scarlet: i'm scarlet fu. this is bloomberg "etf iq," where we focus on the access, risks and rewards offered by exchange traded funds. ♪ scarlet: panic buying up bonds. evidence of slowing growth, plus political unrest in emerging markets fueling global recession fears. the perils of passive investing. a vanguard sustainable fund -- sustainable fund -- messes up big-time. a setback for crypto vols. the sec punts on a bitcoin etf

once again, delaying a decision until october. love them or hate them, etf's are here to stay and flows often signal broader market trends. eric balchunas checks it out. and eric, it's very much a picture of derisking? eric: yes. it is. scarlet, thank you. prices are down. it has been a choppy market. a lot of volatility in the last couple of weeks but the flows are really hanging tough for u.s. equities and fixed incomes. two aberrations we are seeing, and a lot of money going into gold. on the other side, a lot of money leaving emerging markets. look at the bloodbath in emerging markets. that is only over one week. over the past couple of months, they have seen a couple of billion dollars come out quickly. what really struck me about this chart is img is on here. these are the cheap ones that retail uses. this is beyond the trading crowd into retail. let's look at img's flows since it came out. just to get an idea of how weird it is that img -- it has never seen outflows in eight years. what a charmed life this thing has lived, mainly because it is

dirt chief and em is 72 basis points, this one is 14, people love this. it is very telling. let's look at emerging markets in general and compare them to the broad emerging markets and single country to see if the story gets deeper, and it does. you can see how they were doing ok all year and then at the start of the summer, broad and single country em, china, india, all seeing outflows. so scarlet, broad, single country, traders, retail -- this is the whole enchilada here. everything else flows largely holding up. d risking in august. it is a trend we have seen before. let's bring in jennifer kim, as well as rachel evans. jennifer, let me start with you. eric showed us the latest flows. clearly choppy markets this summer. what are you seeing and hearing from your clients, especially on days where it is risk off? jennifer: we definitely see increased volume and increased volatility.

we don't necessarily think that that is an indicator that etf's are causing these issues but we , definitely see increased volume relative. scarlet: and of course, rachel, eric mentioned single country etf's, let's talk about argentina and the selloff. a shocking primary election outcome sent the peso and the bonds all tumbling. the etf have seen a massive turn in its fortunes. rachel: yeah. this was a fund that had been up 40% since the beginning of the year. that was after we saw a 48% plunge in the argentine index, clearly it is a knock on impact. however it is not all completely bad news. if you look at how the funds have performed, because it doesn't track the entirety of the argentine stock arctic, it is actually only falling 24%. not exactly brilliant, but not quite the disaster the stock market might suggest. we also haven't seen any outflows from it. we have seen a spike in volume. people are definitely using it to kind of get exposure to

argentina. we are not really seeing investors yanking their cash yet. eric: you know, this puts things into perspective. we flip out over a 2% day. argentina, 25% in one day, 48% by some indexes. talk about the liquidity on a day like this. frn is a frontier market you guys have. argentina is 12%. how are you making a market in that on one of these crisis type days? jennifer: yes, so understanding that frn is held in argentina, we hold those through adr's. we have many desks that can access the market and are confident in the liquidity behind the product. scarlet: let's talk about how the negative political headlines and the economic headlines negative globally, rachel have , been driving this bid to safety. it has been happening all year long, but the two and 10 yield curve is inverted now. the 30 year yield falling to a record low. it's like the panic buying of treasuries doesn't end, even on days where stocks are up.

rachel: room for another kind of crazy day in that respect, and it's interesting when you look at the etf world how people are positioned for this. because we have seen on the etf side, continued flows into equity etf's. as eric pointed out earlier, it is in em's the outflows, stocks , generally have seen inflows, but we have seen people looking very much on the cautious side of the stock market. ,e are seeing funds like usmv or others like splv taking in money. both of those on the leaderboard for top 10 inflows. we are seeing people still staying investing, but being quite cautious. scarlet: one of the products is bkln. the lovers loan, it peaked in late july right before they cut interest rates for the first time in a decade. talk about the worries that have since cropped up. rachel: yeah, so i always think there is a few concerns about yields. obviously there is a huge push for yields at the moment. they are interesting because they own leveraged loans. they are generally considered to

