Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges and philosophies and security selection. I'm David Cohne,
Speaker 1: I lead Mutual fund and active Research at Bloomberg Intelligence.
Speaker 1: Today my coast is Athonosios. Sara Fagus, ETF, analyst at
Speaker 1: Bloomberg Intelligence. Ethan thank you for being my coast today.
Speaker 2: Hey, yeah, thanks for having me. Happy New Year. If
Speaker 2: we're still allowed to say that, I don't know, I
Speaker 2: don't know, we.
Speaker 3: Have to stop.
Speaker 1: I think we're okay. So since it's the start of
Speaker 1: the new year, I thought we could discuss active ETFs,
Speaker 1: so let's bring our guests on. Todd Rosenbooth is head
Speaker 1: of research at tmx Vetify and is obviously someone who
Speaker 1: is no stranger to ETFs. Todd, thank you for joining
Speaker 1: us today.
Speaker 3: It's a pleasure to be here, and yeah, I'll stay.
Speaker 3: Happy New Year to you both of you.
Speaker 1: So, over the past few years, we've seen active ETFs
Speaker 1: go from emerging to mainstream. From your advantage point, where
Speaker 1: are we in the life cycle right now?
Speaker 3: I think it's still very early days. I believe year
Speaker 3: end data shows that active ETFs are roughly eleven twelve
Speaker 3: percent of total ETF assets. Now that's significantly higher than
Speaker 3: it was three five years ago. But I still think
Speaker 3: there's a lot of room for growth. I think there's
Speaker 3: going to be growth. We'll talk about more as these
Speaker 3: larger asset managers have brought their best and their brightest
Speaker 3: into the ETF marketplace. As we've seen active ETFs evolve
Speaker 3: into and she demand more for the security selection, the
Speaker 3: discretionary approach to building portfolios from a stock or bond standpoint.
Speaker 3: So I still think this is early days. I think
Speaker 3: we're going to be in the next five years we'll
Speaker 3: see that percentage increase into the higher teens and then
Speaker 3: perhaps more stabilize over time.
Speaker 1: Well what surprised you most about active ETFs last year?
Speaker 3: Well, I'm just really excited about the success we saw
Speaker 3: from the firms that I think about with active ETFs.
Speaker 3: So we saw Capital Group cross one hundred billion dollars
Speaker 3: in active ETFs. In fact, that's the only type of
Speaker 3: ETFs that they offer, and they entered the marketplace just
Speaker 3: over three years ago at the time you know, or
Speaker 3: roughly at the time that they crossed one hundred billion dollars.
Speaker 3: They're coming up on their four year anniversary. Firms like
Speaker 3: Tier Price saw its asset base nearly double in overall
Speaker 3: from a flow standpoint because the firm got greater commitment
Speaker 3: and greater focus on active ETFs. And there's a whole
Speaker 3: bunch of other firms. So the fact that we saw
Speaker 3: what I and perhaps many other people think of as
Speaker 3: active ETFs as stock and bond picking seed demand, that
Speaker 3: really excited me.
Speaker 1: Okay, you know, active management is really my specialty, and
Speaker 1: so I really have to ask, do you think the
Speaker 1: flows last year were driven more by market conditions or
Speaker 1: is it kind of, you know, a renewed confidence in
Speaker 1: active management.
Speaker 3: So I think the flows were close to five hundred
Speaker 3: billion dollars that went into active ETFs. I think the
Speaker 3: matters how we classify something into an active ETF and
Speaker 3: what is and what isn't. So that's why I'm using
Speaker 3: close to because I've seen data sources that where it's
Speaker 3: above that number and below that number. I think this
Speaker 3: is people having greater confidence in active ETFs. And so
Speaker 3: I think of this as more of a strategic opportunity
Speaker 3: as opposed to tactical moves. The market wasn't that volatile
Speaker 3: which would make you want to turn to active management.
Speaker 3: In general. It went up, and people when the market
Speaker 3: goes up, and it's okay to invest in an index
Speaker 3: based approach. If you're choosing active, then you're choosing it
Speaker 3: for confidence. But I guess I'll hedge my own bet
Speaker 3: a little bit. The fact that we saw growing demand
Speaker 3: and even stronger demand for active fixed income ETFs. We
Speaker 3: did have a more challenging fixed income environment. We saw
Speaker 3: the FED renew its cutting of interest rates in the
Speaker 3: fourth quarter of twenty twenty five, and people are going
Speaker 3: to turn to active managers when they're unsure about what's
Speaker 3: going to happen in the bond market. We've got the
Speaker 3: Trump administration talking about replacing the FED share and it's
Speaker 3: not clear that it's going to be. If you don't
Speaker 3: know what's the next move from the FED is going
Speaker 3: to be in twenty twenty six, are heading into twenty
Speaker 3: twenty six working with a Rick Reader of black Rock,
Speaker 3: working with the team at Double Line that are experts
Speaker 3: within the active fixed income space, I think makes a
Speaker 3: lot of sense. So I guess I'll hedge my bet
Speaker 3: in terms of where it was more tactical perhaps from
Speaker 3: a fixed income standpoint, but what I'm seeing in the
Speaker 3: equity space gives me confidence that this is more strategic.
