ETF Rising Stars

Episode Summary

Executive Summary: The episode examines how ETF “rising stars” emerge from obscurity to become major products, using Eric Balchunas’s asset-growth screening framework and music/radio metaphors. The hosts and guest Carolina Wilson highlight current winners like BOTS, ARKW, EMQQ, KBA, and potential future breakouts such as PAVE, KWEB, BAR/COMB, JETS, MJX, and LIT, while stressing that performance, story, fees, and portfolio role determine whether these funds stick.

Main Topics: ETF market tiers and the 'rising star' framework (Priority: 5/5): Balchunas divides ETFs into oblivion, middle class, and elite tiers based on assets, then looks for products that jump from small bases into billion-dollar territory. Music metaphors for product discovery (Priority: 4/5): The discussion uses WLIR's 'Screamer of the Week' and indie/new-wave analogies to describe how ETF watchers identify early breakout themes before they become mainstream. Historical validation of the screening method (Priority: 5/5): The hosts review past picks like MTUM, TOTL, NOBL, and FXU to show which products became winners, which stalled, and how asset growth can be misleading without durable demand. Current rising stars in ETFs (Priority: 5/5): The episode spotlights BOTS, ARKW, EMQQ, and KBA as present-day high-growth funds driven by robotics/AI, innovation themes, China internet exposure, and China A-shares inclusion. How theme ETFs fit in portfolios (Priority: 4/5): Theme and factor ETFs are framed as 'hot sauce' or garnish: small, high-conviction allocations that can add upside but require accepting volatility and potential underperformance. Future candidates and market catalysts (Priority: 4/5): The panel looks ahead to funds tied to infrastructure, Chinese internet, commodities, airlines, cannabis, and lithium/electric vehicles, suggesting future inflows will depend on macro trends and policy.

Key Arguments: ETF success is not just about performance; a product must also have a compelling narrative, low overlap with broad indexes, and enough assets to become durable. Many ETFs live in 'oblivion' with under $50 million in assets, and moving from that category to the billion-dollar 'elite' class is extremely difficult. Shiny-object performance bursts often attract assets quickly, as seen in robotics, AI, and innovation funds, but those gains can reverse if the underlying story fades. Theme ETFs should be used in small sizes because they are often concentrated, more volatile, and can underperform broad market benchmarks. A product can gain traction by filling a gap left by larger funds, such as China internet exposure in EMQQ or inexpensive commodities exposure in BAR and COMB. Lower fees and greater liquidity can help a late entrant take share from an existing ETF, as seen in BOTS versus ROBO. Some funds grow due to a narrow institutional use case rather than broad retail adoption, as illustrated by FXU's decline after losing a major fund-of-funds allocation. The future of ETF growth is likely tied to structural trends like infrastructure spending, China market opening, EV battery demand, and cannabis legalization.

Data Points: ETF products with less than $50M in assets: 42% - Balchunas describes this as the 'oblivion' category. ETF products between $100M and $1B: 42% - Defined as the middle class / upper-middle range. ETF products above $1B in assets: 17% - Considered the 'upper class' or elite tier. MTUM assets when first highlighted: $1.3 billion - iShares Edge MSCI USA Momentum ETF when identified as a rising star. MTUM assets later: $7.4 billion - Assets after 18 months; cited as a smash hit. MTUM return over 18 months: 42% - Performance since first identification. FXU assets after decline: $200 million - First Trust Utilities AlphaDEX after losing a large fund-of-funds holder. FXU prior assets: $1.7 billion - Asset level before the shrinkage noted on the show. FXU return: 6% - Return over the period discussed. TOTL assets: $3.4 billion - DoubleLine Total Return ETF grew from its prior level. TOTL return: 3% - Return over the 18-month window discussed. NOBL assets: $3.4 billion - ProShares S&P 500 Dividend Aristocrats ETF. NOBL return: 20% - Return since it was first highlighted. BOTS one-year asset growth: $30 million to $2.3 billion - Global X Robotics & Artificial Intelligence ETF, described as a huge breakout. BOTS organic growth: 7,800% - Percentage increase in assets over one year. BOTS vs. ROBO since launch: 61% vs. 53% - BOTS outperformed ROBO over the period discussed. BOTS holdings: 30 companies - Used to illustrate concentration vs. diversification. ROBO holdings: ~90 holdings - Presented as more diversified than BOTS. BOTS fee: 68 bps - Compared with ROBO's higher fee. ROBO fee: 95 bps - Used to show BOTS' cost advantage. BOTS overlap with S&P 500 and MSCI World: ~1% - Shown as high active share / original exposure. ARKW one-year asset growth: $21 million to $403 million - ARK Web x.0 ETF's growth as a futuristic theme fund. ARKW organic growth: 1,800% - Annual growth figure cited on the show. ARKW lifetime return: 155% - Return since launch. ARKW one-year return: 72% - Recent performance cited. ARKW year-to-date return: 6% - Despite a rough year for internet stocks, it remained positive. ARKW overlap with S&P 500 or tech ETF: ~15% - Illustrates distinct exposure. ARKW fee: 75 bps - Noted as costly given volatility. EMQQ one-year asset growth: $34 million to $404 million - Emerging Markets Internet ETF's rise. EMQQ organic flow growth: 1,100% - Year-over-year increase in flows/asset growth. EMQQ China exposure: ~61% to 60%+ - Described as a 'triple dose of China'. EEM China exposure: ~26% - Used as comparison to EMQQ. KBA asset growth: $35 million to $280 million - KraneShares Bosera MSCI China A Share ETF. KBA return: 4% - Despite strong flows, performance was modest. PAVE spending catalyst: 'a couple trillion dollars' - Potential U.S. infrastructure spending boost. KWEB China exposure: ~97% - Carolina Wilson's pick for pure-play China internet exposure. KWEB internet exposure: 72% - Share of portfolio in internet companies. KWEB fee: 72 bps - Cheaper than EMQQ. EMQQ fee: 86 bps - Compared against KWEB. BAR fee: 20 bps - GraniteShares gold ETF described as half the cost of GLD. COMB fee: 25 bps - GraniteShares all-commodities ETF. JETS assets: Crossed $100 million - U.S. Global Jets ETF milestone. JETS launch date: April 2015 - Referenced as a relatively recent launch. JETS outperformance vs airline index: ~8% - Boosted by holdings such as Boeing. MJX assets: $400 million - Alternative Harvest ETF discussed as a potential cannabis play. LIT assets: Nearing $1 billion - Global X Lithium & Battery Technology ETF.

Pivotal Quotes: "42% of them have less than $50 million. So I would consider that oblivion." — Eric Balchunas: Explaining the ETF asset-size tiers and how many products remain too small to matter. "If you can not just beat the SP by a couple percentage points, but if you can crush it into oblivion... you will get assets." — Eric Balchunas: Describing why strong performance is often the catalyst for ETF inflows. "I would say that given that it does have little overlap, which we call high active share, it should be used like hot sauce." — Eric Balchunas: Advising listeners to use thematic ETFs in small, complementary allocations.

Implications: ETF winners are increasingly theme-driven, fee-sensitive, and story-led. For investors, the lesson is to keep broad-core allocations boring and cheap, and use these high-conviction ETFs sparingly as satellite bets on megatrends.