WEBVTT - ETFs Are Eating the Financial World and They're Not Done Yet 0:00:08.920 --> 0:00:14.160 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.680 --> 0:00:20.400 I'm Joe Wisenthal, and unfortunately is terrible news. My co 0:00:20.560 --> 0:00:24.919 host and colleague Tracy Alloway is traveling this week and 0:00:25.320 --> 0:00:28.400 couldn't join me for today's episode, so I'm already starting 0:00:28.440 --> 0:00:33.080 the episode in a bad mood. Nonetheless, I will persist 0:00:33.200 --> 0:00:37.120 because I'm very excited about today's topic. Probably one of 0:00:37.120 --> 0:00:41.919 the biggest stories, themes, whatever you want to call it 0:00:42.000 --> 0:00:45.240 in finance right now, and that is the rise, the 0:00:45.320 --> 0:00:50.680 seemingly inexorable rise of the E t F exchange traded funds, 0:00:51.440 --> 0:00:54.920 completely changing the way how people invest, being able to 0:00:54.960 --> 0:00:58.640 invest in an index, or a strategy, or all kinds 0:00:58.680 --> 0:01:03.639 of other stuff just simply as buying a stock, completely 0:01:03.760 --> 0:01:09.000 revolutionizing the industry, striking terror in the hearts of many managers. 0:01:09.400 --> 0:01:11.880 People say, E t F s arey this godsend that 0:01:12.000 --> 0:01:15.280 have made investing much cheaper and simpler for the average person, 0:01:15.520 --> 0:01:19.040 enabling more complex strategies. Other people say it's going to 0:01:19.080 --> 0:01:21.600 be the end of capitalism and that it's the road 0:01:21.959 --> 0:01:26.440 to Marxism. Nothing quite causes controversy like E t F. 0:01:26.520 --> 0:01:28.679 Some people think they're going to be the source of 0:01:28.720 --> 0:01:31.639 the next systemic risk. So there is literally an endless 0:01:31.640 --> 0:01:33.840 amount of stuff we could talk about with e t 0:01:34.000 --> 0:01:36.240 f s. And to do that, well, you have two 0:01:36.280 --> 0:01:39.959 great guests who are also my colleagues. Joe Weber, he's 0:01:40.000 --> 0:01:43.440 the editor in chief of Bloomberg Markets magazine, and Eric 0:01:43.440 --> 0:01:46.200 bel Tunis. He is a E t F analyst for 0:01:46.200 --> 0:01:50.360 Bloomberg Intelligence. He's literally written the book about e t 0:01:50.520 --> 0:01:53.160 f s, knows all about how they work. And so 0:01:53.240 --> 0:01:55.840 today we're going to talk to both of them, or 0:01:55.880 --> 0:01:58.680 I'm going to talk to both of them about how 0:01:58.760 --> 0:02:01.840 E t F I've eaten the finance world and where 0:02:01.840 --> 0:02:04.880 they're going next, how they're going to evolve, how they're 0:02:04.960 --> 0:02:09.440 changing the industry every single day. So without further Ado, 0:02:09.760 --> 0:02:12.520 let me welcome Joel and Eric. Thanks for having us, 0:02:12.760 --> 0:02:16.040 Thank you, thanks to both of you. So Eric, I 0:02:16.040 --> 0:02:18.560 want to start with you, but you know, both of 0:02:18.560 --> 0:02:21.280 you just jump in, let's have a conversation. I would 0:02:21.320 --> 0:02:25.120 like to make sure that I introduced things correctly because 0:02:25.160 --> 0:02:26.680 I think you know, I want to make sure that 0:02:26.760 --> 0:02:28.840 I set it up. But when you look at the 0:02:28.880 --> 0:02:30.840 E t F world, and this is what you do 0:02:31.480 --> 0:02:34.400 at Bloomberg from the minute you get on to the 0:02:34.440 --> 0:02:37.080 moment you log off, and even after that, and even 0:02:37.120 --> 0:02:39.679 after that, you're thinking about E T S all the time. 0:02:39.720 --> 0:02:43.320 This is your life's work understanding this behemoth. Is that 0:02:43.360 --> 0:02:47.160 a reasonable characterization of what's going on? Yeah? I mean, 0:02:47.480 --> 0:02:50.800 you know, I remember I was in Bloomberg Data back 0:02:50.840 --> 0:02:54.200 in the early two thousand's and the only reason I 0:02:54.240 --> 0:02:56.280 got E T S I was covering mutual funds. I 0:02:56.280 --> 0:02:57.840 had been been a fun reporter back in the day, 0:02:57.880 --> 0:02:59.960 and I