Speaker 1: Welcome to Trillions. I'm Joel Weber and I'm Eric Beltis Eric.
Speaker 1: I'm excited about today's guest. His name is John Hoffman.
Speaker 1: He looks after invest Goes American E t F business
Speaker 1: and index strategies. Why is Investo so interesting? Yeah, you know,
Speaker 1: they're they're in the heart of the industry. They've been
Speaker 1: around for a long time, and you know, they acquired
Speaker 1: power Shares and they're the fourth biggest disher, so they're
Speaker 1: you know, maybe a little less publicized because they're the
Speaker 1: biggest outside of the big three. But they have a
Speaker 1: three hundred and sixty three billion UM and they've taken
Speaker 1: in twenty billion dollars this year, which again puts them
Speaker 1: about third or fourth in flows this year. Again, those
Speaker 1: are ridiculously big numbers for E t F s UM.
Speaker 1: You know there it's very difficult business to to get
Speaker 1: going in And they have two hundred and thirty three
Speaker 1: funds and they've taken in cash in a hundred and
Speaker 1: sixty three of them this year, which to me really
Speaker 1: speaks at what's going on. There's a feeding frenzy in
Speaker 1: ets this year more than any other that I've ever seen,
Speaker 1: and that number to get that. You know, we know
Speaker 1: they've taken money to the queues. I mean they're the
Speaker 1: big stud blockbuster e TF You here about that are
Speaker 1: there's you kind of know they've taken in money, but
Speaker 1: they've hundred and sixty three including some interesting areas like commodities, uh,
Speaker 1: the value, there's a there's a bunch of different things
Speaker 1: that I think would be good time to just look at,
Speaker 1: you know, what's going on this year From an issuers standpoint,
Speaker 1: they have a great uh point of view as to
Speaker 1: who's buying them, why and what's going on. Yeah, the
Speaker 1: whole customer conversation is an interesting one, this time on
Speaker 1: trillions the E T F Feeding Frenzy with Investigo's John Hoffman. John,
Speaker 1: Welcome to Trillians. Hey Joel, Hey Eric, thanks for having
Speaker 1: me today. Okay, So when I think of Investco, I
Speaker 1: think of the cues Q q Q. You've got a
Speaker 1: ton of other E T s as Eric just mentioned, Um,
Speaker 1: two and thirty three. I think how many of those
Speaker 1: can you name off the top of your head? You
Speaker 1: know what? Um, that's a good question. Now, two D
Speaker 1: and thirty would be challenging. The tickers for each one
Speaker 1: would certainly be challenging and help. But um, I've been
Speaker 1: here for nearly every one of these launches and so
Speaker 1: they're all my babies, um, all of our babies. And
Speaker 1: so I don't have a favorite. I don't have a
Speaker 1: least favorite. Um, but that you are right, there's quite
Speaker 1: a few and and uh and and we'll continue to
Speaker 1: expand that as we hear from more clients about how
Speaker 1: to help them build better portfolios. Okay, so that's a
Speaker 1: lot of babies. And I'm curious, you know, being the
Speaker 1: fourth biggest issuer and you have the black Rocks and
Speaker 1: the Vanguards in the State Street and then there's a
Speaker 1: little bit of a falloff in terms of a u
Speaker 1: M before you get to investco And I'm curious, how
Speaker 1: do you guys think about eating with that big three? Yeah,
Speaker 1: so this is a question. It's an interesting questions when
Speaker 1: we get a lot and you know, I think that
Speaker 1: we've been incredibly deliberate and intentional intentional uh as as
Speaker 1: it relates to our product design and development and who
Speaker 1: we are in the market. Um, you know, in a
Speaker 1: lot of ways, we've really carved out and built and
Speaker 1: pioneered the you know what what today is referred to
Speaker 1: as the smart beta category. UM, we do things in
Speaker 1: beta as well, but our core competency and really what
Speaker 1: we invented and pioneered was this idea of smart beta.
Speaker 1: Again today we all call it smart beta. UM, I
Speaker 1: can tell you back in the early two thousand's when
Speaker 1: I was talking with clients, that terminology didn't even exist.
Speaker 1: And so if you go, Joe, I think all the
Speaker 1: way back to the beginning, which is, um, you know
Speaker 1: where we still are today in terms of how we
Speaker 1: think about the business. We thought that the E t
Speaker 1: F was a tremendous you know, delivery vehicle for investment
Speaker 1: purposes for all the reasons that everybody knows today. Their
Speaker 1: low cost, they're transparent, tax efficient, These things rattle off
Speaker 1: of everybody's tongue today. Twenty years ago, you know, that
Speaker 1: was still a new idea. But our idea was, let's
Speaker 1: take that benefit rich delivery vehicle, the vehicle for delivering
Speaker 1: investment returns, and let's track in disease that are actually
Speaker 1: built to be investable. And that was the combination that
Speaker 1: we put together, which was new at the time. Today
Speaker 1: it's it's well known and well called, you know, are
Speaker 1: documented as smart Beta, but that's what we were born on.
Speaker 1: That's what we pioneer, that's what we invented. And it's
Speaker 1: all about providing investors better ways to invest. And and
Speaker 1: and Joel, I think about you know, the first index
Speaker 1: was built in the eighteen nineties, right, I mean people
Speaker 1: are driving Model T forwards back in this time per day.
