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Roundhill Investment Chief: 5 stocks WIN the LATE-STAGE AI CRASH — Transcript

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0:13episode.
0:15Okay, Drew, big picture here. How would
0:17you describe where we are today in the
0:20market?
0:21>> Okay, late cycle. Let's start with that.
0:24So what does that mean? Nothing is easy.
0:28And nothing's cheap. So this is
0:31I'm coming in hot here, but
0:34at the end of the day, we are in a bull
0:36market. It's not a new one. It's an
0:38older one. And old ones get a little bit
0:41cranky at times, kind of like dads after
0:44Halloween that haven't slept a whole lot
0:46with hyped up, sugared up kids.
0:49But when you're in these older bull
0:51markets, nothing's cheap.
0:52So when we start thinking like, oh, the
0:54market might be getting cheaper at this
0:55point, it's not.
0:57So when I look at the market, when I
0:58think about where we are, when I think
1:00about a real late cycle environment, it
1:02means expectations are really high.
1:06And now it's funny because I sound like
1:08a bear, but you're going to probably
1:10hear me say this a few times on
1:13throughout our chat today, Phil. It's
1:14going to be
1:16if you want to be a good bull, you got
1:17to understand the bear. And I think the
1:19starting point for any bear is this is
1:21not
1:22early cycle. It's late cycle and
1:24nothing's cheap.
1:26>> Okay, so I would
1:27counter that because a lot of the most
1:31bullish investors out there are saying,
1:33hey, third inning of the AI cycle right
1:35now or the infrastructure build out.
1:37What makes you so sure that we are late
1:40cycle as opposed to
1:42third inning of a nine inning game?
1:44>> So late cycle market wise, this is what
1:48I think's fun. We could be, and I think
1:51we are, to be fair, and this is why I'm
1:52bullish and I'm really constructive on
1:54the build out here in the fundamentals.
1:56I don't think it's late cycle for where
1:59fundamentals
2:00But markets don't work backwards.
2:03That's the one thing I I I learned after
2:05about 10 years at City and getting beat
2:08up by a whole bunch of big institutional
2:10investors. I don't care what happened
2:12yesterday. I don't even care what might
2:14happen tomorrow. We're starting to price
2:17things not even on this quarter,
2:19maybe not even next year because people
2:21can really see how big this build out
2:23is. I think people are really
2:24comfortable on on 2027 numbers at this
2:27point.
2:28Markets discount future cash flows and I
2:32think people are looking beyond 26 and
2:3427 right now. So it's how much growth
2:37are we going to get? The further the
2:39market looks out, the further along the
2:43bull market is and more late cycle it
2:46feels, even though fundamentals might
2:47feel earlier.
2:49>> Okay, so I I have a question about
2:51something you just said. Stocks are not
2:54getting cheaper is what you said.
2:56>> Yeah.
2:57>> However, if you look on a PE chart,
2:59which actually you you sent one over, um
3:02it does look like they're getting
3:03cheaper. Like valuations have
3:05compressed, let's say, since the start
3:07of this year.
3:08What do you mean when you say stocks are
3:10not getting cheaper?
3:11>> Yeah, [clears throat] so actually you're
3:12dead right and I see it too. Markets up,
3:15PEs are down. E's up more than P.
3:19Great, that's good. That's not that's
3:20not a bad thing, but
3:24interest rates are higher.
3:26That means growth has to deliver more.
3:28Stock prices are up a lot from where
3:30they are and price, let's be real, price
3:33is the only thing we really know, how
3:35much I'm going to pay for this stock
3:37today that I want to buy. It's the only
3:38thing I know.
3:39Everything else can get adjusted and
3:41changed and it's dynamic and moves.
3:44Prices are higher, so expectations are
3:46higher. And then when you really think
3:48about where the value comes from a
3:50stock,
3:52it's not in the quarter,
3:54it's not in the year,
3:56it's not in the first year,
3:57not in the second, third, or fourth
3:59year. Most value of a stock comes from
4:02more than five or ten years out.
4:04So, when you start to look at what price
4:07means and how much I expect to earn on
4:11stocks. Sorry about the mic, fellas.
4:13It's
4:15the value doesn't come from today. It
4:17comes from the future. So, this is why
4:20you know, it's funny for somebody my
4:22age, I probably do more DCFs, discounted
4:24cash flows than anyone's ever talked
4:26about.
4:27When I try to figure out how much growth
4:29is priced in,
4:31how much growth do I need from today to
4:33justify the price?
4:35And I look at the market from that lens,
4:38that growth expectation is still near
4:40ten-year highs.
4:41It has come down a little bit this year
4:44and earnings the starting point for
4:46earnings keeps going higher, but that
4:48level is still much higher. And if you
4:50were to really kind of tease this out,
4:52where growth expectations are, the
4:54market's not
4:55trading at 20 times forward. It's
4:57probably reacting and feels more like
5:00it's trading at 24 times earnings.