got E T F assigned to me because 0:03:00.000 --> 0:03:02.720 a woman covering them. When on return he leave, it 0:03:02.760 --> 0:03:05.960 never came back. I remember it was two thousand and six. 0:03:06.000 --> 0:03:08.080 It was just right after g l D had launched, 0:03:08.919 --> 0:03:10.840 and it took me, you know, I can't remember exactly 0:03:10.840 --> 0:03:12.800 the timeline, but it just took me very quickly to 0:03:12.840 --> 0:03:15.000 realize that these things were going to be a big deal, 0:03:15.600 --> 0:03:18.079 and I just saw an opportunity. So it was already 0:03:18.120 --> 0:03:20.920 familiar with funds, and I think that when you're familiar 0:03:20.919 --> 0:03:22.880 with mutual funds and hedge funds and clothes and funds 0:03:23.200 --> 0:03:24.800 and you start to sniff around the E T F, 0:03:24.880 --> 0:03:27.520 you realize this thing isn't just like one little notch 0:03:27.880 --> 0:03:31.200 better than the rest, it's like six notches better. It's 0:03:31.240 --> 0:03:34.920 a game changer. So I definitely, um, I guess life's 0:03:34.960 --> 0:03:37.560 work is seems strong, but I guess it is. Uh. 0:03:37.640 --> 0:03:39.960 I have been doing it for a decade. So you 0:03:40.080 --> 0:03:42.920 mentioned something there that's very interesting, which is the g 0:03:43.120 --> 0:03:46.840 l D e t F, which is the Spider Gold 0:03:46.920 --> 0:03:49.440 Shares e t F. It tracks the price of gold. 0:03:49.560 --> 0:03:52.880 It launched in late two thousand and four. More or less, 0:03:53.680 --> 0:03:56.880 buying it gives you exposure very directly to the price 0:03:56.880 --> 0:04:00.320 of gold, and that seems very simple you by this. 0:04:00.480 --> 0:04:03.760 It holds gold. But it is revolutionary, isn't it Because 0:04:03.800 --> 0:04:05.960 prior to the existence of this e t F, if 0:04:05.960 --> 0:04:09.240 you wanted to have exposure to gold, it was not easy. 0:04:09.280 --> 0:04:13.320 You had to go out and buy maybe by physical gold, 0:04:13.680 --> 0:04:15.800 and that was difficult, and it was this huge mark up. 0:04:15.880 --> 0:04:17.240 And then you have to figure out safe. How are 0:04:17.240 --> 0:04:19.200 you gonna you get a safe, You're gonna figure out 0:04:19.200 --> 0:04:22.640 how to still remember the password, remember the password, And 0:04:22.760 --> 0:04:29.360 suddenly this very complicated, costly, time consuming strategy is as 0:04:29.400 --> 0:04:32.440 simple as buying a share of Microsoft. I think what 0:04:32.480 --> 0:04:34.280 you're describing is two things that come to mind to 0:04:34.320 --> 0:04:37.760 me is convenience, I mean everything in this world, it's 0:04:37.800 --> 0:04:40.599 a business. Usually convenience is a big part of why 0:04:40.640 --> 0:04:44.640 people like it. And the second thing is the democratization 0:04:44.680 --> 0:04:47.920 of investing. So the idea that the you know, being 0:04:47.920 --> 0:04:49.840 able to buy anything under the sun like it was 0:04:49.960 --> 0:04:52.919 shares of Microsoft, and everybody likes the way stocks trade, 0:04:52.960 --> 0:04:56.520 so you're essentially making everything trade like stock. So you know, 0:04:56.560 --> 0:04:59.920 the Bloomberg terminal has the yellow keys. All those things 0:05:00.000 --> 0:05:04.039 now trade like equities. And the structure itself allows for 0:05:05.000 --> 0:05:08.120 some arbitrage which helps the nav stay close to the price, 0:05:08.160 --> 0:05:11.360 so you get a fair deal on what you're looking 0:05:11.400 --> 0:05:13.160 to get and you can and now it's level the 0:05:13.160 --> 0:05:15.600 playing field. And the other thing about it, it's democratized. 