WEBVTT - The Heartbeat Trade 0:00:06.400 --> 0:00:12.440 Wellcome to Joan's. I'm Joel Webert and I'm Eric Belchiertis Eric? 0:00:12.480 --> 0:00:15.440 Did you know that I'm the editor of Bloomberg Business Week. Yeah, 0:00:15.480 --> 0:00:20.279 I noticed. Uh, it's when you became pretty intolerable, that's true. No, 0:00:20.440 --> 0:00:22.800 that's why that's where your nickname hard stop comes from. Hart, 0:00:22.960 --> 0:00:25.599 I have a hard stop today. Uh. So, recently we 0:00:25.680 --> 0:00:29.240 ran an article about a phenomenon called heartbeat Trades by 0:00:29.400 --> 0:00:33.920 Zach Miner, Rachel Evans, and Caroline Wilson. And it was 0:00:33.960 --> 0:00:36.839 a little controversial, to say the least. Yeah, I know 0:00:37.120 --> 0:00:39.960 from the E t F world I operated. There was 0:00:40.000 --> 0:00:43.360 a lot of pushback comments, which will address today. But 0:00:43.479 --> 0:00:45.159 all in all, this is something that I've seen on 0:00:45.240 --> 0:00:48.000 my screen for h I don't know, at least five 0:00:48.560 --> 0:00:52.000 eight years maybe, and it it's it's sped up lately 0:00:52.080 --> 0:00:54.400 more recently where you'll see a flow come in and 0:00:54.440 --> 0:00:57.040 it'll be a pretty big spike on the daily flow screen, 0:00:57.280 --> 0:00:58.960 and then two days later or a day later, the 0:00:59.000 --> 0:01:03.200 same exact flow comes out. And they were dubbed heartbeats 0:01:03.240 --> 0:01:06.120 because they kind of look like a heartbeat monitor. Um 0:01:06.160 --> 0:01:10.120 and essentially they can throw you off. For example, sometimes 0:01:10.560 --> 0:01:12.760 you'll see a bunch of heartbeat flows come in right 0:01:12.760 --> 0:01:14.840 at the end of the month and they count to like, 0:01:14.880 --> 0:01:17.560 say March flows, and it'll be like, oh, March was 0:01:17.600 --> 0:01:20.000 a record month, and then where you'll say, oh, value 0:01:20.120 --> 0:01:23.240 had a huge run in, and really it was a 0:01:23.240 --> 0:01:26.280 heartbeat flow. So for me, over the years, I've learned 0:01:26.319 --> 0:01:30.280 to sort of tease them out to try to access 0:01:30.280 --> 0:01:33.000 true sentiment because they are not sentiment. They are an 0:01:33.040 --> 0:01:35.319 operational type flow. And the reason that we want to 0:01:35.319 --> 0:01:37.920 talk about it this week is that taxes are kind 0:01:37.959 --> 0:01:41.600 of on everyone's mind because April and there's some tax 0:01:41.640 --> 0:01:44.560 implications to heartbeats, So that's why we want to talk 0:01:44.560 --> 0:01:47.800 about it this week. Joining us Zach Minor with Boomberg 0:01:47.800 --> 0:01:54.120 News as well as Rachel Elements this week on trillions 0:01:54.160 --> 0:01:59.080 the heartbeat trade controversy. Zack, welcome to the show for 0:01:59.120 --> 0:02:02.360 the first time. Actual you're a regular, Zach. How did 0:02:02.360 --> 0:02:04.840 this story come about? I used to write about taxes 0:02:04.880 --> 0:02:06.800 a lot, so I know you actually like when a 0:02:06.880 --> 0:02:09.200 pulitzer for writing about Texas, right, I did. That's kind 0:02:09.200 --> 0:02:12.679 of a big deal. Congratulations, Thank you. What was the 0:02:12.720 --> 0:02:15.560 story on that you wanted for? It was about um 0:02:15.840 --> 0:02:21.880 companies that acquire a foreign address to no longer be 0:02:21.919 --> 0:02:26.480 Americans so they can pay lower taxes tax exactly. Yeah, 0:02:26.520 --> 0:02:30.079 like Apple. Uh, they didn't do that, but they did 0:02:30.160 --> 0:02:33.600 a lot of other interesting things other taxes. For sure. 0:02:33.400 --> 0:02:35.880 They're the ones who had the Irish company that was 0:02:36.720 --> 0:02:39.320 that was a tax resident of nowhere. It was the 0:02:39.360 --> 0:02:41.280 Irish thought it was American and the Americans thought it 0:02:41.280 --> 0:02:44.560 was Irish, so it was a tax resident of of nowhere. 