August 21, 2025 • 29 mins
In this episode of Lead-Lag Live, I sit down with Paul Baiocchi, CFA, Head of Fund Sales and Strategy at SS&C ALPS Advisors, to explore the strategies shaping today’s ETF landscape.
We dig into how ALPS differentiates itself in a crowded market, the role of innovation in fund design, and where investors should be looking for opportunities as flows shift and volatility stays elevated.
In this episode:
- What sets SS&C ALPS Advisors apart in ETF strategy
- How investors are positioning portfolios in today’s market
- Why fund innovation matters more than ever
- The outlook for active ETFs and thematic strategies
- Where Paul sees opportunities and risks ahead
Lead-Lag Live brings you inside conversations with top financial minds shaping markets in real time.
Subscribe for more interviews, insights, and raw takes that cut deeper than the headlines.
#LeadLagLive #Investing #ETFs #PaulBaiocchi #ALPSAdvisors #SS&C #Markets
Start your adventure with TableTalk Friday: A D&D Podcast at the link below or wherever you get your podcasts! Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.
Youtube: https://youtube.com/playlist?list=PLgB6B-mAeWlPM9KzGJ2O4cU0-m5lO0lkr&si=W_-jLsiREjyAIgEs
Spotify: https://open.spotify.com/show/75YJ921WGQqUtwxRT71UQB?si=4R6kaAYOTtO2V
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
If you talk to advisors, they'll often say that
they've thrown up their handson developed XUS, on EFA
investing, on EM investingbecause it hasn't worked and,
importantly critically theirclients have been asking about
it.
I think there's a lot of scartissue built up around 2022.
Maybe 2025 is shaping up to bea year in which you get a little
bit of normality from yourasset allocation.
Speaker 2 (00:32):
Hello everyone and welcome back to LeadLeg Live.
I'm your host, melanie Schaefer.
Today I'm joined by PaulBiocchi, cfa and Head of Fund
Sales and Strategy at SS&CELXAdvisors.
Paul, thanks so much for beinghere.
Good to be here, nice to seeyou.
So let's jump right into it.
With the market sort ofbroadening out and a lot of
investors concerned about howconcentrated things have become,
(00:55):
especially in the Meg 7.
Equal stock weighting hasreally come into focus.
Is that the right approach inthis kind of environment?
Speaker 1 (01:03):
Well, I think the impetus, or the impulse for why
the market might broaden out, isinstructive.
Because if you look at what'sdominated the earnings growth in
the market, what's dominatedthe performance of the market,
both off of that bottom comingout of the tariff tantrum and
over the course of this bullmarket cycle, it's largely been
(01:23):
the MAG-7, or a small number ofcompanies at the top of the cap
spectrum in key categoriescommunication services, consumer
, discretionary and technology.
And those large hyperscalers,as they're sometimes called.
And the MAG-7 companies havebeen generating ROE and ROI and
ROIC at a level that most othercompanies, even in the S&P 500,
(01:48):
which in and of itself is apretty high quality universe
relative to the rest of theequities listed in the United
States that type of compoundedquality profile, lack of
leverage and earnings growthprofile has been rewarded by the
market.
But to what end?
And if you look at valuationson the S&P 500, where we're at
(02:09):
historically, where we're at ona cyclically adjusted basis,
these moments where you'retrading at multiples that are at
the top end of historicalranges has portended to, at
least historically, belowaverage returns.
And so for investors who aretaking maybe a longer term
(02:31):
perspective on their equityallocation or looking for ways
to maybe dial down risk.
Going to an equal stockportfolio doesn't necessarily
achieve the goal of dialing downrisk, because equally weighting
the 501st or 500th stock in theS&P 500 at the same level as
the largest stock in the S&P 500likely introduces more risk,
(02:53):
not brings down the risk of theportfolio.
Now, if it's a valuation riskthat you're worried about,
perhaps an equal stock weightedapproach might do that, but what
we have learned historically isthat equal stock weighting just
increases the beta or the riskof your large cap portfolio.
And so another way to turn downthe dial on risk and achieve
(03:14):
some of the goals that you mightbe setting out to do would be
to equal sector weight asopposed to equal stock weight,
and EQL does exactly that.
It gives real estate utilities,healthcare, consumer staples the
same weight as technology,which is north of 30% by weight
(03:35):
in the S&P 500.
And so when you think aboututilities and staples
specifically, those are sectorsthat historically have been
defensive and that, by nature,equal weighting them relative to
technology or to comm services,or to consumer discretionary or
even to industrials, for thatmatter, which are more cyclical
(03:56):
sectors of the market, doesbring down the volatility
profile of a large cap portfolioand, importantly, if you look
at equal sector weighting versusequal stock weighting, over
long periods of time past threeyears, past five years, past 10
years it's generated strongrelative performance to an equal
stock weighted portfolio.
But, importantly, it's done sowith better risk adjusted
(04:18):
performance.
So you're not increasing therisk in equal sector weighting
like you are in equal stockweighting.
In fact, you're bringing downthe risk and the relative
performance of that approach hasbeen superior over time.
Speaker 2 (04:31):
So, while we're on the topic of rotation, developed
non-US markets have beenshowing strong relative
performance after years oflagging.
Speaker 1 (04:39):
Is this just another head bake, do you think, or do
you think that we're finallyseeing the start of a sustained
shift and why, in some ways, youfeel like the boy who cried
wolf, saying that this is thetime when developed XUS or
international markets are goingto outperform the US.
Because if you talk to advisors, they'll often say that they've
(05:00):
thrown up their hands ondeveloped XUS, on EFA investing,
on EM investing because ithasn't worked and, importantly,
critically, their clients havebeen asking about it.
You go back 16 plus years,coming into 2025, and the US was
on one of the longest periodsof outperformance of developed
XUS that we've seen.
