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At The Money: The Flood of New ETFs · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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  Speaker 2: There were six hundred new ETFs launched in the first
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  Speaker 2: eight months of twenty twenty five, and it's gonna get
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  Speaker 2: worse because so many more ETFs are coming out next year.
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  Speaker 2: The growth has been explosive. What does this mean for investors?
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  Speaker 2: I have the perfect person to discuss this with. Dave
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  Speaker 2: Kndig is President and head of research at ETF dot Com.
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  Speaker 2: He has been tracking the ETF industry pretty much since
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  Speaker 2: its beginning and is well known as an expert in
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  Speaker 2: the space. Dave, let's talk a little bit about what's
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  Speaker 2: been going on. Most ETF assets are and will likely
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  Speaker 2: continue to be cheap index based products. That's the legacy
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  Speaker 2: for investors, low cost beta. Is this the future of
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  Speaker 2: ETFs or are we going in a different direction.
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  Speaker 3: I think most of the money is going to continue
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  Speaker 3: to flow into low cost asset allocation targets right the
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  Speaker 3: S and P five hundred broad bonds, broad commodities at
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  Speaker 3: very very cheap institutional prices. It's just hard to beat that.
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  Speaker 3: It's one of the best deals going in asset management
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  Speaker 3: in the investing world. And so whether you're an individual,
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  Speaker 3: mom and pop investor, just trading your own account or
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  Speaker 3: whether you're the Harvard Endowment, anything in between. Cheap beta
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  Speaker 3: is still probably going to be important to your portfolio,
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  Speaker 3: and ETFs are going to remain the best wrapper for
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  Speaker 3: that experience. However, this industry is not going to take
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  Speaker 3: that lying down and desperately wants to make money. So
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  Speaker 3: most of the new products, the new launches you talked about,
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  Speaker 3: the six hundred will probably have eight hundred and nine
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  Speaker 3: hundred by the end of the year. Almost all of
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  Speaker 3: those products are very expensive. Doesn't mean some of them
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  Speaker 3: aren't good, but they're all very expensive.
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  Speaker 2: So let's talk about that new products are coming out
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  Speaker 2: with what you described as quote insanely high fees, that
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  Speaker 2: the big revenue winners are likely not the firms you
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  Speaker 2: think of when someone says ETF at a cocktail party.
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  Speaker 2: What does this mean for investors? What does this mean
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  Speaker 2: for the industry? Are there really massive profits to be
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  Speaker 2: had here?
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  Speaker 3: There are pretty huge profits to be had here. And
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  Speaker 3: if you look at where I like to look at
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  Speaker 3: revenue based on flow, meaning like last month x amount
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  Speaker 3: of money came in, what was the revenue implied by
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  Speaker 3: that money and the implied revenue of the industry now
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  Speaker 3: has probably about it. Twenty five percent of the imply
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  Speaker 3: revenue from flow is going to products that cost over
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  Speaker 3: one percent really, so that means there are a lot
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  Speaker 3: of investors buying products that cost over one percent. And
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  Speaker 3: the reason that's an issue for investors is not that
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  Speaker 3: nothing is worth that fee, but that what's getting launched
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  Speaker 3: tends to be very speculative. We're not talking about core
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  Speaker 3: investing building blocks. We're talking about ETFs that use leverage
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  Speaker 3: or ETFs that use the derivatives markets to shape your
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  Speaker 3: pattern of returns to get you more income than you
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  Speaker 3: might otherwise be able to selling volatility. Those types of
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  Speaker 3: products are expensive, and while they may be useful, like
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  Speaker 3: like a really sharp knife in the drawer can be
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  Speaker 3: really useful when you got that chicken bone you got
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  Speaker 3: to get through, it's not a one size fits all thing.
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  Speaker 3: So I have some concern that individual investors see the
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  Speaker 3: marketing from the industry which is really exclusively focused on
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  Speaker 3: those expensive products, and gets sort of suckered into them.
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  Speaker 2: So let's talk about what is transformative, What is innovative
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  Speaker 2: in ETFs over the past few years. What trends do
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  Speaker 2: you see shaping twenty twenty six and beyond. What is
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  Speaker 2: the biggest new type of ETF that's coming out.
