Speaker 1:
Welcome to ETF Central, recorded here at the New York Stock Exchange, the home of ETFs. We're diving deep with the people shaping the space, the technologies driving innovation, and the stories behind the tickers. Whether you're an investor, issuer, or industry insider, welcome home.
Bilal Little:
All right, Kristof, this is exciting.
Kristof Gleich:
Absolutely. Good to see you, Bilal.
Bilal Little:
Good to see you. Today's guest is Kristof Gleich who is the partner and CIO of Harbor Capital, a $65 billion asset manager. I'm excited to have you. How are you doing today?
Kristof Gleich:
I'm amazing. All the better for seeing you. Really good to see you.
Bilal Little:
Oh, see you mean it's me?
Kristof Gleich:
Exactly.
Bilal Little:
It's me, it's me. I love it.
Kristof Gleich:
Exactly.
Bilal Little:
Kristof, I really appreciate you coming. This is important to me. I spent some time at Harbor in my career. I love the organization, I love the firm. But more importantly, you are a leader that is very intentional. How do you feel about the market today, the position of the organization, and just your overall views?
Kristof Gleich:
Sure. Look, I think change is the theme. Our industry is in a state of flux. I've been at Harbor now for just over seven years. When I joined Harbor, we were a mutual fund firm, actively managed mutual fund firm. Just let me back up for one second.
What does Harbor Capital do? We are an active manager and we work with boutique fund managers from around the world that specialize in one or two things that they do very well. We partner with them and then we bring them to the US marketplace. Historically, we've done that in mutual funds because that was the way your every day investor gained access to markets, through actively managed mutual funds. The industry has changed a lot, so we've had to adapt and evolve with it.
For us, that meant really leaning into active ETFs about four years ago. We've been in the market a little under four years. It's really exciting, learning lots. It's great to be here at the NYSE, the home of the active ETF in this beautiful library. Yeah, we've had a lot of fun standing up our active ETF platform. We're hitting some good milestones at the moment.
Specifically around markets, it's a very different in-market environment today. I like to think longterm, I like to think in decades. As I characterized the different decades, I think the 2020s looks very different from the 2010s, or 2000s, or the 1990s. I think this is absolutely an environment where you want to be selective, you want to be curated, you want to be active. We feel really well positioned from that perspective.
Bilal Little:
I love that. Given your seat as a CIO, you've been in this role for over four years now. How do you feel like your role has changed? It seems like historically the CIO would be the one that sets the strategic investment decisions and how we look at the world. I feel like now, your role might be a little more hands-on and more involved with some of the investment decision making. Is that fair?
Kristof Gleich:
Yes. Look, I've spent 25 years in markets and my secret sauce has been just an ability through years of learning, and putting in processes and systems, of how to identify true alpha and true out-performance. I love getting involved and help setting the agenda of where do we want to launch different ETFs or different products, where do we think we can compete, where do we think we can really add value for our clients. Because ultimately, if we can't add value for our clients, then what are we doing?
I do work very closely with the research team, I have a phenomenal manager research team. I have a phenomenal multi-asset team, and we have an awesome product team. It's working together. Maybe I conduct it, as an orchestra, a conductor.
Bilal Little:
For sure.
Kristof Gleich:
It might be a good analogy. But I love it. It's the lifeblood, it's what I get out of bed for in the mornings. It's really exciting.
Bilal Little:
I love it, I love it. Given your role, given your seat, you're working closely we research. How do you feel about the landscape we're in today? Obviously, the first half of the year was no shortage of headlines and/or activity, extremely high trading volume. How do you feel about where we are and what are you excited about?
Kristof Gleich:
In terms of the overall backdrop and growth outlook, it's pretty good. We invest from a multi-asset perspective around the business cycle and where we think we are, and we map out different phases of the business cycle. Where we are at the moment is late cycle expansion. What does that mean? It means it's typically pretty good for risk assets and you're seeing that in markets. Markets are trading at, depending on the day and when this goes out, at around all-time highs. Clearly, the markets had a huge shock around the tariffs. There was a lot to digest. But as we've seen, as you've seen over your career, selling risk assets when they are down 15, 20 percent in such a short space of time, it feels like emotionally gratifying doing it in the moment, but it's normally financially devastating unfortunately. We've seen that happen yet again.
