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At The Money: How Big Can Active ETFS Get? · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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  Speaker 2: When we think about ETFs, we tend to think about large, cheap,
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  Speaker 2: passive indexes. After all, those are the biggest ETFs from
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  Speaker 2: places like Blackrock, Vanguard, and State Street. But when we
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  Speaker 2: look at all the new ETF launches, they tend to
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  Speaker 2: not be passive indexes, not be cheap, and not come
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  Speaker 2: necessarily from those three big companies. They're active and they
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  Speaker 2: are involved in all sorts of different areas that are
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  Speaker 2: off the beaten path. To figure out what this means
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  Speaker 2: for your portfolio, let's bring in Dave Nodig. He is
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  Speaker 2: the president and director of research at ETF dot Com
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  Speaker 2: and a ETF structural expert. Really, since the inception of
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  Speaker 2: the entire sector, so Dave, we've seen an explosion in
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  Speaker 2: the growth of not just new ETFs, but primarily active
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  Speaker 2: ETFs in all sorts of niches. What are you seeing
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  Speaker 2: in this space?
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  Speaker 3: Well, you know, for a long time, ETF meant cheap index, right,
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  Speaker 3: I mean to go back to Spy and then the
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  Speaker 3: first ice shares products, and then even when we started
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  Speaker 3: getting into the big expansion of the two thousands, it
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  Speaker 3: was all just index index index. Then we got some
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  Speaker 3: smart beta where we tried to be a little bit
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  Speaker 3: more clever, and it wasn't really until the late twenty
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  Speaker 3: ten cycle where Kathy would at ARC invest launched ARKK
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  Speaker 3: and really put herself out there as the portfolio manager
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  Speaker 3: in a way that I don't really, frankly remember seeing
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  Speaker 3: since the dotcom boom. It's been a long time since
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  Speaker 3: we'd had superstar managers on CNBC talking about, you know,
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  Speaker 3: pounding the table for a single, and Kathy did that
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  Speaker 3: and obviously had enormous amounts of success. Has had some
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  Speaker 3: performance pickups along the way, but that sort of went
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  Speaker 3: a little bit dormant during some of the pandemic when
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  Speaker 3: people really discovered trading. What we've seen now is this resurgence,
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  Speaker 3: particularly two folks I mentioned Dan Ives why Bush People
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  Speaker 3: know him, and Tom Lee from Funstrat with his granny
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  Speaker 3: shots at ETF, both of which have pulled in huge
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  Speaker 3: money billions of dollars, billions and billions of dollars for
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  Speaker 3: the reasons you would expect, because you've got smart people
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  Speaker 3: talking on podcasts and TV and on their own air
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  Speaker 3: and their own newsletters telling you why they own what's
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  Speaker 3: in the fund. I know that sounds so dumb, but
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  Speaker 3: that's why people love superstar managers because they look and
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  Speaker 3: they can see Tom Lee on screen, and he can
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  Speaker 3: sit there and say, yeah, this is why we like bitcoin. Here,
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  Speaker 3: here are the three firms we have in our fund
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  Speaker 3: because of it. We might be wrong, we might be right.
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  Speaker 3: There's a level of authenticity to that that I think
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  Speaker 3: is really a pretty I also think the fact that they've
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  Speaker 3: doubled D, S and P this year doesn't hurt.
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  Speaker 2: So to put some flesh on the bones here, Kathy
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  Speaker 2: Woods during twenty twenty was a huge tesla and bitcoin
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  Speaker 2: bull the fund arc put up giant numbers, triple digit gains.
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  Speaker 2: Dan Ives has been an apple and an invidiable pretty
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  Speaker 2: much for as long as I can remember. He's been
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  Speaker 2: a whole lot more right than wrong. And Tom Lee
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  Speaker 2: has been very constructive exactly when it paid to be
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  Speaker 2: constructive and stay bullish. All three of those managers have
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  Speaker 2: really big followings. What does the resurgence of brand name
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  Speaker 2: active managers mean for the TF space?
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  Speaker 3: Well, I think, first of all, I think it's great
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  Speaker 3: for the ETF space because I think the ecotomy that
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  Speaker 3: we'd had where people thought of active as being a
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  Speaker 3: thing that happened somewhere else and ETFs were only passive
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  Speaker 3: wasn't helpful. I think we are moving towards the world
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  Speaker 3: where all of your exposures, for the most part, are
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  Speaker 3: going to be in an ETF rapper. So by all
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  Speaker 3: means we should get active managers as part of this mix.
