WEBVTT - Invasion of the ANT ETFs 0:00:05.680 --> 0:00:13.600 Welcome to Trilliance. I'm Joel Webber in America. Bel tunis Eric. 0:00:13.800 --> 0:00:18.240 We've talked about anti e t F on Trillions before 0:00:19.120 --> 0:00:21.239 and we wanted to come back to it for this 0:00:21.320 --> 0:00:24.840 episode because it is a recent phenomenon. They just started 0:00:24.880 --> 0:00:30.560 this year, and I think it warn't a longer, deeper conversation. Yeah, 0:00:30.720 --> 0:00:32.440 a couple of things on this. First of all, AUNT 0:00:32.760 --> 0:00:36.400 is our own acronym stands for active non transparent. Other 0:00:36.520 --> 0:00:41.240 terms for them have been semi transparent ETFs, non transparent ETFs. Uh. 0:00:41.360 --> 0:00:43.440 Some people push for them just to be called active 0:00:43.479 --> 0:00:45.640 and that's it, but for the time being, they are 0:00:45.680 --> 0:00:47.880 a new structure. There's a couple of different types of 0:00:48.000 --> 0:00:51.800 ANT structures and they're all born out of the same motivation, 0:00:51.880 --> 0:00:55.640 which is over the years, active mutual funds, especially on 0:00:55.640 --> 0:00:58.360 the equity side, have seen e t f s blossom 0:00:58.480 --> 0:01:01.160 and wanted to get in there, but I just didn't 0:01:01.160 --> 0:01:03.680 want to show their holdings every day, and that's really 0:01:03.720 --> 0:01:05.880 part of what E t F do, and they're transparent. 0:01:06.280 --> 0:01:10.080 Active managers don't want to give that up. Ants. These structures, 0:01:10.160 --> 0:01:12.600 finally approved by the SEC, give them an opportunity to 0:01:12.640 --> 0:01:14.040 have some of the benefits the e t f s, 0:01:14.120 --> 0:01:17.400 namely tax efficiency, but without having to show their holdings 0:01:17.440 --> 0:01:20.920 every day. So to me, with Active has upwards of 0:01:20.959 --> 0:01:23.680 I don't know, fifteen to eighteen trillion dollars in assets. 0:01:24.360 --> 0:01:26.880 This is a big deal. That's that chunk of money 0:01:26.920 --> 0:01:29.679 now has a bridge over to the e t F world. 0:01:29.680 --> 0:01:33.919 And we've seen companies like American Century, Fidelity, t Rowe Price, 0:01:34.720 --> 0:01:38.600 UH and a few others launch active, non transparent e 0:01:38.680 --> 0:01:40.800 t f s this year for the first time, and 0:01:40.840 --> 0:01:43.039 we're probably going to see about a dozen others in 0:01:43.040 --> 0:01:46.360 the next year. So so joining us to help us 0:01:46.400 --> 0:01:49.960 understand the structure and sort of the future of this 0:01:50.640 --> 0:01:53.640 Greg re Freedman of Fidelity, where he's senior vice president 0:01:53.720 --> 0:01:56.600 and head of et F Management and Strategy, as well 0:01:56.720 --> 0:02:00.880 Scott Livingston of t Rowe Price, who's of Global et 0:02:01.000 --> 0:02:04.440 F Product. Also joining us as Morgan Barna, an e 0:02:04.560 --> 0:02:14.480 t F and mutual fund analyst with Bloomberg Intelligence, this 0:02:14.600 --> 0:02:22.040 time on Trilliance Invasion of the ants. Greg, Scott, welcome 0:02:22.040 --> 0:02:25.880 to Trillions. Thank you for having us. So I wanna 0:02:25.919 --> 0:02:29.120 I wanna start by asking you why does the world 0:02:29.720 --> 0:02:32.360 need aunt e t s. Let's start with you, Greg. 0:02:32.680 --> 0:02:35.440 First of all, uh, we don't believe you know the 0:02:35.560 --> 0:02:39.280 term and I know is in house of brand. UM, 0:02:39.360 --> 0:02:41.440 we don't really believe in that these are just active 0:02:41.440 --> 0:02:44.440 equity e t f s. There's a notion that the 0:02:44.520 --> 0:02:48.679 semi transparent nature of it is you know, a negative, 0:02:49.360 --> 0:02:51.720 but it's really a positive. How do we protect our shareholders? 