Space, Freedom, and Physics Envy

This episode is brought to you by VanEck. If your clients are asking about gold hitting new highs, the real question isn't about how to own gold, but how to position for a broader real asset cycle. Take a look at RAAX, the VanEck Real Assets ETF. It's a one-stop shop that actively rotates across gold, commodities, energy, infrastructure, and natural resources, adapting as the macro environment shifts. Learn more at vaneck.com/raaxstreet. Listen for full fund disclosures at the end of today's episode.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe. It's just us this week, dearest listeners. I've reached shoulder deep into a barrel full of your questions and I've pulled out 4 humdingers. They're on the subjects of space investing, whether the U.S. stock market really is expensive, and an ETF based around freedom. And tax loss harvesting. Let's get into it. Let's start with space. We had a recent Barron's cover story by my pal Al Root. It was titled SpaceX is Going Public: Why a Tesla Merger Could Be Musk's Real Endgame. You can read that for more on Al's theory, but Al writes SpaceX has reportedly filed confidentially for an IPO that's likely to raise $75 billion, and that would be more than double the $29 billion that Saudi Aramco raised in 2019. That's the big Saudi oil monopoly. In other words, we're talking about serious money for space here. The space investing theme has been around for quite a long time, actually. I myself did a cover story for Barron's back in 2017. It was titled "New Space Age Offers Promise and Peril for Investors." We have a question now from Ross about space. I don't show here where Ross is from. I'm going to assume Earth.

Hi, Jack. Longtime listener, first-time caller. With renewed momentum in the space industry, especially around lunar exploration and NASA's long-term plans, how should investors think about opportunities across the space value chain? Where do you see the most sustainable growth emerging? Thanks.

Ross, here's how you should think about investing in space. There's the matter of the returns on the stocks that are involved, and there's the matter of the money that's being made, and those two are very different. The time frames are different. There's an exchange-traded fund out there called Procurer Space, and that ETF, if you invested 3 years ago, you've made 190%. That's more than double the return for the S&P 500 index. So it's doing very well. It's also trading at more than 100 times earnings. So a lot of the companies in there are being priced not according to the money they're making today, but what they might make well into the future. Now, the holdings there are all over the map. Some are satellite companies, others are into navigational equipment. Many of these companies make good money today right here on planet Earth, but not all of them. When I think about a company like SpaceX It's very exciting what they have done with launching rockets and bringing down the cost of getting satellites up into space. It's really marvelous. It's fascinating to watch a SpaceX rocket return to be used again on another launch. That's something that they pioneered, and it's having real economic effects now. It's making it more viable to get more satellites up. There are other things that companies like this talk about, like setting up colonies in space or mining in space. Those are interesting to read about. But the cash flows, I have a hard time imagining those hitting right away. Those are activities that at best will produce money many years from now. And there's a math issue there. When you're deciding how much to pay for a company today, and you map out the likely cash flows that company is going to receive in the future, well, the money it's going to make this year is highly relevant, next year pretty darn relevant, and so on. As you get out past year 8, 10, 12, even if we're talking about large sums of money, they're less relevant today for investors. The answer has to do with how compounding works, but in this case, it's working in reverse. The longer you have to wait for those cash flows to roll in, the less they're actually worth to you as an investor. Now, in the short term, that doesn't really matter for what these stocks do. What matters is investor excitement. Buzz, demand for the shares. And I think this is a buzzy moment for space. I guess my point to you is I would be cautious putting too much money in pure-play space companies that are not making good money right now. I'd be more comfortable looking for companies like aerospace and defense companies that already do real and viable things that are producing plenty of money and that also has a hand in our future space economy. I think the average valuation on that space ETF looks a little high for my tastes. I'd be more inclined to do some stock picking here. One last thing on this topic, which is to say, I can't say I'm a big fan of theme investing to begin with. I'm more of a broad stock market index guy. Let the stock market figure out what the most important themes will be, and the weightings of those stocks should increase automatically in the index. You're also going to keep your fees very low. An S&P 500 fund, you should be able to pay less than 0.1%. But that space ETF, it's 0.75%. I wouldn't buy that fund with ET's money. Thank you, Ross. We did an episode about the stock market and I said it was more expensive than it looks, the US stock market. And we heard from Patrick from sunny San Diego who'd like to tell me where I could stick it. Not really. He seems like a nice guy. Got a different point of view on the stock market. Here's Patrick.