Speaker 1: It might even be before the Model T forward fast
Speaker 1: forward to today. Um. You know, nineteen fifties you had
Speaker 1: the SMP five index. Come all the way today you
Speaker 1: have better technology, more data, more insights. And our idea
Speaker 1: was take all of that advanced technology and partner it
Speaker 1: with a benefit rich vehicle for delivery. Combine that beneficial
Speaker 1: attributes of active management and passive and deliver them in
Speaker 1: this new digital format. And that technology, um is as
Speaker 1: relevant today as it was fifteen years ago. And that's
Speaker 1: how we've really you know, carved our our core focus,
Speaker 1: if you will, from a product development and more importantly
Speaker 1: from a client experienced perspective. Yeah, and that's UM something
Speaker 1: that we see. Uh. You know, I always say you
Speaker 1: could put Mickey Mantle Rookie cards in an e t
Speaker 1: F and it would probably be the best possible way
Speaker 1: to trade Mickey mantle rookie cards, which is why we're
Speaker 1: very pro bitcoin ETF. We've seen everything thrown in there, China,
Speaker 1: a shares, active, just pure active smart beta themes. It
Speaker 1: really is a amazing structure now that is known. And
Speaker 1: you know et has been taking in money every year
Speaker 1: for uh two decades. So this year though, it's gotten insane.
Speaker 1: Right that ets typically take in about two billion a day.
Speaker 1: This year they've taken in four billion a day. And
Speaker 1: I guess I'm just curious, what's going on? Why is
Speaker 1: there such an uptick in money coming in this year?
Speaker 1: What's your take on that? Yeah, so again i'd widen
Speaker 1: out the lens, right. The e t F is a technology.
Speaker 1: It's a technological innovation for delivering investment returns and it's
Speaker 1: it's perfectly it's very you know, great design. Um, when
Speaker 1: you think about great design and simplicity, um, you know,
Speaker 1: think about the Google Search interface, one little bar. You know,
Speaker 1: they've done an incredible job keeping that simple. I think
Speaker 1: about the iPhone and how easy it is to use.
Speaker 1: You know, my kids can unlock my iPhone and take pictures. Um,
Speaker 1: you know, it's just intuitive. And so this is the
Speaker 1: e t F represents a disruptive technology and innovation. I
Speaker 1: think that you know, we go back thirty years, or
Speaker 1: you think of the time horizon, it's still in its
Speaker 1: early stages when you think of this, not in time
Speaker 1: or in assets, but in network effects. And so we
Speaker 1: think about you know, not necessarily um that the growth
Speaker 1: more recently over this long horizon ten distinct network effects
Speaker 1: that are playing out in the E t F segment.
Speaker 1: And network effects is really just a fancy way of saying,
Speaker 1: the more people that use a service, the more valuable
Speaker 1: you know, the service is. Right. I use the analogy
Speaker 1: of Uber. Right, if there's one car on the Uber
Speaker 1: network and you push the button, um, it's not very useful.
Speaker 1: When there's ten thousand a million, when there's a car
Speaker 1: at every corner, that network is very, very useful and powerful.
Speaker 1: And what we're seeing, Eric is is this network effect
Speaker 1: play out in e t F s. We're still in
Speaker 1: some of the mid stages of these network effects, things
Speaker 1: like model portfolios, the growth of retail, you know, self directed.
Speaker 1: But it's really about this incredibly efficient technology for delivering
Speaker 1: investment returns. That's that's powering this growth. And every time
Speaker 1: we have a disruptive event, Um, you know, think back
Speaker 1: to two thousand, two thousand and eight. Coming out of
Speaker 1: oh eight, the E t F product grew significantly. Coming
Speaker 1: out of two thousand, the product grew significantly. As we
Speaker 1: come through the pandemic. You know, money has moved out
Speaker 1: of older structures and it's coming into new and so
Speaker 1: you know, yes, it's it's a trend that I think
Speaker 1: people are looking at today. Uh. You know that the
Speaker 1: numbers are staggering. We're on pace for a trillion dollars
Speaker 1: of inflows here in the US. But this is really
Speaker 1: just a continuation of a trend that's been in motion
Speaker 1: for quite some time. And you know, we think a
Speaker 1: lot about the big macro trends that are powering this
Speaker 1: and those haven't changed. Right when you think about the
Speaker 1: move to fiduciary, when you think about the move from
Speaker 1: active investing to passive, which again we think the words
Speaker 1: are wrong. They're almost all investors are are active investors. Uh.
Speaker 1: You know some of these trends around regulation, um, technological innovation.
Speaker 1: This industry is going to change more in the next
Speaker 1: five years than it has in the past fifty. And
Speaker 1: it's just an acceleration of continuation of this trend around
Speaker 1: better technology for driving investment returns. One of the lanes
Speaker 1: that we find opening up more in terms of people
Speaker 1: using e t F s is the direct do it
Speaker 1: yourself retail investor, and a strand of that is the
Speaker 1: sort of like yolo retail trader type, and where you
Speaker 1: really get to meet them is on TikTok. They make
Speaker 1: some there's some wild videos on there. It's really if
Speaker 1: you just type in an e t F hashtag, you'll
Speaker 1: find some fun stuff on there, some more serious, some
Speaker 1: just downright and saying, um, you have an interesting story
Speaker 1: here about s pH D and the power of TikTok.
Speaker 1: Can you go over that? So we're talking about TikTok here,
Speaker 1: all right? Um, So I would start with, you know
Speaker 1: this idea that what's driving this this direct market growth.
