October 22, 2025 • 18 mins
ETFs gained a reputation for providing investors with low-cost index exposure, but many of the newest funds are actively managed. Some are costly and speculative. What is an ETF investor to do?
Dave Nadig is President and Director of Research at ETF.com, and he shares with us how investors should navigate all of these new products. He helped design and market some of the first exchange-traded funds.
Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:15):
When we think about ETFs, we tend to think about large, cheap,
passive indexes. After all, those are the biggest ETFs from
places like Blackrock, Vanguard, and State Street. But when we
look at all the new ETF launches, they tend to
not be passive indexes, not be cheap, and not come
(00:39):
necessarily from those three big companies. They're active and they
are involved in all sorts of different areas that are
off the beaten path. To figure out what this means
for your portfolio, let's bring in Dave Nodig. He is
the president and director of research at ETF dot Com
and a ETF structural expert. Really, since the inception of
(01:04):
the entire sector, so Dave, we've seen an explosion in
the growth of not just new ETFs, but primarily active
ETFs in all sorts of niches. What are you seeing
in this space?
Speaker 3 (01:19):
Well, you know, for a long time, ETF meant cheap index, right,
I mean to go back to Spy and then the
first ice shares products, and then even when we started
getting into the big expansion of the two thousands, it
was all just index index index. Then we got some
smart beta where we tried to be a little bit
more clever, and it wasn't really until the late twenty
(01:39):
ten cycle where Kathy would at ARC invest launched ARKK
and really put herself out there as the portfolio manager
in a way that I don't really, frankly remember seeing
since the dotcom boom. It's been a long time since
we'd had superstar managers on CNBC talking about, you know,
pounding the table for a single, and Kathy did that
(02:01):
and obviously had enormous amounts of success. Has had some
performance pickups along the way, but that sort of went
a little bit dormant during some of the pandemic when
people really discovered trading. What we've seen now is this resurgence,
particularly two folks I mentioned Dan Ives why Bush People
know him, and Tom Lee from Funstrat with his granny
(02:22):
shots at ETF, both of which have pulled in huge
money billions of dollars, billions and billions of dollars for
the reasons you would expect, because you've got smart people
talking on podcasts and TV and on their own air
and their own newsletters telling you why they own what's
in the fund. I know that sounds so dumb, but
(02:42):
that's why people love superstar managers because they look and
they can see Tom Lee on screen, and he can
sit there and say, yeah, this is why we like bitcoin. Here,
here are the three firms we have in our fund
because of it. We might be wrong, we might be right.
There's a level of authenticity to that that I think
is really a pretty I also think the fact that they've
doubled D, S and P this year doesn't hurt.
Speaker 2 (03:04):
So to put some flesh on the bones here, Kathy
Woods during twenty twenty was a huge tesla and bitcoin
bull the fund arc put up giant numbers, triple digit gains.
Dan Ives has been an apple and an invidiable pretty
much for as long as I can remember. He's been
(03:25):
a whole lot more right than wrong. And Tom Lee
has been very constructive exactly when it paid to be
constructive and stay bullish. All three of those managers have
really big followings. What does the resurgence of brand name
active managers mean for the TF space?
Speaker 3 (03:46):
Well, I think, first of all, I think it's great
for the ETF space because I think the ecotomy that
we'd had where people thought of active as being a
thing that happened somewhere else and ETFs were only passive
wasn't helpful. I think we are moving towards the world
where all of your exposures, for the most part, are
going to be in an ETF rapper. So by all
means we should get active managers as part of this mix.
(04:08):
And now we've got lots of them. You know, we've
got a bunch of active funds from Pimco was early.
We've got lots in the bond space, you know, everything
from Cumberland Advisors to State Street with the Double Line
and Jeff Gunlock. Lots of active managers and lots of
different areas. I think that's very healthy for the industry.
