Speaker 1: So since then you become something of the foremost. I
Speaker 1: don't know about that, but I do. I do work
Speaker 1: a lot in the e TF space. Of all the
Speaker 1: e t F s out there, right, there's two thousand,
Speaker 1: one hundred, just give us a ballpark. How many do
Speaker 1: you think you helped sort of birth through the legal
Speaker 1: process to make it to market a number and then
Speaker 1: an asset waiting. I had no idea. Um. For instance,
Speaker 1: I helped the first eye shares, and there were forty
Speaker 1: of them when we first did the eye shares. Okay,
Speaker 1: so that's but I didn't But I didn't represise to fifty.
Speaker 1: We're already about the whole industry. What else miccap, Spider, diamonds, diamonds, gold,
Speaker 1: all the all the pressures. Yeah, g l D pre shares. Um,
Speaker 1: we're about already. Can we hit fifty? Let me think
Speaker 1: I'm sure I'm looking market vectors, any swab, no Sandguard, Vanguard,
Speaker 1: Oh jesus, Okay, now we're a This is trillions presents
Speaker 1: the E t F story. I'm Joe Webber, editor of
Speaker 1: Bloomberg Business Week in the early two thousand's, after webs
Speaker 1: becomes part of I Shares and it really begins to
Speaker 1: take off. Innovation in the E t F space is inevitable,
Speaker 1: and as you just heard from Kathleen Mariarty, she ushered
Speaker 1: in many of these innovations in the form of new
Speaker 1: ETFs which are still relevant today. Dave Nodded, longtime managing
Speaker 1: director at et F dot Com, says that in terms
Speaker 1: of et F history, spy definite innovation webbs really more
Speaker 1: of a mainstreaming of an existing innovation LQT. I think
Speaker 1: a genuine innovation which prize opened the door. Bruce Levin
Speaker 1: is a senior strategy advisor to a Story Advisors, but
Speaker 1: he was running product development at I Shares when it
Speaker 1: first launched fixed income ETFs, including it is considered to
Speaker 1: sort of be the spy of fixed income l q D,
Speaker 1: the first corporate bond ETF. The bond market, of course,
Speaker 1: is a whole another thing, because it's an intransparent market
Speaker 1: where you don't have that ability just you know, put
Speaker 1: in a picker and get a quote on a bond.
Speaker 1: He said, this also took a while to get the
Speaker 1: SEC on board with the product, but once we got
Speaker 1: the SEC comfortable that not only was it going to work,
Speaker 1: but we were actually going to provide a benefit to
Speaker 1: the market by creating of security that was a reference
Speaker 1: point for where these these things to trade. I think
Speaker 1: they liked that idea, and I think it's been very
Speaker 1: successful as a result, Levine said, like the sec investors
Speaker 1: were slow to warm initially. He says it was only
Speaker 1: the most sophisticated advisors who liked these fixed income products.
Speaker 1: Like everything with ETFs, once people understood what they were
Speaker 1: getting and they toe dipped, they he went back. You know,
Speaker 1: once you've thought and got comfortable with something like an LQD,
Speaker 1: you're not going to try to assemble individual bonds on
Speaker 1: fifty companies for a small amount of money, which is
Speaker 1: never gonna do that, not says l q D was
Speaker 1: one of the most significant launches in et F history.
Speaker 1: It's not like there was a huge leap of faith
Speaker 1: required from a regulatory standpoint to launch l q D.
Speaker 1: What was required was that same leap of faith from
Speaker 1: the dealer community to be the other side of the trade.
Speaker 1: There was no question that portfolio managers and institutions and
Speaker 1: advisers would want to buy corporate bonds in a more
Speaker 1: convenient package, because buying corporate bonds was a pain in
Speaker 1: the ass. So yeah, by all means they were a
Speaker 1: ton of demand for it. But getting the dealer community
Speaker 1: to show up and do creation redemption, the ability to
Speaker 1: do um cash and lou for part of the baskets
Speaker 1: because some stuff might not trade well enough, All of
Speaker 1: that stuff was really just a feat on the street,
Speaker 1: you know, ground effort to make that happen, a little
Speaker 1: bit like trying to get somebody elected who may not
Speaker 1: be that well known. You had to go out and
Speaker 1: knock on doors and get these dealers to understand that, yeah,
Speaker 1: creation redemption was going to work in the bond market. Uh.