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  Speaker 3: Well, you know, there's really three buckets of hot development
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  Speaker 3: from a what could you as an investor target crypto?
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  Speaker 3: We have to talk about, right, Not only do we
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  Speaker 3: now have hundreds of billions of dollars tracking crypto in
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  Speaker 3: various capacities, whether it's spot bitcoin, which is where most
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  Speaker 3: of those flows have gone, but now we're talking about
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  Speaker 3: Ethereum and Solana. We're talking about stake diversions where you're
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  Speaker 3: taking your Solana and you're putting it into a contract
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  Speaker 3: to earn fees off of or earn interest off of it.
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  Speaker 3: That ecosystem of crypto products is going to get very
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  Speaker 3: complex very quickly. The SEC has put out sort of
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  Speaker 3: accelerated listening standards or a default listening standards, which will
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  Speaker 3: allow probably the next ten to twenty coins on the
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  Speaker 3: market cap list to be launched as Spot ETFs. So
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  Speaker 3: those will all be launched within the next six to
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  Speaker 3: twelve months. Before you it's going to be a free
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  Speaker 3: for all. Before you move.
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  Speaker 2: Off crypto, I have to ask about black Rocks I Bit.
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  Speaker 2: You know it was five billion at launch. It's something
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  Speaker 2: like eighty two billion already. Is this the fastest ever
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  Speaker 2: acid accumulator of any ETF that's been launched.
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  Speaker 3: It's pretty close. If it's not the winner, I certainly
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  Speaker 3: think on a pure dollar basis, I can't think of
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  Speaker 3: anything that has had that kind of ramp. GLD when
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  Speaker 3: it first came out, you know, was one of the
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  Speaker 3: first to a billion, and then the first to five billion,
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  Speaker 3: and that broke a lot of records. I think I
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  Speaker 3: Bit and bitcoin as a class has really kind of
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  Speaker 3: blown all those things out of the water, and it's
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  Speaker 3: been it's been I think beneficial for the most part. Right,
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  Speaker 3: it's been an orderly process. I think having these bitcoin
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  Speaker 3: ETFs has helped investors understand it. I'm hearing from a
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  Speaker 3: bigger institution's bigger advisors they love the ETF because it
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  Speaker 3: solves all of their custody issues. Everything stays in the
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  Speaker 3: same account. They don't have to worry about having on
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  Speaker 3: chain assets. So while cryptopurists may not be into it,
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  Speaker 3: I think the average investor is way better suited to
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  Speaker 3: get their little bit of crypto exposure in that ETF.
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  Speaker 2: Rapper, and you mentioned what the SEC is permitting, not
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  Speaker 2: just in crypto, but across the boards. I read your
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  Speaker 2: regular writings and one of the things you had said
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  Speaker 2: is we have a quote incredibly permissive launch environment unquote.
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  Speaker 2: What does this mean in terms of the sort of
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  Speaker 2: things we can see in ETFs either with leverage two
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  Speaker 2: x three x in verse two x. What does this
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  Speaker 2: permissive environment mean for what ETFs are going to get launched?
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  Speaker 3: It means we're gonna get a lot of them. You know,
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  Speaker 3: we're gonna launch all the things.
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  Speaker 2: As I like to say, the thing.
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  Speaker 3: The biggest thing we've had is this move towards single
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  Speaker 3: stock ETFs. And for people might be confused by that,
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  Speaker 3: it's not that you're buying an Apple ETF to invest
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  Speaker 3: in just Apple, because you can obviously just buy Apple
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  Speaker 3: to do that. You're buying an Apple ETF that maybe
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  Speaker 3: gives you two x Apple exposure or minus two x
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  Speaker 3: Apple exposure, so when it goes it goes down, you
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  Speaker 3: go up. Or you're writing options on your Apple position
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  Speaker 3: so that you can get some extra income, or you're
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  Speaker 3: doing a combination of both so that you can only
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  Speaker 3: get you know, you get two x the upside and
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  Speaker 3: minus one x the downside, but with caps involved. Because
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  Speaker 3: you're selling a lot of options along the way. Any way,
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  Speaker 3: you can imagine mixing and matching these kinds of patterns
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  Speaker 3: of returns. The combination of leverage, income and protection around
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  Speaker 3: a single stock is going to be launched. If you
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  Speaker 3: think about it. We've got five hundred stocks and the
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  Speaker 3: S and P five hundred. They are about six different
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  Speaker 3: flavors you can think of for each individual stock, that's
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  Speaker 3: a couple thousand ETFs we're going to have to keep
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  Speaker 3: track of, assuming there's only one of each flavor. And
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  Speaker 3: this industry loves to compete against each other, so legitimately,
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  Speaker 3: I think by this time next year we could have
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  Speaker 3: several thousand more ETFs than we do right now.
