Speaker 1: Welcome to Trillians. I'm Joel Webber and I'm Eric bel Tunis.
Speaker 1: So we have a guest, Eric, we do you brought him? Yeah?
Speaker 1: I believe this is well. We've had an issue where
Speaker 1: on before, but this is our first big time, big
Speaker 1: company issuer. Kind of a big deal. Yeah, I mean
Speaker 1: everybody knows this company. Which company isn't Fidelity? And who
Speaker 1: is he? Matt Goolay who is E t F industry veteran.
Speaker 1: Remember when we did inside E t FS we talked
Speaker 1: to Brian Lake who was at JP Morgan, but he
Speaker 1: had been in other areas. There was a trend and
Speaker 1: it still goes on. A lot of companies that are
Speaker 1: massive mutual fund companies get into the et F space.
Speaker 1: They got to hire people who know what they're doing.
Speaker 1: So they go to Black Rock and State Street and
Speaker 1: they hire them away and they run. They start to
Speaker 1: build up their Brandon Matt is one of those guys
Speaker 1: who's like Fidelity guy. Yeah, he's kind of like the
Speaker 1: E t F entrepreneur inside this massive company that that
Speaker 1: everybody knows. And I think think there I mean a
Speaker 1: household name to say the least, people use it as
Speaker 1: their brokerage. Platform or they have funds. And I remember
Speaker 1: as a as a reporter when I first started out
Speaker 1: at Institutional Investor, covering mutual fund companies for fund Action,
Speaker 1: which is one of the news that ares at II.
Speaker 1: And back then, this is the late nineties mid nineties,
Speaker 1: Fidelity was the king of the hill. I mean, Vanguard
Speaker 1: was something you've covered occasionally. They've since grown big. Fidelity
Speaker 1: is still big. But now you have this new world
Speaker 1: where passive has risen up to a huge extent, right
Speaker 1: a lot of them, Almost all the money is going there,
Speaker 1: and you have firms like Fidelity making their imprint in
Speaker 1: this world. And I think not only they representative from
Speaker 1: an industry standpoint of it's almost like uh merging into
Speaker 1: this new technology, but from an investor standpoint, somebody who's
Speaker 1: worked in the et F industry works in Fidelity, and
Speaker 1: there's all these structures and a lot of them get
Speaker 1: used together. It's just an interesting way to look at Uh.
Speaker 1: He kind of sits at the crossroads of a couple
Speaker 1: of things happening at the same time. So he's like
Speaker 1: the little fish in a big pond making a big difference. Yeah,
Speaker 1: I was trying to think of another way to throw
Speaker 1: a big on there, but you gotta go with it. Yeah,
Speaker 1: you win this episode. Matt Gooley of Fidelity. All right, Matt,
Speaker 1: we just described you. How would you describe yourself? That
Speaker 1: that's a pretty lofty description and background you gave on me. Thanks.
Speaker 1: I remember ten years ago when Eric was the Bloomberg consultant.
Speaker 1: I was at spider et S and couldn't figure out
Speaker 1: how to turn on my computer and he was showing
Speaker 1: me how to use Bloomberg for the first time. So
Speaker 1: I guess we've come along. Did he help you turn
Speaker 1: on your computer? I told you I used to. I
Speaker 1: was the Walmart manager of the data and sometimes they
Speaker 1: send me to Aisle four to help Aisle four. Yeah,
Speaker 1: clean up on Aisle four. So my first job, Matt
Speaker 1: doesn't know how to log in this before AI, before
Speaker 1: robotics or anything like. My first job a spider Ets
Speaker 1: was aggregating news. We sent out a weekly email called
Speaker 1: the Chatterbox, and it was this big deal if if
Speaker 1: a blogger would talk about e t s and now
Speaker 1: you read about them in the Wall Street Journal. So
Speaker 1: how did you get that job at spider Luck chance
Speaker 1: fell into it? How did how did you find the
Speaker 1: e t F. I think growing up in Boston it
Speaker 1: was more of who are the major employers and financial services.
Speaker 1: Knew I wanted to do financial services. I remember getting
Speaker 1: a call from a family friend and saying, look, there's
Speaker 1: this small division within State Free Global Advisors that's working
Speaker 1: on E t S. Might be something worth it looking into.
Speaker 1: Got introduced to Dodd Kinsley, who I know, you know
Speaker 1: Eric and and the rest of history. I guess history
Speaker 1: already it was like a decade ago. Let me ask
Speaker 1: you this question because I remember when I covered ETS.
Speaker 1: We covered this a couple of weeks ago. There's like
Speaker 1: a light bulb moment where you're like, damn, this thing
Speaker 1: is like five evolutionary steps beyond other structures. It's going
Speaker 1: to be a big deal. Did you have that moment
Speaker 1: at Spider And how fast did it happened? Totally? It
Speaker 1: was probably year two or year three. I knew it
Speaker 1: was into something special and knew there was growth. And
Speaker 1: I think the big evolution for me in my career anyways,
Speaker 1: is that at the time we thought about financial advisors,
Speaker 1: we thought about institutions. It was it was really cool
Speaker 1: to think about hedge fund utilization and pension using e
Speaker 1: T s now in the seat I'm in working at Fidelity.
Speaker 1: I think the thing that excites me most is mainstream
Speaker 1: America like and we'll get into this a little bit
Speaker 1: later in the show, but but it's just very very
Speaker 1: early in terms of retail households using E T s.