We talk a lot about how valuations in the S&P look stretched by historical standards, and I agree, but with what I believe to be a significantly higher percentage of the American population participating in the markets, shouldn't valuations be a little higher than they have been historically? We have more capital deployed in markets with a similar number of shares available, and private companies seem more valuable than they ever have. So I just feel like 16 on the P/E, the S&P might not be the right baseline to be comparing today's valuation.

Patrick, this is an excellent question. What price earnings ratio for the stock market is normal? So the forward PE ratio, and, and by the way, there are a million different P/Es you can use. You can look at trailing earnings, current fiscal year earnings, next 4 quarter earnings. You can look at adjusted earnings versus all-in earnings. I'm looking at a next 4-quarter PE ratio for the S&P 500. It's based on projected earnings for the 4 quarters ahead. And the average over the past 10 years is 19.3. So maybe that's normal. But hang on, if I stretch it back to the past 20 years, the average drops to 16.6. So maybe that's normal. Or I can look at much longer time periods and I can use measures of trailing earnings and all-in earnings, and I can come up with numbers closer to 15 or lower. Maybe that's normal. But here's the thing about stock investing, it's not physics. There's not really a normal. Stock investing is based on behavior. It's what people do. And we decide what's normal as we go along. There's no base that we reset back to. This is not like the laws of gravity. We can't get into a lab setting and take out all the other stray factors and make things happen the way they're supposed to happen. There is a lively argument, a debate around something called the equity risk premium. It's basically how much people demand to be rewarded for investing in stocks. And some people argue that stocks are worth more. You say maybe they're worth more because so many people are investing. But that would just push the prices up. If it didn't also push the fundamental pegs of value up, like the earnings and the cash flows and the book value, then we would have rising valuations. And we have. So that's arguably already going on. But the people who say that stocks deserve to trade at higher average valuations ongoing, one argument they make is, look, we have a central bank that intervenes now and then to stop big recessions from getting worse. We didn't always have that. That's a modern mechanism, and that helps to make stocks less risky. Is that true? Do you believe that? I'm not sure where I come down on it. I do see a Fed that has intervened a number of times in recent decades to, let's say, bring interest rates way down or make big purchases of securities to bring the yields down. Or do different things to get the economy going. And they do help spur the economy, but do they add other risks that we haven't caught on to yet? Do they maybe contribute to asset bubbles? I don't know. We don't learn the answers to these things until years later when we look back. I think the situation is a lot easier for bond investors because you're talking about larger yields where you can figure out mathematically, okay, how long is it going to take me to double my money? We used to be able to do something kind of similar with stocks, but dividend yields have gotten so small these days. Companies have gotten stingy with their dividend payments, so the S&P 500 yields only around 1%. It's hard to frame your thoughts about how pricey stocks are around such a puny yield. So Patrick, I don't know. Be careful about falling into what I've seen referred to as physics envy, and this is the tendency of investors to want to over-mathematize everything as though they can understand stock market investing as clearly as they understand the ballistics of, uh, billiard balls bouncing around a tabletop. All we can do is look at how things have gone in the past and make some educated guesses about how they will go in the future. I'll just tell you that my starting point is usually suspicious when it comes to the way rules of investing have permanently changed. In other words, I'm not going to bail out of the stock market just because price-earnings ratios are higher. In the near term, price-earnings ratios actually end up being a pretty poor predictor of returns over, let's say, the next year. But they've historically been a pretty good predictor of average returns over the next 10 years. Historically, when PE ratios are high, then returns going forward over the next decade tend to be low. And that's what I'm expecting. It's no reason to not be invested. It's a reason to not take on too much risk. If I'm wrong about that, I'll be pleasantly surprised. If I'm right, I'll be adequately protected. All I'll say in my defense is it's important to know what you don't know. You can prepare for that. Don't buy too much into the people who claim to know things that they can't possibly know. I know it's got to be time for a break because that's 2 questions down, right? We're going to do 2 more. Is that how this works? We'll be back after this quick something something.

