WEBVTT - Hiding in Plain Sight: Inside the Non-Transparent Active ETF Race 0:00:07.160 --> 0:00:14.080 Welcome you, trillions. I'm Joel Wearer in America Bell Truders. Eric. 0:00:14.120 --> 0:00:16.759 This was a busy week with some news, uh, some 0:00:16.840 --> 0:00:19.400 big news, and I want to talk a little bit 0:00:19.400 --> 0:00:22.080 about that. And joining us is also Rachel Evans from 0:00:22.120 --> 0:00:25.560 Bloomberg News. Rachel, what happened this week? Yeah, so we 0:00:25.640 --> 0:00:28.120 had a big new outbreak in the fee wall, the 0:00:28.280 --> 0:00:31.680 race towards zero on the commission side of things, this 0:00:31.760 --> 0:00:34.959 time from trading platforms. So Schwab came out and announced 0:00:34.960 --> 0:00:37.519 that it was going to cut to zero commissions that 0:00:37.560 --> 0:00:40.000 it used to charge on trading stocks E t f 0:00:40.080 --> 0:00:43.560 s and options. This prompted Schwab's share price to fall 0:00:43.640 --> 0:00:46.440 almost ten percent, but it didn't just take itself down there. 0:00:46.479 --> 0:00:48.720 It also took E trade t D a merry trade. 0:00:48.840 --> 0:00:50.560 And I think there's a lot of questions being asked 0:00:50.560 --> 0:00:54.360 about what this really means for commissions in trading platforms. 0:00:54.640 --> 0:00:56.400 So kind of a blood bath, but this is good 0:00:56.440 --> 0:00:58.760 for me as a consumer writer. Yeah, I think for 0:00:58.800 --> 0:01:02.040 the small investor is obviously saving what five six bucks 0:01:02.080 --> 0:01:04.160 on the trade helps you. If you're bigger, that means 0:01:04.160 --> 0:01:06.920 a lot less that that dollar amount. But per the 0:01:06.959 --> 0:01:09.640 company's falling, you know, Um, we had some numbers here 0:01:09.680 --> 0:01:13.039 that Schwab probably felt felt the least because they only 0:01:13.040 --> 0:01:16.680 get seven percent of their revenue from these commissions, but 0:01:16.880 --> 0:01:19.960 t D and E Trade are thirty sev so it's 0:01:19.959 --> 0:01:23.080 more heavy on them. But really, to me, this is 0:01:23.120 --> 0:01:25.119 just all part of the Vanguard effect because one year 0:01:25.160 --> 0:01:27.560 ago Vanguard announced all E t F s could be 0:01:27.560 --> 0:01:31.039 traded for free, and so I think that just people 0:01:31.640 --> 0:01:33.360 you know, dealt with that for a while. And then 0:01:33.400 --> 0:01:36.399 you saw interactive brokers come out like a week ago, 0:01:36.840 --> 0:01:39.120 and then you had Um Schwab and then t D 0:01:39.200 --> 0:01:42.200 amor Trade and now the two left standing our Fidelity 0:01:42.240 --> 0:01:45.360 and E Trade, and everybody's wondering, you know, how quickly 0:01:46.040 --> 0:01:49.040 they will follow suit, and when they do, you're basically 0:01:49.040 --> 0:01:51.440 all the dominoes have fallen. Um. But I look, I 0:01:51.480 --> 0:01:54.040 think it's good news. I think there's one concern is 0:01:54.120 --> 0:01:56.520 there anything really free? I think if they're going to sell, 0:01:56.560 --> 0:01:59.559 your order flow could have been a slightly wider spread, 0:01:59.640 --> 0:02:02.320 and if to one bib extra in your spread that 0:02:02.360 --> 0:02:04.960 could be three to six bucks anyway, so it might 0:02:05.040 --> 0:02:08.760 be a wash. And also would this encourage bad behavior 0:02:09.040 --> 0:02:12.320 if you trade um, you know, out of your mind. Um, 0:02:12.360 --> 0:02:15.160 you're probably gonna lose money. So there's some car you know, 0:02:15.280 --> 0:02:18.520 concerns and dangerous here, but arguably probably a win for investors. 0:02:18.600 --> 0:02:20.800 So this wasn't the only news this week though, because 0:02:20.800 --> 0:02:23.640 the SEC had a lot of bit of other news. Rachel, 0:02:23.680 --> 0:02:27.200 what was that? Yeah, So the SEC finally approved more 0:02:27.240 --> 0:02:31.000 than decade in the making rule about exchange trade of funds. 