Speaker 1: Were you at Spider when they launched g L D
Speaker 1: uh No, that was before. It was a couple of
Speaker 1: months before my time, but it was there for j
Speaker 1: n K and and a lot of the fixed income
Speaker 1: controversial j n K, what was the launch that made
Speaker 1: you go WHOA? It was probably some of the fixed income,
Speaker 1: It was some of the high yield, some of the
Speaker 1: municipal bond ETFs. There were two issuers at the same time,
Speaker 1: launching products a week apart, and it was a race
Speaker 1: to who could get to a hundred million first. But
Speaker 1: that was that was the time that felt real to me.
Speaker 1: And you mentioned g L D. I think those are
Speaker 1: the funniest phone calls we got in those days. Is
Speaker 1: is every other phone call you would get from the
Speaker 1: client was is the gold really in the vault? Is it? Though?
Speaker 1: I'm going to a vault. We we got to get in.
Speaker 1: We've been trying to get somebody in a vault uh
Speaker 1: to interview the gold for a couple of months now.
Speaker 1: So if anybody out there is listening, who can get
Speaker 1: us into there's like twenty gold funds at this point. Um,
Speaker 1: we're coming for you. Yeah, we we really want to
Speaker 1: get your goal. Yeah, we want to see the man
Speaker 1: with the machine gun guarding it. And it just Eric
Speaker 1: keeps saying that, I just want to see the goal. Yeah,
Speaker 1: I want to talk to the guard. They might put
Speaker 1: a mask over your head, you know when they drive.
Speaker 1: I'll do it. I'll do it. I'll put the bag
Speaker 1: over my head, drive me around the city. I don't
Speaker 1: care where I get out. Well, I mean, I want
Speaker 1: to come home. But I get that question. I'm not
Speaker 1: even I don't even work at Spider or any of
Speaker 1: the goal places. I get that question a lot when
Speaker 1: I go on on the road to do presentations. People
Speaker 1: want to know if the gold is really there. It's
Speaker 1: a top five question. So what are the top five
Speaker 1: questions that you get today in the current role, which
Speaker 1: is what, by the way, what's your job? So current
Speaker 1: job fidelity is is E T F guys Eric put
Speaker 1: it or one of you put it? But really it's
Speaker 1: educating our financial advisors on our platform and in the industry,
Speaker 1: and then retail investors on how to use e t
Speaker 1: F s. So in some ways we're running the same
Speaker 1: playbook we ran five years ago, ten years ago, e
Speaker 1: t F education, how to use them. That's really the
Speaker 1: role right now is is et F education and then
Speaker 1: the role of fidelity products in that right. So in
Speaker 1: the last four years, we've launched over twenty products. Every
Speaker 1: time we launch a new product, we spend a lot
Speaker 1: of time with our client facing teams educating them on
Speaker 1: the product, how it works. How many products have you
Speaker 1: sensed it if you've launched that many zero? Yeah, going
Speaker 1: back to the two three when we launched one queue, Um,
Speaker 1: we haven't closed in et F as of yet. So
Speaker 1: what's the number one question that people ask you number
Speaker 1: one question today? I think most of the questions we're
Speaker 1: still getting our around trading right best practices, and that's
Speaker 1: not just advisors, that's retail investors. So if you think
Speaker 1: about the client experience, the customer experience, that's something we're
Speaker 1: thinking about all the time. Is someone's interacting on fiddli
Speaker 1: dot com or on their treating portal, what does it
Speaker 1: look like and and you know this is et s
Speaker 1: still sit kind of within the stock framework. So you
Speaker 1: put up a trade ticket and will say market order
Speaker 1: versus limit order. For someone who's only ever bought a
Speaker 1: mutual fund, that can be something that you have to
Speaker 1: walk through with them. So that's probably the number one
Speaker 1: question we get in the retail spaces. How do you
Speaker 1: trade et s? What are best practices for trading et s?
Speaker 1: And how do you respond to that? We always encourage
Speaker 1: people to consider limit orders, right, so if if it
Speaker 1: needs YEF and you're putting a market order out there, uh,
Speaker 1: that can lead to to a suboptimal outcome for trading execution.
Speaker 1: So we encourage folks to look at limit orders, to
Speaker 1: think about what's trading the overall market, and and just
Speaker 1: to be thoughtful about their approach for trading ETFs. Let's
Speaker 1: just break this down, because I think there's some people
Speaker 1: who are like, what's a market limit order? Can you
Speaker 1: talk about? Break it down? Your DJ mix sound sounded
Speaker 1: your scratching sounded exactly like your squeaky wheel Squeaky Wheel
Speaker 1: at the supermar very very similar. You gotta work with
Speaker 1: their cousins. I take that one back to the moment. Okay, right,
Speaker 1: limit orders you know, as an analyst, were always told
Speaker 1: to just default to limit order, but you have you
Speaker 1: have access to some of the data that people are
Speaker 1: using on your platform. What's the breakdown between people using
Speaker 1: market orders and limit orders? And and it just go
Speaker 1: through what each is. Sure, So market order is the
Speaker 1: majority of the client orders we see, and I think
Speaker 1: most people in ETF space that could be alarming, right,
Speaker 1: and it's close to sevent our orders are market orders.
Speaker 1: But for the overwhelming majority of e t F to
Speaker 1: trade millions, if not billions of day a day, that's
Speaker 1: that's not a big problem. Limit orders are the minority.
