Speaker 1: Welcome to Trilliance. I'm Joel Weber and I'm Eric bell Chnus. Eric.
Speaker 1: Later this month nine, technically the e t F first
Speaker 1: started trading, and the history of the e t F
Speaker 1: is actually something that you and I know a little
Speaker 1: bit about. The first et F out of the gate
Speaker 1: was Spider sp Y, and we've talked to a lot
Speaker 1: of people about the history of the e t F,
Speaker 1: but there was one person that we actually haven't had
Speaker 1: a chance to ever talk to, and we got him
Speaker 1: for today's episode. Who is he? Jay Baker Um and
Speaker 1: Jay Baker And he can correct me if I'm wrong,
Speaker 1: but I would call him a founding father of the
Speaker 1: e t F world. He worked with Nate Most and
Speaker 1: Steve Bloom who were at the American Stock Exchange and
Speaker 1: that's where the that's where the idea was formed. And
Speaker 1: it's a fascinating story because m X was the third
Speaker 1: place behind Nastacin and Nicey, and they were looking for
Speaker 1: something to get volume, and so they were like the
Speaker 1: story of UM, this sort of down and out exchange
Speaker 1: looking to get something going and UM they weren't getting
Speaker 1: good listings and so they side just create their own thing,
Speaker 1: you know how necessity is the mother of innovation. Uh,
Speaker 1: this is a great case of that, and so J
Speaker 1: I believe, was that am X and was tasked with
Speaker 1: coming up with a marketing plan for this new thing.
Speaker 1: UM called SPIDER, which stands for S ANDP Depository receipts
Speaker 1: and today SPY. Just to bring you up to date,
Speaker 1: is three seventy two billion dollars. That's the biggest et
Speaker 1: F in the world. It also trades the most of
Speaker 1: any E t F. UM usually trades more than the
Speaker 1: next two or three stocks combined. So it is a monster.
Speaker 1: It's like a It's created a whole ecosystem around it.
Speaker 1: Can't say enough, can't really overstate how big of a
Speaker 1: success and hit this one E t F was. And
Speaker 1: as was said in a book, I wrote that they
Speaker 1: started out making a product but ended up creating an industry.
Speaker 1: And so Jay was right there in the early days.
Speaker 1: It's gonna be fascinating to hear him kind of go
Speaker 1: through some of those, uh early memories and moments. Also
Speaker 1: joining us for this episode Katie Greifield, reporter with Bloomberg
Speaker 1: News and a frequent guest on Trillions, as well as
Speaker 1: of course Jay Baker, who's the founding member of Exchange
Speaker 1: Treated Concepts, and he's also a founding father of the
Speaker 1: e t F. And we should also just mention that
Speaker 1: we're going to re release something that Eric and I
Speaker 1: made a number of years ago called the e t
Speaker 1: F Story, which will probably come up during the conversation today,
Speaker 1: but it has a number of really interesting interviews with
Speaker 1: key people who helped create the e t F, that
Speaker 1: first e t F Spider Spy, as well as the
Speaker 1: industry that came about afterwards. This time on Trillions founding
Speaker 1: father J Baker, J. Katie, Welcome to Trillions, Thank you
Speaker 1: very much. Okay, Jay, let's Red and the Clock. You
Speaker 1: were at the American Stock Exchange in the late eighties
Speaker 1: for students of history about the E t F. The
Speaker 1: e t F was basically incepted in a white paper
Speaker 1: about Black Monday that the SEC put together. UM and
Speaker 1: there were two characters that UM Eric mentioned there, Nate
Speaker 1: Most and Stephen Bloom, who basically read that report, found
Speaker 1: a passage in it and almost reversed engineered something that
Speaker 1: was requested by the SEC. So when did you first
Speaker 1: hear about what they were working on? Okay, so let
Speaker 1: me start with you had portfolio insurance that didn't work
Speaker 1: well on on that particular day. And what that led
Speaker 1: to next that the American Stock Exchange there was a
Speaker 1: filing in for IPS Equity Index participations, and believe it
Speaker 1: or not, this product was actually launched. It was basically
Speaker 1: like the Spider, but it was based on cash. That
Speaker 1: product did gain some attention. There were people trading it,
Speaker 1: and the Chicago Mercantile sued the AMAS and they said,
Speaker 1: it's a futures contract. Now there were differences in this product.
Speaker 1: First of all, it's traded on a stock exchange. Futures
Speaker 1: have a duration. The IPS Equity inex participations did not.
Speaker 1: You could buy it on UH margin and the margins
Speaker 1: and futures are much less. So nonetheless, the Chicago Marks
Speaker 1: sued and they won the lawsuit. So next thing you know,
Speaker 1: I was calling up firms and saying, look, the IPS
Speaker 1: are going to stop trading on such and such a
Speaker 1: day after that, and once again Nate Nate, Nate Most
Speaker 1: and Steve Bloom were involved with that. But it's exactly
Speaker 1: what you mentioned before, Eric, that the American Stock Exchange
Speaker 1: would try to get the large listening. Starbucks and IBM
Speaker 1: went to the New York very very difficult Washington posters
Speaker 1: at the m X. There a bunch of oil and
Speaker 1: gas companies, but difficult to get listenings at them. So
Speaker 1: this really the IPPs part of this. But Spider, Steve
Speaker 1: Bloom and they Most got together and we're trying to
Speaker 1: figure out how you could create a product that was
Speaker 1: physically backed. Couldn't do it uncashed were sued that was
Speaker 1: backed by the actual securities. So Nate Most had a
Speaker 1: background in commodity, so he was used to golden silver
Speaker 1: and the commodities being weared house in in a warehouse.
