Speaker 1: Welcome to Trillions.
Speaker 2: I'm Joel Webber and I'm Eric Belchunas.
Speaker 1: Eric, we have not done a mail bag episode in
Speaker 1: a really long time, and people have questions.
Speaker 2: Yeah, and we have all kinds of vacation schedules that
Speaker 2: we're managing around, so this is a good time to
Speaker 2: just phone one in.
Speaker 1: Joel, Well, when we never phone anything in, I happen
Speaker 1: to be remote in the off while we're recording this,
Speaker 1: and I'm still gonna ask some questions on behalf of
Speaker 1: many of our listeners and some of your Twitter followers
Speaker 1: and your LinkedIn followers and anybody else who had some
Speaker 1: questions that they want to get answered to help us
Speaker 1: wade through some of the weeds. We're also going to
Speaker 1: be joined by Athanasio Sarah Figus, an ETF analyst with
Speaker 1: Bloomberg Intelligence, this time on Trillians bail Bag. Athanasos, Welcome
Speaker 1: back to Trillions.
Speaker 3: Hey, thanks for having me on.
Speaker 1: Okay, so you know how this works. We've asked for
Speaker 1: a bunch of questions and we're going to rattle through
Speaker 1: as many of them as we can this episode. You're
Speaker 1: going to hop in whenever warranted. Eric, the first question,
Speaker 1: I'm going to ask of you comes from John Andrew
Speaker 1: Carter Junior, who asked, what's the next big tech innovation
Speaker 1: in exchange traded funds that will affect the way I invest?
Speaker 2: I mean i'd have to go with eat the ETF
Speaker 2: share class which is coming out this summer, probably later
Speaker 2: this summer or early fall, where a mutual fund will
Speaker 2: just be able to bolt on an ETF share class.
Speaker 2: Only Vanguard does that currently, but there's I think over
Speaker 2: sixty different active managers that have filed for this basically
Speaker 2: exception to a rule, and if they get approved, which
Speaker 2: we heard they will, we're looking at basically all mutual
Speaker 2: funds will I mean not all of them, but a
Speaker 2: lot of them. You'll be able to just transfer from
Speaker 2: your mutual fund share to your ETF share. So I
Speaker 2: think for people out there who are you know, have
Speaker 2: been wanting to leave and not have a tax hit
Speaker 2: when they leave, they can now do that and it
Speaker 2: should be very interesting. I think it will be a
Speaker 2: drain from the mutual fund to the ETF, but that
Speaker 2: money was probably going to go over there anyway. This
Speaker 2: just makes it a little easier, more tax efficient, and lets
Speaker 2: some of these old legacy active managers save a client
Speaker 2: rather than losing one. So that's I would it's not
Speaker 2: the most interesting tech innovation. I think that's what they're
Speaker 2: talking about tech with the structure, would you do something different?
Speaker 4: No, I think that's spot on. I was thinking maybe
Speaker 4: like tokenization, which is like what Robinhood's trying to do.
Speaker 4: They just announced that that could be something, you know,
Speaker 4: maybe allowing access to things that were not able to
Speaker 4: fit into the ETF, like private equity. But that might
Speaker 4: be a tall order, right. ETFs give you a really
Speaker 4: good deal. You have pretty much access to everything. But
Speaker 4: I think that the tokenization stories can be around for
Speaker 4: some time.
Speaker 1: Okay, as long as we're talking about tokenization, Alvarro Martinez asks,
Speaker 1: as tokenization of real world assets gains traction, how do
Speaker 1: you envision tokenized ETFs transforming the traditional ETF structure, particularly
Speaker 1: in terms of settlement efficiency, investor access, regulatory oversight. Could
Speaker 1: this technology catalyze the emergence of twenty four to seven
Speaker 1: ETF markets or fractional ownership beyond what's already achievable with
Speaker 1: standard ETFs.
Speaker 2: So it's very interesting, it's exciting to Robinhood just announced
Speaker 2: their tokenizing everything for Europeans who want to get easier
Speaker 2: access to US equities, and they even said, oh, we're
Speaker 2: going to tokenize VU. But there's already a Vanguard SMPO
Speaker 2: five underd ETF in Europe called v USA, which is
Speaker 2: easily accessible and cheap. So I think, you know, when
Speaker 2: you think about tokenization, what is it actually do? If anything,
Speaker 2: it cleans up the back office a little. Using the blockchain,
Speaker 2: you can have faster settlement times, you could do twenty
Speaker 2: four to seven, But I mean, how many people really
Speaker 2: need that. I think the big thing for tokenization is
Speaker 2: for people who don't have access to a stock market,
Speaker 2: right So for the developing countries, tokens can be a
Speaker 2: life saver, especially stable coins, which are just basically tokenized dollars.
