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00:00WHETHER YOU EMBRACE OR FEAR ETF ' S, THERE IS NO GETTING AROUND THE RISING INFLUENCE AS EXCHANGE TRADED FUNDS ARE TAKING ON $2 BILLION A DAY. TO GET US STARTED, LET ' S BRING IN OUR IN-HOUSE EXPERT, ERIC BALCHUNAS , WHO HAS A SNAPSHOT OF FLOWS IN AND OUT OF ETF ' S. ERIC: YOU BROUGHT UP THE WORD HEDGE. ETF ' S HAVE TAKEN IT FOR $75 BILLION THIS YEAR, BY FAR RECORD. ALL OF IT IS GOING INTO LONG EQUITY ETF ' S. 1% IS INTO THAT NUMBER THAT ARE POPULAR HEDGES SO NOBODY IS REALLY HEDGING. THESE ARE POPULAR WAYS TO HEDGE. THEY HAVE ONLY TAKEN IN $1.2 BILLION, BUT WHEN THE MARKET GOES DOWN, THESE THINGS SPIKE UP MORE THAN ANYTHING. THEY ARE EXPENSIVE HEDGES AND NOT A LOT OF PEOPLE GOING IN THERE. GOLD IS ANOTHER POPULAR HEDGE ALTHOUGH IT ' S NOT INVERSELY CORRELATED. IT KIND OF DOES WHAT IT DOES. IN 2008, GOLD WAS ONLY UP 3%, BUT PEOPLE LIKE IT AS A HEDGE. THE GOLD FLOWS ARE NOT GREAT AT ONLY $2 BILLION. THIS IS NOT MUCH HEDGING WITH GOLD ETF ' S. FINALLY LONG DATED TREASURIES ARE ANOTHER POPULAR HEDGE. THEY WENT UP 33% IN 2008 SO THEY WOULD OFFSET YOUR LOSSES IN THE STOCK MARKET. YOU DO SEE MORE FLOWS HERE OVERALL WITH $2.5 BILLION. THAT ' S PRETTY GOOD AND SOME OF IT IS AROUND RATES AND GETTING YIELD OUT OF THIS, BUT THERE IS HEDGING GOING ON HERE IF ANYTHING. 1% OF THAT $475 BILLION IS INTO STUFF PEOPLE USE TO HEDGE. PEOPLE ARE JUST CLEARLY NOT THAT WORRIED. JULIE: WHEN YOU HAVE A YEAR THAT YOU BOUGHT STOCKS AND RODE THE HIGHER, THERE IS LESS OF THAT APPETITE FOR HEDGE. LET ' S NOW BRING IN JOHN DOBBY TO THE CONVERSATION. HE IS THE FOUNDER OF ADVISORS WITH 20% EXPERIENCE ACROSS MACRO STRATEGY, QUANTITATIVE EQUITIES, AND RESEARCH. ERIC WAS LOOKING AT HEDGING AND YOU SAY THAT WE ARE GOING TO SEE AN UPTICK IN THESE KINDS OF STRATEGIES GOING INTO NEXT YEAR. AS HE POINTED OUT, THERE WASN ' T MUCH APPETITE FOR IT LAST YEAR. WHAT DO YOU THINK FOR IT WILL CHANGE AND WHAT WILL CHANGE PEOPLE ' S PERCEPTIONS THAT THEY NEED TO HEDGE MORE? JOHN: THE RATE OF CHANGES EVERYTHING. IF I GO BACK TO 2017, THERE ARE THREE THINGS THAT MADE ME BULLISH. ONE IS MUTED INFLATION. SECOND IS YOU HAD TREMENDOUS LIQUIDITY BEING SO SUPPLIED BY CENTRAL BANKS AND THIRD IS GREAT EARNINGS. YOU WANT TO OWN THINGS LIKE IMG AND YOU COULD FRANKLY ON THE WHOLE WORLD. THE THREE THINGS THAT MADE ME SO BULLISH IN 2017, NEXT YEAR ARE GOING TO THE CLIENT ON MARGINS. I THINK INFLATIONS RISE. WE ARE ABOUT TO HAVE BACK-TO-BACK RETURNS POSITIVE FOR THE FIRST TIME SINCE 2010. EARNINGS FROM YOU, THE YEAR-OVER-YEAR CHANGES GOING TO DECLINE OR IT WILL BE A LOT TOUGHER. FRANKLY THE REAL STORY I THINK IS LIQUIDITY DECLINING. NEXT YEAR YOU HAVE GOT SAID RATE HIKES. YOU HAVE GOT QUANTITATIVE TIGHTENING AND THE ECB THAT ' S GOING TO TEMPER THEIR TV PROGRAM. -- QE PROGRAM. THE RATE OF CHANGE OF OBVIOUSLY VARIANCE WILL DECLINE NEXT YEAR SO I STILL ALWAYS RISK ASSETS THAT I MENTIONED BECAUSE I