0:02:45.040 --> 0:02:47.280 Very true. So you know a few things about Texas well. 0:02:47.280 --> 0:02:49.200 I know a few people. I stayed in touch with 0:02:49.200 --> 0:02:51.640 a few people, and one of them mentioned last year, 0:02:51.680 --> 0:02:53.960 you should really write about this thing, uh in the 0:02:53.960 --> 0:02:56.880 E t F world. And I know nothing about E 0:02:56.960 --> 0:02:59.320 t F s. I barely even knew what et F 0:02:59.440 --> 0:03:03.640 stood for. And so I can't take trillion, yeah exactly. 0:03:03.639 --> 0:03:06.200 So I can't take to Rachel, who knows everything about ETFs. 0:03:06.680 --> 0:03:10.480 And she kind of um explained, you know, using small words. 0:03:10.520 --> 0:03:12.720 She kind of helped explain it to me, and we 0:03:12.760 --> 0:03:15.520 decided to try to look into this topic. Yes, So, 0:03:15.520 --> 0:03:18.200 so that came to me back in January I think 0:03:18.240 --> 0:03:20.560 it was of this year. And like Eric mentioned in 0:03:20.600 --> 0:03:25.320 the intro, we've seen rebalances in the ECF industry for years, 0:03:25.400 --> 0:03:27.600 and to his point, there's something that we really watched 0:03:27.600 --> 0:03:30.120 out for, because when we're writing about sentiment, they tend 0:03:30.120 --> 0:03:31.880 to throw us for a loop. They they send us 0:03:31.960 --> 0:03:33.800 kind of like going in the wrong direction, saying that 0:03:33.800 --> 0:03:36.840 everybody is suddenly bullish on financials, when in fact that 0:03:36.880 --> 0:03:39.200 money is going to come out a couple of days later. However, 0:03:39.240 --> 0:03:41.960 what I hadn't realized, obviously not knowing everything about the 0:03:42.000 --> 0:03:44.760 et F industry, was quite kind of how important these 0:03:44.800 --> 0:03:47.720 trades are for tax purposes. So Z came to me 0:03:47.760 --> 0:03:49.840 with this kind of sort of idea about kind of 0:03:49.840 --> 0:03:54.000 how these were effectively kind of like tax motivated transactions, 0:03:54.160 --> 0:03:56.040 and we started to try and kind of piece together 0:03:56.080 --> 0:03:59.600 exactly how these trades really work, whether they have a 0:03:59.640 --> 0:04:01.840 real well kind of implication in terms of like the 0:04:01.840 --> 0:04:04.920 shifting and stock within a fund, or kind of like well, 0:04:04.960 --> 0:04:08.440 I guess, and exactly how that impacts the tax for 0:04:08.520 --> 0:04:11.240 those funds and for their end investors. So what exactly 0:04:11.400 --> 0:04:16.680 is the heartbeat trade? Typically, you know, most ets follow indexes, 0:04:17.279 --> 0:04:20.679 and every once in a while the the index changes, 0:04:21.240 --> 0:04:22.920 you've got a stock that has to leave the index 0:04:23.040 --> 0:04:26.040 or come in. And if an et F just sells 0:04:26.200 --> 0:04:29.080 the old stock that's leaving the index, and that stock 0:04:29.160 --> 0:04:31.560 was a winner, like it went up during the time 0:04:31.600 --> 0:04:34.479 the et F owned it, that would generate a taxable 0:04:34.520 --> 0:04:36.560 gain which would have to be passed on to et 0:04:36.680 --> 0:04:41.160 F investors. And so the alternative is, if you and 0:04:41.240 --> 0:04:43.880 the people who know e t F s know about 0:04:43.880 --> 0:04:46.599 the creation redemption process, if you happen to have people 0:04:46.920 --> 0:04:51.760 who want to redeem that day enough volume, you can 0:04:51.800 --> 0:04:54.280 just hand off that stock to them and there's no 0:04:54.400 --> 0:04:57.960 tax implications. And that's because of this this kind of 0:04:58.680 --> 0:05:01.880 strange little except and to the general rule in taxes 0:05:01.920 --> 0:05:04.560 that was that only applies to mutual funds and ets, 0:05:04.640 --> 0:05:07.719 and and what's the history of that exception. So in 0:05:07.839 --> 0:05:12.480 nineteen sixty nine, Congress decided to make it. Uh, the 0:05:12.520 --> 0:05:17.040 general rule be that if a corporation essentially buys back 0:05:17.080 --> 0:05:21.720 at stock in the form of giving over appreciated property, 0:05:21.880 --> 0:05:26.039 then they would have to recognize tax on that appreciation. 