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Speaker 1: Wellcome to Joan's. I'm Joel Webert and I'm Eric Belchiertis Eric?

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Speaker 1: Did you know that I'm the editor of Bloomberg Business Week. Yeah,

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Speaker 1: I noticed. Uh, it's when you became pretty intolerable, that's true. No,

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Speaker 1: that's why that's where your nickname hard stop comes from. Hart,

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Speaker 1: I have a hard stop today. Uh. So, recently we

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Speaker 1: ran an article about a phenomenon called heartbeat Trades by

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Speaker 1: Zach Miner, Rachel Evans, and Caroline Wilson. And it was

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Speaker 1: a little controversial, to say the least. Yeah, I know

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Speaker 1: from the E t F world I operated. There was

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Speaker 1: a lot of pushback comments, which will address today. But

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Speaker 1: all in all, this is something that I've seen on

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Speaker 1: my screen for h I don't know, at least five

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Speaker 1: eight years maybe, and it it's it's sped up lately

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Speaker 1: more recently where you'll see a flow come in and

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Speaker 1: it'll be a pretty big spike on the daily flow screen,

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Speaker 1: and then two days later or a day later, the

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Speaker 1: same exact flow comes out. And they were dubbed heartbeats

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Speaker 1: because they kind of look like a heartbeat monitor. Um

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Speaker 1: and essentially they can throw you off. For example, sometimes

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Speaker 1: you'll see a bunch of heartbeat flows come in right

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Speaker 1: at the end of the month and they count to like,

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Speaker 1: say March flows, and it'll be like, oh, March was

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Speaker 1: a record month, and then where you'll say, oh, value

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Speaker 1: had a huge run in, and really it was a

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Speaker 1: heartbeat flow. So for me, over the years, I've learned

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Speaker 1: to sort of tease them out to try to access

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Speaker 1: true sentiment because they are not sentiment. They are an

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Speaker 1: operational type flow. And the reason that we want to

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Speaker 1: talk about it this week is that taxes are kind

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Speaker 1: of on everyone's mind because April and there's some tax

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Speaker 1: implications to heartbeats, So that's why we want to talk

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Speaker 1: about it this week. Joining us Zach Minor with Boomberg

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Speaker 1: News as well as Rachel Elements this week on trillions

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Speaker 1: the heartbeat trade controversy. Zack, welcome to the show for

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Speaker 1: the first time. Actual you're a regular, Zach. How did

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Speaker 1: this story come about? I used to write about taxes

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Speaker 1: a lot, so I know you actually like when a

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Speaker 1: pulitzer for writing about Texas, right, I did. That's kind

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Speaker 1: of a big deal. Congratulations, Thank you. What was the

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Speaker 1: story on that you wanted for? It was about um

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Speaker 1: companies that acquire a foreign address to no longer be

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Speaker 1: Americans so they can pay lower taxes tax exactly. Yeah,

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Speaker 1: like Apple. Uh, they didn't do that, but they did

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Speaker 1: a lot of other interesting things other taxes. For sure.

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Speaker 1: They're the ones who had the Irish company that was

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Speaker 1: that was a tax resident of nowhere. It was the

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Speaker 1: Irish thought it was American and the Americans thought it

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Speaker 1: was Irish, so it was a tax resident of of nowhere.

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Speaker 1: Very true. So you know a few things about Texas well.

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Speaker 1: I know a few people. I stayed in touch with

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Speaker 1: a few people, and one of them mentioned last year,

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Speaker 1: you should really write about this thing, uh in the

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Speaker 1: E t F world. And I know nothing about E

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Speaker 1: t F s. I barely even knew what et F

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Speaker 1: stood for. And so I can't take trillion, yeah exactly.

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Speaker 1: So I can't take to Rachel, who knows everything about ETFs.

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Speaker 1: And she kind of um explained, you know, using small words.

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Speaker 1: She kind of helped explain it to me, and we

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Speaker 1: decided to try to look into this topic. Yes, So,

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Speaker 1: so that came to me back in January I think

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Speaker 1: it was of this year. And like Eric mentioned in

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Speaker 1: the intro, we've seen rebalances in the ECF industry for years,

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Speaker 1: and to his point, there's something that we really watched

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Speaker 1: out for, because when we're writing about sentiment, they tend

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Speaker 1: to throw us for a loop. They they send us

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Speaker 1: kind of like going in the wrong direction, saying that

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Speaker 1: everybody is suddenly bullish on financials, when in fact that

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Speaker 1: money is going to come out a couple of days later. However,

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Speaker 1: what I hadn't realized, obviously not knowing everything about the

