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Speaker 1: Well conatrillions.

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Speaker 2: I'm Joel Weber and I'm Eric Balchunas Eric, this is

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Speaker 2: an episode that we've actually been waiting on for a while.

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Speaker 1: Vanguard had this thing. Now that patent expired.

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Speaker 3: What am I talking about.

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Speaker 2: Yeah, so everybody knows what mutual funds are, and they

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Speaker 2: have share classes ABCI class depending on how much you

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Speaker 2: can afford. It's kind of like a regressive tax system.

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Speaker 2: The more you can pony up, the less they charge you, Joel,

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Speaker 2: which is pretty consistent with the rest of society. But anyway,

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Speaker 2: mutual funds have the share class system, and then ETFs

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Speaker 2: existed separately. Vanguard developed a patent where the ETF would

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Speaker 2: be just bolted into the mutual fund as another share class.

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Speaker 2: But because that patent, nobody could do it. But the

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Speaker 2: patent expired a couple of years ago, and so basically

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Speaker 2: like eighty to one hundred mutual fund firms were like, yeah,

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Speaker 2: let's do that. So they all filed and the SEC

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Speaker 2: starting to approve them, and the guinea Pig, the first

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Speaker 2: one out of the gate to do a non Vanguardian

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Speaker 2: ETF share class of a mutual fun is dimensional DFA,

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Speaker 2: and they put it out recently, and it's basically a

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Speaker 2: big moment for the industry. It's wonky, but it's major.

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Speaker 2: And the reason it's major is because those eighty to

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Speaker 2: one hundred issuers have in the ballpark of ten trillion

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Speaker 2: dollars in assets. So if you're sitting out there and

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Speaker 2: you own a mutual fund and you kind of would

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Speaker 2: rather have it in the ETF format, you might be

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Speaker 2: able to get that without having to sell your mutual fund.

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Speaker 2: You can maybe just move over. There's a lot of

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Speaker 2: options now. And also, at the end of the day,

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Speaker 2: ETFs were the fisher biting trol. It's like Spotify, It's

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Speaker 2: just how people like to get music. So if you're

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Speaker 2: an asset manager, you definitely want to get your strategy

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Speaker 2: in this format.

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Speaker 4: Right.

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Speaker 2: You wouldn't make an album and only put it on

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Speaker 2: compact disc, right, So this is a way for some

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Speaker 2: legacy managers to get their stuff out in the format

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Speaker 2: people wanted in.

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Speaker 1: Well, let's go fishing. Joining us Dimensional Fund Advisors, Joel Schneider,

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Speaker 1: who's the vice president of portfolio management, I think also

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Speaker 1: joining us Katie Greifeld of Bloomberg News, who's written about

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Speaker 1: this story already, this time on trillions the ETF share class.

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Speaker 1: Joel Schneider, Welcome to Trillions.

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Speaker 3: Thank you for having me excited to be here.

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Speaker 1: Katie welcome as well. Hey, Joel, I want to start

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Speaker 1: with you. What exactly did Dimensional launch here?

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Speaker 3: Yeah, recently we launched the industry's first ETF share class

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Speaker 3: of an active mutual fund. So, as Eric was saying earlier,

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Speaker 3: we think this is a big deal for the industry

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Speaker 3: and that you're likely to see more of these to come.

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Speaker 1: And how does it work.

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Speaker 3: Is it an ETF or a mutual fund? It's both.

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Speaker 3: There is one underlying portfolio that holds all the investments,

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Speaker 3: and there's two access points to it, so investors can

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Speaker 3: buy it directly from us the manager, which is the

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Speaker 3: way mutual funds transact, or they can buy it on

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Speaker 3: an exchange in the brokerage account or other accounts through

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Speaker 3: the ETF share class. And what this will do is

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Speaker 3: it will allow some of the benefits of both vehicle

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Speaker 3: types to coexist. You're talking about bringing really big economies

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Speaker 3: of scale right. Because it's one pool of assets, you're

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Speaker 3: able to amortize some of the costs across a bigger pool.

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Speaker 3: You also get more choice because in the past, investors

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Speaker 3: always had to think about what strategy do I want?

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Speaker 3: Is it available in an ETF or a mutual fund?

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Speaker 3: And then, as Eric was referring to earlier, they would

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Speaker 3: have to think about are the costs similar? Because before

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Speaker 3: I used to have pretty different costs for different types

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Speaker 3: of classes. So hopefully going forward investors can just say

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Speaker 3: what investment strategy do I want, and then it can

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Speaker 3: be available in either way they can consume it as

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Speaker 3: a ETF as a mutual fund for similar prices.

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Speaker 1: Okay, I'm curious, what problem do you think that this

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Speaker 1: solves that either existing ETFs or mutual funds don't.