be less liquid with an additional filter. but the story from a few weeks ago was really about about how people used these etf's. most of people think about it as a cash management tool. holding cash holding something , that keeps them invested in the market, a bit of concern that maybe they don't fully understand what those funds will do pricing wise in volatile markets. eric: so let's talk about that. bkln is one of the more controversial ones with hyg. it's liquid but it holds things that are not liquid. talk about the concerns over this and what you do to protect a potential crisis event. jennifer: i think understanding the composition and taking it back a step is important. i think bkln is an excellent example of how product management, product development portfolio management come , together to provide a product with enhanced liquidity. as the product was designed, we do hold high-yield bonds, we do hold cash. we do have a line of credit out there. scarlet: have you had to use it?

jennifer: we have never had to other than during the testing stages early on. eric: hyg holds the most liquid of the junk bonds. is that a similar case with bkln in the liquid side? jennifer: exactly. in theory, it is the largest 100 loans trading. on average, about 81% of those -- 81% to 90% of those loans have traded on any given day compared to the relative market, which is around 40% to 50%. scarlet: people don't seem to understand leveraged loans very well, except it is a scary part of the market. eric: you can have your cake and eat it too. that is why people like them. the yield a lot and they float. they are beloved when the rate start climbing, it is the best of both worlds, but there is no free lunch. jennifer: yeah, i think it istanding, yeah, driven by liquidity but that is. the only thing with the product became why. you have other elements in there to help that liquidity. scarlet: all right, thanks,

jennifer kim of invesco and bloomberg's rachel evans. coming up, vanguard's biggest sustainable etf causing a stir as they purchase shares of a gun maker. what it says about funds overall. and one fund that caught our attention this week, the ishares hong kong etf, ewh. it is the largest etf tracking hong kong stocks with volumes soaring to 25 million shares on tuesday in new york, the most since 2014 as demonstrations escalated. reminder, you can find that chart and all of the others we feature on bloomberg on gtv . this is "etf iq." ♪

♪ scarlet: i am scarlet fu. this is "etf iq." we start with the etf lifecycle, then take you through the three main stages of etf. first up the filing. , pacific global advisors wants to launch a fund that will be actively managed.

focusing on developed markets stocks with above average dividend yields. step two is a launch, but this week's selection is more of a relaunch. boon is changing strategies. it is now targeting companies that are leaders in the transition to a low carbon economy. it has a new name and ticker. renw. for some, the final stage is liquidation. the ishares ibond september 2019 etf's closing because the fund has fulfilled its purpose. ibmh invested with maturity dates in september 2019. time to get passive aggressive now where we track the tensions between active and passive investing. socially in spot -- socially responsible investing means aligning with your values. it does require some active surveillance. that appeared to be missing when vanguard's biggest sustainable etf bought and held shares of a gun maker. a bloomberg intelligence analyst

first discovered vanguard's mistake, emily jason wrote about it for bloomberg news and they join me now. great to have you. you were the one to spot the discrepancy in vanguard's ticker. how did you discover it? shaheen: as concern around gun violence increases, we looked for all funds that hold gun stocks. the premise that scrutiny into such funds will increase. so we used bloomberg to screen this and some of the -- scarlet: emily, let's take the story further because your team contacted vanguard, inquiring this happened. about how on earth -- inquiring about how on earth this happened. what did you learn? emily: vanguard have been working with this fund and it is one of the fastest growing esg funds. it has attracted half a billion dollars in assets this year. so we asked vanguard how could this happen?