0:02:31.160 --> 0:02:33.560 This basically allows e t F s to come to 0:02:33.600 --> 0:02:37.000 market without going through an onerus and sometimes expensive process 0:02:37.000 --> 0:02:39.520 of getting what used to be called exemptive relief. They 0:02:39.520 --> 0:02:41.679 can now come to market under the e t F rule, 0:02:41.840 --> 0:02:44.400 which should kind of streamline that process. They also made 0:02:44.400 --> 0:02:47.200 a few kind of tweaks around the edges, allowing fixed 0:02:47.240 --> 0:02:50.160 income to kind of have more of a hope because 0:02:50.320 --> 0:02:53.800 it now is allowed to use custom baskets. Custom baskets, 0:02:53.919 --> 0:02:57.040 very very technical term, basically means you don't necessarily have 0:02:57.200 --> 0:03:00.320 to do a pro rata slice of the fun that's 0:03:00.360 --> 0:03:02.480 coming in or out of the e t F. Gives 0:03:02.480 --> 0:03:06.119 a bit more flexibility, allows the managers of these products 0:03:06.120 --> 0:03:08.120 to actually and make a few more kind of decisions 0:03:08.160 --> 0:03:11.079 and relating to their fund rather than just to the investor. Eric. 0:03:11.080 --> 0:03:12.840 How many more ets do you think we'll see because 0:03:12.840 --> 0:03:14.880 of this rule? So this is interesting. If this rule 0:03:14.919 --> 0:03:16.799 would come out five ten years ago, I think it 0:03:16.840 --> 0:03:19.440 would have immediately you see to pop in new launches. 0:03:19.480 --> 0:03:21.040 I don't think we'll see that. I think that the 0:03:21.080 --> 0:03:25.000 market has matured and everybody wants you know of the 0:03:25.000 --> 0:03:26.760 flows this year are going to products that are twenty 0:03:26.760 --> 0:03:30.079 basis points or less. That is, I think that's UM 0:03:30.560 --> 0:03:31.959 made a lot of people who have products in the 0:03:32.000 --> 0:03:35.280 pipeline more conservative and cautious about launching. I don't think 0:03:35.640 --> 0:03:38.080 saving whatever UM looks like it might save you a 0:03:38.080 --> 0:03:41.080 little money on the launch. Probably it probably helps some 0:03:41.120 --> 0:03:44.080 people who are outsiders who might have been waiting, But UM, 0:03:44.120 --> 0:03:45.480 I don't know if it's going to help it. I 0:03:45.600 --> 0:03:48.040 maybe I'll be wrong, we'll say, but I'm I don't. 0:03:48.040 --> 0:03:52.640 I just think the market's brutality is what's gonna trump 0:03:52.840 --> 0:03:54.480 the fact that it's now easier. And what do you 0:03:54.480 --> 0:03:57.440 think of this does for fixed income ETFs? Like Racil mentioned, 0:03:58.000 --> 0:03:59.640 I think it's good for them. I think the big 0:03:59.680 --> 0:04:02.920 winner here is active ETF though because previously only passive 0:04:03.120 --> 0:04:05.280 and only some of them could do these flexible baskets. 0:04:05.720 --> 0:04:08.560 UM Here's the stat that um my colleague in London, 0:04:08.600 --> 0:04:11.080 Tom came out with, which is that only six percent 0:04:11.200 --> 0:04:13.800 of all e t f s pay capital gains um. 0:04:13.840 --> 0:04:17.600 But if you look, active ETF pay capital gains. So 0:04:17.640 --> 0:04:20.279 this is probably going to help them lower that number. 0:04:20.720 --> 0:04:23.120 And especially a lot of them are small, and I 0:04:23.120 --> 0:04:25.680 think this is a big advantage for them. You know, again, 0:04:25.720 --> 0:04:28.960 active has its own issues, but this certainly should help them, 0:04:29.040 --> 0:04:32.120 so to me, I think that the bigger takeaway here 0:04:32.200 --> 0:04:35.480 from this rule is that it probably helps little areas 0:04:35.480 --> 0:04:38.000 on the fringe, you know, certain little and it probably 0:04:38.040 --> 0:04:40.600 is democratic because it seems like the winners overall are 0:04:40.640 --> 0:04:44.120 the smaller firms. So that's not all that we're gonna 0:04:44.160 --> 0:04:47.560 talk about on this week's episode, Rachel. You also recently 0:04:47.560 --> 0:04:51.200 wrote an article for Bloomberg Markets magazine about Dan McCabe, 0:04:51.640 --> 0:04:55.880 CEO of Presidian Investments. Who's Dan. He's actually right here 0:04:55.920 --> 0:04:57.839 next to us, but