Speaker 1: No, that makes sense, and you know our et error
Speaker 1: I should say active ETFs. Are we still in land
Speaker 1: grab mode or we kind of starting to enter consolidation phase.
Speaker 3: So I think a lot of what we're seeing is
Speaker 3: that people are moving. So people have been moving from
Speaker 3: active mutual funds into index based ETFs. That's a trend
Speaker 3: that's been going on for years. I think some of
Speaker 3: what's happening is people are moving from active mutual funds
Speaker 3: into active ETFs, and this from the same firms, And
Speaker 3: it's not necessarily a clear, uh one for one. I
Speaker 3: think I've seen your research out there that shows that
Speaker 3: a firm that offers both active ETFs and active mutual
Speaker 3: funds that they're bleeding assets on the mutual fund side
Speaker 3: and they're growing assets. If that's the right way of
Speaker 3: using that analogy on the ETF space, I don't know
Speaker 3: that it's a clear one for one that's happening. But
Speaker 3: so that's why I think this is still an area
Speaker 3: of growth. What I do wonder about and if we
Speaker 3: might be more moving into it. To me, what is more.
Speaker 3: I talked about traditional active and discretionary active or discretionary
Speaker 3: fixed income. The active ETF universe, and you guys know
Speaker 3: it quite well includes things that are not just stock
Speaker 3: and bond oriented. They're options based, and the active management
Speaker 3: is more on the options world. And so whether that's
Speaker 3: single stock related to ETFs, I can't believe we'd have
Speaker 3: to say single stock ETFs with a straight face or
Speaker 3: defined outcome oriented ETFs. I think that we're going to
Speaker 3: see more. There's so much competition in that space, and
Speaker 3: it's less about the brand perhaps, or I don't know
Speaker 3: that the brand has the same value the way that
Speaker 3: it does. People are familiar with Tier Price or Capital
Speaker 3: Group or Black Rock or others as active managers, and
Speaker 3: they have confident in it. I don't know that that's
Speaker 3: the same thing in a single stock leveraged ETF or
Speaker 3: even perhaps defined outcome ETF. So I do think we're
Speaker 3: going to see some market share gains and losses happening
Speaker 3: in that space. I think we might have seen it
Speaker 3: a little bit this past year, but I think it's
Speaker 3: going to certainly a car as we move the next
Speaker 3: year forward. But what do you think. Do you think
Speaker 3: we're still early days?
Speaker 1: Yeah, I think, you know, there's still a lot of
Speaker 1: managers on the mutual fund side that haven't moved over
Speaker 1: to the ETF side, and so I think it's just
Speaker 1: gonna be interesting to kind of see what's gonna happen,
Speaker 1: you know now with the share class. And I know
Speaker 1: we'll discuss that a little bit later, but it's something
Speaker 1: to watch. And I actually do have a follow up,
Speaker 1: you know, when you mentioned some of the traditional stock
Speaker 1: picking or security selection, do you think brand is really
Speaker 1: going to play a big role and where the money goes?
Speaker 3: So, I think brand carries way to get somebody in
Speaker 3: the door, and then performance is going to keep them inside.
Speaker 3: And so if some of the firms that have offered
Speaker 3: ETFs that had a strong mutual fund legacy have kept
Speaker 3: not only their firm brand name, but the names of
Speaker 3: the products are same, and those are they're either clone
Speaker 3: products or they really feel by name or in reality,
Speaker 3: and so I think that's going to carry a lot
Speaker 3: of weight. And they already have a track record that
Speaker 3: you can perhaps point to either of the firm or
Speaker 3: the manager some of the some of the other products,
Speaker 3: again from a discretionary standpoint is we offer active strategies.
Speaker 3: We're now going to offer you an active ETF version
Speaker 3: of something, but we haven't really brought that to market
Speaker 3: in the mutual world. It may have existed in a
Speaker 3: separately managed account space. Then I think it's going to
Speaker 3: help be the brand that gets in the door. And
Speaker 3: then it's gonna it's going to be whether or not
Speaker 3: you can you can deliver on it. And so I'm thinking,
Speaker 3: for example, Reckiner is a is a firm that offers
Speaker 3: colo ETFs. They are they are newer to the ETF space.
Speaker 3: They've got a history and institutional history of of focusing
Speaker 3: on that space. It's gonna they're gonna have to prove
Speaker 3: and I think they can based on on their heritage,
Speaker 3: that they can prove that they can add value with
Speaker 3: active management. But that's a little bit different than uh,
Speaker 3: you know, I keep going back to the same ones.
Speaker 3: So I'll try somebody different. Fidelity that has brought there
Speaker 3: some of the same name products, you know, the Fidelity
Speaker 3: Bond Mutual Funder, Total Bond Mutual Fund. It's already established
Speaker 3: itself as a strong player, you know eight you know,
Speaker 3: eight close to ten year track record.
