Lead-Lag Live

Inside ETF Strategy: Paul Baiocchi on Market Shifts and Innovation at SS&C ALPS

• Michael A. Gayed, CFA

Share episode

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

Energy Rocks: the trending Focus Candy now on sale!  or Power up now with Energy Rocks Adult Focus Candy. energyrocks.store/LEAD25OFF.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


Support the show

Speaker 1:

If you talk to advisors, they'll often say that they've thrown up their hands on developed XUS, on EFA investing, on EM investing because it hasn't worked and, importantly critically their clients have been asking about it. I think there's a lot of scar tissue built up around 2022. Maybe 2025 is shaping up to be a year in which you get a little bit of normality from your asset allocation.

Speaker 2:

Hello everyone and welcome back to LeadLeg Live. I'm your host, melanie Schaefer. Today I'm joined by Paul Biocchi, cfa and Head of Fund Sales and Strategy at SS&CELX Advisors. Paul, thanks so much for being here. Good to be here, nice to see you. So let's jump right into it. With the market sort of broadening out and a lot of investors concerned about how concentrated things have become, especially in the Meg 7. Equal stock weighting has really come into focus. Is that the right approach in this kind of environment?

Speaker 1:

Well, I think the impetus, or the impulse for why the market might broaden out, is instructive. Because if you look at what's dominated the earnings growth in the market, what's dominated the performance of the market, both off of that bottom coming out of the tariff tantrum and over the course of this bull market cycle, it's largely been the MAG-7, or a small number of companies at the top of the cap spectrum in key categories communication services, consumer, discretionary and technology. And those large hyperscalers, as they're sometimes called. And the MAG-7 companies have been generating ROE and ROI and ROIC at a level that most other companies, even in the S&P 500, which in and of itself is a pretty high quality universe relative to the rest of the equities listed in the United States that type of compounded quality profile, lack of leverage and earnings growth profile has been rewarded by the market. But to what end? And if you look at valuations on the S&P 500, where we're at historically, where we're at on a cyclically adjusted basis, these moments where you're trading at multiples that are at the top end of historical ranges has portended to, at least historically, below average returns. And so for investors who are taking maybe a longer term perspective on their equity allocation or looking for ways to maybe dial down risk.

Speaker 1:

Going to an equal stock portfolio doesn't necessarily achieve the goal of dialing down risk, because equally weighting the 501st or 500th stock in the S&P 500 at the same level as the largest stock in the S&P 500 likely introduces more risk, not brings down the risk of the portfolio.

Speaker 1:

Now, if it's a valuation risk that you're worried about, perhaps an equal stock weighted approach might do that, but what we have learned historically is that equal stock weighting just increases the beta or the risk of your large cap portfolio.

Speaker 1:

And so another way to turn down the dial on risk and achieve some of the goals that you might be setting out to do would be to equal sector weight as opposed to equal stock weight, and EQL does exactly that.

Speaker 1:

It gives real estate utilities, healthcare, consumer staples the same weight as technology, which is north of 30% by weight in the S&P 500. And so when you think about utilities and staples specifically, those are sectors that 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 that matter, which are more cyclical sectors of the market, does bring down the volatility profile of a large cap portfolio and, importantly, if you look at equal sector weighting versus equal stock weighting, over long periods of time past three years, past five years, past 10 years it's generated strong relative performance to an equal stock weighted portfolio. But, importantly, it's done so with better risk adjusted performance. So you're not increasing the risk in equal sector weighting like you are in equal stock weighting. In fact, you're bringing down the risk and the relative performance of that approach has been superior over time.

Speaker 2:

So, while we're on the topic of rotation, developed non-US markets have been showing strong relative performance after years of lagging.