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Speaker 3: Yeah, I think there's a couple of them. So Eric

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Speaker 3: talked earlier about there are some investors who would prefer

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Speaker 3: to hold an ETF instead of a mutual fund, and

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Speaker 3: being able to convert in a tax free way is

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Speaker 3: very beneficial to them. So in the prior world, they

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Speaker 3: would have to sell that share of the mutual fund,

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Speaker 3: potentially realize the capital gains, pay tax, and then buy

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Speaker 3: that ETF share. So in the future, are actually starting

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Speaker 3: now with these new share classes, they will be able

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Speaker 3: to convert in a tax free manner to get an

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Speaker 3: ETF share instead of a mutual fund share. I think

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Speaker 3: that's a big problem that solved. A second problem I

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Speaker 3: think is solved is what I was mentioning earlier, which

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Speaker 3: is it was pretty hard to navigate figuring out what

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Speaker 3: investment do I want, how is it offered, and then

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Speaker 3: how's it priced? Differently, I think it brings a lot

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Speaker 3: of simplicity where you can go get the investment you

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Speaker 3: want in the rapper you want for a similar price.

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Speaker 2: So, Katie, you wrote the big story on this that

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Speaker 2: recently came out, and looking at this, you've been covering

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Speaker 2: this for the whole time. What are your thoughts on this?

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Speaker 2: And can you give us some details on this guinea

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Speaker 2: pig ETF that is the first one.

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Speaker 5: Yeah, it's pretty interesting.

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Speaker 6: So Dimensional, as Joel Schneider knows well, is going ahead.

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Speaker 6: The first product is going to be the dimensional US

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Speaker 6: microcap ETF. The mutual fund that it's being tacked onto

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Speaker 6: has existed as a mutual fund since nineteen eighty one.

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Speaker 5: So I find that I find that pretty charming.

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Speaker 6: You know, microcaps, you don't really think of them that much.

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Speaker 6: And I would like to ask Joel, I mean other Joel,

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Speaker 6: not Jeel Weber Jewel Schneider. I mean, talk to us

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Speaker 6: a little bit about how you selected the micro Cap

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Speaker 6: Fund to be your debut product here, because you know,

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Speaker 6: people have a personality assigned to small caps to large caps.

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Speaker 6: Maybe that's just me, but I feel like micro caps

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Speaker 6: don't take up as much mind share.

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Speaker 3: It's great you call it charming. I hope people have

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Speaker 3: a positive reaction to it, because what it is is

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Speaker 3: it's a solution to one of the major problems that

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Speaker 3: investors are facing in the market right now. Everyone's talking

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Speaker 3: about how top heavy the market is, right Everyone's worried

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Speaker 3: about concentration US large caps, and there's a lot of

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Speaker 3: other solutions out there that people are pursuing to try

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Speaker 3: to deal with that, and in some ways, they're just

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Speaker 3: sort of reshuffling the chairs. And if you're holding let's

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Speaker 3: say that's five s top five hundred in an equal

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Speaker 3: weight format, you're not actually getting additional diversification. You're not

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Speaker 3: gaining access to different exposures. And what this Portfoli folio

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Speaker 3: does is it targets companies that are in the smallest

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Speaker 3: five percent of market cap in the US. And as

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Speaker 3: you said, Katie, it's been around for forty five years.

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Speaker 3: It's had a great track record of outperforming other small

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Speaker 3: cap funds, other small cap indexes. It's beaten the Rustle

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Speaker 3: two thousand by one hundred and fifty basis points a

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Speaker 3: year annualized for forty five years. So if you compound that,

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Speaker 3: that's just massive wealth creation for our investors. And it

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Speaker 3: behaves differently than the large cap space, and so if

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Speaker 3: you're looking to round out your portfolio and diversify away

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Speaker 3: from being so top heavy, this is a great solution.

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Speaker 2: I have a question about this one too, because the

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Speaker 2: performance is ridiculously good versus small Of course, large caps

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Speaker 2: have beaten everything since then, but it really has demolished

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Speaker 2: small caps. It's weird though. The microcap ETFs on the

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Speaker 2: market don't have a ton of assets. As Katie said,

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Speaker 2: they're kind of forgotten. Is that why you pick this?

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Speaker 2: Did you feel like there was more white space here

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Speaker 2: or was it the idea that this mutual fund that

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Speaker 2: you have is only has one class, which is institutional.

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Speaker 2: So the ETF has the same expense ratio as the

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Speaker 2: institutional class of the mutual fund. So there really is

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Speaker 2: no AB or C classes with a higher fee that

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Speaker 2: you might potentially annoy which I think could be an

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Speaker 2: issue with other funds where you give people the I

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Speaker 2: class fee and the ETF and the ABC people are like, hey,

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Speaker 2: that's not cool. We found that to be somewhat of

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Speaker 2: an inhibitor in some cases with conversions and other things

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Speaker 2: of that sort. But any thoughts on that.

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Speaker 3: Yeah, I'm glad you're bringing that up, because I think

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Speaker 3: a challenge that some managers may face is if they're

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Speaker 3: offering different price points on their mutual funds, it could

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Speaker 3: create this pricing challenge, and that's never been our philosophy.

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Speaker 3: Our philosophy is we want to offer institution grade whether

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Speaker 3: they're mutual funds or ETFs, and really let the investor

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Speaker 3: choose which rapper is best for them in their situation.