If you look at flows this year, it's quite sad when you think about it because flows have been positive January, February, into March. Then they collapse where there was massive outflows in April.
Bilal Little:
Yeah.
Kristof Gleich:
You see it and you're like, "You're getting out of the market at the wrong time." It's critical to have a longterm investment plan and stick to it. Now they've since recovered and you're beginning to see net flows and money come back in again.
I think valuations are a little rich. It's hard to make a valuation-only argument here, certainly here in the US. But there is still so much growth happening around the AI theme. If you look at the cap ex of effectively the Magnificent Seven or the subset of the Magnificent Seven that are really driving this, there's an arms race that they need to win and you see that trickle throughout the economy and throughout the market. That's a theme that I think is really interesting and is set to continue.
Other things that we've been doing this year. Diversifying. I think every client in the world probably to some degree has a home country bias.
Bilal Little:
Yeah.
Kristof Gleich:
You could argue in the US, it's the only place in the world that actually makes sense to have a home country bias. But I still, when we see portfolios and we do a lot of model portfolio reviews, when you start to see 70, 80 percent of the portfolios in the US, it has a risk. Then when we explain around the index concentration risk on top of that, I think your average investor has exposure to a smaller subset of companies than they perhaps realize.
We've been advising on diversification. That's diversification outside of equities and bonds, specifically commodities. Then we've been talking about diversification outside of the US as well. I think unlike the US, you can make a pretty compelling valuation argument for international investing. Whether that's international including or excluding emerging markets, it doesn't really matter. I think what you're beginning to see now, and as a European I'm quite happy about this, Europe's waking up.
Bilal Little:
Yeah.
Kristof Gleich:
Europe's been this sleeping bureaucratic giant for, well, decades.
Bilal Little:
Yeah.
Kristof Gleich:
20, 30 years, some might even argue longer. I think through, shall we say, less orthodox policy here in the US, one of the positive aspects or spillover effects of that is I think people are realizing they need to stand up themselves. That has meant a lot of structural reform has happened in Europe very, very quickly and that opens up different investment opportunities as well.
Bilal Little:
Yeah, I want you to stay with this global theme for a second. Because you talked about diversification and everyone's got home country bias, and the US obviously the largest dominant market. However, you could have been invested across the emerging markets as well as in different parts of Europe the front of this year-
Kristof Gleich:
Yeah.
Bilal Little:
... and did fairly well.
Kristof Gleich:
Yeah.
Bilal Little:
How are you positioning clients in that particular backdrop, meaning how are you helping them to diversify? Are you pulling away from their large cap US equity exposure, and then saying, "Hey, here's a solution?" How are you addressing that particular need for the client?
Kristof Gleich:
At the moment, we're depending on, obviously for all of your listeners and viewers, it depends on the individual client risk and tolerances. But we are overweight in international equities at the moment. We do that with active management. I don't think Europe is an area where you necessarily want to own the index. There are big parts of that index that we don't think are going to grow. And there are parts of that index and specific companies ... I'll give you an example if I can.
We have an ETF called the International Compounders ETF. It's with a boutique firm out of Copenhagen called C Worldwide and all they do is try and find the best 30 companies overseas to invest with, including some EM. We leave them the discretion to do the relative trade-offs between whether it's developed in Asia or Europe, or in India. That's how we think clients should get their exposure overseas at the moment.
Bilal Little:
Have you been overweight international all year?
Kristof Gleich:
We have.
Bilal Little:
Or is this a new theme?
Kristof Gleich:
No, we came in actually. We made the switch, I think it was in Q4, October, November time. But it was off the back of just the valuation dislocations. Then I think the US markets had run so far ahead of themselves. There was uncertainty about the incoming administration. I think we had some concerns about the dollar as well. Look, we don't have a crystal ball, we don't call all things perfectly. But I think when you come back to it from 101 investment principles of diversification, being out of weather, different outcomes.