0:02:51.720 --> 0:02:53.880 How do we protect the value that they're getting from 0:02:53.880 --> 0:02:56.880 these active equity e t f s. And in some ways, 0:02:57.120 --> 0:02:59.440 you know, the structure of how these work aren't any 0:02:59.480 --> 0:03:02.639 different than how per say, you know non US equity 0:03:02.680 --> 0:03:06.000 ETFs work today. You know, they're not hunt present progrative 0:03:06.080 --> 0:03:08.760 just because of the nature of the markets, the time zones, 0:03:09.240 --> 0:03:12.399 and the complications. So we've taken a model that exists 0:03:12.440 --> 0:03:16.360 already with non US equity ETFs applied it to an 0:03:16.360 --> 0:03:19.280 active strategy. And why this is important is if you 0:03:19.360 --> 0:03:22.520 look at the history of ETFs, we've had a tremendous 0:03:22.560 --> 0:03:27.320 growth with pure passive ribatis since the with the invent 0:03:27.360 --> 0:03:31.000 of the Spider and through the Eye shares and Vanguard, etcetera. UM, 0:03:31.200 --> 0:03:33.760 we've seen a tremendous growth in the last five years 0:03:33.760 --> 0:03:36.560 around what I call Chapter two being smart data, which 0:03:36.560 --> 0:03:40.960 our outcomes and solutions, very tactical, surgical type of applications 0:03:41.000 --> 0:03:46.560 for institutional type of investing, for retail and individuals. And 0:03:46.560 --> 0:03:48.800 this is the natural third chapter. It's active, How do 0:03:48.800 --> 0:03:51.600 I get active equity and active fixed income? Active fixed 0:03:51.640 --> 0:03:53.280 income has been around for a while, but the one 0:03:53.320 --> 0:03:56.400 piece that's been missing its active equity. And now, through 0:03:56.440 --> 0:03:59.400 the invent of the technology and approvals that a lot 0:03:59.400 --> 0:04:03.360 of us god from the SEC we're able to add 0:04:03.400 --> 0:04:07.200 to our clients repertoire a active equity e TP that 0:04:07.280 --> 0:04:10.040 gives int the excess return. So you know, when people 0:04:10.040 --> 0:04:14.520 are building these portfolios for themselves, either strategists, individuals, institutions, 0:04:14.920 --> 0:04:16.560 they've got all the tools in front of them. They've 0:04:16.560 --> 0:04:18.600 got passive, they got smart data, and now they have 0:04:18.720 --> 0:04:22.920 active for both equity and fixed incomes. The biggest difference 0:04:22.920 --> 0:04:24.600 here is that the z t F side outphits an 0:04:24.600 --> 0:04:26.800 investor of portfolio, and we know that even a little 0:04:26.800 --> 0:04:30.840 bit of alpha can drastically have an impact on investor outcomes. 0:04:31.279 --> 0:04:33.560 Many of the strategies brought to market have had that 0:04:33.600 --> 0:04:37.839 track record of strong performance and increasing returns for clients. 0:04:38.480 --> 0:04:40.880 And yeah, so let me come in with my aunt 0:04:41.040 --> 0:04:44.320 defense I hear you, and I think ultimately, I don't 0:04:44.400 --> 0:04:49.479 think transparency. It's arguably not the most important aspect of 0:04:49.480 --> 0:04:51.719 an e t F. I think it's probably fifth or 0:04:51.760 --> 0:04:54.159 sixth on the list of advantages or things people like 0:04:54.200 --> 0:04:57.200 about e t s, And especially here, I think people 0:04:57.200 --> 0:04:59.440 just want to see if it performs, right. I just 0:04:59.480 --> 0:05:02.479 think as us in the media, and uh, you know, 0:05:02.600 --> 0:05:06.080 looking at something new in the industry, it does moret 0:05:06.080 --> 0:05:08.600 a different label. That's how people so it's more of 0:05:08.640 --> 0:05:11.039 a communication. I will say that the et F industry 0:05:11.080 --> 0:05:14.680 is full of unique term spiders. I mean that that 0:05:14.760 --> 0:05:18.000 worked out pretty well for State Street vipers. That worked 0:05:18.000 --> 0:05:20.400 out well for Vangard until they dropped it. But anyhow, 0:05:20.839 --> 0:05:23.279 um aunt seems to fit in that whole, like stuff 0:05:23.279 --> 0:05:25.160 you don't want in your house. But it has a 0:05:25.200 --> 0:05:28.080 cool acronym kind of thing, I guess. But anyway, let 0:05:28.160 --> 0:05:29.800 me ask some tough questions for you guys. I have 0:05:29.880 --> 0:05:31.960 I have a one two punch tough question. But I'm 0:05:32.000 --> 0:05:34.279 sure you're ready for it. Um You probably get asked 0:05:34.320 --> 0:05:37.240 this a lot. First of all, you look at these strategies, 0:05:37.279 --> 