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Market strategist talks stocks, investing amid rising rates, and the metaverse ETF

Global Investment Strategist Simeon Hyman joins Yahoo Finance Live to discuss the outlook for stocks as the Fed raises interest rates and investing in the metaverse.

Video Transcript

- We'll stay on the markets and Federal Reserve here. Simeon Hyman is the global investment strategist at ProShares Advisors and joins us now. Simeon, always good to get some time with you here. So the markets, we've been saying it all morning long, bringing a little bit of a sigh of relief after Fed day. Is it time for investors to back up the truck and buy stocks?

SIMEON HYMAN: I think clearly we're still in an environment where stocks are more attractive than bonds, remember, the other news that we got from Chair Powell yesterday was that the quantitative tightening is at hand, and that's the piece that's going to normalize the long end of the curve. I know we've been hearing a lot about, well, it got a little flatter. But when that balance sheet starts to be reduced, the artificial suppression of the long end of the curve will be gone, and real rates will start to normalize.

So this is not a tightening like we had in the early '80s where that long end is going to drop off. The odds are that pretty much interest rates across the curve will rise. But that puts stocks in a better position, because the key to stocks is their ability to grow cash flow earnings and dividends over time and offset the impacts of rising rates and inflation.

- Hey, Simeon, it's Julie. So does that mean then that you don't think rising interest rates-- I mean, to be fair, in history, rising interest rates don't always put a crimp on corporate profits. But the perception has been that things are going to get more difficult once rates are rising. What you seem to be saying is that won't necessarily be the case.

SIMEON HYMAN: Well, I think you have two choices. One is to lean into it. In other words, lean into the sectors and stocks that really benefit from rising rates, namely things like financials, which, of course, can have higher net interest rate margins, and materials, and, of course, energy, which has been the story of the last couple of months. And then your other option is to focus on quality companies that are consistently growing those cash flows, or particularly dividends.

We know that the S&P 500 dividend aristocrats, as an example, our ticker NOBL, grew their dividends 10% last year. That's a real bulwark against inflation. So it might not be entirely true across the board, but there are certainly going to be important pockets of the market that will be better positioned for rising rates and a little bit of inflation.

- Simeon, you got me here with that background. The metaverse ETF, is that something new you have launched? What companies are in it?

SIMEON HYMAN: That's my job of the day. Indeed, today we've launched V-E-R-S, and we'll pronounce it "vers" like metaverse. And indeed we launched this to capture the evolving metaverse investment opportunity. And that really cuts across a range of technology-focused industries.

It's really interesting, when you look at the basket of companies, it's almost like a timeline of innovation over the years, because companies like Microsoft are there, but so is NVIDIA, and of course Meta, but more recent companies like Roblox and even more recently than that, a company like Unity. So this is an evolving opportunity.

Today you have an immersive but not quite interconnected metaverse. There's already a half a billion, a half a trillion dollars being made in the metaverse. That's likely to double even in the context of just the near term, social media, interactive gaming, and live music, before we even get to the interconnected piece on the other side.

- This is not the first metaverse ETF, we should mention. There is the Roundhill Metaverse ETF as well. And, you know, it's been a bit rough, right, for anything that's sort of associated not just with the metaverse, but anything that's sort of more experimental, more risky in these markets.

So how should people be looking at, first of all, this ETF versus the other, and second of all, the short-term versus long-term metaverse opportunity?

SIMEON HYMAN: Sure, I'll start with the first. And we think we've designed this very, very well. And it does a combination of acknowledging some potential economies of scale. But also, very importantly, focus on the companies that are really generating revenue in the metaverse.

And to put that in a little bit of context, those MMANG stocks, we get two M's, we get Microsoft and we get Meta. And the "N" is for NVIDIA. But they comprise about a third of this portfolio. But the other 2/3rds are a lot of these other companies, like Unity, Agora, and Roblox and others that may not be represented in your portfolio. And that's a disciplined, rules-based approach to that. So we think we designed it right.

To your second question, you do have to have a little bit of a forward lens on. And I think in a market where interest rates are rising, back to my earlier comments, you do have to find some growth in that portfolio, because simply going to those quote unquote "short duration" equities, where all the revenue's now, well, if there's no growth, where is that bulwark against inflation and rising rates?

So you do have to have, importantly, a growth opportunity in the portfolio. And, you know, what we've found over the last decade or so, is that some of these transformational thematic ideas can be very, very important parts of that growth piece of your equity portfolio.

- But Simeon, why have exposure, all of this exposure, to this type of play? Wouldn't it make more sense to nibble at a Facebook/Meta that is down about 52% from its record highs?

SIMEON HYMAN: Well, I think the answer, of course, from our perspective, is diversification. I went through the constituents, some of the constituents, of this ETF, and noted the timeline of innovation over the last, not just 20 or 30 years, but 40 years and 50 years. And that's what we don't know. I hate to use that car thing because it's overused, but there were a gazillion car companies-- I think it was 3,000-- in the late 19th century. And then just a few years later, there were just a couple of dozen.

We don't know who's going to win. And to nibble at just a couple of names is perhaps a little bit of a too-focused play, or on a transformational change that we just don't know who the winners are going to be. I'll give you an example. Blockchain is becoming a more important part of the metaverse. And the interconnected metaverse that lies on the other side of where we are today can have some important decentralized components to it.

And that may mean that some of these legacy investments don't have the value we think they are. So I'm not making a bearish call on any of the names that you mentioned. I'm just suggesting that having a much wider approach to the metaverse opportunity can be an important way to get exposure to it in your portfolio.

- Well, that ticker, VERS, Simeon has now burned into my head the rest of the day. Always good to see you see you, Simeon Hyman.

SIMEON HYMAN: Job accomplished.

- Right, global investment strategist at ProShares Advisors. We'll talk to you soon.