Speaker 2: There I'm very bullish on that. But for the developing world,
Speaker 2: for the developed world, where we all have the ability
Speaker 2: to roll out of bed in our underwear, still roll
Speaker 2: over to Schwab, open up the Internet and hit by
Speaker 2: and we can own almost anything under the sun in
Speaker 2: one second for almost no fee. I just don't really
Speaker 2: know how you're going to disrupt that. That's about is
Speaker 2: clean and easy and low cost as you could possibly get,
Speaker 2: and convenient so I think the tokenization story will be
Speaker 2: one of a back office story. I think they'll use
Speaker 2: the blockchain to maybe streamline some stuff in the back office,
Speaker 2: but you, as the user, probably won't know that notice
Speaker 2: the difference. But I could be wrong. So I'm bullish
Speaker 2: tokenization as a back office a disintermediator, but I'm bearished
Speaker 2: tokenization in terms of killing the ETF at least for now.
Speaker 2: I'm evolving on this issue, but I just don't see
Speaker 2: enough to disrupt what I just described in the rolling
Speaker 2: out of bed visual.
Speaker 4: I mean, I mostly aligned with Eric on this, like
Speaker 4: the back end, Like do people really care about that
Speaker 4: for the most part, Like it's for the you know,
Speaker 4: it's pretty good already we already have you know, they're
Speaker 4: already trying to move the T one settlement.
Speaker 3: Anyways, I think.
Speaker 4: The benefits are marginal, like okay, twenty four seven trading whatever,
Speaker 4: So just it's not it's not enough benefits to be
Speaker 4: a disruptor like the ETF was to the mutual fund.
Speaker 4: You know, I might give you act some cool stuff,
Speaker 4: but I'm still I'm with Eric on this one.
Speaker 2: The other thing is, what is an etfis that would
Speaker 2: be cool if it was tokenized. Okay, private equity maybe art,
Speaker 2: you know, stuff like this, but a lot of that,
Speaker 2: like private equity, let's take that. You can't really like
Speaker 2: sidestep to the regulations and just have a token out
Speaker 2: there for retail. I believe that the regulators won't really
Speaker 2: appreciate that. So even if something seems like, oh it
Speaker 2: hasn't been etfised, a token would fill in. I don't
Speaker 2: know how cleanly you can get that done without dealing
Speaker 2: with regulations. So the regulatory issue is a whole nother
Speaker 2: problem here that will have to be surmounted. That said,
Speaker 2: this particular sec somebody had commented to me when I
Speaker 2: was basically saying, I don't I'm not really bullish on
Speaker 2: robin Hood. And also, you see the guy from robin
Speaker 2: Hood with it looks like Johnny Depp from the movie
Speaker 2: Blow Yeah, and he's out there talking about tokenization and
Speaker 2: in like in con Paris or whatever, and I mean
Speaker 2: it was pretty showy. And I'm I'm not saying he's
Speaker 2: not smart, But when I think about that company trying
Speaker 2: to advertise is like, oh, we're going to give you
Speaker 2: all this stuff for low cost, And then I think
Speaker 2: of like Jack Bogel and Vanguard. I just don't know
Speaker 2: if people are going to leave that boy Scout, trust
Speaker 2: the Vanguard and black Rock and move over to Robinhood
Speaker 2: at least the big giant blob of money. Maybe some
Speaker 2: of the younger people. I don't really see that being
Speaker 2: that attractive. And if something's free, if Robinhood's saying it free,
Speaker 2: don't trust me. They are charging you somewhere else. It's
Speaker 2: probably going to pay for orderflow. They're probably selling your
Speaker 2: order flow to like Citadel, getting money there and you
Speaker 2: don't know it. So be careful out there when it
Speaker 2: comes to those kind of pitches, in my opinion, And
Speaker 2: so I don't know. I'm just skeptical because the US
Speaker 2: ETF market is the terroor dome. It is so hard.
Speaker 2: I've seen so many legacy companies come here and get humbled.
Speaker 2: It's hell for issuers but heaven for investors. And that
Speaker 2: hell is something that I feel like Robin Hood's trying
Speaker 2: to sidestep here. I just I have more faith in
Speaker 2: a more bullish on companies that have come into the
Speaker 2: ETF terrodome and figured out a way to survive and
Speaker 2: thrive in an honest fashion. I'm just so I'm not
Speaker 2: willing to like let go of all that and be like, oh,
Speaker 2: token to the new thing.
Speaker 3: Can't do it now, I'm with you, okay.
Speaker 1: Just on the topic of tokenization, Brian Tovar asks, from
Speaker 1: a custody ownership perspective, what's the difference between owning a
Speaker 1: tokenized stock versus an ETF stock?
Speaker 4: I mean, that's kind of where I get hung up,
Speaker 4: is I don't understand the difference. Like, if Microsoft is
Speaker 4: Microsoft stock and you knowing that in a token form,
Speaker 4: why not just own the ETF owned Microsoft stock unless
Speaker 4: they're issuing tokens like Microsoft tokens. Why I don't Still
Speaker 4: I'm struggling to wrap my head around. Besides the back
Speaker 4: end benefits and maybe twenty four hour trading, those sort
Speaker 4: of marginal benefits, what's the real meaningful difference between the two.