And so if you're an assetallocator and you've allocated
(05:22):
this much to US large caps andyou've allocated this much to
IFA, this much to EM, and yearafter year you see the S&P 500
up this much and the equityportion of the asset allocation
up this much, the question isgoing to be asked well, why is
that?
Well, it's because developedXUS and EM have outperformed.
And then the question is well,why do we have it?
And the answer should be andlogically is because it's a
(05:45):
diversifier and the US doesn'talways outperform those other
markets.
And in 2025, we saw IFA get outto a pretty big lead over the
S&P 500.
That gap is closed with thisvicious rally off the tariff
tantrum bottom.
But I think what you have toask yourself is why do you
(06:06):
invest in developed XUS?
Well, certainly fordiversification purposes.
There's different economicdynamics at play and that's the
sort of 40,000-foot view of whyyou use developed XUS in an
asset allocation framework.
But then you get more to theinvestment logic From a capital
markets perspective.
(06:27):
You look at Europe.
It's an easier monetary policy.
So they've been ahead of theFed in terms of their easing
cycle.
They've cut across the board,whether you're talking about
Eurozone or you're talking aboutthe Bank of England.
They've been cutting much moreaggressively than the Fed has.
In this cycle.
Inflationary pressure, at leastnear term, feels a little bit
(06:49):
less acute than it does in theUnited States, or at least it
has so far in 2025.
From a fiscal perspective,you're starting to get a little
bit more fiscal stimulus in theEuropean market, whether that's
defense spending, whether that'sa commitment specifically from
NATO members.
The Germans have famouslyincreased their defense spending
budget, all of which isstimulus to the European market,
(07:12):
which dominates IFA in terms ofthe index that most people use
to measure developed XUS.
So you've got those capitalmarkets dynamics and then, I'd
argue, one of the biggestdeterminants of developed X
performance over longer periodsof time is the direction of the
dollar, and we've seen now, atleast over the course of the
past week or so, that the dollarhas been weakening once again.
(07:33):
After a little bit of acountertrend rally, the dollar
has been weak so far in 2025.
It's been one of the weakeststarts to the year on record for
the Dixie, the dollar index,which typically includes the
euro and European currencies asthe dominant currencies in that
index.
And so if you do have aprolonged period of dollar
(07:53):
weakness, akin to maybe what wehad going into and coming out of
the GFC, and if that does startto sustain, then for US
investors in developed ex-USmarkets, that should bea
tailwind for returning orbringing those returns back to
US dollars.
And then, finally, thevaluation case for developed
(08:15):
ex-US has been compelling for awhile now and valuations don't
necessarily matter overshort-term periods of time, but
they do tend to matter over longperiods of time and anytime you
have such a strong valuationspread between two segments of
the market in this case US largecaps and developed ex-US large
caps that does portend to meanreversion in that spread.
(08:36):
And if you add all of thosethings up, pretty strong
fundamentals from some of thekey companies in IFA.
The relatively easy monetaryposture in IFA, the relative
stimulus we're seeing beingunleashed in IFA and,
importantly, that valuationspread and you pair it with a
falling dollar, that's a prettynice setup for a prolonged rally
(09:00):
.
Relative to the United Statesand, just like any pocket of the
market, investors, advisorsoperating on their behalf, need
to be diligent, need to beconsiderate and thoughtful in
how they allocate.
Idog on the Alps lineup side isa product that gives you equal
weighted sector exposure to theIFA market, focused on high
(09:22):
yielding stocks in thatmarketplace.
So that's one approach to takein that segment of the market
that departs a little bit fromthe cap-weighted view of that
developed ex-US market, which isdominated by, in some cases, a
long tail of European banks thatyou may or may not want to own
and is really not giving youexposure to some of the trends
(09:44):
that might benefit from thestimulus, both monetary and
fiscal, that's taking place inIFA.
Speaker 2 (09:49):
Yeah.
So I mean right now I sort ofwant to shift to fixed income.
What are some of the keydynamics in the bond market that
you think investors should bepaying attention to as we head
into the back half of the year,and what are some of the
contrarian ideas?
Speaker 1 (10:06):
Yeah, so fixed income has been such a challenging
segment of the market.
2022 was famously such apainful year for investors
because, getting back to theadvisor conversations, bonds are
in portfolios for a reason.
They act as a ballast, or atleast they have historically.
When equities aren't doing well, bonds typically do well, or
(10:26):
vice versa.
And yet in 2022, a 60-40portfolio had one of its worst
performance years on record.
It was a generationalcorrection in a 60-40 portfolio
and a lot of advisors werehaving to answer questions about
why do they have fixed incomein the portfolio if it's not
doing what it's supposed to doin a year that's as challenging
(10:49):
as 2022.
And there's a lot of reasonswhy fixed income fared so poorly
in 2022.
It's largely owed to the factthat we were coming out of this
ZERP, this zero interest ratepolicy environment, and we had
embarked upon this prettysignificant tightening cycle
from the Fed.
And when you're going from zeroor near zero in terms of
(11:12):
interest rates to four, four anda half 5% in terms of 10-year
yields as a result of thathiking cycle, that's necessarily
going to put extreme downwardpressure on a diversified,
core-oriented fixed incomeportfolio, and so I think
there's a lot of scar tissuebuilt up around 2022.
And maybe 2025 is shaping up tobe a year in which you get a
(11:36):
little bit of normality fromyour asset allocation, meaning
equities are doing what they'resupposed to do, fixed income is
starting to do what it'ssupposed to do and even with the
tariff tantrum, we did see asimilar experience to what we
had in 2022 calendar year interms of a high correlation
between fixed income andequities, but more recently that
(11:58):
correlation has started to easea bit and I think that portends
to a good operating environmentfor active fixed income
managers to go about sort ofresumption of normal business in
terms of doing that creditresearch, doing their duration
research, trying to mix andmatch exposures in the portfolio
(12:19):
to affect their view on thetrajectory of interest rates,
the shape of the yield curve andthe outlook for corporate
credit.