For the individual investor, it doesn't necessarily make your life
(04:29):
easier because as much as I happen to like all
the people we have talked about, Dan, tom Lee and
Kathy Like personally as people I would have dinner with,
the math is not on their sides as an industry. Right,
as an industry, we have to point out active managers
categorically underperform over time. Doesn't mean they all do, but
(04:51):
it means that you've got to be the special person
who managed to pick the right active manager at the
right time. That is a tough business. And even active
managers running these fund will tell you trying to time
when to get in and out of their own funds
is going to be tough. So that's the problem, is
that active management is tough to evaluate.
Speaker 2 (05:08):
Yeah, and to put some numbers there, half of all
active managers underperform in any given year. You go out
to ten five years, it's eighty percent under form. Ten
years it's ninety percent. So it's a tough road to hoe.
But let's talk about what makes active ETFs somewhat different
than active mutual funds and that data reference. We're all
(05:31):
mutual fund data. Mutual funds have to do a regular
filing each quarter about their largest holdings. There has been
a lot of back and forth about how transparent active
ETFs have to be versus other active funds. What's the
state of the art today, what is the regulatory environment?
Speaker 3 (05:53):
So there are solutions. If you're an active manager and
you don't want to tell everybody what you're doing every day,
there are solutions, and there's plenty of funds that have
been launched on them. Fidelity has their versions, trou Price
has been one of the more successful funds out there.
They have a pretty popular blue chip strategy called t chip,
which is semi transparent, meaning they're not telling you the
(06:14):
whole portfolio every day. They're telling you once in a while,
and they're giving the street just enough information to make
a good market not knowing all the information. So it's
sort of a clue, a bit of a hack to
be semi transparent. This solves a problem for some asset managers.
It doesn't solve a single problem for an individual investor, right, So,
like I've never heard an individual investor say, golly, I
(06:37):
wish I knew less about what I owned.
Speaker 2 (06:39):
Right, But let's talk about why it's a problem for
fund managers. Fund managers don't buy a stock on a
Monday and then they're done. If they say, hey, we
like XYZ, they're buying that stock trying to take advantage
of draw downs, buying it over days, weeks, even months.
So there is a price advantage to the Yes, if
(07:01):
the fund manager can be a little less transparent.
Speaker 3 (07:05):
Fair description, that's that's that's certainly the argument that the
active management industry, who does not want to disclose what
they're doing, would give you so you have articulated that
side of the argument. Well, my counter to that would
be if your strategy requires you buying securities where your
action is going to move the market absent disclosure or
(07:27):
absent obfuscation, then that strategy probably doesn't belong in an
ETF because you've got bigger problems, right. That means that
you're in something small or a liquid or microcap, at
which point, already my question would be, how do you
plan on running a ten billion dollar ETF with that strategy,
because you can't really close an ETF. So if you
(07:49):
are a special situations manager, if you're a really sort
of obscure niche finding those stocks nobody else knows about, manager,
you do not belong in the ETF. And I'll just
flat out and say it at this as simple as that,
the mutual fund structure, or even better, a liquidity cap
structure like a CEF or old interval fund is actually
(08:09):
a better structure for those kinds of investments everybody else. Honestly,
there's so much liquidity. I think it's tough to argue
that somebody like Tom Lee is being particularly hurt by
being transparent. He's double, he's at thirty percent for the year.
The SP's at fifteen.
Speaker 2 (08:23):
Right, and CEF stands for closed end funds as opposed
to ETFs. Yes, so let's talk about some other varieties
of active funds that are a little bit out there.
We see funds with options, futures, derivatives, inverse leveraged, along
with some wild income promises in an ETF rapper tell
(08:46):
us about some of those products. Yeah.
Speaker 3 (08:48):
The the interesting thing about those is most of them
are very mechanical, Right, So if you're running a leverage strategy,
you're not making any decisions. Right, I've got Apple, I
need two x Apple. I'm going to go to my
swap counterparty overnight. They're just going to settle up my
two x swap. That's the whole management process. But technically
that's going to be an actively managed fund because you
can't just automate that whole process. Somebody still has to
(09:10):
make a call about whether or not you're teeing up
the swap at this rate or that rate. Same thing
with almost anything in the option space. Because the options
are constantly changing and constantly repricing and constantly rolling off.
