Speaker 1: Welcome a giants.
Speaker 2: I'm Joel Webber and I'm Eric Belchernas.
Speaker 1: You know, Eric, we've never actually talked that much about
Speaker 1: revenue in the ETF industry, and Bloomberg Intelligence recently did
Speaker 1: some research about this.
Speaker 2: Yeah. One of the things we love to look at
Speaker 2: is assets, and then of course your market share and
Speaker 2: where you rank.
Speaker 1: In assets that we talk about that all the time totally.
Speaker 2: But then when you compare it to like revenue and
Speaker 2: revenue share and revenue rank, you get a different order
Speaker 2: of firms, you know, like Vanguard slides down the list
Speaker 2: in revenue, other firms that sell leverage products they go up.
Speaker 2: It's really interesting. But to me, this is so useful
Speaker 2: for our clients and when we write because everyone's trying
Speaker 2: to deal with this new ETF terror dome as we
Speaker 2: call it, because it's we're all the fisher biting. But
Speaker 2: they're very picky and they love cheap, So how can
Speaker 2: you make money? And so by studying who can actually
Speaker 2: make more money than their assets allow and vice versa,
Speaker 2: and how that works, it can help firms figure out
Speaker 2: where to launch products and how to price them.
Speaker 1: Athan, I say Sarah Fagus at Bloomberg Intelligence who's an analyst.
Speaker 1: He's written some of this research, right.
Speaker 2: Yeah, of the whole team, you know, I think Athan
Speaker 2: Is he's like a you know, you ever heard of
Speaker 2: that term, a musicians musician, like a band that like
Speaker 2: a lot of like velvet underground. He is really good
Speaker 2: at surprising the team with research. So I think he's
Speaker 2: like an analyst analyst, and when he does these deep dives,
Speaker 2: I'm always like wow, and like usually it has like
Speaker 2: two or three charts in there or data points that
Speaker 2: blow my mind. And you know, I live and breathe
Speaker 2: this stuff. So this was one of those studies I
Speaker 2: thought had a lot of good nuggets like that that
Speaker 2: he unearthed.
Speaker 1: So joining us Athanasius and Blooming Intelligence and also Katie
Speaker 1: Greyfield of Bloomberg News. It's also the co host of
Speaker 1: the new Money Stuff podcast, this time on Trillions What
Speaker 1: Pays the Bills? Athanasios, Katie, welcome back to Trillions.
Speaker 3: Thanks for having me. I mean, after that Athanasios intro,
Speaker 3: I'm expecting.
Speaker 1: A musicians musician, right, Athasias, what what music do you
Speaker 1: actually play?
Speaker 3: Well?
Speaker 4: I don't play any analysts, I don't know, like it
Speaker 4: does a terminal calendar.
Speaker 2: Music he's in the house music house like like.
Speaker 4: Warehouses, wow.
Speaker 2: Outlaw parties, after hours parties where eighten hangs out. The
Speaker 2: place doesn't quote get good till like three thirty in
Speaker 2: the morning.
Speaker 1: Oh my gosh, Okay, what did you set out to
Speaker 1: on earth with your with your researcher.
Speaker 4: You know what actually inspired this was an article you
Speaker 4: had written about the fidelity. Yeah. That's because you know,
Speaker 4: we cover it for a while and it's great for
Speaker 4: the investor, But the end of the day, someone needs
Speaker 4: to make money, right, Like, in order to keep these
Speaker 4: products coming, all this innovation, it needs to be funded somehow.
Speaker 4: While it's great for the investor, So like Vanguard funds
Speaker 4: for three basis points, when you look at what are
Speaker 4: the firms that are making money, it's actually really really interesting.
Speaker 4: For example, like First.
Speaker 1: Trust, it's hard to make a buck, right, that's very
Speaker 1: way here.
Speaker 4: Yeah, I mean just even in context, you make way
Speaker 4: less money than you do let's say in the mutual
Speaker 4: fund industry, so you're already sort of downshifting into a
Speaker 4: more cost competitive landscape. And it's kind of interesting. Like
Speaker 4: what I saw was like First Trust, for example, it
Speaker 4: has just a fraction of the assets of Vanguard makes
Speaker 4: just as much as they do, right, So basically we're
Speaker 4: just trying to identify that there are pockets that you
Speaker 4: can make some money. It's not just you're gonna launch
Speaker 4: an ETF, you're gonna launch it for a couple of
Speaker 4: basis points and you're not going to make any money.