Look, it doesn't matter how good an investor you are, if you're Stan Druckenmiller or Warren Buffet, you don't have a crystal ball. But you can intelligently ahead of time tilt your portfolio to make sure that it is insulated and going to be able to weather the unexpected. That's really how we think about where are we in the business cycle, what are valuations doing, what is sentiment doing. Or, where is sentiment, I should say. That led us to tilt away, actually out of small cap.
That's been an interesting one because that's been an asset class where I think a lot of small cap specialists never heard a PM bearish on their own asset class. Actually, I've heard one, a guy from BlackRock. But that's a story for another day. Generally, PMs tout their own books.
Bilal Little:
Yeah, of course.
Kristof Gleich:
That's what happens.
Bilal Little:
There's always a reason.
Kristof Gleich:
Yeah, there's always a reason. Look, what we would argue is actually owning small cap, on average, the small cap index isn't a great investment. We've been underweight small caps now, we've been playing certain areas of small caps which I can go into, but having more in international. And actually still, despite the run-up of large growth, the reason that large growth has had such a terrific run is because that's where the earnings have been. That's where the earnings growth has been.
Bilal Little:
Yeah.
Kristof Gleich:
By the way, that's what we still think. We do have a good allocation to large growth. I would say we're underweight small cap. We're overweight international. And we are overweight commodities, and underweight fixed income a bit as well.
Bilal Little:
Let's pull forward the commodities conversation. I think that's very timely.
Kristof Gleich:
Yeah.
Bilal Little:
Especially given the fact that part of your positive going into the year was that we'd have a weaker dollar, which we have had. That's obviously been a tailwind for the European equities.
Kristof Gleich:
Yeah.
Bilal Little:
There's also been a tailwind for gold and commodity prices.
Kristof Gleich:
Yes.
Bilal Little:
Could you expand on your views there?
Kristof Gleich:
Yeah. Look, we launched a commodities ETF, the ticker is HGER, H-G-E-R, as in a hedge fuel portfolio. We launched this three-and-a-half years ago, I think it was February 2022. The view then, and this is I think important context and I'll juxtapose that with how we're thinking about it today, the view then was that the 2020s may prove to be a decade where commodities do well. If you look back over the last couple of decades, the 1990s I think was okay. The 2000s was a stellar decade for commodities. The 2010s was terrible. Nobody owned it, everybody hated it. We had a view that actually commodities were going to play a role of diversification.
Bilal Little:
Okay.
Kristof Gleich:
Really, this was we were worried about the end of this 40-year bull market in bonds. If you look at what bonds have done in a 60-40 portfolio ... By the way, a 60-40 portfolio has been the greatest invention ever.
Bilal Little:
Absolutely.
Kristof Gleich:
If you look at how it's done, in the 2010s, a 60-40, the 10% per year in a 2% inflationary environment, that's an 8% per year real return just for owning the market. Well, what's not to love? Layer in you could basically do that for free.
The nuance is, the but is there was no inflation in that environment, there was no threat of inflation. In fact, there was a threat of deflation. Every time there was a risk-off event, it would be because there was some concerns about growths, or equities come down, or because of the concerns about growth, bonds rally. If the slowdown risk is being caused by inflation or inflationary concerns, something very different happens. Equities go down because generally, certainly in the short run, negative inflation shocks are not good for equities.
Bilal Little:
Sure.
Kristof Gleich:
But what happens to bonds is they also go down in value. This decade, you've seen a reversal of what we've probably spent our collective careers saying, and seeing, and practicing is that when equities zig, bonds zag. But now, they both seem to zig and zag together.
Bilal Little:
Yeah.
Kristof Gleich:
We wanted to launch a commodities solution that would help portfolios diversify, so that's what we did.
Bilal Little:
Yeah.
Kristof Gleich:
So far, so good. Where are we today? That was a long context setting.
Bilal Little:
No, this is great.
Kristof Gleich:
But where are we today? Look, I think the tariff trauma or tariff tantrum is largely behind us. We're now left with an administration that is going to be focused on a few different Ds. Deregulation. This administration wants to get notional growth, nominal growth higher. This administration is taking a big bet, it doesn't matter which way you lean-
Bilal Little:
To grow out of the debt problem.
Kristof Gleich:
... to grow out of the debt problem. You can get out of a debt problem by cutting your expenditure and controlling your expenses, or you can try and get out of a debt problem by growing your revenues or growing your sales.
