Beyond the Index: How Small Cap and REIT Investing is Advancing for ETF Investors

but we don't think being cap weighted in the small and midcap universe is the appropriate way to invest we think that using quality and divident growth streams can and has historically enhanced the risk reward profile of a small cap allocation so Paul we hear small cap stocks could be the beneficiary of an accelerating US economy coupled with favorable monetary policies targeting this area is the Alps o shares us small cap quality dividend ETF ousm tell us why small cap stocks are important today well I think they're important today and and broader Market history tells us that they're important from an asset allocation perspective they're diversifier they offer different economic exposures but also historically they've been additive to the total return of a diversified asset allocation the problem is is that in this most recent cycle small caps really haven't participated to the extent you might expect them to and if you look at the spread between the S&P 500 and the Russell 2000 just on price alone you have to go back 25 years or so to see the last time we were at these levels so on a relative basis small caps have continued to deteriorate in terms of the relative valuation of the Universe versus large caps in addition to that depending on what your favored valuation measure is price to earnings or otherwise they're trading at a deep discount to the relationship they've typically had with large caps and there's a number of reasons for that if you look at the Russell 2000 as we've talked about previously it is a universe that's full of warts there's a number of companies as much as 40% that are unprofitable there's a lot of Leverage much of which is floating rate and so when you think about the pertinent economic dynamics that have driven this Market over the course of the past couple years through this Fed rate hiking cycle it's been the level of Leverage which has been punished it's been the level of profitability and profit margin companies with without profits and with poor profit margins have ultimately been punished relative to companies that have better profitability characteristics and higher quality characteristics and so I do agree at a high level that the opportunity for small caps to mean revert meaning close that Gap in valuation to to large caps on the back of expected strong robust earnings growth in 2025 is appealing but I also think a lot of those problems in small caps aren't necessarily going to go away because we've gotten 100 basis points of rate cuts from the FED we're expected to get another 75 or or so basis points of rate cuts from the FED here in 2025 those problems are going to persist for the companies that have been punished in there so what we're advocating advisors and investors do is take that universe and try your best to sort of remove as many of those problematic exposures as possible what ousm does is it focuses on high Roa so profitability on your asset base low leverage net debt to iida companies that that have grown a dividend and have well- covered dividends so the idea is this is a universe that has a lot of problems has a lot of challenges in terms of the nature of the companies there they are domestically oriented so sort of a re acceleration in economic activity deregulation maybe additional m&a activity May disproportionately benefit some of these smaller cap companies but we don't think being cap weighted in the small and midcap universe is the appropriate way to invest we think that using quality and dividend growth stream can and has historically enhanced the risk reward profile of a small cap allocation always good to get back to basics now turning to the political landscape the Trump administration's policies of economic expansion through spending are inflationary and that could be bullish for ETFs like the Alps active re ETF ticker Reit which targets the real estate sector how do you see it yeah so real estate is has always been bucketed by investors in the real assets category and there's a perception earned or otherwise that real assets provide some inflation protection in a diversified asset allocation strategy we tend to agree at a high level that reats are a compelling way to affect the real asset strategy and to provide some inflation protection within a diversified asset allocation framework but it's also important to note that the nature of these businesses short-term leases that tend to reset higher along with inflation is one of the characteristics that makes REITs unique but also you talk about politics and I'm going to try and sort of stay off the third rail as much as possible but we've seen some policy proposals and even in the early stages of this incoming Administration we've all already seen some policy implementations including some significant investment in AI related infrastructure specifically the data center space and REITs are one of the ways that you can play the investment in AI infrastructure and specifically the data center space because there are companies in the publicly traded Reed Market they're some of the largest owners and operators of data centers and so what's unique about Reed is first of all it's actively managed it's run by a team GSI Capital that was spun out of Green Street the foremost authority on Real Estate research on Wall Street both public and private and this is a way to play the re category in a high conviction way leveraging the insights and expertise of a team with a great track record of managing and doing research bottomup fundamental analysis valuation work on real estate investment trusts and so there are some Tailwinds economically historically REITs have done well coming out of a hiking cycle I should say going into an easing cycle but what's unique about this latest cycle is as you know is that even though the FED began cutting rates in the fall of 2024 10year rates actually started to go up and that's not the typical path of 10year rates when the FED is beginning in easing cycle and so that has undermined the re sector and it's one of the reasons why it's lagged and lagged largely in 2024 but on a go forward basis there are a lot of things to like about the re segment traditionally there is a very high yield characteristic relative to other Equity income producing asset classes but also importantly some of those economic Dynamics and some of these secular Trends May disproportionately benefit companies in the space and the case we're making for Reed is that you can hire an active manager who knows this space inside out and can tilt and tweak exposures among the different sub Industries within the re category in order potential to potentially benefit from some of these secular and near-term Tailwinds makes sense all right Switching gears a bit if there's one thing buildings need it's energy the allian energy infrastructure ETF ticker enfr has jumped more than 50% over the past year and has outpaced the S&P 500 energy sector by a wide margin what in your opinion is behind enfr strong performance and what do you predict is ahead well what's unique about energy infrastructure is that within the energy space the business model is just so distinct so many energy companies the big ones at the top of the cap Spectrum the Exxon the Chevrons of the world as well as the service companies the refining the EMP companies are highly dependent on the price of WTI the price of oil and if you look at full year 2024 for the price of oil what we saw was oil was effectively flat it was a long choppy road to get there but that does not necessarily port tend to strong returns from the energy sector despite some of the fundamental improvements those companies have made within the sector is this unique category of companies that own and operate energy infrastructure assets pipelines storage facilities processing facilities fractionation capabilities