Speaker 4: There are some pockets that there is a potential to
Speaker 4: make some decent money.
Speaker 1: So, Katie, did you know that you're the muse for
Speaker 1: this episode?
Speaker 3: The musicians musicians, MWS, WOW, Triple M. So the story
Speaker 3: in question, myself and Emily GRIFFEO we saw a document
Speaker 3: that showed that Fidelity is going to impose a new
Speaker 3: fee on ETFs issued by nine firms. Was the list
Speaker 3: that we saw, And basically it's because those firms didn't
Speaker 3: agree to participate in a maintenance arrangement with Fidelity in
Speaker 3: which they would pay Fidelity and as a result, basically
Speaker 3: investors in those products, So investors going to Fidelity's platform
Speaker 3: trying to buy ETFs from those firms would then be
Speaker 3: faced with one hundred dollars servicing charge, So basically trading
Speaker 3: wouldn't be free anymore. So you think about that, you
Speaker 3: think about the size of trades that's being made on
Speaker 3: the platform. If you wanted to buy twenty five dollars
Speaker 3: worth of shares of Simplify, for example, was on the
Speaker 3: initial list that we saw, you'd have to pay one
Speaker 3: hundred dollars on top of that, which is just really large.
Speaker 1: Some friction there.
Speaker 2: Yeah, and let me give some other scale to that,
Speaker 2: because I wrote a piece on your piece to Katie,
Speaker 2: which my reaction was, I don't know if the optics
Speaker 2: are worth this tiny bit of revenue they're going to get.
Speaker 2: Because let me give you some numbers that just show
Speaker 2: how little ETFs make versus the mutual funds. So ETF's
Speaker 2: total revenue and this is an eighth and story, is
Speaker 2: fifteen billion a year. Pretty good. Sounds like a lot,
Speaker 2: But mutual funds will be north of one hundred billion,
Speaker 2: and Fidelity alone makes twenty eight billions. So Fidelity makes
Speaker 2: two ETF industries itself. And this is a little reason
Speaker 2: why it rubbed some of the issuers the wrong way.
Speaker 2: It's like, hey, you make so much money, we're just
Speaker 2: like fighting for scraps here. Why do you have to
Speaker 2: hurt us little guys just trying to get you get
Speaker 2: something going? And this became, you know, kind of a
Speaker 2: controversial issue, which Katie scoop I think kicked off. I
Speaker 2: will see how it plays out, but I get both sides.
Speaker 3: It was a scoop just for the record, a scoop,
Speaker 3: I think. So I'm just confirming, but no, it definitely
Speaker 3: kicked off, just a firestorm of discussion on Twitter for example,
Speaker 3: and apparently it inspired some great research as well.
Speaker 1: Bring it back, Bring it back to Athanasius coming in
Speaker 1: late there. So what did we learn?
Speaker 4: Well, you're gonna make less money, but Air quoted fifteen billion,
Speaker 4: but the number's gonna keep going up because funds are converting.
Speaker 4: Everything's going towards there. So yes, you can keep milking
Speaker 4: the money in the mutual fund industry. Songs of market
Speaker 4: keeps going up. But what anyone who wants to jump
Speaker 4: into the industry, you just need to realize, like there's
Speaker 4: ways you can make money, right, And it's not just
Speaker 4: you're gonna go to ETFs and you're gonna turn into
Speaker 4: Vanguard and there's no more money. So I think it's
Speaker 4: important to like where are some of the money is
Speaker 4: coming from? Like Active is actually a really big one, right,
Speaker 4: and I think this is where there's always a lot
Speaker 4: of hesitation. Active managers don't want to convert in ETFs.
Speaker 4: But active pays a lot of the bills, right, and
Speaker 4: so I think about active might be about seven percent
Speaker 4: of the assets, but it's almost a fifth of the revenue.
Speaker 4: That's massive, right. But I think it's also good that
Speaker 4: Vanguard is getting bigger, right, And this is something Eric
Speaker 4: has talked about a lot in the past, like the
Speaker 4: bigger they get, and the more you're saving your investors
Speaker 4: in sort of their core portion of the portfolio. You
Speaker 4: have some money to play around with, so you become
Speaker 4: less cost and sensitive. You could go to thematics, you
Speaker 4: could go to buffer. ETFs are active, right, So you
Speaker 4: can see that some of these funds are charging quite
Speaker 4: a bit of money. But again that plays in with
Speaker 4: the Vanguard growth. You know, thematics make quite a bit
Speaker 4: of money too, and so you see it in the
Speaker 4: trends of the new launches. Anyone that's launching a new product,
Speaker 4: they're trying to get creative, they're using options, or they're
Speaker 4: doing themes. Are active because that's a place that's making
Speaker 4: some decent money. It's probably the only place you can
Speaker 4: still make some money too.