Bilal Little:
Absolutely.
Kristof Gleich:
It is pretty obvious that this administration is now pinning themselves to the mast of growing their way out.
Bilal Little:
Absolutely.
Kristof Gleich:
What do you need to do to do that? Deregulation is one thing. The other thing, the other D would be deficits. There is disregard for deficit discipline. God, that is a lot of Ds. You've seen with the One Big Beautiful Bill that's just recently been announced, we're going to be running now at steady state deficits of six to seven percent in an economy that is growing. I have no idea how long that can carry on before the music stops. But right now, that's what's happening. If you look at the impulse from the One Big Beautiful Bill over the next one to two years and out, it is expansionary.
Bilal Little:
Yeah.
Kristof Gleich:
You're going to have fiscal support is going to be good for growth as well.
Bilal Little:
Sure.
Kristof Gleich:
Then the last D stands for dove. You're going to have a dovish Fed chair.
Bilal Little:
Turn it back on.
Kristof Gleich:
Chairman Powell, I believe his term is up next May. There is a lot of talk at time of recording around appointing a new Fed chair earlier than would be tradition. If there's one thing that I can say with almost certainty is whatever this administration does, it will not be traditional.
Bilal Little:
Absolutely.
Kristof Gleich:
Could I see an appointment sooner rather than later? Yes. What is the one prerequisite that any candidate needs to have to even be considered for this job? It's that they're going to be dovish.
I think we're going to end up in actually quite an interesting situation that we've probably never faced before in the next few months. That you could have Fed policy, real Fed monetary policy, and then shadow Fed monetary policy. I don't think that's a good thing, but it's worth thinking through. In whatever happens, I think the person who comes in to take over the Fed, you're going to have a much more dovish Fed chair.
If you look at de-globalization is going to continue. If you look at all the infrastructure that is going to be needed, supply chain security. I think all of these things really do set up a very bullish backdrop.
Bilal Little:
For equities?
Kristof Gleich:
No, for commodities.
Bilal Little:
For commodities.
Kristof Gleich:
For commodities. I think if you look beneath the surface within commodities, gold continues to hit new records. It's doing it for a good reason. De-dollarization is going to continue to drive gold. I think a lot of the buyers of gold now are just price insensitive. They're trying to diversify their reserve asset bases. It doesn't really matter if gold is 3500, or 3700, or 3400, they just don't want to have such a concentration in dollars.
Bilal Little:
For sure.
Kristof Gleich:
That trend really began to accelerate with the Russian invasion of the Ukraine, with the seizing of the dollar-denominated Russian assets. I think that put the fear into the life of a lot of countries, so that's going to continue as well.
I really think with this backdrop for the next few years, I think commodities, if you've got the right strategy and if you can allocate between the difference upset of commodities, I think they're going to do really well and play a valuable part of client portfolios. That's certainly the way that we're advising to be positioned at the moment.
Bilal Little:
I love that. Just if you can unpack this a little further. What is it that you do differently in commodities that sets you apart from just buying gold?
Kristof Gleich:
Going back to what I said earlier, we work with boutique specialists, money managers. We've partnered, for our commodities ETF, it's run by a commodities specialist.
Bilal Little:
Okay.
Kristof Gleich:
This isn't one of 100 portfolio managers that work in an organization that happens to cover commodities. This is someone who lives and breathes the asset class each and every day. The firm that they run is called Quantix.
Bilal Little:
Okay.
Kristof Gleich:
Quantix, LLC. They run about three-and-a-half billion of AUM. They run hedge fund money and they run long-only money, and we're their long-only partner. The pedigree of the team is that the team used to help run Goldman Sachs' commodities trading division. Then they all retired and reformed to start Quantix. That's the largest risk book of commodities risk book in the world. They were doing that for, depending on the individual, somewhere between 20 to 27 years each. They come with this know-how, they come with this pedigree, and they come with a vision that they want to build at their firm that they're implementing inside our ETFs. We think it's a way of getting hedge fund quality money management in an ETF vehicle.
Specifically, how our ETF works and how it navigates is it's much more dynamic in its allocation between commodities, so it's rules-based. We got them to create an index, that's another theme I think, the lines between active investing and index investing are blurring. We can no longer say, "Index is passive and everything else is active," because I think a large subset now of index is really active.