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  Speaker 3: And now we've got lots of them. You know, we've
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  Speaker 3: got a bunch of active funds from Pimco was early.
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  Speaker 3: We've got lots in the bond space, you know, everything
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  Speaker 3: from Cumberland Advisors to State Street with the Double Line
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  Speaker 3: and Jeff Gunlock. Lots of active managers and lots of
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  Speaker 3: different areas. I think that's very healthy for the industry.
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  Speaker 3: For the individual investor, it doesn't necessarily make your life
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  Speaker 3: easier because as much as I happen to like all
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  Speaker 3: the people we have talked about, Dan, tom Lee and
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  Speaker 3: Kathy Like personally as people I would have dinner with,
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  Speaker 3: the math is not on their sides as an industry. Right,
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  Speaker 3: as an industry, we have to point out active managers
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  Speaker 3: categorically underperform over time. Doesn't mean they all do, but
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  Speaker 3: it means that you've got to be the special person
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  Speaker 3: who managed to pick the right active manager at the
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  Speaker 3: right time. That is a tough business. And even active
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  Speaker 3: managers running these fund will tell you trying to time
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  Speaker 3: when to get in and out of their own funds
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  Speaker 3: is going to be tough. So that's the problem, is
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  Speaker 3: that active management is tough to evaluate.
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  Speaker 2: Yeah, and to put some numbers there, half of all
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  Speaker 2: active managers underperform in any given year. You go out
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  Speaker 2: to ten five years, it's eighty percent under form. Ten
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  Speaker 2: years it's ninety percent. So it's a tough road to hoe.
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  Speaker 2: But let's talk about what makes active ETFs somewhat different
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  Speaker 2: than active mutual funds and that data reference. We're all
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  Speaker 2: mutual fund data. Mutual funds have to do a regular
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  Speaker 2: filing each quarter about their largest holdings. There has been
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  Speaker 2: a lot of back and forth about how transparent active
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  Speaker 2: ETFs have to be versus other active funds. What's the
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  Speaker 2: state of the art today, what is the regulatory environment?
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  Speaker 3: So there are solutions. If you're an active manager and
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  Speaker 3: you don't want to tell everybody what you're doing every day,
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  Speaker 3: there are solutions, and there's plenty of funds that have
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  Speaker 3: been launched on them. Fidelity has their versions, trou Price
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  Speaker 3: has been one of the more successful funds out there.
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  Speaker 3: They have a pretty popular blue chip strategy called t chip,
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  Speaker 3: which is semi transparent, meaning they're not telling you the
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  Speaker 3: whole portfolio every day. They're telling you once in a while,
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  Speaker 3: and they're giving the street just enough information to make
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  Speaker 3: a good market not knowing all the information. So it's
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  Speaker 3: sort of a clue, a bit of a hack to
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  Speaker 3: be semi transparent. This solves a problem for some asset managers.
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  Speaker 3: It doesn't solve a single problem for an individual investor, right, So,
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  Speaker 3: like I've never heard an individual investor say, golly, I
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  Speaker 3: wish I knew less about what I owned.
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  Speaker 2: Right, But let's talk about why it's a problem for
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  Speaker 2: fund managers. Fund managers don't buy a stock on a
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  Speaker 2: Monday and then they're done. If they say, hey, we
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  Speaker 2: like XYZ, they're buying that stock trying to take advantage
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  Speaker 2: of draw downs, buying it over days, weeks, even months.
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  Speaker 2: So there is a price advantage to the Yes, if
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  Speaker 2: the fund manager can be a little less transparent.
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  Speaker 3: Fair description, that's that's that's certainly the argument that the
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  Speaker 3: active management industry, who does not want to disclose what
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  Speaker 3: they're doing, would give you so you have articulated that
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  Speaker 3: side of the argument. Well, my counter to that would
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  Speaker 3: be if your strategy requires you buying securities where your
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  Speaker 3: action is going to move the market absent disclosure or
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  Speaker 3: absent obfuscation, then that strategy probably doesn't belong in an
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  Speaker 3: ETF because you've got bigger problems, right. That means that
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  Speaker 3: you're in something small or a liquid or microcap, at
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  Speaker 3: which point, already my question would be, how do you
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  Speaker 3: plan on running a ten billion dollar ETF with that strategy,
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  Speaker 3: because you can't really close an ETF. So if you
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  Speaker 3: are a special situations manager, if you're a really sort
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  Speaker 3: of obscure niche finding those stocks nobody else knows about, manager,
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  Speaker 3: you do not belong in the ETF. And I'll just
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  Speaker 3: flat out and say it at this as simple as that,
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  Speaker 3: the mutual fund structure, or even better, a liquidity cap
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  Speaker 3: structure like a CEF or old interval fund is actually
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  Speaker 3: a better structure for those kinds of investments everybody else. Honestly,
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  Speaker 3: there's so much liquidity. I think it's tough to argue
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  Speaker 3: that somebody like Tom Lee is being particularly hurt by
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  Speaker 3: being transparent. He's double, he's at thirty percent for the year.