0:05:26.640 --> 0:05:28.800 And they made it. They carved out an exception that 0:05:28.880 --> 0:05:31.600 only applies to regulated investment companies, which is mutual funds 0:05:31.600 --> 0:05:33.680 and ets. But back then, of course, there weren't ets. 0:05:33.720 --> 0:05:36.000 There were just mutual funds, and at the time, no 0:05:36.040 --> 0:05:38.200 one really thought it was a big giveaway because mutual 0:05:38.240 --> 0:05:40.240 funds hardly ever do this. They only use it kind 0:05:40.240 --> 0:05:43.000 of in emergencies, So nobody really paid much attention to 0:05:43.040 --> 0:05:47.200 this weird little exception that hardly ever got used. Decades later, 0:05:47.240 --> 0:05:50.400 ETFs come along, they use it all the time. They're 0:05:50.440 --> 0:05:53.000 kind of set up to operate that way, and so 0:05:53.080 --> 0:05:55.600 it's a it's kind of the source of e t 0:05:55.800 --> 0:05:59.599 F s um kind of durable tax advantage over mutual funds. 0:06:00.839 --> 0:06:04.119 And you know, this rings to our documentary shameless Plug 0:06:04.240 --> 0:06:06.240 on how the e t F was created, And remember 0:06:06.320 --> 0:06:11.400 Kathleen Moriarity saying they didn't make the creation redemption mechanism 0:06:11.440 --> 0:06:14.920 for this purpose, but the lawyers, the tax lawyers, informed 0:06:15.000 --> 0:06:17.080 them that this is going to be a nice, happy 0:06:17.080 --> 0:06:19.640 accident that you would be able to limit your capital gains. 0:06:20.120 --> 0:06:22.600 Happy coincidence, I think. And it's called the e t 0:06:22.720 --> 0:06:26.760 F story, what I just call it. Just didn't put 0:06:26.800 --> 0:06:31.520 the title out marketers a little bit, uh, But part 0:06:31.560 --> 0:06:34.320 of that was that you know, this is totally legal, right, like, 0:06:34.360 --> 0:06:37.080 this is something that the e t F hasn't It's 0:06:37.120 --> 0:06:40.279 not like it's exploited but it's taken advantage of So 0:06:40.880 --> 0:06:44.400 what is there anything actually nefarious going on here? So yeah, 0:06:44.440 --> 0:06:46.840 so I just started to say like half the story 0:06:46.839 --> 0:06:49.520 of what a heartbeat is. So normally et f s 0:06:49.520 --> 0:06:52.800 are creating and redeeming, and whenever anyone redeems, they can 0:06:52.880 --> 0:06:56.479 kind of because they're redeeming in stock they can use. 0:06:56.720 --> 0:06:59.480 They can hand over appreciated stock. They can look through 0:06:59.520 --> 0:07:03.520 their invent tory and find the most lowest basis stock, 0:07:03.600 --> 0:07:06.240 the stock they bought for cheapest and hand it over 0:07:06.320 --> 0:07:09.400 every time there's a redemption in just the natural creation 0:07:09.480 --> 0:07:12.400 redemption process in the et F that's the normal way. 0:07:12.440 --> 0:07:14.600 But what if you have a big stock leaving your 0:07:14.640 --> 0:07:17.720 index on a Friday and you don't happen to have 0:07:17.800 --> 0:07:20.119 a bunch of people you know are going to redeem 0:07:20.200 --> 0:07:24.120 that day. Who knows, maybe people want to create that day. Um, 0:07:24.160 --> 0:07:26.840 that's a problem because if you sell again, you're gonna 0:07:26.920 --> 0:07:29.800 create a taxable gain for your that your shareholders will 0:07:29.840 --> 0:07:32.120 have to pay. But what if you could somehow magically 0:07:32.240 --> 0:07:35.560 create more extra redemptions that happened just at the time 0:07:35.600 --> 0:07:38.040 you need them, so there's no tax bill. And that's 0:07:38.080 --> 0:07:42.720 what a heartbeat is. You call up a market participant UM, 0:07:43.080 --> 0:07:46.760 a bank or or a market maker, an authorized participant 0:07:46.840 --> 0:07:49.160 in the e t F LINGO, and you say, hey, listen, 0:07:49.600 --> 0:07:52.040 I've got this redemption I need to happen on Friday. 