Speaker 2: The other problem is, you know, you got all these
Speaker 2: market makers and aps involved that people don't see. And
Speaker 2: this is like heavy duty liquidity and financial institutions, and
Speaker 2: they're smart. They arbitrage the price and the underlying all
Speaker 2: the time. And I've asked people, what's gonna happen if
Speaker 2: people start using tokens? Well, will the whole Wall Street
Speaker 2: apparatus just move over? Because then what about exchanges too,
Speaker 2: And there's some people say all that's gonna go away
Speaker 2: and everything's gonna be on the blockchain. But a couple
Speaker 2: of things. A. I think you're gonna find percent prems
Speaker 2: and discounts. Some people say we can automate the market making.
Speaker 2: I don't know, Like I think the system right now
Speaker 2: is what we call antifragile. You can call somebody, people
Speaker 2: have experience, there's many of them. The token world seems like, okay,
Speaker 2: we could like save a little time on the settlement.
Speaker 2: You can trade twenty four to seven. Costs are gonna
Speaker 2: be the same. It's not like token to be cheap.
Speaker 2: It can't be cheaper than ETFs. So again, it's marginal
Speaker 2: benefit for a lot more fragility, it seems to me.
Speaker 2: And as I've joked about with somebody on Twitter, centralization
Speaker 2: has its benefits, which is meaning you can call somebody
Speaker 2: if there's a real problem, you can take legal action.
Speaker 2: There's prospectuses. This is where I think centralization has its
Speaker 2: perkss you go full DeFi it's a little while west.
Speaker 2: So I don't actually know how all these questions will
Speaker 2: be answered again. The reason ETFs were such a big
Speaker 2: hit is because mutual funds were slow, expensive, not that liquid,
Speaker 2: and a lot of the costs were internalized. The taxes
Speaker 2: weren't good. ETFs corrected like five things. I mean, it
Speaker 2: was like five evolutionary steps. Tokenization seemed like one little baby,
Speaker 2: like a little mouse step.
Speaker 4: Yeah, I feel it doesn't change the experience, right, go
Speaker 4: one to your schwabap whatever you buy Microsoft boom, and
Speaker 4: I feel like when the market's open, I get a
Speaker 4: fail fair price on Microsoft. I don't know what I'm
Speaker 4: doing if I'm trading at like three am right like
Speaker 4: on the blockchain, it just feels like I don't understand
Speaker 4: how that really like improves the user experience.
Speaker 1: Okay, there are a number of things in there to
Speaker 1: follow up on, but I want to start with one
Speaker 1: from an ex username discover Lightcoin, who asks how profitable
Speaker 1: are ETFs really to the issuers and what variables determine
Speaker 1: if a new ETF launches a success or failure.
Speaker 2: ETFs are not that profitable for the assets they have.
Speaker 2: So they have like eleven trillion in assets and they
Speaker 2: bring in what like ten billion in revenue every year, right,
Speaker 2: so maybe a little more, and then market makers make
Speaker 2: about that too. So but to contrast, I believe mutual
Speaker 2: funds pulling like one hundred and twenty five billion in revenue,
Speaker 2: so it's just like and hedge funds pulling like triple ETFs,
Speaker 2: and they have less assets, so every other structure makes
Speaker 2: way more money. That's why when I go to these
Speaker 2: crypto conferences and they think they're like the big disruptor,
Speaker 2: and I'm like, dude, ETFs are way more punk rock
Speaker 2: than you think. That's why all the money goes into
Speaker 2: the bitcoin ETF is because it's so cheap and easy
Speaker 2: that the ETF has a lot of disruptive power because
Speaker 2: the consumers know it's a good deal and they will
Speaker 2: sell you out for an ETF that's like two basis
Speaker 2: points cheaper. I mean, they are brutal consumers, but when
Speaker 2: you service them, and like you said, if you can
Speaker 2: make it there, you're going to do well. Now, there's
Speaker 2: certainly room for some etf to be profitable. You know,
Speaker 2: you can carve out a good living there. Black Rock
Speaker 2: probably the best example. And then there's some hail mary's
Speaker 2: that do well, like the two X Navidia that makes
Speaker 2: six million a year. So there's been some like one
Speaker 2: off Hail Mary ones that have really done well. But
Speaker 2: for the most part, it's a hard business. It's tough.
Speaker 2: Wall Street would rather ETFs have not been this successful.
Speaker 2: I can tell you that.
Speaker 1: Okay, follow up question from the same user, what will
Speaker 1: happen to see a bitcoin or Ethereum etf sell off
Speaker 1: their assets and shut down and say they're on the
Speaker 1: bottom of the list for flows. Are they still profitable?
