scarlet: i'm scarlet fu. this is "etf iq," where we focus on the access, risks, and rewards offered by exchanged traded funds. ♪ scarlet: searching for protection. gold may be the safest of havens in these volatile markets, but it is not getting the love that bonds are. the boston fed jumps into the debate on the shift from passive -- active to passive with a report on risks to financial stability. we speak with one of the lead authors. and, milking it. cash is king when it comes to cash cow etf's. we feature cowz and calf in this week's "there's an etf for

that." now, whether you love or hate etf's, there is no getting around their influence, including what flows signal about bigger ships in the market. eric balchunas gets us started with a look at the latest flows. they are interesting. eric: thank you, scarlet. a lot of red. most of the month there has been a good resistance to the sell-off. now we are down 5% in may. people are selling in may. if you look here, look at these outflows, and a lot of red. 1.5 billion out for the week. a lot of the big popular trading etf's, the risk on etf's, but in the name of not fear mongering, let's talk about how the market is still up 10% for the year even with the sell-off. we are still above historical averages. let's look at the allocators versus traders. and see where the money is really coming out of. we like this chart because it look, the traders are definitely running for the hills. allocators still allocating. you have to admit, it is less than normal. that is about half of the average they normally put in there.

even they are nervous. we have this new thing we are looking at called safe haven etf's. let's look at areas where people go when they are nervous. treasuries, gold, and low vol etf's. we call them all-natural etf's because they do not use leverage or vix. here is where we are looking here. there is some movement into the safe havens, although gold has seen outflows. look at how that does not really even compare to this rush to safe havens that we saw and q4 -- in q4 last year with gold , where they were firing as investors were very scared. i would use the word spooked to describe what is going on here. nowhere near what we saw in 2018. scarlet: let's stay with that topic of safe havens. we want to bring in george m. stanle, who heads up gold strategy at state street global advisors, and also with us is bloomberg across asset advisor sarah ponczek. let me start with you. after the long weekend, we saw stocks fall 1%. we saw the 10-year yield falling five basis points. gold drifted lower. overall gold has meandered

, during this latest bout of trade tensions. why isn't gold getting more of a bid? george: i think there is danger signals in equities and in bonds right now. but nobody is giving up on the equity market. nobody is giving up on the fixed income market. it is being a little wobbly, more volatile, which is what we have been expecting. if we see the kind of problems we saw back in the fourth quarter of last year, then we will see significant inflows into gold. what we are seeing is small wobbles rather than significant moves downward. scarlet: when people see a negative headline or a sell-off in risky assets, they tend to expect gold to go up. if it does not go up the way the expect, talk about how that changes their mindset, their psychology. there are expectations built around gold. george: gold suffers from that in many ways. to me, a safe haven asset is something that does not lose value when everything else is losing value. it is kind of a capital preservation tool rather than a wealth creation tool. i think gold fits into that very well over the long-term. that said, since the great

recession of 2008, we have seen a number of times when equities really were starting to be in trouble and gold has done very well. sometimes, your safe haven will actually perform very strongly rather than outperforming, but in relative terms. eric: speaking of metals, china is talking about weaponizing the rare earth metals. huge story in the terminal today. that is the best news for a little known etf, remx. can you talk about what is going on there? rerah: it is hard to find a pu play on rare earth minerals but this is the closest it gets in the etf space. it is rare earth and strategic metals etf. trading vol, as you can see at the bottom of the screen, those white bars, it has really been through the roof. even if you look at fund flows, $60 million worth of fund flows into these etf's, which is a large amount considering the fact that it has less than 200 million in total assets. rare earth minerals have been

thrown into the spotlight in the back and forth between u.s.-china trade. chinese media reports coming out suggesting that we could see china cut back on exports to the u.s. that is pretty significant when you take into account the fact that china accounts for 80% of u.s. imports. clearly, this etf is getting a bid and some interest because of it. eric: what is your take on this? i know you are a gold guy, but how do you think this is impacting the metals world? george: i think it is adding to the general atmosphere of uncertainty. i talked about danger signals in the equity market, fixed income market. there are also danger signals in the political arena. the way that we seem to be further and further away from any kind of a resolution of the trade issues with china, we do not seem to be getting closer these days, and i think that contributes to the general atmosphere of uncertainty, which is why gold has been holding very steady in its trading range which if you think about , it, it is trading around five times where it was at the beginning of this century. that is not a bad performance if you look at it from that point of view. scarlet: you have the backdrop of trade rhetoric hardening on