Speaker 1: Limit order is you're setting a price, but you don't
Speaker 1: know at what time it will execute. Market orders a
Speaker 1: little bit of the inverse of that. So you want
Speaker 1: it executed now, you want it executed the best price
Speaker 1: available now, and you're willing to sacrifice price for time
Speaker 1: now in that case, right, let's say it's a big
Speaker 1: liquid one like I v V or J and K
Speaker 1: or something like we mentioned or g l D. Is
Speaker 1: there a case where market order just makes more sense
Speaker 1: because it's so liquid, it will just digest to order
Speaker 1: and you'll get a good deal. Is there a point
Speaker 1: where if it doesn't trade a certain amount, then you
Speaker 1: should go limit order because the spreads are wider and
Speaker 1: if you put a limit order and it's likely you
Speaker 1: could save a few basis points on that, right, how
Speaker 1: do you work that out? Yeah? It's kind of like
Speaker 1: when you're crossing the street of three young kids and
Speaker 1: you're tell them across the street and look both ways.
Speaker 1: When do you tell them to look both ways before
Speaker 1: they crossed the street. For us in the e t
Speaker 1: F market, it's probably of volume, right, if your trade
Speaker 1: order represents of what that e t F trades in
Speaker 1: a given day, you want to at least stop, look
Speaker 1: to the flock to the right, think about what you're doing. Uh.
Speaker 1: That's a general rule of thumb we use for for
Speaker 1: kind of trade order guidance. But let's say I'm trading
Speaker 1: one of your lesser liquid products, like the high dividend
Speaker 1: et F and it trades a five thousand shares a
Speaker 1: day or something. Would you tell me to put a
Speaker 1: limit order in always? Or can you do a market order?
Speaker 1: Not necessarily? I think if if you're a retail client
Speaker 1: and time is important to you, and you want that
Speaker 1: trade downe at ten am versus two pm in the afternoon,
Speaker 1: mark orders is your option. So one of the things though,
Speaker 1: in general about e t f s and the knock
Speaker 1: is that you know, they really facilitate trading, Right, I
Speaker 1: can sit there all day and just day trade, day trade,
Speaker 1: day trade as a retail investor, and maybe that's not
Speaker 1: the best thing for me, right, So how do you
Speaker 1: guys talk about that with clients? Yeah, I think that's
Speaker 1: that's a little bit of a myth out there. Certainly
Speaker 1: there's active traders, and out of the nine million households
Speaker 1: we have on the platform, uh that we have about
Speaker 1: one million of those nine million households they're using ets
Speaker 1: in some way, shape or form. Of that one million,
Speaker 1: it's a relatively small majority of of day trader as
Speaker 1: an active trade or as many of the people using
Speaker 1: ETFs now are buy and hold investors. We ran some
Speaker 1: analysis I think it was two years ago that looked
Speaker 1: at holding periods, and the holding periods were up close
Speaker 1: to two years for the average GTF position. And you
Speaker 1: think about we're launching new products as in the industry
Speaker 1: every day, the industry is growing. That holding period was
Speaker 1: roughly in line with what you see with mutual funds.
Speaker 1: And I don't have the data my fingertips, but the
Speaker 1: point is that it's not as if because we're giving
Speaker 1: people trading access into a day that they're trading and
Speaker 1: all the time. And you look back on a kind
Speaker 1: of historical basis if you might remember this, but four
Speaker 1: one ks used to be monthly, they weren't daily. And
Speaker 1: the question was, well, if you give people daily access
Speaker 1: to their four and case traded every day and the
Speaker 1: answer generally is no, people are belong buy and hold investors.
Speaker 1: Of that data you just talked about on households, is
Speaker 1: that regarding just your e t F s or all
Speaker 1: the e t F they could be. That's all the
Speaker 1: ETF And that's why it gets me so excited about
Speaker 1: the space. So when I gave those steps before, there's
Speaker 1: nine million households on the Fidelic brokerage platform, roughly about
Speaker 1: one million of them use any t F, not just
Speaker 1: to Fidelity ETF but any TF, so eleven percent of
Speaker 1: the population. But within that and we're going over your
Speaker 1: history before prior to Bloomberg right where Institutional Investors publication
Speaker 1: two jobs before that, but my first job out of
Speaker 1: school was Institutional Investors newsletter Division. So did you have
Speaker 1: the job up here? Then I did, Yeah, first job,
Speaker 1: I had my depth going hard. I was like a
Speaker 1: twenty one year old in New York City living in Manhattan.
Speaker 1: I mean, I'm still catching up on sleep. So I
Speaker 1: didn't mean to go down this path. But my point was,
Speaker 1: I presumed they paid you at the time, and I
Speaker 1: presumed you had a four one K and maybe you
Speaker 1: rolled it over into an I RA, and maybe that
Speaker 1: money just sat there forever and you didn't really play
Speaker 1: with it. And now you're making the big bucks at Bloomberg,
Speaker 1: so you're you're investing in other things. My point there
Speaker 1: is that if client accounts underneath a hundred thousand dollars,
Speaker 1: only eleven percent across the board on ets. But I
Speaker 1: started to look at client accounts that are over a
Speaker 1: hundred thousand dollars of people who are probably spending some
Speaker 1: time looking at their investments. And that's where it gets
Speaker 1: really interesting, is is on the whole of client accounts
Speaker 1: that are over a hundred thousand dollars, millennials are really
Speaker 1: driving us. Of millennial accounts with over hundred thousand dollars
Speaker 1: own an e t F that's much more than gen X,
Speaker 1: that's much more than baby boomers. They're going to be
Speaker 1: the ones that are driving this and of those millennials
Speaker 1: that hold ets on our platform. If you hold an ETF,
Speaker 1: it represents your assets. So I think as you see
Speaker 1: some of the baby boomers retire and do accumulate assets,
Speaker 1: millennials driving the growth the industry. That's what I'm really
Speaker 1: excited about. Are you a millennial? What's the cut off?
