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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Sarah David, I wanted

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Speaker 1: you to come into the studio with me today because

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Speaker 1: I have to ask you about ETFs and what you

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Speaker 1: know about them.

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Speaker 2: Okay, ETFs, I feel like I usually hear about them

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Speaker 2: in the context of, don't kill yourself researching all these

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Speaker 2: individual stocks. Just find an ETF, put all your money

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Speaker 2: in the ETF basket.

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Speaker 3: These things really can change how we think about investing.

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Speaker 3: We have this like great loophole, Like, let's try to

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Speaker 3: use it in new and creative ways.

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Speaker 2: So over the last twelve months, ninety four percent of

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Speaker 2: ETFs have posted a positive return.

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Speaker 4: You know, it's it's a big tax advantage for a

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Speaker 4: lot of people.

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Speaker 1: But Sir, to be honest, I am not like one

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Speaker 1: hundred percent sure how they work. And also like why

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Speaker 1: they've gotten to be so popular.

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Speaker 2: Yeah, I'm not sure about that either. Why are they

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Speaker 2: such a great investment, David, what's actually in them? How

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Speaker 2: are they different from a mutual fund or an end All.

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Speaker 1: Of these such good questions, Sarah, ones that I have

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Speaker 1: as well, which is why today we are continuing with

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Speaker 1: our ongoing collaboration with our newsroom colleagues Bloomberg.

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Speaker 2: Explains, Thank God I need that.

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Speaker 1: This is our series where every now and then we

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Speaker 1: break down the biggest parts of our financial system. We

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Speaker 1: take a look at how they came to be and

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Speaker 1: what they mean for all of us. Even if you're

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Speaker 1: a finance expert, or.

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Speaker 2: If you're just someone who wants to find out more

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Speaker 2: about what's actually in your portfolio.

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Speaker 1: I promise there's going to be something in here for everyone.

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Speaker 1: I'm Sarah Holder, and I'm David Gerra today on the

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Speaker 1: Big Take from Bloomberg News. ETF's explained exchange traded funds

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Speaker 1: or ETFs, are one of the stars of the investment

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Speaker 1: world these days. They've got Meryl Streep status. They are respected, beloved,

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Speaker 1: and adored by professional investors and amateurs alike. Since ETFs

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Speaker 1: were created over three decades ago, they've become one of

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Speaker 1: the most popular investments in the world. But to understand

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Speaker 1: how ETF's got so big, I first need to understand

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Speaker 1: how they got started. And here at Bloomberg, we're lucky

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Speaker 1: to have an ETF expert who's been covering them for decades.

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Speaker 3: Eric Belcunis, I'm senior ETF analyst, and I write about

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Speaker 3: analyze and talk about ETFs and lead a team of

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Speaker 3: about ten people around the world who do the same thing.

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Speaker 1: Do you have a favorite ATF?

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Speaker 3: So it's hard to pick favorites, you know, I'm so

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Speaker 3: into this stuff. I don't say the look at my children.

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Speaker 3: I wouldn't go that far.

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Speaker 1: Eric says, ETFs were born out of one of the

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Speaker 1: darkest periods on Wall Street.

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Speaker 2: This has, by any measure, been the worst day in

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Speaker 2: stock market history.

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Speaker 3: In Black Monday, which was in October nineteen eighty seven,

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Speaker 3: the market went down I think a twenty four percent.

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Speaker 3: I mean that's a lot in percentage terms. That's like

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Speaker 3: a quarter of the market erase.

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Speaker 2: The now industrials have declined by nearly three times the

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Speaker 2: previous one day record.

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Speaker 1: In the wake of that crash, the Securities and Exchange

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Speaker 1: Commission the SEC wrote a report analyzing what had caused it,

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Speaker 1: and it also made some recommendations about how to avoid

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Speaker 1: another one. Buried in the middle of that report, Eric says,

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Speaker 1: was a modest suggestion from an SEC lawyer, what.

