Market Commentary: Disruptive technologies are accelerating | What is a futures Bitcoin ETF?

29 October 2021

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer and Stephanie Leung, Group Deputy CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

  1. Disruptive technologies are accelerating [0:54]
  2. Will there be stagflation? [3:40]
  3. What is a futures Bitcoin ETF? [7:17]


Philipp | 00:01

Hello and welcome everyone to another market commentary from us at StashAway. With me of course, our investment team consisting of our Chief Investment Officer, Freddy Lim.

Freddy | 00:11

Hey Philipp, how are you doing?

Philipp | 00:13

Hey Freddy, how are you? And also, Stephanie, our Deputy Chief Investment Officer - good to see you both.

Stephanie | 00:23

Good to see you.

Philipp | 00:24

Yeah, it's been another nice 2 weeks. Lots of noise, Freddy - it's not stopping anything. I think we have a few topics that we would like to discuss, right? I think we touched all of them a little bit already before, but I think zooming out a little bit and looking at the bigger picture when it comes to this whole noise that is in the market will probably be a very good level set for all our listeners. Do you want to start with that, Freddy?

Freddy | 00:54

Yeah, I mean, it's important to weed out the noise and focus on what really matters. And what we've learned since the pandemic and also this year is that, the first thing is - inflation is rising, and this inflation, the root cause is, a lot of it is supply chain disruptions. It's not something that can be fought by monetary policy or interest rate hikes alone. It requires us to successfully reopen or the virus naturally itself becomes endemic and then seasonal. That's a natural biological cycle for that. Or simply, industries have to make adjustments to the supply chain and that takes time. So that's why this is from this first point - we prepared our users in July with our reoptimisation and we've tried to ring fence this problem around. And number two is sort of a more interesting outcome as well because you see the pace of disruptions accelerating - lots [02:00] of innovations bringing opportunities, but the disruption effects bring challenges to investment managers as well. I'll let Stephanie elaborate more on this point, although it's very dear to my heart. Stephanie's the real expert here to really comment on this. So, Stephanie, onto you.

Stephanie | 02:21

Well, thank you Freddy and I think just following on to what Freddy has said, we're entering into a higher inflation regime post-COVID, according to our data, and also according to our analysis. Actually, this is a good time to invest in technology-related sectors and disruptive sectors in particular. If we look at the - which is also why we recently launched our Thematic Portfolios because it provides another option for our investors to get exposure. This is a very exciting sector at a very, very interesting time, frankly, because during a high inflation regime, what our analysis shows is that these disruptive technologies or companies actually would outperform the old-economy companies. And I think if we look at it, for example, Tesla, which recently reported earnings, you can see that. I mean, their stock prices actually recover a lot faster than some other traditional car makers or other traditional companies. So although it's a high-volatility regime class, we don't actually advise people to put all your eggs into it. We think actually those 3 themes that we launched: Technology Enablers, Consumer Technology, as well as Healthcare Innovation are pretty good options for you to add to your portfolio and kind of spice it up a little bit.

Philipp | 03:40

Right, absolutely, thank you both for that overview. What I do want to do is we did get a few questions from our listeners and for everyone that's new to the show or new listeners on our podcast or wherever you listen to us - we do take questions. So if you have any following up from today or in general about StashAway or [04:00] about the markets, feel free to always drop them in the comment section below or email us to - with that being said, we did receive some, Freddy and Stephanie. And the first one is towards Freddy and the person is asking, "In your opinion, will the global economy undergo stagflation? And if that would be the case, how would StashAway's investment strategy adjust to that?".

Freddy | 04:26

Let's answer the second part first. At StashAway, when we first launched 4 years ago, we took no prisoners. Our algorithm effectively prepares for every possible economic scenario, and stagflation is one of those scenarios that's rare, but it has a seismic impact if it happens. You also have very little data point, and we go back a long time and you need to really dig deep in your research and development to handle that. But that's what we did 4 years ago. There's the first place we start recession, stagflation, disinflationary growth and inflationary growth. And those 4 main regimes that we prepare you for, and if you don't know which quadrant is going to be, we use an All-weather strategy, right? So let's remove part two. In terms of whether there's going to be a stagflation or not - stagflation is rare and there tends to be a structural reason for it to happen. Today, we have structural reasons for the inflation bit but the stag bit, however, as you can see, we just mentioned the pace of disruptions is actually growing. It accelerated health care innovations, for example, the ecosystem was stagnating prior to COVID. It took so long to develop a new vaccine, and it's antiquated. It suddenly accelerated within a year. Nowhere in human history has anyone done this messenger RNA [06:00] technology within a year to fight COVID-19. That, to me, is a very good example, but it's actually prevalent everywhere. Cloud computing has become a basic thing now. We all work from home or remote. Blockchain is taking off steadily. It's still a very early stage of the S-curve, the adoption curve, but it certainly has certain potential. There's so much more to say I can go on for 2 days, right? But because of all this, I'm confident that human society is not moving backwards. It's when we lack stuff to do and then the pandemic is still around - inflation is eating us alive, stagflation then becomes real. But that's not the case. Today, we innovate faster than before. And not just that, even environmental, clean tech, clean energy, new energy. That's so much more stuff that's coming in every single day. So I feel we're on the cusp of another industrial revolution led by tech. And actually, it's the fourth one. Second one was led by the UK, the third one was the US, and the latest one, possibly in China. But that aside, we're on the cusp of one. Stagflation is probably likely to be low.