Speaker 1: It's it's kind of like one is sort of which
Speaker 1: I am. I am a millennial. Yeah, okay, he's got
Speaker 1: some gen X in them, though, I can just tell
Speaker 1: he's not full blown giving him permission. Yeah, look, I
Speaker 1: look like a gen xer. Do you remember when Nirvana
Speaker 1: came out? Yes, okay, well he can't's not you can't
Speaker 1: be full millennial if you have something full millennial. Yeah,
Speaker 1: so you're like you're like maybe half millennial, like like
Speaker 1: your millennial if your first rock band was like The Strokes.
Speaker 1: That's not me okay, okay, So why why is there
Speaker 1: so much enthusiasm with millennials From your perspective, I think
Speaker 1: they're still learning about it, but they view e t
Speaker 1: S as lower cost as more tax efficient. I think
Speaker 1: the interesting thing about ETFs, there's not one reason that
Speaker 1: someone buys an ETF. It's a whole host of reasons.
Speaker 1: It could be lower costs, could be in day trading,
Speaker 1: could be any of that. And I think they're being
Speaker 1: introduced to it by a lot of the robo advisors,
Speaker 1: by a lot of the digital platforms that are using ETF.
Speaker 1: So if an ETF shows up in your managed account,
Speaker 1: let's say that's going to be the first product that
Speaker 1: you kind of grow up using. And I think that's
Speaker 1: what a lot of millennials are using, is they're using
Speaker 1: different applications and different sources for investing. So you have
Speaker 1: one million of your nine million people using your platform
Speaker 1: that use ETFs in some way. I mean, are where
Speaker 1: are we looking at this number in say ten years,
Speaker 1: let's just even go twenty, because you're talking about bay
Speaker 1: Boomers eventually passing on assets and millennials clearly like this structure.
Speaker 1: I mean, have you done any projections? Is this going
Speaker 1: to be like seven out of nine or all nine?
Speaker 1: I mean one of your podcasts recently, somebody was projecting
Speaker 1: thirty trillion. I don't think i'd be that bold in
Speaker 1: the next ten years that might have been. That was
Speaker 1: a thirty by thirty, the thirty trillion by thirty. A
Speaker 1: lot of that is market cap accumulation of the stock markets,
Speaker 1: but it's still definitely ambitious. I mean, let's go back
Speaker 1: in time. I mean, I don't have any projections for you,
Speaker 1: but I think a historical perspective is interesting. Right, that
Speaker 1: was the time all the sound effects in the studio
Speaker 1: are great. Here. I just think he watched Police Academy
Speaker 1: way too much. Remember that sound effects guy. Yeah, he
Speaker 1: was highly inspired. Okay, so we went back in time.
Speaker 1: So we go back in time. We're in the eighties
Speaker 1: when the millennials are being born. Eric's like sweet spot. Yeah,
Speaker 1: cultural references glory. So I see, I looks at what
Speaker 1: percent of Americans held mutual funds every year, and they
Speaker 1: go back to the eighties, and you think about that's
Speaker 1: when mutual funds first start showing up in four one
Speaker 1: K plans, and the percent of American households that held
Speaker 1: mutual funds in the late nineteen eighties was about and
Speaker 1: that's kind of where we're at now, right, So I said,
Speaker 1: millennials on the moment, but in the masses it's about.
Speaker 1: So think about the growth of ets. We're kind of
Speaker 1: in the year seven in terms of the growth trajectory,
Speaker 1: and then think about how quickly mutual funds grew in
Speaker 1: the nineties, and that's what's ahead of us for e
Speaker 1: t S. Okay, So, Matt, one of the things I'm
Speaker 1: really interested about is how Fidelity, which really created its
Speaker 1: name through actively managed mutual funds, has in recent decades
Speaker 1: adopted ETFs. So what's that like culturally inside Fidelity? I
Speaker 1: think it's a really exciting time. If you think about
Speaker 1: the masses of investment professionals and analysts and portfolio managers
Speaker 1: we have, they're excited about the et F initiative. For us,
Speaker 1: it's just a different delivery mechanism. It's a different structure
Speaker 1: to do what we're already doing on a daily basis
Speaker 1: in a mutual fund or in a managed to counter
Speaker 1: or in a c I T And I'll give you
Speaker 1: an example. You know this, but two years ago we
Speaker 1: launched factory tfs. These are Fidelity ETFs that track of
Speaker 1: Fidelity index. That index was built by our product team
Speaker 1: and our quantitative team. That quant team sits with active
Speaker 1: portfolio managers on a daily basis, managing risk and helping
Speaker 1: pick stocks. So active is very much in our DNA.
Speaker 1: We believe in active management. It's just being built in
Speaker 1: a different structure and in a different every mechanism for consumers.
Speaker 1: So we talk a lot about these E t F
Speaker 1: and how to make a portfolio because ultimately that's what
Speaker 1: you're trying to do. These are the raw materials you
Speaker 1: put into a portfolio. Is the portfolio changing? Is it?