Over the past 5 years, old world assets like energy, gold, and infrastructure have quietly outpaced equities, raising questions about the traditional 60/40 portfolio. VanEck believes the drivers aren't going away. AI buildout, reshoring, and record government spending are fueling a CapEx cycle that could last over a decade. RACS, the VanEck Real Assets ETF, gives investors active diversified exposure across all of it in one allocation. It's built for for this environment. Check it out at vaneck.com/raaxstreet. Listen for full fund disclosures at the end of today's episode.

Welcome back. Let's talk about a Wall Street strategy having to do with tax loss harvesting. This is Dave from the glorious People's Republic of New Jersey. Recently, my wealth advisor suggested I get involved with a strategy called tax loss harvesting through a program administered by BlackRock. I think I understand the concept, but I'm not really sure how this would benefit me in the long run. If I'm basically selling losses to offset gains, how do I come out ahead in the end? Dave from New Jersey, thank you. I don't know exactly what BlackRock is offering you under the name tax loss harvesting. I'll tell you how a lot of these programs work, and you can see whether this is a match for what you're being offered. Let's say that you have a lot of money. This works best if you have a lot of money. Instead of buying an S&P 500 index fund, for example, you can do what's called direct indexing. And it basically means you do what the fund is doing. You buy positions in all those stocks. Why would you want to do that? Well, one reason is if you work for a big company and you have a lot of that company's stock, and that stock has a high weighting in the S&P 500, the last thing you want as an investor is more exposure to that stock. That's going to hurt your diversification. So you might say, turn my S&P 500 into an S&P 499 by excluding that stock. That's a decent use of direct indexing. Another use is tax loss harvesting. Some of the stocks go down, others go up. You can sell the losers to offset the gains. It's going to reduce your tax bill, but there are a few things to think about. Number one, this surely adds fees, and those fees will eat into your tax savings. So be careful about how much this costs. This works best for someone with a very large and obviously taxable portfolio. And the benefits can shrink over time. Stocks tend to go up over time. So as your portfolio grows, you might have less in losses to offset your gains. You could think of the benefit here as really one of timing. You're deferring taxes. You're not going to eliminate them altogether. There's also added complexity. I'm going to say, eh, I'd be inclined to just stick with an index fund to do regular indexing. I don't like the added complexity. I never like added fees, and an index fund ends up being a pretty tax-efficient vehicle to begin with. Now, Dave, whether this is a good idea for you depends on the specifics of what BlackRock is offering. I can't tell you that, but hopefully those thoughts will give you a starting point. Thanks for your question. Let's talk now about niche investing and emerging market investing. We have a question about a specific fund that chooses markets based on freedom. Our question comes from John, who tells us that his friends call him Ace. He didn't say whether I'm a friend, but I'd like to get on the friendship fast track by calling you Ace from the start. Let's hear it, Ace. Hello, Jack. My question has to do with the fund called FRDM.

My understanding is that it only invests in non-US markets that are not dictatorships.