both sides. you also have recession fears looming. an inverted three temp yield curve. what are you seeing in terms of the pricing of rate cuts in the future? sarah: when it comes to the bond market, the bond market is looking for a fed policy easing. if you look at the fed funds future market, now they are pricing in three rate cuts by the end of 2020. even if you look at probabilities for the end of this year, 2019, now probability for a rate cut is all the way up near 90%. then, you look at levels that we are looking at, 10 year treasury yields, 2% in focus for the first time since late 2016. as you mentioned, we still keep seeing the yield curve invert by way of the three month tenure year spread.h-10 you look at the bond market, clearly they want one thing, and that is a fed rate cut. eric: when we talk about gold as a crisis hedge, right? it is also an inflation hedge. the fed very dovish. what is your take on how that will impact gold going forward? george: i think jay powell has

made it very clear we will not , see multiple rate hikes this year. as sarah said the markets are , definitely looking for a cut. i am not sure what will happen by the end of this year in terms of rates. i don't think the markets are very sure either. they are getting conflicting signals. do we have a real inverted yield curve, or does that not really kick in until we start to look at the two's, the best indicator? we are getting confusing signals. all of this is adding to the atmosphere of uncertainty. it is all supportive for people looking for safe havens. scarlet: when you are looking for safe havens and there is a lot of uncertainty, we spoke with someone from the etf store, who says his younger clients favor another store value over gold. let's take a listen to what he said. >> when we talk to our younger clients, we have a core gold allocation in our portfolios. they will ask about that and say, what about crypto? if you talk to primarily millennials and ask them which they prefer, bitcoin or gold, it is a landslide, not even close.

it is 90% for bitcoin. scarlet: 90% prefer bitcoin over gold. george, what is your reaction to that? george: that is not indicative of the financial advisors and the investors i am talking to who say they have not heard about this move at all. the issue of bitcoin and cryptocurrencies comes up, but do you really think something is a safe haven when cryptocurrencies, as a group, lost 80% of their value in 12 months in 2018? i am not sure i would call that a safe haven, frankly. scarlet: depends on your demographic. mic drop. george walks out. our thanks to george milling-stanley and of course, our own sarah ponczek. coming up, ken anadu joins us next with his findings. and, one etf that caught our attention, the vanguard total bond market etf, ticker bnd. it took in almost $400 million last week.

the most since february 2018 during a spike in volatility. you can catch that chart and all of the other charts we feature on the bloomberg at g tv . this is "etf iq." ♪

♪ scarlet: i'm scarlet fu. this is "etf iq." it is time now for the etf lifecycle, where we take you through the three main stages of etf's. we always begin with a filing. the columbia research enhanced core etf will use a multifactor approach of quality, value, growth, and momentum to invest in the russell 1000. step two is the launch. the global infrastructure etf is now trading, uses a multifactor process such as energy, transportation, and materials that fit with the infrastructure theme. and, the final stage, liquidation. goodbye to a fund that is near to our hearts, the etf industry

exposure and financial services etf. it targeted etf issuers, exchanges, custodians, and index providers. it beat the broader financial sector since its launch, but investors never really bought in. let's get passive aggressive now, where we explore the tensions between active and passive investing. the boston fed jumped into the debate over whether the shift from passive to active increases risks to financial stability. one of the lead authors, ken anadu, joins me from boston. great to see you. thank you for taking the time to speak with us. what does it say that the boston fed is looking into this? what prompted you and your colleagues to look into this debate? ken: first, thanks for having me on the show to discuss this. joint work with myself and some of my colleagues at the board of governors as well. before i go further, i think it is important to note that the views i express are mine and not necessarily reflective of the federal reserve system.

as you know, over the past decade, there has been a as you know, over the past decade, there has been a significant shift in assets from active to passive investing. it is particularly evident on one, the growth of the etf's, and we find new evidence that passive investors are less responsive to performers. which could reduce the impact of destabilizing outflows. we also looked at a couple of other factors.