Speaker 1: Is it becoming more of like instead of having your
Speaker 1: core equity be a large cap growth funder or value
Speaker 1: fund or large cap blend, it's now like a cheap
Speaker 1: smp FI et F and then you keep your core
Speaker 1: real passive and cheap, and then you kind of go
Speaker 1: on the outside with your active Do you see a
Speaker 1: shift that the active manager will be much more on
Speaker 1: the outside, used, as we like to say, like hot
Speaker 1: sauce or spice on top to try to get some alpha,
Speaker 1: which would allow the investor more patients to hang in
Speaker 1: there with some underperformance. It would allow them to get
Speaker 1: more active share. Do you see a shift in what
Speaker 1: active is used for and how it's used in a portfolio? Maybe,
Speaker 1: I mean, certainly you've seen a number of factor products
Speaker 1: come into the marketplace, and that's a little bit of
Speaker 1: active but I don't necessarily see that. And I think
Speaker 1: a good example is is FBNDR Total Bond e t
Speaker 1: F that portfolio management team led by Ford O'Neil. They've
Speaker 1: been running a mutual fund version of that. It's not
Speaker 1: exactly a clone, but it's it's similar for years, and
Speaker 1: we're just delivering that in the ETF structure. But we're
Speaker 1: running it very similar to what we run in the
Speaker 1: mutual funds. We're not changing our fundamental investment process or
Speaker 1: bottoms up research. We're just delivering it in a different structure.
Speaker 1: So I don't know if I you know, that could
Speaker 1: be the case in certain areas, but it's not fundamentally
Speaker 1: changing the way we manage money. And what about how
Speaker 1: people are managing their own money, because I mean, we
Speaker 1: were just talking about the mutual fund growth from the
Speaker 1: eighties nineties, Like the one of the reasons that it
Speaker 1: took off was that, you know, you guys have a
Speaker 1: platform that is my four oh one K, and my
Speaker 1: four oh one K auto fills every pay period into
Speaker 1: that account, right, But yet e t f s are
Speaker 1: barely in that device yet right in the four So
Speaker 1: how do you guys see that evolving? Yeah, so specifically
Speaker 1: ets within four OW one case, you do see them
Speaker 1: from time to time. You see them in self directed
Speaker 1: brokerage accounts, which many four own K plans offer. Um,
Speaker 1: what's kind of interesting is you actually see e t
Speaker 1: F show up in I ra A s, which are
Speaker 1: non taxable for for most people. So it's not as
Speaker 1: if people are only using them for their tax efficiency.
Speaker 1: The four O on K questions been out there for
Speaker 1: a while. I think it's operational, and I think it's
Speaker 1: just that clients probably don't need the intraday liquidity like
Speaker 1: they do with maybe their taxable account. But the way
Speaker 1: we're interacting with investors on the platform a fuel and
Speaker 1: that was kind of your original question is we're giving
Speaker 1: them choice and we're giving them value. Right, So, on
Speaker 1: our platform, most e t F F whatever right today
Speaker 1: are available for trading. We offer ninety three of those
Speaker 1: e t F commission free. So we're offering the clients
Speaker 1: commission free trading and some I shares ets and some
Speaker 1: fidelity tfs. And also if they want passive, it's not
Speaker 1: all about an e t F. And you know this,
Speaker 1: but there's passive mutual funds. So we offer low cost
Speaker 1: passive mutual funds to investors and we give choice between
Speaker 1: the actual structure, which leads me to something I saw recently.
Speaker 1: There was an advertisement that someone tweeted out that I
Speaker 1: can't remember the makeup, but it basically was Fidelities sing, Hey,
Speaker 1: forget Vanguard, We're really the low cost provider in the
Speaker 1: index mutual fund space. I think yours are like point
Speaker 1: oh one or point two percent for an index mutual fund.
Speaker 1: So they've they've sort of vanguarded Vanguard if you will
Speaker 1: um and that works right. You see flows when you
Speaker 1: go cheaper. And I don't think it's about a specific competitor.
Speaker 1: There's a number of competitors out there that offer low
Speaker 1: cost index products. But get not about Vanguard. Dude, he's
Speaker 1: nice Dodge, but he's told not to talk about that.
Speaker 1: A lot of these issuers can't say the V word.
Speaker 1: It's like Voldemort. You saw the advertisement, the name was
Speaker 1: in the advertisement and said it. Yet he won't. He
Speaker 1: won't do it, like the competitor you just mentioned, Eric,
Speaker 1: the Valley Forge based competitor. In out of twenty nine
Speaker 1: chances where we have index funds, an ets that go
Speaker 1: ahead to head roughly finally has a lower cost product.
Speaker 1: Think about this what the world has turned. Yeah, you
Speaker 1: also talked about commission free trading. Now this drives a
Speaker 1: lot of flows. Yes, you get your your trade commission free,
Speaker 1: but if you trade an ETF that has a commission,
Speaker 1: not that much. Go over the differences in cost. And
Speaker 1: the second thing is are the commission free ones sometimes
Speaker 1: the one the issuers are looking to promote and they
Speaker 1: might not be the most liquid or uh ones that
Speaker 1: people want and talk about that and how that draws
Speaker 1: flows and trading. Absolutely, it's a great question and something
Speaker 1: I wish investors and advisors were looking at more closely.
Speaker 1: There's a number of different custodians and brokerage sites out there.
Speaker 1: We've been deliberate in the way we've manicured our commission
Speaker 1: free list to make products that are best and breed,
Speaker 1: or what we feel are best and breed, and that
Speaker 1: means low cost, that means good secondary market volume. We
Speaker 1: don't see that across the board. There's a number of
Speaker 1: commission free products on other platforms that might actually have
Speaker 1: higher expense ratios. Wide or bit of spreads things like that.