for ngls or Natural Gas Liquids has been an emerging profit driver in the space as well as increasingly an LG export opportunity that continues to grow and will continue to grow over the next three years and that business is is pretty stable relative to the rest of the energy space it's not spread based so it's not based on what you pull it out of the ground for and what you sell it for in the market it's really fees based on how much volume is moved through the network or how much is processed or stored and so in that way the stability of the business has differentiated it from the broader energy sector and some of the the Tailwinds in this space are the same Tailwinds we just talked about with the data center space Within Reach specifically the investment in energy infrastructure needed to support the increasing electricity demand that is going to support all of these data centers that the hyperscalers are investing in and so some of the the performance in 2024 you could attribute to a sort of knock on effect of this AI investment surge that we're seeing and the companies trying to secure reliable electricity generation which in the United States largely means electricity generated by natural gas and the companies in the energy infrastructure space own the Long Haul natural gas pipelines and the facilities that support the transport and and processing of crude oil and natural gas from where it's produced to ultimately where it is consumed and that consumption basis is changing we're going to be exporting more of that natural gas abroad to Europe and Asia we're also going to see more of that natural gas being consumed to generate electricity to support all of the infrastructure needed to support Ai and so in many ways it's playing on this story that most people think about as a tech story but it's also the stability of the space in terms of how they generate their revenues and if you look at the free cash flow yield on the energy infrastructure space as measured by enfr the free cash flow yield on the space is still double that of the S&P 500 it's 200 basis points higher than that of the energy sector so in many ways despite the strong performance in 2024 the strong relative performance to energy in 2023 the space is multiples the valuation hasn't necessarily got as extended as we've seen in the broad Market Market where we're trading at historically High Cape ratios you've got leadership sectors like technology trading eight or nine turns above the market so in many ways the opportunity for energy infrastructure we feel is similar to the opportunity that presented itself to this space two three four five years ago and over the course of the past five years it's compounded Total return at about 15% without seeing significant multiple expansion so that valuation that macro and that fundamental story continues to underpin the opportunity in energy infrastructure especially for income oriented investors who are looking for income from the equity portion of their asset allocation yeah I agree energy continues to grow in importance the Alps core commodity natural resources ETF ticker ccnr is a recent addition to your ETF lineup can you tell us more about natural resources and ccnr as unique approach to investing in this category yeah so what's what's interesting about ccnr was actually spun out of a mutual fund from our partners at core Commodities which was a strategy that combines physical or Futures based exposure with exposure in the equities of companies who are mining for exploring for and producing various natural resources globally in fact and so CN ccnr provided exposure to those equities and is now spun out into an ETF rapper but as you mentioned it's an actively managed way to get exposure to a global portfolio of natural resource companies spanning all of these emerging and entrenched segments of the natural resources space and the core Commodities team has been doing this managing portfolios in this category for decades and ultimately what this portfolio provides to investors is a way to diversify their Equity exposure from some of the key categories that dominate a typical Equity allocation as we mentioned things like technology com services and financials have had at least historically relatively low correlations to those other Equity segments and importantly allows you to lean on the expertise of the core Commodities team to go out and find those companies globally who are fundamentally valuation wise and execution or operationally I should say driving the opportunity in what many people at the core Commodities firm as well as our partners at USCF believe is a global commodity super cycle that is being driven by a lot of the same Trends AI investment spend electrification of the economy all of which increases demand for a lot of the key Commodities that the companies in ccnr are out exploring the world trying to provide to their customers and that sounds like an ETF that covers many bases so just one more question for you Paul before you take off some fixed income investors have been rocked by higher volatility the Alp Smith core Plus Bond ETF ticker smth could be one solution for Bond investors and advisers with fixed income clients looking for a smoother ride can you explain why yeah so smth launched in December of 2023 with $2 and a half million doll in seed it's since grown to over 1.4 billion in AUM and in many ways that speaks to the opportunity in active fixed income ETFs r large it was a record year for active ETF inflows specifically fixed income ETFs in the active wrapper saw a tremendous amount of inflows in 2024 and that I think in many ways is investors and allocators and advisers working on behalf of investors waking up to the realization that you could expect and we have seen at times Equity like volatility from the fixed income side of an asset allocation and in those environments we feel strongly that having an experienced tenured manager to help Shepherd you through the challenging environment that proves to be 2025 and is proven to be the past couple years in fixed income is Paramount and smth is is run by a guy named Gibson Smith who is sort of one of the best kept secrets in in fixed income in the sense that he was CIO at Janice and helped grow that complex from a billion dollars or so to around $40 billion dollar in AUM and has been managing fixed income products through various Market Cycles has effectively seen it all in terms of changes in fixed income markets changes in Port folio structure and the ETF rappers flexibility has been attractive to those investors who might have been interested in the mutual funds but prefer the ETF rapper so in many ways when you think about what transpired since the FED begun easing last fall and the backup we've seen in tenure rates that is in many ways reflective of how different the market expectations can be and how the market can actually manifest and having someone in a team as well vers first and is well experienced in managing through challenging fixed income environments is extremely important so what smth allows advisers and investors to do is allocate the fixed income sleeve of their asset allocation using a management team whose goal is simply to provide a Ballance to your portfolio manage a fixed income portfolio like a fixed income portfolio was designed to provide stability and balance to offset some of the volatility you get in equities and historically this is a portfolio management team that has proven its stripes time and time again through thick and thin in the fixed income Market remember that phrase Bond bores well there's nothing boring about bonds anymore Paul thank you so much for your timely insights my pleasure thanks for having me once again and be sure to visit Alps funds.com to learn more about the ETF lineup at ssnc Alps advisors I'm Thalia Hayden with ETF guide thanks for watching and we'll see you next time oh