STILL THINK THERE IS VALUE THERE. I BELIEVE IN THE MARGIN OF SAFETY. I JUST WANT TO OWN OTHER ASSETS THAT ARE UNCORRELATED AND DIVERSIFY THE PORTFOLIO. WE HAVE THREE DIFFERENT OPTIONS . WE HAVE GOLD LONG-DURATION AND LIQUID ALL STRATEGIES. ERIC: THAT IS NOT WHAT MOST PEOPLE THINK OF AS A HEDGE, BUT IT ISN ' T AN ALT. THIS IS A MACRO STRATEGY, RIGHT? THE ONE THING ABOUT THIS ONE AND I WANT TO GET YOUR TAKE ON THIS, IT IS MORE CORRELATED TO THE MARKET THAN A TYPICAL HEDGE. IT HAS A 60% CORRELATION TO STOCKS. DOES THAT ENOUGH TO ACT AS A HEDGE WHEN THINGS GET TOUGH? JOHN: I LOOK AT THE DOWNSIDE CAPTURE RATIO. WHEN YOU LOOK AT THE 10 WORST MONTHS FOR THIS SINCE 2009 WHEN THE INDEX WAS CREATED, THE INDEX WAS DOWN LIKE 17%. COMPARED TO THE S & P AND THOSE 10 COLLECTIVE MONTHS WHICH WERE DOWN 34%. I LIKE THAT IT ' S BIG AND LIQUID AND SHE. -- AND SHEEP SO CHEAP SO IT CHECKS A LOT OF BOXES FOR US. ERIC: WE COULDJULIE: WE COULD SEE THE YIELD CURVE FLATTENING AND YOU ARE AT THE BANKS AS A WAGE TO Y TO HEDGE AGAINST THAT COULT. ONE WOULD THINK THAT WOULD NOT BE GOOD FOR BANKS SANS CURIOUS TO WHY YOU ' RE LOOKING AT THAT ONE. JOHN: THIS CONCEPT OF YIELD CURVE FLATTENING BENEFICIARIES, PEOPLE ARE MIXING THEM TOGETHER. YOU JUST NEED TO ME, BANKS ARE CHEAP. WE LIKE THAT A LOT WITH THINGS LIKE ENERGY AND GLOBAL EQUITIES WHERE I THINK THERE ' S A LOT OF VALUE. JULIE: I SHOULD MENTION KBWB IS THE ETF YOU ' RE LOOKING AT. ERIC: LET ' S TALK ABOUT THE OTHER VALUE. YOU PUT SOME TAKERS IN HERE AND WE HAD WEST GRAY ON A COUPLE WEEKS AGO. HE IS HARD-CORE FACTOR. IVAL HAS A PE OF 11. MOST ADVISERS ARE SCARED OF THE STUFF. THEY WANT MORE BETA. YOU ARE PICKING IT. WHY DO YOU PICK SOMETHING LIKE THAT VERSUS VTV, WHICH SEEMS TO BE THE BEST SELLING VALUE ETF? JOHN: WE TAKE ON TRACKERS AND I WATCHED THE SEGMENT FROM WES AND I LIKE WES A LOT. I THINK INTERNATIONAL EQUITIES HAVE A LOT OF DISCOUNT. THEY HAVE A MARGIN OF SAFETY. IF YOU WANT TO HAVE A PORTFOLIO TO TRY TO ADD ALPHA TO THE PORTFOLIO, I PREFER THAT VERSUS SOMETHING THAT IS JUST HUGGING THE BENCHMARK. AS A PRINCIPAL, ENGRAVED IN MY DNA IS THIS MARGIN OF SAFETY. WE LIKE VALUE AND WE ALSO LIKE MIXING VALUE MOMENTUM. THEY PLAY WELL TOGETHER IN A PORTFOLIO IN THIS NEGATIVE CORRELATION. SEPARATELY FROM THAT, WE HAVE TAKEN ON THE INTERNATIONAL SIZE FACTOR THIS YEAR SO WE HAVE USED VSS, WHICH YOU THINK ABOUT INTERNATIONAL SMALL-CAP STOCKS AND THEY HAVE LOWER VOLATILITY AND LOWER BETA THAT LARGE CAPS. IT ' S THE EXACT OPPOSITE OF WHAT WE SEE HERE IN THE U.S. THINK ABOUT IT, RIGHT? WE HAD TREMENDOUS LIQUIDITY THIS YEAR.

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The Year of the Hedge for ETFs

2017 was a record year for low volatility. John Davi, founder and CIO of Astoria Portfolio Advisors, joins Bloomberg's Julie Hyman and Eric Balchunas to discuss how to hedge potential risks in 2018. (Source: Bloomberg)

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