Speaker 1: So break down the money because I mean the big three,
Speaker 1: how much money are they actually breaking it?
Speaker 4: You know, less than half, But they have seventy five
Speaker 4: percent of the assets, right, which is amazing. I think
Speaker 4: that's still that's a good sign for the smaller guys,
Speaker 4: where I think a lot of the innovation comes from.
Speaker 4: And again, Vanguard really pulls that average down. They don't
Speaker 4: make any money. I mean, they're essentially almost like a charity.
Speaker 3: Can I tell you how much money they yeah from
Speaker 3: your table? Because this really I did a double take.
Speaker 3: Vanguard has about two point five trillion dollars in ETF assets,
Speaker 3: and according to Athanasios's research, they make one point three
Speaker 3: billion dollars in annual revenue. I mean, that is shocking
Speaker 3: to me.
Speaker 4: It seems so little, right, Yeah, they do.
Speaker 2: Yeah, So let me just expand on that because on
Speaker 2: percentage terms, so they have twenty nine percent of the assets,
Speaker 2: but they make nine percent of the revenue. But when
Speaker 2: I wrote the Bogel book, I looked at all funds.
Speaker 2: When you bring in mutual funds, that gap gets crazier.
Speaker 2: It's more like twenty seven percent, but five percent because
Speaker 2: mutual funds have so many gigantic revenue generating funds, but
Speaker 2: that gap is absurd. I mean, there's nothing even close
Speaker 2: to it. Black Rock, for example, has thirty one percent
Speaker 2: of the assets but twenty eight percent of the revenue,
Speaker 2: so they're almost like one for one, but clearly like
Speaker 2: even they're making a little less than their assets share.
Speaker 1: Okay, so if you're not those big three, what do
Speaker 1: those numbers look like?
Speaker 4: Uh? Yeah, so I'd say ones that really stick out. First,
Speaker 4: Trust is making quite a bit of money because they
Speaker 4: are average fees something like seventy eight basis points. The
Speaker 4: other thing is leverage the ETFs, so the pro shares
Speaker 4: the directions. I think TQQ is number five on the
Speaker 4: list of the highest revenue generating ETF. Right, it's twenty
Speaker 4: or so billion in assets at ninety five basis points,
Speaker 4: So leverage, thematics active all tend to make quite a
Speaker 4: bit of money. And then anything over six the basis
Speaker 4: points like which seems like it's insane, like how can
Speaker 4: I sell ETF that's over fifty or sixty basis points?
Speaker 4: But money's going there. They make up a good third
Speaker 4: or so of the revenue. So I feel like when
Speaker 4: you pull it back and you look at it, it's not.
Speaker 4: It shouldn't dissuade someone from launching new product. There is
Speaker 4: ways to make money, it's not just your going head
Speaker 4: to head with Vanguard. I think if you're getting innovated, right,
Speaker 4: if you're going to launch another S and P five
Speaker 4: hundred ETF, you can't charge more than three basis points, Like,
Speaker 4: there's not money to be made there, but there are
Speaker 4: some pockets. I think if you get creative, there's some
Speaker 4: potential that you can make some money.
Speaker 1: It's been this race to the bottom for almost as
Speaker 1: long as we've been doing this podcast. But when you
Speaker 1: start talking fifty or sixty basis points, that is kind
Speaker 1: of a new number, right, So is this a new
Speaker 1: trend that's emerging or is it just doubling down on
Speaker 1: things that have worked for the past couple of years.
Speaker 4: Yeah, it's a good question. I think if you're unique enough,
Speaker 4: you can charge more for it. And I think like
Speaker 4: Kathy would really expose that, right, if you're really unique,
Speaker 4: it's something that no one else offers. But I don't know,
Speaker 4: it's like can we get is gonna get so cheap
Speaker 4: that eventually just like swallows itself home, Like we start
Speaker 4: all over again, right, because now they's single stock ETFs,
Speaker 4: and so I feel like we've now we've gone so
Speaker 4: far to one end that it's now swinging back over.
