we are doing, where we have expertise with quantitative stock selection, and intellectual property that lives within goldman sachs and outside goldman, given our long-standing relationship with hardeep, when we first talked about this, it immediately resonated. you heard him right there. what part of the story would not resonate from the perspective of partnering with a leader in silicon valley, a leader in data science. we really think it is the marriage of wall street and silicon valley with the great advantage to eric's point of this is very much forward-looking as opposed to what we traditionally have been constrained to, for example in gig sectors. eric: i went to seize on that. we just showed a list of different ones. data-driven, human evolution, theme etf's are big business. are the gift sectors going to giveaway or will these be the next layer outside of them?

hardeep: i think the sector is an anachronism. what is tesla today? energy company, software company? we don't care. the nice thing about algorithms, when you have algorithms, they don't understand what it is. these are artificial constraints we put on industry. when you look at manufacturing, they would not put things like energy in there, so you get constrained on what is going into the product, and we like to really focus on the drivers of innovation and leave artificial -- it is kind of like trying to do surgery with a machete. i tried to explain what they are, and some products are too nichey, so they don't have longevity. there was a lot of thought that we put into this idea of etf's. they drive long-term structural growth. they are elegant enough to do interesting tips around to use as building blocks, so we think there is a lot in here.

scarlet: there are a couple of great themes that we came up when searching the motif site. eric: junk food, there were a lot of good ones. how much of an incubator is your site for etf? steve: it is definitely an input and a nice way to directly test what is going on in the retail community built around the investing. they are the source of a lot of new ideas, as well as a good laboratory for testing products. scarlet: great to have you on, thank you. steve sachs of goldman sachs. now, speaking of thematic investing, another theme that has struck a chord is future mobility. of course, there is an etf for that. you might get a charge out of the electric vehicles and future mobility index etf, better known by its ticker cars. that fund has companies tied to the market, which bloomberg

estimates will grow to the majority of car sales and one third of the global auto fleet by 2040. cars include sectors from vehicle production, autonomous driving, lithium production and batteries, to shared mobility, as well as hydrogen fuel cell manufacturing. it is no surprise that covers familiar big names like ford, daimler and gm. newer entrants, tesla. along with chinese companies. in addition to china, the u.s. and germany are the top markets and represent the fund's largest country weighting. cars had some $35 million in assets, and since launching in january 2018, it has fallen behind the s&p 500. the fund has an express ratio of 70 basis points and gets a green light in the bloomberg intelligence traffic light system with a warning for its tiered weighting system. and this is such a great theme but not the only etf that covers this. eric: ishares has drive, which is why you know that is a big one because they are getting in before having big success.

scarlet: that does it for bloomberg "etf iq." be sure to catch us at 1:00 p.m. new york time. this is bloomberg. ♪ alix: trade war reignites.

and -- lng and soybeans are driving deeper into the battle between u.s. and china as china raises tariffs on key commodities. driving into the future, electric buses and cars will take over the world faster than you think with china leading the way. the hotspots for oil. tensions flare in the persian gulf. saudi arabia confronts trouble. where is the risk for oil? ♪ alix: welcome to bloomberg "commodities edge." 30 minutes focused on the companies, physical assets and training behind the hottest commodities with the smartest