Speaker 1: So he's trying to figure out how do you wear
Speaker 1: house five hundred stocks. So they got together with State
Speaker 1: Street Bank with s l K, which was a lead
Speaker 1: market maker. UH. Katherine Moriority was part of the legal
Speaker 1: team and the all brainstorm. And when I talked about
Speaker 1: some of the people that were involved as in Nate Most,
Speaker 1: it was Steve Bloom, no doubt about it, Jim Ross,
Speaker 1: Kathy Cucolo, Glenn Francis, all involved with the plumbing of
Speaker 1: the Spider. UH. There was a guy named Gary Eisenrachet
Speaker 1: spear leads and Kellogg. He was very instrumental and in
Speaker 1: helping out and getting the trading going. And Kathleen Moriarity
Speaker 1: seemed to be most of the time the key lawyer
Speaker 1: uh for the Spider. Now, remember it was a unit
Speaker 1: investment trust, so it was it had no board. One
Speaker 1: of the reasons it was a unit investment trust is
Speaker 1: you have no board. If the product had failed, you
Speaker 1: didn't have to continue to pay several board members. The
Speaker 1: disadvantage of a uni investment trust is you cannot loan
Speaker 1: out any of the securities for stock loan. It's actually
Speaker 1: a more conservative structure. But that was one of the
Speaker 1: motivations for keeping it as a unit investment trust, which
Speaker 1: it still is uh uh to this day. So the
Speaker 1: product um also was helped a lot by State Street
Speaker 1: Bank being involved with it. There was tremendous credibility because
Speaker 1: State Street decided to be the custodian. The amics spoke
Speaker 1: with a couple of large firms and and State Street
Speaker 1: was the one that really wanted to be the custodian
Speaker 1: for this product. So the product started trading. And I'll
Speaker 1: bring up a story where uh one of my colleagues
Speaker 1: called a block trader at a firm and said hey, listen,
Speaker 1: if you trade a bunch of spiders, I'll give you
Speaker 1: a spiders hat. And on day one, if you notice,
Speaker 1: there was a million shairs traded, So there were a
Speaker 1: couple of prints of five hundred thousand chairs UM that
Speaker 1: were done because somebody was getting a spider hat. So
Speaker 1: after that day one was a tremendous you know, there
Speaker 1: there was there was a lot of trading on the product,
Speaker 1: but as time went on, the trading sort of got
Speaker 1: much lower and and by March April May there was
Speaker 1: one particular day where it traded seventeen thousand, five hundred shairs.
Speaker 1: And what happened was myself, UM and Steve Bloom were
Speaker 1: called to Ivers Riley. Ivers Riley was the senior executive
Speaker 1: vice president at the American Stock Exchange. He mysteriously called
Speaker 1: us up to his office and he brought brought us
Speaker 1: in and he said, listen, I want you too to
Speaker 1: get together come up with an institutional marketing plan for
Speaker 1: the Spider, and I want you to get two million
Speaker 1: dollars in the Spider by the end of the year.
Speaker 1: This was probably in I don't know, May, late April
Speaker 1: something like that, And he said, you're gonna have a
Speaker 1: report directly to me. I want I want you guys
Speaker 1: to come in every two weeks and uh um speak
Speaker 1: to me about about the progress that you're making. So
Speaker 1: Steve and I basically got in touch with all the
Speaker 1: block trading desks on Wall Street, Goldman, Sachs, Deutsche Bank,
Speaker 1: I think Kid or Peabody might have been around back then,
Speaker 1: City Bank. And we went to all these firms and
Speaker 1: spoke to them, and you know, there was interest. There
Speaker 1: was interest, but it was a little bit of a
Speaker 1: shrug of the shoulders. So we kept on pursuing, going
Speaker 1: to a lot of these large UH trading firms. And
Speaker 1: at one point I called a the head the West
Speaker 1: Coast senior mutual fund sales manager about the spider and
Speaker 1: I said, uh, listen, have you heard about the spy. Later,
Speaker 1: and we had to make these calls at the American
Speaker 1: Stocks Change. Every time there's a new option, you had
Speaker 1: to call the different broker dealers. They all shrugged their shoulders,
Speaker 1: said thanks. So I made a call this senior person
Speaker 1: at a large broker dealer and they said, look, I'm
Speaker 1: calling him about the spider. And he goes, hold on,
Speaker 1: he goes, I love the spider. I owned the spider
Speaker 1: and you were never ever, ever going to get in
Speaker 1: our office again. And by the way, I hope you failed.
Speaker 1: Huge slap in the face. This this was the Will
Speaker 1: Smith Chris Rock point in my life, you know. Just
Speaker 1: I was like, whoa, I mean, um, I've made a
Speaker 1: lot of calls on behalf of the ammys and nobody
Speaker 1: had ever had, you know, such a violent reaction. But
Speaker 1: the fact of the matter is this particular firm had
Speaker 1: an SMP UH product that was eighty or ninety basis
Speaker 1: points set up as a mutual fund. So that was
Speaker 1: the day as far as I'm concerned. That was the
Speaker 1: turning point, the hostility of that phone call. I turned
Speaker 1: to Steve and I said, this isn't be successful because
Speaker 1: we never get a reaction like that. It was a
Speaker 1: threatening product because many many different firms at SMP five
Speaker 1: funds internal that were much more than nine and a
Speaker 1: half basis points uh, which was where the spider was at. So,
Speaker 1: believe it or not, even though it was a slap
Speaker 1: in the face, it was a great slap in the
Speaker 1: face to me. It gave me confidence that this product
Speaker 1: was gonna uh do do well. So then what we
Speaker 1: did was we continued going to these different firms and
Speaker 1: one of them we went to his die with Securities
Speaker 1: and the individual that we were speaking to his name
Speaker 1: Jim Phillips, and he ran a group of maybe six
Speaker 1: or seven program traders Index arbitrjurs and he was interested
Speaker 1: in in the Spider. Now, I'm I don't want to
Speaker 1: make this more complex than it should be, but there
Speaker 1: was another product out at this point. It was called
Speaker 1: the super Trust. So the MX as super Trust had
Speaker 1: six for parts to it money market SMP with a
Speaker 1: put option covered call. But the one they did have
Speaker 1: one piece that was similar to the Spider, I would
Speaker 1: say almost identical. The price I think was much higher.