And if you were to just add allof that complexity to a market
where, famously, yields orspreads are very tight on
investment grade credit, verytight on high yield credit,
(12:41):
which means the risk rewardproposition for being aggressive
in those segments of the marketis maybe not as attractive as
it's been historically To us,that means it's paramount that
someone who's managing yourfixed income portfolio is
someone with great experienceand with, importantly,
experience managing in a widerange of investment environments
(13:04):
and bond markets and, to thatend, with something like SMTH,
the Alpsmith Core Plus ActiveETF, you're able to leverage a
team that's been through it all,seen it all and has the type of
mentality that's been throughit all, seen it all and has the
type of mentality which we thinkis paramount, like I said, in
fixed income, where it'simportant to focus on what fixed
(13:26):
income is supposed to do in aportfolio, not what you want it
to do, but really what it'ssupposed to do.
It's supposed to be a ballast,it's supposed to offset some of
the risks that you're taking inother parts of your asset
allocation.
And your manager shouldunderstand that and not be
reaching for yield in segmentswhere spreads are tight, not
reaching for riskier and riskiersegments of the market to
(13:48):
enhance the yield portfolio of afixed income portfolio, because
we do believe strongly that atthis moment, being too
aggressive in any direction withyour fixed income strategy,
this is not the time to do that.
And whether it's reaching foryield, whether it's being
aggressive in terms of thequality of the credits that you
own and understanding exactlywhat it is that you own at all
(14:12):
times within the diversified mixof bonds that makes up a core
plus portfolio is of criticalimportance at this moment in
time.
And, from a contrarianperspective, I think everyone
expects that the Fed's going tobe cutting at some point here,
and the odds of a rate cut herein September have increased on
the back of that unexpectedlypoor jobs print on Friday and
(14:34):
some of the downward revisionsthat came about in the wake of
that in prior months.
And if that is in fact the case, that we're going to get a
couple rate cuts here in 2025,that feels like the consensus.
And if you're going to try andfind non-consensus views on rate
cuts, it would either be not toexpect multiple rate cuts, or
(14:56):
any rate cuts for that matter,in 2025, or the other side would
be to expect perhaps a jumbocut in September and maybe
another cut or two as we closeout the calendar year.
And those two out of consensusperspectives would lead to, from
an active portfolio manager'sperspective, very different
(15:16):
strategies in terms of theirimplications for the yield curve
, their implications for theprice of various bonds, whether
they're in the investment gradeor high yield segment of the
market.
They're in the typical treasurymarket, the short end, the
medium segment or even thelonger end of the yield curve,
and a fixed income manager who'sable to assign probabilities to
(15:38):
those various out of consensusviews but also be aware of what
the consensus view andincorporate that into their
process and in their positioning.
We think is critical and wethink SCI Smith Capital
Investors is someone you cantrust to do that through SMTH or
the mutual funds that theyoffer as well.
Speaker 2 (15:55):
Now, Paul, is there anything you're seeing sort of
outside of the more crowdedtrades and tech communication
services and consumerdiscretionary?
Speaker 1 (16:04):
So I think it gets back to that equal sector
weighting conversation we had atthe beginning of the
conversation, where it isn'tnecessarily about taking big
swings in any segment of themarket.
But if you're just looking atthe S&P 500 and saying tech is
once again north of 30%, eventhough companies have been
kicked out of the technologysector through GIX changes over
(16:28):
the course of the past decade,and yet here we are once again
technology, 30% of the market ona cap-weighted basis, and the
key companies in that sectordominating the tape, dominating
the news flow, dominating theirearnings, influence on the
overall market.
And you're just wondering if,going forward, we're likely to
(16:48):
see technology go from 30% to35% or more likely to go from,
say, 30% to 25%, based onrelative performance.
Well then that begs thequestion where should you go?
And if you're looking atsegments of the market that are
not as popular right now, one ofthe ones that jumps out is
REITs, because REITs have beenthe worst performing sector or
(17:08):
real estate, I should say, hasbeen the worst performing sector
of the S&P 500 over the courseof the past five years, narrowly
edging, I should say,healthcare over that period of
time and as a result, it's avery small weighting in the S&P
500.
And it's a sector that a lot ofpeople don't know what to do
with, because they might view itas real assets and they
(17:31):
distinctly allocate to itindependent of their equity
allocation, or they just view itas part of their equity
allocation and they're at orbelow market weight because it's
been underperforming.
The technicals haven't lookedgreat and there's concern about
the impact on the sector of theongoing challenges with
(17:51):
commercial real estate, but thereality for investors is that
there's not a lot of commercialreal estate exposure in a
diversified public REITportfolio.
If you look at the S&P 500,there's one name that you can
even define as commercial realestate in the real estate
segment of the S&P 500, asdefined by something like XLRE.
(18:13):
A lot of what makes up thepublic REIT market now is either
specialized REITs, cell towerREITs, data center REITs,
self-storage REITs, industrialREITs all of which have very
different dynamics economicallyor capital markets oriented than
, say, your typical commercialreal estate footprint in a
(18:33):
private portfolio or as wastypically viewed by real estate
investors 15, 20, 25 years ago.
And so, importantly, if youlook at some of the fundamentals
of those categories like datacenter REITs, industrials REITs
or even self-storage REITs.
They're a lot different.
They want most people perceivedto be real estate fundamentals,
(18:55):
just thinking about emptybuildings in metro areas across
the country, and so in that way,I think real estate provides a
lot of critical insights,dynamics and characteristics
that maybe investors areoverlooking at this moment.
They're unloved, first of all,and so it is very much a
contrarian perspective to thinkabout the sector.