It's very difficult to create solid index product around actively
or high frequency moving positions in the options market, so
(09:32):
for convenience as much as anything. Almost all of those
type products you mentioned are listed as active products. I
refer to them as inos like active and name only
because they're really There's no Tom Lee saying I really
want Apple options today. There's some guy generally j PASTTLI title,
sitting on a desk somewhere pushing a button to say, yes,
(09:53):
we want those options because the model says we need
to roll and that becomes active management. And I mean
it is active management. It has higher costs associated with
it for a reason. Some of that is the profit
that the issuer wants, but some of it is legitimately
you need a trading desk with a bunch of people
doing work.
Speaker 2 (10:10):
So let's talk about another niche ill liquid alts, things
like private equity, private credit, private debt, real estate. Are
we going to see those asset classes that really don't
trade on their own because they're not public. Are we
going to see those in an etf rapper.
Speaker 3 (10:30):
We're starting to. We're starting to the canary in the
coal mine here with some products from State Street, the
big ones priv pr IV for private which has a
bunch of Apollo private credit in it generally pretty short
maturity stuff two three year kind of things, and fairly
straightforward understandable private credit. Intel needs to build a fab
(10:52):
in Ireland, they go get a loan, Apollo gives them
the loan. You get a slice of it. Nothing super complicated,
nothing super interesting either. I mean it's not you're not
getting twenty percent yields out of or anything like that.
You're getting some marginal increase in the yield you would
get if you were simply investing in, say junk or
short term co corporates. So those products are starting to
(11:13):
come to market. The concerns I have about them is
they're just going to be untested. We're not going to
really know how they're going to perform when the markets
go hinky, right, And also what does that even mean,
Like if we had a corporate bond blowout and we
saw a bunch of triple C stuff start, you know,
get you defaulting. I have no idea what the impact
(11:34):
on Apollo private credit issued in Ireland to Intel is
going to be when that happens. I also have no
idea how they're going to respond if half the fund
decides they want out on that Tuesday and now you've
got a bunch of liquid stuff which can be up
to thirty five percent of the portfolio. That literally the
only buyer is Apollo. Technically, they've got answers to all
(11:54):
those questions. I'm and I've read all the answers to
those questions, and I'm sort of not gonvinced. But it's
one of those things that if you want to be,
if you want to be out there on the edge,
by all means, go ahead. But I think the private
securities in the daily liquid vehicle has not really been
through the ring aer yet, so I remain very skeptical.
Speaker 2 (12:16):
So let's talk a little bit about crypto and how
that's going to impact both investor behavior and portfolio construction.
Last year Blackrock, was it last year? This year Blackrock
introduced twenty a bit.
Speaker 1 (12:30):
Yeah.
Speaker 2 (12:31):
Yeah, so it's a year ago coming up on one
hundred billion dollars in assets, probably the fastest etf ever
to do that. What does this mean and explain the
concept of tokenization.
Speaker 3 (12:47):
Yeah, So what it means is all of these assets
are going to be more and more available to the
average joe like us who's just trading in their Schwab
account or something. Like that, and because the SEC has
said they're going to make it very easy. Very soon,
we're going to have every major coin that people know about,
a Solana and ave whatever, they'll be a sleeve of
that in an ETF that you'll be able to trade.
(13:09):
That's all great. Having those building blocks is awesome also
because it will now allow portfolio managers to create portfolios
of those individual securities, which right now you can't even do.
You can't even buy an index the top ten coins
because there isn't a target for the top ten coins
to invest in. So that will be fun when we
get that, and I suspect you'll see firms like Bitwise
(13:32):
and black Rock, who've got some real bona fides in
the crypto management space start bringing pretty institutional active management
products there. That's probably a twenty twenty six side. Long term, though,
if we want to talk ten years from now, that's
when crypto starts becoming an interesting competitor to the ETF space.