Speaker 1: So that's definitely something to watch out for. Is is
Speaker 1: I would never advocate for somebody that you buy an
Speaker 1: ETF strictly because it's commission free and you save five dollars.
Speaker 1: There's a whole boatload of costs that go went to that,
Speaker 1: and depending on the trade sides, right, the more you're
Speaker 1: trading dollars, the less that five dollars matters, and the
Speaker 1: smaller the universe. And that's a one time cost that
Speaker 1: dilutes over time, whereas the expense ratio is coming rain
Speaker 1: or shine every day, coming. Then yeah, they're like my
Speaker 1: metaphor is the expense ratio is like termites living in
Speaker 1: your returns. They're not going away, they just live there where. Well,
Speaker 1: that that's sort of like a round trip ticket, like
Speaker 1: you know, you buy it and you and then you
Speaker 1: sell it. It's a one time it's almost like a tiny,
Speaker 1: tiny load if you think of the mutual fund model
Speaker 1: or a you know, like I said, a round trip ticket.
Speaker 1: I was looking for another termite analogy. That's what I
Speaker 1: was getting. Yeah, sorry, that's my one. That the termite
Speaker 1: one is. Uh, it kind of works though, because if
Speaker 1: the expense ratio is small it just limits the amount
Speaker 1: that nibbles away at the return. Not that you can't
Speaker 1: outperform if you're active, but that expense is truly uh
Speaker 1: something that comes. And some people don't realize that the
Speaker 1: expense ratio is taken out in tiny little bits every day.
Speaker 1: It's not like once a year. And that is why
Speaker 1: the termite metaphor, it's just nibbling a little bit each day,
Speaker 1: pro rated at the at the annual cost. I think
Speaker 1: you're right, there's parallels to mutual fund Land, right, and
Speaker 1: mutual fund Land. We talked about the search charges or
Speaker 1: transaction fees in et f land because it's a brokerage
Speaker 1: product and trades in the stock exchange. It's a commission.
Speaker 1: And but you're right, some of these costs are analogous
Speaker 1: and and it just begs for more tools and more
Speaker 1: research and screener tools. So there's some really great comparison
Speaker 1: tools out there. I know Bloomberg has some, Fidelity has some,
Speaker 1: but these are the costs need to be looking at
Speaker 1: to create this total cost framework of the bidst spread,
Speaker 1: the commission, the expense ratio, and the tax cost. If
Speaker 1: that matters to you, so talk to me about being
Speaker 1: an issuer, that seems like a really big deal. And
Speaker 1: specifically though, where's the white space that you guys see
Speaker 1: right now? So as an issuer, so we've talked about
Speaker 1: fidelity as a platform, and now we're talking about fidelitis
Speaker 1: an issue. As an issuer. Five years ago, I think
Speaker 1: we were maybe outside the top twenty. Now we're number
Speaker 1: fifteen or number sixteen, and I think you were sharing
Speaker 1: with me yesterday. I just looked at the numbers that
Speaker 1: their number six they're the sixteenth biggest issue. Where um,
Speaker 1: they came out of nowhere. They have five years old
Speaker 1: most they had that one from the two thousand three,
Speaker 1: but let's just not count that. Mostly their big effort
Speaker 1: was five years old. They have ten billion. How our
Speaker 1: sixteenth place and E T f LAN only gives you
Speaker 1: a point three percent market share because it's a lot
Speaker 1: of concentration at the top. But look, they're but they're
Speaker 1: they're passing the quiet march. Yeah, I don't know if
Speaker 1: it's a quiet march. But I think the point is
Speaker 1: we're growing, we're taking market share. We're top ten in
Speaker 1: flows here to day, So continue to move up the
Speaker 1: ladder and the white space they get to your question
Speaker 1: is the retail investor. I'm convinced of that. I'm I'm
Speaker 1: convinced that there are still advisors out there who don't
Speaker 1: use et s, But there's masses of retail investors that
Speaker 1: have not been introduced to ets yet. And that is
Speaker 1: the white space I think in in E t F land,
Speaker 1: when I look at your E t f s, you
Speaker 1: kind of have three main components. There's sector E t
Speaker 1: S where you came out and you basically again you
Speaker 1: van guarded the sector category. They charge point eight percent,
Speaker 1: meaning they came in and they undercut everybody. Those are
Speaker 1: a five percent of your assets. Talk about those those
Speaker 1: track tech, the general sectors. What's the play there? Why
Speaker 1: why would somebody use those? So those fidelity sector et
Speaker 1: F they track M s c I benchmarks the big
Speaker 1: not just the cost, they're the lowest cost sector et
Speaker 1: F on the mark it. But they also are all
Speaker 1: cap and I think that's the key differentiator is having
Speaker 1: small cap within your portfolio. You look at some of
Speaker 1: the bigger We're talking about technology earlier, and technology is
Speaker 1: a great example where some of the biggest quote unquote
Speaker 1: technology ETFs have a T and T and veries and
Speaker 1: a lot of telecom names in them. They're missing out
Speaker 1: on some of the MidCap and smaller cap names like
Speaker 1: Twitter and Square and some of these other names. So
Speaker 1: that's the biggest differentiator for me, is that the mid
Speaker 1: cap the small cap exposure and delivering that all commission
Speaker 1: free on the fidel A platform at a basis points
Speaker 1: to anyone. That's the key differentiator, and I think what's
Speaker 1: led to the growth of the FIDELI sector series over
Speaker 1: the last few years. And you guys have sector mutual
Speaker 1: funds though, we do, and how does that work? I mean,
Speaker 1: when you're out there trying to sell the sector et F,
Speaker 1: does it step on the toes of the mutual fund
Speaker 1: sales people? Not at all from a client facing perspective
Speaker 1: of the same people in most cases, right, it's not
Speaker 1: like we have some rogue organization. And but but if
Speaker 1: you're working with maybe maybe, but absolutely not. They're both growing,
Speaker 1: right And I think a great example in Bloomberg featured
Speaker 1: our portfolio manager Charlie Chai is the PM of our
Speaker 1: active technolo G sector fund and and he had one
Speaker 1: of the better performing mutual funds last year for seen
Speaker 1: over the last twelve months through Q one that mutual
Speaker 1: fund is brought in almost a billion dollars. The technology
Speaker 1: et F a basis points is brought in almost a
Speaker 1: billion dollars. So they're both growing when active is doing
Speaker 1: well and doing what it should. The stat I look at,
Speaker 1: which is kind of the crossover stat, right, So take
Speaker 1: the people who hold our technology et F F tech
Speaker 1: ft e C. There's about forty eight households there that
Speaker 1: hold FTECK on the fail A platform, only about of
Speaker 1: them on any active sector mutual fund at Fidelity whatsoever.