Uh, could you please help me understand why it's done so well and also if there are other funds like it? Ace, great question and thank you. You are referring to something called Freedom 100 Emerging Markets ETF, and the ticker is FRDM. And there's an index that it tracks, and it calls that index a freedom-weighted emerging markets equity strategy using personal and economic freedom metrics as primary factors in its investment selection process. The issuers of this ETF make the case that there's a direct relationship between freedom and investor returns. I guess I kind of believe that. I believe that there is a direct relationship between freedom and being able to raise money from outside investors for capital markets. It's not always the case. There are exceptions. The ETF company points to something they call the autocracy drag, and they cite two examples. One is Russia. Stock returns there have been abysmal. The other is China— returns there have been quite poor too. We've talked about that on this podcast in the past. So this company's process uses outside scores for freedom, and they use that to weight countries. They exclude companies with 20% or more state ownership. If you look, since this fund's inception date in 2019, the fund has returned 190%. That's better than the S&P 500. It's about 15 percentage points better. If you compare the Freedom 100 ETF with an emerging markets ETF, which is what we really should be doing, then the difference is even more striking. It's done more than twice as well as a big MSCI-based emerging markets ETF. So the case seems open and shut. The Freedom 100 gives you lots of freedom, lots of returns. You beat the market, and it makes it look like the fees for the fund, which are fairly high, 0.49%, are worth paying. But Ace, I'd be a little cautious in that thinking. The fund has benefited recently from not having China exposure. There were past periods where not having that exposure would have hurt the fund. When I look at the country breakdown for the fund, I see Taiwan at the top, 22%, South Korea 19%, Why do those two countries together make up 40% of the fund? It's definitely because of the AI investment boom. There's a huge amount of spending now on chips for data centers and memory and hard drives for data centers. Taiwan is at the epicenter of chip spending, and South Korea is huge for memory and hard drives. You asked, Ace, why is the fund done so well? It's done so well because it's riding the AI boom. It's not freedom. I can show you plenty of companies that are free where the returns stink. Now, over time, will this fund's methodology give you an edge over a broader emerging markets fund? I'm not ready to say yes. And I know that makes me sound like a bad guy, like am I against freedom or something? No, I like freedom. I am sometimes wary about who's doing the scoring and what they like or don't like. We said in the case of Russia, that seems not terribly controversial. But if you brought up— let's just use the example of Hungary. If you brought up Hungary here in the U.S., you'd have one side of the political spectrum would tell you, no, that's been a country that's on the march toward autocracy. Another side will tell you, no, they're doing it right. They're an example. Where I come down doesn't matter. It's just that the scorers can sometimes disagree. I think the market does a good job over time of deciding where investment dollars are going to flow. And I think investment dollars flow toward countries where there's enough economic freedom to allow companies to flourish. I will add, just as a last note on this, that I have seen cases of emerging market funds where they have separate weightings for China and Hong Kong and Taiwan, or as China would call all of those things, China. I've seen cases where the combined weighting of those countries is enormous. And I think that doesn't give you enough diversification. So I would be careful about the country diversification in a regular emerging markets fund. I tend also to think that some parts of the worldwide stock market are better than others for cheap indexing. Large-cap US stocks, that's where cheap indexing works very well. Emerging markets, it doesn't work as well. I'd also be inclined to consider reasonably priced active management for those stocks. I guess what I'm saying, Ace, is there's nothing to me that stands out about this fund as being particularly problematic. I just would not look at recent returns and say, hey, I almost tripled my money since 2019. That's the freedom factor at work. That's chips and hard drives. If freedom helps too, it's going to take a longer investment record to prove it. Thanks for a great question, Ace. I also want to thank our friends Dave from New Jersey, Patrick from sunny San Diego, and our space investor Ross. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, you can write a review. If you have a question you'd like answered on the podcast, send it in. Could be in a future episode. You can tape it on your phone, just use the voice memo app, send it to jack.hough@barons.com. See you next week.

What if the assets many investors ignored for years—energy, gold, and infrastructure—could play a meaningful role in the next cycle? The assets building the future aren't all in tech. Data centers need electricity. AI needs copper. Reshoring needs steel. And gold is signaling that the old rules about money, debt, and currency are shifting, something VanEck's Real Assets team has been highlighting for years. RAX, the VanEck Real Assets ETF, is built for this environment. It's an actively managed one-stop shop for real assets exposure, including gold, commodities, natural resource equities, and infrastructure, adjusting as macro conditions evolve. VanEck has been in real assets for 70 years. If you're looking to add inflation protection and real-world diversification to a portfolio, RAAX is worth a serious look. Visit vaneck.com/raaxstreet for the prospectus and full details. An investor should consider the investment objective, risks, charges, and expenses of the funds carefully before investing. To obtain a prospectus and summary prospectus which contain this and other information, visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing. RAAX is distributed by VanEck Securities Corporation Distributor.