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  Speaker 3: The SP's at fifteen.
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  Speaker 2: Right, and CEF stands for closed end funds as opposed
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  Speaker 2: to ETFs. Yes, so let's talk about some other varieties
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  Speaker 2: of active funds that are a little bit out there.
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  Speaker 2: We see funds with options, futures, derivatives, inverse leveraged, along
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  Speaker 2: with some wild income promises in an ETF rapper tell
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  Speaker 2: us about some of those products. Yeah.
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  Speaker 3: The the interesting thing about those is most of them
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  Speaker 3: are very mechanical, Right, So if you're running a leverage strategy,
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  Speaker 3: you're not making any decisions. Right, I've got Apple, I
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  Speaker 3: need two x Apple. I'm going to go to my
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  Speaker 3: swap counterparty overnight. They're just going to settle up my
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  Speaker 3: two x swap. That's the whole management process. But technically
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  Speaker 3: that's going to be an actively managed fund because you
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  Speaker 3: can't just automate that whole process. Somebody still has to
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  Speaker 3: make a call about whether or not you're teeing up
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  Speaker 3: the swap at this rate or that rate. Same thing
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  Speaker 3: with almost anything in the option space. Because the options
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  Speaker 3: are constantly changing and constantly repricing and constantly rolling off.
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  Speaker 3: It's very difficult to create solid index product around actively
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  Speaker 3: or high frequency moving positions in the options market, so
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  Speaker 3: for convenience as much as anything. Almost all of those
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  Speaker 3: type products you mentioned are listed as active products. I
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  Speaker 3: refer to them as inos like active and name only
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  Speaker 3: because they're really There's no Tom Lee saying I really
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  Speaker 3: want Apple options today. There's some guy generally j PASTTLI title,
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  Speaker 3: sitting on a desk somewhere pushing a button to say, yes,
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  Speaker 3: we want those options because the model says we need
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  Speaker 3: to roll and that becomes active management. And I mean
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  Speaker 3: it is active management. It has higher costs associated with
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  Speaker 3: it for a reason. Some of that is the profit
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  Speaker 3: that the issuer wants, but some of it is legitimately
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  Speaker 3: you need a trading desk with a bunch of people
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  Speaker 3: doing work.
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  Speaker 2: So let's talk about another niche ill liquid alts, things
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  Speaker 2: like private equity, private credit, private debt, real estate. Are
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  Speaker 2: we going to see those asset classes that really don't
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  Speaker 2: trade on their own because they're not public. Are we
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  Speaker 2: going to see those in an etf rapper.
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  Speaker 3: We're starting to. We're starting to the canary in the
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  Speaker 3: coal mine here with some products from State Street, the
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  Speaker 3: big ones priv pr IV for private which has a
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  Speaker 3: bunch of Apollo private credit in it generally pretty short
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  Speaker 3: maturity stuff two three year kind of things, and fairly
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  Speaker 3: straightforward understandable private credit. Intel needs to build a fab
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  Speaker 3: in Ireland, they go get a loan, Apollo gives them
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  Speaker 3: the loan. You get a slice of it. Nothing super complicated,
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  Speaker 3: nothing super interesting either. I mean it's not you're not
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  Speaker 3: getting twenty percent yields out of or anything like that.
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  Speaker 3: You're getting some marginal increase in the yield you would
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  Speaker 3: get if you were simply investing in, say junk or
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  Speaker 3: short term co corporates. So those products are starting to
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  Speaker 3: come to market. The concerns I have about them is
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  Speaker 3: they're just going to be untested. We're not going to
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  Speaker 3: really know how they're going to perform when the markets
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  Speaker 3: go hinky, right, And also what does that even mean,
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  Speaker 3: Like if we had a corporate bond blowout and we
• 11:27
  Speaker 3: saw a bunch of triple C stuff start, you know,
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  Speaker 3: get you defaulting. I have no idea what the impact
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  Speaker 3: on Apollo private credit issued in Ireland to Intel is
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  Speaker 3: going to be when that happens. I also have no
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  Speaker 3: idea how they're going to respond if half the fund
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  Speaker 3: decides they want out on that Tuesday and now you've
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  Speaker 3: got a bunch of liquid stuff which can be up
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  Speaker 3: to thirty five percent of the portfolio. That literally the
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  Speaker 3: only buyer is Apollo. Technically, they've got answers to all
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  Speaker 3: those questions. I'm and I've read all the answers to
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  Speaker 3: those questions, and I'm sort of not gonvinced. But it's
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  Speaker 3: one of those things that if you want to be,
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  Speaker 3: if you want to be out there on the edge,
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  Speaker 3: by all means, go ahead. But I think the private
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  Speaker 3: securities in the daily liquid vehicle has not really been
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  Speaker 3: through the ring aer yet, so I remain very skeptical.
