Crypto News: ETF IQ: Cheating up

Welcome to ETF IQ, a weekly newsletter dedicated to the $14 trillion global ETF industry. I'm Bloomberg News reporter and anchor Katie Greifeld.

There was a time when large-cap managers would dip into smaller stocks in search of off-the-grid names that might juice their returns. Fast-forward to 2024, and the opposite dynamic is playing out.

As documented by David Cohne of Bloomberg Intelligence, the average percentage of small-cap stocks in actively managed small-cap growth mutual funds is just 16.4%. That compares to 52% in September 2014. Meanwhile, the average market cap clocks in at $4.9 billion — the often-cited ceiling for what's considered a small cap is $2 billion.

But what's a beaten-down small-cap manager to do? In an era dominated by megacaps and still-high interest rates, the little guys of this market have performed miserably against their larger peers over the past several years. Take the Russell 2000, which is populated by small-cap stocks. It has trailed the S&P Midcap 400 and the large-cap S&P 500 by roughly 20 and 54 percentage points, respectively, over the past five years.

So, the temptation to cheat up is real — and Jodi Love of T. Rowe Price is doing her best to resist it. She's the lead portfolio manager of the active T. Rowe Price Small-Mid Cap ETF (ticker TMSL). The fund has the flexibility to play in both sandboxes, and Bloomberg data show that the average weighted market cap of its nearly 300 holdings is about $11 billion.

It takes discipline to stick to small caps, Love told us on Bloomberg Television's ETF IQ, especially after big rallies:

We really try hard to stick with our bandwidth and don't cheat. We do lean a little bit more mid-cap than small, small-cap, but our holdings range from anywhere from stocks that are sub-$1 billion to about the mid-$20 billion... We really leaned into some of our favorite names, they appreciated, so as we've trimmed some of those as they get above that cheating range, we are definitely looking for new ideas.

Here's a fun one: pair-trade ETFs could soon be coming to the ETF arena.

Tidal filed for eight such ETFs this week that would go long and short on two opposing stocks under a trademarked "Battleshares" tag. If launched, the ETFs would use a grab-bag of securities, swaps and options to achieve the exposure.

The concept of packaging a pair trade neatly into the ETF wrapper is already compelling. But what's maybe more entertaining is the proposed combinations. The filing starts with some straightforward rivalries — pitting Nvidia versus Intel or Tesla against Ford, for example.

But drag your eyes down the list, and things get interesting: there's the suggested Battleshares COIN vs WFC ETF. The logic, as listed in the filing, is to take targeted positions in two companies: "one which the Adviser views as a leader in a new industry: Coinbase Global, Inc., ("COIN") and one which the Adviser views as a legacy leader in an older industry: Wells Fargo & Company ("WFC")." If that's your worldview, you can pair that with the Battleshares MSTR vs JPM ETF, as well.

Should these ETFs get the greenlight from regulators, it'll be fascinating to see what uptake looks like. Traders clearly love single-stock ETFs — but will that enthusiasm carry over to this new breed of long-short funds?

"We'll see if people respond to these," Bloomberg Intelligence ETF analyst Eric Balchunas said. "A lot of people don't really know how to short a stock, so if these do something for you, a little legwork, it's been proven that if you make something even a little bit more convenient, you can get some assets in ETFs."

An Alabama man was charged over the January hack of the US Securities and Exchange Commission's X account ahead of its highly anticipated decision to approve spot-Bitcoin ETFs.

Former Tesla Inc. and Lyft Inc. executive Jon McNeill is launching a firm that will run exchange-traded funds that focus on artificial intelligence and electrification.

Investors are driving massive inflows into ETFs that buy Chinese stocks last week on optimism over additional fiscal stimulus.

In this week's Drill Down on Bloomberg Television's ETF IQ, Cambria Investment Management co-founder Meb Faber joined to talk about his firm's recent filing for the Cambria Tax Aware ETF (ticker TAX). The goal is to cut down on capital-gains tax bills by letting investors swap holdings of appreciated securities in exchange for shares of the ETF. No actual sale takes place, which means that no taxable gains occur.

TAX is an ETF-ized take on a "swap fund" or an "exchange fund", which pool together holdings from wealthy investors in return for shares of a combined portfolio. According to the fund's prospectus, TAX will be seeded with stocks investors looking to swap their assets for shares in the ETF. Faber told Bloomberg that TAX's seed investments will likely come from Cambria's long-time clients, and the firm partnered with ETF Architect to make that happen:

The innovation that we're trying to do says look, this shouldn't be reserved for just clients of the big boys, right? But let's make this open enrollment. Now the reason we haven't done this before is trying to corral thousands of investors is not something that we're probably capable of. So, we partnered with our good friends over at ETF Architect, Wes Gray and that crew — they have that military efficiency.

The TAX ETF is expected to launch in December.

Kay Herr of JPMorgan and Matt Markiewicz of Tradr ETFs join me, Eric Balchunas and Scarlet Fu on Bloomberg Television's ETF IQ. Watch live on Mondays at noon on Bloomberg Television, on the Bloomberg Terminal at TV <GO> and on YouTube.