July 17, 2025 • 33 mins
Joel, Eric and Athanasios Psarofagis crack open the mailbag to answer some listener questions about ETFs.
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Speaker 1 (00:06):
Welcome to Trillions.
Speaker 2 (00:06):
I'm Joel Webber and I'm Eric Belchunas.
Speaker 1 (00:12):
Eric, we have not done a mail bag episode in
a really long time, and people have questions.
Speaker 2 (00:18):
Yeah, and we have all kinds of vacation schedules that
we're managing around, so this is a good time to
just phone one in.
Speaker 1 (00:25):
Joel, Well, when we never phone anything in, I happen
to be remote in the off while we're recording this,
and I'm still gonna ask some questions on behalf of
many of our listeners and some of your Twitter followers
and your LinkedIn followers and anybody else who had some
questions that they want to get answered to help us
(00:46):
wade through some of the weeds. We're also going to
be joined by Athanasio Sarah Figus, an ETF analyst with
Bloomberg Intelligence, this time on Trillians bail Bag. Athanasos, Welcome
back to Trillions.
Speaker 3 (01:00):
Hey, thanks for having me on.
Speaker 1 (01:01):
Okay, so you know how this works. We've asked for
a bunch of questions and we're going to rattle through
as many of them as we can this episode. You're
going to hop in whenever warranted. Eric, the first question,
I'm going to ask of you comes from John Andrew
Carter Junior, who asked, what's the next big tech innovation
in exchange traded funds that will affect the way I invest?
Speaker 2 (01:27):
I mean i'd have to go with eat the ETF
share class which is coming out this summer, probably later
this summer or early fall, where a mutual fund will
just be able to bolt on an ETF share class.
Only Vanguard does that currently, but there's I think over
sixty different active managers that have filed for this basically
(01:49):
exception to a rule, and if they get approved, which
we heard they will, we're looking at basically all mutual
funds will I mean not all of them, but a
lot of them. You'll be able to just transfer from
your mutual fund share to your ETF share. So I
think for people out there who are you know, have
been wanting to leave and not have a tax hit
(02:09):
when they leave, they can now do that and it
should be very interesting. I think it will be a
drain from the mutual fund to the ETF, but that
money was probably going to go over there anyway. This
just makes it a little easier, more tax efficient, and lets
some of these old legacy active managers save a client
rather than losing one. So that's I would it's not
(02:31):
the most interesting tech innovation. I think that's what they're
talking about tech with the structure, would you do something different?
Speaker 4 (02:36):
No, I think that's spot on. I was thinking maybe
like tokenization, which is like what Robinhood's trying to do.
They just announced that that could be something, you know,
maybe allowing access to things that were not able to
fit into the ETF, like private equity. But that might
be a tall order, right. ETFs give you a really
good deal. You have pretty much access to everything. But
(02:59):
I think that the tokenization stories can be around for
some time.
Speaker 1 (03:04):
Okay, as long as we're talking about tokenization, Alvarro Martinez asks,
as tokenization of real world assets gains traction, how do
you envision tokenized ETFs transforming the traditional ETF structure, particularly
in terms of settlement efficiency, investor access, regulatory oversight. Could
(03:25):
this technology catalyze the emergence of twenty four to seven
ETF markets or fractional ownership beyond what's already achievable with
standard ETFs.
Speaker 2 (03:34):
So it's very interesting, it's exciting to Robinhood just announced
their tokenizing everything for Europeans who want to get easier
access to US equities, and they even said, oh, we're
going to tokenize VU. But there's already a Vanguard SMPO
five underd ETF in Europe called v USA, which is
easily accessible and cheap. So I think, you know, when
(03:57):
you think about tokenization, what is it actually do? If anything,
it cleans up the back office a little. Using the blockchain,
you can have faster settlement times, you could do twenty
four to seven, But I mean, how many people really
need that. I think the big thing for tokenization is
for people who don't have access to a stock market,
right So for the developing countries, tokens can be a
(04:21):
life saver, especially stable coins, which are just basically tokenized dollars.
There I'm very bullish on that. But for the developing world,
for the developed world, where we all have the ability
to roll out of bed in our underwear, still roll
over to Schwab, open up the Internet and hit by
(04:43):
and we can own almost anything under the sun in
one second for almost no fee. I just don't really
know how you're going to disrupt that. That's about is
clean and easy and low cost as you could possibly get,
and convenient so I think the tokenization story will be
one of a back office story. I think they'll use
the blockchain to maybe streamline some stuff in the back office,
(05:05):
but you, as the user, probably won't know that notice
the difference. But I could be wrong. So I'm bullish
tokenization as a back office a disintermediator, but I'm bearished
tokenization in terms of killing the ETF at least for now.