I think we will eventually end up in a world
(13:54):
where how you move your ownership of Apple around is
going to happen, not by going to the New York
Stock Exchange and exchanging ledger entries to move around your
Schwab account. Instead, you're going to have an actual token.
You'll be able to look at the serial number of it.
You'll be able to put it in a wallet and say, oh, no,
this is worth one hundred shares of Apple, and that
(14:16):
wallet will be able to directly move that security to
your wallet without any exchange being part of the process.
Most of it will happen like crypto happens now on
giant exchanges because price discovery. But just like with bitcoin,
I could walk up to you when we could engage
in a direct transaction. You're going to start seeing that
with other securities. It's happening more in bonds and real estate.
(14:38):
Now to do it in equities is going to require
some actual legislation, and we don't make so many laws
these days, so that may take some time. Instead, what
we'll do is will wrap a lot of stuff. So
you'll probably hear about things like wrapped Apple and wrapped Cisco.
And what that's going to be is a token that
owns the security in some sort of trust pool. That's
(15:00):
a baby step, but that's what we'll start hearing first.
So be skeptical when people say we're tokenizing everything because
it's going to be a decade.
Speaker 2 (15:07):
I had a conversation with Jose Manyana, who is the
head of wealth Strategies at Investment Giant BNY Bank of
New York, and he was saying, Hey, we went from
T plus three to T plus one, meaning it used
to take three days to settle a trade. Today it's
going to take one day. If we want to get
to T plus zero, we have to really have confidence
(15:28):
in both sides of the transaction, and theoretically tokenization solves
that problem.
Speaker 3 (15:33):
It does. Although think about how many big transactions in
the world that we could be doing easier we deliberately
put brakes on. Think about buying a house wiring right,
so there's you know, there's escrow, there's secondary inspection processes,
there's separate contracts around just the intention to buy and sell.
(15:54):
So the bigger and more interesting a transaction gets, the
less T zero is actually a good right. I Mean,
the thing I always say about T zero is did
you really want T zero during the flash crash in
twenty ten, Like, did you really want no recourse for
that that fat fingered billion dollar pennies on the dollar trade? No,
(16:15):
you wanted this ecosystem that protects you from a bad
actor spoofing something into the system. So we're gonna have
a lot to evaluate as a as a as a
market what we actually want. The idea of slowing down
markets has actually gotten a lot of traction, like speed
bump markets, things like that that are actually pushing against
(16:36):
this idea of instantaneous settlement for anything. I don't even
want instantaneous settlement for my bank account. I like knowing
that I've got somebody I can call when something goes wrong.
Speaker 2 (16:44):
Huh. So you've written about volatility and liquidity laundering. Explain
what this is and are these really going to be ETFs?
Speaker 3 (16:54):
They already are. Man So, volatility laundering is simply moving
volatility from one bucket to another and charging something for
the privilege of doing that. Right now, you can buy
something like MSTY which will give you one hundred percent
income return on a micro strategy position through the magic
of options, right, and it creates a synthetic long position.
(17:16):
Then it does a synthetic covered call against the synthetic
long position, and then it does a whole lot of
return of capital to give you your money back and
promises you this endless stream of high distributions high percentage distributions.
That is volatility laundering because what you were actually doing
is you were trying to sell other people the volatility
of micro strategy, which is probably not a fantastic idea
(17:40):
because the wall of all is high in those cases.
So you're being the person picking up the in this
case quarters in front of the steamroll or not the pennies,
but you're still exposed to MicroStrategy collapsing and going to nothing.
That volatility laundering is what all of these options strategies
are really doing.