0:05:15.640 --> 0:05:18.440 That is, everyone pays the same price. In mutual funds, 0:05:18.800 --> 0:05:20.880 you have these share classes that are like a regressive 0:05:20.920 --> 0:05:24.120 tax system, and with the e t F, it basically 0:05:24.160 --> 0:05:27.279 everybody gets the institutional level feed. It's like the Sam's 0:05:27.279 --> 0:05:29.440 wholesale club. The thing that I wanted to kind of 0:05:29.480 --> 0:05:31.840 point out, Eric was I was looking at flows here 0:05:32.440 --> 0:05:36.160 and you know Spy which tracks s actually was the 0:05:36.279 --> 0:05:39.440 very first e t F, which which you've actually written 0:05:39.480 --> 0:05:42.560 about for me and Bloomberg markets, but there are obviously 0:05:42.600 --> 0:05:45.400 other e t F s since then which that came 0:05:45.440 --> 0:05:49.960 out in So even though spies the biggest E t 0:05:50.120 --> 0:05:54.600 F of all, there are other competitors, right. And one 0:05:54.600 --> 0:05:56.480 of the things that's happened this year when we look 0:05:56.520 --> 0:05:59.920 at flows is that even though the spy has is 0:06:00.080 --> 0:06:05.360 up for the year to date, flows are way down, right, 0:06:05.440 --> 0:06:09.560 and other SMP five products are up. What's going on there? Yeah? 0:06:09.600 --> 0:06:11.800 So the E t F industry, you know, I refer 0:06:11.880 --> 0:06:14.240 to it as a jungle as you know, droll because 0:06:14.240 --> 0:06:18.359 it's brutal. People are undercutting fees and there's similar products 0:06:18.920 --> 0:06:21.080 and there's hardly any money. I mean, eat F industry 0:06:21.120 --> 0:06:23.479 only produces about six billion dollars a year in revenue. 0:06:23.880 --> 0:06:26.239 To put that into perspective, hedge funds make about sixty 0:06:26.279 --> 0:06:29.359 five billion a year in revenue, so and they have 0:06:29.440 --> 0:06:32.600 less assets. So there's not much assets and people are 0:06:32.600 --> 0:06:36.240 calling and so spies outflows are a function of black Rock, 0:06:36.279 --> 0:06:38.480 who has i VV which is the other smp F 0:06:39.080 --> 0:06:42.599 t F Vanguard has one two came in at point 0:06:42.600 --> 0:06:44.520 oh four percent, so they lower their fee from point 0:06:44.560 --> 0:06:46.560 of seven to point oh four is five charges point 0:06:46.560 --> 0:06:49.760 o nine and just a couple of basis points was 0:06:49.880 --> 0:06:54.360 enough to completely change the flows. And SPY is not 0:06:54.440 --> 0:06:56.280 in any trouble. They don't, don't feel bad for it. 0:06:56.279 --> 0:06:59.960 It's still spy will always appeal to like really hardcore trader, 0:07:00.080 --> 0:07:02.560 some big institutions. It It trades more each here than 0:07:02.640 --> 0:07:08.000 Japan's GDP basically, and there's you know, options market is massive, 0:07:08.120 --> 0:07:13.119 and so ultimately i VV has been stealing not institutional money, 0:07:13.160 --> 0:07:16.320 but retail and advisor money. They care more about the 0:07:16.360 --> 0:07:18.280 feed because when you go in long term, the expense 0:07:18.360 --> 0:07:21.200 rat sue does matter way more than any little like 0:07:21.320 --> 0:07:24.160 extra basis point on the spread, which is I think 0:07:24.440 --> 0:07:26.440 an interesting thing to keep in mind here is that 0:07:27.040 --> 0:07:29.840 buying and holding e t f s is kind of 0:07:29.840 --> 0:07:32.840 a recent phenomenon, right because here to date it's been 0:07:32.840 --> 0:07:35.200 more of a trading strategy, which is always also the 0:07:35.280 --> 0:07:38.320 knock on e t f s because they're so easy 0:07:38.480 --> 0:07:41.800 to trade with, people just trade with them constantly. But 0:07:41.880 --> 0:07:44.680 buying and holding because they're so cheap, it's sort of 0:07:44.720 --> 0:07:47.840 really catching on now, right. I called this the investor 0:07:48.040 --> 0:07:52.560 enlightenment age, where investors are finally understanding the importance of cost. 0:07:53.320 --> 0:07:55.920 They're getting better at asset allocation. But the next phase 0:07:55.960 --> 0:07:58.640 of this is behavior, And I think there is some 0:07:58.840 --> 0:08:02.560 credence to John Bogel's criticism of heifs that the temptation 0:08:02.640 --> 0:08:04.680 to trade goes up a lot, unlike a mutual fund, 0:08:04.680 --> 0:08:06.600 where it's like just kind of it's just like too 0:08:06.600 --> 0:08:08.160 annoying to have to sell it and you get out 0:08:08.160 --> 0:08:09.520 the end of the day. But if you could trade 0:08:09.560 --> 0:08:12.600 intra day, the temptation goes up. And I think if 0:08:12.640 --> 0:08:17.520 you do too much trading, you basically completely kill all 0:08:17.560 --> 0:08:20.240 of the cost savings. So I think the next baton 0:08:20.440 --> 0:08:23.520 is like, how do you basically not trade yourself out 0:08:23.520 --> 0:08:25.880 of the cost savings from using the et F in 0:08:25.880 --> 0:08:28.120 the first place. But there is some buying and holding. 