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Speaker 1: et F industry, was quite kind of how important these

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Speaker 1: trades are for tax purposes. So Z came to me

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Speaker 1: with this kind of sort of idea about kind of

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Speaker 1: how these were effectively kind of like tax motivated transactions,

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Speaker 1: and we started to try and kind of piece together

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Speaker 1: exactly how these trades really work, whether they have a

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Speaker 1: real well kind of implication in terms of like the

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Speaker 1: shifting and stock within a fund, or kind of like well,

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Speaker 1: I guess, and exactly how that impacts the tax for

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Speaker 1: those funds and for their end investors. So what exactly

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Speaker 1: is the heartbeat trade? Typically, you know, most ets follow indexes,

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Speaker 1: and every once in a while the the index changes,

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Speaker 1: you've got a stock that has to leave the index

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Speaker 1: or come in. And if an et F just sells

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Speaker 1: the old stock that's leaving the index, and that stock

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Speaker 1: was a winner, like it went up during the time

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Speaker 1: the et F owned it, that would generate a taxable

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Speaker 1: gain which would have to be passed on to et

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Speaker 1: F investors. And so the alternative is, if you and

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Speaker 1: the people who know e t F s know about

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Speaker 1: the creation redemption process, if you happen to have people

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Speaker 1: who want to redeem that day enough volume, you can

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Speaker 1: just hand off that stock to them and there's no

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Speaker 1: tax implications. And that's because of this this kind of

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Speaker 1: strange little except and to the general rule in taxes

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Speaker 1: that was that only applies to mutual funds and ets,

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Speaker 1: and and what's the history of that exception. So in

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Speaker 1: nineteen sixty nine, Congress decided to make it. Uh, the

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Speaker 1: general rule be that if a corporation essentially buys back

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Speaker 1: at stock in the form of giving over appreciated property,

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Speaker 1: then they would have to recognize tax on that appreciation.

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Speaker 1: And they made it. They carved out an exception that

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Speaker 1: only applies to regulated investment companies, which is mutual funds

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Speaker 1: and ets. But back then, of course, there weren't ets.

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Speaker 1: There were just mutual funds, and at the time, no

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Speaker 1: one really thought it was a big giveaway because mutual

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Speaker 1: funds hardly ever do this. They only use it kind

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Speaker 1: of in emergencies, So nobody really paid much attention to

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Speaker 1: this weird little exception that hardly ever got used. Decades later,

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Speaker 1: ETFs come along, they use it all the time. They're

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Speaker 1: kind of set up to operate that way, and so

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Speaker 1: it's a it's kind of the source of e t

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Speaker 1: F s um kind of durable tax advantage over mutual funds.

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Speaker 1: And you know, this rings to our documentary shameless Plug

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Speaker 1: on how the e t F was created, And remember

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Speaker 1: Kathleen Moriarity saying they didn't make the creation redemption mechanism

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Speaker 1: for this purpose, but the lawyers, the tax lawyers, informed

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Speaker 1: them that this is going to be a nice, happy

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Speaker 1: accident that you would be able to limit your capital gains.

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Speaker 1: Happy coincidence, I think. And it's called the e t

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Speaker 1: F story, what I just call it. Just didn't put

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Speaker 1: the title out marketers a little bit, uh, But part

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Speaker 1: of that was that you know, this is totally legal, right, like,

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Speaker 1: this is something that the e t F hasn't It's

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Speaker 1: not like it's exploited but it's taken advantage of So

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Speaker 1: what is there anything actually nefarious going on here? So yeah,

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Speaker 1: so I just started to say like half the story

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Speaker 1: of what a heartbeat is. So normally et f s

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Speaker 1: are creating and redeeming, and whenever anyone redeems, they can

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Speaker 1: kind of because they're redeeming in stock they can use.

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Speaker 1: They can hand over appreciated stock. They can look through

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Speaker 1: their invent tory and find the most lowest basis stock,

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Speaker 1: the stock they bought for cheapest and hand it over

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Speaker 1: every time there's a redemption in just the natural creation

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Speaker 1: redemption process in the et F that's the normal way.

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Speaker 1: But what if you have a big stock leaving your

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Speaker 1: index on a Friday and you don't happen to have

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Speaker 1: a bunch of people you know are going to redeem

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Speaker 1: that day. Who knows, maybe people want to create that day. Um,

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Speaker 1: that's a problem because if you sell again, you're gonna

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Speaker 1: create a taxable gain for your that your shareholders will

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Speaker 1: have to pay. But what if you could somehow magically

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Speaker 1: create more extra redemptions that happened just at the time

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Speaker 1: you need them, so there's no tax bill. And that's

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Speaker 1: what a heartbeat is. You call up a market participant UM,

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Speaker 1: a bank or or a market maker, an authorized participant

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Speaker 1: in the e t F LINGO, and you say, hey, listen,

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Speaker 1: I've got this redemption I need to happen on Friday.