Speaker 4: And I think when you look at it total cost
Speaker 4: of ownership, right, so like you're not gonna be one
Speaker 4: hundred percent in an ARC. So if you sort of
Speaker 4: look at it in the context of your whole portfolio
Speaker 4: sort of weighted average cost, you're still lower, right, you
Speaker 4: have your vandguard allocation, your thematics, your actives, you're still
Speaker 4: saving money as an investor. So yeah, I think if
Speaker 4: it's unique enough, like you're not going to watch an
Speaker 4: SP five hundred ETF at fifty basis points, it's just
Speaker 4: not going to sell. But I think if it's really
Speaker 4: something unique, it could be done. It's shown that it
Speaker 4: could be done. I think buffers are a really interesting
Speaker 4: case study too. They're very unique. They got something like
Speaker 4: forty billion or so in assets, and you know, the
Speaker 4: pretty decent like revenue generators for the industry.
Speaker 1: Katie, do you know what the pop revenue generating ETF is?
Speaker 3: I mean, is it GPTC at this point or is
Speaker 3: it GLD It's something like that.
Speaker 1: You're close.
Speaker 3: Oh my god, I feel like I should.
Speaker 2: Know that those are three and four.
Speaker 4: Oh my gosh, you're close.
Speaker 3: It's not the cues. Yes, it's still the cues. Wow.
Speaker 1: Yeah, this is research.
Speaker 3: One of my favorite things.
Speaker 1: Yeah, that's why I was gonna, you know, volleyed to you.
Speaker 3: We're all just stepping all over each other. Yeah. The
Speaker 3: cues is amazing. I forgot what the fee is. It's
Speaker 3: like twenty basis points, right, twenty basis points.
Speaker 1: And that's because of that trust structure.
Speaker 3: Yeah, unit investment trust, which means that Invesco virtually sees
Speaker 3: none of that money. It's sort of like this piggy
Speaker 3: bank that they can't crack. Spy is a similar thing,
Speaker 3: and Spy is nine basis points and it's enormous. So
Speaker 3: I have to imagine it's on that list number two. Yeah,
Speaker 3: there you go. So but more some of that money
Speaker 3: stays in the door at State Street, I believe, because
Speaker 3: they're the custodian correct.
Speaker 4: Yes, all right, thank you.
Speaker 3: It's also Velvet Underground.
Speaker 1: It's so wonky. Okay. So if you look at this
Speaker 1: that list that you put together, Athanasis, like, what's the
Speaker 1: big surprise on there?
Speaker 4: Oh yeah, So we looked at the top thirty revenue
Speaker 4: drating generating ETFs. So ones that really stuck out. Jeppy
Speaker 4: from JP Morgan cracked the list, Cows from Pacer cracked
Speaker 4: the list, Mote from van k which really shocked me.
Speaker 4: So there were these really interesting ones, like I had
Speaker 4: to double check. I'm like, wow, all of a sudden,
Speaker 4: these names started getting pulled up.
Speaker 1: To some indies in there. Yeah for sure.
Speaker 4: Yeah, GBTC is on the list. You had mentioned. That's
Speaker 4: a conversion.
Speaker 1: So when you look at it.
Speaker 4: You're like, wow, there's actually a TQQQ which is like
Speaker 4: number five U. So but they have something in common, right,
Speaker 4: They're all very different. They're smart beta, they're leveraged or
Speaker 4: active or thematic. And again these are at the top
Speaker 4: of the list. So yeah, that one. Those ones definitely
Speaker 4: stuck out the most. And Q was always number two
Speaker 4: for a long time, behind Spy, and it just when
Speaker 4: he kind of recently had taken the top spot.
Speaker 3: I will say what we're describing now, and like you
Speaker 3: say that issuers are looking more towards active thematics, et
Speaker 3: cetera as a way to make money. It sort of
Speaker 3: puts what issuers always tell us in more of a
Speaker 3: pessimistic light because I mean, especially on ETFIQ, we talked
Speaker 3: to a lot of issuers you know, coming out with
Speaker 3: active products, et cetera, and they say, you know, we're
Speaker 3: responding to client demand, client demand, it's always client demand,
Speaker 3: but it's also just a way to pay the bills.
Speaker 1: Pay those bills. Yeah.