(19:15):
But also from a funds, fromoperations perspective or a
relative valuation perspectiveto net asset value.
They trade, at least right now,at a discount to net asset
value and certainly trade at arelative discount to their
private counterparts.
So private REIT portfolios thathave been so popular in recent
years.
They allow you in some cases todraft on some of the trends
(19:39):
that people are going totechnology for, say, ai.
As an example, there's datacenter REITs in the public space
that have certainly beenbenefiting from the massive
CapEx spending by thehyperscalers on that category.
But again getting back to thisidea that you need to be
thoughtful and deliberate in howyou go about allocating REIT,
(20:01):
our active REIT strategyleverages a team with 30 plus
years of experience investing inand doing research on public
REITs and has the flexibility togo into and out of certain
industries to do that relativevaluation work, that sort of old
school roll your sleeves upwork on the research side to
pick and choose individualcompanies.
(20:21):
And the relative performance ofREIT since its inception more
than four years ago has beenvery strong.
So I would say REITs are one ofthose categories that jumps out
to me as a contrarianopportunity within the sector
framework, within an assetallocation framework that a lot
of people aren't talking aboutbut have characteristics, yield,
(20:41):
relative fundamental strengthand a relative valuation case
that might portend to strongrelative performance.
And a lot of people don't knowthat if you go back 25 years and
I know a lot of people aren'tgoing to go back that far when
they're thinking aboutallocating to their portfolio
but REITs are one of the best,if not the best performing
sectors in the market over 25years, and so this five-year
(21:04):
period in many ways hasdissuaded a lot of people from
allocating seriously to thecategory.
But the argument we would makeis to revisit it this moment in
time with a mean reversionopportunity in terms of that
relative performance.
Speaker 2 (21:19):
And you mentioned the word AI briefly, but I wanted
to ask you I mean, investors arestill chasing AI exposure.
Are there ways to play the AIstory beyond the obvious tech
and semiconductor names?
Speaker 1 (21:31):
Yeah, we often talk about AI adjacencies, because if
you hear a conference call froma Microsoft or a Meta or an
Alphabet and they're talkingabout CapEx budgets in aggregate
of $80 billion, about CapExbudgets in aggregate of $80
(21:51):
billion, $90 billion a year,that money is going to GPUs from
NVIDIA and that's part of thereason why NVIDIA shares have
been on such a run and why it'sone of the most valuable
companies in the world.
But it's also going to some ofthe infrastructure that's going
to be necessary to support theselofty AI ambitions, and that
infrastructure spans from chipsto the computers themselves or
(22:16):
to the data centers.
And then, importantly, theknock-on effect of that is, if
we're going to build all ofthese data centers to ensure
that when someone plugssomething into LLM, that it
actually works because there'selectricity available to them,
well then we need a better gridand we need to ensure that that
grid is modernized and isaccommodative of the increased
(22:37):
load.
And when you think about whobenefits from increasing
electricity demand and,depending on the forecast you
look at, we're talking aboutelectricity demand growth here
in the United States that wehaven't seen since the 1960s
Well, utilities companies arecertainly a part of that.
Energy infrastructure companiesare certainly a part of that,
because those are the companiesthat are moving the natural gas
(22:58):
from where it's produced towhere it's consumed,
increasingly in the form ofelectricity demand or
electricity generation andsupport of AI data centers, and
so, to that end, it's reallyabout trying to build a mosaic
of picks and shovels.
Equivalent exposure to the AIstory.
Midstream companies thatoperate the pipelines, the
(23:21):
storage, the processingfacilities that ensure the
natural gas is available to theconsumers of it are critical.
So ENFR is our energyinfrastructure ETF that provides
exposure to those companies,has benefited from some of these
AI adjacency trends, as we termthem.
We also launched anelectrification ETF back in
(23:42):
April, ticker ELFY, whichcombines utilities companies
with materials companies,industrials companies,
technology companies as well asenergy infrastructure companies
to give you comprehensiveexposure to the electrification
theme, and so to put a bow onall of that, I think the idea is
most people think about AI andthey think about technology
(24:05):
companies, software and servicescompanies, semi-companies, and
those are, in many cases, themost direct way to play AI.
But you also have to think aboutthe second derivative, if you
will, of AI investment and thesemassive CapEx budgets, and
where that money is going to go?
It's going to go to copper.
It's going to go to some of themetals that are required to
(24:29):
ensure that the construction ofthese data centers goes on
without a hitch.
It's going to go to investmentin utilities infrastructure so
that the utilities in thiscountry can invest in the
necessary capacity to supportthe ongoing electricity demand
growth.
And I think it's no accidentthat when you look at the S&P
(24:50):
500 in 2024, the best performingstock outside of Palantir,
which was added mid-year, wasactually a utilities company,
and that was the first timereally since the turn of the
century that a utilities companyhas been the best performing
stock in the S&P 500.
And it's reflective of some ofthe companies that are
benefiting indirectly from theAI story and are going to be
(25:13):
really at the heart of ourability to meet the increasing
electricity demand coming fromAI consumer level trends like
switching from ICEs to EVs, fromyour gas stove to an induction
stove, from a typical heatingand air conditioning unit to a
(25:37):
heat pump, etc.
All of which, at the margin,increase electricity demand at
the consumer level, at thecommercial level, and then
wholesale from a step functionas a result of these massive AI
data center projects, the likesof which we really haven't seen.
Speaker 2 (25:52):
Really interesting.
Paul, just before you go, canyou let people know where the
best place is to follow you andto learn more?
Speaker 1 (26:00):
Sure.
So the website, easy toremember alpsfundscom for all of
the information you'll need onall of our products, all of our
strategies.