Speaker 1: My point in giving you that stat is that the
Speaker 1: majority of our et F clients are new clients. They're
Speaker 1: they're using ets for whatever reason. I don't see a
Speaker 1: lot of people selling the active mutual fund to buy
Speaker 1: the passive ETF directly. One for one, I think, in fact,
Speaker 1: the people who are buying the sector e t F
Speaker 1: s are more likely to buy an index mutual fund
Speaker 1: than they are to buy one of our active mutual funds.
Speaker 1: Is just a different client set completely from what I've
Speaker 1: seen in the data. So let's talk about the factory tfs.
Speaker 1: We just spent last episode talking about factory tfs and
Speaker 1: smart beta and the conversion. Like you said of active
Speaker 1: into an index your factory tfs. They cover the main
Speaker 1: areas quality, value, momentum. These are these areas. Here's what
Speaker 1: I really want to ask you, which is that if
Speaker 1: you look at factory t f s from the different brand,
Speaker 1: there's a lot of brands out there that have factory
Speaker 1: t F lns. Here's an example. The SMP five hundred
Speaker 1: indexes their value et F does not hold Apple. In fact,
Speaker 1: Apple is not in any of their factory e t
Speaker 1: f s in fidelity, Apple makes all of them. But
Speaker 1: let's just stick to value. Why would Apple be in
Speaker 1: your value e t F and not in the SMP
Speaker 1: five hundreds, which is tracked by Investco. So you bring
Speaker 1: up a great point is that when you buy two
Speaker 1: large cap passive ETF, whether their benchmark to Russell one
Speaker 1: thousand or S and P five hundred, they move in
Speaker 1: line with each other very close. There's very little dispersion
Speaker 1: between the outcomes in factory land. It's all over the place.
Speaker 1: You can buy two different value e t F two
Speaker 1: different low vol ETFs, they're gonna have very different performance
Speaker 1: based on the underlying methodology. So you ask the question
Speaker 1: about Apple, and let's dig a little bit to the
Speaker 1: methodology for fit all these factors serious and this applies
Speaker 1: to all of the single factor e t F you
Speaker 1: just mentioned. Our e t F s are sector neutral,
Speaker 1: their size neutral, meaning we don't drift down into small
Speaker 1: cap as many factor products do. And all the individual
Speaker 1: security bets are are capped. It's called equal active waiting.
Speaker 1: It's a long way of saying it's relatively constrained to
Speaker 1: what the eligible universe is, which is the top thousand names.
Speaker 1: So when you go through that approach, it's no surprise
Speaker 1: that a name like Apple might show up in a
Speaker 1: value or given an et F, Apple today yields one
Speaker 1: point five percent, it's not like it yields nothing. And
Speaker 1: we're looking at it within the technology sector, right, so
Speaker 1: all of our metrics are applied within the technology sector.
Speaker 1: That's why you might not see it. And I think
Speaker 1: that might be a rare case where it shows up
Speaker 1: in all of the ETFs. Some of the other names
Speaker 1: I was looking at the other day, where Amazon, So
Speaker 1: Amazon can only be found in our momentum ETF General Electric,
Speaker 1: that's not value. That would be kind of messed up,
Speaker 1: But that's my point. I think that would be messed
Speaker 1: up it could be messed up, but I mean Amazon
Speaker 1: still is concerned discretionary. But my point there was that
Speaker 1: at the individual stock name, they tell you a story
Speaker 1: about the individual methodology of each product, and I think
Speaker 1: Apple's example, but there are other examples of individual names
Speaker 1: that show up where you think they whether they should
Speaker 1: be the other products that you mentioned, just a quick bullet.
Speaker 1: I don't know the SMP series too well, but I
Speaker 1: think when you get unconstrained, you can get some funky
Speaker 1: things happening. Right, So the book value of financial services companies,
Speaker 1: from accounting reasons is can be kind of goofy. You
Speaker 1: could load up on financials and a value e t
Speaker 1: F just based if you're just looking at price the
Speaker 1: book value. So we try to constrain these products. When
Speaker 1: you say constrain yours, make sure the sectors are somewhat
Speaker 1: aligned to the sector weightings of the SMPT, whereas the
Speaker 1: SMP they don't care. They're just going after it and
Speaker 1: their sector. They have no sector bands. Yeah, I don't.