Speaker 2: I think Jefpy is interesting here and Cows. These two
Speaker 2: I think should be somewhat a blueprint for how active
Speaker 2: can survive going forward. I think Cows is like, hey,
Speaker 2: let's just take this one metric cash flow and it
Speaker 2: came out like three years and nobody cared. But then
Speaker 2: when the Fed raised rais, cash flow became like a
Speaker 2: big deal and that is on the top twenty. And
Speaker 2: jepy to me JP Morgan. We just covered this on ETFIQ. Also,
Speaker 2: Brian Lake just moved from JP Morgan to Goldman and
Speaker 2: he was I thought, turned picking expense ratios into an
Speaker 2: art form because JEP is thirty five basis points right,
Speaker 2: so it's not dirt cheap, but it's cheap enough where
Speaker 2: as an advisor you're like, Okay, it's got JP Morgan's
Speaker 2: brand name. It's a covered call strategy, so they're doing
Speaker 2: this legwork of like options they have to sort of
Speaker 2: like keep up with. Then there's a fundamental screen in
Speaker 2: there and it's thirty five basis points. It feels fair
Speaker 2: and this is again now in the top twenty revenue generating.
Speaker 2: So what he did is made I think everybody feel
Speaker 2: like they got a fair deal for active while at
Speaker 2: the same time making good money. And so I would
Speaker 2: definitely study if I was coming out with ETFs, I'd
Speaker 2: study jepy and then on the flip side, i'd study
Speaker 2: like an ARC or a thematic ETF. So if you
Speaker 2: have a lot of active share, I think you can
Speaker 2: charge more TQQQ And the top five is also interesting.
Speaker 2: Ethan and I frequently joke about the leverage issuers because
Speaker 2: they have to be the envy of the industry because
Speaker 2: Vanguard will never deal with them. They take a little
Speaker 2: crap from people online. It's like they're selling legs.
Speaker 1: Those analysts who have like a red light rating system and.
Speaker 2: All, yeah, people are like, you know, what is the
Speaker 2: social purpose of triple leverage this? But the social I
Speaker 2: mean they really they really have you know, or is
Speaker 2: this too dangerous? They definitely every now and then they
Speaker 2: just kind of get kicked around, but they make a
Speaker 2: nice little living. They account for five to six percent
Speaker 2: of the revenue even though it's like one percent of
Speaker 2: the assets, and that it's the trading tools.
Speaker 1: I was gonna say, I do think there's a polarization.
Speaker 1: It feels like there's this existential thing that's happening where
Speaker 1: it's like, okay, super tidy, vanilla, low cost things and
Speaker 1: then assortment of trading tools that you know you have
Speaker 1: to pay for and not a small amount anymore. No,
Speaker 1: I think that's enough for people to make a living.
Speaker 4: Yeah, I think either you're gonna shot at Walmart or
Speaker 4: like the really boutique shop, right, and that's it. You're
Speaker 4: gonna burow your essentials there and then the specialized suff
Speaker 4: and you're willing to pay for it, right, And it
Speaker 4: seems like that's where the industry is splitting. When we
Speaker 4: look at launches by fee, the fees are actually going
Speaker 4: up on average, right, and so they're you know, launches
Speaker 4: will follow the money people willing to pay for it,
Speaker 4: and you're offering something unique, the flows are going to
Speaker 4: go there. And it's and it's showing at least so far.
Speaker 2: And we have another term, Joel, we have another term
Speaker 2: that we call package adrenaline, like if you can make
Speaker 2: somebody feel something. And I would put the leverage single
Speaker 2: stock ETFs in there, people will pay. There's like no
Speaker 2: price sensitivity out there. Like the double leverage Navidia ETF
Speaker 2: is two billion dollars. It charges one point one percent
Speaker 2: in fees. No advisor would ever pay that much for fees,
Speaker 2: but they would never use this anyway. This is purely
Speaker 2: for like gambling really, but I mean, I'm okay with
Speaker 2: it as long as you know what you know you
Speaker 2: use it and you know you're kind of gambul at gambling.
Speaker 2: That's a very ironic situation where the bigger vanguard and
Speaker 2: passive gets the kind of crazier and more exotic we're
Speaker 2: going to see new ETF launches get. So it's ironic,
Speaker 2: but it makes sense if you think about it.