0:05:39.760 they're all large cap. Now, if you look at the 0:05:39.800 --> 0:05:44.400 flows of active mutual funds, all cap sizes, all international, 0:05:44.440 --> 0:05:48.800 all fixed income. The worst hardest hit is large cap. 0:05:49.440 --> 0:05:52.760 People just say, you know, Amazon's got fifty analysts covering it. 0:05:52.800 --> 0:05:55.600 There's no new information there. I'll just go passive. That 0:05:55.640 --> 0:05:58.200 seems to be a lot of what advisers saying. When 0:05:58.240 --> 0:06:01.080 it goes to small cap or international, they think, okay, 0:06:01.120 --> 0:06:06.200 well there's less coverage, there's more opportunity for alpha uh 0:06:06.240 --> 0:06:09.640 and the flows show it. So why go to large cap? 0:06:09.720 --> 0:06:13.240 What's to say these will succeed if the mutual fund struggles, 0:06:13.279 --> 0:06:15.400 and you know, why not put out something that's maybe 0:06:15.440 --> 0:06:20.120 a little different, like international or small. I'll start with Greg. Sure, No, 0:06:20.480 --> 0:06:23.080 it's a question we've heard before. You know, in three 0:06:23.080 --> 0:06:25.240 to five years, no one should talk about the structures. 0:06:25.800 --> 0:06:28.000 All the structures out there work, and they all are 0:06:28.080 --> 0:06:30.920 produced by quality shop. It's really gonna be how's your 0:06:30.920 --> 0:06:34.240 client experience? What is your fund perform? What's my client experience? 0:06:34.839 --> 0:06:37.200 Build on to what you're you're asking Eric. You know 0:06:37.320 --> 0:06:39.560 right now the SEC is only allowed us to do 0:06:39.800 --> 0:06:43.680 large cap us equity um. It follows the same pattern 0:06:43.720 --> 0:06:45.400 we saw with the h F industry. You know, if 0:06:45.400 --> 0:06:47.720 you look at the spider. In the early et F 0:06:47.800 --> 0:06:50.599 they're all large cap. Then they went to MidCap, small cap, 0:06:50.720 --> 0:06:55.080 non US equity, fixed income, commodities, et cetera. We'll probably 0:06:55.120 --> 0:06:57.160 follow the same game plan. So right now, the only 0:06:57.160 --> 0:06:59.840 reason you're seeing large cap US equally only if that 0:07:00.080 --> 0:07:02.200 the only thing allowed by the SEC. You know, they 0:07:02.200 --> 0:07:05.000 want us to test and make sure this works. You know, 0:07:05.040 --> 0:07:08.920 we've spent fidelity. We really started the first application two 0:07:08.920 --> 0:07:11.200 thousand seven and really started working with the SEC and 0:07:11.240 --> 0:07:13.360 earns in two thousand and twelve, so it's taken eight 0:07:13.480 --> 0:07:15.480 years to get the SEC comfortable. So they're not going 0:07:15.520 --> 0:07:18.840 to allow any of US sponsors to go out with 0:07:19.040 --> 0:07:22.320 an emerging market small cap. It's gonna be a large 0:07:22.360 --> 0:07:25.840 cap US equity and proved that works, and every product 0:07:25.920 --> 0:07:29.280 so far that's not launched has worked. Now. In terms 0:07:29.320 --> 0:07:32.000 of flows, yes, we've seen some outflows in the mutual 0:07:32.040 --> 0:07:35.280 fund industry, but remember that the client based avias ETFs 0:07:35.360 --> 0:07:39.120 are different, the different user, the different profile, it's a 0:07:39.200 --> 0:07:43.160 different client. So for us, each F client is very 0:07:43.200 --> 0:07:47.080 different than the mutual phone client. The each of clients seems, 0:07:47.160 --> 0:07:50.960 you know, in some cases are no more sophisticated, more 0:07:51.120 --> 0:07:55.360 educated using more of the offerings that a fidelity has. 0:07:55.480 --> 0:07:58.520 So it's it's it's a very profitable client where in 0:07:58.680 --> 0:08:01.600 some cases the mutual clients, it's a different client base 0:08:01.640 --> 0:08:03.360 and a lot of learned DC plan so you have 0:08:03.440 --> 0:08:06.560 a different flow pattern just because of that alone. Um, 0:08:06.680 --> 0:08:09.880 we've got some experience through our sectors and our fixed income. 