we'll hear from it in a second. Yeah, 0:04:57.880 --> 0:04:59.440 but as you said, it has been a busy way. Yeah, 0:04:59.440 --> 0:05:00.640 this was the other thing that we were kind of 0:05:00.680 --> 0:05:04.240 working on this week. Basically, there's been a whole kind 0:05:04.240 --> 0:05:06.560 of structure that's been in the making for for more 0:05:06.600 --> 0:05:08.279 than a decade or you thought the e t F 0:05:08.360 --> 0:05:10.800 rull took a long time, Well, so has this. This 0:05:10.880 --> 0:05:13.200 is something that the SEC has been considering since I 0:05:13.200 --> 0:05:16.000 believe about two thousand and nine when Dan set up 0:05:16.040 --> 0:05:19.760 his company Presidian, And basically this structure is designed to 0:05:19.839 --> 0:05:22.359 allow active funds to come to market in an e 0:05:22.400 --> 0:05:25.880 t F wrapper without necessarily disclosing their holdings every day. 0:05:26.200 --> 0:05:28.880 That's something that's obviously, you know, something that's very common 0:05:29.000 --> 0:05:32.080 for um, you know, active managers, this kind of concern 0:05:32.160 --> 0:05:35.160 that they're going to have to disclose their holdings and 0:05:35.320 --> 0:05:39.400 they don't necessarily exactly, Yeah, you've got your intellectual property, 0:05:39.440 --> 0:05:41.039 you want to keep that hidden. But for the e 0:05:41.120 --> 0:05:43.400 t F structure, that is typically been the way you 0:05:43.440 --> 0:05:46.080 do it. You put your holdings out every night. So 0:05:46.120 --> 0:05:47.760 this is kind of a structure that that has gone 0:05:47.760 --> 0:05:50.520 through the SEC process and seeks to give active managers 0:05:50.520 --> 0:05:53.159 away to get into the market without necessarily giving away 0:05:53.200 --> 0:05:54.760 those goods. I want to job out the SEC. It 0:05:54.760 --> 0:05:58.799 seems like everything take takes a decade there. The financial 0:05:58.839 --> 0:06:01.920 crisis happened in the middle to this is probably the 0:06:01.920 --> 0:06:04.760 biggest issue, especially for people in the E t F bubble. 0:06:04.800 --> 0:06:08.039 I think it's something we debate constantly because you have 0:06:08.200 --> 0:06:12.279 twelve trillion dollars in active mutual funds and a good 0:06:12.320 --> 0:06:14.600 portion of it is wondering how can I take part 0:06:14.640 --> 0:06:16.800 in this quote new world of e t f s 0:06:16.880 --> 0:06:19.120 and index funds where all the money is going, which 0:06:19.160 --> 0:06:22.320 for context is four trillion dollars, which well, no, seven 0:06:22.080 --> 0:06:25.839 seven and a half. Yeah, so you have twelve over here, 0:06:25.880 --> 0:06:27.360 seven and a half here, But the seven and a 0:06:27.400 --> 0:06:30.280 half has come out of nowhere over the past ten years. Um, 0:06:30.320 --> 0:06:32.240 And I thought of it actually came out of the 0:06:32.279 --> 0:06:35.360 active side. Yeah, exactly, Yeah, that this is stolen from 0:06:35.360 --> 0:06:37.919 the active side. All the active side is grown because 0:06:37.920 --> 0:06:41.080 of the market returns, but long story short, the organic 0:06:41.080 --> 0:06:43.760 growth is going towards passive. This to me, I always 0:06:43.800 --> 0:06:46.520 picture this is like a bridge. Is this the bridge 0:06:46.680 --> 0:06:48.520 that will get us from one side to the other? 0:06:48.600 --> 0:06:50.880 And I think There's been a couple attempts, but I'm 0:06:50.960 --> 0:06:53.560 excited to go into them here on this episode of 0:06:53.600 --> 0:07:01.960 Joints making Sense of non Transparent actives. Dan, welcome to trillions. Hey, 0:07:02.120 --> 0:07:04.440 thank you very much. So, Dan, where did this idea 0:07:04.520 --> 0:07:07.880 come from? This idea generated actually from meeting I had 0:07:07.880 --> 0:07:10.320 with the company out in California back in two thousand 0:07:10.400 --> 0:07:12.440 and seven. They had asked us to see if we 0:07:12.480 --> 0:07:15.600 could figure out a way to work embedded capital gains 0:07:15.600 --> 0:07:17.679 out of the fund that had a small cap fund 0:07:17.680 --> 0:07:19.560 that frankly got to a point where they were not 0:07:19.640 --> 0:07:22.800 able to rebalance it because they were triggering so many 0:07:22.800 --> 0:07:26.040 capital gains. I went to a whiteboard with my partners. 