Speaker 2: So at Bitcoin ETF, even the lowest one of the
Speaker 2: spots is totally profitable. That's why this was such a
Speaker 2: crazy launch, is that I think wisdom Tree might have
Speaker 2: the least of the eleven or twelve out there, maybe hashtacks,
Speaker 2: but they're all in profit mode already. That's rare. Now
Speaker 2: on ether, I believe the couple towards the bottom are
Speaker 2: maybe not profitable. I would say, if you're going to
Speaker 2: charge twenty five thirty BIPs, which is what they most charge,
Speaker 2: you would need like about eighty million right to be profitable,
Speaker 2: and I don't know if all the ether have that.
Speaker 2: So over the next five years, you know, the spot
Speaker 2: ETFs look pretty good, but there's going to be some
Speaker 2: like you know, option overlay. It's not going to try
Speaker 2: all kinds of stuff. And there will be closures that
Speaker 2: are in the crypto ETF space for sure. And if
Speaker 2: a closure happens, if it's a company like Wisdom Tree
Speaker 2: and they close a fund, there's the company's still profitable.
Speaker 2: They just choosing to close that fund rather than sort
Speaker 2: of like you know, put more money into to try
Speaker 2: to sell it to make it profitable. It's really no
Speaker 2: different than any other business.
Speaker 3: You know.
Speaker 2: You you attempt all these products, you hope some of
Speaker 2: them hit. Usually have a couple of blockbuster hits, a
Speaker 2: couple in the middle, and then maybe a couple duds,
Speaker 2: and some issuers will keep those duds alive longer than others.
Speaker 2: Some close quicker. But I'd imagine in the crypto space,
Speaker 2: since it is so fledgling and new, you'll probably have
Speaker 2: them hang in a little longer than if they were
Speaker 2: trying some random theme ETF.
Speaker 4: Oh okay, you now understand, Yeah, you're Right's probably punched
Speaker 4: his way above its weight, like profitability wise and some
Speaker 4: other categories. And I think Bloomberg News just covered this
Speaker 4: right that black rocks ibit is like one of their
Speaker 4: most profitable. I think third or second. It makes more
Speaker 4: than their SMP product, So yeah, it definitely it speaks
Speaker 4: to the demand there too, and the ability to be
Speaker 4: able to charge a little bit more.
Speaker 3: Yeah.
Speaker 2: Joel Ethan actually helped News with this data. Ibit is
Speaker 2: third in profitability out of twelve hundred ETFs that Blackrock has, Joel,
Speaker 2: it's number three, and if it gets nine billion more
Speaker 2: based on the fee, it will be the most profitable.
Speaker 2: And nine billion is only a ten or eleven percent
Speaker 2: increase in Bitcoin's price, so it doesn't even need any
Speaker 2: new flows, just a nice little run in bitcoin. It
Speaker 2: will be the number one most profitable et from black
Speaker 2: Rock at a year and a half old. It's it's
Speaker 2: absolutely bonkers. So that said, people are like, oh, Blackrock
Speaker 2: is getting away with murder. He I'm like not really.
Speaker 2: Twenty five BIPs for that is pretty fair. Up until
Speaker 2: Blackrock came out, you had to pay two percent or
Speaker 2: one point five percent at best in Europe or in
Speaker 2: hedge funds, so twenty five is dramatically cheaper. I think
Speaker 2: this is a win win. You know, in capitalism, you
Speaker 2: want to if somebody's first has a good idea, has
Speaker 2: a good price, point, it's okay to make some money.
Speaker 2: I just so, I think this is a case where
Speaker 2: everybody won here.
Speaker 3: Yeah, I agree.
Speaker 4: I mean they're giving you IVV at three BIPs, right,
Speaker 4: like everything can't be free. But yeah, overall, it's a
Speaker 4: tough business. It's not even for these ascid managers. ETFs
Speaker 4: are such a small part of their revenue. Like JP Morgan,
Speaker 4: who's killing it, it's still like one percent of their
Speaker 4: total revenue.
Speaker 2: They're so lucky. Some jol some of these companies. I
Speaker 2: always said, the Wall Street banks probably have the best position.
Speaker 2: If you have other things that make you money, you
Speaker 2: can afford to get guts when it comes to your
Speaker 2: ETF business. And JP Morgan did. They had the guts
Speaker 2: to get cheap. They sold active at vanguardian fees and
Speaker 2: they're killing it. But it's harder for a company to
Speaker 2: do that when that's your only thing, because then you're
Speaker 2: instantly cannibalizing. But for JP Morgan, because they got so
Speaker 2: much going on, it's a little easier to have that
Speaker 2: intestinal fortitude.
Speaker 1: Okay, next question from pick god on X looking forward,
Speaker 1: is there ever going to be a product that catches
Speaker 1: or matches VU, which is obviously vanguards just and P
Speaker 1: five ETFs interesting.
Speaker 2: I think VO will be king for I don't want
Speaker 2: to say ever, but I'd say at least ten years.