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Speaker 1: Could you please create on Wednesday? Create this amount and

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Speaker 1: the banker market maker will create a whole bunch of

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Speaker 1: ETF and then a day or two later redeem out.

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Speaker 1: But rather than redeem just the custom the standard basket

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Speaker 1: of all the stocks in the e t F, they'll

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Speaker 1: take the stuff that the et F needs to get

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Speaker 1: rid of that day. And that's why the question about

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Speaker 1: whether this is kind of nefarious or not really comes in.

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Speaker 1: If this is part and parcel of kind of like

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Speaker 1: how an et F operates day and day out, that's

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Speaker 1: one thing. But then when you're synthetically creating a transaction

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Speaker 1: for that purpose to get rid of those those specific stocks,

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Speaker 1: how does the I R S? How does Treasury? How

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Speaker 1: does Congress and the American public feel about that? Eric?

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Speaker 1: When when you see that on a screen, what does

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Speaker 1: it look like to you? Looks like a heart monitor,

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Speaker 1: It looks you know, I call these operational flows or

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Speaker 1: tax flows. UM. It's interesting because this idea of maneuvering

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Speaker 1: around the I R S happens like everywhere, every industry

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Speaker 1: does this. I think some of the initial reaction the

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Speaker 1: pushback was basically that um, typically when something to farious

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Speaker 1: going on, little guys getting screwed, and here the average

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Speaker 1: investors benefiting from this practice. I think that if you're

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Speaker 1: an investor in e t fs via anything, you're actually

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Speaker 1: probably benefiting from this in the form of not actually

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Speaker 1: having to pay those capital gains. Right, well, let's talk

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Speaker 1: about dodge versus deferral. Can you just break down this

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Speaker 1: isn't avoiding the tax, it's more just putting it off, right, Yeah, absolutely,

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Speaker 1: So if an e t F doesn't distribute capital gains

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Speaker 1: to its shareholders, that doesn't mean they'll never have to pay.

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Speaker 1: It means that rather than paying every time a stock

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Speaker 1: leaves the index every year they own the e t F,

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Speaker 1: they get to sort of save up all those tax

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Speaker 1: bills till the end. They get to wait until they

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Speaker 1: actually sell the e t F and then pay them

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Speaker 1: all at once. But there's so first of all, there's

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Speaker 1: you're essentially getting a no interest loan from the U. S.

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Speaker 1: Government that you control when when the loan is due, right,

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Speaker 1: so that's like obviously a cost to the government. If

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Speaker 1: I call the I R S and said I don't

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Speaker 1: want to pay my taxes for ten years, they would

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Speaker 1: throw me in jail. That's not okay, right, So that

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Speaker 1: first of all, that it's it's it's deferral, but that

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Speaker 1: deferral is a real thing. The second thing is there

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Speaker 1: are cases that are where you don't pay. The first

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Speaker 1: is if you if you leave the e t F

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Speaker 1: in your state, your heirs don't have to pay that

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Speaker 1: capital gain it disappears. The second one is that some

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Speaker 1: of the gains that are generated by an e t

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Speaker 1: F buying and selling stocks are short term gains that

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Speaker 1: are that are paid at a higher rate um than

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Speaker 1: long term capital gains. But by the magic of this process,

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Speaker 1: you're transforming them into long term gains that are paid

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Speaker 1: about half the tax rate. Now that's not a big

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Speaker 1: number for most CTFs, most of their gains are long term,

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Speaker 1: but it's not zero either. Obviously, the the investors you

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Speaker 1: do benefit from this maneuver, if you want to call

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Speaker 1: it that. But I think the other things kind of

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Speaker 1: remember is that when we look at sort of the

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Speaker 1: American population at large, the vast majority are not investors.