0:07:26.240 --> 0:07:28.200 We spent in that it was actually on a weekend, 0:07:28.360 --> 0:07:30.240 so we actually took time away on the weekend, went 0:07:30.280 --> 0:07:34.160 to a whiteboard and drew this up. Um Interestingly enough, 0:07:34.240 --> 0:07:36.600 once we saw, you know, what we had created, we 0:07:36.680 --> 0:07:39.440 knew what it was useful for. But to Rachel's point, 0:07:39.680 --> 0:07:41.920 it took us a decade uh in order to be 0:07:41.960 --> 0:07:44.920 able to get the necessary approvals from the SEC to 0:07:44.960 --> 0:07:47.040 bring this. So this sounds like a big deal because 0:07:47.040 --> 0:07:50.320 the thing that an ETF is known for is its transparency. 0:07:50.440 --> 0:07:52.360 Right like, at any moment in time, I can see 0:07:52.400 --> 0:07:55.560 what's happening here and what's inside of ye about what 0:07:55.840 --> 0:07:57.560 I would disagree with that. I think that what e 0:07:57.640 --> 0:08:00.000 t f s are really known for primarily very few 0:08:00.000 --> 0:08:01.880 people know what to do with the transparency other than 0:08:01.880 --> 0:08:04.200 the professional audience E t F to know for real 0:08:04.240 --> 0:08:07.840 time pricing and access, and I think that's what we've 0:08:08.040 --> 0:08:11.320 we've allowed here. So we're giving actual pricing of the 0:08:11.400 --> 0:08:14.480 value of the securities in real time per second, updated 0:08:14.520 --> 0:08:17.480 on the midpoint of their worth, and then we're giving 0:08:17.520 --> 0:08:20.760 access through what entity we call an AP representative to 0:08:20.880 --> 0:08:23.720 create a redeem shares the actual shares on a pro 0:08:23.800 --> 0:08:27.280 roded basis. So very similar to how the spider operates today. 0:08:27.520 --> 0:08:30.000 But what's inside? How do I know what I've got? Well? 0:08:30.000 --> 0:08:31.800 What you what you know is you have the corpus 0:08:31.800 --> 0:08:33.880 of the trust right. You know exactly who the manager is, 0:08:33.920 --> 0:08:35.640 you know what he's trying to accomplish for you. And 0:08:35.720 --> 0:08:37.320 just like a mutual fund, you're going to get the 0:08:37.360 --> 0:08:41.160 same disclosures on a quarterly basis of what the actual 0:08:41.200 --> 0:08:45.360 holdings are um. But most importantly, you have full price 0:08:45.440 --> 0:08:50.040 transparency every day. How was it dealing with the SEC 0:08:50.200 --> 0:08:53.200 for a decade? Uh? You know, to be fair to 0:08:53.200 --> 0:08:55.959 the SEC, there was a lot of turnover. We'd start, 0:08:56.040 --> 0:08:58.880 we we'd have great, what we thought were really good meetings, 0:08:58.880 --> 0:09:01.839 We get things moving along and then uh, people may 0:09:01.920 --> 0:09:04.120 leave or you know, the shoe may drop on on 0:09:04.160 --> 0:09:06.760 a flash crash or something like that, and everything goes 0:09:06.800 --> 0:09:08.840 in a drawer for a number of years. So it 0:09:08.880 --> 0:09:10.960 was it was a little difficult. So before we get 0:09:11.000 --> 0:09:12.800 to some of the headwinds that I think this structure 0:09:12.800 --> 0:09:15.480 is going to face that are bigger, just real quick, 0:09:15.520 --> 0:09:17.040 let's go into the price and the NAV which I 0:09:17.040 --> 0:09:19.200 think it's some of the technical issues without getting two 0:09:19.240 --> 0:09:22.240 technical actions. But the reason et F S works so 0:09:22.280 --> 0:09:23.840 well is the price you pay for it on the 0:09:23.840 --> 0:09:26.800 exchange usually is very close to the navy So it's 0:09:26.800 --> 0:09:29.120 almost like the you know, that blue book value of 0:09:29.160 --> 0:09:31.520 a car being close to what you pay. It's a 0:09:31.559 --> 0:09:33.800 great thing, right, Nobody wants to pay something more than 0:09:33.840 --> 0:09:37.679 what it's don't know, net asset value. It's basically the 0:09:37.760 --> 0:09:39.719 value of the stocks or bonds in the e t 0:09:39.880 --> 0:09:42.240 F So it's like the fair value, right, so you 0:09:42.240 --> 0:09:44.400 want to pay something close to the fair value. How 0:09:44.440 --> 0:09:47.880 can we ensure that in when something's hidden, because how 0:09:47.920 --> 0:09:51.079 can you arbitrage it if you don't If the people 0:09:51.080 --> 0:09:54.480 who are arbitraging don't know the underlying components every day, 0:09:54.559 --> 0:09:57.079 and that's what arbitrage essentially is a dirty sounding wall 0:09:57.080 --> 0:09:59.600 street where but it's actually very effective in keeping the 0:09:59.640 --> 0:10:02.520 price in the navy clothes. I would agree with exactly 0:10:02.600 --> 0:10:04.880 what you're saying. And what we've done is to update 0:10:04.920 --> 0:10:07.599 what you're calling the nav or in an E t 0:10:07.760 --> 0:10:11.360 F terms, an indicative value. We've created a methodologies it's 0:10:11.400 --> 0:10:14.360 called a verified indicative value. So we're actually updating what 0:10:14.440 --> 0:10:17.920 I think is UM. Something that is you know, ancient 0:10:18.040 --> 0:10:23.079 developed in nineteen has not updated so that today's ETFs 0:10:23.120 --> 0:10:26.480 rely on a fifteen second indicative value based on last cell. 0:10:27.240 --> 0:10:29.920 You know that's not enough information to your point, So 0:10:29.960 --> 0:10:32.760 what we've done is taken next next generation. We've taken 0:10:32.800 --> 0:10:35.480 it to a per second indicative value on the actual 0:10:35.520 --> 0:10:38.920 holdings of the component securities priced at midpoints, So you 0:10:38.920 --> 0:10:43.240 are eliminating stale stale prices in that in that process. UM. 0:10:43.320 --> 0:10:46.000 The other thing that is critical again and to your point, 0:10:46.320 --> 0:10:49.280 you need to have access to the underlying component securities 0:10:49.280 --> 0:10:53.200 in order to be able to to execute that arbitrage um. 0:10:53.360 --> 0:10:56.520 Through the ap representative role that we've created here, you 0:10:56.600 --> 0:10:58.960 have the ability not only to know the value of 0:10:58.960 --> 0:11:02.520 the component securities, but to access the component's securities, not 0:11:02.679 --> 0:11:05.680 a proxy, not something that may correlate, but the actual 0:11:05.840 --> 0:11:08.400 fund itself. Rachel, what do you think this means for 0:11:08.440 --> 0:11:10.319 the industry. I think it means that there's a lot 0:11:10.400 --> 0:11:13.320 of mutual fund managers out there that are looking at 0:11:13.360 --> 0:11:16.120 this very closely and wondering whether this is the kind 0:11:16.120 --> 0:11:18.800 of salvation that they've been waiting for. The thing. Yeah, 0:11:18.880 --> 0:11:20.920 I mean, like you've been seeing, to to Eric's point earlier, 0:11:20.960 --> 0:11:23.680 this huge amount of money coming out of active mutual 0:11:23.720 --> 0:11:26.640 funds and going into predominantly passive e t f s. 0:11:26.880 --> 0:11:28.920 But there's nothing really about the et F structure per 0:11:28.920 --> 0:11:31.440 se that stops it from being used by active managers. 0:11:31.679 --> 0:11:33.600 It's just at that point about kind of not wanting 0:11:33.640 --> 0:11:36.320 to give up their secret source. So I think there's 0:11:36.320 --> 0:11:38.800 a lot of kind of like interest in how these 0:11:39.240 --> 0:11:41.760 structures kind of like do when they hit the market. 0:11:41.920 --> 0:11:43.840 I think the challenge is going to be sort of 0:11:43.880 --> 0:11:47.199 standing out because DAN is sort of the only active, 0:11:47.280 --> 0:11:50.240 non transparent et F to to get approval at the moment, 0:11:50.520 --> 0:11:52.480 but there are a number of others that are seeking 0:11:52.480 --> 0:11:55.280 approval and that the SEC is kind of currently evaluating. 0:11:55.679 --> 0:11:58.960 Let's just go over those real quick, just for anyone curious. 