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  Speaker 2: So let's talk a little bit about crypto and how
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  Speaker 2: that's going to impact both investor behavior and portfolio construction.
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  Speaker 2: Last year Blackrock, was it last year? This year Blackrock
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  Speaker 2: introduced twenty a bit.
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  Speaker 1: Yeah.
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  Speaker 2: Yeah, so it's a year ago coming up on one
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  Speaker 2: hundred billion dollars in assets, probably the fastest etf ever
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  Speaker 2: to do that. What does this mean and explain the
• 12:44
  Speaker 2: concept of tokenization.
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  Speaker 3: Yeah, So what it means is all of these assets
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  Speaker 3: are going to be more and more available to the
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  Speaker 3: average joe like us who's just trading in their Schwab
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  Speaker 3: account or something. Like that, and because the SEC has
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  Speaker 3: said they're going to make it very easy. Very soon,
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  Speaker 3: we're going to have every major coin that people know about,
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  Speaker 3: a Solana and ave whatever, they'll be a sleeve of
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  Speaker 3: that in an ETF that you'll be able to trade.
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  Speaker 3: That's all great. Having those building blocks is awesome also
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  Speaker 3: because it will now allow portfolio managers to create portfolios
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  Speaker 3: of those individual securities, which right now you can't even do.
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  Speaker 3: You can't even buy an index the top ten coins
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  Speaker 3: because there isn't a target for the top ten coins
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  Speaker 3: to invest in. So that will be fun when we
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  Speaker 3: get that, and I suspect you'll see firms like Bitwise
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  Speaker 3: and black Rock, who've got some real bona fides in
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  Speaker 3: the crypto management space start bringing pretty institutional active management
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  Speaker 3: products there. That's probably a twenty twenty six side. Long term, though,
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  Speaker 3: if we want to talk ten years from now, that's
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  Speaker 3: when crypto starts becoming an interesting competitor to the ETF space.
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  Speaker 3: I think we will eventually end up in a world
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  Speaker 3: where how you move your ownership of Apple around is
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  Speaker 3: going to happen, not by going to the New York
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  Speaker 3: Stock Exchange and exchanging ledger entries to move around your
• 14:06
  Speaker 3: Schwab account. Instead, you're going to have an actual token.
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  Speaker 3: You'll be able to look at the serial number of it.
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  Speaker 3: You'll be able to put it in a wallet and say, oh, no,
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  Speaker 3: this is worth one hundred shares of Apple, and that
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  Speaker 3: wallet will be able to directly move that security to
• 14:19
  Speaker 3: your wallet without any exchange being part of the process.
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  Speaker 3: Most of it will happen like crypto happens now on
• 14:25
  Speaker 3: giant exchanges because price discovery. But just like with bitcoin,
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  Speaker 3: I could walk up to you when we could engage
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  Speaker 3: in a direct transaction. You're going to start seeing that
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  Speaker 3: with other securities. It's happening more in bonds and real estate.
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  Speaker 3: Now to do it in equities is going to require
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  Speaker 3: some actual legislation, and we don't make so many laws
• 14:44
  Speaker 3: these days, so that may take some time. Instead, what
• 14:47
  Speaker 3: we'll do is will wrap a lot of stuff. So
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  Speaker 3: you'll probably hear about things like wrapped Apple and wrapped Cisco.
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  Speaker 3: And what that's going to be is a token that
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  Speaker 3: owns the security in some sort of trust pool. That's
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  Speaker 3: a baby step, but that's what we'll start hearing first.
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  Speaker 3: So be skeptical when people say we're tokenizing everything because
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  Speaker 3: it's going to be a decade.