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Speaker 3: If we came up with some kind of market basket

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Speaker 3: instrument that traded under our supervision on the New York

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Speaker 3: Stock Exchange.

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Speaker 1: Enter Nate Most and Steve Bloom, two traders working not

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Speaker 1: at the New York Stock Exchange but at its competitor,

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Speaker 1: the American Stock Exchange. Most was in his seventies. He

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Speaker 1: was a Canadian physicist who'd served in the military.

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Speaker 3: Steve Bloom, his partner, was like a Harvard whiz kid,

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Speaker 3: wonder kid, rocket sciencest type, very good at math and younger.

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Speaker 3: So they were an interesting sort of duo. I think

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Speaker 3: name might have been two or three times as old

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Speaker 3: as Thief. But they worked really well together.

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Speaker 1: The problem was where they worked.

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Speaker 3: The American Stock Exchange was not doing well at that time.

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Speaker 3: They were in third place in terms of listings in

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Speaker 3: trading life, behind the New York Stock Exchange and NASDAC.

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Speaker 1: What the American Stock Exchange needed was an edge, and

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Speaker 1: that's when Most in Bloom got their hands on that

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Speaker 1: report from the SEC, that eight hundred page Black Monday

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Speaker 1: post mortem.

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Speaker 3: Well, Nate and Steve read this whole book, the nerds

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Speaker 3: they are, and were like, wait a second, a market

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Speaker 3: basket instrument and the SEC's kind of asking for it,

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Speaker 3: and they probably would approve it. Let's do that, so

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Speaker 3: no stocks will list with us? So why don't we

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Speaker 3: invent something that will create more trading on our exchange.

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Speaker 1: So they went about trying to design a market basket

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Speaker 1: trading instrument, something that could be bought and sold on

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Speaker 1: a stock exchange that acted like a stock, but was

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Speaker 1: instead a basket of stocks, a basket that mirrored the market.

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Speaker 3: The idea literally was born out of some lawyer's brain

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Speaker 3: from the SEC, which is interesting that laid the groundwork

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Speaker 3: for them to find the ETF invent it because they

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Speaker 3: were desperate, really.

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Speaker 1: But turning that idea into an actual product that could

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Speaker 1: be bought and sold was not easy.

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Speaker 3: So what Nate most did that was genius, and really

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Speaker 3: the secret sauce of the ETF was he remembered his

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Speaker 3: time at the Commodities Exchange, and there you have something

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Speaker 3: called commodities warehouse receipts. A commodity's warehouse is where you

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Speaker 3: store different commodities, for example, soybean oil. You go there,

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Speaker 3: you put your soybean oil in a locker, You get

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Speaker 3: a receipt for the exact amount of soybean oil. Then

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Speaker 3: you trade the receipts. You don't have to move a

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Speaker 3: large amount of merchandise around. And then if you have

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Speaker 3: a bunch of receipts and you want soybean oil. You

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Speaker 3: take them to the locker and you get the oil back.

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Speaker 3: So Nate Most is like, why don't we have receipts?

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Speaker 3: But for it's the S and P five hundred stocks,

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Speaker 3: and they'll sit in this warehouse. But it's really a

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Speaker 3: custodian and when you get enough receipts, you can then

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Speaker 3: get the stocks back. That is called the creation redemption process.

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Speaker 3: So that is genius because it keeps the receipts can

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Speaker 3: trade all day long without messing with the merchandise. They

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Speaker 3: actually are linked to the physical merchandise in the proverbial warehouse.

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Speaker 1: The idea was to create a commodity's warehouse for stocks

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Speaker 1: or bonds or pretty much anything you'd want to bundle

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Speaker 1: together and lo, the exchange traded fund was born. The

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Speaker 1: very first ETF, created by Nate Most and Steve Bloom,

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Speaker 1: contained all the stocks in the S and P five

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Speaker 1: hundred and they called it the S and P Depository

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Speaker 1: Receipts ETF or Spider. The firm State Street launched it

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Speaker 1: in nineteen ninety three with a lot of fanfare.