5:02So, it's yeah, PE comes down naturally,
5:05but growth expectations are still high.
5:06That's why you see volatility even when
5:08companies beat earnings right now.
5:11>> So, do you think it's fair to say then
5:13even if asset prices are
5:15I would say not stratospheric because
5:18valuations have come down,
5:20there is a something of a bubble in
5:22expectations. Is that the right way to
5:23think about it?
5:24>> Not bubble, they're high.
5:26They might be at ten-year highs. They're
5:28not at all-time highs.
5:30And look, like if you did this on the
5:31Nasdaq during the tech bubble, it would
5:33be you know, you got a compound earnings
5:35probably ten, 15, 20% into infinity.
5:37That's a little bit nuts. But we're
5:39talking about a growth expectation now
5:41that's about five or 6% and when you
5:43think about high growth companies,
5:45it's attainable. So, back to
5:48back to like my I
5:50I almost want to say just
5:51my training and how I think about stuff.
5:55Again, to be a good bull, you have to
5:57know the bear.
5:58Growth expectations are high, but I
6:01think they're attainable and the
6:03revisions and the expectations for
6:05growth going forward,
6:07they keep moving up and up. So that
6:08keeps me bullish even though I
6:10understand where the bears are coming
6:11from.
6:13>> This episode is sponsored by Bloomberg.
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6:41get back to this episode.
6:44Okay, so just so I can understand this
6:47myself, you are bullish and constructive
6:50on where the market is even though we're
6:53late cycle and even though you
6:56are trying to make the bear case here,
6:58that's not your base case. Is that
7:00right?
7:00>> No, I it's I want to know what bears are
7:03saying.
7:04And I it's funny because everyone likes
7:07kind of posting the scoreboard. Oh, this
7:09guy was bearish. This girl was bearish.
7:12And they were wrong. Look how silly they
7:13are. You need that bear.
7:17You need the bear in the market because
7:19guess what? If I'm bullish and I already
7:21hold the stock, I don't make it go up.
7:24Holding a stock and liking a stock
7:25doesn't make it go up. What makes it go
7:27up is finding a new buyer of it.
7:30So a really good argument that can
7:32convince someone that's on the sidelines
7:34or negative on a stock to change their
7:36opinion is what makes it go up.
7:40So when I say you need bears in the
7:42market, well, who's going to be the next
7:43buyer? You got to find someone that
7:45doesn't own it already.
7:47>> That is a great distinction there. Um
7:49Drew, you have this chart that shows how
7:52the AAII investor sentiment survey
7:54[snorts] is pretty bearish right now. At
7:57the same time, we have stock allocations
7:59near all-time highs.
8:01What is going on here?
8:02>> Oh man, this is
8:04we're just bringing up all the stuff
8:05that's super hard to measure. Number
8:07one, hard to measure what's priced in.
8:09And number two, really hard to measure
8:11sentiment.
8:12So people always do these surveys.
8:15Phil, how do you feel today?
8:17If you had eight hours of sleep,
8:19unlike me, you probably feel better.
8:22If you had a bad night and someone calls
8:24you up, well, how do you feel? Or you
8:25lost money in the stock market
8:26yesterday, I probably feel bad.
8:29But how you might behave in your
8:30portfolio is completely different.
8:34Just because I'm cranky and didn't sleep
8:36and didn't have enough coffee doesn't
8:37necessarily mean I'm going to go sell
8:39all of my stocks in my portfolio.
8:41So this is where I like to come in and
8:44talk about sentiment because I want to
8:45know what's priced in and I want to know
8:48how
8:49investors not feel about the market, but
8:52what they're doing. Where is sentiment?
8:55So the AAII survey, they call people
8:59every week. How do you feel about
9:01stocks? Are you bullish, neutral, or
9:03bearish? That has a lot of volatility
9:05because we're humans.
9:07At the end of the day, stock prices are
9:09just an amalgamation of what all of us
9:11crazy, fun, unique humans are doing.
9:15But
9:16how they feel
9:18is different than the real, what they're
9:21actually doing.
9:23And that same company that does a
9:24sentiment survey that everyone watches
9:27every week because it can make a
9:28headline, up or down, lots of
9:29volatility,
9:31what's not changing is people are still
9:33holding stocks. That is still near an
9:36all-time high.
9:37So when you break it down, the real is
9:40investors are still bullish.
9:42The feel, as we got into the beginning
9:45of this volatility, is uh I don't feel
9:47good. So when you put it together, the
9:50real versus feel is disconnected.
9:52>> Do you think that's enough evidence then
9:54that we can just ignore sentiment
9:56surveys?
9:57>> To an extent, yeah. I think there's just
9:59a better way to do them.
10:01So back to
10:02price.