Speaker 1: It was a little bit clunky because I think to
Speaker 1: buy ten shares that was around lot. But what was
Speaker 1: happening with super Trust was the other pieces weren't going particular,
Speaker 1: weren't trading a lot, but that piece was trading well.
Speaker 1: So as I was talking, when we spoke with Jim
Speaker 1: Phillips at DIIWA, he had a million questions for us.
Speaker 1: So Steve and I were answering all these questions about
Speaker 1: the creation, redemption process, the flow process, and at one
Speaker 1: point and the super trust UH product launched in November.
Speaker 1: The Spider launched in late January, so they had a
Speaker 1: three month head start. They had a billion dollars going
Speaker 1: into it, and subscriptions not in that product, but I
Speaker 1: think all the products, and of course the Spider. You know,
Speaker 1: the Spider came out at party five. Because yes, the
Speaker 1: the SMP was at four fifty. The average price of
Speaker 1: a stock in the New York stock exchanged around forty dollars.
Speaker 1: They use a devisor of ten to get it to
Speaker 1: open at forty five. When the Spiders started trading on
Speaker 1: January twenty nine, there were three creation units. The creation
Speaker 1: units were fifty thousand shares and hundred and fifty thousand
Speaker 1: shairs who were created times a price of forty five.
Speaker 1: That's six point seven million dollars was in the Spider
Speaker 1: on day one. And now you have three hundred seventy
Speaker 1: billion in the Spiders, so many creations since then. But
Speaker 1: what happened was we kept on badgering Diwa, We kept
Speaker 1: on going back and answering questions and answering questions, and
Speaker 1: one day was and this is while the volume was
Speaker 1: somewhat tepid. Remember the opening day trade was just a trade,
Speaker 1: five hundred thousand, five hundred thousands, No creations, right, you
Speaker 1: didn't see any creations. So uh so we kept going
Speaker 1: back to Diawa, and finally one day, after we had
Speaker 1: address their questions, that two things happened. Um they mentioned
Speaker 1: to me, he mentioned that Supertrust had been in there,
Speaker 1: and then he said just very casually, you know, they
Speaker 1: couldn't answer a lot of questions, and I was like,
Speaker 1: I almost fell over. Didn't say anything, just said nothing,
Speaker 1: just nodded. So what what? What? What they did at
Speaker 1: Die with that day? They literally put in a creation
Speaker 1: for I think about a hundred million that day, I
Speaker 1: mean went through the process of doing it, and then
Speaker 1: I think they created another hundred millions, So the Spider
Speaker 1: Trust jumped up a couple of hundred million. Then from
Speaker 1: that day on or shortly there after, Spider really never
Speaker 1: traded less than a hundred thousand shares a day. In
Speaker 1: I think the whole year they traded a hundred million shares,
Speaker 1: which is four hundred thousand shares a day. Now, the
Speaker 1: interesting thing was why did he do this? Nobody else
Speaker 1: was seemed to be particularly interested. The reason that Die
Speaker 1: with Securities created a couple of hundred million dollars of
Speaker 1: the spiders. Is there were people that wanted to short
Speaker 1: the spider. There weren't enough spiders around to borrow them
Speaker 1: to short it. So what they did is we called
Speaker 1: it create to loan. They created two hundred million in
Speaker 1: a couple of tranches of the spider. And meanwhile, remember
Speaker 1: their shorting SMP futures against this position. So they're long
Speaker 1: two hundred million dollars of the spider, their short two
Speaker 1: million dollars of the futures. So whether the market went
Speaker 1: up four hundred points or dropped five d their risk
Speaker 1: was ameliorated. And they kept that position on for probably
Speaker 1: nine months to ten months, and they were earning a
Speaker 1: return on it back then short term rates I think
Speaker 1: one year treasuries, two year, three something like that. So
Speaker 1: that to me was a huge turning point. So finally
Speaker 1: I'll mention this as well that when those trades were done,
Speaker 1: what you saw was the trades were printing away from
Speaker 1: the exchange. So what people were seeing was and when
Speaker 1: I say people Morgan Stanley, JP, Morgan Goldman sects are
Speaker 1: seeing a million, then a couple of days later a million,
Speaker 1: And what happens when they see that, oh gosh, that's
Speaker 1: that's that's forty million dollars? Who is it? Do we
Speaker 1: get the call? What's going on? What's and then they
Speaker 1: saw the creation. So what you all of suddenly was
Speaker 1: not only was somebody trading that that share amount, but
Speaker 1: you're seeing assets going into the fund. So it alerted people, hey,
Speaker 1: there's something going on. Look we have a product right
Speaker 1: now at etc. That when they come in they trade
Speaker 1: millions of shares. All of the big block traders are
Speaker 1: aware of it. All of them are interested in that
Speaker 1: type of flower. That's great. That's the whole story. And
Speaker 1: die way, I think is is fascinating that sometimes you
Speaker 1: just need someone to believe in you, you know when
Speaker 1: when early believer, early adopter. What you're talking about reminds
Speaker 1: me of when any new E t F launches. Sometimes,
Speaker 1: like an E t F, like jets, kind of hung
Speaker 1: in oblivion for a couple of years and then it
Speaker 1: got a couple of trades, had a nice little run
Speaker 1: in performance, and then boom, it starts trading a hundred
Speaker 1: million dollars a day, and then all of a sudden
Speaker 1: people are curious about it. So it's it's interesting that
Speaker 1: set a tone for how every launch I think goes
Speaker 1: after that. I think also what you brought up that
Speaker 1: was interesting was the fee. I was just exploring the
Speaker 1: whole world of Vanguard in a book, and the idea
Speaker 1: of the fee being used to match Vanguards five hundred
Speaker 1: funds that way you could compete head to head with
Speaker 1: Vanguard turned out to be crucial because then obviously retail
Speaker 1: investors could use this, but at ninety bits it might
Speaker 1: not take over in the retail market. Did you, when
Speaker 1: you were selling it think of it more as a
Speaker 1: mutual fund that happens to trade, or a futures contract.