Speaker 2: So Michael Saylor, famous for micro Strategy CEO, replied to
Speaker 2: one of my tweets colored weeks strategy. Sorry, yeah, it's
Speaker 2: just hey, it's cleaner, that's okay. Anyway, strategy, he said,
Speaker 2: mark my words, ibit will be the biggest ETF. So
Speaker 2: I did the math on this, and I think he
Speaker 2: said within ten years. I did the math, Joel. It
Speaker 2: would have to like Quinn triple its flows. WU would
Speaker 2: have to chill, and the S and P would have
Speaker 2: to stop going up, and Bitcoin would have to rally.
Speaker 2: So a lot would have to happen in that scenario.
Speaker 2: I think you have a case where maybe the US
Speaker 2: stock market has real issues and somehow Bitcoin is looked
Speaker 2: at as the savior asset like and it just goes
Speaker 2: up and up while the stock market goes down. That
Speaker 2: scenario hasn't really happened. Bitcoin tends to have a little
Speaker 2: more correlation to stocks, So as long as it's correlated,
Speaker 2: I stn't see how that's possible, but I bits rise.
Speaker 2: It's now the twenty third biggest ETF of all time
Speaker 2: at one point four years old, which is insane to
Speaker 2: be that high that quickly. I will never say never
Speaker 2: with IBIT. I thought vt I would be bigger one
Speaker 2: day because VOO and IVV be fighting over that same
Speaker 2: assets and the total market. But it turns out people
Speaker 2: want the S and P so bad, especially over any
Speaker 2: other index or the total market that they just VU
Speaker 2: and IVV can actually split some of that money and
Speaker 2: VOU will still be the biggest. So I don't see
Speaker 2: anything passing VU for at least a decade.
Speaker 4: Yeah, it's too it's too big, and we can't live
Speaker 4: in a world where ibit is the biggest ETF. VU
Speaker 4: keeps us in check, right, It's like it is going
Speaker 4: to quit.
Speaker 2: He yeah, I will quit if I'm going to retire
Speaker 2: if I BIT passes VU. It's like you know that
Speaker 2: phrase no country for old analysts roll like this is
Speaker 2: another one of the If I bid is the biggest ETF,
Speaker 2: it's like a whole generation of people are just gonna
Speaker 2: be like, I'm out.
Speaker 3: Yeah, VU VO gives us some hope.
Speaker 4: But all the point you said, though, they're spot on
Speaker 4: that people you know, ibit's still always going to be
Speaker 4: like a satellite position, so it's got to all come
Speaker 4: from price, which vol you know, people can have sixty percent,
Speaker 4: seventy percent allocations to VOO.
Speaker 2: There's one black sheep here and that is a Fidelity
Speaker 2: We're to do a conversion of its index SMP five
Speaker 2: entered ETF. I believe right now that's already bigger than SPY,
Speaker 2: So that would come in almost that where VU is.
Speaker 2: And if Fidelity were to really you know, put in
Speaker 2: its advisor network and Vanguard, you know, stumbled a little.
Speaker 2: There's an outside chance that could be something is the
Speaker 2: Fidelity conversion of an index mutual fund to an ETF,
Speaker 2: But that's a little out.
Speaker 1: There, okay. Next question comes from Liz Simmy who asked,
Speaker 1: since active is the coolest thing in ETFs, can you
Speaker 1: break down the difference between flows to traditional active strategies
Speaker 1: in ETFs versus thematic in ets and how the flows
Speaker 1: have changed over time.
Speaker 4: Yeah, Active is a pretty fluid turn and ETFs, and
Speaker 4: it's not traditional stock picking like, so flows to that
Speaker 4: type of stuff is pretty pretty low. When we say active,
Speaker 4: it's more things like single stock ETFs option overlays buffers,
Speaker 4: which technically get classified as active. I get it that
Speaker 4: it's not the traditional like stock picking, but I feel
Speaker 4: like with all these ETF options single stocks, people are
Speaker 4: their own active managers now, right, So instead of like
Speaker 4: going to Kathy Wood to buy these like stocks, there's
Speaker 4: like single stock versions of all these so they're just
Speaker 4: ended up doing on themselves. So the breakdown if you
Speaker 4: if you really look at it closely, it's not going
Speaker 4: to like the how we think active traditionally. It's sort
Speaker 4: of like this new generation of active, like mostly derivatives
Speaker 4: usage and things like that.
Speaker 2: Yeah, I think active is taking in forty percent of
Speaker 2: all the flows, and that sounds like, oh my god,
Speaker 2: active is back. It's a I could see a reporter
Speaker 2: a tempted to write that headline, But as Ethan's said,
Speaker 2: most of it is buffers and sort of you know,
Speaker 2: derivative using stuff that is more solution oriented. That said,
Speaker 2: there is some traction with traditional grandpa stockpicking active. You've
Speaker 2: got Capital Group DFA, JP Morgan JP Morgan in particular,
Speaker 2: and one of the reasons it's finally working is they
Speaker 2: got cheap. Most of the products that take in money
Speaker 2: from the grandfather active are now got their fun under
Speaker 2: forty basis points. So I think there's a definitely a
Speaker 2: group of advisors out there that still believes in Active,
Speaker 2: but they want it served up a little cheaper. I
Speaker 2: just want to pay for the active, not all the
Speaker 2: beta which you can get for free and a Vanguard fund.