Need, on all of our products,all of our strategies, the
insights from our very seasonedresearch teams, as well as some
of our sub-advisory partners whoare experts in categories like
REITs, like muni bonds, fixedincome, as we talked about, as
(26:22):
well as categories like energyinfrastructure, where we have
the largest, most liquid MLP ETFin the market, and we've been
doing this now for 15 years interms of supporting that energy
infrastructure story as theindustry has evolved.
Speaker 2 (26:35):
Yeah Well, thank you so much for joining us and thank
you all for watching.
Don't forget to like, share andsubscribe for more
conversations with the peopleshaping today's markets.
I'm Melanie Schaefer and thisis Lead Lake Lies.
If you talk to advisors, they'll often say that
they've thrown up their handson developed XUS, on EFA
investing, on EM investingbecause it hasn't worked and,
importantly critically theirclients have been asking about
it.
I think there's a lot of scartissue built up around 2022.
Maybe 2025 is shaping up to bea year in which you get a little
bit of normality from yourasset allocation.
Speaker 2 (00:32):
Hello everyone and welcome back to LeadLeg Live.
I'm your host, melanie Schaefer.
Today I'm joined by PaulBiocchi, cfa and Head of Fund
Sales and Strategy at SS&CELXAdvisors.
Paul, thanks so much for beinghere.
Good to be here, nice to seeyou.
So let's jump right into it.
With the market sort ofbroadening out and a lot of
investors concerned about howconcentrated things have become,
(00:55):
especially in the Meg 7.
Equal stock weighting hasreally come into focus.
Is that the right approach inthis kind of environment?
Speaker 1 (01:03):
Well, I think the impetus, or the impulse for why
the market might broaden out, isinstructive.
Because if you look at what'sdominated the earnings growth in
the market, what's dominatedthe performance of the market,
both off of that bottom comingout of the tariff tantrum and
over the course of this bullmarket cycle, it's largely been
(01:23):
the MAG-7, or a small number ofcompanies at the top of the cap
spectrum in key categoriescommunication services, consumer
, discretionary and technology.
And those large hyperscalers,as they're sometimes called.
And the MAG-7 companies havebeen generating ROE and ROI and
ROIC at a level that most othercompanies, even in the S&P 500,
(01:48):
which in and of itself is apretty high quality universe
relative to the rest of theequities listed in the United
States that type of compoundedquality profile, lack of
leverage and earnings growthprofile has been rewarded by the
market.
But to what end?
And if you look at valuationson the S&P 500, where we're at
(02:09):
historically, where we're at ona cyclically adjusted basis,
these moments where you'retrading at multiples that are at
the top end of historicalranges has portended to, at
least historically, belowaverage returns.
And so for investors who aretaking maybe a longer term
(02:31):
perspective on their equityallocation or looking for ways
to maybe dial down risk.
Going to an equal stockportfolio doesn't necessarily
achieve the goal of dialing downrisk, because equally weighting
the 501st or 500th stock in theS&P 500 at the same level as
the largest stock in the S&P 500likely introduces more risk,
(02:53):
not brings down the risk of theportfolio.
Now, if it's a valuation riskthat you're worried about,
perhaps an equal stock weightedapproach might do that, but what
we have learned historically isthat equal stock weighting just
increases the beta or the riskof your large cap portfolio.
And so another way to turn downthe dial on risk and achieve
(03:14):
some of the goals that you mightbe setting out to do would be
to equal sector weight asopposed to equal stock weight,
and EQL does exactly that.
It gives real estate utilities,healthcare, consumer staples the
same weight as technology,which is north of 30% by weight
(03:35):
in the S&P 500.
And so when you think aboututilities and staples
specifically, those are sectorsthat historically have been
defensive and that, by nature,equal weighting them relative to
technology or to comm services,or to consumer discretionary or
even to industrials, for thatmatter, which are more cyclical
(03:56):
sectors of the market, doesbring down the volatility
profile of a large cap portfolioand, importantly, if you look
at equal sector weighting versusequal stock weighting, over
long periods of time past threeyears, past five years, past 10
years it's generated strongrelative performance to an equal
stock weighted portfolio.
But, importantly, it's done sowith better risk adjusted
(04:18):
performance.
So you're not increasing therisk in equal sector weighting
like you are in equal stockweighting.
In fact, you're bringing downthe risk and the relative
performance of that approach hasbeen superior over time.
Speaker 2 (04:31):
So, while we're on the topic of rotation, developed
non-US markets have beenshowing strong relative
performance after years oflagging.
Speaker 1 (04:39):
Is this just another head bake, do you think, or do
you think that we're finallyseeing the start of a sustained
shift and why, in some ways, youfeel like the boy who cried
wolf, saying that this is thetime when developed XUS or
international markets are goingto outperform the US.
Because if you talk to advisors, they'll often say that they've
(05:00):
thrown up their hands ondeveloped XUS, on EFA investing,
on EM investing because ithasn't worked and, importantly,
critically, their clients havebeen asking about it.
You go back 16 plus years,coming into 2025, and the US was
on one of the longest periodsof outperformance of developed
XUS that we've seen.
And so if you're an assetallocator and you've allocated
(05:22):
this much to US large caps andyou've allocated this much to
IFA, this much to EM, and yearafter year you see the S&P 500
up this much and the equityportion of the asset allocation
up this much, the question isgoing to be asked well, why is
that?
Well, it's because developedXUS and EM have outperformed.
And then the question is well,why do we have it?
And the answer should be andlogically is because it's a
(05:45):
diversifier and the US doesn'talways outperform those other
markets.
And in 2025, we saw IFA get outto a pretty big lead over the
S&P 500.
That gap is closed with thisvicious rally off the tariff
tantrum bottom.
But I think what you have toask yourself is why do you
(06:06):
invest in developed XUS?
Well, certainly fordiversification purposes.
There's different economicdynamics at play and that's the
sort of 40,000-foot view of whyyou use developed XUS in an
asset allocation framework.