Speaker 1: You know, there's a huge macro factor here of of
Speaker 1: commissionless trading, commission free trading, which is reduced the frictions
Speaker 1: to to transacting and so eric to your point, we
Speaker 1: have seen really significant growth in this segment, and as
Speaker 1: we unpacked the segment and see what drives the behaviors,
Speaker 1: we are finding some very interesting elements of influence. One
Speaker 1: of our more obscure tickers at the time had a
Speaker 1: really high ownership on robin Hood, and as we looked
Speaker 1: at the disproportionate ownership in robin Hood, what we attributed
Speaker 1: it back to. What we found was a TikTok video
Speaker 1: from an investor or a client that was putting forth
Speaker 1: a strategy to hold this particular e t f UM
Speaker 1: for a period of time, and we saw that video
Speaker 1: go from a thousand hits to five thousand to fifty.
Speaker 1: It ultimately had over half a million views, and the
Speaker 1: correlation of account openings and transaction UH data on some
Speaker 1: of the underlying platforms was really indicative of how powerful
Speaker 1: all of these other mediums are around buying decisions and
Speaker 1: asset flows in e t FS, something that again traditionally
Speaker 1: was not our core focus, but increasingly is important to
Speaker 1: understand the drivers of flows. Let's get into some tickers here,
Speaker 1: because you know, I think they can be representative what's
Speaker 1: going on. So in my opinion on the two to four,
Speaker 1: I get the whole transformative technology. I think that's good
Speaker 1: for two billion. I think the four is because the
Speaker 1: market has breadth this year, and by breath I mean
Speaker 1: small caps, value, international commodities, a lot of these left
Speaker 1: behind places have been working for most of the year,
Speaker 1: not the past month so much. But RSP is a
Speaker 1: great example. So this is your equal weight at e
Speaker 1: t F this year. It's your best selling e TF
Speaker 1: better than the cues. And to me, the cues probably
Speaker 1: defined last year. RSP this year it has more value
Speaker 1: slate tilts of smaller companies, UM, and I want to
Speaker 1: ask you about RSP. It's so simply just equate the SMP.
Speaker 1: When I go to the money Show and interact with
Speaker 1: direct retail investors, it's weird. I love hearing their questions
Speaker 1: and I do get asked about equal eating a lot UM,
Speaker 1: I guess. Just talk to me about what are people
Speaker 1: buying here? What do you think of RSP? Like, how
Speaker 1: are how are they using it? Are they replacing like
Speaker 1: a voo or is this like a trade when I
Speaker 1: say who, I mean, like a Vanguard five hundred or
Speaker 1: is this like a trade where you add a little
Speaker 1: RSP on top of your portfolio for a little juice
Speaker 1: and then you trade out of it. So, Eric, I
Speaker 1: think this gets right to the core of who we
Speaker 1: are right and first off, we we believe in long
Speaker 1: term investing. UM. And when you think about that, construct
Speaker 1: our idea of providing you know, better return patterns and
Speaker 1: and creating methodology that's more efficient. Let's take RSP as
Speaker 1: the example or what is this? Is it a trade?
Speaker 1: Is a short term? What are we looking at? So
Speaker 1: it is simple. It equally waits the security, incredibly simple.
Speaker 1: All five securities the SMP five received the same way.
Speaker 1: What does it do? What it does is it provide
Speaker 1: a more balanced exposure to the SMP five hundred. And
Speaker 1: why have we seen it this year? Accelerate the SMP
Speaker 1: five hundred. The top ten names right now have nearly
Speaker 1: a thirty percent concentration, so you're getting, you know, a
Speaker 1: very concentrated exposure to some large cap names um which
Speaker 1: again a lot of the return is going to be
Speaker 1: driven by those big, big stocks, right, those big companies.
Speaker 1: What RSP does is provides you a little bit more
Speaker 1: exposure to the size premium in the market. So it's
Speaker 1: tilting a little bit more towards small cap right, which
Speaker 1: again is a differentiated and rewarded return pattern. It's also
Speaker 1: taking advantage of the value factor, so it's going to
Speaker 1: tip a little bit more towards the value spectrum and
Speaker 1: so we don't look at this over you know, a
Speaker 1: day or a week or a month. We believe that
Speaker 1: RSP can provide a very efficient core US equity exposure.
Speaker 1: And to the tickers that you've referenced, that that broader
Speaker 1: SMP five hundred exposures, you know, those are nearly a
Speaker 1: trillion dollars in a u M when you add them
Speaker 1: up right, And what we're finding is that clients are
Speaker 1: looking to um ultimately balance their concentration a bit more
Speaker 1: in the index, diversify a little bit differently. And that's
Speaker 1: why this year, you know, we've seen significant flows there
Speaker 1: and now I think RSP is the largest smart beta
Speaker 1: e t F in the US market. You know, another
Speaker 1: theme from this year that I'm really interested in talking
Speaker 1: with you about has been the commodities boom. And you
Speaker 1: all have a huge foothold in commodities, but specifically sort
Speaker 1: of in commodity futures, and so I'm wondering how you
Speaker 1: approached that because outside of basically the g l D
Speaker 1: s of the world, you guys are basically the biggest
Speaker 1: name name there. But but why focus on futures instead
Speaker 1: of more of an equity play. Sure, so when we
Speaker 1: entered the commodity space in the mid two thousand's. We
Speaker 1: looked at what was already in the market, and you know,
Speaker 1: there were some some great physical based capability and what
Speaker 1: we saw was an opportunity to pioneer the future segment
Speaker 1: UM and what I mean by that is, you know,
Speaker 1: there were other futures products in the market, you know,
Speaker 1: et f s buying futures. What we did was we
Speaker 1: went back to our core DNA, which is about building
Speaker 1: enhanced you know, strategies, and so we applied We partnered
Speaker 1: with Deutsche Bank in this lineup in the mid two thousand's,
Speaker 1: and we actually utilize an intelligent index. So the index
Speaker 1: looks at the shape of the futures curve and identifies
Speaker 1: where to roll futures kind of like a manager would, uh,
Speaker 1: you know, and in a more active fund, identifying the
Speaker 1: most opportune place to roll forward those futures. And so
Speaker 1: DBC was our flagship product there broad commodity exposure. We
Speaker 1: then expanded on that and got to the individual sectors
Speaker 1: d B A and agriculture d B O and oil
Speaker 1: UM And as we continued to iterate and work with clients,
Speaker 1: one of the opportunities we found was a way to
Speaker 1: deliver this without a K one, and so we created
Speaker 1: p DBC, which is a very similar product to DBC
Speaker 1: holding futures, but it had a structure that enables us
Speaker 1: to pass through a TONE nine instead of a K one. Again,
Speaker 1: there's tradeoffs and benefits of each of these structures. In
Speaker 1: this instance, that's what we were solving for. And now
Speaker 1: that's a uh, you know, a six billion dollar fund
Speaker 1: um providing you know, a broad exposure to commodities, which
Speaker 1: you know Joel. In this idea of long term investing,
Speaker 1: what we see is model portfolio builders you know, attracted
Speaker 1: to the correlation properties of commodities and so you know,
Speaker 1: Eric would probably ask is this a short term trade?