0:08:10.080 --> 0:08:13.680 Yet when we launched the US the active ETF for 0:08:13.760 --> 0:08:16.480 the path VTS, we didn't see cacunibalization. In fact, we 0:08:16.520 --> 0:08:19.760 saw both tides rise. Scott, do you have I mean, 0:08:19.840 --> 0:08:23.520 I'm guessing you echo of that or it. Do you 0:08:23.560 --> 0:08:27.040 have anything else to add? It's it's hard to continue 0:08:27.080 --> 0:08:28.440 to agree with Greg, but I think he did a 0:08:28.520 --> 0:08:31.960 nice job there and honestly, I think it was reasonable. 0:08:31.960 --> 0:08:35.199 So t RO has had a similar timeline and while 0:08:35.240 --> 0:08:37.320 over a decade trying to bring this to market. Um, 0:08:37.640 --> 0:08:40.559 you know, really constructive conversations with the SEC throughout. I 0:08:40.640 --> 0:08:44.719 think they were very thoughtful about this, and you know, 0:08:44.840 --> 0:08:48.480 one of the key requirements was you know, we're hearing 0:08:48.559 --> 0:08:50.640 from from you and from others that this will work. 0:08:50.880 --> 0:08:52.760 You know, we worked with market makers who are very 0:08:52.800 --> 0:08:55.520 thoughtful through the design phase. Tons of different tests and 0:08:55.840 --> 0:08:58.440 back test and and tools we played put in place 0:08:58.520 --> 0:09:03.040 to ensure that these ets trade efficiently. Um. So we're 0:09:03.040 --> 0:09:05.000 able to convince the SEC, but they really wanted to 0:09:05.080 --> 0:09:07.480 make sure that we started in in the most liquid 0:09:07.600 --> 0:09:09.800 area of the market, which is which tends to be 0:09:09.920 --> 0:09:12.760 larger cap us names. But I think the best thing 0:09:12.840 --> 0:09:15.520 that Gregg said, um, was this is early inns. So 0:09:15.880 --> 0:09:18.319 this is very early on. Um. You know, I think 0:09:18.360 --> 0:09:20.080 all these firms that have come to market have truly 0:09:20.120 --> 0:09:24.280 been innovators and offering their client's choice. And this is 0:09:24.280 --> 0:09:26.439 going to play out over many years. And I think 0:09:26.520 --> 0:09:30.240 it's a relatively easy argument. Eric, you commented on the 0:09:30.360 --> 0:09:33.400 amount of money that's that's managed by active investors or 0:09:33.440 --> 0:09:36.719 active managers excuse me at the top, Uh, it's a 0:09:36.760 --> 0:09:41.160 big bucket of of money. And to package that invest 0:09:41.280 --> 0:09:44.679 the active investment and potentially a more efficient rapper for 0:09:44.760 --> 0:09:47.280 certain types of clients is is a pretty easy argument 0:09:47.320 --> 0:09:50.559 to me. Okay, So here's my second tough question, which 0:09:50.679 --> 0:09:54.040 is just how the environment has changed since the nineties. Right. 0:09:54.120 --> 0:09:56.320 You know, when you think Fidelity tro you guys kind 0:09:56.360 --> 0:09:59.840 of ruled the nineties. The vanguard was even a small 0:10:00.040 --> 0:10:02.760 layer until the mid nineties, and they really blew up 0:10:02.800 --> 0:10:04.880 in two thousand and eight till now, and passive has 0:10:04.920 --> 0:10:09.040 become a huge deal in that process. Active has then 0:10:09.200 --> 0:10:12.880 taken the index and done active things with it. So 0:10:13.040 --> 0:10:16.760 you have smart beta where you take fundamental strategy put 0:10:16.800 --> 0:10:20.360 into a rules based index. You've got themes, You've got 0:10:20.440 --> 0:10:23.640 E s G now which is active. You've got Cathy 0:10:23.720 --> 0:10:27.040 Wood who's like high Babe Ruth Swing for the Fences active, 0:10:27.920 --> 0:10:30.080 and now you've got something like d f A coming 0:10:30.160 --> 0:10:34.559 in as cheap active. And I just wondered how you 0:10:34.800 --> 0:10:37.320 evaluated that landscape and if you thought of any other 0:10:37.679 --> 0:10:41.400 possible ways to enter the E t F world, and 0:10:41.520 --> 0:10:44.520 how you chose to do this method. I'm assuming it's 0:10:44.520 --> 0:10:46.599 because this is your DNA, this is what you do. 0:10:46.640 --> 0:10:48.280 You're not going to stray from it. But some of 0:10:48.360 --> 0:10:51.640 the firms have converted some of their active into smart 0:10:51.720 --> 0:10:54.439 beta or these other