On this week’s episode of ETF Prime, host Nate Geraci and VettaFi Senior Industry Analyst Kirsten Chang discussed small caps, REITs, and noteworthy new ETF launches. Afterward, Geraci was joined by Todd Sohn, Strategas Asset Management ETF Strategist, to discuss concerns over covered call strategies.

Leveraged MicroStrategy Launch

To begin, Geraci and Chang discussed a few particular interesting launches of note. The first fund highlighted was the Defiance Daily Target 1.75x Long MSTR ETF (MSTX). Geraci noted that MSTX is the first leveraged single-stock ETF for MicroStrategy, which holds over 200k bitcoins.

Chang assessed that MSTX is a “highly speculative product” due partly to how much debt MicroStrategy has taken on to purchase that much Bitcoin. As such, she added that MSTX can be a high-risk means of achieving aggressive crypto exposure. However, Chang pointed out that spot bitcoin products from BlackRock, Bitwise, and Fidelity, among others, can be “better suited for longer term, more strategic positioning.”

Schwab’s Next Fund

Another new ETF that Geraci found worth highlighting was the Schwab Ultra-Short Income ETF (SCUS). What Geraci found interesting about Schwab’s ETF launch strategy was how Schwab manages an immensely large pool of assets. And yet, it only has 31 ETFs on the market.

Chang noted that Schwab takes a prudent and gradual approach when it comes to product development. She added that this cautious strategy may have paid off, given Schwab’s strong fund flows and how the firm has yet to close an ETF to this day.

“Schwab, with its distribution, is in some ways better suited to taking this more measured approach to launching funds. They’re not here to follow the latest fad,” Chang adds.

State of Small Caps

Moving on, Geraci asked Chang for her thoughts regarding how small caps performed in July and August. Chang noted that the selloff earlier in August threw a wrench into the story of the small cap comeback this summer. However, she believed “all the levers are still in place to really benefit most from lower borrowing costs in a stable growth environment.”

As an additional benefit for small caps, Chang noted the growing market concerns over tech valuations. With the added benefit of diversification from mega-cap tech stocks, Chang assessed that small caps are currently trading at attractive discounts.

Benefits of REITs

Pivoting to REITs, Geraci noticed that REIT ETFs have enjoyed some strong performance over the last couple of months. In particular, he flagged the Vanguard Real Estate ETF (VNQ), which is up roughly 10% over the past three months.

Looking at how REITs are doing, Chang noted that “interest rates are the name of the game.” According to Chang, rate cuts sitting on the potential horizon can open up new opportunities for both affordability and inventory in the housing market.

Additionally, Chang observed that some other sectors of real estate have been gaining traction as well. In particular, she highlighted the residential, industrial, health care, and senior housing sector. As an added benefit, Chang notes that investing in REIT ETFs helps investors broaden out their portfolio allocations away from big tech. Chang adds that this can be particularly beneficial amid growing concerns regarding overconcentration among the Mag Seven.

Covered Call Concerns

To finish out this week’s episode, Geraci was then joined by Todd Sohn, Strategas Asset Management ETF Strategist. Geraci highlighted Sohn’s recent observation that roughly half of ETF launches have been in nontraditional strategies, be it covered call, buffer, or single stock strategies, among others. However, Geraci asked Sohn if he would agree that the covered call ETF investment space is a bubble.

Sohn noted that he agreed that covered calls are either approaching a bubble or just getting a little too much attention. “In an environment where there’s momentum for stocks, these covered call funds lose their luster. It’s because you’re not getting all the upside,” Sohn adds. While investors get the benefit of downside protection, Sohn observed that losing out on potential upside might not be worth it at this time.