Speaker 2: So I think Active is going through this repricing of
Speaker 2: how much it's actually worth, and as it goes through
Speaker 2: that it gets a little cheaper. I think it will
Speaker 2: see actual real flows, But there's all the new fangled
Speaker 2: stuff that kind of makes the active rebound story a
Speaker 2: little more complex and just on thematic ETFs. I just
Speaker 2: looked today. Actually they've taken in two billion this year
Speaker 2: out of five hundred sixty billion to flows, so not
Speaker 2: a lot when you look at themes. If you look
Speaker 2: like some themes are on fire, like defense, everyone's taking
Speaker 2: you money. It's a feeding frenzy. But then like ARC
Speaker 2: and UH, the US infrastructure and the natural resources have
Speaker 2: seen outflows, and so you tend to have like whatever's
Speaker 2: going on in the market, there's always some theme ETF
Speaker 2: like killing it, and there's always some that's suffering. So
Speaker 2: them ETFs have a lot going on underneath and they're
Speaker 2: they're they're viable to me. I think they'll be around
Speaker 2: for a while, but I don't know if they're going
Speaker 2: to like grow to any more than say, two to
Speaker 2: three percent of all ETF assets.
Speaker 1: Okay, next question comes from a next user named market Wizard.
Speaker 1: What do you think of multi asset ETFs?
Speaker 2: Oh, this is a good question. This is when you
Speaker 2: combine like stock bond like it would be like a
Speaker 2: target day fund essentially. I share just trying it. Everybody's
Speaker 2: tried it, it it here's you know, eighth and alluditude early.
Speaker 2: I think for the most part, when people invest in ETFs,
Speaker 2: they want to be the decider. To quote w remember
Speaker 2: in that movie W He's like, Dick, I'm the decider anyway,
Speaker 2: great movie, underrated movie about George the b Bush. But
Speaker 2: that word the decider always stuck with me, and I
Speaker 2: think that the advisor wants to be the decider how
Speaker 2: much goes in equity bonds. You can't be an advisor
Speaker 2: and have one ticker and client portfolio because the client's
Speaker 2: going to be like, why do I need you? I
Speaker 2: think for four to one k is they're great, but
Speaker 2: ETFs have don't really have an easy time penetrating four
Speaker 2: one k, so outside of the form one k market,
Speaker 2: I just think most people want to assemble the pieces,
Speaker 2: and therefore a multi acid ETFs will always be relegated
Speaker 2: to the fringe. Yeah.
Speaker 4: I agree, And I think people are just in general
Speaker 4: questioning that sixty forty model with bonds and they like, well,
Speaker 4: they don't want to own bonds as much. They want
Speaker 4: to own alternatives like crypto or whatever, and I think
Speaker 4: those haven't caught up yet. Like if you're buying one
Speaker 4: of these funds, it's just a pretty traditional model. So
Speaker 4: maybe if they start getting a little bit, you know,
Speaker 4: more innovative in the allocations, but overall, Eric, I think
Speaker 4: it's just the category that's never really taken off.
Speaker 1: The next question from Carrie Presley, who asks there are
Speaker 1: a few clear explanations for the kind of redemption and
Speaker 1: the tax efficiency of ETFs. Eric, a clear metaphor example
Speaker 1: would be swell.
Speaker 2: Okay, I've I've spent years on this. I used to
Speaker 2: teach the new higher class and I go over crash
Speaker 2: redemption and their eyes would glaze over. And in my survey,
Speaker 2: that's when they'd say that part sucked. Everything else is interesting.
Speaker 2: So I actually reframed it and I told the story
Speaker 2: of how the ETF was designed. And I start with, like,
Speaker 2: you know, the American Stock Exchange was in third place.
Speaker 2: They were looking for a winner. And Nate most was
Speaker 2: I don't know, in his sixties or seventies at the MX,
Speaker 2: and he had worked at the commodity's warehouse and when
Speaker 2: he was thinking about how to design the ETF and
Speaker 2: make it so that costs of trading wouldn't infiltrate the
Speaker 2: actual costs of the ETF, which would affect all the shareholders,
Speaker 2: Like how do you say break trading costs from like
Speaker 2: the shareholders? And he thought about commodity warehouse that he
Speaker 2: worked at, and he thought, well, in that warehouse, you
Speaker 2: have a bunch of soybean oil and you bring it
Speaker 2: to the warehouse. They give you a receipt for your
Speaker 2: soybean oil and they store it for you in a locker.