0:11:58.960 --> 0:12:02.400 So who is sides PRESIDI and what are the structures 0:12:02.400 --> 0:12:04.720 are in the running. Yeah, So at the SEC at 0:12:04.760 --> 0:12:07.439 the moment, there are I think about six proposals that 0:12:07.480 --> 0:12:09.959 are currently seeking approval. So you've got one from tro 0:12:10.160 --> 0:12:14.280 Price Fidelity Investments, nice Ease in their company called Blue 0:12:14.320 --> 0:12:16.959 Tractor Investco. Just filed, and there's a bunch of me 0:12:17.000 --> 0:12:18.800 I'm missing one there, but there's a bunch of people 0:12:18.840 --> 0:12:20.640 out there that are kind of looking to to get 0:12:20.679 --> 0:12:24.000 into the the market. They are primarily proposing something a 0:12:24.000 --> 0:12:26.440 little bit different to what Dan's looking at. He mentioned 0:12:26.440 --> 0:12:29.120 they're the ap representative kind of having sort of this 0:12:29.640 --> 0:12:31.840 kind of blind trust element kind of standing in the 0:12:31.840 --> 0:12:34.640 middle that helps facilitate money going into the fund and 0:12:34.720 --> 0:12:37.480 coming out from the fund. These are other structures are 0:12:37.480 --> 0:12:40.240 primarily looking at what we call a proxy basket, which 0:12:40.280 --> 0:12:43.400 is basically kind of putting out some kind of maybe 0:12:43.400 --> 0:12:47.280 representative maybe substitute, some kind of version of the holdings 0:12:47.520 --> 0:12:50.040 within that fund and allowing kind of market makers to 0:12:50.040 --> 0:12:51.960 see that and use that to make markets. So there 0:12:52.000 --> 0:12:54.439 is a slightly different approach going on. What's your pattern 0:12:54.520 --> 0:12:57.600 for though, Dan, Well, we have about sevenary issued patterns 0:12:57.640 --> 0:13:02.240 are around this around the ap representative role, uh, which 0:13:02.280 --> 0:13:06.360 we call trusted agent. Given our conversations with the sec A, UH, 0:13:06.520 --> 0:13:09.720 the the and then on the indicative value processes as well, 0:13:10.280 --> 0:13:20.160 we have a bunch of issued intellectual property. Let's let's 0:13:20.160 --> 0:13:21.800 go into the real I think what I have the 0:13:21.800 --> 0:13:24.640 real motivation here is the tax efficiency of ets which 0:13:24.640 --> 0:13:27.520 was honestly a happy accident. They did not really mean 0:13:27.640 --> 0:13:29.600 for that to be such a big benefit. But if 0:13:29.600 --> 0:13:32.440 you're in a taxable count and et F will it 0:13:32.480 --> 0:13:34.680 defers the taxes, let's say, but it it doesn't spit 0:13:34.679 --> 0:13:36.559 out capital gains. As the number I mentioned earlier, six 0:13:36.600 --> 0:13:38.800 percent of e t f s paid taxes last year. 0:13:38.840 --> 0:13:41.840 I think for mutual funds is more like and that's 0:13:41.840 --> 0:13:44.320 got to be very frustrating for the fund itself because 0:13:44.320 --> 0:13:47.160 et f s get this quote maybe unfair treatment or 0:13:47.480 --> 0:13:50.040 different treatment, and for the investors in the mutual fund 0:13:50.040 --> 0:13:51.480 who did nothing but sit there and they got to 0:13:51.520 --> 0:13:54.400 gain on their hands. So how confident are you that 0:13:54.440 --> 0:14:00.560 this structure will really um minimize those capital gain distributions? Well, 0:14:00.600 --> 0:14:02.360 I think yea. To your point, I would agree with 0:14:02.360 --> 0:14:03.679 you that this is going to be a lot more 0:14:03.720 --> 0:14:06.880 efficient than any mutual fund out there. Mutual funds do 0:14:06.960 --> 0:14:09.800 have the ability to deliver our securities and cond It's 0:14:09.800 --> 0:14:13.080 just that the structure itself doesn't avail it self to 0:14:13.120 --> 0:14:16.840 that UM DTF structure. The t F rapper and this 0:14:17.040 --> 0:14:18.920 what we've created here with active shares is an e 0:14:19.000 --> 0:14:23.560 t F UM will will function again very similar to 0:14:23.560 --> 0:14:25.640 how the spider functions. We're going to hand out a 0:14:25.680 --> 0:14:29.120 provider slice of the basket to the trusted