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  Speaker 2: I had a conversation with Jose Manyana, who is the
• 15:10
  Speaker 2: head of wealth Strategies at Investment Giant BNY Bank of
• 15:14
  Speaker 2: New York, and he was saying, Hey, we went from
• 15:17
  Speaker 2: T plus three to T plus one, meaning it used
• 15:20
  Speaker 2: to take three days to settle a trade. Today it's
• 15:22
  Speaker 2: going to take one day. If we want to get
• 15:25
  Speaker 2: to T plus zero, we have to really have confidence
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  Speaker 2: in both sides of the transaction, and theoretically tokenization solves
• 15:32
  Speaker 2: that problem.
• 15:33
  Speaker 3: It does. Although think about how many big transactions in
• 15:37
  Speaker 3: the world that we could be doing easier we deliberately
• 15:41
  Speaker 3: put brakes on. Think about buying a house wiring right,
• 15:44
  Speaker 3: so there's you know, there's escrow, there's secondary inspection processes,
• 15:50
  Speaker 3: there's separate contracts around just the intention to buy and sell.
• 15:54
  Speaker 3: So the bigger and more interesting a transaction gets, the
• 15:57
  Speaker 3: less T zero is actually a good right. I Mean,
• 16:01
  Speaker 3: the thing I always say about T zero is did
• 16:04
  Speaker 3: you really want T zero during the flash crash in
• 16:07
  Speaker 3: twenty ten, Like, did you really want no recourse for
• 16:10
  Speaker 3: that that fat fingered billion dollar pennies on the dollar trade? No,
• 16:15
  Speaker 3: you wanted this ecosystem that protects you from a bad
• 16:19
  Speaker 3: actor spoofing something into the system. So we're gonna have
• 16:23
  Speaker 3: a lot to evaluate as a as a as a
• 16:26
  Speaker 3: market what we actually want. The idea of slowing down
• 16:30
  Speaker 3: markets has actually gotten a lot of traction, like speed
• 16:32
  Speaker 3: bump markets, things like that that are actually pushing against
• 16:36
  Speaker 3: this idea of instantaneous settlement for anything. I don't even
• 16:39
  Speaker 3: want instantaneous settlement for my bank account. I like knowing
• 16:42
  Speaker 3: that I've got somebody I can call when something goes wrong.
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  Speaker 2: Huh. So you've written about volatility and liquidity laundering. Explain
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  Speaker 2: what this is and are these really going to be ETFs?
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  Speaker 3: They already are. Man So, volatility laundering is simply moving
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  Speaker 3: volatility from one bucket to another and charging something for
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  Speaker 3: the privilege of doing that. Right now, you can buy
• 17:04
  Speaker 3: something like MSTY which will give you one hundred percent
• 17:09
  Speaker 3: income return on a micro strategy position through the magic
• 17:13
  Speaker 3: of options, right, and it creates a synthetic long position.
• 17:16
  Speaker 3: Then it does a synthetic covered call against the synthetic
• 17:19
  Speaker 3: long position, and then it does a whole lot of
• 17:21
  Speaker 3: return of capital to give you your money back and
• 17:24
  Speaker 3: promises you this endless stream of high distributions high percentage distributions.
• 17:29
  Speaker 3: That is volatility laundering because what you were actually doing
• 17:33
  Speaker 3: is you were trying to sell other people the volatility
• 17:36
  Speaker 3: of micro strategy, which is probably not a fantastic idea
• 17:40
  Speaker 3: because the wall of all is high in those cases.
• 17:43
  Speaker 3: So you're being the person picking up the in this
• 17:46
  Speaker 3: case quarters in front of the steamroll or not the pennies,
• 17:49
  Speaker 3: but you're still exposed to MicroStrategy collapsing and going to nothing.
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  Speaker 3: That volatility laundering is what all of these options strategies
• 17:57
  Speaker 3: are really doing.
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  Speaker 2: So really, to wrap this up, the bottom line is
• 18:02
  Speaker 2: bring the same level of common sense and scrutiny to
• 18:06
  Speaker 2: new ETFs that you would to any financial product. Make
• 18:10
  Speaker 2: sure you understand what the product is, how it generates gains,
• 18:15
  Speaker 2: the sort of risks you're incurring, especially with these exotic products,
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  Speaker 2: and the costs. Are these products worth spending seventy five
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  Speaker 2: one hundred, one hundred and twenty five bases points more
• 18:29
  Speaker 2: than what you would get for a plain vanilla passive
• 18:32
  Speaker 2: index that seems to be dominating the asset allocation space
• 18:37
  Speaker 2: and the space for ETFs. Be smart, be thoughtful, do
• 18:41
  Speaker 2: your homework. I'm Barry Ridults you've been listening to Bloomberg
• 18:46
  Speaker 2: at the Money