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  Speaker 2: More ETFs than there are actually stocks.
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  Speaker 3: Huge already, they're absolutely I mean we've been under we
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  Speaker 3: haven't had five thousand stocks in the whelshare in a
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  Speaker 3: long time. I think you're or so. Yeah. So we're
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  Speaker 3: going to see all those single stock products, which are
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  Speaker 3: for the most part, training vehicles. If you're a day trader,
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  Speaker 3: there's lots of value in there. If you are trying
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  Speaker 3: to you know, monetize a long term position, there's some
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  Speaker 3: value in those kinds of covered call strategies. They're all
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  Speaker 3: very expensive, they're very inappropriate for most long term investor
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  Speaker 3: from an allocation perspective, but sharp useful training tools for
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  Speaker 3: a certain class of trader.
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  Speaker 2: I keep reading some of the things you're penning about
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  Speaker 2: share class relief. Explain what this means and why this
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  Speaker 2: is another flood of new ETFs that are coming out.
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  Speaker 3: Yeah, let's an example. A DFA dimensional was late to
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  Speaker 3: the ETF party, very well known sort of the nineties
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  Speaker 3: for being one of those shops where you could only
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  Speaker 3: buy them through an advisor who'd gone through their coursework.
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  Speaker 3: They made the shift to convert some of their mutual
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  Speaker 3: funds to ETFs a couple of years ago, and we're
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  Speaker 3: very successful at it now. Why didn't they convert all
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  Speaker 3: of them? Well, because a lot of the DFA products
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  Speaker 3: end up in four oh one K plans, and if
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  Speaker 3: you're in a four to oh one K plan, that
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  Speaker 3: means you need to be able to get fractional shares,
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  Speaker 3: which is really easn't a mutual fund and impossible in
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  Speaker 3: an ETF. So the only way to get the efficiencies
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  Speaker 3: of the ETF structure into those mutual funds is a
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  Speaker 3: share class. An ETF share class pointing at the same
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  Speaker 3: pool of assets. That's how a lot of Vanguard ETFs
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  Speaker 3: are built. They had a patent which has now expired.
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  Speaker 3: The SEC has seventy odd applications from other players in
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  Speaker 3: the industry to basically duplicate things the way Vanguard is.
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  Speaker 3: They've made it very clear that's imminent. I would suggest
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  Speaker 3: by the end of the year, at the very latest,
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  Speaker 3: we'll see this first one's approved, and that will then
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  Speaker 3: be a flood because that becomes a very very simple
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  Speaker 3: boilerplate piece of paperwork to file a new share class
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  Speaker 3: and get it trading on NAZI or Nasdaq, Orcibo. So
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  Speaker 3: we'll just see a lot of those. I would suspect
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  Speaker 3: by the end of the year, we could have maybe
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  Speaker 3: a thousand of those individual share class ETFs turned on.
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  Speaker 3: If all of the people who have filed, converted all
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  Speaker 3: or share classed all of the things they could, it
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  Speaker 3: would be about five or six thousand new ETFs.
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  Speaker 2: Huh, that's really intriguing. I have to ask a question,
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  Speaker 2: and you're the one who's really schooled me on this.
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  Speaker 2: If mutual funds were created today, they probably wouldn't be approved.
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  Speaker 2: Explain the problem with mutual funds and why ETFs are
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  Speaker 2: arguably so much superior.
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  Speaker 3: Well, the biggest problem with funds is their tax fairness.