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Speaker 3: I remember they had like spiders hanging from the ceiling.

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Speaker 3: They gave out hats. It was a fun day, and

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Speaker 3: they traded. I think it was like a million shares

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Speaker 3: the first.

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Speaker 1: Day, a million shares on the first day. Eric says

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Speaker 1: that eventually the money being invested in ETFs started to

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Speaker 1: double year after year. That's because people started to realize

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Speaker 1: that ETFs had some real advantages over other bundled investments

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Speaker 1: like mutual funds or index funds.

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Speaker 3: Generally speaking, they're cheaper, right, so that's big. The second

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Speaker 3: thing is they are transparent. You know, you know what's

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Speaker 3: in them every day. Other mutual funds and hedge funds

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Speaker 3: you don't know for either quarterly or even at all,

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Speaker 3: So the transparency's nice.

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Speaker 1: Another big appeal of ETFs taxes. With an ETF, you

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Speaker 1: only pay taxes when you sell. With mutual funds, it's

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Speaker 1: every year. But the other big advantage, according to Eric,

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Speaker 1: is that, unlike a lot of investments on Wall Street,

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Speaker 1: ETFs are very user friendly.

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Speaker 3: Like you have this computer and you have a mouse,

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Speaker 3: whatever you want to invest in, and all you do

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Speaker 3: is click buy and you own it. The amount of

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Speaker 3: friction that has been eliminated in that is major. It's

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Speaker 3: it's almost like Amazon in that way. It's they're other, fast, good,

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Speaker 3: and cheap. It's hard to get all three as a customer.

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Speaker 1: Today, some three decades after Spider debuted, there are now

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Speaker 1: thousands of ETFs with trillions of dollars invested in them.

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Speaker 1: Coming up after the Break a user's guide to the best,

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Speaker 1: the worst, and the weirdest ETFs out there. To talk

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Speaker 1: about the current state of play for ETFs, We found

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Speaker 1: yet another Bloomberg person who is obsessed with them, and

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Speaker 1: that's one Katie Greifeld.

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Speaker 4: I am the co host of Open Interest on Bloomberg TV.

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Speaker 4: I write the ETFIQ newsletter for Bloomberg News. I also

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Speaker 4: anchor the TV show Bloomberg Etfiq, and I also co

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Speaker 4: host the Money Stuff podcast with Matt Lvien.

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Speaker 1: Katie has a lot of jobs.

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Speaker 4: I'm so tired, but she.

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Speaker 1: Is so excited about ETFs that she dropped everything to

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Speaker 1: talk to us about them. Cany you told me that

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Speaker 1: ETFs are your favorite thing they are? Explain that. Why

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Speaker 1: is that the case?

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Speaker 4: Boy? So I've been covering ETF since January twenty twenty,

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Speaker 4: and January twenty twenty was such a strange time to

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Speaker 4: come into a new beat. But the most exciting thing,

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Speaker 4: and the reason I think I love ETFs, is because

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Speaker 4: over that time span, I've just seen this industry grow

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Speaker 4: and evolve so much at such a rapid pace.

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Speaker 1: Give me a sense of how big the ETF industry

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Speaker 1: has become.

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Speaker 4: It's big and growing. So there's about nine and a

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Speaker 4: half trillion dollars in US listed ETF trillion with the

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Speaker 4: t oh yeah, there's about twelve point eight trillion worldwide.

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Speaker 1: Now that's not even half the size of the market

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Speaker 1: for mutual funds, the traditional choice for more conservative investors,

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Speaker 1: but ETFs are gaining ground. A lot of the reason

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Speaker 1: for all that growth is that ETFs, like mutual funds,

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Speaker 1: are seen as safe investments that, along with ETF's lower fees,

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Speaker 1: have made them very appealing to people who want a safe,

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Speaker 1: low cost place for their nest egg.