10:04Price matters. Price tells you what
10:06people are really doing.
10:08And there's a lot of price data that you
10:10can get out there every day.
10:12And the the price data that we started
10:15digging into at Roundhill was the
10:17options data.
10:18Cuz when people are again, not just
10:21individuals trading options, but big
10:23institutions do it all the time, again,
10:25they're transacting at a price. They can
10:27see what they're doing. You know what
10:29they're really doing, the real price
10:31that they're paying.
10:33Where do they expect volatility to be?
10:35You can look at the VIX.
10:37You can look at term structure, which is
10:39basically is the VIX higher for the next
10:429 days or the next 3 months? You can
10:44look at how much they're paying for big
10:47moves way down and way up. That's skew.
10:51You can dig into how much they expect
10:54the VIX to move, vol of vol. We take all
10:56these these price indicators from
10:58options and we put it together in our
11:00sentiment model.
11:01And that's how we can figure out for
11:03real, the real what people are doing
11:07when it comes to markets. So sentiment
11:10surveys, they're interesting to me to
11:13look at, but they're not interesting to
11:16me to actually measure sentiment.
11:19>> Hm. I I think that's fair. I always take
11:22them pretty skeptically, I'd say,
11:24whether that's investor sentiment or
11:26even uh consumer surveys about how
11:29people feel about the economy. Those
11:31always seem uh politically skewed and
11:34the sampling size and the sampling bias,
11:36there's always something going on with
11:38those consumer surveys.
11:41Drew, there's another chart I want to
11:42ask you about here. You have S&P 500
11:45rolling 21-day pairwise correlation over
11:47the last 5 years.
11:49My read on this from, let's say, an
11:51amateur's perspective,
11:53it looks like it's right near 5-year
11:54lows. Uh help me understand what that
11:56actually means. Like why show this chart
11:58here?
11:59>> Yeah, so this is really interesting
12:01because
12:03my mentor
12:06for years and years
12:07kept beating me up on this one point.
12:10It's not a stock market, Drew. It's not
12:12a stock
12:13It's a market of stocks. And I
12:15Okay, sure. Let me just figure out how
12:17to do my job today. And then I I really
12:19look at it. And why is it a market of
12:21stocks? Because we think of the stock
12:23market as risk. Oh, that's you have
12:26stock risk. You have equity risk in your
12:27portfolio. No, you have
12:29if you buy the S&P 500, you have 500-ish
12:32stocks that all have their own
12:34individual risk. What correlation tells
12:36us
12:38and this is pairwise or like internal
12:40correlation, the chart looks at industry
12:42groups. People do this at a single stock
12:44level. You can do it a whole bunch of
12:45different ways. But all these different
12:47collections of stocks, are they moving
12:49similar to one another or are they
12:51moving different?
12:52And that matters a lot
12:55because that tells you how much
12:56diversification you actually have in
12:58your allocation.
13:00If I buy the S&P 500 like today, now,
13:05it is not as volatile as it feels
13:08because
13:10when AI drops, like we felt lately,
13:13you're starting to see energy and some
13:14other things pop.
13:16So you have this this kind of divergence
13:19in how things move directionally. That's
13:20why correlation, how things relate
13:22directionally, how they move
13:23directionally versus one another is
13:25different. So that's why it might feel
13:28like we are in this like gross, terrible
13:30bear market, single stock volatilities
13:33way up,
13:34but the VIX is still low and the S&P
13:36isn't even in a correction at this
13:38point.
13:39You're kind of sitting there going,
13:40well, why hasn't that happened?
13:42Well, because things are all all moving
13:44independently of each other, more so
13:45than usual.
13:47And I don't think that's actually
13:48inefficient.
13:50>> Hm. What what does that mean?
13:52>> You it's funny talking to macro like
13:55let's think about people that think
13:56super high level. And it's funny because
13:57I'm a strategist and people expect me
14:00like, oh, he's going to talk about the
14:02market, all all the these big broad
14:04things.
14:05No, it's again, back to it's a market of
14:06stocks.
14:08Instead of trading the S&P 500 when I
14:10see a risk pop up,
14:12I'm going to go trade the stocks that
14:14matter to that risk.
14:16So if oil spikes
14:18and inflation' really sticky,
14:21do I trade AI stocks? No, because it it
14:24really doesn't matter. It's early cycle
14:27and AI adoption. That's not going to
14:29change the fundamentals.
14:30But should I sell my consumer staples
14:32that can't move price and all their
14:34input prices went up? The market does
14:36that. Should I trade oil stocks higher?
14:39Should I trade the refiners? Should I
14:41trade something else? Like the market is
14:43being very I I call it micro efficient.
14:45They're efficient at trading stocks
14:48based on changing risks. People are not
14:50just trading the market based on some
14:52risks they see.