Speaker 1:

Is this just another head bake, do you think, or do you think that we're finally seeing the start of a sustained shift and why, in some ways, you feel like the boy who cried wolf, saying that this is the time when developed XUS or international markets are going to outperform the US. Because if you talk to advisors, they'll often say that they've thrown up their hands on developed XUS, on EFA investing, on EM investing because it hasn't worked and, importantly, critically, their clients have been asking about it. You go back 16 plus years, coming into 2025, and the US was on one of the longest periods of outperformance of developed XUS that we've seen. And so if you're an asset allocator and you've allocated this much to US large caps and you've allocated this much to IFA, this much to EM, and year after year you see the S&P 500 up this much and the equity portion of the asset allocation up this much, the question is going to be asked well, why is that? Well, it's because developed XUS and EM have outperformed. And then the question is well, why do we have it? And the answer should be and logically is because it's a diversifier and the US doesn't always outperform those other markets. And in 2025, we saw IFA get out to a pretty big lead over the S&P 500. That gap is closed with this vicious rally off the tariff tantrum bottom. But I think what you have to ask yourself is why do you invest in developed XUS? Well, certainly for diversification purposes. There's different economic dynamics at play and that's the sort of 40,000-foot view of why you use developed XUS in an asset allocation framework. But then you get more to the investment logic From a capital markets perspective.

Speaker 1:

You look at Europe. It's an easier monetary policy. So they've been ahead of the Fed in terms of their easing cycle. They've cut across the board, whether you're talking about Eurozone or you're talking about the Bank of England. They've been cutting much more aggressively than the Fed has. In this cycle. Inflationary pressure, at least near term, feels a little bit less acute than it does in the United 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 the European market, whether that's defense spending, whether that's a commitment specifically from NATO members. The Germans have famously increased their defense spending budget, all of which is stimulus to the European market, which dominates IFA in terms of the index that most people use to measure developed XUS.

Speaker 1:

So you've got those capital markets dynamics and then, I'd argue, one of the biggest determinants of developed X performance over longer periods of time is the direction of the dollar, and we've seen now, at least over the course of the past week or so, that the dollar has been weakening once again. After a little bit of a countertrend rally, the dollar has been weak so far in 2025. It's been one of the weakest starts to the year on record for the Dixie, the dollar index, which typically includes the euro and European currencies as the dominant currencies in that index. And so if you do have a prolonged period of dollar weakness, akin to maybe what we had going into and coming out of the GFC, and if that does start to sustain, then for US investors in developed ex-US markets, that should bea tailwind for returning or bringing those returns back to US dollars. And then, finally, the valuation case for developed ex-US has been compelling for a while now and valuations don't necessarily matter over short-term periods of time, but they do tend to matter over long periods of time and anytime you have such a strong valuation spread between two segments of the market in this case US large caps and developed ex-US large caps that does portend to mean reversion in that spread.

Speaker 1:

And if you add all of those things up, pretty strong fundamentals from some of the key companies in IFA. The relatively easy monetary posture in IFA, the relative stimulus we're seeing being unleashed in IFA and, importantly, that valuation spread and you pair it with a falling dollar, that's a pretty nice setup for a prolonged rally. Relative to the United States and, just like any pocket of the market, investors, advisors operating on their behalf, need to be diligent, need to be considerate and thoughtful in how they allocate. Idog on the Alps lineup side is a product that gives you equal weighted sector exposure to the IFA market, focused on high yielding stocks in that marketplace. So that's one approach to take in that segment of the market that departs a little bit from the cap-weighted view of that developed ex-US market, which is dominated by, in some cases, a long tail of European banks that you may or may not want to own and is really not giving you exposure to some of the trends that might benefit from the stimulus, both monetary and fiscal, that's taking place in IFA.

Speaker 2:

Yeah. So I mean right now I sort of want to shift to fixed income. What are some of the key dynamics in the bond market that you think investors should be paying attention to as we head into the back half of the year, and what are some of the contrarian ideas?