methods. Um, so can you just 0:10:54.480 --> 0:10:57.960 talk about the changing because all that to us is active. Yeah, 0:10:58.200 --> 0:11:00.240 I think it's I think it's a good question. Um. 0:11:00.440 --> 0:11:02.960 You mentioned smart data and I think it's a form 0:11:03.040 --> 0:11:06.080 of active, right, So if you think about the penduloum 0:11:06.160 --> 0:11:08.199 er or the or the scale from from passive to 0:11:08.280 --> 0:11:11.360 fully active. I think that's probably in the middle. Um, 0:11:11.760 --> 0:11:14.079 you know, it's still a benchmark, it's still it's sort 0:11:14.120 --> 0:11:18.120 of an automatic rebalance in many cases. Um, but it's 0:11:18.280 --> 0:11:20.720 it's it's a smart index, right, So I kind of laugh. 0:11:21.280 --> 0:11:23.559 You know, we certainly are aware of the growth of 0:11:23.600 --> 0:11:26.600 those strategies. We've looked at it. To answer your question initially, 0:11:26.600 --> 0:11:28.280 be where you go down the path, Erika, you know 0:11:28.600 --> 0:11:30.400 this this is our d n A, right, So when 0:11:30.440 --> 0:11:32.679 we thought about coming to e T f s, this 0:11:33.040 --> 0:11:35.320 was a play for us to bring our best strategies 0:11:35.320 --> 0:11:37.640 to market, and to do that, we really needed the 0:11:37.720 --> 0:11:41.160 ability to shield IVP and protect investor performance. So I 0:11:41.200 --> 0:11:43.719 think it's logical that we started with flagship funds that 0:11:43.760 --> 0:11:47.439 tour Price is known for that have large retail franchises 0:11:47.559 --> 0:11:50.040 investors that wanted to access these strategies through an e 0:11:50.080 --> 0:11:52.480 T A crapper. That's not to say longer term, we 0:11:52.520 --> 0:11:55.959 won't consider uh smart data or some of the other 0:11:56.040 --> 0:12:01.240 types of products you mentioned as it pertains to smart data. Um, 0:12:01.440 --> 0:12:04.079 you know, there's some interesting ideas in that space, but 0:12:04.200 --> 0:12:06.360 it still goes back to the fact that they're sort 0:12:06.400 --> 0:12:09.679 of automatically rebalanced. There's not really a PM, you know 0:12:09.840 --> 0:12:13.280 that that has this hand or her hand on the wheel. Um. 0:12:13.679 --> 0:12:15.679 We still prefer the way that we do active. I 0:12:15.720 --> 0:12:19.400 think there's uses for some of those other types of strategies. UM, 0:12:19.640 --> 0:12:21.960 but ultimately what we're talking about is full active, where 0:12:22.000 --> 0:12:25.840 a PM has the ability to make decisions intra day. Uh. 0:12:26.080 --> 0:12:29.880 They're not constrained of a specific index or um, you know, 0:12:30.040 --> 0:12:33.160 some sort of calculation on the back end. They're really 0:12:33.200 --> 0:12:36.040 able to monitor the markets, kind of work through the volatility, 0:12:36.240 --> 0:12:42.000 identify interesting opportunities. Um. Everything he's here, It's true. I 0:12:42.080 --> 0:12:46.600 mean your passive has been great acid gather and our minds. However, 0:12:46.720 --> 0:12:51.640 smart data is outcome and solution oriented. So the focus 0:12:51.760 --> 0:12:53.839 is like, how do I fix volatility. I've got a 0:12:53.880 --> 0:12:56.719 concern around that, or I'm looking for extra yield or 0:12:56.720 --> 0:12:58.920 I'm looking to farmer French is you know a guide 0:12:58.960 --> 0:13:02.960 to factors? How do I get very scalpel type precision 0:13:03.040 --> 0:13:05.360 into my investment with the solution or outcome. So that's 0:13:05.360 --> 0:13:08.120 how we think of smart data. Active is just that 0:13:08.440 --> 0:13:11.199 excess return. So when we think about our landscape and 0:13:11.240 --> 0:13:14.880 how we build out our et F enterprise, it's the 0:13:15.000 --> 0:13:17.800 passive building blocks with our own sectors one queue and 0:13:17.840 --> 0:13:21.400 our partnership with black Rock too. It's the smart data, 0:13:21.480 --> 0:13:26.000 which are solutions or outcomes, volatility, momentum value, et cetera. 