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Speaker 1: Your investments are still managed by a relatively small proportion

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Speaker 1: of the overall public. So if the treasury is effectively

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Speaker 1: giving a loan to investors for this purpose to defer

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Speaker 1: tax for a certain number of years, there are other

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Speaker 1: things that treasury cannot do with that money. They can't

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Speaker 1: invest in in your children's playground, for example. They can't

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Speaker 1: necessarily give out food stamps to the poor. There is

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Speaker 1: something that kind of like goes from actually having this

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Speaker 1: this defer or there's something that this money could be

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Speaker 1: put to which is not so. Yes, the small investors

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Speaker 1: do benefit, but you've got to be an investor to

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Speaker 1: be able to benefit. And how much money are we

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Speaker 1: are we talking here? So in the by our calculations,

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Speaker 1: in the most recent calendar year for e t f S,

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Speaker 1: we found over two billion dollars of capital gains that

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Speaker 1: were essentially uh not recognized through this process. So if

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Speaker 1: you were to do the math on that, that's maybe

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Speaker 1: twenty some billion dollars of taxes that essentially weren't paid

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Speaker 1: that year and that will be paid instead some year

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Speaker 1: in the future. And so in the next year there

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Speaker 1: will be another loan by the government to these investors

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Speaker 1: of twenties so twenty or so billion dollars. And there's

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Speaker 1: a lot of ways in which the government um encourages

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Speaker 1: savings and offers tax subsidies two savers like through four

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Speaker 1: owen k's and I ra s and savings vehicles like that.

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Speaker 1: But those were the product of some kind of policy

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Speaker 1: discussion in Washington where Congress said, we want to encourage

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Speaker 1: this kind of savings and not that kind of savings.

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Speaker 1: This one is just kind of happened by accident. No one,

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Speaker 1: no one even really kind of knew in Congress that

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Speaker 1: they did it, and so we thought it was worth

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Speaker 1: pointing out so you can have that policy discussion about

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Speaker 1: is this the kind of subsidy we want to we

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Speaker 1: want to impose UM just on et F holders, not

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Speaker 1: mutual fund holders, not hedge fund owners, not people who

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Speaker 1: in individual stocks, just E t s. And this idea

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Speaker 1: of tax maneuvering we saw this year in January weren't

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Speaker 1: heartbeat trades, but a ton of money came out of

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Speaker 1: equity E t F s unnaturally, and in Q four

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Speaker 1: a ton of money went into equity E t F

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Speaker 1: s in the face of a downturn, unnatural that was

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Speaker 1: tax loss harvesting, and an advisor would advertise they call

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Speaker 1: it tax alpha. And one argument that was made was

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Speaker 1: that the advisor is being fiduciary by helping their client

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Speaker 1: steer around that. Could you make the argument the asset

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Speaker 1: manager would not be would be violating their fiduciary duty

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Speaker 1: by not taking advantage of this. I think that's a

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Speaker 1: totally valid argument. I mean, I don't think it's at all.

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Speaker 1: You can't really blame the UM the market participants here

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Speaker 1: for doing what they believe and their lawyers are telling

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Speaker 1: them as legal and that clearly benefits their investors. There's

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Speaker 1: no question about that. At least they're taxable investors UM

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Speaker 1: and so, uh, you can't really you know, cast moral

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Speaker 1: you know, aspersions on folks who are trying to follow

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Speaker 1: law and you know, maximize the tax of sency of

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Speaker 1: their funds. But it's also worth kind of pointing out,

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Speaker 1: what are the policies that were created? Did anyone ever

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Speaker 1: intend this subsidy to applied to this one particular industry

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Speaker 1: and not others? And you know, if we were to

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Speaker 1: kind of take a look at the tax code, is

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Speaker 1: that really like the way it's it's supposed to work.

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Speaker 1: I think that's our point. I also want to point

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Speaker 1: out that the term of heartbeat wasn't one that you

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Speaker 1: guys coined. The first people to recognize that this was happening. Um,

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Speaker 1: So who coined it? And what happened since she discovered so?

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Speaker 1: Elizabeth Kashner at fact Set Research wrote about this in

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Speaker 1: December UM and she it reminded her of the flows

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Speaker 1: on the screen, reminded her of her of her dad's

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Speaker 1: e KG monitor. That's why she called them heartbeats. UM.

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Speaker 1: That research was was great and really gave us kind

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Speaker 1: of the foundation of what we you know, pursued um UM.

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Speaker 1: But you know, outside the et F industry, I don't

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Speaker 1: think a lot of people, um had really heard about it,

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Speaker 1: which was why we thought there was an opportunity to

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Speaker 1: tell tell the story more people. Yeah. And these these

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Speaker 1: trades also have a lot of different names within the industry,

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Speaker 1: which may give you a sense of how people view them.

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Speaker 1: You know, they're often called friendlies or kickers or tax trades.