Speaker 1:

Yeah, so fixed income has been such a challenging segment of the market. 2022 was famously such a painful year for investors because, getting back to the advisor conversations, bonds are in portfolios for a reason. They act as a ballast, or at least they have historically. When equities aren't doing well, bonds typically do well, or vice versa. And yet in 2022, a 60-40 portfolio had one of its worst performance years on record. It was a generational correction in a 60-40 portfolio and a lot of advisors were having to answer questions about why do they have fixed income in the portfolio if it's not doing what it's supposed to do in a year that's as challenging as 2022. And there's a lot of reasons why fixed income fared so poorly in 2022. It's largely owed to the fact that we were coming out of this ZERP, this zero interest rate policy environment, and we had embarked upon this pretty significant tightening cycle from the Fed. And when you're going from zero or near zero in terms of interest rates to four, four and a half 5% in terms of 10-year yields as a result of that hiking cycle, that's necessarily going to put extreme downward pressure on a diversified, core-oriented fixed income portfolio, and so I think there's a lot of scar tissue built up around 2022. And maybe 2025 is shaping up to be a year in which you get a little bit of normality from your asset allocation, meaning equities are doing what they're supposed to do, fixed income is starting to do what it's supposed to do and even with the tariff tantrum, we did see a similar experience to what we had in 2022 calendar year in terms of a high correlation between fixed income and equities, but more recently that correlation has started to ease a bit and I think that portends to a good operating environment for active fixed income managers to go about sort of resumption of normal business in terms of doing that credit research, doing their duration research, trying to mix and match exposures in the portfolio to affect their view on the trajectory of interest rates, the shape of the yield curve and the outlook for corporate credit. And if you were to just add all of that complexity to a market where, famously, yields or spreads are very tight on investment grade credit, very tight on high yield credit, which means the risk reward proposition for being aggressive in those segments of the market is maybe not as attractive as it's been historically To us, that means it's paramount that someone who's managing your fixed income portfolio is someone with great experience and with, importantly, experience managing in a wide range of investment environments and bond markets and, to that end, with something like SMTH, the Alpsmith Core Plus Active ETF, 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 through it all, seen it all and has the type of mentality which we think is paramount, like I said, in fixed income, where it's important to focus on what fixed income is supposed to do in a portfolio, not what you want it to do, but really what it's supposed to do.

Speaker 1:

It's supposed to be a ballast, it's supposed to offset some of the risks that you're taking in other parts of your asset allocation. And your manager should understand that and not be reaching for yield in segments where spreads are tight, not reaching for riskier and riskier segments of the market to enhance the yield portfolio of a fixed income portfolio, because we do believe strongly that at this moment, being too aggressive in any direction with your fixed income strategy, this is not the time to do that. And whether it's reaching for yield, whether it's being aggressive in terms of the quality of the credits that you own and understanding exactly what it is that you own at all times within the diversified mix of bonds that makes up a core plus portfolio is of critical importance at this moment in time. And, from a contrarian perspective, I think everyone expects that the Fed's going to be cutting at some point here, and the odds of a rate cut here in September have increased on the back of that unexpectedly poor jobs print on Friday and some of the downward revisions that 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.

Speaker 1:

And if you're going to try and find non-consensus views on rate cuts, it would either be not to expect multiple rate cuts, or any rate cuts for that matter, in 2025, or the other side would be to expect perhaps a jumbo cut in September and maybe another cut or two as we close out the calendar year. And those two out of consensus perspectives would lead to, from an active portfolio manager's perspective, very different strategies in terms of their implications for the yield curve, their implications for the price of various bonds, whether they're in the investment grade or high yield segment of the market. They're in the typical treasury market, the short end, the medium segment or even the longer end of the yield curve, and a fixed income manager who's able to assign probabilities to those various out of consensus views but also be aware of what the consensus view and incorporate that into their process and in their positioning. We think is critical and we think SCI Smith Capital Investors is someone you can trust to do that through SMTH or the mutual funds that they offer as well.