14:53>> So is one way to think about this then,
14:56let's say as a individual investor,
14:58increasingly this is a stock picker's
15:00market rather than, hey, buy and hold
15:02the index?
15:03>> I think this means find different types
15:07of risk. The why the the reason I I say
15:09it's not necessarily a stock picker's
15:10market
15:12and it's funny because a lot of people
15:13would say, oh, when when stocks move
15:14independently of one another and
15:16dispersion's high, that should be great
15:17for stock pickers. Well, not really
15:19because nothing gets dislocated long
15:20enough.
15:21So if I'm a stock picker, I actually
15:23want correlation really high.
15:25This is this I'm I can't wait for
15:27someone to blow me up on this point, but
15:30I want my stock that isn't hurt by
15:33whatever event that makes you sell the
15:35index so I can buy it cheaper than it
15:37should be.
15:38Today we don't have as much of that. I
15:41think there's a lot of reasons retail
15:44people that are watching this probably
15:47talk more about single stocks and trade
15:49more single stocks than they ever have.
15:51Well, guess what? The hedge funds that I
15:52used to work with
15:54they don't trade as much index. They're
15:55looking for baskets of stocks. And those
15:58baskets of stocks aren't 100 names long
16:01anymore. Hey, give me 20 really good
16:03ideas around this risk. Okay, 15 10 over
16:06there. Even look at the ETFs, like even
16:09some of the ones that we've launched,
16:10like DRAM,
16:11that are absolutely growing rapidly
16:15because people are looking
16:17to make more specific trades around what
16:21they're seeing, good or bad. That's
16:23micro efficient. That's why
16:25correlation's low.
16:27>> It's funny you say people are looking
16:28for different risks to trade. That to me
16:31sounds like you're describing thematic
16:33investing. Is that the same thing?
16:34>> Yeah, thematics,
16:36thematic industries even, different
16:38parts of AI, different sectors. Again,
16:41anything more focused around
16:44a very specific
16:46fundamental narrative, story, risk.
16:49There's a million different names we can
16:51call it, but I do think the way the
16:55world's evolved for not just individual
16:57investors, but for institutions, it's
17:00about precision.
17:02>> Hm. And so I I will say uh Roundhill I I
17:06follow you guys very closely. I follow
17:07your work. You guys are excellent at
17:11picking very niche uh thematics, let's
17:15say. Even uh like memory bottlenecks.
17:17You guys nailed that. And that's a
17:19really interesting theme that's going to
17:20last, I think, for a very long time. And
17:24therefore the assets will probably
17:25continue to accrue for a very long time
17:27to a theme like that.
17:29Let me ask you about the Mag Seven.
17:30They're only up about 6% this year,
17:33lagging the S&P 500. Roundhill has a Mag
17:36Seven ETF. It's M A G S, Mags.
17:40How are you thinking about the Mag Seven
17:42as a group, as a trade right now? Do you
17:44have favorites in this? What's going on?
17:47>> Lots to unpack. It's
17:49It's still seven
17:51>> you want.
17:51>> It's It's fun cuz it's seven of the most
17:53important stocks in the market still.
17:55And it's funny why that moniker has
17:57lasted so long. Even if they
17:59underperform, why do you care about
18:00them? Because they're
18:02they have major impact on the rest of
18:05the market, the capex they spend, the
18:07financing they back,
18:09the themes they represent.
18:12It all matters, matters, matters. So I
18:14think the relevance even when they
18:15underperform stays pretty high. So the
18:18nice thing about having Mags is you can
18:20trade the group. What I've
18:23come to realize,
18:24anytime I personally feel terrible about
18:27one of those stocks is probably when I
18:29should have bought them.
18:30Think about Meta this year.
18:33Uh, Meta's dead. It's behind. It's
18:35lagging. They come out with Muse. It
18:37pops.
18:38Oh man, now I'm chasing Meta.
18:40Google, left for dead, AI dinosaur,
18:43search is getting killed.
18:45Oh wow, cloud revenue's growing really
18:47fast.
18:48Microsoft software's disrupted. That
18:51quarter looked pretty good. [laughter]
18:53Amazon, consumer business under
18:55pressure. Oh wow, look at all the other
18:57growth and what it's doing with AWS,
19:01where it might even be competing with
19:03the SpaceX. Like you start sitting there
19:04and you you sit back and you look at all
19:06these stocks and they're big and dynamic
19:09and innovative. They're the most
19:11differentiated
19:13they've ever been. It's so hard to pick
19:15within them.
19:17But you put me on the spot,
19:19if I had to pick
19:21in the Mag Seven right now,
19:23Microsoft, technically, I'll give Thomas
19:25on my team does a ton of great work on
19:27this.
19:28Software's technical setup is a lot
19:30easier short-term.
19:32And Microsoft is working off this point
19:34where sentiment was low, expectations,
19:37what was priced in for growth was
19:38relatively low. I think that's a much
19:41easier bar to clear. So I like having
19:43Microsoft and then I want to pair it
19:46with I want to couple it with something
19:48else in the Mag Seven.