Speaker 2 (17:58):
So really, to wrap this up, the bottom line is
bring the same level of common sense and scrutiny to
new ETFs that you would to any financial product. Make
sure you understand what the product is, how it generates gains,
the sort of risks you're incurring, especially with these exotic products,
(18:20):
and the costs. Are these products worth spending seventy five
one hundred, one hundred and twenty five bases points more
than what you would get for a plain vanilla passive
index that seems to be dominating the asset allocation space
and the space for ETFs. Be smart, be thoughtful, do
(18:41):
your homework. I'm Barry Ridults you've been listening to Bloomberg
at the Money
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:15):
When we think about ETFs, we tend to think about large, cheap,
passive indexes. After all, those are the biggest ETFs from
places like Blackrock, Vanguard, and State Street. But when we
look at all the new ETF launches, they tend to
not be passive indexes, not be cheap, and not come
(00:39):
necessarily from those three big companies. They're active and they
are involved in all sorts of different areas that are
off the beaten path. To figure out what this means
for your portfolio, let's bring in Dave Nodig. He is
the president and director of research at ETF dot Com
and a ETF structural expert. Really, since the inception of
(01:04):
the entire sector, so Dave, we've seen an explosion in
the growth of not just new ETFs, but primarily active
ETFs in all sorts of niches. What are you seeing
in this space?
Speaker 3 (01:19):
Well, you know, for a long time, ETF meant cheap index, right,
I mean to go back to Spy and then the
first ice shares products, and then even when we started
getting into the big expansion of the two thousands, it
was all just index index index. Then we got some
smart beta where we tried to be a little bit
more clever, and it wasn't really until the late twenty
(01:39):
ten cycle where Kathy would at ARC invest launched ARKK
and really put herself out there as the portfolio manager
in a way that I don't really, frankly remember seeing
since the dotcom boom. It's been a long time since
we'd had superstar managers on CNBC talking about, you know,
pounding the table for a single, and Kathy did that
(02:01):
and obviously had enormous amounts of success. Has had some
performance pickups along the way, but that sort of went
a little bit dormant during some of the pandemic when
people really discovered trading. What we've seen now is this resurgence,
particularly two folks I mentioned Dan Ives why Bush People
know him, and Tom Lee from Funstrat with his granny
(02:22):
shots at ETF, both of which have pulled in huge
money billions of dollars, billions and billions of dollars for
the reasons you would expect, because you've got smart people
talking on podcasts and TV and on their own air
and their own newsletters telling you why they own what's
in the fund. I know that sounds so dumb, but
(02:42):
that's why people love superstar managers because they look and
they can see Tom Lee on screen, and he can
sit there and say, yeah, this is why we like bitcoin. Here,
here are the three firms we have in our fund
because of it. We might be wrong, we might be right.
There's a level of authenticity to that that I think
is really a pretty I also think the fact that they've
doubled D, S and P this year doesn't hurt.
Speaker 2 (03:04):
So to put some flesh on the bones here, Kathy
Woods during twenty twenty was a huge tesla and bitcoin
bull the fund arc put up giant numbers, triple digit gains.
Dan Ives has been an apple and an invidiable pretty
much for as long as I can remember. He's been
(03:25):
a whole lot more right than wrong. And Tom Lee
has been very constructive exactly when it paid to be
constructive and stay bullish. All three of those managers have
really big followings. What does the resurgence of brand name
active managers mean for the TF space?
Speaker 3 (03:46):
Well, I think, first of all, I think it's great
for the ETF space because I think the ecotomy that
we'd had where people thought of active as being a
thing that happened somewhere else and ETFs were only passive
wasn't helpful. I think we are moving towards the world
where all of your exposures, for the most part, are
going to be in an ETF rapper. So by all
means we should get active managers as part of this mix.
(04:08):
And now we've got lots of them. You know, we've
got a bunch of active funds from Pimco was early.
We've got lots in the bond space, you know, everything
from Cumberland Advisors to State Street with the Double Line
and Jeff Gunlock. Lots of active managers and lots of
different areas. I think that's very healthy for the industry.
For the individual investor, it doesn't necessarily make your life
(04:29):
easier because as much as I happen to like all
the people we have talked about, Dan, tom Lee and
Kathy Like personally as people I would have dinner with,
the math is not on their sides as an industry. Right,
as an industry, we have to point out active managers
categorically underperform over time. Doesn't mean they all do, but
(04:51):
it means that you've got to be the special person
who managed to pick the right active manager at the
right time. That is a tough business. And even active
managers running these fund will tell you trying to time
when to get in and out of their own funds
is going to be tough. So that's the problem, is
that active management is tough to evaluate.