Speaker 1: I would argue that a well constructed portfolio is going
Speaker 1: to find you know, value in a correlation pattern that's
Speaker 1: different than stocks and bonds. Uh. And so we think
Speaker 1: that in many ways this is an allocation in a
Speaker 1: long term asset allocation. Yeah, certainly. And I think the
Speaker 1: one thing with these commodity futures et s and we
Speaker 1: have a traffic light system and we do give them
Speaker 1: a red light although the system and saying it's good
Speaker 1: or bad it's it's most like movie ratings, like, hey,
Speaker 1: this is this is kind of like a rated R
Speaker 1: E T F. And the reason we say that simply
Speaker 1: is because of rolling futures. When you roll futures, you
Speaker 1: tend to pay more for the next month than the
Speaker 1: month you just sold because people know that you don't
Speaker 1: want to get delivery of oil to your health. So
Speaker 1: the storage costs are kind of baked into this roll cost.
Speaker 1: So I'm not saying you could do it any better
Speaker 1: if you trade the futures on your own, but there
Speaker 1: is it's not really seeing the expense ratio. Do you
Speaker 1: try to like warn clients of this or how do
Speaker 1: you explain canentango and this idea of rolling futures because
Speaker 1: in some of them, like oil in particular, it can
Speaker 1: be a pretty hefty cost over the years. Now it
Speaker 1: could go opposite and actually benefit you when there's a
Speaker 1: rush for commodities. I get that that's more like a
Speaker 1: full moon I think normal circumstances, though, is you do
Speaker 1: pay for the role? Yeah, Eric, You're spot on, And
Speaker 1: that's actually what the product is designed to do is
Speaker 1: optimize is that role. So it has rules built into
Speaker 1: the index to look at the shape, so to get
Speaker 1: very granular and specific, it looks at the particular curves.
Speaker 1: So let's say we're in oil and we're going to
Speaker 1: roll a contract. It's going to calculate the implied roll
Speaker 1: yield on the next thirteen months, and then it's going
Speaker 1: to select the place on the curve that would be
Speaker 1: the most optimal to roll um. And if you think
Speaker 1: about the first generation of futures based commodity products, they
Speaker 1: did exactly what you said. They statically rolled every month
Speaker 1: front month, you know, regardless of the shape of the curve.
Speaker 1: And what we did was we said, hey, hold on
Speaker 1: a second, there might be a more intelligent way to
Speaker 1: do this by using a basic algorithm that calculates roll
Speaker 1: yield um and identifies the place to to to roll
Speaker 1: onto the curve. And eric, that's what we've been doing
Speaker 1: in all of our products. It's you know, it's not
Speaker 1: about um. You know, the each one has its own
Speaker 1: design um to take a little bit of intelligence. Will
Speaker 1: be an index, right, it's passively managed index based rules methodology,
Speaker 1: but put a little bit of intelligence into the product
Speaker 1: to create a better outcome in again, you know, will
Speaker 1: these outperform in every market? Absolutely? Not right. There will
Speaker 1: be periods of underperformance. But what we're hired to do
Speaker 1: is provide the return pattern to clients for that particular index.
Speaker 1: And that's what we do, you know, really really well.
Speaker 1: CUT is your is your wood E t F right,
Speaker 1: which you know is much more friendly. Let's call it
Speaker 1: UM since it's it's a PG rated UM et F
Speaker 1: and in the stop light system. So how do you
Speaker 1: how do you think about being such a big name
Speaker 1: in commodities but then basically having different tools for different people.
Speaker 1: I guess yeah, I would draw the parallel to you know,
Speaker 1: microprocessors in a computer, right, we create these microprocessors that
Speaker 1: provide return patterns to clients. CUT is providing the return
Speaker 1: pattern of the equities UM in the timber market. If
Speaker 1: you want to buy timber directly, UM, you know, there's
Speaker 1: ETFs that hold those futures. If you want to get
Speaker 1: closer to the eggs and and the underlying UM you know,
Speaker 1: grains and metals, we can provide that exposure as well.
Speaker 1: So CUT is a basket of securities that are focused
Speaker 1: in that particular market. It's the equity exposure, uh, you know,
Speaker 1: not necessarily the futures exposure and so again, Joel, I
Speaker 1: think it's about providing more return patterns to clients. You know,
Speaker 1: we get this question, is there the rise of the thematics? Right?