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Speaker 3: And so for other future ETF share classes in our lineup,

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Speaker 3: I think you'll see something similar right where we're not

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Speaker 3: going to face some of that challenge with multiple pricing

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Speaker 3: points that other managers may face. Another thing that I

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Speaker 3: think you have to be cognizant of is if you're

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Speaker 3: running a more traditional active strategy that has higher turnover,

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Speaker 3: is more concentrated, then that may be more challenging in

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Speaker 3: an ETF format. Now, you mentioned earlier that the performance

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Speaker 3: of this strategy, the microcap strategy, has been excellent for

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Speaker 3: a really long time period, and you may think that

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Speaker 3: it is doing that in some sort of high turnover

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Speaker 3: active way, but it's not. It's actually broadly diversified, it's

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Speaker 3: low turnover, it's incredibly tax efficient. Everyone in the ETF

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Speaker 3: ecosystem loves to talk about tax efficiency, and this strategy

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Speaker 3: as a mutual fund was actually more tax efficient than

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Speaker 3: the other small cap index ETFs that were out there.

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Speaker 3: So I think there's it'll depend on the manager and

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Speaker 3: the strategy in terms of what strategies are best to

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Speaker 3: bring in the ETF share class format.

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Speaker 1: Okay, I'm I'm gonna ask a question. I'm gonna regret

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Speaker 1: asking the question, but can you walk us through how

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Speaker 1: that tax efficiency actually works under the hood.

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Speaker 3: Sure, happy to. It's our goal to be one of

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Speaker 3: the most tax efficient managers in the entire industry, whether

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Speaker 3: that's a ETF or a mutual fund. And I think

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Speaker 3: start with the really simple framework, which is taxes are

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Speaker 3: driven by two things, right, capital gains and income. The

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Speaker 3: ETF industry, he puts a lot of focus on capital gains,

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Speaker 3: and rightfully so we do too. Last year the US

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Speaker 3: Microcap mutual fund had no capital gain distribution. The year

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Speaker 3: before that had no capital gain distribution. But let's not

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Speaker 3: forget that income also matters, and any investment fund, whether

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Speaker 3: it's ETF mutual fund, can put off two types of income,

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Speaker 3: qualified and non qualified. And qualified income is taxed like

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Speaker 3: a long term capital gain, but non qualified income is

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Speaker 3: taxed like a short term capital gain. So at the

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Speaker 3: highest marginal rate, non qualified dividend income is a forty

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Speaker 3: point eight percent tax. So that's really toxic. And what

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Speaker 3: our strategies do is they are maximizing the amount of

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Speaker 3: qualified income. So compared to other index ETFs that are

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Speaker 3: out there, if you go look at their QDI percentage,

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Speaker 3: they are putting out a lot more non qualified dividend

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Speaker 3: income that's taxed at a much higher rate. And so

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Speaker 3: the way that any of the listeners would find this

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Speaker 3: information for themselves without having to get too much in

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Speaker 3: the weeds is start from the highest level. Just open

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Speaker 3: up the perspectus, go to the performance section of any

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Speaker 3: fund or ETF, and there will be a pre tax

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Speaker 3: return and there will be a post tax return, and

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Speaker 3: you just want to compare the difference year by year,

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Speaker 3: and that difference is called the tax cost. And so

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Speaker 3: across the morning Star universe of US small cap strategies,

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Speaker 3: the average tax cost has been over one hundred basis points.

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Speaker 3: And if you narrow it down to just the biggest

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Speaker 3: small cap index ETFs, that tax costs was still about

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Speaker 3: fifty basis points, whereas this strategy's tax cost last year

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Speaker 3: was only twenty nine basis points, so twenty one basis

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Speaker 3: points better than some of the big index ETFs.

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Speaker 5: I didn't see you right in that town. Tool.

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Speaker 1: I got it all twenty one basis points better.

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Speaker 5: Joel Schneider.

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Speaker 6: Something I did want to ask you. You know, it

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Speaker 6: feels like every asset manager has filed to do this

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Speaker 6: with the SEC in some form. Dimensional obviously first, yes,

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Speaker 6: it's it's nuts. I think the number is close to

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Speaker 6: it's close to triple digits at this point. Dimensional first

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Speaker 6: of the punch. But I was recently speaking with Capital Group,

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Speaker 6: for example, about why they didn't file for this exemptive relief,

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Speaker 6: which was pretty interesting, and their point was that the

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Speaker 6: bulk of their mutual fund assets are sitting in retirement accounts,

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Speaker 6: and if you have a mutual fund in a retirement account,

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Speaker 6: it's not as urgent to you know, get the tax

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Speaker 6: efficiency that the ETF offers, since I believe capital gains

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Speaker 6: aren't taxed in the same way if it's in a

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Speaker 6: retirement account. I'm sure I butchered that somehow. But I

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Speaker 6: wonder how Dimensional sorted through that. I mean, what percent

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Speaker 6: of Dimensional's mutual funds are in retirement accounts and versus

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Speaker 6: you know, how many would be eligible for something like this.

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Speaker 3: So you were right, Katie that the mutual funds that

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Speaker 3: are held by investors in four one ks, those are

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Speaker 3: tax exempt, and so they're not dealing with those income

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Speaker 3: distributions each year. And so this is why it's actually

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Speaker 3: so important to be able to, I think, offer share

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Speaker 3: classes of either. So we've talked already today about taking

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Speaker 3: some of our mutual funds and offering ETF share classes.