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  Speaker 3: It's the issue with a fund is that if you
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  Speaker 3: as a big investor, Let's say you owned twenty percent
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  Speaker 3: of the Dave mutual fund and you decide I'm terrible
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  Speaker 3: and you on out, well, the mutual fund me has
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  Speaker 3: to now go sell a bunch of securities to give
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  Speaker 3: you back your twenty percent of my fund. All that
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  Speaker 3: cash that you're gonna want that engenders generally a bunch
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  Speaker 3: of capital gains. Those capital gains now have to be
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  Speaker 3: distributed to all the people who are left, the people
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  Speaker 3: you abandoned, Barry. They end up paying taxes because you left,
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  Speaker 3: because you created a capital gain for everybody. Now, it's
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  Speaker 3: not that those are taxes that would never be paid,
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  Speaker 3: it's just you're paying them earlier than you would otherwise
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  Speaker 3: because you get to reduce your basis. So, individual investors
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  Speaker 3: in a mutual fund can often get tax distributions through
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  Speaker 3: no fault of their own, through no action of their own,
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  Speaker 3: simply because other investors go in and out, and an
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  Speaker 3: ETF that simply doesn't happen. So it is a simply
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  Speaker 3: a fairer mechanism. The ETF also brings other things that
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  Speaker 3: are helpful, like the ability to wash out some cap
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  Speaker 3: gains by doing so called creation redemption heartbeat trading. That's
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  Speaker 3: a little feature of ETFs that makes them very tax efficient,
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  Speaker 3: and of course liquidity and transparency and all those other things.
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  Speaker 3: But the big reason mutual funds would probably get the
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  Speaker 3: kibosh today is they're inherently less fair in terms of
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  Speaker 3: how they treat individual investors.
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  Speaker 2: So even if I don't sell my mutual fund but
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  Speaker 2: other people have, I incre capital gains one hundred percent.
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  Speaker 3: Now you get again, you get to change your basis,
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  Speaker 3: so when you go to sell, you'll pay less tax gains.
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  Speaker 3: But I don't know about you. I prefer paying taxes later,
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  Speaker 3: hopefully never, or maybe after I'm dead, not today.
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  Speaker 2: So so final question, it sounds like the future of
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  Speaker 2: ETFs are pretty much anything anything you want to do,
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  Speaker 2: sometimes cheap, always very liquid, but can be accomplished very
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  Speaker 2: well with an ETF. Is this the future of asset management?
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  Speaker 3: I think so. I think the ETF structure is the
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  Speaker 3: most efficient vehicle we've come up with for taking exposures
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  Speaker 3: and getting them traded on exchanges, and it's hard for
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  Speaker 3: me to see how we're going to make it any
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  Speaker 3: more efficient. Tokenization Crypto sometime down the line will replace
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  Speaker 3: some of what we've done with ETFs, but will largely
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  Speaker 3: duplicate it, and it will just do it in a
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  Speaker 3: different fashion. So the ETF structure is where you're going
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  Speaker 3: to probably get almost all of your exposures for the
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  Speaker 3: foreseeable future, with some very strange educases things like some
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  Speaker 3: private credit or maybe some real estate that you can't
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  Speaker 3: trade daily. There'll be some EDU cases. Everything else is
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  Speaker 3: going to be an ETF.
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  Speaker 2: So to wrap up, if we're talking about the future
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  Speaker 2: of ETFs, we're really talking about the future of asset
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  Speaker 2: allocation and investing. For the most part, the big money
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  Speaker 2: are in the low cost passive indexes that charge three
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  Speaker 2: four five basis points. But the fastest growing space in
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  Speaker 2: ETF world are active funds. Are alternative funds are all
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  Speaker 2: sorts of niche areas, some of which are pretty pricey.
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  Speaker 2: One hundred, one hundred and twenty five basis points, directional bets,
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  Speaker 2: leverage two x three x, inverse bets. Those are really
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  Speaker 2: special use cases. Tread carefully if you're playing in those spaces.
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  Speaker 2: Use ETFs for what they're really good at, getting you
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  Speaker 2: low cost exposure to inexpensive indices. Tread lightly when you
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  Speaker 2: go into the pricier, wilder stuff. Those are potential accidents
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  Speaker 2: waiting to happen. I'm Barry Ridlts. You're listening to Bloomberg's
• 14:39
  Speaker 2: at the Money