But then you get more to theinvestment logic From a capital
markets perspective.
(06:27):
You look at Europe.
It's an easier monetary policy.
So they've been ahead of theFed in terms of their easing
cycle.
They've cut across the board,whether you're talking about
Eurozone or you're talking aboutthe Bank of England.
They've been cutting much moreaggressively than the Fed has.
In this cycle.
Inflationary pressure, at leastnear term, feels a little bit
(06:49):
less acute than it does in theUnited States, or at least it
has so far in 2025.
From a fiscal perspective,you're starting to get a little
bit more fiscal stimulus in theEuropean market, whether that's
defense spending, whether that'sa commitment specifically from
NATO members.
The Germans have famouslyincreased their defense spending
budget, all of which isstimulus to the European market,
(07:12):
which dominates IFA in terms ofthe index that most people use
to measure developed XUS.
So you've got those capitalmarkets dynamics and then, I'd
argue, one of the biggestdeterminants of developed X
performance over longer periodsof time is the direction of the
dollar, and we've seen now, atleast over the course of the
past week or so, that the dollarhas been weakening once again.
(07:33):
After a little bit of acountertrend rally, the dollar
has been weak so far in 2025.
It's been one of the weakeststarts to the year on record for
the Dixie, the dollar index,which typically includes the
euro and European currencies asthe dominant currencies in that
index.
And so if you do have aprolonged period of dollar
(07:53):
weakness, akin to maybe what wehad going into and coming out of
the GFC, and if that does startto sustain, then for US
investors in developed ex-USmarkets, that should bea
tailwind for returning orbringing those returns back to
US dollars.
And then, finally, thevaluation case for developed
(08:15):
ex-US has been compelling for awhile now and valuations don't
necessarily matter overshort-term periods of time, but
they do tend to matter over longperiods of time and anytime you
have such a strong valuationspread between two segments of
the market in this case US largecaps and developed ex-US large
caps that does portend to meanreversion in that spread.
(08:36):
And if you add all of thosethings up, pretty strong
fundamentals from some of thekey companies in IFA.
The relatively easy monetaryposture in IFA, the relative
stimulus we're seeing beingunleashed in IFA and,
importantly, that valuationspread and you pair it with a
falling dollar, that's a prettynice setup for a prolonged rally
(09:00):
.
Relative to the United Statesand, just like any pocket of the
market, investors, advisorsoperating on their behalf, need
to be diligent, need to beconsiderate and thoughtful in
how they allocate.
Idog on the Alps lineup side isa product that gives you equal
weighted sector exposure to theIFA market, focused on high
(09:22):
yielding stocks in thatmarketplace.
So that's one approach to takein that segment of the market
that departs a little bit fromthe cap-weighted view of that
developed ex-US market, which isdominated by, in some cases, a
long tail of European banks thatyou may or may not want to own
and is really not giving youexposure to some of the trends
(09:44):
that might benefit from thestimulus, both monetary and
fiscal, that's taking place inIFA.
Speaker 2 (09:49):
Yeah.
So I mean right now I sort ofwant to shift to fixed income.
What are some of the keydynamics in the bond market that
you think investors should bepaying attention to as we head
into the back half of the year,and what are some of the
contrarian ideas?
Speaker 1 (10:06):
Yeah, so fixed income has been such a challenging
segment of the market.
2022 was famously such apainful year for investors
because, getting back to theadvisor conversations, bonds are
in portfolios for a reason.
They act as a ballast, or atleast they have historically.
When equities aren't doing well, bonds typically do well, or
(10:26):
vice versa.
And yet in 2022, a 60-40portfolio had one of its worst
performance years on record.
It was a generationalcorrection in a 60-40 portfolio
and a lot of advisors werehaving to answer questions about
why do they have fixed incomein the portfolio if it's not
doing what it's supposed to doin a year that's as challenging
(10:49):
as 2022.
And there's a lot of reasonswhy fixed income fared so poorly
in 2022.
It's largely owed to the factthat we were coming out of this
ZERP, this zero interest ratepolicy environment, and we had
embarked upon this prettysignificant tightening cycle
from the Fed.
And when you're going from zeroor near zero in terms of
(11:12):
interest rates to four, four anda half 5% in terms of 10-year
yields as a result of thathiking cycle, that's necessarily
going to put extreme downwardpressure on a diversified,
core-oriented fixed incomeportfolio, and so I think
there's a lot of scar tissuebuilt up around 2022.
And maybe 2025 is shaping up tobe a year in which you get a
(11:36):
little bit of normality fromyour asset allocation, meaning
equities are doing what they'resupposed to do, fixed income is
starting to do what it'ssupposed to do and even with the
tariff tantrum, we did see asimilar experience to what we
had in 2022 calendar year interms of a high correlation
between fixed income andequities, but more recently that
(11:58):
correlation has started to easea bit and I think that portends
to a good operating environmentfor active fixed income
managers to go about sort ofresumption of normal business in
terms of doing that creditresearch, doing their duration
research, trying to mix andmatch exposures in the portfolio
(12:19):
to affect their view on thetrajectory of interest rates,
the shape of the yield curve andthe outlook for corporate
credit.
And if you were to just add allof that complexity to a market
where, famously, yields orspreads are very tight on
investment grade credit, verytight on high yield credit,
(12:41):
which means the risk rewardproposition for being aggressive
in those segments of the marketis maybe not as attractive as
it's been historically To us,that means it's paramount that
someone who's managing yourfixed income portfolio is
someone with great experienceand with, importantly,
experience managing in a widerange of investment environments
(13:04):
and bond markets and, to thatend, with something like SMTH,
the Alpsmith Core Plus ActiveETF, you're able to leverage a
team that's been through it all,seen it all and has the type of
mentality that's been throughit all, seen it all and has the
type of mentality which we thinkis paramount, like I said, in
fixed income, where it'simportant to focus on what fixed
(13:26):
income is supposed to do in aportfolio, not what you want it
to do, but really what it'ssupposed to do.