Speaker 1: It's actually physically back with the thocks behind. No, no, no, no,
Speaker 1: we didn't sell it ever as a futures contract. As
Speaker 1: a matter of fact, Um, well, once again I'm not
Speaker 1: using names. One of my friends was telling somebody there
Speaker 1: were country baskets. I think they had some thing that
Speaker 1: was similar to an SMP five fund. It wasn't exactly,
Speaker 1: but that this individual was telling people it was a
Speaker 1: futures contract, and that was a no no. I called
Speaker 1: him up and and had some choice words with him.
Speaker 1: Don't start this. It's not a future sy it's backed
Speaker 1: by physical stock. We always pushed the fact that it
Speaker 1: was back I love I love the futures. They it
Speaker 1: was think about this product. You had futures that traded actively,
Speaker 1: you had options on futures, and now you had this
Speaker 1: security back by the SMP five funder. They all together
Speaker 1: two plus two equal to AID. So yeah, now what
Speaker 1: you're getting at here is this is was registered and
Speaker 1: Spy took like four years to get through the SEC.
Speaker 1: So it stat with the SEC for like four years,
Speaker 1: which is a long time. Yes, And I think that
Speaker 1: to your point, that's why I would also be like, no,
Speaker 1: this is not a derivative. This is an actual mutual
Speaker 1: fund that passed the same regulation UM as A as
Speaker 1: A as A, I don't know a t real price
Speaker 1: or a fidelity mutual fund um. And then this brings
Speaker 1: up another question. While Spy is sitting in regulatory uh
Speaker 1: with the SEC, Canada comes out and launches the TIPS.
Speaker 1: But according to my interview with Bloom, he says that
Speaker 1: the Toronto people came down and just Nate most was
Speaker 1: just cool and shared information with them. They took the
Speaker 1: idea to Canada and just got through the regulation quicker.
Speaker 1: And now Canada goes around saying they were out first.
Speaker 1: I try to put this other side to this story
Speaker 1: out there. But what's your take on that whole thing
Speaker 1: with Canada and the US. Oh? Boy, um, I'm not
Speaker 1: I don't. I don't think I was involved with those conversations,
Speaker 1: So I can't. I can't actually say that that that's
Speaker 1: what happened. That's a little bit unclear to me because
Speaker 1: I have heard for years that the Canadians said that,
Speaker 1: uh uh, you know that they actually came out with
Speaker 1: the idea first. And I think you're right. It was
Speaker 1: called tips um. But what I will say is one
Speaker 1: of the and I think Kathleen Moriarty one of the
Speaker 1: things she mentioned about Spider, Remember this is the first
Speaker 1: time something like this was done. It was sort of
Speaker 1: a closed end fund, open ended fund, right, So I
Speaker 1: remember she was saying that when it went to the SEC,
Speaker 1: it it went to almost every division of the FCC,
Speaker 1: investment management, trading and markets, economic and risk analysis, and
Speaker 1: who knows, it might have even gone to enforcement. I
Speaker 1: don't know, but that was one of the reasons that
Speaker 1: it took so long. Clearly that was another reason why
Speaker 1: it took Supertrust two years to get their exemptive relief
Speaker 1: because there's was a more complicated structure. Jay, I want
Speaker 1: to go back to your slap in the face moment
Speaker 1: that uh what is it? Will Smith Chris Rock moment,
Speaker 1: because this is something I wonder about, especially with like
Speaker 1: very popular songs like did the band did the artists
Speaker 1: know that it was going to be such a hit?
Speaker 1: And you said that you knew that it was going
Speaker 1: to be successful. But I mean when when in those
Speaker 1: four years when you when Spy was still in development,
Speaker 1: I mean, did you have any inkling that you know,
Speaker 1: e t f s were really going to take off
Speaker 1: to the extent that they have that you know one
Speaker 1: day this would be in almost four hundred billion dollar product. Yeah, No,
Speaker 1: I don't. I don't think I had that. I I
Speaker 1: what I did know partially the reason I brought up
Speaker 1: the apps was people like the apps, and I thought,
Speaker 1: this is interesting. They like the apps. They've got a
Speaker 1: love of the spider that's actually backed by by the
Speaker 1: physical And I thought, look, we were we were told
Speaker 1: we were ordered to get two hundred million dollars in
Speaker 1: that product. We didn't do a lot of thinking about.