Speaker 2: Yeah, I'll jump in because I thought you brought up
Speaker 2: something interesting about how we're defining active. So I think
Speaker 2: it's just important, Like this whole time active should being
Speaker 2: quotes right because you said you have single stock, you
Speaker 2: have the stock picking. But I mean, I'll throw out
Speaker 2: some stats about eighty five percent of all the launches
Speaker 2: this year we're active at some component. We now have
Speaker 2: more active ETFs than passive. Like on this concept of
Speaker 2: like over routed and this like tod do you think
Speaker 2: that like a we are we overcrowded now already or
Speaker 2: do you think there's still a lot of room and
Speaker 2: then how do you actually start to stand out, like
Speaker 2: as there is more products, what actually determines which ones
Speaker 2: maybe actually are still around five ten years from now.
Speaker 3: So I think we're overcrowded, and we're going to get
Speaker 3: even more overcrowded in terms of the single stock and
Speaker 3: defined outcome areas the options based strategy. And I say
Speaker 3: overcrowded in that there's it's a small pool of assets
Speaker 3: right now, so we have to the universe of potential
Speaker 3: investors has to expand. People who are are more trading
Speaker 3: oriented and that are using leverage and doing this on
Speaker 3: their own to do. Single stocks have to make it
Speaker 3: into the ETF world the way that we saw, you know,
Speaker 3: bitcoin investors make it into the ETF world. Options strategies
Speaker 3: have existed for years. I think we've seen a number
Speaker 3: of them. We're going to see more of them as
Speaker 3: we as the industry gets more creative. I would shout
Speaker 3: out Calamos for example. I know you guys, and you
Speaker 3: and your Collie Eric Boucho's has talked about the auto
Speaker 3: callable space and Calamos was early there. That's innovation and
Speaker 3: that's been successful. I think it's gathered over five hundred
Speaker 3: million dollars in assets. I don't think well, I think
Speaker 3: we're too crowded in terms of a number of products.
Speaker 3: But I think we're too I think there's too many
Speaker 3: mutual funds also, except the difference is those active equity
Speaker 3: mutual funds are bleeding assets and the active equity ETFs
Speaker 3: collectively are growing assets. So I think we're going to
Speaker 3: see firms that have dipped their toe into the ETF
Speaker 3: marketplace and have had some success and seen the broader
Speaker 3: industry success continue to expand. And yeah, at the risk
Speaker 3: of front running the question, when we get share classes
Speaker 3: of existing products. I think then we'll start to really
Speaker 3: feel much more crowded than we do today. Let me
Speaker 3: ask you, because I heard you, Athan on a on
Speaker 3: a different Bloomberg podcast talk about, you know, something might
Speaker 3: blow up because it's a single stock leverage at some point.
Speaker 2: Yeah, we were to your point about like the single
Speaker 2: stock crowdedness. Right, So at first there was like all
Speaker 2: these several issues were launching the same testa product, so
Speaker 2: they wanted to differentiate, So they were going after these
Speaker 2: like small cap might quantum stocks, and there is some
Speaker 2: stocks that have a market cap of like one hundred
Speaker 2: million in a two x levered ETF, and we tested
Speaker 2: this that. Yeah, I don't want to see anything blow up,
Speaker 2: but obviously we pushed the envelope into what products, what
Speaker 2: stocks are being put into these leverage products. So I
Speaker 2: don't think it's a non zero possibility that one of
Speaker 2: these ETFs could liquidate in a single day, right, just
Speaker 2: because of the moves in some of these stocks. But right,
Speaker 2: that's a different active, right that that you're talking about,
Speaker 2: that the single stock stuff. But yeah, I think that's
Speaker 2: a good answer, Like, yeah, maybe there are a lot
Speaker 2: of ETFs, but there's a lot of mutual funds too,
Speaker 2: so I don't know what. To your point, more stuff's
Speaker 2: going to keep coming, so it may be standing out.
Speaker 2: It's just going to be harder.
Speaker 3: So I want to come back to you on one
Speaker 3: stat and apologies, I'm going to source somebody else's data.
Speaker 3: It's not even mine, it's morning Stars data. But dare
Speaker 3: you and feel free to then edit this part out
Speaker 3: as appropriate. I'm sure your data would match this as well.
Speaker 3: But Ben Johnson posted this I saw on LinkedIn that
Speaker 3: single stock ETF, so at least the way that the
Speaker 3: morning Star is classifying it is two and a half
Speaker 3: percent of the assets of active ETFs and fourteen percent
Speaker 3: of the number of products. So to your point, Ethan,
Speaker 3: there's a lot of products that are out there. I
Speaker 3: think we're going to and I think we've seen closures
Speaker 3: already happen. I think we're likely to see more closures
Speaker 3: in that space. Whereas where the discrete, let me bring
Speaker 3: it back to the majority of it more the discretionary
Speaker 3: side of it. I think a firm like Baron Capital
Speaker 3: that just launched their first CTFs, I feel like they're
Speaker 3: in it for the longer haul that I think they're
Speaker 3: going to be committed to the space and hopefully the
Speaker 3: products are going to be successful also, but I think
Speaker 3: it's less likely that they're going to close those products,
Speaker 3: even if they're under one hundred million dollars in the
Speaker 3: in the in the in this or under a five
Speaker 3: hundred million dollars or whatever number. We want to use
Speaker 3: UH as a as a point of time for success.
Speaker 3: Whereas the traders who else the t Rex products, I
Speaker 3: think we're going to see many more of those come
Speaker 3: and go.