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Speaker 1: That the more kind of like politically correct term these

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Speaker 1: days as custom in kind baskets or SIPs. It's like

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Speaker 1: the lawyer, Yeah, the lawyers, the lawyers. Basically, the lawyers

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Speaker 1: told them not to use all those other terms because

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Speaker 1: they they kind of they're a little too truthy. The

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Speaker 1: problem for the lawyers is that they want to pretend

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Speaker 1: that these are kind of third you know, arm's length

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Speaker 1: transactions with the banks doing them for their own reasons,

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Speaker 1: but they're really not. And so a word like friendlies

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Speaker 1: set off alarm bells. So now that they they instead

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Speaker 1: they use this word custom in kind baskets that doesn't

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Speaker 1: really mean anything and no one can remember, but it

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Speaker 1: it um they think is safer ground legally. You know,

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Speaker 1: I think if I was the I R S the

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Speaker 1: government listening to this, you know. One of the things

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Speaker 1: that really just upsets people about mutual funds and I

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Speaker 1: get it is hey, I bought this mutual fund and

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Speaker 1: I'm just sitting there like a good soldier, and I

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Speaker 1: get this nasty tax bill because somebody else left. That

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Speaker 1: really is not fair. The e t F sort of

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Speaker 1: seems fair, not like like you're cheating, but fair. You

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Speaker 1: pay a tax when you sell um. So if anything,

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Speaker 1: I think the mutual funds should be fixed or we're

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Speaker 1: dealt with to make it like the e t F

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Speaker 1: level playing field. That that's just my opinion on it,

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Speaker 1: because that idea of just sitting there and getting a

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Speaker 1: tax bill because you invested in a fund, just I

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Speaker 1: don't know, something seems kind of wrong about that, especially

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Speaker 1: because you're basically paying taxes because somebody else did something.

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Speaker 1: So judge truth, judge everything on this one. So I

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Speaker 1: feel like I kind of have a pretty good sense

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Speaker 1: of what people in the industry have said, and we'll

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Speaker 1: get to that in a second. But what have you

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Speaker 1: heard from policy makers since the article was published? So far?

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Speaker 1: From my side and Za can probably speak to this better,

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Speaker 1: it's been to be relatively quiet in terms of the

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Speaker 1: wider reaction. You know, obviously the industry has been relatively

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Speaker 1: defensive in some in some respects, and I think that's

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Speaker 1: entirely understandable. You know, this is obviously something that has

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Speaker 1: helped the E T F industry grow into this three

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Speaker 1: point eight trillion, you know, sort of size beasts that

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Speaker 1: we see now in the US. So it's obviously something

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Speaker 1: that people feel quite strongly about and and see as

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Speaker 1: being very investive friendly in terms of kind of like

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Speaker 1: the wider reaction, though, you know, from the general public,

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Speaker 1: you know, I have had quite a number of emails

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Speaker 1: and comments sort of saying that they're glad that we're

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Speaker 1: shedding a light on this and asking these questions. Some

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Speaker 1: of those maybe investors that have benefited from it, some

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Speaker 1: of them are not. But I think you know that

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Speaker 1: the point of all these types of stories is really

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Speaker 1: to to provoke a conversation and get people kind of

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Speaker 1: talking about it. Two things I thought fascinating about this

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Speaker 1: if you go deep to the end of the story,

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Speaker 1: two things jumped out at me that we're just fascinating.

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Speaker 1: One is that the SEC is sort of putting into

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Speaker 1: their new rule to make this easier for smaller players

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Speaker 1: to do. In a sense, they're helping helping the industry out.

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Speaker 1: There's the SEC, and then the I c I, which

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Speaker 1: is the biggest mutual fund lobbying organization, which, if anybody

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Speaker 1: would might benefit from this loophole getting closed its mutual

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Speaker 1: funds right because E T f are so much more

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Speaker 1: tax efficient, They've driven a lot of investors away from

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Speaker 1: mutual funds. It's one of the reasons. And the I

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Speaker 1: c I is basically saying this, you shouldn't close this loophole.

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Speaker 1: It would it would force our frequent sizeable and unanticipated

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Speaker 1: tax bills. I thought those were interesting defenses from gigantic

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Speaker 1: bodies that you would almost think have a vested interests

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Speaker 1: on the other side, to close the loophole, so I

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Speaker 1: can take the Securities and Exchange Commission first. Mean, so

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Speaker 1: the rule you're referring to is what we call kind

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Speaker 1: of colloquially the e t F rule, and basically that's

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Speaker 1: been in the works for the last decade or so,

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Speaker 1: and the idea is to effectively kind of streamline the

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Speaker 1: process by which e t f s are able to

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Speaker 1: come to market. That's its overall task, but one of

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Speaker 1: the proposals within that is designed to make it easier,

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Speaker 1: particularly within fixed income e t f s, to create

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Speaker 1: more liquidity within those e t f s and to

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Speaker 1: allow peop to create and redeem those more easily. As