0:07:52.280 --> 0:07:55.520 Could you please create on Wednesday? Create this amount and 0:07:56.360 --> 0:07:59.440 the banker market maker will create a whole bunch of 0:07:59.480 --> 0:08:03.640 ETF and then a day or two later redeem out. 0:08:03.920 --> 0:08:07.560 But rather than redeem just the custom the standard basket 0:08:07.600 --> 0:08:09.800 of all the stocks in the e t F, they'll 0:08:09.800 --> 0:08:11.880 take the stuff that the et F needs to get 0:08:11.960 --> 0:08:13.920 rid of that day. And that's why the question about 0:08:13.960 --> 0:08:16.720 whether this is kind of nefarious or not really comes in. 0:08:17.000 --> 0:08:18.840 If this is part and parcel of kind of like 0:08:18.880 --> 0:08:21.360 how an et F operates day and day out, that's 0:08:21.440 --> 0:08:24.800 one thing. But then when you're synthetically creating a transaction 0:08:25.120 --> 0:08:29.120 for that purpose to get rid of those those specific stocks, 0:08:29.120 --> 0:08:31.720 how does the I R S? How does Treasury? How 0:08:31.760 --> 0:08:34.960 does Congress and the American public feel about that? Eric? 0:08:34.960 --> 0:08:36.960 When when you see that on a screen, what does 0:08:37.000 --> 0:08:39.480 it look like to you? Looks like a heart monitor, 0:08:39.960 --> 0:08:43.480 It looks you know, I call these operational flows or 0:08:43.520 --> 0:08:47.600 tax flows. UM. It's interesting because this idea of maneuvering 0:08:47.640 --> 0:08:50.640 around the I R S happens like everywhere, every industry 0:08:50.679 --> 0:08:53.840 does this. I think some of the initial reaction the 0:08:53.920 --> 0:08:59.600 pushback was basically that um, typically when something to farious 0:08:59.679 --> 0:09:03.200 going on, little guys getting screwed, and here the average 0:09:03.240 --> 0:09:07.040 investors benefiting from this practice. I think that if you're 0:09:07.080 --> 0:09:10.840 an investor in e t fs via anything, you're actually 0:09:10.960 --> 0:09:13.960 probably benefiting from this in the form of not actually 0:09:13.960 --> 0:09:17.440 having to pay those capital gains. Right, well, let's talk 0:09:17.480 --> 0:09:20.440 about dodge versus deferral. Can you just break down this 0:09:20.520 --> 0:09:24.359 isn't avoiding the tax, it's more just putting it off, right, Yeah, absolutely, 0:09:24.400 --> 0:09:28.040 So if an e t F doesn't distribute capital gains 0:09:28.080 --> 0:09:32.160 to its shareholders, that doesn't mean they'll never have to pay. 0:09:32.240 --> 0:09:35.960 It means that rather than paying every time a stock 0:09:36.080 --> 0:09:38.640 leaves the index every year they own the e t F, 0:09:38.920 --> 0:09:40.760 they get to sort of save up all those tax 0:09:40.800 --> 0:09:43.520 bills till the end. They get to wait until they 0:09:43.559 --> 0:09:46.679 actually sell the e t F and then pay them 0:09:46.720 --> 0:09:49.360 all at once. But there's so first of all, there's 0:09:49.840 --> 0:09:52.280 you're essentially getting a no interest loan from the U. S. 0:09:52.320 --> 0:09:56.920 Government that you control when when the loan is due, right, 0:09:57.000 --> 0:09:59.640 so that's like obviously a cost to the government. If 0:09:59.640 --> 0:10:01.040 I call the I R S and said I don't 0:10:01.080 --> 0:10:03.160 want to pay my taxes for ten years, they would 0:10:03.160 --> 0:10:05.640 throw me in jail. That's not okay, right, So that 0:10:05.880 --> 0:10:08.880 first of all, that it's it's it's deferral, but that 0:10:09.040 --> 0:10:11.360 deferral is a real thing. The second thing is there 0:10:11.400 --> 0:10:15.760 are cases that are where you don't pay. The first 0:10:15.840 --> 0:10:17.880 is if you if you leave the e t F 0:10:17.880 --> 0:10:20.160 in your state, your heirs don't have to pay that 0:10:20.200 --> 0:10:23.920 capital gain it disappears. The second one is that some 0:10:24.000 --> 0:10:26.280 of the gains that are generated by an e t 0:10:26.440 --> 0:10:29.320 F buying and selling stocks are short term gains that 0:10:29.400 --> 0:10:32.120 are that are paid at a higher rate um than 0:10:32.360 --> 0:10:35.760 long term capital gains. But by the magic of this process, 0:10:35.800 --> 0:10:39.080 you're transforming them into long term gains that are paid 0:10:39.080 --> 0:10:41.720 about half the tax rate. Now that's not a big 0:10:41.800 --> 0:10:44.640 number for most CTFs, most of their gains are long term, 0:10:44.679 --> 0:10:48.080 but it's not zero either. Obviously, the the investors you 0:10:48.240 --> 0:10:51.280 do benefit from this maneuver, if you want to call 0:10:51.320 --> 0:10:53.200 it that. But I think the other things kind of 0:10:53.200 --> 0:10:54.920 remember is that when we look at sort of the 0:10:54.960 --> 0:10:58.719 American population at large, the vast majority are not investors. 