Speaker 1: And that I think was what really opened up people's
Speaker 1: eyes to what E T s could become. And another
Speaker 1: significant launch in that early two thousand's was Vanguard's first
Speaker 1: et F, the Vanguard Index Participation Receipts or VIPERS. I
Speaker 1: think it was more psychologically significant and maybe almost spiritually
Speaker 1: significant than it was from any markets perspective. Viper poisonous snake. This,
Speaker 1: as you'll recall, is Vanguard founder Jack Bogel. In some ways,
Speaker 1: Bogel played a significant role in the ETS creation by
Speaker 1: giving Nate Most feedback when Most was first dreaming about
Speaker 1: what would become spy. Spy was also priced to compete
Speaker 1: with Vanguard expense ratio from the very beginning, but no that.
Speaker 1: Bogel has remained an outspoken critic of ETFs ever since.
Speaker 1: Well in e t F is just another form of
Speaker 1: index fun, a sort of bastardized form for the one
Speaker 1: of a better word. Bogel says it's hard to pinpoint
Speaker 1: his reaction to VI first it was eighteen years ago,
Speaker 1: but he says he could understand why it happened. So
Speaker 1: there we are had to They looked at it, and
Speaker 1: many looked at as a way to get into the
Speaker 1: brokerage business, which I thought was not catastrophic. But you know,
Speaker 1: our our original premise was build a better mousetrap in
Speaker 1: the world, will be a path your door, And all
Speaker 1: of a sudden we were out there hunting money's other work. Uh.
Speaker 1: And so it didn't warm my heart. I don't refe
Speaker 1: recall feeling bothered about him, and I even, to be
Speaker 1: quite blunt about it, said, you know, I'd probably have
Speaker 1: done it too. I think the real kicker for the
Speaker 1: Vipers coming online was it signaled to individual investors and
Speaker 1: to a growing class of Vanguard focused advisors that e
Speaker 1: t F s were okay, and I think that that
Speaker 1: sort of anointment by somebody as revered as Vanguard really
Speaker 1: opened the door for a huge rush into these products
Speaker 1: by core asset allocation advisors, which is really what drove
Speaker 1: all the growth in the two thousand's. Soon after Vipers
Speaker 1: comes to market, Power Shares launches in two thousand three,
Speaker 1: and the power Shares brand is where we first get
Speaker 1: the concept of smart beta ETFs in a big way.
Speaker 1: Bruce Bond, who had previously been the head of marketing
Speaker 1: at Muvine, was leading the launch. Bond says he'd seen
Speaker 1: all kinds of product packaging in the e t F
Speaker 1: space and he knew what the problems were for all
Speaker 1: the different products, and that's when I started to say, Okay.
Speaker 1: At the time, there were no active e t s
Speaker 1: and I looked at it and I said, well, what
Speaker 1: is an index? An index is a group of stocks
Speaker 1: that track something, right, it doesn't matter what it is,
Speaker 1: so um now it has there's certain requirements and index
Speaker 1: has to have in order to be replicated by an
Speaker 1: e t F. But at the time they were all benchmarks,
Speaker 1: and you know, just static cap weighted or dollar rated
Speaker 1: or what you know. However, their waiting scheme was but
Speaker 1: we looked at it and said, well, why wouldn't we
Speaker 1: create an index of stocks that are intelligently selected using
Speaker 1: a quantitative methodology, and we will build an index out
Speaker 1: of a stocks a rank stocks rather than just all stocks,
Speaker 1: and we'll have it waited like the market, so it
Speaker 1: will look like the market from awaiting exposure standpoint, but
Speaker 1: we'll do that with quality securities rather than just all securities.
Speaker 1: And that's when the intellidux was born. And that's when
Speaker 1: really intelligent indexing or smart beta or whatever you want
Speaker 1: to call it. That was the birth of that whole movement.