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Speaker 3: And the types of clients that care about that may

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Speaker 3: be a financial advisor who has both a retirement business

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Speaker 3: and a wealth business, and once they've done the diligence

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Speaker 3: on the strategy and they're like, I really love this

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Speaker 3: investment strategy. I would like to be able to use

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Speaker 3: it for both types of clients. Now, they can, whereas

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Speaker 3: before they were faced with the trade off where they

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Speaker 3: could only use it in one or the other. But

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Speaker 3: going the other direction, we actually do have some strategies

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Speaker 3: that are only offered in ETF formats right now that

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Speaker 3: we are likely to bring over and offer mutual fund

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Speaker 3: share classes of So we recently filed to do that

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Speaker 3: for two strategies that we call our market series. And

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Speaker 3: what these are is they're designed to be index replacement strategies,

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Speaker 3: so they have lower tracking air than most of our

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Speaker 3: other more active strategies, but they're designed to outperform, and

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Speaker 3: they have a track record of outperforming. And we have

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Speaker 3: some clients who are using those for their taxable clients

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Speaker 3: in the ETF wrapper, saying we would love to be

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Speaker 3: able to offer those in mutual fund format to some

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Speaker 3: of our retirement clients. Or we have institutions who are

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Speaker 3: tax exempts saying we would like to have these in

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Speaker 3: another vehicle type, and so we are likely to offer

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Speaker 3: both types of share classes, so then you can get

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Speaker 3: the economies of scale of running one portfolio with two

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Speaker 3: different access points.

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Speaker 2: Okay, let's talk about the performance record of the track record,

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Speaker 2: because a lot of ETF issuers it's really important for

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Speaker 2: advisors to have a track record, and in order to

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Speaker 2: get on the wirehouse platform sometimes they they want to

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Speaker 2: see three years and this has been a challenge for

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Speaker 2: some of the active clones that have come out. They've

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Speaker 2: got to really perform well in the market. Do you

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Speaker 2: get to use the mutual funds performance when marketing the

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Speaker 2: ETF or do the wirehouse is consider it to be

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Speaker 2: the same performance? How does that work?

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Speaker 3: Yeah, track records are really important, and in the case

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Speaker 3: of the ETF share classes, it is literally a new

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Speaker 3: access point to an existing portfolio, and so that's viewed

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Speaker 3: as a track record that you can rely upon. And

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Speaker 3: in the case of DFMC, the microcap ETF share class,

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Speaker 3: that portfolio has a forty five year track record and

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Speaker 3: so people who come in and do diligence on the

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Speaker 3: ETF share class can look through a ton of history

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Speaker 3: and understand how that portfolio is design and how it's managed,

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Speaker 3: how it's behaved, and that does I think give the

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Speaker 3: ETF share class a leg up over a newly issued ETF,

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Speaker 3: even if it's of sort of a sister strategy.

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Speaker 1: Joe, I'm also curious how many mutual funds do you

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Speaker 1: expect are going to from Dimensional have this new ETF

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Speaker 1: share class, And now that I know you intend to

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Speaker 1: go the other way, what the overall Dimensional portfolio start

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Speaker 1: to look like with the addition of this share class.

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Speaker 3: Yeah. So, so I'll say two things about this. The

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Speaker 3: first is we have went out and spoken with many,

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Speaker 3: many of our clients across different channels, so different types

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Speaker 3: of advisors, different types of institutions, to try to understand

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Speaker 3: what they need. Because our job isn't necessarily to be

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Speaker 3: a supermarket where we offer one of everything. We're really

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Speaker 3: our client is the financial professional, and so we're trying

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Speaker 3: to give them professional grade tools, best in class strategies

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Speaker 3: so they can accomplish the investment outcomes that they need

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Speaker 3: for their clients or their organizations. And what we've heard

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Speaker 3: from all of them, I shouldn't say all, but the vast,

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Speaker 3: vast majority have said we really like this idea of

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Speaker 3: having shared classes, and then the other ones have really

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Speaker 3: just not said anything. To be honest, I have not

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Speaker 3: heard a negative thing yet. Most of them are very

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Speaker 3: supportive of the idea that there's going to be mutual

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Speaker 3: funds share classes of ETFs and ETF shared classes and

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Speaker 3: mutual funds, and so in terms of what that means

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Speaker 3: for our plans in the short run, we have filed

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Speaker 3: to bring thirteen different US equity strategies to the ETF

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Speaker 3: share Class Rapper. We will likely be doing that through

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Speaker 3: the rest of this year and into the following years.

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Speaker 3: I think you can probably expect fixed income to follow equity,

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Speaker 3: and then non US markets to follow the US markets,

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Speaker 3: and so we do have a pretty big pipeline in mind.

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Speaker 3: It will be driven by client demand. But if we

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Speaker 3: realize sort of the vision that we're hearing clients want

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Speaker 3: us to realize, and this is a big statement, but

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Speaker 3: I think you'll see us go from being a big

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Speaker 3: mutual fund manager and a big ETF manager. And you know,

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Speaker 3: we've been the largest active ETF manager. I think we

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Speaker 3: could potentially go to become one of the largest ETF

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Speaker 3: managers period, whether that's active or passive, big words, big words.

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Speaker 2: Right now, they're at two hundred and fifty five billion,

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Speaker 2: which is pretty good. I mean, I think they're ninth

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Speaker 2: ish around there. So this is going to.