Philipp | 07:17

Now, I think a good, good summary, I totally agree with you, I think even though we were all locked in, so much innovation has happened even over the last year or a year and a half since COVID. So I think I'm looking a little brighter towards the future as well. So we're relying on that Freddy. The other question we got - Stephanie, maybe I'll start with you on that is the person was asking, what do we think is the impact of the launch of the first US Bitcoin Futures ETF in general for the cryptocurrency? And also maybe how are we looking at that asset class with that ETF being launched? And before I give you the question, there were a lot of questions already. Maybe [08:00] you can explain a little bit what actually is a futures Bitcoin ETF? Because I think there's still a lot of people that don't understand it 100%. They think, oh, it's a Bitcoin ETF and I can just buy it. And it's Bitcoin, right? But I think maybe we can start from there and then kind of think about our view on that.

Stephanie | 08:16

So it's actually been very, very exciting in the cryptocurrency world. I mean, it's the launch of the first real ETF in the US. So if you took a step back and look at how people can get exposure to Bitcoin or cryptocurrencies, of course, investors can open an account with some of the crypto native exchanges like Binance, FTX, or Coinbase, but a lot of people don't have access to that. So to access - and also institutions as well - to access cryptocurrencies historically there were trusts. So Grayscale, for example, has been a trust with the longest history that trades in the US. However, it's not a real ETF in the sense that there are mechanisms that are different. There is like redemption subscription, and therefore, if you look at, for example, the premium or discount NAV for Grayscale, it tends to fluctuate quite a lot because it's not a real ETF. So there's no kind of real arbitrage mechanism to make sure the tracking error stays low. So it's not a very, I guess, an ideal vehicle to get exposure to cryptocurrencies. Now, since then, there were a few other physically-backed ETFs that were listed in places like Canada or Europe, and these are backed by physically-held Bitcoin or Ethereum. And they are actually stored in mostly cold storage, partially hot storage. So it means that you are actually entrusting the ETF provider to store the coins for you. So of course, it exposes the ETF holders to some [10:00] sort of hacking risk. And also, if you look at expense ratios, I mean, these also tend to be a bit more expensive. So actually, for the US, we never had a real ETF related to cryptocurrencies, and this is sort of the regulator's first step to, I guess, introduce this asset class into the US retail investors properly. And the basic mechanism of this is that the ETF actually does not own physical coins, right? Instead, it goes onto the US CME market and buys and sells the nearer-term futures. So there are futures that are trading on CME, on both Bitcoin and also Ethereum, and this ETF in particular focuses on Bitcoin. So it's not exactly a physically-backed ETF. I mean, there are pros and cons to it. It's cheaper to execute. But also, I know Freddy has also looked at some of the underlying mechanisms of how the tracking error could be. So maybe also Freddy can comment a bit on that.

Freddy | 11:06

Well, the futures-based ETF does not incur hacking risks, as Stephanie, as mentioned, because it's just cash settling every day the differences in the price, right? And it's probably used by hedgers like somebody who actually has coins elsewhere wanting to manage short-term risk. They are willing to be on the short side, right? But the ETF would be on the long side of things. Now, in terms of futures-based ETF, there's a contango problem - where you're buying the futures. A contango problem, essentially, is that if everything stays unchanged, the price of what the ETF is holding on that contract will roll down as it approaches maturity. And that means you incur sudden loss due to the passing of time. It's like a time-decay thing, and that happens in commodities a lot, too. And [12:00] however, that curve - I want to caution that actually Stephanie herself is the one that reminded me in the past that this curve, this rolling down effect is not always the same. Sometimes the curve can change shape depending on supply and demand. It doesn't mean it's always going to be realised but at the moment, for example, it is about an annualised 10.8% of contango. So that means it's actually rolling against the long side of the futures ETF. If this persists, you can actually see a difference in the futures space ETFs returns versus the direct holding ETFs returns. They would have this difference due to contango, right? Again, it's not a guarantee it will happen. It's stacked against you to start with, right? So this thing can reverse and we call it backwardation when it's reversed, where it's actually nicely rolling up the other way with the passing of time. Again, who knows the future? We're not saying one is better than the other, but it's simply that you've got to have your own view on risk when you choose between them.

Philipp | 13:17

No, absolutely. A good thing for the crypto space in general for the launch and like getting their feet wet with the SEC and different organisations in the US. So from that standpoint, a good step forward. But yeah, be cautious. Know what you're investing in. Do your research. And again, thanks Freddy and Stephanie, both of you for summarising the new Bitcoin ETF for us. With that being said, to wrap it up, we do have quite a few webinars, as always, for our listeners to join in all the different locations that we're currently in. First one up, let's start with Singapore. We have a very timely [14:00] webinar coming up calling Growing Your Wealth with SRS Investing. That's on the 9th of November at 7pm local time. You learn about how to make use of SRS. Maybe you've done it before. Maybe you have never done it. We'll really talk you through the tax benefits, especially since you still have till the end of the year to make your contributions to SRS still. So join us for this, 9th of November at 7pm. For our Malaysian audience, we have a couple of different webinars upcoming. First one 3rd of November 6pm local time, Personal Finance Basics. So this is where you can learn more about your personal financial planning and things like that. And then following up from that, the week after, on the 10th of November, we have what's called Investing Basics. So that really builds up on that Personal Finance Basics course. So if you want to learn more about those and really get a solid understanding and you're in Malaysia, please join us for those, they're both at 6pm local time. For our MENA region, we also have our Financial Planning Basics course. It's on the 3rd of November as well 6pm local time. And in Hong Kong, we actually have Investing for Creatives, completely messed up on the line there, but Investing for Creatives, 3rd of November, 10am local time. As always, you can find all the signup links in our show notes, and you can also see them on our websites, Eventbrite and anywhere else you interact with us. With that being said, I think we lost Stephanie to a run out battery on her video, but I still have Freddy here with me. So again, Freddy, thank you so much for joining and we hope to see all of you again next time. Until then, have a good day.

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