0:10:58.760 --> 0:11:02.400 Your investments are still managed by a relatively small proportion 0:11:02.440 --> 0:11:05.240 of the overall public. So if the treasury is effectively 0:11:05.280 --> 0:11:09.080 giving a loan to investors for this purpose to defer 0:11:09.200 --> 0:11:11.199 tax for a certain number of years, there are other 0:11:11.240 --> 0:11:13.880 things that treasury cannot do with that money. They can't 0:11:13.920 --> 0:11:16.800 invest in in your children's playground, for example. They can't 0:11:16.800 --> 0:11:19.360 necessarily give out food stamps to the poor. There is 0:11:19.400 --> 0:11:22.240 something that kind of like goes from actually having this 0:11:22.400 --> 0:11:24.400 this defer or there's something that this money could be 0:11:24.480 --> 0:11:27.079 put to which is not so. Yes, the small investors 0:11:27.120 --> 0:11:29.000 do benefit, but you've got to be an investor to 0:11:29.040 --> 0:11:31.360 be able to benefit. And how much money are we 0:11:31.440 --> 0:11:35.400 are we talking here? So in the by our calculations, 0:11:35.440 --> 0:11:39.400 in the most recent calendar year for e t f S, 0:11:39.840 --> 0:11:44.000 we found over two billion dollars of capital gains that 0:11:44.080 --> 0:11:49.559 were essentially uh not recognized through this process. So if 0:11:49.559 --> 0:11:51.480 you were to do the math on that, that's maybe 0:11:51.760 --> 0:11:56.520 twenty some billion dollars of taxes that essentially weren't paid 0:11:56.960 --> 0:12:00.440 that year and that will be paid instead some year 0:12:00.480 --> 0:12:02.640 in the future. And so in the next year there 0:12:02.640 --> 0:12:06.199 will be another loan by the government to these investors 0:12:06.240 --> 0:12:09.320 of twenties so twenty or so billion dollars. And there's 0:12:09.320 --> 0:12:12.359 a lot of ways in which the government um encourages 0:12:12.559 --> 0:12:17.760 savings and offers tax subsidies two savers like through four 0:12:17.800 --> 0:12:21.360 owen k's and I ra s and savings vehicles like that. 0:12:21.679 --> 0:12:23.640 But those were the product of some kind of policy 0:12:23.679 --> 0:12:27.120 discussion in Washington where Congress said, we want to encourage 0:12:27.160 --> 0:12:29.400 this kind of savings and not that kind of savings. 0:12:29.840 --> 0:12:32.240 This one is just kind of happened by accident. No one, 0:12:32.480 --> 0:12:34.600 no one even really kind of knew in Congress that 0:12:34.640 --> 0:12:36.920 they did it, and so we thought it was worth 0:12:36.960 --> 0:12:39.600 pointing out so you can have that policy discussion about 0:12:39.960 --> 0:12:42.440 is this the kind of subsidy we want to we 0:12:42.480 --> 0:12:45.880 want to impose UM just on et F holders, not 0:12:46.000 --> 0:12:49.160 mutual fund holders, not hedge fund owners, not people who 0:12:49.160 --> 0:12:52.760 in individual stocks, just E t s. And this idea 0:12:52.760 --> 0:12:58.240 of tax maneuvering we saw this year in January weren't 0:12:58.240 --> 0:13:00.920 heartbeat trades, but a ton of money came out of 0:13:00.960 --> 0:13:04.320 equity E t F s unnaturally, and in Q four 0:13:04.360 --> 0:13:06.280 a ton of money went into equity E t F 0:13:06.400 --> 0:13:09.400 s in the face of a downturn, unnatural that was 0:13:09.480 --> 0:13:13.600 tax loss harvesting, and an advisor would advertise they call 0:13:13.640 --> 0:13:17.480 it tax alpha. And one argument that was made was 0:13:17.520 --> 0:13:21.600 that the advisor is