Bilal Little:
Absolutely.
Kristof Gleich:
This is an example of that. It dynamically allocates, depending upon a couple of things. Something called backwardation versus contango. Without making this super dry and boring, basically backwardation is good, it means you're being paid positive carry to own the commodities. Contango is bad, it means you're paying effectively carry away to own those commodities. If you can position around that dynamic, if you can look at which commodities do well in inflationary environments, and you can identify what type of inflation environment we're in. Are we in an inflation environment that's driven by too few commodities or too much money? Debasement versus scarcity. You combine all those things thoughtfully.
Bilal Little:
Huge [inaudible 00:24:07].
Kristof Gleich:
That's what makes it different. We compare ourselves to BCOM, the Bloomberg Commodities Index. It's like the S&P 500 for commodities.
Bilal Little:
For sure.
Kristof Gleich:
We've outperformed by about north of 700 basis points per annum-
Bilal Little:
Wow.
Kristof Gleich:
... since we launched the solution a few years ago.
Bilal Little:
I love it, thank you.
Kristof Gleich:
Thank you.
Bilal Little:
Let's switch gears a little bit. We covered equities. We've covered global equities. We've covered commodities. Let's touch on, because you brought this up earlier, the AI revolution and what you're seeing in the Mag Seven and obviously what's going on in big tech because there's a lot going on in big tech.
Kristof Gleich:
Sure. Look, you saw a massive correction, I'd probably argue an overdue correction earlier this year.
Bilal Little:
Yeah.
Kristof Gleich:
There's certain ETFs out there run by competitors that track just the Magnificent Seven, the Roundhill Fund, and that had a very, very sharp draw-down.
We had the scare, oh my goodness, I'm blanking on the name, DeepSeek.
Bilal Little:
Oh, yeah, yeah.
Kristof Gleich:
I've got my marbles back. The DeepSeek scare. I think that shook a lot of tourists out of the theme and out of the asset class.
Bilal Little:
Tourists.
Kristof Gleich:
Yeah.
Bilal Little:
Tourists. You call an investor a tourist.
Kristof Gleich:
Yes.
Bilal Little:
I like it.
Kristof Gleich:
I have to give Mohamed El-Erian of PIMCO credit to that one.
Bilal Little:
Yeah, yeah, that's a good one.
Kristof Gleich:
When he described EM holders as the EM tourists and the residents. That shook a lot of tourists out. But look, I think when you come down to it, the fundamentals are still there.
Bilal Little:
Yeah.
Kristof Gleich:
The cashflow generation of large growth, these are still some of the most profitable companies that we've ever seen.
Bilal Little:
Yeah.
Kristof Gleich:
The trick is going to be over the next five years, and what we're going to need to see is a translation of cap ex into cashflow. At the moment, the market is giving them the benefit of the doubt, probably rightly because of some of the experiences and success they've had reinventing themselves in cloud, and SaaS, and going to mobile, and this is another key inflection point for them. Still an area of the market that we like. We still think the fundamentals are strong. We still think it should make up an appropriate amount of a portfolio. And it's a space that we're obviously going to be watching very, very closely over the next 18 to 24 months.
Bilal Little:
Yeah, there seems to be a lot going on there. Let's switch gears now to fixed income, because you talked about obviously diversifying away from fixed income. But what does the world look like now, just given where we are? Obviously, we talked about debt, we talked about possible incoming new Fed chair. What do you see in there?
Kristof Gleich:
Look, I think we've grown up in our careers, the role of bonds has been to generate some income and provide some protection.
Bilal Little:
That's it.
Kristof Gleich:
You get the growth elsewhere. Equities, or maybe you for some crypto, I don't know. That's the role that bonds have played.
Bilal Little:
Yeah.
Kristof Gleich:
I think the role that the bond market is now playing is to be the fiscal disciplinarian on certain governments around the world. The bond vigilantes, I think the bond vigilantes are back. I think they need to be back. I think there's going to be this game of tug-and-war, cat-and-mouse, call it what you will, between governments and between the bond markets. I don't care who you are, no one, no single person or single entity is bigger than the bond market. Not even you, Bilal.