0:08:37.080 --> 0:08:40.800 So there's two things here that I think are really important. 0:08:40.920 --> 0:08:44.520 And one is you know, again it's similar to the 0:08:44.559 --> 0:08:46.960 gold ETF. You think, oh, it's really simple. You buy 0:08:46.960 --> 0:08:48.840 the ETF. It just tracks the gold. That's not a 0:08:48.840 --> 0:08:51.640 complex strategy. But when you think about how difficult it 0:08:51.720 --> 0:08:54.560 is to actually own golden story, it turns out that 0:08:54.920 --> 0:08:58.000 something very difficult has become very simple. It's the same 0:08:58.080 --> 0:09:00.360 for this, right, I mean, like, there wouldn't wuld be 0:09:00.400 --> 0:09:02.880 prior to the existence of this e t F. We 0:09:02.960 --> 0:09:06.840 think of an STP five index tracker as about as 0:09:06.920 --> 0:09:09.760 plain vanilla as it gets when it comes to investing. 0:09:10.080 --> 0:09:15.839 But imagine the impossibility for the average person of replicating 0:09:15.880 --> 0:09:19.880 that on their own buying five stocks, if they wanted 0:09:19.920 --> 0:09:21.880 to trade that in and out, it would be essentially 0:09:21.920 --> 0:09:24.720 impossible being able to, you know, always trade in and 0:09:24.720 --> 0:09:28.360 out of this perfectly balanced index of five stocks. That 0:09:28.400 --> 0:09:33.520 would actually qualify as an extremely complicated thing to do. Um. 0:09:33.559 --> 0:09:36.240 You know, before we even get into more complicated ETFs. 0:09:36.440 --> 0:09:39.880 That alone would be a you know, investment vehicle that 0:09:39.960 --> 0:09:43.719 the person you know, would be almost impossible. Now, we 0:09:43.840 --> 0:09:47.440 talked about this incredible fee compression that we're seeing and 0:09:47.559 --> 0:09:50.880 the idea of like people going crazy finding the e 0:09:51.000 --> 0:09:53.440 t F that offers the same thing for a slightly 0:09:53.520 --> 0:09:57.160 lower fee um, and this is a big part why 0:09:57.280 --> 0:10:00.200 these vehicles strike terror in the heart of of the 0:10:00.200 --> 0:10:03.920 financial industry, just because the extraordinary you know, this is 0:10:03.920 --> 0:10:07.280 where people make their money, the extraordinary feed deflation. We're saying, Well, 0:10:07.280 --> 0:10:09.200 I think the other thing to mention there too, is 0:10:09.240 --> 0:10:11.760 that this is a first and foremost sort of an 0:10:11.800 --> 0:10:14.440 improvement on the mutual fund, right, which was an index 0:10:14.480 --> 0:10:19.640 thing already you can always buy it was, and you 0:10:19.640 --> 0:10:23.880 couldn't trade it into day. But then the vehicle itself 0:10:24.200 --> 0:10:27.400 went from you know, just whatever index you want to track, 0:10:27.520 --> 0:10:31.000 to boy, we can make anything an index. And not 0:10:31.040 --> 0:10:33.280 only can we make anything an index, but we can 0:10:33.280 --> 0:10:36.800 look at oil, which you, as a retail investor, could 0:10:36.880 --> 0:10:39.400 never touch before, and all of a sudden, now you 0:10:39.440 --> 0:10:42.559 can dabble in things that are really crazy, I think 0:10:42.559 --> 0:10:45.800 from a retail's perspective, and as a consumer, I think 0:10:45.880 --> 0:10:47.840 that's the scary part, is that you can look at 0:10:47.880 --> 0:10:51.079 this and you can buy anything you want, even though 0:10:51.120 --> 0:10:54.160 you might not understand. Well, let's talk about that, Eric, 0:10:54.240 --> 0:10:58.200 because one of the most you know, biggest phenomenons of 0:10:58.240 --> 0:11:00.559 the last year, maybe a couple of years, but it's 0:11:00.559 --> 0:11:02.920 really sort of taken on life of its own is 0:11:03.200 --> 0:11:07.680 people trading volatility products, so exchange traded notes similar to 0:11:07.679 --> 0:11:11.440 e t f s that track not a specific basket 0:11:11.520 --> 0:11:15.760 of equities or any or even a commodity, but volatility itself. 