Speaker 1: I think that this is really about UM, you know,
Speaker 1: or the rise of smart beta or some iteration of that.
Speaker 1: This is really about the evolution of technology. The reason
Speaker 1: why the Dow Jones Industrial Average is price weighted is
Speaker 1: because that was the only way you could calculate it
Speaker 1: every day in nineteen hundred. Right today, we can calculate
Speaker 1: things more efficiently with technology, and it's enabled us to
Speaker 1: carve all the return patterns more precisely. And that's really
Speaker 1: what we're focused on, is precision over return patterns UM
Speaker 1: using modern technology wrapped inside of a very efficient delivery mechanism. Yeah. Actually,
Speaker 1: it's funny you say the rise of thematics. We've tried.
Speaker 1: We've really distilled this down into into two buckets, cheap
Speaker 1: beta or dirt cheap and shiny objects UM, and I
Speaker 1: would put thematics are commodities things that are just happening UM,
Speaker 1: but not happening a little, not like outperforming the SMP
Speaker 1: by one percent like the old days, but literally crushing
Speaker 1: it UM or providing something very unique. And that leads
Speaker 1: me to another area that I want to ask you about,
Speaker 1: which is crypto. And look, there's now fifteen issuers that
Speaker 1: have filed for crypto, including some big, bigger names like
Speaker 1: van Neck, your competitor, Fidelity. Are you guys considering getting
Speaker 1: getting involved in this, because if you're a leader in commodities,
Speaker 1: you know, outside of g l D and i AU,
Speaker 1: you're right there. I would think this would make sense
Speaker 1: given that people want to use it for similar purposes,
Speaker 1: non correlated returns shiny objects seems right up your alley.
Speaker 1: How come you haven't filed yet? So we recently files
Speaker 1: this as a public filing for again the equities capability
Speaker 1: UM in both the blockchain. Yeah okay, I know, so
Speaker 1: you okay, the blockchain etf that hold stocks. That makes sense, Um, okay, great,
Speaker 1: But I'm talking about the real deal. Sure, so let's
Speaker 1: get to it. So look, this blockchain, digital assets, cryptocurrency
Speaker 1: again a substantial technological innovation. We are paying attention to
Speaker 1: what we're doing, a tremendous amount of research and development
Speaker 1: in the space. And I can tell you, having been
Speaker 1: in these two worlds for a while, there's incredible parallels
Speaker 1: between the e t F market and the digital asset
Speaker 1: cryptocurrency market. I could extend you know that discussion if
Speaker 1: if you want. We're spending a tremendous amount of energy
Speaker 1: UM on this space. We've been engaged here for an
Speaker 1: extended period of time, but we're seeing changes in the
Speaker 1: market now that are increasing our focus in this segment.
Speaker 1: And so UM again, it's a technology is really you know,
Speaker 1: an investment in blockchain, investment in digital assets and cryptocurrency
Speaker 1: is an investment in technology. And as you pointed out,
Speaker 1: we have often pioneered new ways to gain exposure to
Speaker 1: asset classes. So you think back to our build out
Speaker 1: of bank loans, UH fixed income. There's a lot of
Speaker 1: questions that need to be solved in this blockchain UH
Speaker 1: more specifically bitcoin UH space. I would argue that the
Speaker 1: first bitcoin et F is not the ending place. There
Speaker 1: is going to be theoretically a whole series of return
Speaker 1: patterns in this market, in this new asset class, and
Speaker 1: it's something that we are again spending a lot of
Speaker 1: energy on. Again, I think about its twelve year old
Speaker 1: technology now, but where are we in the network effects
Speaker 1: of this market? And Eric rest assured we are continuing
Speaker 1: to drive innovation, thoughtful innovation, and this is a space
Speaker 1: that you know, we're we are continuing to to put
Speaker 1: energy against. So another product that we are really interested
Speaker 1: in is um sp l V, which is this low
Speaker 1: volatility ETF that had been really popular and then sort
Speaker 1: of um, you know, everybody left, it seemed, but now
Speaker 1: it's actually starting to perform. So just just wondering, like
Speaker 1: when you have a product like that that maybe is
Speaker 1: you know, potential to have a moment, yet like, how
Speaker 1: do you how do you like get people re excited
Speaker 1: about it? Can I just actually add that because what
Speaker 1: Droll talks about is something we have found, which is
Speaker 1: you know, we call it do you get a second
Speaker 1: bite at the Apple currency? Hedging ets just went through this.
Speaker 1: They crushed it, Everybody rushed and it was like a craze.
Speaker 1: Then they started underperforming the non hedged index. Everybody left,
Speaker 1: they come back, they perform great over another year or two.
Speaker 1: Nobody cares do you think that's going to happen to lovall?