Bilal Little:
You know, listen, I got a lot of personality, but I'm not. It's funny you say that because we've had a few conversations recently on the pod and we talked about this.
Kristof Gleich:
Yeah.
Bilal Little:
More so because the Fed actually follows the bond market, to your point.
Kristof Gleich:
Yeah.
Bilal Little:
It's presumed that they lead.
Kristof Gleich:
Yeah. That's the dirty secret, right?
Bilal Little:
That's the dirty secret.
Kristof Gleich:
Jeffrey Gundlach once said that they should "shut down the Fed," and that they should just make the overnight rate equal to the two-year rate and be done. I'm like, "Huh."
Bilal Little:
It kind of makes sense.
Kristof Gleich:
Yeah, it kind of-
Bilal Little:
It makes sense.
Kristof Gleich:
Gundlach's a smart guy.
Bilal Little:
Yeah, exactly. He let the cat out of the bag with that one, though.
Kristof Gleich:
Then you start to think about it. Sorry, anyway, I interrupted.
Bilal Little:
No, it was fantastic. In your opinion, how should people think about a strategic allocation to fixed income? Here's the reason for the question.
Kristof Gleich:
Yeah.
Bilal Little:
You have a significant group of people who are retiring who cannot stomach equity risk.
Kristof Gleich:
Yeah.
Bilal Little:
They may not be ready to tolerate commodity risk. Fixed income is still a viable component of what they hold. How do you look at that, and why active should be the key theme within holding fixed income?
Kristof Gleich:
There's no alchemy that I can-
Bilal Little:
You don't have one?
Kristof Gleich:
I don't have ... I haven't figured out this magical alchemy machine yet. I think it's always best to just deal in truth.
Bilal Little:
Yeah.
Kristof Gleich:
The truth is that fixed income allocations aren't going to be as beneficial as they have been in the past, or what people have gotten used to.
Bilal Little:
It's just a math problem.
Kristof Gleich:
Yeah, it's a math problem. Now with where we are with fiscal deficits, it's hard to see interest rates going back down to where they were five years ago.
Bilal Little:
Yeah.
Kristof Gleich:
They were basically zero five years ago.
Bilal Little:
Yeah.
Kristof Gleich:
The problem is you had a lot of investors, a lot of retirees, a lot of everyday investors and savers that would open up their statements, look at their 401K, and they would look at how their bonds have done. The bonds had not only provided income and coupon, they provided a lot of total return because interest rates had come down, so you'd had that double benefit. I don't think you're going to get that double benefit anymore. You'll get the income.
Now, look, the good news is you've got a higher starting point of income.
Bilal Little:
Yeah.
Kristof Gleich:
But in a world where you have deficits of six to seven percent, I believe that the inflation risk is firmly to the right tail, meaning higher. It's just going to be a tougher slog for bonds to contribute as meaningfully on a real, meaning after inflation basis.
Look, they can go to other areas, you can go to higher yielding areas. Depending on what your income needs are, obviously high yield or loans. You can even get exposure to private credit in ETFs. That's something-
Bilal Little:
That's a loaded question, that's a loaded question.
Kristof Gleich:
That's a whole different podcast.
Bilal Little:
That's a whole loaded question, yeah.
Kristof Gleich:
That's a whole different podcast. But there are other ways, if you work with a financial professional.
Bilal Little:
Yeah.
Kristof Gleich:
They can help navigate you through some of these fears. What I would say is the way we're investing in fixed income now, meaning as an industry or a market, is changing.
Bilal Little:
Yeah.
Kristof Gleich:
It used to be ... If I'd been here a few years ago and we'd been talking, I'd said, "Look, mutual funds and ETFs, it's pretty safe. That's going to stay the de fact." Oh my goodness, that statement would not have aged well if we had said it.
Bilal Little:
Yeah.
Kristof Gleich:
That the active ETF is becoming the preferred vehicle for investors to get exposure to the markets. There's now obviously a lot of choice around that. Again, I think per fee per unit of risk saved or alpha generated, it's pretty strong in fixed income. We haven't had a credit cycle really for 17 years.
Bilal Little:
Yeah.