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Speaker 5: Help higher up when it comes to active.

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Speaker 2: Oh yeah, dominant and active overall ninth But you know, look,

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Speaker 2: I think the whole industry is looking for you at

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Speaker 2: you guys, because there's all these people who have filed,

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Speaker 2: but that I can tell there they want to see

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Speaker 2: some data come back from the marketplace, and it'll be

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Speaker 2: interesting to see what happens with you. I think. Do

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Speaker 2: you feel that that there's a lot of people watching

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Speaker 2: you to see what happens or do you think we'll

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Speaker 2: see other launches very quickly even if we don't have

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Speaker 2: any maybe early flows or information from your funds.

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Speaker 1: How does it feel to be a guinea pig more

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Speaker 1: or less?

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Speaker 3: Yeah, We're happy to be the guinea pig. And one

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Speaker 3: of the things that I'll say has actually been very

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Speaker 3: positive for the industry here is when we put out

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Speaker 3: that first application for exemptive relief, a lot of the

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Speaker 3: other managers ended up using our application as sort of

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Speaker 3: a template, and I think there was a healthy discussion

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Speaker 3: in the industry with SEC about all the benefits that

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Speaker 3: this can bring to end clients. Now, do I think

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Speaker 3: that it'll be panacea, that it'll be a universal solution

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Speaker 3: for everybody in that every fund in the industry will

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Speaker 3: also turn into an ETF. Probably not. Not every strategy

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Speaker 3: is well suited to an etf rapper. Right, You've seen

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Speaker 3: the debates already about what can be fit into an

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Speaker 3: etf rapper over on the private side and people dealing

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Speaker 3: with the lack of liquidity. I think people will eventually

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Speaker 3: run into some limits of what can be put in

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Speaker 3: the etf rapper, even in public markets, and so I

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Speaker 3: think that other managers will have to think through which

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Speaker 3: of their strategies are well suited to the etf rapper,

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Speaker 3: and then it's not one of those situations where if

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Speaker 3: you build it, people will just come. I think it's

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Speaker 3: also important that you spend time talking with your clients

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Speaker 3: to understand is this a solution that they really need.

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Speaker 3: And what we've done is we've went out. You know,

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Speaker 3: we saw in the first day of trading for DFMC

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Speaker 3: some clients come in and place trades on day one

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Speaker 3: in really large sizes and get great executions inside a

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Speaker 3: very tight spread. So that type of coordination with your

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Speaker 3: clients is key. You can't just sort of toss these

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Speaker 3: things out there in the market and hope that assets

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Speaker 3: show up.

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Speaker 7: Okay, I'm curious, Eric, what's the big number that you

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Speaker 7: know we've come back to this in a couple of years.

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Speaker 7: How much money moves into ETFs because of this, you.

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Speaker 2: Mean everybody, or just this one microcap BTF?

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Speaker 1: Everybody?

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Speaker 2: Okay, well, let me start with the microcap BTF. The

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Speaker 2: mutual fund has six point six billion, this ETF has

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Speaker 2: one million. So what portion of them come over? If

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Speaker 2: we use Vanguard as a model, I think about ten

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Speaker 2: percent went from the one class to the other. But

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Speaker 2: the ETF was cheaper for them for most of them,

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Speaker 2: only one bit. But that's enough for Vanguardians to move.

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Speaker 2: This one's the same fee, but the tax efficiency is better.

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Speaker 3: We'll see.

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Speaker 2: I think this dfa ETF, if it has over I

394
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Speaker 2: don't know, one hundred million, five hundred million in the

395
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Speaker 2: next couple months, that will turn heads. And if it

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Speaker 2: gets one to two billion, or even goes and becomes

397
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Speaker 2: more than fifty percent of the mutual fund, everyone's going

398
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Speaker 2: to be like jumping in like crazy. That's my guess

399
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Speaker 2: on this guinea pig. In terms of if that happens, man,

400
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Speaker 2: I mean, we could see a lot of money coming in.

401
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Speaker 2: ETFs took in one point five trillion last year. This

402
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Speaker 2: year they're already on pace to have more than that.

403
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Speaker 2: This is a big variable. I just think it's going

404
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Speaker 2: to happen in slow, gradual stages. It's possible it goes

405
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Speaker 2: gradually then and then suddenly, like if like DFA you know,

406
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Speaker 2: attracts fidelity and then Capital Group and then we're looking

407
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Speaker 2: at the big fish of that active world. I think

408
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Speaker 2: you could find then it's like suddenly. But I think

409
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Speaker 2: it will be gradually. If I had to estimate, I

410
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Speaker 2: don't know, maybe like a couple billion in the first

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Speaker 2: few months and then we'll go to ten billions and

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Speaker 2: then one hundred billion. But I don't know. I think

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Speaker 2: it's going to depend. But here's what I do know, Joel.

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Speaker 2: If you look at the especially equities, equity mutual funds

415
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Speaker 2: saw a trillion of auflows last year, most ever by far,

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Speaker 2: and the markets were.

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Speaker 3: Up a ton.

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Speaker 2: I mean, you have to be in dire straits to

419
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Speaker 2: see money come out when the market's up that much.