Speaker 2: Then you can trade your receipts with other commodity traders
Speaker 2: without having to move all the merchandise around. Right, it
Speaker 2: makes sense. And let's you get a bunch of receipts
Speaker 2: and you want actual soybean oil back. Then you take
Speaker 2: your receipts and they give the exact proportion to soybean oil,
Speaker 2: and then you have your goods. So all he did
Speaker 2: was take that structure, that paradigm and say, instead of
Speaker 2: soybean oil, what if I had the S and P
Speaker 2: five hundred stocks. I could then take it to this
Speaker 2: warehouse which is State Street and the custodian, and I
Speaker 2: get a receipt for spy and that receipt is worth
Speaker 2: fifty is fifty thousand shares worth of receipts, then I
Speaker 2: can sell those in the open market. People can just
Speaker 2: trade these receipts all day long, and then if there's
Speaker 2: a surplus of receipts and we need to do a
Speaker 2: creation or redemption, will go back to the warehouse. So
Speaker 2: all it is is a commodity warehouse paradigm applied to
Speaker 2: stocks and bonds. And the reason that's cool is because again,
Speaker 2: when the receipts are trading, it's basically all everybody trading,
Speaker 2: all the tax implifications and everything is on them. And
Speaker 2: when a creation redemption happens, when you bring the stocks
Speaker 2: get in exchange for the receipts or shares, there's no
Speaker 2: money changing hands. And so when there's no money changing hands,
Speaker 2: there's no taxation, and so there's no tax consequence in
Speaker 2: the creation redemption process, which is the magic of why
Speaker 2: ETFs don't kick out capital distributions capital gains distribution. So
Speaker 2: that is I love stories like that because a lot
Speaker 2: of times, you know, Steve Jobs always said like nothing
Speaker 2: is wasted like that. You know the font he made,
Speaker 2: the calligraphy and the early apple he got because he
Speaker 2: just used to like skip class and go to the
Speaker 2: this writing class. Things that happen in your old life
Speaker 2: can come in really valuable or something you see overseas
Speaker 2: you apply it to your country you're in. And that's
Speaker 2: what happened here, and it was ingenius and that's the
Speaker 2: secret sauce right there. Joel Eighthan, did your eyes glaze over?
Speaker 3: Yeah? I fell asleep a little bit too.
Speaker 4: That No, that was actually a really good explanation for
Speaker 4: a topic that is kind of operational and dubba. And
Speaker 4: this is why we talk about the share classes. Why
Speaker 4: all met funds want to go towards that because they
Speaker 4: get this benefit now, so which is why there's that
Speaker 4: big push towards the ETF.
Speaker 1: Okay, next question from Crypto Roy, how much notice is
Speaker 1: usually required to close an ETF or move to a
Speaker 1: different ETF. Are there usually fees involved with closing an ETF. Also,
Speaker 1: if you move from one ETF to another, is this
Speaker 1: a taxable event?
Speaker 4: Oh, those are some good questions. I don't know about
Speaker 4: the lead time from when they closed. There's definitely an
Speaker 4: announcement they let you know, so you.
Speaker 2: Have like sixty days maybe something like that.
Speaker 3: Yeah, so they have a chance to get out.
Speaker 4: Yeah, so give me a chance to wap you into
Speaker 4: some so like etn's do this all the time. If
Speaker 4: the ETN is sort of coming to a maturity date,
Speaker 4: they will offer you to switch you into another one.
Speaker 4: So you definitely are getting notices. If you own the fund,
Speaker 4: you know the cost. Obviously there's some unwinding, paying some
Speaker 4: some of the fun administration costs, but you're pretty much
Speaker 4: gonna get what.
Speaker 3: Nav is at that day.
Speaker 2: Yeah, but you get the tax then the tax, so
Speaker 2: you're kind of Yeah, so when you if you want
Speaker 2: to switch, like let's say the Wisdom Tree such and
Speaker 2: such ETF clothes not to pick on them this whole show,
Speaker 2: but anyway, you whether you sell or they send you
Speaker 2: a check because they redeemed the funds, you got a
Speaker 2: capital gains distribution if the fund went up as you
Speaker 2: bought it. So that's why closure risk is like real,
Speaker 2: but it's not huge. It's not like loss of principal risk.
Speaker 2: You can never lose your principle in an ETF, but
Speaker 2: the closure risk is just like annoying and nobody wants
Speaker 2: to deal with that. Again, people hate taxes, so that's
Speaker 2: the problem. So yeah, that's why you don't like to
Speaker 2: see ETF's liquidate, but usually don't liquid if there's a
Speaker 2: hardlybody in there. So like there's very few casualties to
Speaker 2: ETF liquidations in general, but definitely, and this is part
Speaker 2: of why it's hard in ETFs because a lot of
Speaker 2: advisors in particular won't use you unless you've got like
Speaker 2: five hundred million a billion dollars. But how do you
Speaker 2: get that if you can't sell to anybody because people
Speaker 2: don't want to be in there just in case you close.