for one, there are exchange traded products that engage in daily rebalancing generally in , the same direction as the market. we feel that these rebalancing dynamics could contribute to the increased market volatility. scarlet: you actually say passive reduces risk. what is the single most important reason why? ken: the two factors we looked at, it is important to note that when we talk about liquidity and redemption risk, i'm talking about more broadly, the mutual fund structure where investors can redeem within a days notice about the liquidity of the underlying line, which could be varied. the shift to active may reduce this for two reasons. one is the growth in etf's. etf's, most of them are created in kind. these and kind -- these in-kind transactions do not necessitate selling assets because you essentially are exchanging a basket of securities. the second thing we find is we

find new evidence shows that passive investors are less responsive to performance than active investors. if you think about the scenario performanceare bad passive investors are less , likely to run. therefore, we can sell assets at prices that could be fire sale prices. scarlet: we have data that shows if you go back to 2008, passive funds took over $200 billion while active neutral funds saw that much in outflows. passive funds seem to be more reliable to buy-and-hold during these difficult times. i want to ask you about volatility. you and the paper have pointed to leveraged etf's as a source of potential volatility. if you look at how big these etf's are, they only have 2% of all etf assets, which works out to about 4/10 of 1% of the total stock market assets. it is not like they are a big slice of the market. ken: we alluded to this in our paper. the reality is that depending on

what index they are tracking or , what markets they are tracking, the small size could be a relatively large fraction of the market that they are replicating. one example is, we go back to february of 2018 with the so-called vix flash crash, if you will, you will recall some of the volatility exchange rated products, there is evidence that they exacerbated late day movements in certain indices. when we look at the data, we find even though it is a small fraction of the etf market in the aggregate, those products are a relatively large fraction of volatility futures. you can see how that could have a broader spillover effects, notwithstanding the small aggregate size. scarlet: i want to go back to a chart we pulled up. final question to you. passive giants like vanguard and blackrock, you say, could increase risk. even the late jack vogel called it a duopoly. they have about $12 trillion in assets between vanguard and

blackrock. they are the top two owners of the s&p 500 stock. how do we address this? ken: we do not speak specifically to regulation in our paper. the one thing we point out is the shift to passive has indeed led to an increased concentration in the asset management industry as you alluded to. one of the risks we point out in the paper is that if there is an idiosyncratic shock in one of these large asset managers, it could have spillover effects to asset management. scarlet: got it. ken anadu, thank you so much for joining us and giving us your take on that report. coming up, we look at two cash cow etf's that seek out companies large and small with high free cash flow yields. this is bloomberg. ♪

♪ scarlet: i'm scarlet fu. this is "etf iq." fly was the first etf to offer exposure to the s&p 500, and others quickly followed. of course long before the birth , of spy 26 years ago, investors could trade through future contracts. tim accord is global head of equity products at the cme group. before we talk to him, eric balchunas will give us the drill cme's newest

products on the s&p 500. eric: thank you. fpy, which we do not need to drill down into, this is unusual drill down, because normally we are looking at this as compared to a mutual fund. it is .095 basis points. most people view this like that, but there is a different set of investors that will look at this number. the trading volume. it trades 76 million shares a day, about 22 billion. they will see it as a replacement for futures. spy was invented, to compete with futures. let's compare spy versus futures and the pros and cons of those two as if we were institutional investors. we can see there are differences. depends on what you are looking for neither is good or bad. , here, fully funded versus unfunded. you buy those on margin. that is a big difference. the expiration, these do not expire, those do every quarter. thus, when you have to manage your position, you do not have to roll these, you have to roll the futures. which brings me to another

chart, the roll cost. sometimes they can be cheap, but sometimes they can creep up above the zero line if you are rolling futures over a long period. thus, the expense ratio of the etf becomes cheaper than the futures depending on your timeframe. the oceanic liquidity of spy is the swiss army knife appeal of etf's in that they are competing with futures as well as mutual funds. scarlet: great introduction. still with us is tim, the global head of equity products in alternative investments at cme group. you launched a new index futures. who is this new product targeted at? tim: we launched four new micro mini futures contracts on the s&p 500, the nasdaq 100, dow jones, and russell 2000. these are targeted at the active individual trader in the market who is sophisticated and already trading other parts of the market, etf's single stocks, or , options. now, we are able to unveil the