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Speaker 2: ETFs on the equity side took in you know, close

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Speaker 2: to one trillion, So that's they're in this business.

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Speaker 1: If you're going to make a prediction market wager on

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Speaker 1: Calshier polymarket, what is the question that we want to

424
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Speaker 1: ask here? Is it by the end of the year,

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Speaker 1: this new share class is it ten billion dollars that

426
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Speaker 1: have moved into it.

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Speaker 2: Let me set the over under for Katie and Joel

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Speaker 2: and all three of you, and then you tell me

429
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Speaker 2: where you go. Okay, if I'm Vegas and I have

430
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Speaker 2: to set an over under.

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Speaker 1: Vegas anymore, let me just do prediction market, yes or no?

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Speaker 2: True? Okay, first twelve next, the first twelve months. Okay,

433
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Speaker 2: the over under in assets in ETF share classes X Vanguard, Right,

434
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Speaker 2: this is active only. I'm going to go with fifteen billion.

435
00:25:07,119 --> 00:25:09,320
Speaker 5: Well, I guess I'll take the under.

436
00:25:10,800 --> 00:25:14,640
Speaker 1: Joe Schneider, He's like, uh uh uncomfortable.

437
00:25:15,080 --> 00:25:17,080
Speaker 3: No, So in the in the next twelve months. I

438
00:25:17,080 --> 00:25:19,520
Speaker 3: think there's a big thing that's going to happen in

439
00:25:19,600 --> 00:25:22,919
Speaker 3: between now and the next twelve months, which is the

440
00:25:22,960 --> 00:25:28,040
Speaker 3: industry's working on more of an automated conversion mechanism. So today,

441
00:25:28,240 --> 00:25:30,720
Speaker 3: if someone wants to move their money in a tax

442
00:25:30,720 --> 00:25:32,919
Speaker 3: free way out of the mutual fund and into the

443
00:25:32,920 --> 00:25:35,600
Speaker 3: ETF share class, they have to go through a manual

444
00:25:35,680 --> 00:25:38,680
Speaker 3: process that involves a lot of paperwork. And I think

445
00:25:38,720 --> 00:25:41,280
Speaker 3: that while that's in place, and we worked really hard

446
00:25:41,280 --> 00:25:44,560
Speaker 3: to get that in place for our investors, that will

447
00:25:44,880 --> 00:25:48,119
Speaker 3: cause it to be a slower conversion. As soon as

448
00:25:48,119 --> 00:25:50,080
Speaker 3: you can log into your broker JAP and there's a

449
00:25:50,080 --> 00:25:52,280
Speaker 3: button for it and you can move it in a

450
00:25:52,320 --> 00:25:54,680
Speaker 3: tax free way, I think that you'll see a big increase.

451
00:25:55,200 --> 00:25:57,359
Speaker 3: And so right now we're expecting that to be later

452
00:25:57,440 --> 00:26:00,320
Speaker 3: in this calendar year. But as soon as that happens,

453
00:26:00,359 --> 00:26:03,159
Speaker 3: then I think you're probably order of magnitude closer to

454
00:26:03,880 --> 00:26:06,480
Speaker 3: Eric's estimate than single digits.

455
00:26:07,400 --> 00:26:10,680
Speaker 1: Information has coming to light that puts me over.

456
00:26:10,800 --> 00:26:11,199
Speaker 3: I'll take that.

457
00:26:11,240 --> 00:26:12,239
Speaker 1: I'll take the guess on that.

458
00:26:12,320 --> 00:26:13,240
Speaker 5: I'll still take the under.

459
00:26:13,320 --> 00:26:15,640
Speaker 2: Okay, And Joel, what would you take if you had

460
00:26:15,640 --> 00:26:16,000
Speaker 2: to bet?

461
00:26:20,359 --> 00:26:24,720
Speaker 3: I think you're probably order magnitude in the tensvillions, all right.

462
00:26:24,560 --> 00:26:28,400
Speaker 2: So my over under is pretty solid. That's really interesting information, Joel.

463
00:26:28,440 --> 00:26:30,960
Speaker 2: I agree. Anything can make easier will help. The other

464
00:26:31,000 --> 00:26:34,200
Speaker 2: thing that I'm accounting for is another big name or

465
00:26:34,240 --> 00:26:37,160
Speaker 2: two coming in, and you never know. Some of these

466
00:26:37,160 --> 00:26:40,320
Speaker 2: firms have prepared and they want to look good, right,

467
00:26:40,359 --> 00:26:42,639
Speaker 2: so they launched the ETF share class. They want to

468
00:26:42,720 --> 00:26:45,520
Speaker 2: kind of fill it quickly. Because assets is marketing, you

469
00:26:45,560 --> 00:26:47,560
Speaker 2: want to look like it's a success story. So I

470
00:26:47,560 --> 00:26:50,639
Speaker 2: think there'll be some like preparation before, so it looks

471
00:26:50,640 --> 00:26:52,720
Speaker 2: like they're have a hit on their hands.

472
00:26:52,880 --> 00:26:54,679
Speaker 6: Part of the reason I think that I'm taking the

473
00:26:54,800 --> 00:26:56,720
Speaker 6: under which I have to say, surprises me.

474
00:26:56,800 --> 00:26:58,760
Speaker 1: Usually you're already regretting at.