Speaker 2 (05:08):
Yeah, and to put some numbers there, half of all
active managers underperform in any given year. You go out
to ten five years, it's eighty percent under form. Ten
years it's ninety percent. So it's a tough road to hoe.
But let's talk about what makes active ETFs somewhat different
than active mutual funds and that data reference. We're all
(05:31):
mutual fund data. Mutual funds have to do a regular
filing each quarter about their largest holdings. There has been
a lot of back and forth about how transparent active
ETFs have to be versus other active funds. What's the
state of the art today, what is the regulatory environment?
Speaker 3 (05:53):
So there are solutions. If you're an active manager and
you don't want to tell everybody what you're doing every day,
there are solutions, and there's plenty of funds that have
been launched on them. Fidelity has their versions, trou Price
has been one of the more successful funds out there.
They have a pretty popular blue chip strategy called t chip,
which is semi transparent, meaning they're not telling you the
(06:14):
whole portfolio every day. They're telling you once in a while,
and they're giving the street just enough information to make
a good market not knowing all the information. So it's
sort of a clue, a bit of a hack to
be semi transparent. This solves a problem for some asset managers.
It doesn't solve a single problem for an individual investor, right, So,
like I've never heard an individual investor say, golly, I
(06:37):
wish I knew less about what I owned.
Speaker 2 (06:39):
Right, But let's talk about why it's a problem for
fund managers. Fund managers don't buy a stock on a
Monday and then they're done. If they say, hey, we
like XYZ, they're buying that stock trying to take advantage
of draw downs, buying it over days, weeks, even months.
So there is a price advantage to the Yes, if
(07:01):
the fund manager can be a little less transparent.
Speaker 3 (07:05):
Fair description, that's that's that's certainly the argument that the
active management industry, who does not want to disclose what
they're doing, would give you so you have articulated that
side of the argument. Well, my counter to that would
be if your strategy requires you buying securities where your
action is going to move the market absent disclosure or
(07:27):
absent obfuscation, then that strategy probably doesn't belong in an
ETF because you've got bigger problems, right. That means that
you're in something small or a liquid or microcap, at
which point, already my question would be, how do you
plan on running a ten billion dollar ETF with that strategy,
because you can't really close an ETF. So if you
(07:49):
are a special situations manager, if you're a really sort
of obscure niche finding those stocks nobody else knows about, manager,
you do not belong in the ETF. And I'll just
flat out and say it at this as simple as that,
the mutual fund structure, or even better, a liquidity cap
structure like a CEF or old interval fund is actually
(08:09):
a better structure for those kinds of investments everybody else. Honestly,
there's so much liquidity. I think it's tough to argue
that somebody like Tom Lee is being particularly hurt by
being transparent. He's double, he's at thirty percent for the year.
The SP's at fifteen.
Speaker 2 (08:23):
Right, and CEF stands for closed end funds as opposed
to ETFs. Yes, so let's talk about some other varieties
of active funds that are a little bit out there.
We see funds with options, futures, derivatives, inverse leveraged, along
with some wild income promises in an ETF rapper tell
(08:46):
us about some of those products. Yeah.
Speaker 3 (08:48):
The the interesting thing about those is most of them
are very mechanical, Right, So if you're running a leverage strategy,
you're not making any decisions. Right, I've got Apple, I
need two x Apple. I'm going to go to my
swap counterparty overnight. They're just going to settle up my
two x swap. That's the whole management process. But technically
that's going to be an actively managed fund because you
can't just automate that whole process. Somebody still has to
(09:10):
make a call about whether or not you're teeing up
the swap at this rate or that rate. Same thing
with almost anything in the option space. Because the options
are constantly changing and constantly repricing and constantly rolling off.