you said this was weapons-free fund. this gun stuck -- stock showed in there. they said it was a mistake that was supposed to be corrected. scarlet: in fact they wrote a letter to investors saying we wanted to make you aware in june, an issue in the screening methodology used by the benchmark provider resulted in the erroneous inclusion of securities and benchmarks followed by two vanguard funds. so, emily, where exactly was the breakdown? index on the ftse, whose it was tracking or was it , vanguard? because my understanding is vanguard is not obligated to hold 100% of the index's stocks. emily: they set about the fund it is a weapons-free fund. it was not actually the gun stocks but also a private prison operator that landed in there. they say the ftse made the mistake when they rebalanced the index. there was an error there and it was a really small amount of stock. it wasn't any huge amount of the

fund, but vanguard has a duty to its investors. scarlet: 219 shares of one gun maker worth about $9,000. shaheen, did you find any other esg fund that also held gun makers? shaheen: there were a few. another example is the small-cap index fund. it is only a handful so it is not something that is common. it really depends on the fund's mandate and what it explicitly states that achieves. one is yes g avoid tech stocks. one really needs to look under the hood when investing. scarlet: that is something we hear a lot from etf strategists. emily, you mentioned how vanguard is popular and really got a lot of people interested in yesterday -- in esg because the costs are low. is this a result in any way because the low fees? emily: i don't think so. i think this was an accident that happened. it shows there might not be the kind of control that responsible

investors expect in a passive fund that they might see to a more -- the strategies are relatively new. scarlet: you have to pay up for extra scrutiny and extra vigilance whereas at 12 basis points, what level -- emily: esg funds have a higher ratio than the rest of the industry. scarlet: absolutely. social scene put it all together. as you look at the esg funds, more coming into the market, what is the lesson here? shaheen: investors really need to look under the hood. for vanguard, it was a mistake, but the bigger challenge is one often does not know what is going into such funds. mandates often have statements that they considered the esg which leaves a lot of room for , interpretation. analysis becomes a challenge. it is really looking under the hood that is the moral of the story. scarlet: considering esg is kind of fuzzy and squishy. all right thank you so much, , ladies. vanguard said as well the inclusion of the stocks and

subsequent correction has no material impact on the fund's performance. vanguard regrets that this error occurred. ftse has additional oversight and control to prevent future occurrences. shaheen contractor and emily of bloomberg news. thank you. now coming up, this week, the sec delayed a decision on bitcoin etf proposals. we talked to a pair of guests that have their eyes on launching a bitcoin etf of their own. this is "etf iq." ♪

♪ scarlet: i am scarlet fu. this is bloomberg "etf iq." now for every etf that offers exposure to an asset class or theme, others are quick to follow. but before any of that can happen the sec must give its , blessings. this week regulators said they need more time before approving bitcoin etf's. bitcoin asset management has been patiently waiting for that decision. the ceo and global head of researcher here with us. first, eric balchunas will give us a drilldown into bitwise's cryptocurrency index fund. eric: thank you. we could not wait for the sec to approve. it has been years, so we are just going to drill into the index which is odd for this segment. it is interesting because you heard of the s&p 500. they are trying to do that now with the crypto world. this is the bitwise 10. the market cap ways the 10 biggest currencies. if it were approved, it would be

the first crypto index. i'm sure bitcoin would probably come first. it could be an etf soon. let's look at the weighting and see what you get in this index. and you can see anybody who follows crypto is going to go yeah, that feels about right. heavy in bitcoin but market cap was, that is the big one. let's look at the performance. this is where it is interesting. if you go way down the road and you think about investing in crypto, some people will like the diversification benefits of a basket. so in this year you are not going to feel the upside of a bitcoin, but if it goes down, there could be some protection there in that because you are not in a single security. it is interesting to see this kind of index methodologies being applied to crypto. so scarlet if and when this ever , gets approved, it will be an interesting product. scarlet: absolutely. now still with us is hunter horsley and matt hougan. hunter, i will ask you the obvious question. the sec delaying a decision once

again. what is your read on why regulators are still so hesitant? hunter: yeah, absolutely. the most recent delay was largely procedural. from the additional -- initial filing, there are 240 days to be considered and that puts the final decision on october 13. our filing is currently the first in line. i think we were not surprised by the window extending and the amount of time continuing. the sec has been pretty open about the things they are thinking about. there thinking about custody, they are thinking about the ability to operate effectively, the ability to go short, and the ability for the market. the market is in a mature place with the liquidity they are accessing. what we have been excited by even though we have been filing by -- 2014 there was a filing, in 2013 there was a filing there , has been a huge amount of progress the last 12 months. eric: matt, you were here one year ago. i predicted that some of the products had a 30% chance of being approved by the end of