0:11:15.800 --> 0:11:18.800 Explained to us what those are and why they've become 0:11:18.840 --> 0:11:22.680 this subject of fascination. You know, the VIX in general, 0:11:22.760 --> 0:11:25.040 it's like betting on fear. And I think that's just 0:11:26.520 --> 0:11:29.280 here's the thing the VIX in general, um, I call 0:11:29.320 --> 0:11:31.360 it media proof. And the E t N that tracks 0:11:31.400 --> 0:11:34.000 is VXX. That's the main When that goes long, vixed 0:11:34.040 --> 0:11:36.920 futures on the short end of the curve, that thing, 0:11:37.320 --> 0:11:39.280 because you have to roll the future is it basically 0:11:40.080 --> 0:11:44.520 will lose about a year just on that rolling. Uh. 0:11:44.760 --> 0:11:48.880 Some call it decay, but people still trade the you 0:11:48.920 --> 0:11:51.160 know what out of it every day and it's never 0:11:51.200 --> 0:11:53.679 had one bit of good ink written about it. It's 0:11:53.760 --> 0:11:56.880 media proof because why when the market goes down like 0:11:56.880 --> 0:12:00.280 city SMP goes down two, the VIX would be up 0:12:00.360 --> 0:12:04.480 like say, I don't know, the xx would get up 0:12:04.480 --> 0:12:07.920 about half that nine So nine percent is more than 0:12:08.640 --> 0:12:11.920 is more than even a negative triple leverage inverse S 0:12:11.960 --> 0:12:14.080 and P five hundred. So I called it's the jackpot. 0:12:14.440 --> 0:12:17.640 When VIX works, it's like the payout from heaven. So 0:12:17.679 --> 0:12:20.400 that's one reason people go along the VIX E T 0:12:20.760 --> 0:12:22.880 S and the short one x I V which you 0:12:22.920 --> 0:12:25.040 and I've discussed a lot. I think he called the 0:12:25.040 --> 0:12:28.040 magic money machine, if I'm correct, which I think is 0:12:28.080 --> 0:12:31.439 a perfect name for it because it just spits out money. Um. 0:12:31.480 --> 0:12:33.440 I sometimes call it the greatest of all time because 0:12:33.440 --> 0:12:35.880 it's had the best performance of any product ever in 0:12:35.880 --> 0:12:38.280 the existence of e t s. Seriously, if you're listening 0:12:38.320 --> 0:12:41.680 to this, if you're at home and you've never checked 0:12:41.720 --> 0:12:44.640 out the ticker x I V, bring it up somewhere. 0:12:45.040 --> 0:12:47.720 Take a look at this chart. It just goes up. 0:12:47.760 --> 0:12:50.520 I mean, so the thing is is that I gotta 0:12:50.559 --> 0:12:53.280 be really careful. It's one day it's not gonna go up, 0:12:53.400 --> 0:12:55.280 So I don't want to be like representing that you're 0:12:55.280 --> 0:12:57.840 going to make money on this. However, here to four, 0:12:58.040 --> 0:13:02.160 since its existence in it goes up. Occasionally, it has 0:13:02.240 --> 0:13:05.600 these really sharp draw downs because when volatility does spike, 0:13:05.600 --> 0:13:08.880 it gets crushed, but it almost completely erases them very 0:13:08.960 --> 0:13:11.679 quick after. In uh, you know, since the beginning of 0:13:12.679 --> 0:13:17.120 it started around twenty, it's up fivefold. So betting against 0:13:17.160 --> 0:13:20.440 volatility has been like, just this incredibly good trade and 0:13:20.480 --> 0:13:24.400 this vehicle has just made people an extraordinary amount of money. Yeah, 0:13:24.400 --> 0:13:27.360 I mean, this x I V ultimately takes advantage of 0:13:27.400 --> 0:13:30.679 what that a year loss in VXX that I talked about, 0:13:31.080 --> 0:13:34.760 that's a gain for x I V. So somebody just 0:13:34.880 --> 0:13:37.560 and that that's sort of the innovation of ets. People 0:13:37.559 --> 0:13:39.000 complain