It's very difficult to create solid index product around actively
or high frequency moving positions in the options market, so
(09:32):
for convenience as much as anything. Almost all of those
type products you mentioned are listed as active products. I
refer to them as inos like active and name only
because they're really There's no Tom Lee saying I really
want Apple options today. There's some guy generally j PASTTLI title,
sitting on a desk somewhere pushing a button to say, yes,
(09:53):
we want those options because the model says we need
to roll and that becomes active management. And I mean
it is active management. It has higher costs associated with
it for a reason. Some of that is the profit
that the issuer wants, but some of it is legitimately
you need a trading desk with a bunch of people
doing work.
Speaker 2 (10:10):
So let's talk about another niche ill liquid alts, things
like private equity, private credit, private debt, real estate. Are
we going to see those asset classes that really don't
trade on their own because they're not public. Are we
going to see those in an etf rapper.
Speaker 3 (10:30):
We're starting to. We're starting to the canary in the
coal mine here with some products from State Street, the
big ones priv pr IV for private which has a
bunch of Apollo private credit in it generally pretty short
maturity stuff two three year kind of things, and fairly
straightforward understandable private credit. Intel needs to build a fab
(10:52):
in Ireland, they go get a loan, Apollo gives them
the loan. You get a slice of it. Nothing super complicated,
nothing super interesting either. I mean it's not you're not
getting twenty percent yields out of or anything like that.
You're getting some marginal increase in the yield you would
get if you were simply investing in, say junk or
short term co corporates. So those products are starting to
(11:13):
come to market. The concerns I have about them is
they're just going to be untested. We're not going to
really know how they're going to perform when the markets
go hinky, right, And also what does that even mean,
Like if we had a corporate bond blowout and we
saw a bunch of triple C stuff start, you know,
get you defaulting. I have no idea what the impact
(11:34):
on Apollo private credit issued in Ireland to Intel is
going to be when that happens. I also have no
idea how they're going to respond if half the fund
decides they want out on that Tuesday and now you've
got a bunch of liquid stuff which can be up
to thirty five percent of the portfolio. That literally the
only buyer is Apollo. Technically, they've got answers to all
(11:54):
those questions. I'm and I've read all the answers to
those questions, and I'm sort of not gonvinced. But it's
one of those things that if you want to be,
if you want to be out there on the edge,
by all means, go ahead. But I think the private
securities in the daily liquid vehicle has not really been
through the ring aer yet, so I remain very skeptical.
Speaker 2 (12:16):
So let's talk a little bit about crypto and how
that's going to impact both investor behavior and portfolio construction.
Last year Blackrock, was it last year? This year Blackrock
introduced twenty a bit.
Speaker 1 (12:30):
Yeah.
Speaker 2 (12:31):
Yeah, so it's a year ago coming up on one
hundred billion dollars in assets, probably the fastest etf ever
to do that. What does this mean and explain the
concept of tokenization.
Speaker 3 (12:47):
Yeah, So what it means is all of these assets
are going to be more and more available to the
average joe like us who's just trading in their Schwab
account or something. Like that, and because the SEC has
said they're going to make it very easy. Very soon,
we're going to have every major coin that people know about,
a Solana and ave whatever, they'll be a sleeve of
that in an ETF that you'll be able to trade.
(13:09):
That's all great. Having those building blocks is awesome also
because it will now allow portfolio managers to create portfolios
of those individual securities, which right now you can't even do.
You can't even buy an index the top ten coins
because there isn't a target for the top ten coins
to invest in. So that will be fun when we
get that, and I suspect you'll see firms like Bitwise
(13:32):
and black Rock, who've got some real bona fides in
the crypto management space start bringing pretty institutional active management
products there. That's probably a twenty twenty six side. Long term, though,
if we want to talk ten years from now, that's
when crypto starts becoming an interesting competitor to the ETF space.
I think we will eventually end up in a world
(13:54):
where how you move your ownership of Apple around is
going to happen, not by going to the New York
Stock Exchange and exchanging ledger entries to move around your
Schwab account. Instead, you're going to have an actual token.