It's supposed to be a ballast,it's supposed to offset some of
the risks that you're taking inother parts of your asset
allocation.
And your manager shouldunderstand that and not be
reaching for yield in segmentswhere spreads are tight, not
reaching for riskier and riskiersegments of the market to
(13:48):
enhance the yield portfolio of afixed income portfolio, because
we do believe strongly that atthis moment, being too
aggressive in any direction withyour fixed income strategy,
this is not the time to do that.
And whether it's reaching foryield, whether it's being
aggressive in terms of thequality of the credits that you
own and understanding exactlywhat it is that you own at all
(14:12):
times within the diversified mixof bonds that makes up a core
plus portfolio is of criticalimportance at this moment in
time.
And, from a contrarianperspective, I think everyone
expects that the Fed's going tobe cutting at some point here,
and the odds of a rate cut herein September have increased on
the back of that unexpectedlypoor jobs print on Friday and
(14:34):
some of the downward revisionsthat came about in the wake of
that in prior months.
And if that is in fact the case, that we're going to get a
couple rate cuts here in 2025,that feels like the consensus.
And if you're going to try andfind non-consensus views on rate
cuts, it would either be not toexpect multiple rate cuts, or
(14:56):
any rate cuts for that matter,in 2025, or the other side would
be to expect perhaps a jumbocut in September and maybe
another cut or two as we closeout the calendar year.
And those two out of consensusperspectives would lead to, from
an active portfolio manager'sperspective, very different
(15:16):
strategies in terms of theirimplications for the yield curve
, their implications for theprice of various bonds, whether
they're in the investment gradeor high yield segment of the
market.
They're in the typical treasurymarket, the short end, the
medium segment or even thelonger end of the yield curve,
and a fixed income manager who'sable to assign probabilities to
(15:38):
those various out of consensusviews but also be aware of what
the consensus view andincorporate that into their
process and in their positioning.
We think is critical and wethink SCI Smith Capital
Investors is someone you cantrust to do that through SMTH or
the mutual funds that theyoffer as well.
Speaker 2 (15:55):
Now, Paul, is there anything you're seeing sort of
outside of the more crowdedtrades and tech communication
services and consumerdiscretionary?
Speaker 1 (16:04):
So I think it gets back to that equal sector
weighting conversation we had atthe beginning of the
conversation, where it isn'tnecessarily about taking big
swings in any segment of themarket.
But if you're just looking atthe S&P 500 and saying tech is
once again north of 30%, eventhough companies have been
kicked out of the technologysector through GIX changes over
(16:28):
the course of the past decade,and yet here we are once again
technology, 30% of the market ona cap-weighted basis, and the
key companies in that sectordominating the tape, dominating
the news flow, dominating theirearnings, influence on the
overall market.
And you're just wondering if,going forward, we're likely to
(16:48):
see technology go from 30% to35% or more likely to go from,
say, 30% to 25%, based onrelative performance.
Well then that begs thequestion where should you go?
And if you're looking atsegments of the market that are
not as popular right now, one ofthe ones that jumps out is
REITs, because REITs have beenthe worst performing sector or
(17:08):
real estate, I should say, hasbeen the worst performing sector
of the S&P 500 over the courseof the past five years, narrowly
edging, I should say,healthcare over that period of
time and as a result, it's avery small weighting in the S&P
500.
And it's a sector that a lot ofpeople don't know what to do
with, because they might view itas real assets and they
(17:31):
distinctly allocate to itindependent of their equity
allocation, or they just view itas part of their equity
allocation and they're at orbelow market weight because it's
been underperforming.
The technicals haven't lookedgreat and there's concern about
the impact on the sector of theongoing challenges with
(17:51):
commercial real estate, but thereality for investors is that
there's not a lot of commercialreal estate exposure in a
diversified public REITportfolio.
If you look at the S&P 500,there's one name that you can
even define as commercial realestate in the real estate
segment of the S&P 500, asdefined by something like XLRE.
(18:13):
A lot of what makes up thepublic REIT market now is either
specialized REITs, cell towerREITs, data center REITs,
self-storage REITs, industrialREITs all of which have very
different dynamics economicallyor capital markets oriented than
, say, your typical commercialreal estate footprint in a
(18:33):
private portfolio or as wastypically viewed by real estate
investors 15, 20, 25 years ago.
And so, importantly, if youlook at some of the fundamentals
of those categories like datacenter REITs, industrials REITs
or even self-storage REITs.
They're a lot different.
They want most people perceivedto be real estate fundamentals,
(18:55):
just thinking about emptybuildings in metro areas across
the country, and so in that way,I think real estate provides a
lot of critical insights,dynamics and characteristics
that maybe investors areoverlooking at this moment.
They're unloved, first of all,and so it is very much a
contrarian perspective to thinkabout the sector.
(19:15):
But also from a funds, fromoperations perspective or a
relative valuation perspectiveto net asset value.
They trade, at least right now,at a discount to net asset
value and certainly trade at arelative discount to their
private counterparts.
So private REIT portfolios thathave been so popular in recent
years.
They allow you in some cases todraft on some of the trends
(19:39):
that people are going totechnology for, say, ai.
As an example, there's datacenter REITs in the public space
that have certainly beenbenefiting from the massive
CapEx spending by thehyperscalers on that category.
But again getting back to thisidea that you need to be
thoughtful and deliberate in howyou go about allocating REIT,
(20:01):
our active REIT strategyleverages a team with 30 plus
years of experience investing inand doing research on public
REITs and has the flexibility togo into and out of certain
industries to do that relativevaluation work, that sort of old
school roll your sleeves upwork on the research side to
pick and choose individualcompanies.