0:13:26.480 --> 0:13:29.000 And then the third piece of it is the active piece, 0:13:29.040 --> 0:13:32.800 which is the excess return above benchmark. Now, you know, 0:13:32.880 --> 0:13:35.079 as you said, there's other flavors out there which we're 0:13:35.120 --> 0:13:38.559 excited about and we're thinking about as well. Thematic In 0:13:39.040 --> 0:13:42.040 our minds, it's a compliment hip, you know, the next 0:13:42.120 --> 0:13:46.120 wave of sector investing and thematic investing. So there's no 0:13:46.400 --> 0:13:49.040 clear delineation, but our goal is how do we take 0:13:49.120 --> 0:13:52.760 our fundamental research and our bombs up approach and our 0:13:52.840 --> 0:13:56.000 heritage and put into different products and different strategies that 0:13:56.080 --> 0:13:59.280 our clients can can use. I think one thing that's 0:13:59.320 --> 0:14:01.800 really interesting, you know, how are you going to introduce 0:14:02.280 --> 0:14:05.840 the active managers of these strategies to this new audience. 0:14:05.960 --> 0:14:08.439 I think that is one of the more interesting areas 0:14:08.520 --> 0:14:12.959 here where you know, the the former um you know, 0:14:13.120 --> 0:14:16.280 base of investors that are typical mutual fund investors maybe 0:14:16.320 --> 0:14:19.680 sought out or were placed into these funds by advisors. 0:14:20.120 --> 0:14:22.520 And you know, I'm curious, you know, with with your 0:14:22.560 --> 0:14:25.440 familiarity of of the E t F distribution landscape and 0:14:25.880 --> 0:14:28.600 and through the channels, especially Fudelity has some of its 0:14:28.640 --> 0:14:31.680 own distribution channels. You know, who you you intend to 0:14:31.840 --> 0:14:35.080 be these incremental investors and how you plan to introduce 0:14:35.120 --> 0:14:38.960 the portfolio managers to them. Well, yeah, it's it's a 0:14:38.960 --> 0:14:42.160 interesting question. You know. Our first three tfs are what 0:14:42.280 --> 0:14:46.280 we're calling clon is, where they're similar to existing strategies, 0:14:46.360 --> 0:14:48.480 you know, the Scott point, and we have a heritage 0:14:48.520 --> 0:14:51.160 of successful mutual funds and the ones that we think 0:14:51.240 --> 0:14:54.520 would translate well into an ETF form as well. In 0:14:54.600 --> 0:14:57.840 addition to you know, we've made clonish. Our job is 0:14:58.280 --> 0:15:02.760 to present clients solution and philosophies to help them with 0:15:02.800 --> 0:15:05.400 their investing. Whatever vehicle they want, they can choose the 0:15:05.560 --> 0:15:07.920 I T S, S M as models ETFs except for 0:15:08.040 --> 0:15:12.040 mutual funds. UM. Not every of our active equity ETFs 0:15:12.040 --> 0:15:14.400 are gonna be clonish. Some are a good brand new strategy. 0:15:14.520 --> 0:15:17.120 So while you know, the stars of the show are 0:15:17.160 --> 0:15:20.120 still the investors and they're still the ones that creating 0:15:20.120 --> 0:15:24.400 the alpha, we're producing products that fit clients needs. So 0:15:24.440 --> 0:15:28.760 it might be clonish UM like our first three. We 0:15:28.880 --> 0:15:31.560 might have a series that aren't run by you know, 0:15:31.640 --> 0:15:34.280 an existing strategy that they're run by new managers, So 0:15:34.840 --> 0:15:37.160 more important to us it's you know, what's the strategy, 0:15:37.320 --> 0:15:42.280 How's it solved a client's needs necessarily than UM you 0:15:42.360 --> 0:15:44.680 know the manager's name behind it. You know, I think 0:15:44.800 --> 0:15:49.480 the days of single ticker sales either stocks or funds 0:15:49.640 --> 0:15:52.320 have diminished. Investors are now looking for how do I 0:15:52.400 --> 0:15:55.240 sell my needs? Isn't ETF? Is a mutual fund? Is 0:15:55.320 --> 0:15:58.840 a model, is an s m A. And for advisors 0:15:58.920 --> 0:16:02.560 like Fidelity, it's how do we add all our capabilities 0:16:03.320 --> 0:16:05.760 and put into a position where clients can then choose 0:16:06.040 --> 0:16:09.440 what's the rapper? What's the strategy? Why you use? Yeah? 0:16:09.600 --> 0:16:12.600 Last week, I mean, Dimensional Fund advisors said they're going 0:16:12.640 --> 0:16:16.720 to convert six