about this one thing and then all of a 0:13:39.040 --> 0:13:40.920 sudden there's a new ETF to like take advantage of 0:13:40.960 --> 0:13:44.400 that complaint or correct it. And x I V. You know, 0:13:44.480 --> 0:13:47.600 it's controversial, but as long as vault stay is low, 0:13:48.200 --> 0:13:50.560 it doesn't make money on VIX going down. It makes 0:13:50.559 --> 0:13:54.440 money on basically the role, so it benefits from that. 0:13:54.480 --> 0:13:57.880 But it certainly is something that I think, like we're 0:13:57.880 --> 0:14:00.960 developing this rating system at b I where we're going 0:14:01.040 --> 0:14:03.079 to give every E t F a green, yellow or 0:14:03.200 --> 0:14:06.679 red light, and this would be a red light. Doesn't 0:14:06.679 --> 0:14:08.400 mean you can't use. It just means that if your 0:14:08.400 --> 0:14:10.120 retail you really need to read the fine print and 0:14:10.160 --> 0:14:12.560 understand what you're buying. Because x I V on a 0:14:12.559 --> 0:14:16.520 bad day could go down in a day, right and 0:14:16.520 --> 0:14:19.080 it wouldn't even take anything that extraordinary for that to 0:14:19.120 --> 0:14:22.240 happen right like around. But I think breggs that it 0:14:22.280 --> 0:14:26.200 went down. I can't know in the exactly, maybe August 0:14:26.720 --> 0:14:30.400 it was down like thirty or over two days, um, 0:14:30.480 --> 0:14:33.400 And if it goes down more, it will just shut down, 0:14:33.480 --> 0:14:36.080 it will close and redeem the money. Wow, I didn't 0:14:36.080 --> 0:14:39.120 realize that And Just to be clear, this is a 0:14:39.480 --> 0:14:42.520 strategy that the average person would never prior to this 0:14:42.600 --> 0:14:45.440 existence have any real way of playing like being I mean, 0:14:45.760 --> 0:14:48.240 there was just the ease with which one can now 0:14:48.280 --> 0:14:52.080 bet against volatility can't even be compared to the level 0:14:52.080 --> 0:14:55.520 of technical skill and knowledge that it would have required 0:14:55.560 --> 0:14:57.480 to make the same trade prior to the existence. I mean, 0:14:57.520 --> 0:15:01.040 it's completely uncomparable, totally. This is why again I think 0:15:01.040 --> 0:15:03.120 a rating system like movies is what e t F 0:15:03.160 --> 0:15:04.920 s need, because I don't think you want to ban 0:15:05.040 --> 0:15:06.640 an e t F like X I V because for 0:15:06.680 --> 0:15:09.880 a certain group of investors it's great. It's a convenient 0:15:09.920 --> 0:15:12.040 way to do what you have you have to go 0:15:12.640 --> 0:15:15.280 basically short fixed futures. In this case, it just does 0:15:15.280 --> 0:15:18.240 it for you. But yeah, for for certain investors this 0:15:18.320 --> 0:15:21.960 is definitely off the charts, potentially complicated. And the other 0:15:22.000 --> 0:15:25.520 one is like leverage gtfs, which use total return swaps, 0:15:25.920 --> 0:15:29.440 which ultimately you needed to have like a prime broker 0:15:29.560 --> 0:15:31.720 or Noah, you know, have connection with Golden Sacks to 0:15:31.760 --> 0:15:35.760 get a swap contract. Now any investor can basically access 0:15:35.800 --> 0:15:38.840 them through leverage e t f s. So the democratization 0:15:38.840 --> 0:15:42.840 has gone into some really complicated, potentially dangerous areas. There's 0:15:42.880 --> 0:15:45.720 no denying that, all right. So we've talked about these 0:15:45.840 --> 0:15:49.280 very early E t F that you know seem quite 0:15:49.320 --> 0:15:53.640 simple but are in fact incredibly uh you know, complicated. 0:15:53.720 --> 0:15:57.360 They make life a lot simpler. Now there's this obsession 0:15:57.680 --> 0:16:00.320 with you know, various products that we see today that 0:16:00.720 --> 0:16:05.080 would essentially be impossible for the average person to replicate 0:16:05.200 --> 0:16:08.320 on their own, but now the E t F to 0:16:08.360 --> 0:16:10.880 make it incredibly simple, even if the people maybe don't 0:16:10.920 --> 0:16:12.800 really understand what they're buying a lot of the time, 0:16:13.120 --> 0:16:16.520 necessitating a need for more clarity on some of the risks. 