Speaker 1: He says people really hadn't thought creatively about what an
Speaker 1: index actually was. And he says it was hard getting
Speaker 1: power Shares off the ground. So we had to convince
Speaker 1: something an intelligent index, quantitatively derived was better, you know,
Speaker 1: like an index with value. It was better than just
Speaker 1: a benchmark that floated along out there. And then we
Speaker 1: had to also convince them, you know, of who power
Speaker 1: shares was, and what an e t F is, and
Speaker 1: and y an e t F the structure is. We're
Speaker 1: going through all this to get the value through it
Speaker 1: from a tax standpoint and a cost an efficiency standpoint,
Speaker 1: not exaust The power shares products are so important because
Speaker 1: we first started seeing evangelism for smart beta et s
Speaker 1: and the form of ROB are not at a sticker
Speaker 1: pr F. I think PRF is notable because it brings
Speaker 1: with it ROB or not even more so than whatever
Speaker 1: it's doing in the method adology, and ROB are not
Speaker 1: was and remains such an advocate of a smart data methodology.
Speaker 1: All right there, RAFFI waiting scheme in there that we've
Speaker 1: for the first time sort of had our are evangelists.
Speaker 1: The person you could put on radio or person you
Speaker 1: can put on television would sit there and talk about
Speaker 1: smart beta, whether they were using that phrase or not.
Speaker 1: Are not says. The term smart beta has been commondeered
Speaker 1: by the industry to encompass practically anything, so smart beta
Speaker 1: now spans a whole array of strategies, some of which
Speaker 1: are smart, some of which are not at all smart,
Speaker 1: some of which break the link with price and have
Speaker 1: the structural rebalancing alpha of the original smart beta concepts,
Speaker 1: and some of them chase fads, chase bubbles, and are
Speaker 1: the antithesis of smart. But smart Beta has grown hand
Speaker 1: in glove with the t F community because the E
Speaker 1: t F community, well, fourteen years ago it was boring,
Speaker 1: had a bunch of capuited indices. The only exciting thing
Speaker 1: in that whole domain was sector funds. All right, well
Speaker 1: that's not very interesting. And so once fundamental index was
Speaker 1: adapted to e t S, the doors swung wide open
Speaker 1: for a whole array of strategies. And I applaud the
Speaker 1: product proliferation that's happened there. Why shouldn't investors have a
Speaker 1: wide array of choices. So, after we have bonds and
Speaker 1: smart Beta plus some major growth in the E t
Speaker 1: F space, g l D is the next logical innovation,
Speaker 1: Although the intellectual property to make it happen required yet
Speaker 1: another leap of faith and yet another bunch of structural
Speaker 1: shenanigans not exist. The people behind structuring g LD gold
Speaker 1: really did have to re invent the wheel. The way
Speaker 1: g l D works from an investor's perspective is, hey,
Speaker 1: it's just like everything else. You just buy it, you
Speaker 1: get exposure to gold under the hood. It's doing all
Speaker 1: sorts of stuff no other structure has ever had to do.
Speaker 1: All it had to create a whole way of accounting
Speaker 1: based on ounces. It was literally a whole new accounting
Speaker 1: methodology that you could never get away within a traditional
Speaker 1: Fortiact fund. They had to come up with a new
Speaker 1: trust structure in order to make that happen. They had
Speaker 1: a whole another gap of creation redemption problems to solve.
Speaker 1: And much like how l q D gave people access
Speaker 1: to a very difficult to buy security corporate bonds, not
Speaker 1: says g l D really opened up gold as an
Speaker 1: asset class. Prior to that, the only people who really
Speaker 1: thought about gold as a portfolio asset were either sort
Speaker 1: of hedge funds that could afford to be, you know,
Speaker 1: buying certificated golden large amounts where they could be afford
Speaker 1: to be buying directly in the London volume market, um
Speaker 1: central banks, uh, you know, maybe major corporate treasuries that
Speaker 1: were trying to shelter money. But but it wasn't something
Speaker 1: that the average investor thought of it as a portfolio acid.