Speaker 2:

Now, Paul, is there anything you're seeing sort of outside of the more crowded trades and tech communication services and consumer discretionary?

Speaker 1:

So I think it gets back to that equal sector weighting conversation we had at the beginning of the conversation, where it isn't necessarily about taking big swings in any segment of the market. But if you're just looking at the S&P 500 and saying tech is once again north of 30%, even though companies have been kicked out of the technology sector through GIX changes over the course of the past decade, and yet here we are once again technology, 30% of the market on a cap-weighted basis, and the key companies in that sector dominating the tape, dominating the news flow, dominating their earnings, influence on the overall market. And you're just wondering if, going forward, we're likely to see technology go from 30% to 35% or more likely to go from, say, 30% to 25%, based on relative performance. Well then that begs the question where should you go? And if you're looking at segments of the market that are not as popular right now, one of the ones that jumps out is REITs, because REITs have been the worst performing sector or real estate, I should say, has been the worst performing sector of the S&P 500 over the course of the past five years, narrowly edging, I should say, healthcare over that period of time and as a result, it's a very small weighting in the S&P 500. And it's a sector that a lot of people don't know what to do with, because they might view it as real assets and they distinctly allocate to it independent of their equity allocation, or they just view it as part of their equity allocation and they're at or below market weight because it's been underperforming. The technicals haven't looked great and there's concern about the impact on the sector of the ongoing challenges with commercial real estate, but the reality for investors is that there's not a lot of commercial real estate exposure in a diversified public REIT portfolio.

Speaker 1:

If you look at the S&P 500, there's one name that you can even define as commercial real estate in the real estate segment of the S&P 500, as defined by something like XLRE. A lot of what makes up the public REIT market now is either specialized REITs, cell tower REITs, data center REITs, self-storage REITs, industrial REITs all of which have very different dynamics economically or capital markets oriented than, say, your typical commercial real estate footprint in a private portfolio or as was typically viewed by real estate investors 15, 20, 25 years ago. And so, importantly, if you look at some of the fundamentals of those categories like data center REITs, industrials REITs or even self-storage REITs. They're a lot different. They want most people perceived to be real estate fundamentals, just thinking about empty buildings 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 are overlooking at this moment. They're unloved, first of all, and so it is very much a contrarian perspective to think about the sector. But also from a funds, from operations perspective or a relative valuation perspective to net asset value. They trade, at least right now, at a discount to net asset value and certainly trade at a relative discount to their private counterparts. So private REIT portfolios that have been so popular in recent years. They allow you in some cases to draft on some of the trends that people are going to technology for, say, ai. As an example, there's data center REITs in the public space that have certainly been benefiting from the massive CapEx spending by the hyperscalers on that category.

Speaker 1:

But again getting back to this idea that you need to be thoughtful and deliberate in how you go about allocating REIT, our active REIT strategy leverages a team with 30 plus years of experience investing in and doing research on public REITs and has the flexibility to go into and out of certain industries to do that relative valuation work, that sort of old school roll your sleeves up work on the research side to pick and choose individual companies.

Speaker 1:

And the relative performance of REIT since its inception more than four years ago has been very strong. So I would say REITs are one of those categories that jumps out to me as a contrarian opportunity within the sector framework, within an asset allocation framework that a lot of people aren't talking about but have characteristics, yield, relative fundamental strength and a relative valuation case that might portend to strong relative performance. And a lot of people don't know that if you go back 25 years and I know a lot of people aren't going to go back that far when they're thinking about allocating to their portfolio but REITs are one of the best, if not the best performing sectors in the market over 25 years, and so this five-year period in many ways has dissuaded a lot of people from allocating seriously to the category. But the argument we would make is to revisit it this moment in time with a mean reversion opportunity in terms of that relative performance.

Speaker 2:

And you mentioned the word AI briefly, but I wanted to ask you I mean, investors are still chasing AI exposure. Are there ways to play the AI story beyond the obvious tech and semiconductor names?