being fiduciary by helping their client 0:13:22.000 --> 0:13:24.720 steer around that. Could you make the argument the asset 0:13:24.760 --> 0:13:28.320 manager would not be would be violating their fiduciary duty 0:13:28.320 --> 0:13:30.800 by not taking advantage of this. I think that's a 0:13:30.840 --> 0:13:33.440 totally valid argument. I mean, I don't think it's at all. 0:13:34.440 --> 0:13:38.199 You can't really blame the UM the market participants here 0:13:38.240 --> 0:13:41.040 for doing what they believe and their lawyers are telling 0:13:41.040 --> 0:13:44.320 them as legal and that clearly benefits their investors. There's 0:13:44.360 --> 0:13:48.160 no question about that. At least they're taxable investors UM 0:13:48.200 --> 0:13:52.840 and so, uh, you can't really you know, cast moral 0:13:53.679 --> 0:13:56.679 you know, aspersions on folks who are trying to follow 0:13:56.800 --> 0:14:00.600 law and you know, maximize the tax of sency of 0:14:00.640 --> 0:14:03.360 their funds. But it's also worth kind of pointing out, 0:14:03.360 --> 0:14:06.000 what are the policies that were created? Did anyone ever 0:14:06.040 --> 0:14:09.520 intend this subsidy to applied to this one particular industry 0:14:09.520 --> 0:14:12.199 and not others? And you know, if we were to 0:14:12.280 --> 0:14:14.280 kind of take a look at the tax code, is 0:14:14.320 --> 0:14:16.920 that really like the way it's it's supposed to work. 0:14:16.960 --> 0:14:25.080 I think that's our point. I also want to point 0:14:25.080 --> 0:14:27.560 out that the term of heartbeat wasn't one that you 0:14:27.600 --> 0:14:32.040 guys coined. The first people to recognize that this was happening. Um, 0:14:32.200 --> 0:14:36.440 So who coined it? And what happened since she discovered so? 0:14:36.520 --> 0:14:40.160 Elizabeth Kashner at fact Set Research wrote about this in 0:14:40.200 --> 0:14:46.120 December UM and she it reminded her of the flows 0:14:46.120 --> 0:14:49.040 on the screen, reminded her of her of her dad's 0:14:49.040 --> 0:14:52.360 e KG monitor. That's why she called them heartbeats. UM. 0:14:52.400 --> 0:14:55.840 That research was was great and really gave us kind 0:14:55.840 --> 0:15:00.560 of the foundation of what we you know, pursued um UM. 0:15:00.680 --> 0:15:03.440 But you know, outside the et F industry, I don't 0:15:03.440 --> 0:15:06.400 think a lot of people, um had really heard about it, 0:15:06.480 --> 0:15:08.400 which was why we thought there was an opportunity to 0:15:08.400 --> 0:15:10.640 tell tell the story more people. Yeah. And these these 0:15:10.640 --> 0:15:12.960 trades also have a lot of different names within the industry, 0:15:13.000 --> 0:15:15.400 which may give you a sense of how people view them. 0:15:15.400 --> 0:15:19.320 You know, they're often called friendlies or kickers or tax trades. 0:15:19.600 --> 0:15:21.760 That the more kind of like politically correct term these 0:15:21.840 --> 0:15:24.640 days as custom in kind baskets or SIPs. It's like 0:15:24.640 --> 0:15:27.840 the lawyer, Yeah, the lawyers, the lawyers. Basically, the lawyers 0:15:27.880 --> 0:15:30.160 told them not to use all those other terms because 0:15:30.160 --> 0:15:33.360 they they kind of they're a little too truthy. The 0:15:33.400 --> 0:15:36.360 problem for the lawyers is that they want to pretend 0:15:36.400 --> 0:15:38.560 that these are kind of third you know, arm's length 0:15:38.600 --> 0:15:40.880 transactions with the banks doing them for their own reasons, 0:15:41.080 --> 0:15:44.720 but they're really not. And so a word like friendlies 0:15:45.200 --> 0:15:47.840 set off alarm bells. So now that they they instead 0:15:47.880 --> 0:15:50.600 they use this word custom in kind baskets that doesn't 0:15:50.600 --> 0:15:53.280 really mean anything and no one can remember, but it 0:15:53.760 --> 0:15:56.680 it um they think is safer ground legally. You know, 0:15:56.840 --> 0:15:58.640 I think if I was the I R S the 0:15:58.640 --> 0:16:01.280 government listening to this, you know. One of the things 