I'm evolving on this issue, but I just don't see
(05:26):
enough to disrupt what I just described in the rolling
out of bed visual.
Speaker 4 (05:32):
I mean, I mostly aligned with Eric on this, like
the back end, Like do people really care about that
for the most part, Like it's for the you know,
it's pretty good already we already have you know, they're
already trying to move the T one settlement.
Speaker 3 (05:43):
Anyways, I think.
Speaker 4 (05:44):
The benefits are marginal, like okay, twenty four seven trading whatever,
So just it's not it's not enough benefits to be
a disruptor like the ETF was to the mutual fund.
You know, I might give you act some cool stuff,
but I'm still I'm with Eric on this one.
Speaker 2 (06:00):
The other thing is, what is an etfis that would
be cool if it was tokenized. Okay, private equity maybe art,
you know, stuff like this, but a lot of that,
like private equity, let's take that. You can't really like
sidestep to the regulations and just have a token out
there for retail. I believe that the regulators won't really
(06:21):
appreciate that. So even if something seems like, oh it
hasn't been etfised, a token would fill in. I don't
know how cleanly you can get that done without dealing
with regulations. So the regulatory issue is a whole nother
problem here that will have to be surmounted. That said,
this particular sec somebody had commented to me when I
(06:42):
was basically saying, I don't I'm not really bullish on
robin Hood. And also, you see the guy from robin
Hood with it looks like Johnny Depp from the movie
Blow Yeah, and he's out there talking about tokenization and
in like in con Paris or whatever, and I mean
it was pretty showy. And I'm I'm not saying he's
not smart, But when I think about that company trying
(07:05):
to advertise is like, oh, we're going to give you
all this stuff for low cost, And then I think
of like Jack Bogel and Vanguard. I just don't know
if people are going to leave that boy Scout, trust
the Vanguard and black Rock and move over to Robinhood
at least the big giant blob of money. Maybe some
of the younger people. I don't really see that being
(07:25):
that attractive. And if something's free, if Robinhood's saying it free,
don't trust me. They are charging you somewhere else. It's
probably going to pay for orderflow. They're probably selling your
order flow to like Citadel, getting money there and you
don't know it. So be careful out there when it
comes to those kind of pitches, in my opinion, And
so I don't know. I'm just skeptical because the US
(07:47):
ETF market is the terroor dome. It is so hard.
I've seen so many legacy companies come here and get humbled.
It's hell for issuers but heaven for investors. And that
hell is something that I feel like Robin Hood's trying
to sidestep here. I just I have more faith in
a more bullish on companies that have come into the
(08:08):
ETF terrodome and figured out a way to survive and
thrive in an honest fashion. I'm just so I'm not
willing to like let go of all that and be like, oh,
token to the new thing.
Speaker 3 (08:18):
Can't do it now, I'm with you, okay.
Speaker 1 (08:21):
Just on the topic of tokenization, Brian Tovar asks, from
a custody ownership perspective, what's the difference between owning a
tokenized stock versus an ETF stock?
Speaker 4 (08:35):
I mean, that's kind of where I get hung up,
is I don't understand the difference. Like, if Microsoft is
Microsoft stock and you knowing that in a token form,
why not just own the ETF owned Microsoft stock unless
they're issuing tokens like Microsoft tokens. Why I don't Still
I'm struggling to wrap my head around. Besides the back
end benefits and maybe twenty four hour trading, those sort
(08:56):
of marginal benefits, what's the real meaningful difference between the two.
Speaker 2 (09:01):
The other problem is, you know, you got all these
market makers and aps involved that people don't see. And
this is like heavy duty liquidity and financial institutions, and
they're smart. They arbitrage the price and the underlying all
the time. And I've asked people, what's gonna happen if
people start using tokens? Well, will the whole Wall Street
apparatus just move over? Because then what about exchanges too,
(09:24):
And there's some people say all that's gonna go away
and everything's gonna be on the blockchain. But a couple
of things. A. I think you're gonna find percent prems
and discounts. Some people say we can automate the market making.
I don't know, Like I think the system right now
is what we call antifragile. You can call somebody, people
have experience, there's many of them. The token world seems like, okay,
(09:46):
we could like save a little time on the settlement.
You can trade twenty four to seven. Costs are gonna
be the same. It's not like token to be cheap.
It can't be cheaper than ETFs. So again, it's marginal
benefit for a lot more fragility, it seems to me.