Speaker 1: I mean, we came up with a marketing plan and
Speaker 1: ended up executing. When the volume let's say, averaging whatever,
Speaker 1: four dred thousand shares a day, it was crystal clear
Speaker 1: this was going to be a multibillion dollar product. How
Speaker 1: many billions, I don't know. And look, when you think
Speaker 1: about the American Stock Exchange, they created this product. It
Speaker 1: wasn't nastic and it wasn't the New York uh State Street,
Speaker 1: of course, is the trust they want. They were on
Speaker 1: the trust. But PDR Services is a sponsor, and the
Speaker 1: AMEX was PDR Services. They were sort of the steward
Speaker 1: of the product that had the ability to hire and
Speaker 1: fire a custodian right or a distributor. So and then
Speaker 1: it passed on to the New York Stock Exchange. You
Speaker 1: can look it up. What I think about is um
Speaker 1: the American Stock Exchange situation that as the years went
Speaker 1: by and as it was trading more and more, the
Speaker 1: AMEX market share of the volume at one point towards
Speaker 1: the end was less than one percent. You get a
Speaker 1: hundred million shares traded, they're not trading a million, they're
Speaker 1: trading four dred thousand shares. All it was trading on
Speaker 1: the different exchanges. So one of the things that I'm
Speaker 1: not we weren't. You've got to realize with the exchange,
Speaker 1: you're thinking about trading and exchange fees. But I was
Speaker 1: speaking with somebody this morning, and what would have been
Speaker 1: interesting is if the m X could have gotten two
Speaker 1: basis points in the spider two basis points on billion
Speaker 1: dollars is seventy five million dollars based on the assets
Speaker 1: that they have. Could that have been done? How could
Speaker 1: you do it? The exchanges are self regulated, the the
Speaker 1: the the SEC. I don't think one of the American
Speaker 1: stock exchanged to be uh, they weren't really an advisor.
Speaker 1: Could the AMEX have created a broker dealer? Could a
Speaker 1: clever of attorney come up and create a broker dealer?
Speaker 1: Maybe the AMEX is the distributor taking the creations of
Speaker 1: redemptions getting one or two basis points. And remember another thing,
Speaker 1: if you could get a couple of basis points in
Speaker 1: the Spider, maybe the other people that launched the vanguards
Speaker 1: the eye shares, maybe they would have been willing to.
Speaker 1: But um, that's not how it worked out. And in
Speaker 1: the end, the AMEX was trading I'll say it again,
Speaker 1: less than one percent of the total volume of a
Speaker 1: superior product that they created. That that really is um
Speaker 1: fascinating and just a little tragic. I mean it's almost like, yeah, yeah,
Speaker 1: I never thought of it that way. Here's here's another thing.
Speaker 1: I'm just praying up a couple. I know you're probably
Speaker 1: aware of this, but when the when the Union Investment
Speaker 1: Trust has a lifespan of it's either twenty or forty years.
Speaker 1: I think it's twenty years. So what people were worried
Speaker 1: about the American Stock Exchange was in twenty years, you
Speaker 1: have to roll it over to another one huge capital
Speaker 1: gain if if the SMP was out and the SMP
Speaker 1: of course was up. Remember Spider was at forty five
Speaker 1: dollars in uh January and now it's almost four hundred.
Speaker 1: So there were huge concerns about a rollover. So what
Speaker 1: they did was they ended up and this had been
Speaker 1: done before. What they ended up doing was getting eleven kids.
Speaker 1: I think you've probably heard this basically, we've we've written
Speaker 1: that story. Yeah, the trust, you wrote the whole start. Well, yeah,
Speaker 1: so you know they got eleven kids under two years old.
Speaker 1: And somebody came in my office one day and said,
Speaker 1: you know, how how old is your daughter? I said,
Speaker 1: she's nine months old. Okay, she's gonna we'd like her
Speaker 1: to be in the Spider Trust. So she was born
Speaker 1: on May seventh, nine two, so she she's a Spider baby.
Speaker 1: So her name is in the legal docs. And then
Speaker 1: Cliff Webber's daughter is in there, and Claire McGrath, who
Speaker 1: was an attorney at damics her son. So that's sort
Speaker 1: of just an interesting tidbit. By the way, when when
Speaker 1: when when Bloomberg got in touch with me, they mentioned
Speaker 1: that I had totally forgotten that I signed signed my
Speaker 1: daughter's life away on this thing. And then then the
Speaker 1: reporter came back and said, Jay, you weren't totally being upfront.
Speaker 1: What do you mean is your daughter named Julia? And
Speaker 1: I went, oh, my god, okay, she was one of
Speaker 1: the Spider babies, but I did not remembered at that time.
Speaker 1: What I'm thinking about now is is there any way
Speaker 1: that I can hire some clever lawyers and maybe get
Speaker 1: my daughter a basis point on the Spider Spider Baby.
Speaker 1: Hopefully they're listening right theoretically, yeah, I know the Spy kids.
Speaker 1: I mean just to recab um really quickly. So originally
Speaker 1: Spy was going to what expire in twenty five years.
Speaker 1: But now it's when the last Spy kid perishes. Yeah,
Speaker 1: basically it is. I think it had ten or eleven kids,
Speaker 1: and it expires twenty years after the death sort of
Speaker 1: ghoulish after the death of the last Spider baby, which
Speaker 1: in statistically means about a hundred and ten years. That's
Speaker 1: what it meant statistically. And by the way, according to
Speaker 1: a friend recently, they said, you could do you could
Speaker 1: get another set of kids and that is ten years
Speaker 1: do the same thing. Yeah, the second generation Spy kids.
Speaker 1: It's a little bit, it's a little bit googlish to
Speaker 1: that point. I wanted to sort of goalish thinking about it,
Speaker 1: because the tyranny of time, it's going to happen, the
Speaker 1: tyranny of year around and I'm going to write that town.
Speaker 1: I want to talk about sort of the next thirty years.
Speaker 1: This is something Eric and I were actually chatting about
Speaker 1: this morning because in thinking about Spies thirtieth birthday, obviously
Speaker 1: it's range supreme for thirty years. What it has what
Speaker 1: over three hundred seventy billion dollars in assets, Uh so,
Speaker 1: by far and away, it's it's dominant, especially when you
Speaker 1: think about the liquidity. But the question I want to ask,
Speaker 1: because I'm a Debbie Downer, is who takes the crown away?