Speaker 1: So, actually, something I wanted to talk about, which I
Speaker 1: think flows naturally from this is trends. And so I
Speaker 1: know you mentioned innovation and the auto callabowls, and are
Speaker 1: there any active trends you think are overhyped as we
Speaker 1: head into this.
Speaker 3: Year I've moved into So there's ETFs that I don't
Speaker 3: think we should have, and I'm not going to name them.
Speaker 3: There's just enough eat gift and it isn't necessarily up
Speaker 3: to me, UH to be able to do. I guess
Speaker 3: I'm happy that I'm talking to the two Bloomberg Research
Speaker 3: colleagues that I know of that are not crypto advocates. UH.
Speaker 3: I hope Eric or Zealous I hope Eric listens to this. Yes, uh,
Speaker 3: happy to have it. But so I think we're going
Speaker 3: to see many I don't think you guys, and I
Speaker 3: don't think that's considered active in this space. But there's
Speaker 3: there's ETFs that exists that are tied to strategies that
Speaker 3: I didn't necessarily see of value. And I'm not just
Speaker 3: naming crypto related once. I'm not. I think the market's
Speaker 3: going to determine that. So, for example, I was pleasantly
Speaker 3: surprised at how popular Colo ETFs. I know, I just
Speaker 3: referenced one of the firms that's there, but the Janis
Speaker 3: Henderson Sweeter products have been tremendously successful when they came out.
Speaker 3: I don't think I was as optimistic about how successful
Speaker 3: they would be, and I was proven wrong. I think,
Speaker 3: you know, if I think ETFs are a great access
Speaker 3: vehicle and you can get the benefits of active, whether
Speaker 3: it's active in the security selection or active in the
Speaker 3: implementation or options or what have you, I'll let the
Speaker 3: market decide and then we've got a pine on those
Speaker 3: from a success or a lack of success standpoint. So
Speaker 3: I feel like that's a dodge of a question or
Speaker 3: dodging of the question. But listen, we've got how many
Speaker 3: four thousand children in this CTF space, ethan just I know, David,
Speaker 3: you've got many more mutual funds there. I treat them
Speaker 3: all equally until I don't have to know about them anymore.
Speaker 3: You love all the children, well, some of them I
Speaker 3: remember their names, some of them I don't. And you
Speaker 3: come across these things. The market's going to determine whether
Speaker 3: or not. And we've seen products that came out of
Speaker 3: under the or it came from under the radar and emerged,
Speaker 3: and so it would have been logical to say those
Speaker 3: products weren't going to survive and didn't have a case uh,
Speaker 3: and then the market had success. But I think that
Speaker 3: and maybe you're we're gonna get to an apologies. I
Speaker 3: know you shared an outline audience. I got an outline
Speaker 3: on this, but I don't have it in front of me.
Speaker 3: I think distribution is going to be key for whether
Speaker 3: or not a product is successful. Maybe I'll pause there,
Speaker 3: Maybe maybe we don't want to go down that path.
Speaker 2: No, I want to talk about the four thousand plus
Speaker 2: and maybe another four thousand coming. But obviously a big
Speaker 2: story for look for twenty twenty six and be the
Speaker 2: share class, right what or a conversion. So let's just
Speaker 2: say any of those routes, what kind of like impact
Speaker 2: do you think the share class ruling or or firms
Speaker 2: looking for conversions is going to have on just the
Speaker 2: industry or just active in general. Like that part of it,
Speaker 2: just like how much more competitive can it get? What
Speaker 2: maybe types of strategies do you think are gonna come
Speaker 2: through or be listed as share classes from some of
Speaker 2: these asset managers.
Speaker 3: So I'm really I'm really intrigued to see how this
Speaker 3: is going to play out. Getting approval and then coming
Speaker 3: to market are not the same things as you both
Speaker 3: would would appreciate, and so I want to see what,
Speaker 3: not only what products the asset managers come to market with,
Speaker 3: because to come to market means to convert, to take
Speaker 3: a non transparent product and make it transparent, and so
Speaker 3: the industry has moved primarily towards offering ETFs that are
Speaker 3: fully transparent from an active standpoint. There's some success stories,
Speaker 3: and I don't want to debate that here, but there's
Speaker 3: some success stories some Fidelity and Teriro price that are
Speaker 3: in smaller number of products but but have have had
Speaker 3: had success. When you got to you gotta be willing
Speaker 3: to share your full book.
Speaker 1: Uh.
Speaker 3: So that's going to be strategies that one makes sense
Speaker 3: to be able to do that, primarily large cap us
Speaker 3: equity strategies. That's going to be ones that have capacity
Speaker 3: to be able to not have to worry about closing. Again,
Speaker 3: good real world problem to be able to have, and
Speaker 3: where the management team is fine showing their hands. So
Speaker 3: it's a relatively low turnover. I'll go with relatively low
Speaker 3: turnover strategy at least out of the gate. So I
Speaker 3: think we're going to see products in twenty twenty six.
Speaker 3: I think both of you all see at the Exchange
Speaker 3: conference in March of twenty twenty six. Will I know
Speaker 3: we'll I have confidence that will have products that'll be
Speaker 3: out from Dimensional Funds and FM and maybe a couple
Speaker 3: other firms that have been very eager to come to market.