0:16:16.920 --> 0:16:22.040 Let's look forward. Where is this industry going next? I 0:16:22.160 --> 0:16:25.320 see two evolutionary lines. One is a race to zero. 0:16:25.840 --> 0:16:28.600 So we talked about i VV and sp Y in 0:16:28.640 --> 0:16:32.080 that whole battle that also includes Vanguard and Schwab, and 0:16:32.120 --> 0:16:33.920 they're going to be in this few war that now 0:16:33.960 --> 0:16:37.440 has them down to like selling the whole stock market 0:16:38.280 --> 0:16:41.320 for point oh three. That's probably gonna be zero in 0:16:41.360 --> 0:16:43.880 a year or two. So on the one evolutionary line, 0:16:43.920 --> 0:16:45.720 it's great for investors. You're able to get your whole 0:16:45.760 --> 0:16:50.120 portfolioll be free probably within five years. That that's a 0:16:50.120 --> 0:16:52.360 tough line to do business. And by the way, that's 0:16:52.400 --> 0:16:55.480 like taking on Vanguard and Swab is just almost like suicide. 0:16:55.480 --> 0:16:59.840 But hey, for investors, it's great. There's also that idea though, 0:17:00.200 --> 0:17:05.400 that you might get paid to own an e t F. Yeah, 0:17:05.400 --> 0:17:08.400 there's some talk about that. It's possible that they might 0:17:08.440 --> 0:17:11.680 do like a negative expense ratio where they actually give 0:17:11.760 --> 0:17:13.679 you four or five basis points just to buy the 0:17:13.680 --> 0:17:16.479 thing um just because they want your assets, because then 0:17:16.480 --> 0:17:19.640 they could lend some securities out, or in Schwab's case, 0:17:19.680 --> 0:17:23.040 they'll they invest some in treasuries, make the interest basically 0:17:23.119 --> 0:17:25.840 whoever considered the biggest pile of assets. They feel like 0:17:26.200 --> 0:17:28.399 they could give free exposure everybody and make money in 0:17:28.440 --> 0:17:31.480 other ways. That's why these companies would go that low. 0:17:32.080 --> 0:17:34.080 But the other evolutionary line, I think is the one 0:17:34.160 --> 0:17:36.919 where for me as an analyst, it's uh, it's exciting 0:17:36.920 --> 0:17:39.879 because that first one is very plain vanilla, but the 0:17:39.920 --> 0:17:43.960 other one is like everything that ever happened on Wall Street, ever, 0:17:44.359 --> 0:17:46.840 and every idea that anyone's head could be packaged into 0:17:46.880 --> 0:17:49.520 an index, and that's what's happening there. That's like the experimental, 0:17:49.560 --> 0:17:52.840 innovative side where you see like like T. Boon Pickens 0:17:52.880 --> 0:17:54.959 is going to pack at his oil strategy into an 0:17:54.960 --> 0:17:57.560 E t F. Soon Gunlock made an E t F. 0:17:57.640 --> 0:18:00.399 Then you're gonna have things like this new E t 0:18:00.560 --> 0:18:04.200 F powered by IBM S Watson, the robotics CTF, all 0:18:04.320 --> 0:18:06.280 kind of wild stuff that can charge a little more 0:18:06.320 --> 0:18:08.840 because the potential to outperform is higher. And that's where 0:18:08.840 --> 0:18:10.720 you see a lot of the bigger companies go eventually 0:18:10.760 --> 0:18:12.560 because they're just not going to fight vanguards, so they'll 0:18:12.600 --> 0:18:16.080 come out with some more like repackaged active and we've 0:18:16.119 --> 0:18:19.080 seen that, like you know, what is it Goldman SAX 0:18:19.160 --> 0:18:23.240 has launched ETFs based on what is it the recommendations 0:18:23.320 --> 0:18:26.520 of their what are the there's some Goldman et f 0:18:26.600 --> 0:18:30.120 s that are sort of based on their own internal research, right, yeah, 0:18:30.240 --> 0:18:33.159 so close. They had at Goldman sex v I p 0:18:33.359 --> 0:18:36.480 Hedge Fund Research TTF. Now here's the thing that is 0:18:36.520 --> 0:18:38.520 a is a research report, but it's based on hedge 0:18:38.560 --> 0:18:42.879 fund holdings, so it's not quite Goldman's picks. Now you 0:18:42.960 --> 0:18:44.840 bring up a good point though, because