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Speaker 4: One of my favorite charts out there, and I recognize

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Speaker 4: that we're on a podcast, but if you take a

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Speaker 4: look at annual inflows into ETFs and out of mutual

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Speaker 4: funds for some years, it's basically a zero sum game.

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Speaker 1: But not all ETFs are the same. There are gold ETFs,

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Speaker 1: palladium ETFs, corn futures, ETFs. There's an ETF that only

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Speaker 1: has in video stock, and now there are spot bitcoin ETFs.

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Speaker 1: We're among the most popular ETFs out there. How do

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Speaker 1: they work? Is Blackrock buying a ton of bitcoin and

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Speaker 1: holding it?

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Speaker 4: Yes, that's that's basically it's It's something that I found

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Speaker 4: helpful is comparing it to spot gold ETFs because the

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Speaker 4: spot gold ETFs do have to buy a bunch of gold.

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Speaker 1: They have to be backed up, yes, with the actual thing.

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Speaker 4: Yes, there's a lot of conspiracy theorists out there who

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Speaker 4: say there's no way State Street owns that much gold,

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Speaker 4: but they do. They keep it in a vault in

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Speaker 4: London underneath the City of London. If you take a

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Speaker 4: look at the spot bitcoin ETFs, you do have the

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Speaker 4: likes of you know, Fidelity black Rock just buying up

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Speaker 4: a bunch of bitcoin, the spot ether same thing.

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Speaker 1: It strikes me we're seeing this kind of ETF fication

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Speaker 1: of all kinds of assets, Like, can you really get

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Speaker 1: an ETF that is tracking anything?

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Speaker 4: Almost almost there is almost an ETF for everything under

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Speaker 4: the sun.

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Speaker 1: There was an ETF invested in every stock CNBC's Jim

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Speaker 1: Kramer recommended, and there was also an inverse Kramer Tracker,

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Speaker 1: which bet against all of Jim Kramer's stock picks. Both

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Speaker 1: of those closed last year, but others like them launch

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Speaker 1: every day. Katie says, a lot of these are not

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Speaker 1: meant for run of the mill investors. They're more for sport.

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Speaker 4: In Nvidia single stock ETFs in particular Tesla. So those

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Speaker 4: are definitely fun to watch day to day because they

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Speaker 4: go up by a gazillion percent and then they go

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Speaker 4: down by a gazillion percent.

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Speaker 1: I asked Katie, what's next for ETF.

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Speaker 4: One of the interesting conversations that's happening in the industry

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Speaker 4: right now is whether you can put private assets in

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Speaker 4: an ETF. The private market so hot right now, especially

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Speaker 4: with companies just not going public anymore.

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Speaker 1: But even as the number of ETFs has exploded, the

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Speaker 1: number of firms making money off of them has stayed

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Speaker 1: pretty concentrated among some big name players.

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Speaker 4: The economics are tough when it comes to ETFs because

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Speaker 4: they tend to be much cheaper than mutual funds. I

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Speaker 4: thought it was really interesting that Vanguard is your number

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Speaker 4: two ETF ISSU or second to black Rock. Bloomberg Intelligence

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Speaker 4: founds that their average fee is just nine bases points

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Speaker 4: and even though they have something close to two and

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Speaker 4: a half trillion dollars in ETF assets in their ETFs,

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Speaker 4: they're only making one point three billion dollars annually off

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Speaker 4: of that, which isn't nothing. I would take that, but

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Speaker 4: you would think that it would be higher with you know,

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Speaker 4: two and a half trillion dollars in assets. So really

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Speaker 4: the way to make money here is through scale.

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Speaker 1: Now, there are a few downsides to the proliferation of ETFs.

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Speaker 1: Bloomberg Intelligence ETF analyst Eric Beltunas says that because they're

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Speaker 1: so easy to use and easy to launch, there can

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Speaker 1: be issues.