Speaker 3: I will say something that's interesting to me is like
Speaker 3: what this means for issuers beyond what sort of strategies
Speaker 3: that they might launch into. Because there was this city
Speaker 3: report from last year. I wrote it up in October
Speaker 3: twenty twenty three, so it probably came out a little
Speaker 3: before then, but they found that roughly one third to
Speaker 3: half of US listed ETFs right now can't cover their
Speaker 3: annual operating costs. And you think about this big uptick
Speaker 3: that we've seen in ETF closures, and I'm wondering if
Speaker 3: this sort of dynamic and also what we're describing right
Speaker 3: now will keep those closures at this high level. I
Speaker 3: think it wasn't quite record closures last year, but it
Speaker 3: was pretty close at the same time that you had
Speaker 3: record almost record launches, and.
Speaker 2: There's record closures this year too. They're on pace to
Speaker 2: have a record So.
Speaker 1: I think the churn will I agree, but we'll see
Speaker 1: you in October again for the graveyard episode Spooky.
Speaker 2: Well, for every two x Navidia that's a two billion
Speaker 2: dollars hit, there's like five of them that like nobody touched.
Speaker 2: So some of these hot sauce products is spaghetti at
Speaker 2: the wall and in Verse crammed something.
Speaker 1: You guys, as we should have, and.
Speaker 2: I wrote about how that was the right idea but
Speaker 2: the wrong design. They should have made it long short.
Speaker 2: They needed to make it just one direction because it
Speaker 2: kept offsetting. So to Athan's point, you got to be
Speaker 2: cheap or shiny, and the kramer was the way it
Speaker 2: was designed. It could never get shiny.
Speaker 4: Sometimes the stars just align. Like it's just a formula
Speaker 4: that hopefully is like, Okay, where's the money going. It's
Speaker 4: going to active people willing to pay issuers are going
Speaker 4: to try it, but a lot of them are going
Speaker 4: to fail to write. There's just normal turn in the industry.
Speaker 4: Someone might take it too far, they might get a
Speaker 4: little too crazy, you know, but at least this gives
Speaker 4: you a blueprint of like what might be working in
Speaker 4: what areas should an issuer be looking to launch in.
Speaker 3: To your point, Eric, you were saying, Jefpy perhaps will
Speaker 3: provide a blueprint to other issuers looking to launch active.
Speaker 3: A lot of issuers took that literally and just sort
Speaker 3: of came out with jeppy copycats. And it's interesting that
Speaker 3: those haven't done too well. I mean, you think about
Speaker 3: some of the big names, I believe black Rock Goldman
Speaker 3: for example, who you know just tapped Brian Lake. They
Speaker 3: I mean, they haven't exactly been able to replicate what
Speaker 3: we're seeing with Jeffy.
Speaker 2: Yeah, it's kind of like ARC. Right after ARC was
Speaker 2: a hit, everybody came out with their innovation or disruptors
Speaker 2: ETF and none of them really took in that much money,
Speaker 2: but they somewhere over one hundred million. I mean, you know,
Speaker 2: eked out a little bit of a profit. I think
Speaker 2: with JEPPI, this train is so popular, which is the
Speaker 2: covered call trade, that if you have a salesperson going
Speaker 2: to meet advisors, you kind of need a jet by
Speaker 2: product in your toolbox. So I think they have it
Speaker 2: there just so they have something that don't have to
Speaker 2: refer to the person to JP Morgan, but I'm with you,
Speaker 2: really the innovator definitely gets most of the spoil, and
Speaker 2: that's how it should be, I think. But there's a
Speaker 2: lesson just in Jetpy in general, which is a brand
Speaker 2: name with some legwork and a moderate fee. Forget if
Speaker 2: it's covered call, think of something else. It's that spirit,
Speaker 2: it's that logic that I think is what could be successful,
Speaker 2: not doing another Jetpy, but just doing something that balances
Speaker 2: all that in a way that an advisor can be
Speaker 2: like feeling like they're being fiduciary and not paying too
Speaker 2: much because obviously I think over the years they felt
Speaker 2: like they paid too much for somebody to pick stocks
Speaker 2: and underperform.
Speaker 1: Okay, so all of this just makes me think of
Speaker 1: Dave to Einhorn a little bit who has said some
Speaker 1: spicy things about passive investing this year. There's been some
Speaker 1: ongoing coverage, including recently from Bloomberg News and our colleague
Speaker 1: Glu Lang there that dove into some of that. Ethan
Speaker 1: you came up in there because one of the things
Speaker 1: that I mean, basically ein Horn feels like passive is
Speaker 1: destroying stock market value has been crushed. But you think
Speaker 1: he's over oversteps slightly.