19:50Meta, Amazon, or Google. Give me one of
19:52those three hyperscalers and what
19:54they're doing.
19:56They don't pop and work at the same time
19:58as Microsoft. I like owning them
19:59together.
20:00So if you're not going to own the whole
20:01Mag Seven, make sure you have a little
20:04bit of differentiation within the group.
20:07>> Okay, I um I own Google. I think that's
20:11the only Mag Seven I currently own. I
20:13like that stock a lot. Maybe I should
20:15get into Microsoft. I don't know. I'm
20:17I'm not as bullish on the software theme
20:20at large. I And maybe I'm just holding
20:23on to getting spooked out of the SaaS
20:25pocalypse earlier this year. Since then,
20:28I kind of just don't want to deal with
20:29it. Is that something that factors into
20:32how you're you're talking about this?
20:33>> Yeah, cuz it's different type of risk.
20:35Isn't it funny? We're talking about AI
20:37and we're talking about risk to AI. So
20:40the hyper scalers,
20:42Amazon and some of these other companies
20:44that are having to put a hell of a lot
20:46of money up front for CAPEX, have a
20:48different type of risk, different type
20:50of opportunity.
20:52Microsoft on the other hand, like yeah,
20:54they are developing. Yeah, are they
20:55doing like compute and so on? Yes.
20:58Uh the growth expectations are just
21:00different there.
21:02And the risk of disruption near term
21:05that probably got a little too
21:07aggressively priced in gives you a
21:08different type of risk if you own
21:10software.
21:11Like look, we we actively manage one of
21:13our ETFs, chat.
21:15And that's where we look at AI and
21:17generative technology as a whole.
21:19And look, we're we're very
21:21very aggressively tilted to hardware and
21:24semis and a lot of the bottlenecks. That
21:27really drove us to look at something
21:29like memory as a a standalone ETF.
21:32Those make a lot of sense and they have
21:34runway fundamentally, but we know the
21:37stocks have moved.
21:38What we've been lagging into is a lot
21:41more software names over the past few
21:43months. And you're starting to see like
21:45the AI narrative change that it's not
21:47one versus the other. All of these are
21:50probably going to have to work all
21:51together at some point.
21:53You're going to need software companies
21:56that have relationships with end people
21:59that will use and adopt AI into their
22:01organizations as almost a point of sale
22:04for what the back end might be building.
22:06>> Yeah, those are really good points. Um
22:09it's interesting. I I actually didn't uh
22:10have chat on my radar as a ETF that's
22:14I'm going to look that one up. Um I want
22:15to ask you about photonics and optics.
22:17Roundhill does have an ETF for this,
22:20LYTE, light.
22:22Tell me about this trade as a theme and
22:24then also I want to get some of these
22:26specifics in this fund.
22:27>> Yeah, so we just went out with our first
22:31ever, we call it Focus Five.
22:33Our top five ideas based on our market
22:35outlook. And when we're looking at AI
22:38within this idea that we're late cycle
22:40in a more volatile phase and a volatile
22:42volatile older bull market,
22:45what trade in our portfolio did we like
22:48as our favorite AI on pullbacks trade?
22:50And Photonics stuck out.
22:53The reason is you still have
22:56this bottleneck. You can see that they
22:57have pricing power.
22:59You can see that
23:02they have visibility into earnings
23:04multiple years.
23:06On the sell off where Neo Clouds been at
23:09the heart of all this and financing,
23:12you've beaten up a lot of names that are
23:13very debt sensitive.
23:15Well, guess what? Photonics aren't. When
23:18you look at some of the biggest names
23:20in that group,
23:22they've actually reduced
23:24their debt risk over the past few years.
23:27But here's the but, quality looks
23:30better, it's gotten better, but they've
23:32traded down just like a Neo Cloud.
23:35So when you kind of sit there
23:37and step back for a minute, maybe there
23:39is a little bit of inefficiency that
23:40these things are getting sold off a
23:41little bit aggressive. That's why they
23:43they've been our favorite AI on
23:44pullbacks trade.
23:45>> So it's it's almost like people see the
23:48AI negative sentiment and they're just
23:50going to sell anything with any exposure
23:52to AI.
23:53>> Especially things that they feel should
23:55be higher beta, which basically will
23:57higher risk. What's higher risk? Smaller
23:58companies. They throw the Photonics
24:00names in there too.
24:02>> Got it. Okay. So one of the names you
24:04have here, Coherent, COHR,
24:07it's up about 6% this year. Tell me
24:09about this stock.
24:11>> Look, deleveraged. They have less debt.
24:15They have declining debt ratios, but
24:18this thing is the baby that's getting
24:19thrown out with the bath water.