mutual funds um directly to an et F. 0:16:16.800 --> 0:16:19.800 These were tax managed strategies, but but basically, you know 0:16:19.920 --> 0:16:22.560 the way we were speaking with the team, I mean 0:16:22.680 --> 0:16:26.280 they said, shareholders are are going to go to sleep 0:16:26.400 --> 0:16:29.120 with mutual fund and wake up with with shares of 0:16:29.200 --> 0:16:32.000 an e t F. I mean to me, that is 0:16:32.040 --> 0:16:34.480 a very customer centric way to do this. UM. There 0:16:34.520 --> 0:16:37.600 are obviously some some technical hurdles, but they're going to 0:16:37.680 --> 0:16:40.320 start off with the assets that they formerly had in 0:16:40.360 --> 0:16:42.880 these strategies, which is around twenty nine billion for the 0:16:43.280 --> 0:16:46.640 six funds. You know, what does this mean for you know, 0:16:47.040 --> 0:16:49.040 for you guys, and what does it mean for the 0:16:49.240 --> 0:16:52.080 mutual fund companies that haven't yet launched? You know, do 0:16:52.160 --> 0:16:54.760 you think they'll take a harder look at conversion. We've 0:16:54.840 --> 0:16:57.600 heard and I know you can. There's a lot of 0:16:57.680 --> 0:17:00.040 technical steps that have to be done. I think some 0:17:00.080 --> 0:17:02.200 of the concerns around broke which accounts happen to be 0:17:02.280 --> 0:17:05.920 open shareholder approval, so there's some some sticky issues out 0:17:05.960 --> 0:17:09.240 there as well as you know board responsibility. Um, we're 0:17:09.400 --> 0:17:12.639 rap agnostic. We believe in in mutual funds. We believe 0:17:12.640 --> 0:17:15.600 in ETFs, s M A s C I, T S models, 0:17:15.680 --> 0:17:18.680 et cetera. So you know, we don't at this point 0:17:18.960 --> 0:17:21.399 see a huge need for us to convert because some 0:17:21.520 --> 0:17:23.800 of our our mutual funds are still being used across 0:17:23.840 --> 0:17:26.120 our different platforms and in some cases the mutual fund 0:17:26.160 --> 0:17:29.200 outperforms and it's better for some clients and some platforms 0:17:29.240 --> 0:17:31.000 in the e t F. So we want to be 0:17:31.240 --> 0:17:35.199 rapor agnostic and offer our clients all the different rappers. Um, 0:17:35.280 --> 0:17:37.400 if we think of strategy is good, we might open 0:17:37.440 --> 0:17:39.320 in et F and a mutual fund, but then the 0:17:39.400 --> 0:17:42.600 client can choose between SM a mutual fund and ETF 0:17:42.640 --> 0:17:45.520 because once again the client base we're scene is different 0:17:46.040 --> 0:17:49.240 that the actual client of mutual fund is very different 0:17:49.280 --> 0:17:50.840 as I said in the beginning, than a client in 0:17:50.880 --> 0:17:53.920 the ETF. And we don't want necessary alien or force 0:17:54.040 --> 0:17:58.040 someone into a rappid it in by initially, so you know, 0:17:58.160 --> 0:18:01.639 for us, it's choice value innovation rather than necessary emergence. 0:18:09.320 --> 0:18:11.200 So I want to ask, I mean, you guys have 0:18:11.320 --> 0:18:15.320 given us a pretty high level overview, um uh. And 0:18:15.440 --> 0:18:18.760 I want to kind of dive into just a very 0:18:18.920 --> 0:18:21.240 kind of specific example. So I pulled up the t 0:18:21.440 --> 0:18:24.920 rowe price blue Chip growth e t F, the tickers 0:18:25.600 --> 0:18:31.879 tc HP, and I'm also pulling up the the holdings 0:18:32.200 --> 0:18:34.440 on on the Bloomberg terminal so I can see what's 0:18:34.480 --> 0:18:40.080 in here, and it shows Amazon, Facebook, Alphabet Apple. But 0:18:40.200 --> 0:18:44.879 this this is actually a proxy, right, So I'm curious, like, 0:18:45.040 --> 0:18:48.560 what what is that showing? Exactly what am I? What 0:18:48.680 --> 0:18:51.760 would I own as an investor? There? What we've done 0:18:52.080 --> 0:18:54.600 is what you've pulled up is our proxy basket. So 0:18:54.680 --> 0:18:57.480 if we think about what we view as the reason 0:18:57.560 --> 0:19:00.639 for Delhi disclosed holdings and passive products, it's for pricing 0:19:00.720 --> 0:19:04.199 and valuation of products that are trading intra day. Passive 0:19:04.200 --> 0:19:07.280 products are UM in our case, you know, for the 0:19:07.320 --> 0:19:10.320 reasons we discussed, we're not able to show those those 0:19:10.400 --> 0:19:14.360 daily holdings disclosures, so instead we're producing. Just as Fidelity 0:19:14.520 --> 0:19:18.640 is a proxy basket or tracking basket, and that basket 0:19:18.760 --> 0:19:22.399 really is intended to give market makers the information they 0:19:22.480 --> 0:19:25.520 need to accurately price ets in market. What I mean 0:19:25.600 --> 0:19:28.200 by that is essentially that's a basket designed to as 0:19:28.240 --> 0:19:31.120 closely replicate for performance of the underlying fun as possible. 0:19:31.800 --> 0:19:34.439 But that basket isn't a percent overlap. Um. There are 0:19:34.520 --> 0:19:36.400 names that we're working into are out of each day. 0:19:36.520 --> 0:19:38.560 Those are the names where we have the most sensitivity 0:19:38.600 --> 0:19:41.320 from an IP perspective in order to keep our transaction 0:19:41.400 --> 0:19:45.439 costs inlineing and seek best execution for our clients. UM, 0:19:45.520 --> 0:19:49.080 they're not in our proxy basket. So the proxy baskets 0:19:49.119 --> 0:19:51.680 the primary pricing signal. Market makers use that just like 0:19:51.760 --> 0:19:54.280 they would a daily disclosed basket for a passive product. 0:19:54.760 --> 0:19:58.040 In addition, the proxy basket serves as our creation redemption basket. 0:19:58.240 --> 0:20:01.360 Again that's really important in the e t F construct. 0:20:01.920 --> 0:20:03.879 There's the create redeem is really where you get that 0:20:03.960 --> 0:20:07.000 tax efficiency. So when we publish our proxy each day, 0:20:07.400 --> 0:20:09.520 market makers use it for pricing, they can use it 0:20:09.600 --> 0:20:12.440 to create redeem if there's excess supplier demand and market 0:20:12.480 --> 0:20:15.440 for shares. Again, that's how ets have operated here in 0:20:15.600 --> 0:20:17.800 since ninety three in the US, so it just really 0:20:18.280 --> 0:20:21.240 uh fits right into their existing workflow. In addition to 0:20:21.320 --> 0:20:24.040 that proxy basket, we give a fifteen second i D 0:20:24.400 --> 0:20:29.200 or INTROD excuse me, interday indicative value UM every fifteen 0:20:29.240 --> 0:20:32.560 seconds to seminating via the exchange of our actual fund. 0:20:33.240 --> 0:20:34.919 So if you're a market maker, you have a proxy 0:20:35.000 --> 0:20:37.639 basket your primary pricing signal, you have a fifteen second 0:20:37.720 --> 0:20:40.160 I I D every fifteen seconds you get a check 0:20:40.200 --> 0:20:42.680 of the real fund value. And then third we give 0:20:43.119 --> 0:20:46.520 risk metrics. And these risk metrics are produced daily, published 0:20:46.560 --> 0:20:49.560 on our website. And really what they do is they 0:20:49.640 --> 0:20:52.520 quantify the close relationship between that proxy basket you pulled 0:20:52.600 --> 0:20:55.600 up Joel and the current fund holdings. So I think 0:20:55.640 --> 0:20:57.200 they're going to show that there's a high degree of 0:20:57.440 --> 0:21:01.080 of of overlap portfolio overlap between the two baskets. They're 0:21:01.080 --> 0:21:03.399 going to show that there's a low degree of tracking 0:21:03.560 --> 0:21:06.359 or high degree of correlation. And again that's really to 0:21:06.400 --> 0:21:10.040 get people comfortable, people meaning market makers comfortable that the 0:21:10.080 --> 0:21:12.720 proxy basket is really an accurate representation of the current 0:21:12.760 --> 0:21:15.560 basket and they can use a price and purposes for 0:21:15.680 --> 0:21:19.800 the end investor. The proxy basket does show you the 0:21:19.920 --> 0:21:22.320 types of names you can expect to own. You know, 0:21:22.840 --> 0:21:25.399 our clients are used to getting full holdings on a 0:21:25.520 --> 0:21:28.720 quarterly basis, on a fifteen day lag for our mutual 0:21:28.760 --> 0:21:30.560 fund holdings, they're going to get the same thing here 0:21:30.600 --> 0:21:33.199 for the e t F they get top ten holdings 0:21:33.400 --> 0:21:35.840