Speaker 4: Yeah, I mean I don't think it's iron I think
Speaker 4: it's a lot of people. Right. Every couple of years
Speaker 4: we got to deal with this. They come out with
Speaker 4: some thing about passive distorting markets. So we looked at it.
Speaker 4: We looked at all the stocks based on their passive ownership.
Speaker 4: And just to give you context, right, if you take
Speaker 4: mutual funds and ETFs together, they own about twenty four
Speaker 4: percent of the stock market and only half of that
Speaker 4: is passive, so again a pretty small number. But then
Speaker 4: we looked at stocks with higher and lower passive ownership,
Speaker 4: and we've actually found that stocks with lower passive ownership
Speaker 4: performed better than ones with higher passive ownership. And the
Speaker 4: critics always say, well, the main premise was that stocks
Speaker 4: with higher passive ownership, they get inflated up artificially, they
Speaker 4: tend to be more viotal during drawdowns. Things like that.
Speaker 4: Wouldn't you find anything meaningful from the data that would
Speaker 4: support that. I'm not saying that passive isn't a thing, right,
Speaker 4: maybe in some stocks, but overall, the data kind of
Speaker 4: refuted a lot of the stuff that they've been saying
Speaker 4: for for a while.
Speaker 2: And just to be clear, what this is is the
Speaker 2: S and P five hundred stocks. There's five hundred of them.
Speaker 2: The ones that have the least amount of their shares
Speaker 2: owned by passive actually had the best performance. That kind
Speaker 2: of goes against this idea that like the stocks that
Speaker 2: do the best are the ones that index funds own
Speaker 2: the most of.
Speaker 1: Was that surprising? I mean like that it sounds like
Speaker 1: when you actually dig it up, it's like whoa, whoa.
Speaker 1: That's like, yeah, we even talked about that before.
Speaker 4: It was and it seems like if you're active, I
Speaker 4: would have taken this as a good thing, Like, wait,
Speaker 4: there's opportunities. There's stocks that are lower passively owned, there's
Speaker 4: more opportunity for me. They performed better, Like I feel
Speaker 4: like that's a good thing. That's giving you more on
Speaker 4: a portfolio management side. And then you know, we even
Speaker 4: looked at things like additions and deletions from the S
Speaker 4: and P. Deletions ended up doing better than the additions
Speaker 4: and vice versa. Like, I think even the fact that
Speaker 4: there are additions and deletions to the S and P
Speaker 4: refutes all that, right, because if your argument is, if
Speaker 4: it's in the S and P, pass is going to
Speaker 4: push it up, none of these stocks should ever drop
Speaker 4: out of the S and P. They should just all
Speaker 4: keep going up. So the fact the fact that that
Speaker 4: even exists sort of like is goes against the premise
Speaker 4: of some of these arguments.
Speaker 3: And you said that you got a lot of hate mail.
Speaker 4: Yeah, yeah, good and bad some people. You know, as
Speaker 4: you can imagine, it's a pretty touchy thing now, you see,
Speaker 4: Like you know, there's been podcasts now off of this
Speaker 4: and a couple of articles. Yeah, it's very touchy, especially
Speaker 4: you know for active managers because the performances have not
Speaker 4: been great, right, So a lot of them can blame
Speaker 4: the SMP. But I still don't see like Apple being
Speaker 4: propped up because it's you know, the second biggest stock
Speaker 4: in the S.
Speaker 3: And P, Like is also underperformed this year.
Speaker 1: Yeah.
Speaker 4: Ex example, it's like, could they just be a good
Speaker 4: company that has a lot of cash and sells a
Speaker 4: lot of iPhones? Is that why they're they're like doing
Speaker 4: so well. But we even looked at it relative to
Speaker 4: small caps, so small caps tend to have higher passive
Speaker 4: ownership than large caps. Small caps have been in like
Speaker 4: have lagged for a decade or you know, to the
Speaker 4: S and P. So that refutes it too. There's a
Speaker 4: lot of things that refuted a lot of the arguments
Speaker 4: that you know, some big names have brought up. I
Speaker 4: think when people just take it at face value because
Speaker 4: they're a big name and it's just been hard to
Speaker 4: outperform the the S and P, and can we get
Speaker 4: there eventually? Sure? May if it's like seventy five or
Speaker 4: eighty percent passive ownership, maybe that becomes problematic. But at
Speaker 4: least right now, it just seems like it's really premature
Speaker 4: to be blaming passive for a lot of the underperformance.