24:21And it's funny. Another behemoth in the
24:24space, like in that Photonics space that
24:26I really like is Lite, L I T E, hence
24:29why L Y T E is our ticker for our fund.
24:33It looks really interesting to me, but
24:35we just have the news lately that makes
24:37it a where Marvell has agreed to acquire
24:40them in an all stock deal.
24:42So it's a little bit messy trying to
24:44trade Light right now because of the
24:46corporate actions.
24:48But when you really think about what
24:49that deal means for another good high
24:52quality player in the space,
24:55that bottleneck has value. Enough value
24:58where Marvell is looking to make an $80
25:01billion plus dollar purchase of
25:03Lumentum, of Light.
25:05>> You know, you're the second investor
25:07this week to tell me they really like
25:09Lumentum.
25:10So that's
25:12hopefully a good sign. Two smart people.
25:14>> ho hopefully he was a bear that's now a
25:16bull.
25:16>> Yeah. [laughter] Yeah.
25:17>> buyer. But we'll see. It's it's it's a
25:19messy story, but I think like longer
25:21term it's a bottleneck that matters.
25:23Moving data faster, more efficiently in
25:26data centers thematically is not going
25:28away. And these companies are actually
25:31better operators than they used to be 5
25:33years ago and they're not throwing on a
25:35ton more debt.
25:37I think it's an interesting quality AI
25:40trade that that's kind of been lumped in
25:42with some of the
25:43the more cyclical higher levered trades.
25:45>> I like it a lot. Um
25:47there's this idea of Halo stocks with
25:50Josh Brown which Josh Brown came up with
25:52earlier this year. Heavy assets, low
25:54obsolescence.
25:55Roundhill, of course, has an ETF around
25:58this, L O H A, which is Halo Rearranged.
26:03Tell me about this theme and why you
26:04like it.
26:05>> Uh Loha. Loha. Halo versus Loha here. Um
26:08>> out.
26:09>> so
26:11I said correlations down. I love kind of
26:13tying together like our narrative. You
26:15can see like how
26:16how we're doing our work at Roundhill.
26:18We're we're not an ETF issuer, but we're
26:21a bunch of market nerds that get in the
26:22weeds and that's how
26:24we find these things.
26:26And
26:27Loha's risk,
26:29it's just a different type of risk.
26:32And that's why it
26:33it works so beautifully alongside the AI
26:36trade right now.
26:37So if you look at Lohaw, it doesn't have
26:39a lot of overlap with like the S&P 500.
26:42Almost like next to nothing with Nasdaq.
26:46And well, nothing with MAGS.
26:48So it's it's interesting cuz it's
26:50different.
26:51But it it's volatile. It has its moves.
26:53It has a lot of exposure to like energy
26:56names, materials, construction,
26:58cyclicality, cyclical risk, the old
27:01school down and dirty stuff that gets
27:05made in the real world.
27:07But
27:08it's not a whole bunch of low beta,
27:11low volatility quant stocks that have
27:14no growth.
27:15These things have growth. They have
27:17earnings volatility. They move.
27:19But you get it where there's not a lot
27:22of growth priced in and they actually
27:24will grow and move. They just don't move
27:27at the same time as the AI trade.
27:29>> Which I think we need more of those in
27:33like the collective our portfolios. We
27:35probably need more of those because
27:37everyone has so much tech and AI
27:38exposure. You're probably underweight
27:41stocks like the the the boring stocks
27:43frankly. Um one of the stocks you named,
27:46Canadian Natural Resources,
27:50This is up almost 60% this year.
27:52>> Yep.
27:53>> Pretty good pick. Do you still like it
27:55at these levels?
27:56>> Yes. Why is
27:59the the issue here. So you can go buy
28:01Exxon.
28:03Exxon's up a whole bunch this year.
28:04Energy prices are up. Anything tied to
28:06energy would be. CNQ is.
28:09A little bit of
28:10different kind of energy and a little
28:12bit of
28:13refining exposure and it it it sells
28:16into like a different market, more into
28:19like
28:20diesel and petrochemicals, not just kind
28:23of traditional stuff like that's
28:25the oil they sell is what gets refined
28:27into like physical things that you use
28:30in asphalt and so on. So the story's a
28:32little bit different. So volatility
28:34compared to a big integrated oil
28:36company's actually higher. So, I have
28:38more leverage to choke choke points
28:42in energy refining to energy price
28:44moves. And even if the prices come down,
28:47if the refining spreads are still wide,
28:49you probably have a different profile
28:51here.
28:52So, when I think about it, these might
28:55sound like boring stocks cuz they're not
28:57tech,
28:58but they have a lot of volatility and
29:00movement. They're a different kind of
29:03risk. I guess maybe boring cuz it's not
29:05tech risk and it's not fun and gadgets,
29:07but in a portfolio,
29:10they move. You feel them, but they just
29:12move at a different time. That's the
29:13key.