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Speaker 1: part of that, the SEC plans to allow custom baskets,

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Speaker 1: which is something that's very much been a part of

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Speaker 1: kind of this heartbeat trade. You need to be able

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Speaker 1: to give out something that's not a pro rat slice

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Speaker 1: of the fund in order to be able to give

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Speaker 1: out securities that there are are going to be taxed

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Speaker 1: at that the highest level. So this is something that

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Speaker 1: we will have that implication, but I don't think it's

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Speaker 1: necessarily the intent for having read that the rule as

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Speaker 1: it's been put out there. But I think the SEC

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Speaker 1: is definitely aware of heartbeat trades, and to our knowledge,

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Speaker 1: they haven't come out and slapped any risks about them

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Speaker 1: or or commented praising them either. Yeah. And as for

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Speaker 1: the i C, I mean, they do represent et F companies,

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Speaker 1: so if you talk to mutual fund managers, some of

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Speaker 1: them are are livid about this, this heartbeat situation. And

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Speaker 1: I think the i C s comment there was not

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Speaker 1: defending heartbeats, but defending the underlying tax benefit that does

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Speaker 1: apply to mutual funds in a much less attractive way

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Speaker 1: and saying that you know, the tax and benefit that

386
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Speaker 1: the e t F E t F to use every

387
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Speaker 1: day shouldn't be repealed. So, Eric, what's been the reaction

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Speaker 1: within the industry, I think mostly defensiveness. I think you

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Speaker 1: know um Rachel's point earlier I think is key here.

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Speaker 1: If you're looking at society as a whole, there's a

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Speaker 1: huge argument this is why the FEDS policies, you could argue,

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Speaker 1: are creating income inequality, because they're just helping asset prices

393
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Speaker 1: go up, and if you don't own any assets like stocks, bonds,

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Speaker 1: that you're kind of missing out on this whole bonanza.

395
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Speaker 1: And e t f s are part of that. And

396
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Speaker 1: anything that helps people who own stocks, it helps. But

397
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Speaker 1: if you take just the owners of assets and you

398
00:20:38,840 --> 00:20:41,720
Speaker 1: bubble those off and put the rest of society aside,

399
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Speaker 1: I think most of them are like, hey, this is

400
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Speaker 1: the retail investors benefiting here. Um, this is nothing new.

401
00:20:48,000 --> 00:20:50,880
Speaker 1: We've heard about this. I can I can see both

402
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Speaker 1: sides for sure. I do think there's somebody Quota who

403
00:20:53,760 --> 00:20:57,480
Speaker 1: said the fact that they got a little they sped

404
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Speaker 1: up the amount of heartbeats they got bigger, like, maybe

405
00:21:00,840 --> 00:21:04,359
Speaker 1: they shouldn't have taken advantage so quickly, so fast, because

406
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Speaker 1: it does look a little uh, not greedy, it might

407
00:21:07,440 --> 00:21:11,240
Speaker 1: not be the right word, but maybe a little yeah,

408
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Speaker 1: because back in the day, I don't recall hardly any

409
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Speaker 1: of these maybe once in a blue moon, but they're

410
00:21:15,720 --> 00:21:18,120
Speaker 1: pretty routine now. And one other point was made, which

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Speaker 1: was Vanguard now everybody knows them is sort of the

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Speaker 1: you know, Jack Bogel, the champions of the little guy.

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Speaker 1: And they're probably, besides black Rock, the biggest company that

414
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Speaker 1: does this, and so I think that also the biggest right.

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Speaker 1: So what do you guys make a Vanguard being involved?

416
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Speaker 1: What do they say? Um, you know, they they commented

417
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Speaker 1: for a story. They said that they've they believe they're

418
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Speaker 1: in full compliance with the rules, and they defend the

419
00:21:46,000 --> 00:21:48,280
Speaker 1: practice and and to be to be fair, I mean,

420
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Speaker 1: Vanguard's whole mantra is low fees, low taxes. Uh, and

421
00:21:53,640 --> 00:21:57,159
Speaker 1: this fits right into that. It fits into you know,

422
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Speaker 1: let's do everything we can to put the investor first.

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Speaker 1: To your point about how this has become more more common,

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Speaker 1: you know, I think that's that's not just kind of

425
00:22:04,320 --> 00:22:06,280
Speaker 1: an illusion. That's definitely true, you know, based on on

426
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Speaker 1: the data that we looked at, and that really speaks

427
00:22:08,320 --> 00:22:11,000
Speaker 1: to Hannah how fast the E t F industry has grown.