Speaker 3: But I'm still a little skeptical as to how fast
Speaker 3: we'll see. Some of the other firms that have a
Speaker 3: well established lineup of strategies, are they ready to bring
Speaker 3: their usual fund client base into the ETF marketplace or
Speaker 3: even smaller firms I reference Baron Capital, they and tweety
Speaker 3: Brown or a couple of the firms that I saw
Speaker 3: that have gotten the next step of approval. Those are
Speaker 3: mutual fund franchises with mutual fund more oriented shareholder bases.
Speaker 3: Are they ready to bring those people into the ETF world?
Speaker 3: I think they should be, but are they set up
Speaker 3: to be able to do that? And I don't know
Speaker 3: how fast that happens? Do you guys, well, I mean,
Speaker 3: let me get your take. I realized this is not
Speaker 3: my job to ask you the question. But my gut
Speaker 3: is that we're going to see in the in the hundreds,
Speaker 3: low hundreds, maybe hundred, one hundred plus or so tops
Speaker 3: products that come to market in twenty twenty six is
Speaker 3: I don't know. I'm not putting a hard number on that.
Speaker 3: Do you guys have a number in mind of active
Speaker 3: share classes that come to market in the next year.
Speaker 1: I don't think it's going to be high. I think
Speaker 1: it's going to be slow going. I think there'd be
Speaker 1: a lot of wait and see from some of these
Speaker 1: firms just to see what happens. And one of the
Speaker 1: things I, you know, last year, one of the things
Speaker 1: I was waiting on just from the mutual fund side
Speaker 1: is holding holding reporting was supposed to go monthly for
Speaker 1: big funds, like it was a go over a billion,
Speaker 1: but that got pushed, got pushed another couple of years,
Speaker 1: and it just seems like the industry there's a lot
Speaker 1: of firms that do not want to show their holdings,
Speaker 1: and so if they don't want to show their holdings monthly,
Speaker 1: with like another lag, you know, why would they want
Speaker 1: to show their holdings daily. And so I think there's
Speaker 1: still a lot of apprehension for a lot of firms,
Speaker 1: and so I think it'll be slow going in twenty
Speaker 1: twenty six. I don't know what's going to happen after that.
Speaker 1: I think it could pick up after that. Yeah, what
Speaker 1: about you?
Speaker 2: Yeah, I think I agree, And maybe I'm just too cynical.
Speaker 2: But I also think the stuff they're going to roll
Speaker 2: out might not necessarily be their best stuff at first.
Speaker 2: Like if you have a really good fund that's has
Speaker 2: good star ratings, could performance, maybe that's not the one
Speaker 2: you start with. You sort of start with these other
Speaker 2: ones first. They maybe have smaller assets. But let's obviously
Speaker 2: we're very pro ETF here, right, But Todd, is there
Speaker 2: maybe with either share classes or conversions? Is there actually
Speaker 2: strategies that you think do not make sense in an ETF.
Speaker 3: Like, I know.
Speaker 2: Everyone wants to push to go towards ETFs, but is
Speaker 2: there maybe once or even Dave, this might even be
Speaker 2: a question for you, like where is it, Hey, you
Speaker 2: don't need to be an ETF. It's either because you're
Speaker 2: giving something up, or because of the transparency, or because
Speaker 2: of the liquidity that maybe it doesn't necessarily make sense
Speaker 2: to be in that wrapper and stays in you should
Speaker 2: just stay as a mutual fund.
Speaker 3: So, Mike, I don't have a great answer. Again, I'm
Speaker 3: a former mutual fund annalyer that became an ETF analyst
Speaker 3: and so is aware of what's going on in the
Speaker 3: musical fund space, but not enough. But the active small
Speaker 3: cap space. We've started to see products that have come
Speaker 3: to market, and but most of the products that exist
Speaker 3: in the active small cap space. And I'm going for
Speaker 3: gut not from actually the data I think are more
Speaker 3: in the systematic approach, the avantas, the dimensional funds, the
Speaker 3: very broadly diversified not taking on that much beta or
Speaker 3: taking them, you know, trying to add that much alpha
Speaker 3: being beta, Like that's that feels like an insult that's
Speaker 3: not intended as an insult, but lower cost, well diversified
Speaker 3: holds thousands of positions and not in the below one
Speaker 3: hundred positions. So if you want to concentrated small cap strategy,
Speaker 3: if you believe in stock picking from a small cap approach,
Speaker 3: mutual funds might make sense because one that's where it exists,
Speaker 3: and two, if you are successful, then the closure can happen.
Speaker 3: That's an area that I probably I'm going to fall
Speaker 3: back on. There's I'm not sure that I can come
Speaker 3: up with that. I'm gonna go with that. That's the
Speaker 3: one I'm going to fall back on.
Speaker 1: No, I would agree. I think capacity issues is kind
Speaker 1: of the still the big hold up on and some
Speaker 1: of the mutual funds moving to ETFs, and yeah, small caps,
Speaker 1: microcaps especially, I can't imagine we'll see a ton of
Speaker 1: microcap ETFs and even you know, you talk about emerging
Speaker 1: markets that are emerging market ETFs, but then if you
Speaker 1: start getting into the even the front tier markets, I
Speaker 1: start to wonder about capacity issues there as well.