29:14>> Well, boring also because no one writes
29:16about them. Like you don't see these
29:18names in the news if they're not AI
29:20stocks.
29:21>> That's that's the beauty of them. And
29:23that's why the growth expectations are
29:25so low.
29:26>> The the less people are talking about a
29:28name, the more bullish it is, gen-
29:29generally speaking.
29:30>> Yeah, it can be cuz you got got a chance
29:32to find that new buyer, right? Back to
29:34tying something together. The sentiment
29:37here lower, you can find more people.
29:39>> This next stock which you shared with
29:41me, Kirby Corporation, KEX.
29:45It's up 28% this year. Also a Halo
29:48stock.
29:49What is this name? I've never heard of
29:50this.
29:51>> Okay, this might actually be boring. Um,
29:53[laughter]
29:54they literally operate ships
29:57and move
29:59oil and refined products within the
30:01United States.
30:03They it's a barge company. They move
30:06stuff from point A to point B. They're
30:08kind of in this random I I would say
30:11like transportation, but energy
30:13transportation sector that's not a
30:14pipeline.
30:16>> Sounds very economically resilient.
30:18>> It is. And yeah, there's some nuances
30:21that kind of protect their moat here,
30:23but also not too many people are just
30:25building ships, large big barges
30:27overnight, right?
30:29What's not boring about them, what's not
30:31boring about CNQ, what's not boring
30:34about the Mag 7 as a whole in AI stocks,
30:38they all actually have something in
30:39common.
30:40Their revisions, the estimates, the
30:43earnings expectations by Wall Street
30:46have moved up for most of the year.
30:49So while it might be a boring business,
30:51it's a boring business people have
30:53underestimated.
30:55So back to almost the top
30:58discussion here.
30:59A late stage bull market, nothing is
31:02cheap,
31:03but how does a stock go up when people
31:05underestimate it? And this to us fits
31:09into that narrative. It's a different
31:11type of risk.
31:12It's still late cycle.
31:15We're okay with risk as long as there's
31:17a story that tells me why I should buy
31:19it when it's not cheap. And that's the
31:21revision pattern.
31:22>> So are most of the stocks
31:25that you guys put into these funds,
31:26let's say,
31:28you are looking for that revision
31:30factor? Is that one of the big variables
31:32that goes into all your themes that
31:34you're looking at?
31:35>> No, it's not because at some point the
31:38revision story in a different market
31:41cycle won't work. What we're trying to
31:43put into the funds that you see in our
31:45lineup
31:46are the stocks that are tied to the
31:48industry and the thematic that are pure.
31:52What is a memory stock? We know what
31:55those are. Let's get that defined group
31:57right. Again, get the bucket right. What
32:00we want investors to know is we care
32:02about the tools we make. We want them to
32:04be representative of what they're
32:05supposed to be. And then what we're
32:08trying to do, like my job, why I'm at
32:09Roundhill, is try to take this
32:11I don't want to say mess, but I'm going
32:13to say mess, of all these different
32:15themes and all these different types of
32:16risks and try to highlight what we think
32:17makes sense.
32:19So whether you like memory today or not,
32:21we would expect people to kind of trade
32:24the ETF if they want good exposure.
32:27If you want hard assets, we think Loha
32:29gives you a good group of hard asset
32:31stocks. If you want neo clouds, we do
32:33that. If you want photonics, we do that.
32:35If you want the Mag Seven, you know what
32:37you're going to get there.
32:38If you want
32:40multi-layer ceramic capacitors,
32:42something we've
32:44you and I our brains would explode
32:46trying to figure this out, but if you
32:47want exposure
32:49to industry thematics that are focused
32:51and trade ideas to put in your
32:53portfolio,
32:54we want to make
32:56the right tool for it, whether it's
32:57right for the market environment or not.
33:00>> And I think one of the advantages of
33:01thematic investing in general, we've
33:03seen this sort of renaissance time for
33:06thematic investing.
33:08Retail does not have to be stock
33:10picking,
33:11which is I think very advantageous. Even
33:13for myself, I live and breathe markets
33:15all the time, but if I see a theme to
33:17buy, it's way lower of a barrier to
33:20entry for me than trying to do the work
33:22on a single-name company. So I think
33:25Roundhill and your competitors, you've
33:27all done a very good job at almost like
33:28democratizing thematic investing. That's
33:30really interesting because it used to be
33:33just hard to figure out as an individual
33:35investor.
33:37I I want to ask you about
33:39why you made the jump to Roundhill
33:40because you did have
33:42a long and big career at Citi,
33:44obviously one of the biggest Wall Street
33:46banks we have,
33:48and now you are at a relative upstart
33:50compared to Wall Street Bank.
33:52Why did you make that jump? Because I
33:54think a lot of people would have not
33:55made that jump.