475
00:26:58,680 --> 00:27:01,200
Speaker 6: Usually I root for chaos and it's just like I

476
00:27:01,800 --> 00:27:03,480
Speaker 6: want to see big things happen.

477
00:27:03,600 --> 00:27:07,160
Speaker 5: But do you remember ants?

478
00:27:08,160 --> 00:27:08,360
Speaker 1: Yeah?

479
00:27:08,520 --> 00:27:12,560
Speaker 6: Yeah, yeah, I wonder if this could be similar.

480
00:27:13,400 --> 00:27:15,280
Speaker 5: Yeah, it's of non transparent.

481
00:27:15,320 --> 00:27:18,640
Speaker 2: By the way, that's a pretty good point. The problem

482
00:27:18,680 --> 00:27:21,800
Speaker 2: with ants, though, I think transparency is just the hallmark

483
00:27:21,800 --> 00:27:23,840
Speaker 2: of ETFs. The second thing is that people who launched

484
00:27:23,840 --> 00:27:27,639
Speaker 2: ants tended to be I think high cost managers who

485
00:27:27,720 --> 00:27:30,080
Speaker 2: were so afraid that their IP was so great nobody

486
00:27:30,119 --> 00:27:32,480
Speaker 2: could see their holdings and they thought they're worth like

487
00:27:32,560 --> 00:27:34,800
Speaker 2: one hundred basis points. So the ants tended to be

488
00:27:34,880 --> 00:27:37,200
Speaker 2: higher cost. I think most of these will be like

489
00:27:37,280 --> 00:27:39,320
Speaker 2: DFA where they launched or JEPY where they launched at

490
00:27:39,320 --> 00:27:42,000
Speaker 2: the R six or I class. And if they do that,

491
00:27:42,480 --> 00:27:45,720
Speaker 2: then the ABC people are probably gonna have no reason

492
00:27:45,760 --> 00:27:48,560
Speaker 2: to stay there. So you couldn't launch this at an

493
00:27:48,560 --> 00:27:52,440
Speaker 2: A class price point, because I mean, I just don't

494
00:27:52,440 --> 00:27:55,200
Speaker 2: see it selling an ETF market. So they're going to

495
00:27:55,280 --> 00:27:57,159
Speaker 2: have to launch it closer to the eye right, and

496
00:27:57,200 --> 00:28:01,000
Speaker 2: that alone will entice people. Well uh, but will it

497
00:28:01,080 --> 00:28:04,760
Speaker 2: get new bites from like probably probably not most of them,

498
00:28:04,800 --> 00:28:06,119
Speaker 2: to be honest with you, A lot of this is

499
00:28:06,119 --> 00:28:09,320
Speaker 2: a conversion story, But this fun from these guys. The

500
00:28:09,400 --> 00:28:13,240
Speaker 2: microcap I mean microcaps are kind of forgotten. Nobody's really

501
00:28:13,280 --> 00:28:15,320
Speaker 2: in there. There is a if they just launched this

502
00:28:15,359 --> 00:28:19,040
Speaker 2: straight and it wasn't a share class, I would look

503
00:28:19,040 --> 00:28:21,560
Speaker 2: at this a little bit. It's interesting, it's it's you know,

504
00:28:21,600 --> 00:28:23,800
Speaker 2: it's outperformed at least the mutual fund. Has the managers

505
00:28:23,800 --> 00:28:26,240
Speaker 2: done a good job? Microcaps have been like off the radar.

506
00:28:26,680 --> 00:28:28,520
Speaker 2: Maybe it could get like a Vanti style in the

507
00:28:28,560 --> 00:28:30,439
Speaker 2: small cap category. Maybe it could like kick off some

508
00:28:30,480 --> 00:28:35,200
Speaker 2: microcap interest. This one has some real market I think potential.

509
00:28:35,600 --> 00:28:38,560
Speaker 2: But DFA is a great case of like their conversions

510
00:28:39,080 --> 00:28:41,320
Speaker 2: are all like very low cost. I mean they have

511
00:28:41,480 --> 00:28:43,760
Speaker 2: low tracking error, but their fee is low, so they

512
00:28:43,760 --> 00:28:46,200
Speaker 2: have beta adjusted their fees. So I will say the

513
00:28:46,240 --> 00:28:47,960
Speaker 2: ones that will have the most success are the ones

514
00:28:48,000 --> 00:28:51,080
Speaker 2: that most beta adjust their fees. DFA is really good

515
00:28:51,080 --> 00:28:53,640
Speaker 2: at that, so this is JP Morgan. Others not so good.

516
00:28:53,680 --> 00:28:56,239
Speaker 2: So I think that's where the success and failures will go.

517
00:28:56,400 --> 00:28:58,960
Speaker 6: Well, let's say that, you know, we are talking about

518
00:28:58,960 --> 00:29:02,600
Speaker 6: tens of billions of dollars and Joel Schneider, I'll throw

519
00:29:02,600 --> 00:29:05,320
Speaker 6: it back to you because there's a lot of conversation

520
00:29:06,520 --> 00:29:09,360
Speaker 6: about the market making community within the ETF. We know

521
00:29:09,440 --> 00:29:13,000
Speaker 6: that it's pretty concentrated, pretty top heavy, and there's a

522
00:29:13,000 --> 00:29:18,040
Speaker 6: lot of concern around there about you know, whether market makers.