Speaker 2: Yeah, one thing that comes to mind is like kind
Speaker 2: of on the private equity side, like we saw this
Speaker 2: XOVR ETF fright to cross over the holds some SpaceX,
Speaker 2: but there was actually a problem that when more people
Speaker 2: came in the way and SpaceX went got watered down.
Speaker 2: So I would think that would be a case that
Speaker 2: they wish they could maybe close the fund right because
Speaker 2: the existing shareholders are getting watered down. So I don't
Speaker 2: know if maybe private assets falls in that category two,
Speaker 2: but yeah, definitely be interesting to see. Like I agree,
Speaker 2: I think on the small and microcap I think that's
Speaker 2: maybe one strategy that they It could become a problem
Speaker 2: if they get too big.
Speaker 3: Yeah, I mean so in some of the even US
Speaker 3: equity mutual funds, I'm going from pulling back from years
Speaker 3: of memory on it. But where they own private placements,
Speaker 3: obviously that's that's something you can't do. I don't think
Speaker 3: you can do in the ETF apper you'd have to
Speaker 3: mark mark to market uh that much more work daily uh,
Speaker 3: or have would be all over the place, uh for
Speaker 3: the for the ETF. Yeah. So if that's if that's
Speaker 3: if you, as if we're thinking about from an investor standpoint,
Speaker 3: if you, as an investor believe that that's a value
Speaker 3: add that your active manager can provide, then you'd want
Speaker 3: to have that you then you'd want to make sure
Speaker 3: that that was possible and it would exist in the
Speaker 3: mutual fund where it wouldn't exist from the ETF standpoint.
Speaker 3: But there are again, there are also, David, you know
Speaker 3: this better than I do. There are mutual funds that
Speaker 3: are active equity mutual funds that are gathering assets that
Speaker 3: people are staying loyal to and adding money to so
Speaker 3: that that they're doing so for good reason.
Speaker 1: Yeah. Yeah, I mean, there's definitely gonna be a lot
Speaker 1: of legacy holdovers that will still find success no matter what.
Speaker 1: But as you know, the industry as a whole, though
Speaker 1: it's going ETFs. I did want to switch gears just
Speaker 1: a little bit. And I know you speak to advisors,
Speaker 1: so I think it'd be great. This is a good
Speaker 1: question for our audience. You know, how our advisors actually
Speaker 1: using active ETFs today? Is it you know, for alpha
Speaker 1: building blocks? What are you hearing?
Speaker 3: So it depends upon what type of product that it is.
Speaker 3: So we work and just as much for the audience
Speaker 3: to better understand the lens that I'm focusing on, we
Speaker 3: add Verify. We host virtual events with some asset management partners.
Speaker 3: Speakers and the audience are financial advisors, and we're routinely
Speaker 3: asking them questions, survey questions, poll questions, whatever you want
Speaker 3: to phrase that during our events to get an understanding
Speaker 3: of who that audience is, what they're interested in, and
Speaker 3: help that help use that to help drive the overall conversation.
Speaker 3: So it depends if we're doing We've done events with
Speaker 3: a firm like NEOs for example, that offers defined outcome.
Speaker 3: They use their active management. It's on a tax efficient
Speaker 3: approach using options tied to the S and P five
Speaker 3: hundred with the product like SPYI or the NASDAQ one
Speaker 3: hundred like QQQI. What they're doing is what the investors
Speaker 3: that are coming and listening to that have told us
Speaker 3: is many more of them are using an options based
Speaker 3: product to generate enhanced income and using that as a
Speaker 3: compliment or a replacement to their S and P five
Speaker 3: hundred or their NASDAC based strategy. So that's a compliment
Speaker 3: to generate income. Whereas we've hosted events with Tierro Price
Speaker 3: where their products are more discretionary stockpicking equity strategies, and
Speaker 3: so what they're doing is trying to outperform the S
Speaker 3: and P five hundred and looking to do so with
Speaker 3: security selection. So I think that those are just two
Speaker 3: examples of use cases that we're hearing from people. It's
Speaker 3: it's a little hard to ask an audience that hasn't
Speaker 3: opted itself in that question, so it's somewhat self selecting.
Speaker 3: The people who are coming to learn about options income
Speaker 3: are using options income strategies as a compliment more than
Speaker 3: I or to be able to generate that income, whereas,
Speaker 3: of course the discretionary folks are doing differently. We haven't
Speaker 3: asked the full audience because if we tried to get
Speaker 3: everybody to respond to such a question, we wouldn't get
Speaker 3: them because they weren't as engaged with us. So again,
Speaker 3: answer and maybe a bit of a make sure that
Speaker 3: you know the data that you're working with.
Speaker 2: I really like that usage question, and I don't know, Todd.
Speaker 2: Are you finding what's a You mentioned barn Right that
Speaker 2: had come to the market for their ETFs, and I think, David,
Speaker 2: you've written a lot about this like it's a good
Speaker 2: fund right Their strategy has been really good over time.