0:16:01.320 --> 0:16:04.240 that really just upsets people about mutual funds and I 0:16:04.280 --> 0:16:06.520 get it is hey, I bought this mutual fund and 0:16:06.520 --> 0:16:08.600 I'm just sitting there like a good soldier, and I 0:16:08.640 --> 0:16:11.720 get this nasty tax bill because somebody else left. That 0:16:11.800 --> 0:16:14.000 really is not fair. The e t F sort of 0:16:14.000 --> 0:16:17.480 seems fair, not like like you're cheating, but fair. You 0:16:17.840 --> 0:16:21.080 pay a tax when you sell um. So if anything, 0:16:21.160 --> 0:16:24.200 I think the mutual funds should be fixed or we're 0:16:24.280 --> 0:16:26.560 dealt with to make it like the e t F 0:16:26.760 --> 0:16:28.800 level playing field. That that's just my opinion on it, 0:16:28.840 --> 0:16:33.160 because that idea of just sitting there and getting a 0:16:33.200 --> 0:16:35.360 tax bill because you invested in a fund, just I 0:16:35.400 --> 0:16:38.280 don't know, something seems kind of wrong about that, especially 0:16:38.320 --> 0:16:41.680 because you're basically paying taxes because somebody else did something. 0:16:42.800 --> 0:16:48.640 So judge truth, judge everything on this one. So I 0:16:48.680 --> 0:16:50.120 feel like I kind of have a pretty good sense 0:16:50.120 --> 0:16:52.360 of what people in the industry have said, and we'll 0:16:52.400 --> 0:16:53.680 get to that in a second. But what have you 0:16:53.720 --> 0:16:57.400 heard from policy makers since the article was published? So far? 0:16:57.480 --> 0:16:59.480 From my side and Za can probably speak to this better, 0:16:59.560 --> 0:17:02.320 it's been to be relatively quiet in terms of the 0:17:02.360 --> 0:17:05.560 wider reaction. You know, obviously the industry has been relatively 0:17:05.600 --> 0:17:07.880 defensive in some in some respects, and I think that's 0:17:08.040 --> 0:17:10.880 entirely understandable. You know, this is obviously something that has 0:17:11.200 --> 0:17:13.400 helped the E T F industry grow into this three 0:17:13.400 --> 0:17:16.040 point eight trillion, you know, sort of size beasts that 0:17:16.080 --> 0:17:18.520 we see now in the US. So it's obviously something 0:17:18.640 --> 0:17:21.239 that people feel quite strongly about and and see as 0:17:21.280 --> 0:17:23.760 being very investive friendly in terms of kind of like 0:17:23.800 --> 0:17:26.280 the wider reaction, though, you know, from the general public, 0:17:26.320 --> 0:17:27.959 you know, I have had quite a number of emails 0:17:28.119 --> 0:17:30.080 and comments sort of saying that they're glad that we're 0:17:30.080 --> 0:17:32.600 shedding a light on this and asking these questions. Some 0:17:32.680 --> 0:17:34.879 of those maybe investors that have benefited from it, some 0:17:34.960 --> 0:17:36.560 of them are not. But I think you know that 0:17:36.720 --> 0:17:38.960 the point of all these types of stories is really 0:17:38.960 --> 0:17:41.199 to to provoke a conversation and get people kind of 0:17:41.200 --> 0:17:44.320 talking about it. Two things I thought fascinating about this 0:17:44.680 --> 0:17:46.320 if you go deep to the end of the story, 0:17:46.400 --> 0:17:48.480 two things jumped out at me that we're just fascinating. 0:17:49.000 --> 0:17:52.120 One is that the SEC is sort of putting into 0:17:52.160 --> 0:17:55.520 their new rule to make this easier for smaller players 0:17:55.600 --> 0:17:59.040 to do. In a sense, they're helping helping the industry out. 0:17:59.040 --> 0:18:01.400 There's the SEC, and then the I c I, which 0:18:01.480 --> 0:18:05.000 is the biggest mutual fund lobbying organization, which, if anybody 0:18:05.000 --> 0:18:07.960 would might benefit from this loophole getting closed its mutual 0:18:08.000 --> 0:18:10.280 funds right because E T f are so much more 0:18:10.280 --> 0:18:12.239 tax efficient, They've driven a lot of investors away from 0:18:12.280 --> 0:18:14.480 mutual funds. It's one of the reasons. And the I 0:18:14.640 --> 0:18:18.840 c I is basically saying this, you shouldn't close this loophole. 