Speaker 1: If anything, you thought of it as sort of a
Speaker 1: rainy day collectible that you literally stuck in a safe
Speaker 1: in the basement. It got to a billion dollars in
Speaker 1: three days. That's a record. As you know it's the
Speaker 1: I called the Joe DiMaggio hitting still the standing record
Speaker 1: easily is it? You know what number two is? Can
Speaker 1: you guess? Yeah? That's true? Nerd nerds him right there.
Speaker 1: Hardly anybody knows that I thought MJ might break it.
Speaker 1: But the performance it was on Pace D and D
Speaker 1: was like a week or two, two and a half months,
Speaker 1: was it? Really? That's that's why it's the hitting streak.
Speaker 1: Bomb Tool says that gold really helped demonstrate the vehicle
Speaker 1: use of the E t F. E t F s
Speaker 1: are rappers, right, cases into which you put something. The
Speaker 1: case is agnostic. What became wonderful about the case is
Speaker 1: that we could put anything into it. It could hold
Speaker 1: gold because you would deposit gold into it and you'd
Speaker 1: have the shares. It would be a proxy for gold,
Speaker 1: and then you became silver. And then we did currencies,
Speaker 1: and we did all kinds of things. And part of it,
Speaker 1: the reason for it is by doing all of this,
Speaker 1: at the end of the game, if a person had
Speaker 1: twenty dollars, they could have a real assid allocation model
Speaker 1: as opposed to exposure to a couple of stocks. And
Speaker 1: since the realization that these vehicles are so effective in
Speaker 1: many spaces. Each have grown immensely over the past decade.
Speaker 1: To give you a sense, they were at six and
Speaker 1: two thousand eight and since then they've grown sixfold to
Speaker 1: three point six trillion. This growth can provide a lot
Speaker 1: of opportunity for investors, but it can also feel like
Speaker 1: a lot are not. Likens it to being overwhelmed with
Speaker 1: choices at the grocery store, but if you see too
Speaker 1: much variety, your eyes started to start to glaze over
Speaker 1: and you wonder what the heck am I going to buy?
Speaker 1: We're in sort of that situation in in ets today.
Speaker 1: There are hundreds of smart bait e t s and
Speaker 1: a lot of them aren't smart. A lot of them
Speaker 1: are really pretty dumb ideas. We're looking at a world
Speaker 1: in which change happens gradually. People don't en mass pick
Speaker 1: up and move from one idea to another. Most of
Speaker 1: the growth in a U M and mutual funds has
Speaker 1: actually been on the e T S side, but most
Speaker 1: of the assets are still on the mutual fund side.
Speaker 1: These things change slowly, and just as the dinosaurs in
Speaker 1: Jurassic Park were big and powerful, they eventually got wiped out.
Speaker 1: The best new ideas will gain tractions slowly but surely,
Speaker 1: and the worst of the old ideas will lose ground
Speaker 1: slowly bit surely, but they'll still be powerful participants in
Speaker 1: the market in the interim, and that interim will last
Speaker 1: many years to come. I don't expect this to be
Speaker 1: a sudden see change, but I do do expect the
Speaker 1: evolution of recent years to continue. E t f s
Speaker 1: are a powerful tool and an investors stool kit. So
Speaker 1: where are et f s headed. Dave Nodding thinks the
Speaker 1: natural evolution is towards traditional active management, like how companies
Speaker 1: such as Fidelity or t rowe Price have skilled research
Speaker 1: teams that pick et f for other people. I think
Speaker 1: that's almost inevitable now. Whether those will be successful products
Speaker 1: or not, I don't know. I give kudos to the
Speaker 1: folks like David's advisors who really just come out and said,
Speaker 1: you know what, traditional active we pick stocks better than
Speaker 1: you do. Give us your money, and I admire the
Speaker 1: huts of that, whether they end up being right or wrong.
Speaker 1: I think what we're going to see is more um,
Speaker 1: whether we call them AI based funds, whether we call
Speaker 1: them smart beta funds. You know, we're seeing more and
Speaker 1: more of those strategies get launched and get some traction
Speaker 1: on the AI e Q launched pretty recently, got decent
Speaker 1: assets pretty much out of the gate couple a million bucks.