Speaker 1: You know what, how long can Spy remain on top
Speaker 1: at nine basis points right now? When you have you know,
Speaker 1: competing products from black Rock, from Vanguard at three basis points.
Speaker 1: I would love to hear your thoughts on that. My
Speaker 1: thoughts are that price makes a difference, and I think
Speaker 1: at some point one of those funds could overtake it.
Speaker 1: I'm not sure that they'll overtake the trading volume because
Speaker 1: if you look at the trading volument and there's they're
Speaker 1: both millions of shares right there. There's still millions and
Speaker 1: millions of shares. But the fact is they're both at
Speaker 1: three basis points. You've got a competing product in nine
Speaker 1: and a half basis points. Nobody should be concerned about
Speaker 1: the liquidity of the Vanguard or Ice shares. Uh Core, Yeah,
Speaker 1: you know SMP funds. So it could happen, And if
Speaker 1: you look at it, they're getting closer. I mean, I
Speaker 1: think both those products are in the one of them
Speaker 1: I think is around two billion. I don't I don't
Speaker 1: have it in front of me, but um, it's not
Speaker 1: gonna happen on my watch. I just real quick interesting
Speaker 1: fun facts. Spy actually was the biggest ETF the whole time,
Speaker 1: except for one day. I think in August. G l
Speaker 1: D was bigger for one day, but then it changed
Speaker 1: and SPY took over one day. So I just want
Speaker 1: to talk about the folks who created the product. Jay,
Speaker 1: you know, Nate Most, Stephen Bloom being probably the most
Speaker 1: instrumental architects, and and I'm curious, I mean, since you
Speaker 1: knew them. Um, you know, Eric's interviewed Bloom before. Um,
Speaker 1: he's pretty quiet these days. Nate Most, obviously it passed
Speaker 1: away years ago. He was pretty old when he actually
Speaker 1: helped create it, right, So I'm curious, what did it,
Speaker 1: what did it take? What was it about? Uh, those
Speaker 1: two guys and the people around them that led to
Speaker 1: this financial innovation, Well, you know they were um so Nate.
Speaker 1: I think Nate Most got his job at the NAMES
Speaker 1: when he was seventy. You know, Nate Most, I had,
Speaker 1: I got along with him. He spoke his mind. He
Speaker 1: seventy years old, seventy one, seventy three. He did not
Speaker 1: pull punches. I wouldn't. I don't think he was particularly
Speaker 1: I don't think he was particularly political, and he spoke up.
Speaker 1: And the other thing is, and I am friendly with
Speaker 1: Steve Blohm and and he's yeah, he's um, he's still working,
Speaker 1: but not not in the securities business. And uh, Steve Bull,
Speaker 1: Steve Bloom was a bull. He was a PhD from Harvard,
Speaker 1: and they got it in in his mind to get
Speaker 1: this thing done. And he was one of the individuals
Speaker 1: that really pushed push this thing through the sec And
Speaker 1: don't get me wrong, you know Jim Ross and Glenn Francis,
Speaker 1: Cath Cathy Cucolo, But I'm talking about those two individuals
Speaker 1: at the amics. The the idea originated at the MS
Speaker 1: and as I said, PDR was a steward of the
Speaker 1: product and was involved with getting the different service providers.
Speaker 1: But um, look, they had a dynamic chemistry. And I
Speaker 1: would say it was dynamic. It was not. Were they
Speaker 1: all huggy wuggy? I wouldn't. I wouldn't say that. I
Speaker 1: would say that they they they they were both very Uh,
Speaker 1: both of them were strong willed people. Well think I
Speaker 1: think it's just two plus two equaled eight and getting
Speaker 1: things done. The other thing that about those two that
Speaker 1: I found interesting was as you said, most might have
Speaker 1: been seventy three ish and Bloom was twenty seven. You
Speaker 1: rarely have two people working together with that massive of
Speaker 1: an age gap, and I have to think that played
Speaker 1: a part in that. I guess Bloom Moore book smart
Speaker 1: at that point, and but most had a lot of
Speaker 1: life experienced worked on submarines, I mean, worked at the
Speaker 1: Pacific all that. I feel as though when someone has
Speaker 1: that much experience, they're able to like pull from that
Speaker 1: and use and find templates. And then Bloom probably had
Speaker 1: some of the um I guess the youth that's like
Speaker 1: we can do this, like he doesn't know what can't
Speaker 1: be done. And I think that age gap is really
Speaker 1: just unusual. That is unusual. And what I would say
Speaker 1: about Bloom is he's an executioner. He knows how to execute.
Speaker 1: When he gets in his mind he's going to execute,
Speaker 1: he's he is not going to give up. He's an executioner.
Speaker 1: What do you think the e t F has yet
Speaker 1: to accomplish that? It still needs to So I think
Speaker 1: last year there was six and seven billion dollars that
Speaker 1: came in slightly lower than the year before. I think
Speaker 1: it was it was seven hundred fifty billion. So what
Speaker 1: we're saying is um at a t s. We're saying
Speaker 1: a lot of interest from mutual funds that want to
Speaker 1: do versions right for for tax efficiency. And it's tricky
Speaker 1: because if you think about the mutual funds. One of
Speaker 1: my friends was telling me, one of the reasons that clients,
Speaker 1: you know, stay in mutual funds is and and and
Speaker 1: not get out and just you know, by by a
Speaker 1: spider or something like that is huge capital gains they've
Speaker 1: they've they've had, you know, they've owned the mutual fund forever.