this week, literally 0:18:44.880 --> 0:18:47.720 this week, and by the way, you brought up Marxism earlier, 0:18:48.000 --> 0:18:51.000 the group, the research group behind that Marxism claim that 0:18:51.040 --> 0:18:53.960 passive was the road to Marxism is now launching e 0:18:54.080 --> 0:18:58.000 t F s. So irony aside or hypocrisy aside. Uh, 0:18:58.160 --> 0:18:59.960 they're now going to basically do what you just said. 0:19:00.000 --> 0:19:03.240 They're gonna put their top sixty or their sixty outperformed 0:19:03.240 --> 0:19:06.520 picks into an e t F. This is Bernstein, by 0:19:06.560 --> 0:19:08.520 the way, and you'll be able to buy it. Now. 0:19:08.800 --> 0:19:11.840 If this gets any traction, lookout for Goldman and JP 0:19:11.920 --> 0:19:14.760 Morgan to do that, which I think is great. That's uh, 0:19:15.200 --> 0:19:17.359 you know, Walt sell side, research is one of the 0:19:17.480 --> 0:19:20.960 last things to be democratized or broke, you know, turned 0:19:20.960 --> 0:19:23.160 into an e t F. On the flip side, that's 0:19:23.200 --> 0:19:26.200 pretty proprietary stuff. So giving it away like that, I'm 0:19:26.359 --> 0:19:28.840 you know, I'm not sure if that would irk current clients. 0:19:28.880 --> 0:19:30.440 Another thing is, once you put all your calls in 0:19:30.440 --> 0:19:33.600 an e t F, we now know how good you are. Yeah, 0:19:34.000 --> 0:19:35.760 you know. Eric. The other thing that that brings to 0:19:35.800 --> 0:19:38.320 mind when you're talking about research is sort of the 0:19:38.359 --> 0:19:42.720 implications of Method two in Europe, which is this you know, 0:19:42.920 --> 0:19:46.320 kind of hallmark piece of legislation that's gonna take effect 0:19:46.400 --> 0:19:49.000 January three, and there's a lot of speculation that e 0:19:49.119 --> 0:19:50.560 t F are going to be one of the biggest 0:19:50.600 --> 0:19:55.000 winners of that eventuality. Can you speak to that a 0:19:55.080 --> 0:19:56.720 little bit? What do you what do you what do 0:19:56.760 --> 0:20:00.840 you see happening when method goes into effect? So myfed two. 0:20:00.920 --> 0:20:02.720 I know that some people just probably went to sleep, 0:20:02.760 --> 0:20:05.800 but it basically this myth. This is a rule that's 0:20:05.840 --> 0:20:07.920 just basically like in Europe. You know how here the 0:20:08.080 --> 0:20:10.520 investors will like sell you out for one basis point 0:20:10.600 --> 0:20:13.160 for the cheaper e t F. It's the opposite. In Europe. 0:20:13.160 --> 0:20:15.720 People have no idea what they're paying. So people pay 0:20:15.840 --> 0:20:19.879 two to five percent in a mutual fund fee, and 0:20:20.000 --> 0:20:22.399 then they get broker commissions on top of that, so 0:20:22.480 --> 0:20:24.359 they could be paying up to seven or eight percent. 0:20:25.280 --> 0:20:28.080 And here we're arguing over seven basis points. So this 0:20:28.280 --> 0:20:30.240 is going to make all that transparent. People are gonna 0:20:30.280 --> 0:20:32.119 see line items of all the stuff they're paying for 0:20:32.240 --> 0:20:34.520 and their fund. One of those is research. That was 0:20:34.600 --> 0:20:37.399 the impetus. But the side effect of this is that 0:20:37.840 --> 0:20:41.080 once the cost or transparent, they think a lot of 0:20:41.119 --> 0:20:44.080 people will switch over to e t S because it's 0:20:44.119 --> 0:20:46.680 sort of like the d L rule here. Anytime regulations 0:20:46.800 --> 0:20:49.399 in any country step in and say, hey, we need 0:20:49.480 --> 0:20:52.560 to make things more transparent. E T S and passive 0:20:52.640 --> 0:20:56.359 are going to win that fight, like almost every single time. Um, 0:20:56.720 --> 0:21:01.080 they thrive in the light, whereas when there's layers of 0:21:01.160 --> 0:21:03.600 fees that's sort of more the way the mutual fund 0:21:03.600 --> 0:21:07.520 industry has thrived without that transparency. So myf the two 0:21:07.640 --> 0:21:09.600 is bad for mutual funds, probably good for E T 0:21:09.760 --> 0:21:12.000