Speaker 1: So we we've been getting a lot of questions on
Speaker 1: lovall in particular recently. It's been a big part of
Speaker 1: our client discussions, and i'd widen the lenser, and go
Speaker 1: back to when we launched LOVAL. The same day we
Speaker 1: launched it, we launched high Beta. So kind of the
Speaker 1: Yin and the Yang. And now we've got ten years
Speaker 1: of history on these two products. Again, lo vall a
Speaker 1: lot of attention there. I can tell you. When we're
Speaker 1: developing these products, you know, we had discussions interning which
Speaker 1: one is going to be more implemented. And I can
Speaker 1: tell you that, um, there was a thinking that Hi
Speaker 1: beta was gonna be the revolutionary product because it's going
Speaker 1: to provide this this new return pattern, and much too
Speaker 1: many people's surprise, lo Val took off SPLV for its
Speaker 1: different return pattern. Now we're ten years later, we can
Speaker 1: look at these two and see how they performed, how
Speaker 1: they gathered assets. Um, you know, they're kind of again
Speaker 1: the Yin and the Yang. One holds the lowest volatility
Speaker 1: stocks of the s MP five, the other one holds
Speaker 1: the highest beta securities. And again CAPM would tell us
Speaker 1: that high beta should beat low volatility. You're rewarded for
Speaker 1: the risk you're taking. There, And ten years later, high
Speaker 1: Beta SpHb has performed better than sp lv. Uh, but
Speaker 1: ironically sp LV has you know, significantly larger assets, and
Speaker 1: so these are capabilities and return patterns that we don't
Speaker 1: look at eric. You know, in in isolation, there's low volatility,
Speaker 1: there's high beta, there's momentum, there's quality. We offer those
Speaker 1: as well, and we do see some rotation through the
Speaker 1: different factors based on where we are in market cycles.
Speaker 1: But our role is to provide the return pattern. And
Speaker 1: you know what we're seeing in the more much shorter
Speaker 1: time horizon here is that you know, there is starting
Speaker 1: to be a return to quality, a return sent to
Speaker 1: low volatility UM. And again you look at the pandemic period,
Speaker 1: I would point out that low volatility underperformed during that
Speaker 1: period of period where it should have you know, done well. Um.
Speaker 1: Having said that, you know, we've looked back on this
Speaker 1: through different times and we've seen the strategy underperform. But
Speaker 1: the behavioral finance element of this index, you know, people
Speaker 1: will will ultimately um sell at the wrong time, is
Speaker 1: certainly evident in this and we think that the anomaly
Speaker 1: of low volatility is still as relevant today as it
Speaker 1: was in prior markets. One of the things you bring
Speaker 1: up is the idea that smart beta takes the emotion
Speaker 1: out of active management, because you are have a system,
Speaker 1: there's criteria, it rebounces in a schedule. It's almost like
Speaker 1: R two D two. It's a droid. No matter what happens,
Speaker 1: the thing just does what it is programmed to do.
Speaker 1: This really came up. I'm sure you're gonna love this
Speaker 1: story because it's favorab alters towards your e t F.
Speaker 1: But it could have gone the other way, which is
Speaker 1: p e J, which is the Dynamic Leisure e t F,
Speaker 1: which you know, it's one of these ETF that holds
Speaker 1: a lot of the stocks that benefit from the reopening trade.
Speaker 1: So it and JETS were used quite a bit. Now
Speaker 1: it's interesting, is it bought um a m C, the
Speaker 1: movie theater chain, and then a MC gets hijacked by
Speaker 1: the Wall Street bets and Reddit crowd goes up like
Speaker 1: I don't know, something ridiculous. And then p e J
Speaker 1: sells a m C the next quarter and it's perfectly timed. It.
Speaker 1: I gotta be honest, this was like a trade that
Speaker 1: no human could do because once the stock is that good,
Speaker 1: it's almost hard to let go like that. But you
Speaker 1: did it, and I guess I just want to talk
Speaker 1: about the concept of rebalancing luck or how people who
Speaker 1: are et F investors should think about balancing. Should they
Speaker 1: look at how often it does? Um? What would you
Speaker 1: recommend on that front? Yeah, so you hit on a
Speaker 1: lot of topics. Are the first one I go back
Speaker 1: to is you know PEJ was launched in the early
Speaker 1: two thousands, sat in fifty million dollars in a u
Speaker 1: M kind of did Joel's comments earlier, and then had
Speaker 1: its day in the sun and went from fifty million
Speaker 1: to four billion, mostly about this reopening trade. And Eric,
Speaker 1: as you point out, the securities in the portfolio, Uh,
Speaker 1: you know provided a targeted exposure to the reopening trade
Speaker 1: and so we saw significant inflows there. Rebalancing is key
Speaker 1: to good portfolio management, and so smart beta codes that
Speaker 1: into it, right, and so this particular e t F
Speaker 1: rebalances and reconstitutes four times a year unemotionally predefined. Um.
Speaker 1: Just as you pointed out, Um, you know does things systematically,
Speaker 1: and it's that systematic nature that is important to the
Speaker 1: return pattern. And to your point, you know, as you
Speaker 1: as you mentioned, you know, this was a very well
Speaker 1: timed re balance with a MC. So let me let
Speaker 1: me unpack that for for a quick second. The index
Speaker 1: looks at price, momentum, earnings momentum, quality, management, action, and
Speaker 1: value and it rates them every quarter on that and
Speaker 1: then it takes the thirty names that are you know,
Speaker 1: scoring the best on those attributes, which again they're just
Speaker 1: common sense attributes that a manager would would use. That's
Speaker 1: what it holds in the portfolio. In this instance, it
Speaker 1: actually um you know, on on on the May rebalance um.
Speaker 1: Right before the rebalance, AMC was at twenty six dollars
Speaker 1: a share. The calendar turned, we rebalance on the first
Speaker 1: day of June, and it actually sold AMC at sixty
Speaker 1: two dollars a share much as you pointed out, you know,
Speaker 1: a trade that would have been hard to do if
Speaker 1: it wasn't systematic. But I point back to, really, you
Speaker 1: know that the idea that rebalancing is important in portfolio construction,
Speaker 1: and as you ask, it's important for investors to understand
Speaker 1: how does their fund rebalance, how frequently, how does it
Speaker 1: select securities. That's a key element to understand in e
Speaker 1: t F And my favorite story is our fundamentally weighted
Speaker 1: e t F PRF, which is a you know, a
Speaker 1: one thousand security portfolio in the thick of the financial
Speaker 1: crisis back in in in March of oh nine, it
Speaker 1: was going through its annual reconstitution and it was looking
Speaker 1: at the banking sector and saying, how big is the banks?