benefits of futures in a smaller contract size. about 1/10 the classic size. scarlet: the irony is that the futures market was part of the reason why etf spy was invented. eric: absolutely. a fully funded one of the futures was really the deal. i have seen their presentations. here is why etf's are better than futures from your perspective. how are futures better than etf's? tim: i think i am biased coming from the futures market, but i think it is not necessarily an either/or decision. when we look at it, it depends on the trading time as well as what are you trying to accomplish. there are benefits in futures with respect to being available nearly 24 hours a day, it is a more efficient use of capital in terms of deploying a little bit of margin to get the full exposure. there are tax benefits over etf's. the most important is when you look at the amount of dollar value that trades per day. on the s&p 500, futures trade 10 times that combined the top three etf's. scarlet: it goes to liquidity. you had mentioned that there is micro e-mini futures for other indexes as well.

the dow, the nasdaq 100, russell 2000. eric is utterly bewildered why people are using the dow in any way, because it is antiquated, it has 30 members, and bewilderingly, it is price weighted. what is the function? tim: it is interesting that they all offer different ways to trade the global equity index landscape. the dow, even though it may have lost its luster, it has been around for over 130 years. it remains popular with investors especially when you , look outside the u.s., it remains a popular bellwether benchmark. particularly in asia. eric: give us the report on the futures for bitcoin. cme looks like they are taking off cboe de-list theirs. , what are the odds this could be the way forward for a bitcoin etf? tim: it is tough to say what will be the precipitating factor that gets a bitcoin etf approved in the u.s. it has been an unquestionable record month for bitcoin futures at cme. we are trading over 13,000 bitcoin contracts per day. that is worth a little over 65 billion bitcoin, because we have a five bitcoin multiplier. we had a record day earlier in the month trading over 33,000 bitcoin.

back on may 13th. futures, worth 170,000 bitcoin equivalent. quite the month for bitcoin futures at cme. scarlet: it has been quite the month for a lot of assets not just at the cme, but around the world. tim mccourt, thank you so much. the etf industry has something for everyone, including those who believe high free cash flows lead to better returns. here's this week's "there is an etf for that." ♪ scarlet: cash is king when it comes to a couple of pacer u.s. cash cow etf's. first up, cowz. the russell 1000 for the 100 biggest companies based on free cash flow yield. the second fund trades under the ticker calf and has the same objective, but uses the s&p small caps 600 index. both funds have had success looking for companies with strong cash flows, healthy balance sheets that trade at a discount and show long-term , potential. they also wait their holdings according to each company's cash flow capping each name at 2% of

, the time of the quarterly rebalancing. cowz includes names like dell technologies starbucks and , apple. calf has abercrombie & fitch and others. there is a big divergence in size. bigger.significantly calf has under 50 million. it comes with a lower expense ratio as well. bloomberg intelligence gives both funds a green light with a notice for their alternative weighting. ♪ scarlet: love the piles of cash. but actually, they underperform their benchmarks. cowz comes below, as well as calf versus the russell 2000. russell 2000 is doing better. eric: they are very novel and specific. what i tend to find the appeal here is for people who have a problem with price-to-book. lenders who do not like that metric, and those people like free cash flow as a metric to determine value. i would assume they have an audience. a lot of etf's use

price-to-book. scarlet: maybe warren buffett. that does it for bloomberg's "etf iq." catch us each wednesday at 1:00 p.m. new york time. this is bloomberg. ♪

♪ alix: crops in crisis. tornadoes pummel kansas. rain and floods rage in the midwest. the outlook for farmers who are trying to plant corn with prices near five-year highs. oil, the fight over iran. the administration double down on its hardline with iran, while europe with sanctions, while traders worry about a trade war and global growth. the nuclear debate. two ohio plants might be profitable as the battle over nuclear heats up. we speak to the president of the nuclear energy institute. ♪ ♪ alix: i'm alix steel. welcome to bloomberg