Speaker 1: I don't know that the SMP series as well as
Speaker 1: I should. But for the Fidelity series it's and it's
Speaker 1: not to the SMP, it's to a universe of a
Speaker 1: thousand names. But yes, you're on You're on the right track.
Speaker 1: It's sector neutral to the overall eligible universe. So when
Speaker 1: you look at a fidelity factor ETF single factory t
Speaker 1: f IF technology on the market, you're gonna see likely
Speaker 1: in technology. Um. So I got a big meta question,
Speaker 1: which is what are people not talking enough about in
Speaker 1: the ETS space that you think they should be considering.
Speaker 1: So I think the common response from et F issuers
Speaker 1: there is active, and I certainly believe in active. We've
Speaker 1: talked about this a little bit already, but the flows
Speaker 1: have gone from a billion a year to seven billion
Speaker 1: and fifteen billion, and I really feel excited about active management.
Speaker 1: But one of the trends I'm starting to follow is
Speaker 1: what I call multipurpose ETFs. And you think backed years ago,
Speaker 1: and you might remember this is we always position ets
Speaker 1: is precise. They were precise instruments. You've got SPI, nothing else,
Speaker 1: no small cap, no emerging markets, no surprises. And what
Speaker 1: I'm seeing now is that investors don't necessarily want that
Speaker 1: precision in all circumstances. Sometimes they want a multi purpose ETF.
Speaker 1: So one example of that that we brought to the
Speaker 1: market was the Fideli DIVN and et F four rising rates.
Speaker 1: It does two things. It's a divn and e t F,
Speaker 1: but it protects rising rates relative to they're diven in
Speaker 1: et f s right. So it's not probably the best
Speaker 1: vehicle if you're just trying to make a play on
Speaker 1: rising rates. But it's a divn and ETF that has
Speaker 1: the rising rate birds one stone exactly, and I think
Speaker 1: that's a trend you're going to see more of. This
Speaker 1: is e t F to do two things that do
Speaker 1: three things that maybe aren't precisest people are used to
Speaker 1: going back five and ten years, but it's what the
Speaker 1: marketplaces is asking for, and it's what our customers are
Speaker 1: asking us for. How dangerous is that? Not necessarily dangerous
Speaker 1: from my perspective. I mean, these products are still well
Speaker 1: diversified across a hundred or more names. But if you
Speaker 1: get three or four things that these things are doing,
Speaker 1: like maybe you don't know what what you're going to get,
Speaker 1: Like the currency hedged low volatility income rising rate factory
Speaker 1: with the side of fries we have that's coming down
Speaker 1: the plate. I'm sure it could be. It could be.
Speaker 1: I I don't know. I think it's all about the
Speaker 1: name and how it's positioned the marketplace, right, So this
Speaker 1: would be a good day write that down bringing that
Speaker 1: back to our products. Uh. But in the case of FDRR,
Speaker 1: it's just it's up to us as the issue or
Speaker 1: to educate people that this is first and foremost a
Speaker 1: divin an ETF with built in added methodology features. And
Speaker 1: it just goes back to the to the long march
Speaker 1: for education that we were talking about earlier. So I
Speaker 1: think one of the things that's in our thing with
Speaker 1: what's basically happening in the ETS space is it used
Speaker 1: to be that, you know, like you could have a
Speaker 1: great idea enter the space, maybe blow up in both
Speaker 1: good ways and bad. But like as institutions like Fidelity
Speaker 1: enter and take over more and more of the market,
Speaker 1: it does become more institutional. And I'm wondering how you
Speaker 1: guys see the overall space as all this white space
Speaker 1: gets kind of gobbled up, what is the space gonna
Speaker 1: look like going forward? My perspective would be that over
Speaker 1: the next five or ten years, you'll probably see it
Speaker 1: won't be as black and white between e t F
Speaker 1: and mutual fund, between active and passive and all these
Speaker 1: nomenclature things we used to describe the space. But I
Speaker 1: think there'll be a grain and that five ten years
Speaker 1: from now, it could be structures that come together. It
Speaker 1: could be how indexes are put together. But people won't
Speaker 1: be spending as much time thinking about active versus passive.
Speaker 1: The be talking about how to use them both together
Speaker 1: in a portfolio, how to incorporate factor based investing. And
Speaker 1: I don't know if that answers your question, but I
Speaker 1: think from my perspective ten years ago, it was a
Speaker 1: little bit of ets versus mutual funds, passive versus active.
Speaker 1: You're starting to see that a road as as as
Speaker 1: active has come back and favor a little bit, and
Speaker 1: active managers have entered the space, and I just think
Speaker 1: that will lead to an overall conversation about portfolio construction.
Speaker 1: I think that's just good for advisor, is good for retail,
Speaker 1: big gray portfolio oatmeal, oatmeal. Yeah, that's good for you. Yeah, Matcool,
Speaker 1: Thanks so much for joining, Thanks for having me, Thanks
Speaker 1: for listening to trillions Until next time. You can find
Speaker 1: us on the Bloomberg terminal, Bloomberg dot com, Apple podcasts,
Speaker 1: and whatever else you listen to podcasts we'd love to
Speaker 1: hear from you. We're on Twitter. I'm at Joel Webber Show.
Speaker 1: He's at Eric Balcunos. Trillions is produced by Magnus Hendrickson.
Speaker 1: Francesca Levy is the head of Bloomberg podcast from Paco