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Speaker 3: If you can't control yourself and you're just like kind

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Speaker 3: of a gambling mindset, Like you know, you may want

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Speaker 3: to go to a mutual fund, even one that has

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Speaker 3: an early withdraw fee, if it helps you from trading

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Speaker 3: that that atfs could be dangerous.

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Speaker 1: A lot of the safer, more obvious investments have already

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Speaker 1: been covered, Eric says, so many of the new ETFs

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Speaker 1: can be a little out there.

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Speaker 3: That's sort of the Frankenstein factor. It's like nobody's launching

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Speaker 3: vanilla stuff anymore. Really, they're all trying to invent new

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Speaker 3: things that will appeal to investors, and that's where you

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Speaker 3: get into a little bit of Frankenstein situation.

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Speaker 1: In fact, the advent of Franken ETFs was something that

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Speaker 1: I worried the legendary Jack Bogel of Vanguard. He was

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Speaker 1: an early backer of index funds and advises Nate Most

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Speaker 1: and Steve Bloom early on when they were developing the ETF.

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Speaker 1: According to Eric, when Bogel saw how creative everyone was

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Speaker 1: getting with ETFs, he got concerned.

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Speaker 3: Bogel said he woke up some days feeling like doctor Frankenstein,

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Speaker 3: because he sort of is the father of the index

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Speaker 3: fund and he would be like, what have they done

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Speaker 3: to my boy?

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Speaker 1: Frank and ETF's aside, Both Eric and Katie agree that

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Speaker 1: the more basic ETFs are generally speaking, getting all the hype.

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Speaker 1: They're transparent, easy to use, and they cost less and

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Speaker 1: all this is thanks to the Great market Crash of

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Speaker 1: nineteen eighty seven, the afterthought of an sec lawyer and

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Speaker 1: two traders with an entrepreneurial spirit who saw an opportunity

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Speaker 1: and Sarah, well, that got me thinking, yes, maybe we

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Speaker 1: should launch our own ETF.

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Speaker 2: Seriously, like a big takeaway ETF exactly, Okay, do you

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Speaker 2: mean podcast related stock. I don't know about that.

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Speaker 1: Yeah, me either. That doesn't sound like a good idea,

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Speaker 1: But I did run this idea by Eric and he

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Speaker 1: agreed to advise us on our launch.

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Speaker 3: Well, the ticker could be take if you ever have

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Speaker 3: topics and guests on, you could just basically invest in

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Speaker 3: that area until the next one comes on and then

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Speaker 3: trade to the different area and just see where it happens.

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Speaker 1: So, Sarah, that take ETF. What do you think about that?

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Speaker 1: What kind of newsy investments do you think you're put

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Speaker 1: in the ETF?

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Speaker 2: That's easy. We're going long on election twenty twenty four.

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Speaker 2: We're making targeted investments in k pop. Got it hit

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Speaker 2: the Olympics. But honestly, let's just bet Gratt.

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Speaker 1: This is the big take from Bloomberg News. I'm David Gera.

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Speaker 1: This episode was produced by Alex Sagura and Adriana Tapia.

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Speaker 1: It was edited by Stacy Vanick Smith and Joel Weber.

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Speaker 1: It was also mixed by Alex. It was fact checked

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Speaker 1: by Thomas lou Our senior producers are Kim Giittleson and

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Speaker 1: Naomi Shavin. Our senior edit is Elizabeth Ponso. Our executive

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Speaker 1: producer is Nicole beemster boor Sage Bauman is head of podcasts.

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Speaker 1: For an even deeper dive into the world of ETFs,

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Speaker 1: check out the Trillions podcast, hosted by Bloomberg's Joe Weber

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Speaker 1: and Eric Belcunas. Wherever you listen to podcasts, We'll be

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Speaker 1: back tomorrow.