agent of 0:14:29.200 --> 0:14:32.320 the ap who have the ability to UH sell those 0:14:32.360 --> 0:14:36.360 securities and and therefore make that deliver out the low 0:14:36.400 --> 0:14:38.440 cost basis shares out of the fund to make it 0:14:38.480 --> 0:14:41.960 more tax efficient than today's mutual funds are. I would 0:14:42.000 --> 0:14:44.480 take umbradge with with one point. I don't think it's 0:14:44.520 --> 0:14:47.360 just taxes. I think taxes are very important component. I 0:14:47.360 --> 0:14:52.200 think that today's UM investors, younger investors, want access. They 0:14:52.240 --> 0:14:53.680 want to access from real time, and they want to 0:14:53.680 --> 0:14:55.960 know evaluations in real time. You know, we all have 0:14:56.000 --> 0:14:58.080 our phone sitting here. We're all what customed to we're 0:14:58.120 --> 0:15:00.280 on computers. You know, we don't want to weigh until 0:15:00.280 --> 0:15:03.200 four o'clock to find out what what our securities are worth. 0:15:03.520 --> 0:15:05.520 So I think E t F s are are do 0:15:05.560 --> 0:15:09.040 your point of bridge between you know the traditional fund 0:15:09.040 --> 0:15:11.560 today and the exchange based model and just to riff 0:15:11.600 --> 0:15:13.640 off that. Like on the on the cost side, it 0:15:13.680 --> 0:15:15.320 is interesting Corlo, when you look at sort of some 0:15:15.360 --> 0:15:16.920 of the costs inherent with an e t F and 0:15:16.960 --> 0:15:19.440 mutual funds. You do have that taxation issue, but also 0:15:19.480 --> 0:15:22.000 you have kind of issues about transfer agency. The e 0:15:22.080 --> 0:15:24.360 t F isn't necessarily kind of paying the same amount 0:15:24.360 --> 0:15:26.280 to kind of record that the holders of the fund 0:15:26.280 --> 0:15:28.320 that a mutual fund would be, so that gets rid 0:15:28.360 --> 0:15:30.680 of one cost by by doing an e t F structure. 0:15:30.800 --> 0:15:33.520 Then you also have what's technically called twelve B one fees, 0:15:33.760 --> 0:15:36.040 which which kind of like are the marketing fees that 0:15:36.160 --> 0:15:38.720 most mutual funds do charge and most ETFs do not. 0:15:39.080 --> 0:15:40.920 Now there's kind of a question mark about how much 0:15:40.960 --> 0:15:44.040 of that gets incorporated into an overall expense ratio on 0:15:44.160 --> 0:15:46.440 these e t F s. They are not likely to 0:15:46.480 --> 0:15:48.920 be as cheap as some of the cheapest passive funds 0:15:48.960 --> 0:15:51.680 because somebody is still out there picking stocks. But by 0:15:51.720 --> 0:15:54.880 removing some of those kind of inherent costs, you potentially 0:15:54.880 --> 0:15:56.840 have a way in which you know a mutual fund 0:15:56.920 --> 0:15:59.600 is able to run more efficiently, efficiently and cheaper and 0:15:59.640 --> 0:16:02.360 that should get posted onto the amvestor. Okay, this brings 0:16:02.400 --> 0:16:04.240 up a great point and one that I've yet to 0:16:04.240 --> 0:16:07.440 get an answer on what will these costs? Because you know, 0:16:08.080 --> 0:16:09.960 how do you price this thing so it's cheap enough 0:16:10.000 --> 0:16:12.720 to attract some of the cost obsessed advisors who are 0:16:12.760 --> 0:16:15.480 E t F users, but not too cheap where it 0:16:15.600 --> 0:16:19.120 upsets the existing mutual fund shareholders in the company's own fund. 0:16:19.680 --> 0:16:21.800 PIMCO did this thing where they priced it rate in 0:16:21.880 --> 0:16:24.720 between the EYE class and the A class, which is, 0:16:24.880 --> 0:16:26.920 you know, maybe five six bits away from each and 0:16:27.160 --> 0:16:29.760 that seemed to do the trick. But they were also 0:16:29.800 --> 0:16:32.360 doing a fund that was slightly different than the mothership 0:16:32.480 --> 0:16:36.480 mutual fund. But largely speaking, what's your plan of attack there? 