Speaker 1:

Yeah, we often talk about AI adjacencies, because if you hear a conference call from a Microsoft or a Meta or an Alphabet and they're talking about CapEx budgets in aggregate of $80 billion, about CapEx budgets in aggregate of $80 billion, $90 billion a year, that money is going to GPUs from NVIDIA and that's part of the reason why NVIDIA shares have been on such a run and why it's one of the most valuable companies in the world. But it's also going to some of the infrastructure that's going to be necessary to support these lofty AI ambitions, and that infrastructure spans from chips to the computers themselves or to the data centers. And then, importantly, the knock-on effect of that is, if we're going to build all of these data centers to ensure that when someone plugs something into LLM, that it actually works because there's electricity available to them, well then we need a better grid and we need to ensure that that grid is modernized and is accommodative of the increased load. And when you think about who benefits from increasing electricity demand and, depending on the forecast you look at, we're talking about electricity demand growth here in the United States that we haven't seen since the 1960s Well, utilities companies are certainly a part of that. Energy infrastructure companies are certainly a part of that, because those are the companies that are moving the natural gas from where it's produced to where it's consumed, increasingly in the form of electricity demand or electricity generation and support of AI data centers, and so, to that end, it's really about trying to build a mosaic of picks and shovels.

Speaker 1:

Equivalent exposure to the AI story. Midstream companies that operate the pipelines, the storage, the processing facilities that ensure the natural gas is available to the consumers of it are critical. So ENFR is our energy infrastructure ETF that provides exposure to those companies, has benefited from some of these AI adjacency trends, as we term them. We also launched an electrification ETF back in April, ticker ELFY, which combines utilities companies with materials companies, industrials companies, technology companies as well as energy infrastructure companies to give you comprehensive exposure to the electrification theme, and so to put a bow on all of that, I think the idea is most people think about AI and they think about technology companies, software and services companies, semi-companies, and those are, in many cases, the most direct way to play AI.

Speaker 1:

But you also have to think about the second derivative, if you will, of AI investment and these massive 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 the metals that are required to ensure that the construction of these data centers goes on without a hitch. It's going to go to investment in utilities infrastructure so that the utilities in this country can invest in the necessary capacity to support the ongoing electricity demand growth.

Speaker 1:

And I think it's no accident that when you look at the S&P 500 in 2024, the best performing stock outside of Palantir, which was added mid-year, was actually a utilities company, and that was the first time really since the turn of the century that a utilities company has been the best performing stock in the S&P 500. And it's reflective of some of the companies that are benefiting indirectly from the AI story and are going to be really at the heart of our ability to meet the increasing electricity demand coming from AI consumer level trends like switching from ICEs to EVs, from your gas stove to an induction stove, from a typical heating and air conditioning unit to a heat pump, etc. All of which, at the margin, increase electricity demand at the consumer level, at the commercial level, and then wholesale from a step function as a result of these massive AI data center projects, the likes of which we really haven't seen.

Speaker 2:

Really interesting. Paul, just before you go, can you let people know where the best place is to follow you and to learn more?

Speaker 1:

Sure. So the website, easy to remember alpsfundscom for all of the information you'll need on all of our products, all of our strategies. Need, on all of our products, all of our strategies, the insights from our very seasoned research teams, as well as some of our sub-advisory partners who are experts in categories like REITs, like muni bonds, fixed income, as we talked about, as well as categories like energy infrastructure, where we have the largest, most liquid MLP ETF in the market, and we've been doing this now for 15 years in terms of supporting that energy infrastructure story as the industry has evolved.

Speaker 2:

Yeah Well, thank you so much for joining us and thank you all for watching. Don't forget to like, share and subscribe for more conversations with the people shaping today's markets. I'm Melanie Schaefer and this is Lead Lake Lies.

People on this episode

Head Shot

Michael A. Gayed, CFA

Host