Speaker 1: So if you can convert a mutual fund in a
Speaker 1: tax free manner, you still have your low cost basis,
Speaker 1: but you're not getting hit with a sale. I think
Speaker 1: that's a huge, huge advantage. And we're seeing more mutual
Speaker 1: funds doing this the same thing with separately managed accounts.
Speaker 1: Their firms out there with large and small separately managed
Speaker 1: accounts that have started to convert their separately managed accounts
Speaker 1: into e t f because the t f is is
Speaker 1: a more tax efficient structure. I think we're at just
Speaker 1: the beginning of that, and this could be billions and
Speaker 1: billions of dollars because generally, if you think about the
Speaker 1: mutual funds are to do it. They're probably larger ones,
Speaker 1: you know, mutual funds that have you know, hundreds of
Speaker 1: millions of dollars. You could do it for a small
Speaker 1: one as well. But we're getting the phone calls on this.
Speaker 1: Lots of people are getting the phone calls and were
Speaker 1: ready to do it, and um, I think that that's
Speaker 1: gonna be a huge part of the growth. What I
Speaker 1: will say is it's harder to do the thematic. When
Speaker 1: you look at the thematic products, a lot of them
Speaker 1: went up, they went down. It's harder to do with thematic.
Speaker 1: You have to have something very very interesting and unusual.
Speaker 1: And one of my favorite et F and Eric you
Speaker 1: brought up was the jets. I've been watching that for
Speaker 1: years and uh, quite frankly, he's the only one that
Speaker 1: has it. It's was sort of dormant for six or
Speaker 1: seven years, and exactly what you said, pandemic came. The
Speaker 1: airlines were super volatile. That thing started. That thing had
Speaker 1: forty million and popped up to six billion with millions
Speaker 1: of shares traded. But not every E t F does
Speaker 1: it that that. Luckily for the individual running he kept
Speaker 1: it open and for eight years, it didn't do a lot,
Speaker 1: got up to a hundred, dropped to forty. But um,
Speaker 1: the pandemic ignited. That was that was like a stick
Speaker 1: of dynamite for for the airline, that air airline et
Speaker 1: F well, another stick of dining in my I'm not
Speaker 1: sure how exactly I want to phrase the metaphor here,
Speaker 1: but when you think about the pandemic and what it
Speaker 1: meant for e t f s, I mean it's hard
Speaker 1: not to have a conversation about fixed income e t
Speaker 1: f s for example, like the FED actually stepping in
Speaker 1: buying credit e t f s. I feel like that
Speaker 1: was a big, um, you know, point of legitimization. Is
Speaker 1: that a word, jol, You're you're the you're the editor here, Um,
Speaker 1: but I kind of and I mean we're talking about
Speaker 1: sector e t f s. We talked just brought up
Speaker 1: fixed income et fs. Do I want to get your
Speaker 1: thoughts on whether we're like reaching the existential limits of
Speaker 1: what an e t F is because one of the
Speaker 1: big innovations in two was single stock e t f
Speaker 1: s for example. So again, just in reflecting on the
Speaker 1: past thirty years, going from just a passive UH index
Speaker 1: tracking exchange traded fund, which was extremely revolutionary. Here we are, uh,
Speaker 1: you know, talking about single stock ETFs, all flavors of
Speaker 1: leverage gtfs. We still don't have a bitcoin ETF, but
Speaker 1: what more white spaces there? Yeah, So what I think is,
Speaker 1: I I still think that there's a lot of room
Speaker 1: for fixed income ETFs. And there are a couple of
Speaker 1: new companies there that have launched, like twenty five Bond
Speaker 1: Blocks is one, and I think they've got a lot
Speaker 1: of people there, They've got a good infrastructure. I think
Speaker 1: they're they're gonna get there. Look, the single stock ETFs,
Speaker 1: the only one that's got any assets is really the Tesla.
Speaker 1: I think it's up to a hundred million. The rest
Speaker 1: of them really haven't done well. Uh you're gonna You're
Speaker 1: always gonna have and I'm not I'm not against this,
Speaker 1: you know, but I never really thought that the single
Speaker 1: stock ETFs would do that well. Um, I understand people
Speaker 1: you know, trying to you know, you know, strike eening again,
Speaker 1: but um, you know, the markets sort of said that
Speaker 1: there's not that much interest in those particular products. Yet
Speaker 1: I would say, you know, a set of twenty five new,
Speaker 1: very low priced, different fixed income products. I think I
Speaker 1: think that will work. I think that there will continue
Speaker 1: to be new and clever e t F s. The
Speaker 1: single stock. I shrugged my shoulders about not against them
Speaker 1: if they take off, go go go. But yeah, you know,
Speaker 1: a lot of the remember interviewing some other of the
Speaker 1: founding father types, and I think a lot of them
Speaker 1: were just like, it's hard to believe what they've put
Speaker 1: into et s over the years, but they were just
Speaker 1: thinking of equities at the time. But yeah, it's a
Speaker 1: great technology. Um. I compare it to the MP three
Speaker 1: in that it's it's something. It's not an asset class,
Speaker 1: it's not a sector, it's a vehicle. It is something
Speaker 1: that has made the consumption or the people getting exposure cheaper, easier,
Speaker 1: more flexible, more liquid. So you're gonna see a lot
Speaker 1: of people try lot of stuff, I think in the
Speaker 1: E t F rapper over the years, but most of
Speaker 1: the flows are probably are going to go to play
Speaker 1: vanilla stuff. And the conversions are interesting because that's instant flow.