Speaker 2: Do you find that, whether it's advisors or retail investors,
Speaker 2: are they using the ACTIVETF properly? Meaning are they and
Speaker 2: holding it for the long term, or are they trading
Speaker 2: in and out of it and then thus maybe doing
Speaker 2: themselves at the service it's not committed to that strategy
Speaker 2: long term.
Speaker 3: So I think the flows would and not picking up
Speaker 3: I mean that Barren products have not been out long
Speaker 3: enough for us to use them as a full study.
Speaker 3: And I also can't I don't want to go off
Speaker 3: the top of my head in terms of not looking
Speaker 3: at such data. But the flows data that I've seen
Speaker 3: shows that people are using the active ets that are
Speaker 3: intended for longer term strategies in a longer term manner.
Speaker 3: The single stock oriented ones obviously are being traded and
Speaker 3: or hopefully they're being traded much more frequently in and out.
Speaker 3: Otherwise people are going to get hurt. But their asset
Speaker 3: base suggests that that's the case. To me, I think
Speaker 3: people are doing or using them the right way. What
Speaker 3: what I'm I'm going to answer your question the way
Speaker 3: that may not have been intended. What I'm a little
Speaker 3: concerned and want to make sure not that we're gonna
Speaker 3: have maybe the audience here is going to learn as
Speaker 3: a result of this for how to properly trade in ETF.
Speaker 3: But my my concern is we bring more people over
Speaker 3: from the mutual fund world into the ETF space. Is
Speaker 3: that trades get put in overnight and executed at the open.
Speaker 3: People are trying to do things at the close, and
Speaker 3: you know, as you guys know, that's just not the
Speaker 3: way you should be buying. Is selling an ETF limit orders.
Speaker 3: I will be the eightieth person who talks about ETF
Speaker 3: trading that uses the phrase limit orders this year. I
Speaker 3: listing eighty people have done that, as he pops into
Speaker 3: his own head. But you know, trading the right way
Speaker 3: that you should within ETF. So'm I'm more concerned that
Speaker 3: people are not trading or thinking of it is a
Speaker 3: trade then more than they're trading too much.
Speaker 2: Yeah. Well, that's actually a really good point. I've never
Speaker 2: thought about it about let's say a conversion, right, if
Speaker 2: you're using a mutual fund, you used to putting in
Speaker 2: your orders, they get executed at nav versus. Now if
Speaker 2: a converse to an ETF, there's a whole new trading dynamic,
Speaker 2: right that you might not be used to when you're
Speaker 2: putting in your orders. So, uh, I think you gave
Speaker 2: us some research ideas that we can really explore. So yeah,
Speaker 2: thank you for that. Yeah, that's a really great point
Speaker 2: on this, Like like David did a good job of
Speaker 2: like identifying someone like Ron Baron who's like performed really
Speaker 2: well over time. But obviously beating the market is hard, right,
Speaker 2: Like we've seen the spiel of reports, and David does
Speaker 2: a report too about it, like just active it's hard
Speaker 2: to beat the market over the long term. And now
Speaker 2: you have all these single stock ETFs. Do you think
Speaker 2: in the way investors might be looking at these active
Speaker 2: funds saying, hey, they can't beat the market. I have
Speaker 2: all these like leverage, single stock tools. Now maybe I
Speaker 2: just become the new stock picker, like I can beat
Speaker 2: caffy Wood and shifting that away from like the active
Speaker 2: manager decisions. Do you think that we see more of
Speaker 2: that as we see all these single stock ETFs and
Speaker 2: people just having this confidence that hey, the market only
Speaker 2: goes up all the time. I could beat the market.
Speaker 2: I have these lever tools, and I'm the new stock picker.
Speaker 2: I don't need this XYZ manager.
Speaker 3: So yes, I think that I think we've we've been
Speaker 3: in that world, whether or not the individuals fully in
Speaker 3: that world, but we've certainly seen, you know, the growth
Speaker 3: of ETF strategists and model portfolios where they're using index
Speaker 3: based ETFs primarily to overweighth this and underweighth that on
Speaker 3: a sector or a style or investment approach. To do
Speaker 3: it on a a single stock leverage approach is dangerous
Speaker 3: because you're not picking I mean, I guess you are
Speaker 3: picking the stock, but you're also picking how much that
Speaker 3: stock is going to move in that short period of time.
Speaker 3: So in that scenario that you were talking about of
Speaker 3: using individual stock or single stock leverage ETFs as the
Speaker 3: way of trying to outperform the market and doing that
Speaker 3: on a daily basis, sure, I think that's I mean,
Speaker 3: that's probably had that's been happening outside the ETF space,
Speaker 3: of people using their brokerage account and using leverage. That
Speaker 3: scares me. I mean, I didn't know that those people
Speaker 3: existed outside of the ETF world beforehand, and I didn't
Speaker 3: know them. But now if I know them because they're
Speaker 3: part of the ETF world, then that then I'm more
Speaker 3: concerned about that. I'm assuming you were talking about that
Speaker 3: scenario as opposed to somebody who's using the different sectors
Speaker 3: of the S and P five hundred and overweighting based on.
