Research Affiliates’ Rob Arnott on Markets, Fed, Value Investing, & More

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On this episode of ETF Prime, host Nate Geraci speaks with a pair of individuals discussing several different ETF-related topics. His guests include VettaFi’sTom Lydon, who discusses recent bitcoin ETF news, equity markets, and more. Geraci also speaks with Research Affiliates’ Rob Arnott, who gives his take on the currently market and smart beta’s future.

Bitcoin ETF News

To open the podcast, Geraci brings on VettaFi’s Tom Lydon to discuss a multitude of different ETF topics. The pair began their discussion by breaking down the recent “fake” bitcoin news that took the ETF internet space by storm. Geraci then shares that when he got all the facts from the “fake news,” it ultimately didn’t make sense to him for a number of different reasons. He then shares the “real” bitcoin news that broke last week, where the SEC decided that it would not appeal the ruling in the Grayscale case. He then asks Lydon for his thoughts on the subject, and if we can expect an approval of a spot bitcoin ETF soon.

“It was telling that the SEC did not appeal and that was favorable. At the same time, the SEC has had regular conversations with almost 10 issuers that have filings in place,” said Lydon.

Lydon highlights that despite the SEC having regular conversations about spot bitcoin ETFs with other issuers, it were not doing the same with Grayscale. He mentions that now that it decided to not appeal the ruling, it will most likely have to begin to have conversations with them. Ultimately, Lydon thinks that there are still a lot of questions that need to be answered before we see an approval of a fund like this.

What Is Going on in the Equity Markets?

The conversation then shifted gears when the pair began to discuss equity markets. Geraci highlights how investors are currently concerned about interest rates, the Fed, and several other geopolitical issues. He then asks Lydon for his take on what he is currently seeing in equities.

“A lot of the positive momentum that we had at the beginning of the year, especially in areas like developed markets outside of the U.S., emerging markets and small-caps have really fallen off,” said Lydon.

Lydon mentions that when looking at trends from some of the major indexes, there isn’t a lot of positive data to be shown. He says that a majority of sectors are still not producing numbers that investors may be looking for. To close the conversation on equities, the pair continued to go in-depth into their expectations for the asset class moving forward.

TLT’s Inflows

The pair then moved the conversation to the fixed income market. Geraci highlights that recently both he and Lydon have had a “tug of war” on whether investors should consider ultra-short duration bond ETFs or an ETF like the iShares 20+ Year Treasury Bond ETF (TLT). Geraci then points to the fact that since the first Fed rate hike, TLT has taken in more than $30 billion in new investments. In 2023 alone, it has taken in just over $18 billion. Lydon then shares his thoughts on duration risks, and one possible reason for TLT seeing such a large influx of funds.

“Most advisors feel that a year from now, rates will be lower. We don’t know if we are going to have a recession and we don’t know how tough it will be,” said Lydon.

He highlighted that for some investors, the yields on shorter-duration funds may be attractive right now, but if rates go lower, those yields will not be there. Lydon believes that this is why some investors and advisors have begun looking at more long-term funds like TLT.

In addition, the pair discuss ETF topics that investors should watch closely for the remainder of 2023.

Current Market Environment

To close the podcast, Geraci brings on Rob Arnott, founder and chairman of the board of Research Affiliates. Geraci mentions that the firm powers an index that is behind more than 30 ETFs. To open the segment, Geraci plays a clip from a previous podcast in which Arnott said that the market in February 2021 looked very similar to the bubble in the early 2000s. Following the clip, Arnott shares his thoughts on the current market environment in 2023.

“My initial instinct is to say, ‘You know whatever he said back in February 2021, I’d say the same thing today,”’ he said.

Arnott then goes in-depth into several different areas of technology that he feels are affecting the current environment of the market. To close the segment. the pair discuss the future of smart beta.