0:18:18.880 --> 0:18:22.840 It would it would force our frequent sizeable and unanticipated 0:18:22.880 --> 0:18:27.800 tax bills. I thought those were interesting defenses from gigantic 0:18:27.840 --> 0:18:31.359 bodies that you would almost think have a vested interests 0:18:31.359 --> 0:18:33.399 on the other side, to close the loophole, so I 0:18:33.400 --> 0:18:35.760 can take the Securities and Exchange Commission first. Mean, so 0:18:35.840 --> 0:18:38.359 the rule you're referring to is what we call kind 0:18:38.359 --> 0:18:40.840 of colloquially the e t F rule, and basically that's 0:18:40.840 --> 0:18:42.880 been in the works for the last decade or so, 0:18:43.000 --> 0:18:45.679 and the idea is to effectively kind of streamline the 0:18:45.720 --> 0:18:47.679 process by which e t f s are able to 0:18:47.840 --> 0:18:50.439 come to market. That's its overall task, but one of 0:18:50.480 --> 0:18:54.200 the proposals within that is designed to make it easier, 0:18:54.320 --> 0:18:57.280 particularly within fixed income e t f s, to create 0:18:57.320 --> 0:18:59.439 more liquidity within those e t f s and to 0:18:59.480 --> 0:19:02.280 allow peop to create and redeem those more easily. As 0:19:02.359 --> 0:19:05.800 part of that, the SEC plans to allow custom baskets, 0:19:05.920 --> 0:19:08.199 which is something that's very much been a part of 0:19:08.240 --> 0:19:10.160 kind of this heartbeat trade. You need to be able 0:19:10.200 --> 0:19:12.840 to give out something that's not a pro rat slice 0:19:12.840 --> 0:19:14.560 of the fund in order to be able to give 0:19:14.600 --> 0:19:17.879 out securities that there are are going to be taxed 0:19:17.920 --> 0:19:20.800 at that the highest level. So this is something that 0:19:20.840 --> 0:19:22.960 we will have that implication, but I don't think it's 0:19:23.000 --> 0:19:26.040 necessarily the intent for having read that the rule as 0:19:26.080 --> 0:19:27.840 it's been put out there. But I think the SEC 0:19:28.000 --> 0:19:31.919 is definitely aware of heartbeat trades, and to our knowledge, 0:19:31.960 --> 0:19:34.560 they haven't come out and slapped any risks about them 0:19:34.640 --> 0:19:37.480 or or commented praising them either. Yeah. And as for 0:19:37.520 --> 0:19:40.080 the i C, I mean, they do represent et F companies, 0:19:40.400 --> 0:19:43.720 so if you talk to mutual fund managers, some of 0:19:43.760 --> 0:19:47.560 them are are livid about this, this heartbeat situation. And 0:19:47.720 --> 0:19:49.359 I think the i C s comment there was not 0:19:49.920 --> 0:19:54.320 defending heartbeats, but defending the underlying tax benefit that does 0:19:54.359 --> 0:19:57.800 apply to mutual funds in a much less attractive way 0:19:58.160 --> 0:20:01.119 and saying that you know, the tax and benefit that 0:20:01.200 --> 0:20:03.119 the e t F E t F to use every 0:20:03.200 --> 0:20:06.520 day shouldn't be repealed. So, Eric, what's been the reaction 0:20:06.560 --> 0:20:11.199 within the industry, I think mostly defensiveness. I think you 0:20:11.240 --> 0:20:14.880 know um Rachel's point earlier I think is key here. 0:20:15.440 --> 0:20:18.200 If you're looking at society as a whole, there's a 0:20:18.280 --> 0:20:20.840 huge argument this is why the FEDS policies, you could argue, 0:20:20.840 --> 0:20:24.320 are creating income inequality, because they're just helping asset prices 0:20:24.359 --> 0:20:27.479 go up, and if you don't own any assets like stocks, bonds, 0:20:27.520 --> 0:20:30.840 that you're kind of missing out on this whole bonanza. 0:20:31.359 --> 0:20:33.040 And e t f s are part of that. And 0:20:33.080 --> 0:20:36.040 anything that helps people who own stocks, it helps. But 0:20:36.080 --> 0:20:38.679 if you take just the owners of assets and you 0:20:38.840 --> 0:20:41.720 bubble those off and put the rest of society aside, 0:20:42.320 --> 0:20:44.119 I think most of them are like, hey, this is 0:20:44.160 --> 0:20:47.920 the retail investors benefiting here. Um, this is nothing new. 0:20:48.000 --> 0:20:50.880