Speaker 1: Worth noting that he's also had pretty good performance during
Speaker 1: that some of this time.
Speaker 2: A couple things on this passive number that are important.
Speaker 2: Number one is when you look at the stocks that
Speaker 2: are most known by passive. Passive also includes smart beta
Speaker 2: and like so sometimes Active sells off a stock and
Speaker 2: its price starts to go down, it's yield goes up,
Speaker 2: and there's a lot of dividend popular dividit ETFs. Because
Speaker 2: investors like yield whatever, they'll buy that stock. So it
Speaker 2: ironically some of the dump stocks by Active become pass
Speaker 2: his favorite because of smart beta. So there is a
Speaker 2: smart beta factor in that passive number. That's I think
Speaker 2: important to point out. The other thing is I like
Speaker 2: the eye test. You know people with the eye tests
Speaker 2: are gonna just the eye test. Is this Tesla is
Speaker 2: a great example. It's a big holding. The SMP you
Speaker 2: just talked about Apple, Teslas might even be better. It
Speaker 2: has had a bad run, but then it had a
Speaker 2: good run right after that when earnings it popped back up.
Speaker 2: Navidio was like really nowhere three or four years ago.
Speaker 2: Now it's like a top holding. It's not like index
Speaker 2: funds decided to make Navidia a big deal or decided
Speaker 2: that Tesla wasn't good. Active decided that the people trading
Speaker 2: the stocks bid up Tesla after good earnings, they dump
Speaker 2: it after bad earnings. So when I see these stocks
Speaker 2: moving up and down. I don't really that's the eye test. Someday,
Speaker 2: if stocks just stop moving because we're all just one
Speaker 2: gigantic passive blob, I think the arguments will could be stronger.
Speaker 2: But I think until people can see it or feel it,
Speaker 2: and certainly their index funds gives them a lot of
Speaker 2: return over active funds, so they're happy with the outcome
Speaker 2: as customers, and they don't really see any problem in
Speaker 2: the market. Because stocks go up and down. That's a
Speaker 2: big problem for the warriors. You can't really see it,
Speaker 2: feel it, or touch it. Right now, it all looks
Speaker 2: like it's working fine. So I'm not saying they don't
Speaker 2: have some points and deepen those white papers. There are
Speaker 2: some things we need to look at, but the eye
Speaker 2: test is pretty compelling that there's no problem.
Speaker 1: So the market is not broken.
Speaker 4: No.
Speaker 2: I mean again, stocks go up and down all over
Speaker 2: the place. Sometimes small caps are in favor of sometimes
Speaker 2: large caps. And also the FED is a big variable,
Speaker 2: and so is the options market. There's many things that
Speaker 2: quote distort things, and I just think active that's the
Speaker 2: natural state of the market. And there was crashes and
Speaker 2: surges before index funds were invented too, So I don't know.
Speaker 2: I just don't see this as any any really big
Speaker 2: thing to worry about in general. But Athan's numbers I
Speaker 2: think were interesting because they sort of helped give some
Speaker 2: data behind this as well that overturned some of what
Speaker 2: people like to say. But let me tell you this, Jrol,
Speaker 2: the reason the worriers get a lot of ink is
Speaker 2: because those those articles will do really well.
Speaker 1: We've tested it.
Speaker 2: You write something about passive worry, the readerships are amazing.
Speaker 2: People are going to click on that. If you write like, hey,
Speaker 2: nothing to worry about here, it's like crickets. So there's
Speaker 2: definitely a natural inclination to talk about anything that says
Speaker 2: there's a worry. And this is why you don't see
Speaker 2: many studies that go this other direction, because there's really
Speaker 2: not an incentive readership wise to put them out.
Speaker 1: All right, Ethan, Katie, thanks so much for joining us
Speaker 1: on trillions.
Speaker 4: Good, thanks for having me, Thanks.
Speaker 1: Thanks for listening to Trillions until next time. You can
Speaker 1: find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 1: or wherever else you'd like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter. I'm at Joel Webbers Show.
Speaker 1: He's at Eric Balchunas. This episode of Trillions was produced
Speaker 1: by Magnus Hendrickson. Bye.