this year. you said eric is understating that. it is more than that. i revised down. i also think the sec has pr worries about approving. i'm more 15%. where are you now by the end of this year, which would include that october decision? matt: i would love to give you an exact percentage, but my lawyer is sitting on my shoulder would not let me do that. , a lot has happened in the last year. hunter mentioned this but things that happen that are important. jane street has come into the market. susquehanna has come into the market. spreads have come in. now custodians have huge insurance policies from lloyd's of london. a lot of concern that the sec has lined up in january 2018 when they articulated why bitcoin etf's will need water review have been solved, not by hunter and i and the rest of the team at bitwise but just by the market maturing. 15%, i guess we will see. 15%, i guess we will see. [laughter] eric: your lawyers will be

pleased. scarlet: not committing to a number. scarlet: looking through your crypto indexes, there is a variety of option. a total market index, small-cap index as well. what do you do with these? do people license them for separate accounts? i mean, before they actually get made into etf's, how do you use them? hunter: yeah, that is a great question. there is some investors, private banks that we work with who say we want to have exposure now. we are not ready to wait for an etf at some point. and so we facilitate them investing today through integrative -- accredited product. we launch the first and largest crypto index fund. they are limited to investors so large r.a.'s working with high net worth individuals, investors who have that clientele are able to come in today before others get access. eric: i like to look at europe as an incubator of what a bitcoin etf might do. sweden has two etn's, they actually have a crypto basket in switzerland, but no one cares. -- has a cool

ticker. what makes you think this will be different? matt: i think the key to a bitcoin etf is in the u.s., it unlocks the financial advisor marketplace. so far, crypto is focused on retail investors through things like coinbase, gemini, or crack in, or institutional investors. vc investments. half the money in the u.s. is managed by financial advisors. and right now, it is difficult for them to access that market. what a bitcoin etf would do is the same thing that a gold etf did, the same thing a private bank etf did. it would open up these major new areas of the market to a major segment of american wealth. that is why we think it is both that one is approved and that there will be real demand. scarlet: i want to revisit the gold versus crypto debate because the crypto crowd has shifted to the argument that crypto is a better stored value and even a safe haven like gold. but you look at the price movement and volatility is unbecoming of a safe haven. [laughter]

matt: bitcoin makes gold look like a money market fund. [laughter] scarlet: how can someone in the crypto world make the argument that bitcoin is a safe haven? matt: i think that is a great question. you have to go back to 1971 when we went off the gold standard, and gold emerged as this new sovereign stored value. we never had that before. people forget, but at the time, gold's volatility was huge. it had years when it went up 30%, 40%. it had years when it went down 30%, 40%. when you get a new value emerging to the market, of course people don't trust it totally. of course they have to get comfortable. but as they do, village to the -- volatility comes down. last point, bitcoin volatility seems large. it has come way down in the last five years. it is about 4% per day. that will continue. scarlet: hunter and matt, well defended. thank you so much. it is back to school across the u.s., and of course, there is etf that tracks the spending that goes along with that occasion. ♪

scarlet: the vanec vectors retail etf, rth, tracks the 25 largest u.s. companies that get at least half the revenue from retail. the fund offers concentrated exposure to the retail ecosystem. from distribution, wholesale, online and multiline, to specialty, food and other signals retailers. -- staples retailers. because rth is market cap weighted with a limited number of holdings, the big names dominate. amazon, costco, walmart, target, home depot and lowe's. the only overseas exposure comes from a 2% holding in china's jd.com. since launching in late 2011, rth has outperformed the s&p 500 and its main retail etf competitor, xrt. when it comes to assets though, rth has around $50 million versus xrt's $200 million. the two of them do cost the same. an expense ratio of 35 basis points. rth gets a green light in the bloomberg intelligence traffic light system.

♪ scarlet: that does it for "etf iq." be sure to catch us next wednesday. this is bloomberg. ♪

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