Speaker 1: I mean, that's that's probably money that would eventually have
Speaker 1: left the mutual fund structure and gone to the et
Speaker 1: F anyway slowly in a migration. So the fund company
Speaker 1: is smart, in my opinion, just to move them right
Speaker 1: over and not lose those people. I think that makes
Speaker 1: a lot of sense. And so we're very bullish conversions
Speaker 1: as you are. And yeah, I think right now E
Speaker 1: T s account for the assets mutual funds have, but
Speaker 1: I do see that number eclipsing maybe even over the
Speaker 1: next thirty years. Um, I think mutual funds in four
Speaker 1: one ks probably are gonna that's their alamo. I don't.
Speaker 1: I think they'll be there a long time. E T
Speaker 1: f s don't really they don't like have a lot
Speaker 1: of advantages inside of four one K versus outside. They
Speaker 1: really do. So I agree with all this. I think
Speaker 1: it's just it's fascinating that you that you're still in
Speaker 1: the industry and that you're like helping future spies if
Speaker 1: you will launch every day. There's only a few of you,
Speaker 1: probably kind of on one hand, that have been there
Speaker 1: since basically day one and are still doing their thing
Speaker 1: in the industry. Yeah. No, I don't know that's good
Speaker 1: or bad, but no, I I still I still enjoy it.
Speaker 1: And uh, you know, I'm still with with E T C.
Speaker 1: I mean we're up to you know. I don't know,
Speaker 1: five and a half billion, So we do hear a
Speaker 1: lot of interesting ideas. And remember another thing, the marketplace
Speaker 1: sorts out these products too. Somebody comes up with something
Speaker 1: that that's clever and and good, it will draw assets.
Speaker 1: And you know, on the flip side, I still think
Speaker 1: you need a lot of marketing when when when you're
Speaker 1: launching these problems. Well just real quick on this. This
Speaker 1: is something people missed it like, oh, et F so
Speaker 1: much marketing, and that was both one of Bogel's complaints.
Speaker 1: I get it. But here's the thing. Mutual funds literally
Speaker 1: paid off a broker, and the broker would put the client.
Speaker 1: By the way, the payoff came from the end client.
Speaker 1: So the whole mutual fund industry was largely built on kickbacks,
Speaker 1: and so E T s or a meritocracy. Well, when
Speaker 1: you have a meritocracy, you gotta market more. You've got
Speaker 1: to try to get your voice out there because you
Speaker 1: can't pay someone off. So I think the marketing isn't
Speaker 1: is a is a way to kind of replace the kickbacks.
Speaker 1: And so I understand why there's marketing and there and
Speaker 1: there should be I don't I don't find it to
Speaker 1: be I'm not I don't demonize it as much because
Speaker 1: to me, it's better to have more marketing than a
Speaker 1: system of kickbacks where you're putting where you're consciously putting
Speaker 1: a retail investor money in something you know. Isn't that good? Yeah?
Speaker 1: What I You know, it's interesting because we've got UM
Speaker 1: a couple of our clients, Robo and E m q Q.
Speaker 1: One of the things that they do and I think
Speaker 1: they've done this successfully. You need to tell a story,
Speaker 1: as one of them says. But what they do is
Speaker 1: UM they do webinars, but they do them themselves. So
Speaker 1: if they're let's say, uh in a big broker dealer,
Speaker 1: they'll send out an invitation to the broker's financial consultants
Speaker 1: that are in Florida thirty minute webinar and remember, if
Speaker 1: they can speak to one law one one financial consultant
Speaker 1: for an hour, they will do that. If they get
Speaker 1: thirty financial consultants, people say that's terrible. It's not terrible
Speaker 1: because there's no continuing in the way these individuals do it.
Speaker 1: And you've got thirty people speak with one of them
Speaker 1: for an hour, to speak with thirty for an hour,
Speaker 1: and it cost you five or six hundred dollars well
Speaker 1: worth it. Both of those firms employ that, and both
Speaker 1: of them I think that's helped get the mass US.
Speaker 1: Now once again, you have to have something interesting, you
Speaker 1: have to know how to tell a story, and you
Speaker 1: have to keep their their interests. But but I do
Speaker 1: think that is important and it's hard work. You know.
Speaker 1: I call it the E t F terror Dome for
Speaker 1: a reason. A lot of the people who use the
Speaker 1: E t f s are smart. It's after tax money.
Speaker 1: It's picky, and they got Vanguard in there, and they're
Speaker 1: they're they're spoiled. These investors are spoiled, so you really
Speaker 1: have to find something of value for them. And the
Speaker 1: good news is I think all the investors demand creates
Speaker 1: an industry that has really had to hustle. Not everybody
Speaker 1: makes it, but anybody can make it. Okay, j Last
Speaker 1: question I gotta ask you. You've been around, You've seen
Speaker 1: a few tickers. What is your favorite ticker other than
Speaker 1: any that you've helped launch? Uh Um, you know, I
Speaker 1: I am. I am fond of jets. I will say that. Okay, good, simple,
Speaker 1: but I I think about it more than I should. Yeah, okay, God,
Speaker 1: I mean you guys launched robo. I think that's what's
Speaker 1: a top twentier. But uh yeah, jets is right up there, Virgin,
Speaker 1: Now listen. Of course I would have mentioned our own products,
Speaker 1: but I helped launch that. Yeah, right, that, That's what
Speaker 1: I'm saying. So, but I don't I think robot was
Speaker 1: brought up once as a favorite ticker. J Baker, thanks
Speaker 1: for joining us on Trillions. All right, Thanks for listening
Speaker 1: to Trillions until next time. You can find us on
Speaker 1: the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and
Speaker 1: wherever else you like to listen. We'd love to hear
Speaker 1: from you. We're on Twitter. I'm at Joel webbershow he's
Speaker 1: at Eric Faltinus. This episode of Trillions was produced by
Speaker 1: Magnet Henderson, but