And as I've joked about with somebody on Twitter, centralization
has its benefits, which is meaning you can call somebody
(10:07):
if there's a real problem, you can take legal action.
There's prospectuses. This is where I think centralization has its
perkss you go full DeFi it's a little while west.
So I don't actually know how all these questions will
be answered again. The reason ETFs were such a big
hit is because mutual funds were slow, expensive, not that liquid,
(10:33):
and a lot of the costs were internalized. The taxes
weren't good. ETFs corrected like five things. I mean, it
was like five evolutionary steps. Tokenization seemed like one little baby,
like a little mouse step.
Speaker 4 (10:45):
Yeah, I feel it doesn't change the experience, right, go
one to your schwabap whatever you buy Microsoft boom, and
I feel like when the market's open, I get a
fail fair price on Microsoft. I don't know what I'm
doing if I'm trading at like three am right like
on the blockchain, it just feels like I don't understand
how that really like improves the user experience.
Speaker 1 (11:06):
Okay, there are a number of things in there to
follow up on, but I want to start with one
from an ex username discover Lightcoin, who asks how profitable
are ETFs really to the issuers and what variables determine
if a new ETF launches a success or failure.
Speaker 2 (11:24):
ETFs are not that profitable for the assets they have.
So they have like eleven trillion in assets and they
bring in what like ten billion in revenue every year, right,
so maybe a little more, and then market makers make
about that too. So but to contrast, I believe mutual
funds pulling like one hundred and twenty five billion in revenue,
(11:45):
so it's just like and hedge funds pulling like triple ETFs,
and they have less assets, so every other structure makes
way more money. That's why when I go to these
crypto conferences and they think they're like the big disruptor,
and I'm like, dude, ETFs are way more punk rock
than you think. That's why all the money goes into
the bitcoin ETF is because it's so cheap and easy
(12:05):
that the ETF has a lot of disruptive power because
the consumers know it's a good deal and they will
sell you out for an ETF that's like two basis
points cheaper. I mean, they are brutal consumers, but when
you service them, and like you said, if you can
make it there, you're going to do well. Now, there's
certainly room for some etf to be profitable. You know,
(12:28):
you can carve out a good living there. Black Rock
probably the best example. And then there's some hail mary's
that do well, like the two X Navidia that makes
six million a year. So there's been some like one
off Hail Mary ones that have really done well. But
for the most part, it's a hard business. It's tough.
Wall Street would rather ETFs have not been this successful.
(12:50):
I can tell you that.
Speaker 1 (12:51):
Okay, follow up question from the same user, what will
happen to see a bitcoin or Ethereum etf sell off
their assets and shut down and say they're on the
bottom of the list for flows. Are they still profitable?
Speaker 2 (13:03):
So at Bitcoin ETF, even the lowest one of the
spots is totally profitable. That's why this was such a
crazy launch, is that I think wisdom Tree might have
the least of the eleven or twelve out there, maybe hashtacks,
but they're all in profit mode already. That's rare. Now
on ether, I believe the couple towards the bottom are
maybe not profitable. I would say, if you're going to
(13:26):
charge twenty five thirty BIPs, which is what they most charge,
you would need like about eighty million right to be profitable,
and I don't know if all the ether have that.
So over the next five years, you know, the spot
ETFs look pretty good, but there's going to be some
like you know, option overlay. It's not going to try
all kinds of stuff. And there will be closures that
are in the crypto ETF space for sure. And if
(13:48):
a closure happens, if it's a company like Wisdom Tree
and they close a fund, there's the company's still profitable.
They just choosing to close that fund rather than sort
of like you know, put more money into to try
to sell it to make it profitable. It's really no
different than any other business.
Speaker 3 (14:02):
You know.
Speaker 2 (14:02):
You you attempt all these products, you hope some of
them hit. Usually have a couple of blockbuster hits, a
couple in the middle, and then maybe a couple duds,
and some issuers will keep those duds alive longer than others.
Some close quicker. But I'd imagine in the crypto space,
since it is so fledgling and new, you'll probably have
(14:23):
them hang in a little longer than if they were
trying some random theme ETF.
Speaker 4 (14:28):
Oh okay, you now understand, Yeah, you're Right's probably punched
his way above its weight, like profitability wise and some
other categories. And I think Bloomberg News just covered this
right that black rocks ibit is like one of their
most profitable. I think third or second. It makes more
than their SMP product, So yeah, it definitely it speaks
to the demand there too, and the ability to be
able to charge a little bit more.