33:56>> Yeah, I guess I like being
33:58uncomfortable. I have dad back, that's
34:00why I'm fidgeting around in this chair
34:02the whole time, but the
34:05what you said
34:06about thematic investing in its
34:09resurgence,
34:11I saw that on the street.
34:13I spent a lot of time with our traders
34:15talking about baskets, trying to come up
34:17with new ways to slice and dice markets
34:19for big institutions.
34:21And
34:23they were thinking about the world
34:24differently, and these companies were
34:25evolving faster than
34:28large cap growth and large cap value
34:31styles were. Even the factors were
34:33starting to look old and dated, and
34:35people were looking at new ways to do
34:38investing.
34:40And guess what? If institutions do it,
34:42there's no reason retail can't and
34:44shouldn't. So this resurgence of
34:46thematics and and look, I I see it in
34:49the ETF flow data too. Thematics were
34:52almost like next to nothing of US equity
34:54flows a couple years ago. You're certain
34:56to see them be like a bigger portion of
34:58flows like in the last few years as it
35:00comes back.
35:02That's because the world and investing
35:03world
35:04is evolving faster than these old
35:06traditional constructs that people used
35:08to get in ETFs.
35:11Tech is a sector
35:12now is broken apart over three or four
35:14different sectors, depending how you
35:16want to look at it.
35:17The styles,
35:19well, they get messed up
35:21when you look at how companies change
35:22faster than their data changes.
35:25Memory stocks, are they growth stocks or
35:27they value stocks? Well, if you asked
35:28Russell and S&P, they told you something
35:30different at the beginning of the year.
35:32So I I
35:33have a very strong belief
35:36that good thematics, good baskets, good
35:41focused tools to trade risks,
35:44it's not just an institutional thing.
35:46It can be for institutions, it could be
35:48for retail investors, and I think ETFs
35:50make a lot of sense.
35:52>> I agree with all of that. I mean, the
35:54ETF revolution has been extraordinary. I
35:57think most of my friends, let's say,
36:00who are, let's say, 28 to 35 independent
36:04investors, they make six figures,
36:08they are buying almost exclusively ETFs,
36:11and I don't think any of them are
36:13picking single stocks,
36:14which but they're also not really buying
36:17the S&P 500, which is another change cuz
36:19that used to be the retirement default,
36:22but now you can get much more specific
36:25and it's almost like you can feel like a
36:27stock picker if you pick a memory ETF.
36:30You don't have to be that clever to do
36:31that because it's sort of silver spoon
36:34on a plate for you.
36:35But that access I think has changed a
36:38lot of individual investors outlook on
36:40how they invest in the market, how they
36:42plan for retirement, things like that.
36:44>> It changes institutions, too.
36:46And and advisors.
36:48Cuz people talk about core and explorer
36:50core and satellite. And and I say this
36:53like honestly here, would I love for
36:56your portfolio to be full of Roundhill
36:58ETFs?
37:00Yeah, it'd be great for our bottom line.
37:01You should not do that.
37:03Buying the S&P 500, buying a core
37:06vehicle in the middle to have your
37:09exposure makes a ton of sense.
37:11We're trying to make the best tool for
37:13you to add around that.
37:15Like again, why we think memory was a
37:18good
37:20thematic industry ETF is because it gave
37:23you pure exposure to that. It's more
37:26volatile than buying a broader
37:27semiconductor ETF.
37:29That's actually good for you because if
37:32you want to feel it in your portfolio,
37:34it can be 2 to 5% of your portfolio,
37:36where the old semiconductor
37:39or sector ETFs had to be 10 or 20% to
37:41feel it.
37:43We're We make products that are focused
37:47so you can buy less of us and feel the
37:49impact and have more bets on different
37:51types of risk in your portfolio.
37:53That's what I think is changing and I
37:56think institutions and individuals can
37:58see that and they can now get better
37:59tools.
38:00>> It's like you could sprinkle in super
38:02high beta concentrated bets almost
38:05around your
38:06whatever it is, S&P 500.
38:09Which I I think is frankly very useful.
38:11I do it all the time.
38:13Drew, where can we send people to find
38:15more of your work?
38:16>> Look,
38:17right now find us on LinkedIn.
38:19We're putting out
38:21And I I love doing it cuz again, I'm I'm
38:23one of those market nerds at Roundhill.
38:26And the team
38:27We work on this every day and it's all
38:30our own charts and data and you can see
38:32it. Every day we got a newsletter out,
38:34the Market Memo.
38:35Absolutely proud of what we've built.
38:38I'm eight plus weeks on the job and we
38:40missed one day, my first day. That was
38:42it.
38:43>> [clears throat]
38:43>> Very impressive. I read it. You guys do
38:45excellent work and uh look forward to
38:47next time, Drew. Thank you very much for
38:48your time.
38:49>> Good fill, guys. Thank you.

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