523
00:29:17,760 --> 00:29:20,360
Speaker 5: Might run into bandwidth issues if we're.

524
00:29:20,160 --> 00:29:24,520
Speaker 6: Talking about you know, a big increase in overall ETF

525
00:29:24,600 --> 00:29:29,320
Speaker 6: AUM and a big increase you know, thousands of new

526
00:29:29,360 --> 00:29:34,560
Speaker 6: ETFs coming to market, whether or not basically the industry

527
00:29:34,600 --> 00:29:38,120
Speaker 6: could handle that from a market making perspective. And I wonder,

528
00:29:38,200 --> 00:29:41,760
Speaker 6: you know what those conversations have sounded like, ad dimensional

529
00:29:41,760 --> 00:29:44,840
Speaker 6: and you know, industry wide, what your thoughts are there.

530
00:29:45,520 --> 00:29:47,560
Speaker 3: Yeah, I think it's a big topic for the industry.

531
00:29:47,800 --> 00:29:51,520
Speaker 3: We certainly thought a lot about it, and we've worked

532
00:29:51,520 --> 00:29:54,920
Speaker 3: with a lot of these market makers for decades. Right,

533
00:29:55,040 --> 00:29:59,080
Speaker 3: we've managed ETFs for ten years, but we've also worked

534
00:29:59,120 --> 00:30:02,160
Speaker 3: with a lot of these markets going back multiple decades,

535
00:30:02,440 --> 00:30:04,880
Speaker 3: so have very deep relationships with them, do a lot

536
00:30:04,880 --> 00:30:08,600
Speaker 3: of business with them. And as you saw on Friday

537
00:30:09,160 --> 00:30:11,600
Speaker 3: in terms of the lead market maker for this product,

538
00:30:11,800 --> 00:30:14,200
Speaker 3: like very good executions for the clients that came in

539
00:30:14,240 --> 00:30:18,200
Speaker 3: on day one. Luckily, a manager our size and with

540
00:30:18,240 --> 00:30:20,720
Speaker 3: our reputation in history, we get to work with the

541
00:30:20,760 --> 00:30:22,440
Speaker 3: A team. We get to work with a lot of

542
00:30:22,480 --> 00:30:25,080
Speaker 3: the best market makers that are out there. I do

543
00:30:25,160 --> 00:30:28,040
Speaker 3: think as people start to come into the market, they

544
00:30:28,040 --> 00:30:30,480
Speaker 3: may not have the depth of relationships with some of

545
00:30:30,480 --> 00:30:35,000
Speaker 3: those aps and market makers, and then the strategies themselves

546
00:30:35,040 --> 00:30:38,239
Speaker 3: may be more difficult to make markets in. I think

547
00:30:38,280 --> 00:30:40,600
Speaker 3: they're going to have to engage with that community and

548
00:30:40,640 --> 00:30:43,360
Speaker 3: figure out what's possible, because what you don't want to

549
00:30:43,400 --> 00:30:46,920
Speaker 3: do is launch a product and then have the end

550
00:30:47,000 --> 00:30:51,400
Speaker 3: investor have a bad experience. So for us the north Stars,

551
00:30:52,040 --> 00:30:56,920
Speaker 3: those investors need to have low costs when they trade,

552
00:30:57,080 --> 00:31:02,080
Speaker 3: so tight spreads, good executions, good liquidity, and that's not

553
00:31:02,120 --> 00:31:04,320
Speaker 3: something that we would compromise on in products that we

554
00:31:04,320 --> 00:31:06,320
Speaker 3: would bring. But I think people are going to have

555
00:31:06,360 --> 00:31:08,120
Speaker 3: to spend a lot of time thinking through that, because

556
00:31:08,160 --> 00:31:11,400
Speaker 3: you're right, Katie, there's not unlimited balance sheet available from

557
00:31:11,440 --> 00:31:12,360
Speaker 3: some of the marketmakers.

558
00:31:14,120 --> 00:31:17,080
Speaker 1: All Right, we're gonna leave it there, Katie Greidfield Joel Schneider,

559
00:31:17,200 --> 00:31:19,000
Speaker 1: thanks so much for joining us on Trillions.

560
00:31:19,520 --> 00:31:19,760
Speaker 3: Cool.

561
00:31:19,800 --> 00:31:29,320
Speaker 4: Thanks guys, all right, thanks for listening to Trillions. Until

562
00:31:29,320 --> 00:31:31,160
Speaker 4: next time. You can find us on the Bloomberg Terminal,

563
00:31:31,240 --> 00:31:34,720
Speaker 4: Bloomberg dot com, Apple Podcasts, Spotify.

564
00:31:34,840 --> 00:31:36,840
Speaker 3: Or wherever else you'd like to listen. We'd love to

565
00:31:36,880 --> 00:31:37,320
Speaker 3: hear from you.

566
00:31:37,400 --> 00:31:39,800
Speaker 4: Hit us up on social I'm at Joel Weber Show,

567
00:31:39,960 --> 00:31:43,560
Speaker 4: He's at Eric Faulchina's. Trillions is produced by Magnus Hendrickson