Speaker 1: Are the banks from a sales, cash flow book value,
Speaker 1: dividends and it so these are still very important entities,
Speaker 1: and it upweighted it's exposure to financials, you know, in
Speaker 1: a very significant way. Um I remember the calls we
Speaker 1: were getting from clients. You're buying financials right now? How
Speaker 1: could this fund possibly be doing that? But when you're
Speaker 1: looking at five year trailing on sales, cash flow book
Speaker 1: value and dividend, city groups still a big organization. These
Speaker 1: banks that were very small in size at that point
Speaker 1: got upweighted in the index and that drove tremendous outperformance
Speaker 1: from that rebalance forward, which again to your point, these
Speaker 1: things can be timed well, but the important aspect is
Speaker 1: continuing to rebalance, John, I just want to stay with this,
Speaker 1: the rebalanced thing for a second longer because it's such
Speaker 1: an important part of smart data. Right. It's like you've
Speaker 1: got a robot basically that's gonna like do what it
Speaker 1: does when you say it, when you tell it to
Speaker 1: do what it does right. But within that, I'm even wondering, like,
Speaker 1: do you all have a ranking system of like the
Speaker 1: robots who like surprise you and do a really good
Speaker 1: job and others that are like meet a little bit
Speaker 1: more improvement on on the rebalancing abilities? How do you
Speaker 1: guys evaluate that internally? So we're constantly looking at the
Speaker 1: methodologies of the underlying indices and and and making sure
Speaker 1: that they're providing the return pattern that we've stated UM
Speaker 1: as the objective. Uh, and we've done enhancements and you know,
Speaker 1: evolved in disease and changed indicase through time to ensure
Speaker 1: that we're providing clients with with you know, the best
Speaker 1: way of accessing that particular return. And I can tell
Speaker 1: you again back in in in the early days of
Speaker 1: e t F, says, we talked to clients about UM,
Speaker 1: you know this this rebalance frequency UM. The initial reaction
Speaker 1: from from traditional you know thinking was well, you're gonna
Speaker 1: have you know, high turnover is going to you know,
Speaker 1: is ultimately a negative attribute of of you know, what
Speaker 1: we've been trained on in asset management. But the reality
Speaker 1: is that turnover is what drives some of the tax
Speaker 1: efficiency of the e t F. And so again, our
Speaker 1: our core elements and focus has been about challenging convention,
Speaker 1: you know, in the pursuit of innovation and rebalance. Frequency
Speaker 1: is now something that everybody understands. UM. You know, drives
Speaker 1: efficiency from a tax perspective. UH. And the ability to
Speaker 1: to um make a potentially taxable gains at the fund level. UM.
Speaker 1: Let me Uh. I kind of want to end the
Speaker 1: conversation here talking a little business. UM. Two things I
Speaker 1: want to ask about. They're both kind of related. Which
Speaker 1: is just your your strategy for growth? UM? You know
Speaker 1: it's tough. I mean, if Vanguard and black Rock are
Speaker 1: going to take in se of the money that leaves
Speaker 1: about for about a hundred firms, you guys are taking
Speaker 1: a nice chunk of that. But people wonder how how
Speaker 1: can you make it? How are what? How are you
Speaker 1: going to grow? You guys acquired Guggenheim, you acquired Oppenheimer.
Speaker 1: Some people will equate you with acquisitions, so I'm curious
Speaker 1: if you have any there. And then the other thing
Speaker 1: is this move with q q Q you come up
Speaker 1: with q q q M, which essentially is the same thing,
Speaker 1: but it's in a different type of structure. It's not
Speaker 1: a unit investment trust, which means that you get to
Speaker 1: actually make some money on it because the cues has
Speaker 1: the kind of um uh structure. I'll let you a
Speaker 1: explain it, but I guess why launch q q M
Speaker 1: and who are you going to acquire next? Just break
Speaker 1: the news here, yes, yeah, yeah, And I know this
Speaker 1: is run on a delay, so that'll be interesting now
Speaker 1: I'm not kidding. So the uh, the launch of q
Speaker 1: q q M and and q q q J. You know,
Speaker 1: we look back at it now we're a year past
Speaker 1: that launch. Um q q q J you know, was
Speaker 1: awarded the most innovative et F of opened up this
Speaker 1: new segment of the queues, if you will, the next
Speaker 1: one innovators looks so obvious today, right of course we're
Speaker 1: gonna do q q q J. Q q q M
Speaker 1: is now bigger than q q q j um at
Speaker 1: one point three billion. It's accelerating. We're seeing clients that
Speaker 1: preference you know fee um you know, moving to to
Speaker 1: q q q M. It has a lower management fee.
Speaker 1: But again it's really about providing clients more ways to
Speaker 1: access you know, this incredibly important capability. This index, the
Speaker 1: Nasdaq one hundred UM with different attributes again I gave
Speaker 1: the example with DBC and p DBC K one and
Speaker 1: no K one. Q q q M and q q
Speaker 1: q provide very similar exposures but are structured differently depending
Speaker 1: on a client's preference. And so you know, where there's
Speaker 1: high priority for liquidity trading volume, q q Q, you know,
Speaker 1: is one of the most traded securities in the world.