0:16:37.520 --> 0:16:39.680 You have to step back and understand what we are 0:16:39.720 --> 0:16:42.320 Prosidian are right, We're we're we're really not going to 0:16:42.400 --> 0:16:45.000 be the sponsor of the product, right, We're the guys 0:16:45.000 --> 0:16:47.000 behind the scenes. They have developed a structure, so we 0:16:47.080 --> 0:16:49.960 have license and you're talking about the other competitors. The 0:16:49.960 --> 0:16:52.760 other compartiers are all one off models. We have licensed 0:16:52.760 --> 0:16:55.960 fourteen of the largest active active managers on the planet 0:16:56.240 --> 0:16:58.840 who are all coming to market with their own plans. 0:16:59.120 --> 0:17:01.400 So I think in first quarter of this coming year, 0:17:01.400 --> 0:17:03.440 you're gonna see a lot of new products come to market. 0:17:03.840 --> 0:17:06.160 And and from what I see from from these guys, 0:17:06.200 --> 0:17:08.600 and I'm not gonna put it any any names to this, 0:17:09.119 --> 0:17:11.159 is that if there are savings, they're gonna want to 0:17:11.160 --> 0:17:13.320 pass some of those savings along to the client to 0:17:13.400 --> 0:17:15.680 make it more efficient for that client. And that's away 0:17:15.720 --> 0:17:18.200 from just a taxation to to the point removing the 0:17:18.280 --> 0:17:21.040 twelve B one fees and removing transfer agency costs that 0:17:21.600 --> 0:17:24.119 automatically and yours to the benefit of the client. And 0:17:24.119 --> 0:17:27.080 then you're gonna pick up also the the efficiency and 0:17:27.160 --> 0:17:29.480 taxation that you don't have in the mutual fund. I'm 0:17:29.480 --> 0:17:32.080 not trying to side scept that I think that they're 0:17:32.080 --> 0:17:35.040 gonna be guys that are waiting for it, because I'm not. 0:17:35.119 --> 0:17:37.080 I'm not the guy who's gonna tell JP Morgan how 0:17:37.119 --> 0:17:39.720 they should charge, right, So, so you're gonna want these 0:17:39.760 --> 0:17:41.879 guys look this, we're in a competitive world here, and 0:17:41.920 --> 0:17:46.040 I think they know. But that said, this is a 0:17:46.040 --> 0:17:48.720 better mouse trap than anything they've ever had to avail 0:17:48.760 --> 0:17:52.360 themselves up before to compete with the passive industry. That's 0:17:52.400 --> 0:17:55.800 had an advantage for twenty five years. So now we're 0:17:55.800 --> 0:17:57.399 gonna be able to put them on a level playing 0:17:57.440 --> 0:17:59.359 field and and they'll be able to go head to 0:17:59.400 --> 0:18:01.680 head with the past. So here's a question for you, though, 0:18:02.080 --> 0:18:05.280 there are about Kirk if I'm wrong, two d and 0:18:05.280 --> 0:18:09.080 fifty transparent active e t f s the account for 0:18:09.119 --> 0:18:10.560 less than two percent of the assets. They've been on 0:18:10.600 --> 0:18:13.760 the market for ten years, and if you take fixed 0:18:13.800 --> 0:18:15.959 income out of there, you get two really more bleaku numbers, 0:18:16.080 --> 0:18:19.200 maybe like point four percent of the market. The equity 0:18:19.240 --> 0:18:22.200 side is pretty much unloved. What would make you think 0:18:22.240 --> 0:18:25.480 someone would pay for non trant that's acting. So you're saying, 0:18:25.640 --> 0:18:29.760 if transparent active equity doesn't sell currently, what would non 0:18:29.840 --> 0:18:33.080 transparent active equity do differently? Again, to be to be fair, 0:18:33.200 --> 0:18:36.959 if you look at the growth in active even transparent 0:18:37.040 --> 0:18:41.480 index ETFs over the last cup four years, it's so 0:18:41.480 --> 0:18:44.960 so it's not like they're not growing the but specifically 0:18:45.040 --> 0:18:48.359 numbers are small. Numbers are right, right, yeah, very small 0:18:48.520 --> 0:18:51.840 for a good reason. Because if I actually have intellectual property, 0:18:52.119 --> 0:18:54.719 I'm not going to bring my intellectual property to someplace 0:18:54.760 --> 0:18:58.199 that it can be copied and then mimicked by somebody 0:18:58.200 --> 0:19:00.200 else a lot cheaper than it cost me the out 0:19:00.200 --> 0:19:03.000 of it. Yeah, exactly. So. So so if you have 0:19:03.080 --> 0:19:05.159 your best fund managers out there, you're you were never 0:19:05.200 --> 0:19:07.320