Speaker 1: So there is an appetite for these smarter smart beta products.
Speaker 1: I think will eventually abandon this moniker smart beta. I
Speaker 1: don't know anybody that actually likes likes that phrase. So
Speaker 1: we're going to just start calling these things quant active
Speaker 1: or quant funds, which is frankly what they've been all along.
Speaker 1: There are a lot of projections out there, not only
Speaker 1: about how ect we used like not I just explain,
Speaker 1: but also projections about how big these things can get.
Speaker 1: We talked about projections. P w C is like ten
Speaker 1: trillion in five years, State streets twenty five trillion. Yeah,
Speaker 1: that's that's even more aggressive than mine. I don't use
Speaker 1: the term aggressive, I use it less sober. And then
Speaker 1: and then we've for at thirty and thirty, which is
Speaker 1: thirty trillion. That's global. Those are global. Let's let's go
Speaker 1: with the global number we got. I forget what it
Speaker 1: is now, five and a half or six trillion. Where's
Speaker 1: this headed? Like, how far do you think the e
Speaker 1: t F can go? Where it doesn't again sort of
Speaker 1: eat up too much. Well, too much is a relative thing.
Speaker 1: I mean, you know in the US right now, ETF
Speaker 1: zone about what six percent of market cap, right, So
Speaker 1: could you double that and still not substantially impact market structure? Yeah?
Speaker 1: Could you quadruple that? Yeah? Right, So the idea that
Speaker 1: you can go from five trillion to twenty trillion doesn't
Speaker 1: scare me in the least, especially when we're talking about
Speaker 1: some of those assets going into enormously large markets like
Speaker 1: sovereign bonds and commodities and currencies and gold, right and
Speaker 1: not everything is a small cap equity fund, right, Not
Speaker 1: everything is emerging market local currency debt. So these assets
Speaker 1: are going to go into very large pools. And we're
Speaker 1: also in a market where issuance is growing faster than
Speaker 1: people talk about, Like and you just think about the
Speaker 1: corporate bondspace where everybody worries about the ETF is getting
Speaker 1: too big. Issuance is doubled in the last nine years.
Speaker 1: They're total outstanding debt, right, So you know, the e
Speaker 1: t F portion of that hasn't grown by percentage basis
Speaker 1: at all. It's just the fact that that there's just
Speaker 1: way more corporate debt out there, and so assuming that
Speaker 1: we don't have some radical global economic downturn that crushes
Speaker 1: asset values worldwide, twenty trillion seems like a completely reasonable number,
Speaker 1: you know, by we can't know if that growth will happen.
Speaker 1: But as my colleague Eric Baltunas points out, Nate most
Speaker 1: would most definitely be surprised if he were still alive.
Speaker 1: I don't think they think there would be three trillion.
Speaker 1: I don't think they think they be you know, six
Speaker 1: trillion worldwide. I don't think they'd think they're being et
Speaker 1: F in Iceland. I don't think they would think there'd
Speaker 1: be a t S tracking the things they do. I
Speaker 1: think some of the things et S track would actually
Speaker 1: worry them, you know, like Vick's futures. So you know, look,
Speaker 1: this industry has just exploded, and just like any evolutionary line,
Speaker 1: those lines run fast and they go into different places
Speaker 1: and it's interesting. You know, see, if we don't get Bloom,
Speaker 1: I can sort of just say what he told me.
Speaker 1: But you know what his his really great quote was
Speaker 1: is we're we're trying to make a great product, but
Speaker 1: it turned into in an entire industry, or more simply,
Speaker 1: can you imagine a world without the E t F
Speaker 1: any longer. No, probably not, I don't never. Thanks for
Speaker 1: listening to the et F Story until next time. You
Speaker 1: can find us on the Bloomberg Terminal, Bloomberg dot com,
Speaker 1: Apple Podcast, Spotify, and wherever else you like to listen.
Speaker 1: The et F Story is produced by Jordan's Bell, with
Speaker 1: some production help by Magnus Hendrickson. Francesca Levy is the
Speaker 1: head of Bloomberg Podcast. To say, the pilot sad that
Speaker 1: the triple to shake the BA