428
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Speaker 1: I mean, if you look at kind of like assets,

429
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Speaker 1: you know, we're now at three point eight trillion. You're

430
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Speaker 1: a decade ago we were under one trillion. So it's

431
00:22:17,200 --> 00:22:20,560
Speaker 1: become very very big, very very quick. And many of

432
00:22:20,560 --> 00:22:23,040
Speaker 1: those new funds that have been garnering assets are those

433
00:22:23,119 --> 00:22:25,800
Speaker 1: that rebalance much more frequently. If you look at the

434
00:22:25,840 --> 00:22:28,399
Speaker 1: older E t F you know they're maybe doing twice

435
00:22:28,440 --> 00:22:31,120
Speaker 1: a year, once a year. They don't need these so frequently.

436
00:22:31,280 --> 00:22:34,119
Speaker 1: We now have funds that rebalance once a week. If

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00:22:34,119 --> 00:22:37,320
Speaker 1: you're rebalancing once a week, that tax kind of a

438
00:22:37,760 --> 00:22:41,040
Speaker 1: burden from having to book attacks every time you are

439
00:22:41,040 --> 00:22:43,960
Speaker 1: are changing your portfolio could be pretty severe. So being

440
00:22:44,000 --> 00:22:47,159
Speaker 1: able to capitalize on this this this part of the

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00:22:47,200 --> 00:22:50,000
Speaker 1: tax code allows you to have those funds, and they

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00:22:50,000 --> 00:22:51,560
Speaker 1: have been kind of like the ones that have really

443
00:22:51,560 --> 00:22:54,560
Speaker 1: been growing, these kind of like smart beta factor focused funds.

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00:22:54,800 --> 00:22:55,919
Speaker 1: So I think that's kind of like one of the

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00:22:55,920 --> 00:22:57,840
Speaker 1: reasons we're seeing more and more of them now and

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00:22:57,840 --> 00:23:01,520
Speaker 1: why it's become such a kind of interesting feature, and

447
00:23:01,560 --> 00:23:03,359
Speaker 1: perhaps you know, we see that much more frequent. The

448
00:23:03,440 --> 00:23:04,840
Speaker 1: other thing, of course, is that we've had, you know,

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00:23:04,880 --> 00:23:07,000
Speaker 1: the longest bull market in history. So if you've got

450
00:23:07,000 --> 00:23:09,160
Speaker 1: stocks always going up, you're gonna have an awful lot

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00:23:09,160 --> 00:23:12,119
Speaker 1: of gains there. Yeah. And and to that point, one

452
00:23:12,119 --> 00:23:13,240
Speaker 1: of the e t s back in the day that

453
00:23:13,320 --> 00:23:15,440
Speaker 1: gave off nasty capital gains because it had no other

454
00:23:15,480 --> 00:23:18,960
Speaker 1: choice was FM, the frontier market. It had this incredible

455
00:23:19,040 --> 00:23:20,840
Speaker 1: run up. And that's true if the market were to

456
00:23:20,880 --> 00:23:25,440
Speaker 1: be more normal, less fed induced, and less utopia like uh,

457
00:23:25,440 --> 00:23:26,880
Speaker 1: and had you know, went up and down, I think

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00:23:26,880 --> 00:23:28,879
Speaker 1: this would probably come out naturally. You guys pointed out

459
00:23:28,920 --> 00:23:32,120
Speaker 1: that Spy in particular was able to do this naturally

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00:23:32,160 --> 00:23:34,440
Speaker 1: for a number of years. Right, we don't. I mean

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00:23:34,560 --> 00:23:37,000
Speaker 1: they may. There's a couple of times they might have

462
00:23:37,040 --> 00:23:38,879
Speaker 1: done a heartbeat. We're not really sure. But for the

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00:23:38,880 --> 00:23:42,600
Speaker 1: most party, that's the biggest etf the most heavily traded

464
00:23:42,760 --> 00:23:45,280
Speaker 1: stock in the world, I think, right in the US,

465
00:23:45,760 --> 00:23:49,959
Speaker 1: and and they have so much natural creation redemption they

466
00:23:50,000 --> 00:23:52,560
Speaker 1: don't need to kind of create synthetic redemptions in order

467
00:23:52,640 --> 00:23:56,520
Speaker 1: to do these kind of UM changes in their portfolio.

468
00:23:56,600 --> 00:23:59,040
Speaker 1: That's a good point. And Vanguard sees nothing but influence

469
00:23:59,040 --> 00:24:01,080
Speaker 1: for the most part. And that's the problem inflows. Plus,

470
00:24:01,160 --> 00:24:03,359
Speaker 1: a rising market means you you're going to have a

471
00:24:03,359 --> 00:24:06,359
Speaker 1: capital gain unless you maybe do this UM. One other

472
00:24:06,440 --> 00:24:08,840
Speaker 1: issue here is that the other participant isn't the asset manager.