Speaker 2: Yeah, I mean just more like, Okay, the stock pickers
Speaker 2: have always been there, they can trade stocks, but now
Speaker 2: it's like, hey, like you want to buy in video,
Speaker 2: but like now you're two x and video and maybe
Speaker 2: you see what let's say Kathy Wood is holding, and
Speaker 2: I can just buy two x versions of all these
Speaker 2: ETFs and try to just I don't know if it's
Speaker 2: you know, this get rich quick mentality or I can
Speaker 2: I can do better than them, and I have these
Speaker 2: tools that didn't exist five or so years ago, and
Speaker 2: that's what's sort of been feeding into this, like the
Speaker 2: new stock picker I can it's been being a DJ
Speaker 2: and the more risk I've taken has been better off.
Speaker 1: And I don't know how this age is.
Speaker 2: Obviously the market can change, but I was more thinking
Speaker 2: just about how not necessarily just using this leverage stuff,
Speaker 2: just how that more ETFs have gone back to hey,
Speaker 2: you're the new you're the stock picker. You know.
Speaker 3: So I think if it's using broadly diversified ETFs to
Speaker 3: do it tactically, and they're very low costs and on
Speaker 3: most platforms you can trade them commission free, yeah, I'm
Speaker 3: I'm for that, even though the more you trade, the
Speaker 3: the more you're likely to fail in doing trading. I
Speaker 3: think I'm more I'm more advocating for someone to take
Speaker 3: a more strategic approach and a tactical quarterly overweight this
Speaker 3: and underweighth that from my mindset. But starting people are
Speaker 3: doing that. The ETF vehicle is going to make that
Speaker 3: better for them. I think that's going better in that
Speaker 3: it's going to be easier to execute, not necessarily better
Speaker 3: in that it's like you're playing with sharp objects with
Speaker 3: single stock leverage gtfs. You have to do so carefully.
Speaker 3: I don't have confidence in my ability to be able
Speaker 3: to use such sharp objects, so I'm not using them,
Speaker 3: and I'm going to leave it to somebody else to
Speaker 3: be able to do so. I don't have confidence in
Speaker 3: my ability to necessarily do security selection anymore. I don't
Speaker 3: have the time to be able to do that. So
Speaker 3: either I would be again I'm not going to reveal
Speaker 3: my book, but I am doing things that's more strategic
Speaker 3: in nature, or I'll pick a couple of active managers
Speaker 3: that I have confidence in that they have the full
Speaker 3: time job and a team of resources to be able
Speaker 3: to do that on my behalf.
Speaker 1: So I've got one more question before we go, you
Speaker 1: mentioned the portfolio manager. You know, with mutual funds, for
Speaker 1: years we had star managers, and as we move into
Speaker 1: the ETF rapper, do you think that era of the
Speaker 1: star manager is feeding or evolving?
Speaker 3: So I think it's evolving. I mean, we have some
Speaker 3: of the stars of the mutual fund world, and it's
Speaker 3: more I feel like the names of portfolio managers. We've
Speaker 3: referenced Ron Barron, so he's an example within the equity space,
Speaker 3: but more of them are in the fixed income space.
Speaker 3: I name drop Brick Reader earlier, who's got a couple
Speaker 3: I think successful ETFs. I think I name dropped the
Speaker 3: double line guys of Gunlock and and Chairman and Team.
Speaker 3: I'm probably failing to name other ones, but it was interesting.
Speaker 3: I was with Jay Jacobs of a Blackrock earlier this
Speaker 3: week and he referenced the name of the manager of BAI,
Speaker 3: which is their artificial intelligence ETF, Tony kim And I
Speaker 3: think it was intentional that he was referencing the name
Speaker 3: of that manager, so that I'm sure Tony kim Is
Speaker 3: has a great record and great pedigree, and the data
Speaker 3: shows how well that this fund has been performing. But
Speaker 3: I hadn't known. I don't know that the average investor
Speaker 3: would have known of Tony Kim, but this was I think.
Speaker 3: I think we're seeing asset managers and I think they
Speaker 3: should lean in. If you're going to trust our security selection,
Speaker 3: you should know the name of our security selector for
Speaker 3: ETFs And I don't know who. Did you guys know?
Speaker 3: I'm going to put you both on the spot. Did
Speaker 3: you know the manager? Would you know the name of
Speaker 3: a manger of an active ETF if you didn't know
Speaker 3: it beforehand? In the mutual fund.
Speaker 1: World, probably not. It's tough.
Speaker 3: There's so many it's hard enough to remember the four
Speaker 3: thousand children tickers we've got to come up with, right,
Speaker 3: so the names of the portfolio managers that go with them.
Speaker 1: Yeah, it's tough, but this was a great discussion. Todd,
Speaker 1: thank you so much for joining us.
Speaker 3: It's a pleasure to be with you this way, and
Speaker 3: I'm excited to see both of you, I hope at
Speaker 3: the Exchange conference in mid March in Las Vegas.
Speaker 1: Great Ethan, thank you for being my cost on this episode,
Speaker 1: and I do want to thank our listeners. If you
Speaker 1: liked the episode, please subscribe and leave a review. If
Speaker 1: you want to see more of our research on the terminal,
Speaker 1: go to BI Fund, Go for fund and Active research
Speaker 1: and b I ETF go for ETF research. Until our
Speaker 1: next episode, This is David Cohne with Inside Active
Speaker 2: Four No.