You'll be able to look at the serial number of it.
You'll be able to put it in a wallet and say, oh, no,
this is worth one hundred shares of Apple, and that
(14:16):
wallet will be able to directly move that security to
your wallet without any exchange being part of the process.
Most of it will happen like crypto happens now on
giant exchanges because price discovery. But just like with bitcoin,
I could walk up to you when we could engage
in a direct transaction. You're going to start seeing that
with other securities. It's happening more in bonds and real estate.
(14:38):
Now to do it in equities is going to require
some actual legislation, and we don't make so many laws
these days, so that may take some time. Instead, what
we'll do is will wrap a lot of stuff. So
you'll probably hear about things like wrapped Apple and wrapped Cisco.
And what that's going to be is a token that
owns the security in some sort of trust pool. That's
(15:00):
a baby step, but that's what we'll start hearing first.
So be skeptical when people say we're tokenizing everything because
it's going to be a decade.
Speaker 2 (15:07):
I had a conversation with Jose Manyana, who is the
head of wealth Strategies at Investment Giant BNY Bank of
New York, and he was saying, Hey, we went from
T plus three to T plus one, meaning it used
to take three days to settle a trade. Today it's
going to take one day. If we want to get
to T plus zero, we have to really have confidence
(15:28):
in both sides of the transaction, and theoretically tokenization solves
that problem.
Speaker 3 (15:33):
It does. Although think about how many big transactions in
the world that we could be doing easier we deliberately
put brakes on. Think about buying a house wiring right,
so there's you know, there's escrow, there's secondary inspection processes,
there's separate contracts around just the intention to buy and sell.
(15:54):
So the bigger and more interesting a transaction gets, the
less T zero is actually a good right. I Mean,
the thing I always say about T zero is did
you really want T zero during the flash crash in
twenty ten, Like, did you really want no recourse for
that that fat fingered billion dollar pennies on the dollar trade? No,
(16:15):
you wanted this ecosystem that protects you from a bad
actor spoofing something into the system. So we're gonna have
a lot to evaluate as a as a as a
market what we actually want. The idea of slowing down
markets has actually gotten a lot of traction, like speed
bump markets, things like that that are actually pushing against
(16:36):
this idea of instantaneous settlement for anything. I don't even
want instantaneous settlement for my bank account. I like knowing
that I've got somebody I can call when something goes wrong.
Speaker 2 (16:44):
Huh. So you've written about volatility and liquidity laundering. Explain
what this is and are these really going to be ETFs?
Speaker 3 (16:54):
They already are. Man So, volatility laundering is simply moving
volatility from one bucket to another and charging something for
the privilege of doing that. Right now, you can buy
something like MSTY which will give you one hundred percent
income return on a micro strategy position through the magic
of options, right, and it creates a synthetic long position.
(17:16):
Then it does a synthetic covered call against the synthetic
long position, and then it does a whole lot of
return of capital to give you your money back and
promises you this endless stream of high distributions high percentage distributions.
That is volatility laundering because what you were actually doing
is you were trying to sell other people the volatility
of micro strategy, which is probably not a fantastic idea
(17:40):
because the wall of all is high in those cases.
So you're being the person picking up the in this
case quarters in front of the steamroll or not the pennies,
but you're still exposed to MicroStrategy collapsing and going to nothing.
That volatility laundering is what all of these options strategies
are really doing.
Speaker 2 (17:58):
So really, to wrap this up, the bottom line is
bring the same level of common sense and scrutiny to
new ETFs that you would to any financial product. Make
sure you understand what the product is, how it generates gains,
the sort of risks you're incurring, especially with these exotic products,
(18:20):
and the costs. Are these products worth spending seventy five
one hundred, one hundred and twenty five bases points more
than what you would get for a plain vanilla passive
index that seems to be dominating the asset allocation space
and the space for ETFs. Be smart, be thoughtful, do
(18:41):
your homework. I'm Barry Ridults you've been listening to Bloomberg
at the Money
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