473
00:24:08,880 --> 00:24:13,200
Speaker 1: It's the banks, right, the authorized participants, right market makers.

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00:24:13,440 --> 00:24:15,880
Speaker 1: So here's the quote from Vanguard. The question was what

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00:24:15,880 --> 00:24:17,920
Speaker 1: do they get out of it? Because isn't the real

476
00:24:17,920 --> 00:24:21,560
Speaker 1: deal that if it's a tax violation, whatnot? If it's

477
00:24:21,560 --> 00:24:24,520
Speaker 1: done for the sole purpose of dodging taxes versus the

478
00:24:24,560 --> 00:24:27,200
Speaker 1: party has a reason to do it right. So here's

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00:24:27,200 --> 00:24:30,720
Speaker 1: what Vanguard said, Um, the banks enter these transactions for

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00:24:30,760 --> 00:24:33,760
Speaker 1: their own independent business reasons. That's all they said about it.

481
00:24:33,800 --> 00:24:35,600
Speaker 1: But what what what what did you guys find out

482
00:24:35,600 --> 00:24:38,240
Speaker 1: about I found that nicely vague. I mean, independent business

483
00:24:38,240 --> 00:24:41,320
Speaker 1: reasons cover a multitude of different possibilities, right, I mean

484
00:24:41,480 --> 00:24:43,520
Speaker 1: what what we heard from talking to people and we

485
00:24:43,600 --> 00:24:46,600
Speaker 1: you know, we did talk to tens tons of people

486
00:24:46,880 --> 00:24:49,840
Speaker 1: about this story and was really kind of the when

487
00:24:49,840 --> 00:24:51,439
Speaker 1: it comes to what they're getting out of it, this

488
00:24:51,520 --> 00:24:55,600
Speaker 1: is primarily done for relationship reasons. Banks are able to

489
00:24:55,760 --> 00:24:58,320
Speaker 1: as as authorized participants, are able to kind of hedge

490
00:24:58,320 --> 00:25:00,720
Speaker 1: these transactions. They may even be able to kind of

491
00:25:00,960 --> 00:25:03,000
Speaker 1: trade with some of the securities they get out at

492
00:25:03,000 --> 00:25:05,439
Speaker 1: the end of the day potentially have optimized their headges

493
00:25:05,480 --> 00:25:08,879
Speaker 1: to get a little bit of upside. But by and large,

494
00:25:08,920 --> 00:25:11,280
Speaker 1: these are pretty much trades where they break even and

495
00:25:11,320 --> 00:25:13,880
Speaker 1: they're doing it because they want to get more business

496
00:25:13,960 --> 00:25:17,040
Speaker 1: from these asset managers. It's my favor. It's a favor exactly,

497
00:25:17,080 --> 00:25:19,359
Speaker 1: whether it comes to ets or it kind of translates

498
00:25:19,359 --> 00:25:23,080
Speaker 1: into maybe their active management a sphere. They're doing this

499
00:25:23,160 --> 00:25:26,000
Speaker 1: because it helps out somebody that they want to get

500
00:25:26,040 --> 00:25:29,600
Speaker 1: business from in another respects. So I guess independent business

501
00:25:29,640 --> 00:25:32,800
Speaker 1: frees and stuff that falls under that for sure. We're

502
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Speaker 1: a whole episode called good Guy right there. Zach Rachel,

503
00:25:39,160 --> 00:25:46,920
Speaker 1: thanks for joining us, Thanks having its, thank you, thanks

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00:25:46,920 --> 00:25:49,320
Speaker 1: for listening to trades Until next time. You can find

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00:25:49,359 --> 00:25:53,280
Speaker 1: us on the Bloomberg Jomnal, Bloomberg dot com, Apple Podcast, Spotify,

506
00:25:53,600 --> 00:25:55,960
Speaker 1: and wherever else you'd like to listen. We'd love to

507
00:25:55,960 --> 00:25:59,359
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,

508
00:25:59,760 --> 00:26:03,159
Speaker 1: He's at Eric Baltunis and he can follow Zach and

509
00:26:03,280 --> 00:26:07,280
Speaker 1: Rachel at Zach Miners and at Rachel Evans. Underscore and

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00:26:07,400 --> 00:26:12,720
Speaker 1: Why Trillions is produced by Magnus Hendrickson. Francesca Levy is

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00:26:12,760 --> 00:26:15,040
Speaker 1: the head of Bloomberg Podcast. Bye