Speaker 1: Where there's fee sensitivity, we're seeing clients implement q q
Speaker 1: q M as it relates to to growth. UM. You know,
Speaker 1: we have really continued to center our focus, UM, you know,
Speaker 1: on on client outcomes, which which I think everybody would
Speaker 1: talk about in this market. One of the things that
Speaker 1: we think about within E t FS is, you know,
Speaker 1: the client experience can only be, you know, at the
Speaker 1: at the highest level equal to our our our employee experience,
Speaker 1: and so we're spending a lot of time UM on
Speaker 1: our employee morale culture people, knowing that if we get
Speaker 1: the best people from an E t F perspective, UM,
Speaker 1: we're going to continue to drive innovation and that's going
Speaker 1: to extend beyond just product development, but really about again
Speaker 1: that full ecosystem of how a client interfaces with E
Speaker 1: t S And I know Eric, we talked about, UM,
Speaker 1: the opportunity with direct indexing to create personalization. We think that,
Speaker 1: you know, as a bit of a teaser here, there's
Speaker 1: things that can be done around the client experience that
Speaker 1: drive personalization in this traditional forty act rapper, and we're
Speaker 1: spending more and more time around that full client experience
Speaker 1: and that's what's going to drive our girl. My colleague
Speaker 1: Ethnosios Sara Vegas really laid out a nice case for
Speaker 1: why you guys should buy State Streets e t F business. UM,
Speaker 1: it really emerged as well. And then one of your
Speaker 1: ex colleagues, then Fulton, wrote about that also in E
Speaker 1: t F dot Com, saying this would make a lot
Speaker 1: of sense. So any any thoughts on that or you
Speaker 1: just want to I'm gonna guess you're gonna pass. Look,
Speaker 1: I would say, as you pointed out, historically we've grown
Speaker 1: organically and inorganically. UM. You know you mentioned in the US,
Speaker 1: you know, we we acquired the power shares business, Googgenheim's
Speaker 1: ETF business. In Europe, we acquired the source business. Most recently,
Speaker 1: you know, we we combined with the Oppenheimer Funds capability
Speaker 1: here in the US. So we've grown both organically and inorganically.
Speaker 1: And I think it all comes down to the client
Speaker 1: experience and what makes most sense, and that's ultimately what
Speaker 1: our north star is. And so I wouldn't comment on
Speaker 1: one particular name. You know, there's there's there's news every
Speaker 1: day and speculation every day on on all of these things.
Speaker 1: But at the end of the day, you know, our
Speaker 1: north star is about client and client experience, um, and
Speaker 1: that's what's going to drive our decisions going forward. Okay,
Speaker 1: I'm gonna try and get you say something about a
Speaker 1: single name, but it'll be a little bit different, which
Speaker 1: is we've talked about a lot of of Invesco's ETFs
Speaker 1: here out of two and thirty three, is there anyone
Speaker 1: that we didn't talk about that you have a special
Speaker 1: affinity for. I know it's gonna say, go ahead, a
Speaker 1: bullet chairs, that's my guess, but go ahead. You know
Speaker 1: what I think? Um, Look, I I don't there's not
Speaker 1: one of the Invesco loves bullet chairs. I would too,
Speaker 1: They're great products. I'm just no, I look, I think
Speaker 1: Look it's it's there's a technology associated with bullet chairs
Speaker 1: that is innovative. It makes an et F feel like
Speaker 1: a big bond, certainly an interesting capability and something that
Speaker 1: we saw in the acquisition of Goggenheim. Having said that, um,
Speaker 1: you know that there's not a particular product that I
Speaker 1: would jump off the page, you know, in terms of newness,
Speaker 1: maybe possibly Joel, if I had to answer it and
Speaker 1: go somewhere. Um you know, our senior loan e t
Speaker 1: F is one that um you know, a number of
Speaker 1: teams across the organization worked on to Pioneer. We had
Speaker 1: so many questions at the time of how to bring
Speaker 1: this O t c UH structure on exchange something that
Speaker 1: settles UH in much longer cycles and prices differently. And
Speaker 1: today b k l N is one of the largest
Speaker 1: loan funds in the world, and it was about opening exposure,
Speaker 1: opening access to that return pattern, so one that we're
Speaker 1: seeing more and more interested recently. But um, of the
Speaker 1: as I said on the front end, you know I
Speaker 1: love all two and five of our kids the same. Okay,
Speaker 1: So let me also ask you a question that we
Speaker 1: ask everyone at the end of Trilliance, which is favorite
Speaker 1: et F ticker that is not your own favorite et
Speaker 1: F ticker that's not my own. I'm gonna go with
Speaker 1: MoU m Oo, just because that was one of the
Speaker 1: early ones that um, you know, really created brand recognition
Speaker 1: on its own, uh you know, early in the days there,
Speaker 1: and and certainly a memorable one. That's a that's a
Speaker 1: popular one. Yeah. John Hoppin thinks so much for joining
Speaker 1: us on, Trillian, Joel, Eric, thank you so much for
Speaker 1: the opportunity as a pleasure. Thanks for listening to Trillions
Speaker 1: until next time. You can find us on the Bloomberg terminal,
Speaker 1: Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you
Speaker 1: like to listen. We'd love to hear from you. We're
Speaker 1: on Twitter, I'm at Joel Webber Show. He's at Eric Baltunas.
Speaker 1: You can find Investco at investo Us. This episode of
Speaker 1: Trillions was produced by Magnus Hendrickson. Francesica Levie is the
Speaker 1: head of Bloomberg Podcast. Bye.