Kristof Gleich:
Did I do my math right? Yeah, 2008 now, about 17 years.
Bilal Little:
Yeah.
Kristof Gleich:
It's close enough. Yet, we've had higher interest rates for now two or three years, that long and variable lags. I still think there's a lot of risk within fixed income that you want a professional to be able to go out and effectively ... If you're taking $100 of your money and investing in the fixed income markets, you're lending that money.
Bilal Little:
Absolutely.
Kristof Gleich:
To governments, to entities, to corporations. That's effectively what you're doing. If you just do it blindly in an index, no one's underwriting your loan.
Bilal Little:
Yeah.
Kristof Gleich:
That, just from a first principles' perspective, makes me a little bit nervous.
Bilal Little:
Right.
Kristof Gleich:
The opposite from equities. If you invest in equities, and indices, and market cap indices, they reward good companies that are growing, they become bigger. The more debt you issue, the bigger you become in indices. Not only are you not doing any underwriting, you're structurally lending more money to the more indebted issuers. Whereas 101, from a bank credit department, it's probably not the wisest strategy. I think the rate cycle is going to be very different from what we've experienced, starting rates are very different, and we haven't had a credit cycle in 17 or so years. I think the fees now in fixed income for fixed income active are pretty attractive for what you get. That would definitely be an area where I would say it makes more sense to be active than index or passive.
Bilal Little:
I appreciate your views on that. We've come to a part of the show where I like to ask our ETF issuers what's one underdog-
Kristof Gleich:
Yeah.
Bilal Little:
... in your portfolio of managers or ETFs that you offer?
Kristof Gleich:
Yeah.
Bilal Little:
That people don't know about, that you wish they had more visibility into, or that they knew was available to them in the market.
Kristof Gleich:
Underdog? All right. I'm going to go with EBIT.
Bilal Little:
EBIT?
Kristof Gleich:
E-B-I-T.
Bilal Little:
Okay.
Kristof Gleich:
It is a small cap earners ETF.
Bilal Little:
Okay.
Kristof Gleich:
I talked about being underweight small cap earlier, but there being areas of the market that we like. There's a dynamic, small cap is almost like two asset classes now. There's profitable small cap and there's unprofitable small cap. If you look at the Russell 2000, which is the common benchmark for small cap investors, I think it's about 40% of the Russell 2000 don't generate any profits. If you look at it by market cap, I think it's 27% or something like that, give or take a percent or two. We've seen that's an area of the market that you want to avoid.
Last year, we created an ETF called the Small Cap Earners Index, EBIT, as in the measure of profitability.
Bilal Little:
Yeah, sure.
Kristof Gleich:
It focuses on screening out the structural loss makers in the index. It's designed to be very well diversified. It's designed to give broad-based sectorial exposure. But it's just eliminating that tail of offenders, of those serial offenders, by looking back over three years and really trying to give an effective way of exposure to the piece of the asset class that we think is more investible.
And look, we're underweight small cap today. Small cap is not dead.
Bilal Little:
Yeah, but if I'm going to invest in a small cap, I'd like to invest in a company that's somewhat and/or has the potential to be profitable.
Kristof Gleich:
Yeah, exactly.
Bilal Little:
Yeah.
Kristof Gleich:
Actually, if you look at the fundamentals, if you break apart small cap and then you look at how profitable the profitable section is and the how profitable the profitable companies are growing, it looks like a completely different asset class.
Bilal Little:
Yeah.
Kristof Gleich:
We talk about this being the piece of the asset class that you wish you owned, that actually you used to own. Because this unprofitable thing, dynamic in small cap, it's more recent, meaning in the last five, seven years. As the number of unprofitable small cap companies has grown, you've seen the risk premia associated with small cap go negative. It's like, okay, let's get back to fundamentals and 101. Can we provide our clients and our portfolios exposure to the piece of small cap that we should all own as part of a diversified portfolio?
Bilal Little:
I love it. Kristof, thank you so much for joining ETF Central.
Kristof Gleich:
That was fun, Bilal. Thank you very much for having me. It was great to see you again.
Bilal Little:
Good to see you, too.
Kristof Gleich:
Cheers.
Speaker 1:
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