Speaker 2: It's a chicken and egg conundrum.
Speaker 1: Final question comes from Kyle four Kid, who asks on
Speaker 1: a macro level, Eric, how do you and your team
Speaker 1: see the ETF landscape evolving over the next ten to
Speaker 1: fifteen years? Any improvements to the ETF structure itself if needed,
Speaker 1: or we see a zero fee ETF like we have
Speaker 1: with zero fee index mutual funds.
Speaker 2: Well yeah, I mean Bank Bank in New York alread
Speaker 2: has zero that's hard that already exists. Here's the thing
Speaker 2: about zero fee, they've if you talk to people, brand
Speaker 2: is huge, and so unless Blackrock or Vanguard or State
Speaker 2: Street did zero fee, it won't matter that much. People
Speaker 2: are going to go with that brand and three BIPs.
Speaker 2: In fact, I think some people like paying a little
Speaker 2: because it feels less like you're gonna get like ripped
Speaker 2: off somewhere else. So I think three BIPs, five BIPs.
Speaker 2: You know, people are gonna want to build portfolios with
Speaker 2: ETFs under ten basis points for the next ten to
Speaker 2: twenty years. The only again, the tokenization is certainly one thing.
Speaker 2: Perhaps tokenization can improve some of the back office stuff,
Speaker 2: but again that wouldn't totally affect anybody. If anything, that
Speaker 2: would just help the issuers more maybe save a little money.
Speaker 2: But I you know, look, I think what's going to
Speaker 2: be tested is that they're gonna put stuff in ETFs
Speaker 2: that's just not liquid, and that's I think where we're
Speaker 2: going to find some experimentation where I guess private equity,
Speaker 2: private credit. Maybe they'll try to put something like I
Speaker 2: don't know, farmland and Nebraska, you know, something that's just
Speaker 2: like like that an endowment would invest in. We'd call
Speaker 2: those real assets. I would be fine with that. I think,
Speaker 2: you know, it's okay to break an egg once in
Speaker 2: a while to get the omelet. So I'm okay with
Speaker 2: experimenting with ets But it could get very interesting in
Speaker 2: terms of testing the durability of the ETF. But the
Speaker 2: other thing is you got to look overseas. That's where
Speaker 2: a lot of a growth opportunity is. They're just waking
Speaker 2: up to like what fees are and like how to
Speaker 2: make money long term. And so to me, the ETF
Speaker 2: story is like maybe fifth sixth inning in the US,
Speaker 2: but it's like second third overseas. So that's what I
Speaker 2: would look for. But I do think we're gonna see
Speaker 2: a lot of crazy because the vanilla is so hard
Speaker 2: to compete in that you will see more people launching
Speaker 2: stuff that's pretty out there and it will get a
Speaker 2: lot of copy because it's interesting. But just relax, almost
Speaker 2: all the money is going to go to the VU
Speaker 2: type stuff, and that's probably for the best. But some
Speaker 2: of that experimentation will be interesting and there'll be some
Speaker 2: evolutions there that will probably be pretty good in my opinion.
Speaker 2: But I'm generally optimistic. I have some colleagues that worry
Speaker 2: more than I do.
Speaker 3: Nathan, are you one of those colleagues.
Speaker 1: Yeah, I think see what do you see evolving in
Speaker 1: the YouTube landscape.
Speaker 4: I think sometimes someone will push it too far at
Speaker 4: one point, but overall, these are fringe products, right, it's
Speaker 4: not gonna I don't think it's gonna dislodge industry at all.
Speaker 4: It's like absolutely on fire. But I think we'll see
Speaker 4: every type of combination you can possibly think of. We
Speaker 4: did max seven single stocks. Now there's like stocks pinned
Speaker 4: against each other. Then there might be like five portfolio stocks.
Speaker 4: So I just think it's gonna be any possible combination
Speaker 4: of things you can think of. We'll be etf e's
Speaker 4: and then it's on to the next frontier, whether it's
Speaker 4: private equity, all coins, whatever. So I think that's just
Speaker 4: how it's gonna gonna evolve, which is gonna you know,
Speaker 4: products are gonna keep coming at a really rapid pace.
Speaker 3: Yeah, we probably might see a product blow up at
Speaker 3: some point, but I.
Speaker 4: Don't think it's gonna be a big deal like one
Speaker 4: of these single stock ones quantum stocks or something like that.
Speaker 4: But I don't think it's gonna be up a bruise
Speaker 4: on the industry at all.
Speaker 1: Pathan, As always, thank you for joining us on Trillions,
Speaker 1: Thanks for having me on, Thanks for listening to Trillions.
Speaker 1: Until next time. You can find us on the Bloomberg terminal,
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Speaker 1: at Eric Balchina's. Trillions is produced by Magnus Hendrickson. Brendan
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