(20:21):
And the relative performance ofREIT since its inception more
than four years ago has beenvery strong.
So I would say REITs are one ofthose categories that jumps out
to me as a contrarianopportunity within the sector
framework, within an assetallocation framework that a lot
of people aren't talking aboutbut have characteristics, yield,
(20:41):
relative fundamental strengthand a relative valuation case
that might portend to strongrelative performance.
And a lot of people don't knowthat if you go back 25 years and
I know a lot of people aren'tgoing to go back that far when
they're thinking aboutallocating to their portfolio
but REITs are one of the best,if not the best performing
sectors in the market over 25years, and so this five-year
(21:04):
period in many ways hasdissuaded a lot of people from
allocating seriously to thecategory.
But the argument we would makeis to revisit it this moment in
time with a mean reversionopportunity in terms of that
relative performance.
Speaker 2 (21:19):
And you mentioned the word AI briefly, but I wanted
to ask you I mean, investors arestill chasing AI exposure.
Are there ways to play the AIstory beyond the obvious tech
and semiconductor names?
Speaker 1 (21:31):
Yeah, we often talk about AI adjacencies, because if
you hear a conference call froma Microsoft or a Meta or an
Alphabet and they're talkingabout CapEx budgets in aggregate
of $80 billion, about CapExbudgets in aggregate of $80
(21:51):
billion, $90 billion a year,that money is going to GPUs from
NVIDIA and that's part of thereason why NVIDIA shares have
been on such a run and why it'sone of the most valuable
companies in the world.
But it's also going to some ofthe infrastructure that's going
to be necessary to support theselofty AI ambitions, and that
infrastructure spans from chipsto the computers themselves or
(22:16):
to the data centers.
And then, importantly, theknock-on effect of that is, if
we're going to build all ofthese data centers to ensure
that when someone plugssomething into LLM, that it
actually works because there'selectricity available to them,
well then we need a better gridand we need to ensure that that
grid is modernized and isaccommodative of the increased
(22:37):
load.
And when you think about whobenefits from increasing
electricity demand and,depending on the forecast you
look at, we're talking aboutelectricity demand growth here
in the United States that wehaven't seen since the 1960s
Well, utilities companies arecertainly a part of that.
Energy infrastructure companiesare certainly a part of that,
because those are the companiesthat are moving the natural gas
(22:58):
from where it's produced towhere it's consumed,
increasingly in the form ofelectricity demand or
electricity generation andsupport of AI data centers, and
so, to that end, it's reallyabout trying to build a mosaic
of picks and shovels.
Equivalent exposure to the AIstory.
Midstream companies thatoperate the pipelines, the
(23:21):
storage, the processingfacilities that ensure the
natural gas is available to theconsumers of it are critical.
So ENFR is our energyinfrastructure ETF that provides
exposure to those companies,has benefited from some of these
AI adjacency trends, as we termthem.
We also launched anelectrification ETF back in
(23:42):
April, ticker ELFY, whichcombines utilities companies
with materials companies,industrials companies,
technology companies as well asenergy infrastructure companies
to give you comprehensiveexposure to the electrification
theme, and so to put a bow onall of that, I think the idea is
most people think about AI andthey think about technology
(24:05):
companies, software and servicescompanies, semi-companies, and
those are, in many cases, themost direct way to play AI.
But you also have to think aboutthe second derivative, if you
will, of AI investment and thesemassive CapEx budgets, and
where that money is going to go?
It's going to go to copper.
It's going to go to some of themetals that are required to
(24:29):
ensure that the construction ofthese data centers goes on
without a hitch.
It's going to go to investmentin utilities infrastructure so
that the utilities in thiscountry can invest in the
necessary capacity to supportthe ongoing electricity demand
growth.
And I think it's no accidentthat when you look at the S&P
(24:50):
500 in 2024, the best performingstock outside of Palantir,
which was added mid-year, wasactually a utilities company,
and that was the first timereally since the turn of the
century that a utilities companyhas been the best performing
stock in the S&P 500.
And it's reflective of some ofthe companies that are
benefiting indirectly from theAI story and are going to be
(25:13):
really at the heart of ourability to meet the increasing
electricity demand coming fromAI consumer level trends like
switching from ICEs to EVs, fromyour gas stove to an induction
stove, from a typical heatingand air conditioning unit to a
(25:37):
heat pump, etc.
All of which, at the margin,increase electricity demand at
the consumer level, at thecommercial level, and then
wholesale from a step functionas a result of these massive AI
data center projects, the likesof which we really haven't seen.
Speaker 2 (25:52):
Really interesting.
Paul, just before you go, canyou let people know where the
best place is to follow you andto learn more?
Speaker 1 (26:00):
Sure.
So the website, easy toremember alpsfundscom for all of
the information you'll need onall of our products, all of our
strategies.
Need, on all of our products,all of our strategies, the
insights from our very seasonedresearch teams, as well as some
of our sub-advisory partners whoare experts in categories like
REITs, like muni bonds, fixedincome, as we talked about, as
(26:22):
well as categories like energyinfrastructure, where we have
the largest, most liquid MLP ETFin the market, and we've been
doing this now for 15 years interms of supporting that energy
infrastructure story as theindustry has evolved.
Speaker 2 (26:35):
Yeah Well, thank you so much for joining us and thank
you all for watching.
Don't forget to like, share andsubscribe for more
conversations with the peopleshaping today's markets.
I'm Melanie Schaefer and thisis Lead Lake Lies.
Popular Podcasts
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
The Clay Travis and Buck Sexton Show
The Clay Travis and Buck Sexton Show. Clay Travis and Buck Sexton tackle the biggest stories in news, politics and current events with intelligence and humor. From the border crisis, to the madness of cancel culture and far-left missteps, Clay and Buck guide listeners through the latest headlines and hot topics with fun and entertaining conversations and opinions.