Speaker 3 (14:48):
Yeah.
Speaker 2 (14:49):
Joel Ethan actually helped News with this data. Ibit is
third in profitability out of twelve hundred ETFs that Blackrock has, Joel,
it's number three, and if it gets nine billion more
based on the fee, it will be the most profitable.
And nine billion is only a ten or eleven percent
increase in Bitcoin's price, so it doesn't even need any
(15:09):
new flows, just a nice little run in bitcoin. It
will be the number one most profitable et from black
Rock at a year and a half old. It's it's
absolutely bonkers. So that said, people are like, oh, Blackrock
is getting away with murder. He I'm like not really.
Twenty five BIPs for that is pretty fair. Up until
Blackrock came out, you had to pay two percent or
one point five percent at best in Europe or in
(15:31):
hedge funds, so twenty five is dramatically cheaper. I think
this is a win win. You know, in capitalism, you
want to if somebody's first has a good idea, has
a good price, point, it's okay to make some money.
I just so, I think this is a case where
everybody won here.
Speaker 3 (15:47):
Yeah, I agree.
Speaker 4 (15:47):
I mean they're giving you IVV at three BIPs, right,
like everything can't be free. But yeah, overall, it's a
tough business. It's not even for these ascid managers. ETFs
are such a small part of their revenue. Like JP Morgan,
who's killing it, it's still like one percent of their
total revenue.
Speaker 2 (16:02):
They're so lucky. Some jol some of these companies. I
always said, the Wall Street banks probably have the best position.
If you have other things that make you money, you
can afford to get guts when it comes to your
ETF business. And JP Morgan did. They had the guts
to get cheap. They sold active at vanguardian fees and
they're killing it. But it's harder for a company to
(16:24):
do that when that's your only thing, because then you're
instantly cannibalizing. But for JP Morgan, because they got so
much going on, it's a little easier to have that
intestinal fortitude.
Speaker 1 (16:40):
Okay, next question from pick god on X looking forward,
is there ever going to be a product that catches
or matches VU, which is obviously vanguards just and P
five ETFs interesting.
Speaker 2 (16:59):
I think VO will be king for I don't want
to say ever, but I'd say at least ten years.
So Michael Saylor, famous for micro Strategy CEO, replied to
one of my tweets colored weeks strategy. Sorry, yeah, it's
just hey, it's cleaner, that's okay. Anyway, strategy, he said,
(17:22):
mark my words, ibit will be the biggest ETF. So
I did the math on this, and I think he
said within ten years. I did the math, Joel. It
would have to like Quinn triple its flows. WU would
have to chill, and the S and P would have
to stop going up, and Bitcoin would have to rally.
So a lot would have to happen in that scenario.
(17:44):
I think you have a case where maybe the US
stock market has real issues and somehow Bitcoin is looked
at as the savior asset like and it just goes
up and up while the stock market goes down. That
scenario hasn't really happened. Bitcoin tends to have a little
more correlation to stocks, So as long as it's correlated,
I stn't see how that's possible, but I bits rise.
It's now the twenty third biggest ETF of all time
(18:06):
at one point four years old, which is insane to
be that high that quickly. I will never say never
with IBIT. I thought vt I would be bigger one
day because VOO and IVV be fighting over that same
assets and the total market. But it turns out people
want the S and P so bad, especially over any
other index or the total market that they just VU
and IVV can actually split some of that money and
(18:28):
VOU will still be the biggest. So I don't see
anything passing VU for at least a decade.
Speaker 4 (18:34):
Yeah, it's too it's too big, and we can't live
in a world where ibit is the biggest ETF. VU
keeps us in check, right, It's like it is going
to quit.
Speaker 2 (18:42):
He yeah, I will quit if I'm going to retire
if I BIT passes VU. It's like you know that
phrase no country for old analysts roll like this is
another one of the If I bid is the biggest ETF,
it's like a whole generation of people are just gonna
be like, I'm out.
Speaker 3 (18:57):
Yeah, VU VO gives us some hope.
Speaker 4 (19:00):
But all the point you said, though, they're spot on
that people you know, ibit's still always going to be
like a satellite position, so it's got to all come
from price, which vol you know, people can have sixty percent,
seventy percent allocations to VOO.
Speaker 2 (19:14):
There's one black sheep here and that is a Fidelity
We're to do a conversion of its index SMP five
entered ETF. I believe right now that's already bigger than SPY,
So that would come in almost that where VU is.
And if Fidelity were to really you know, put in
its advisor network and Vanguard, you know, stumbled a little.
There's an outside chance that could be something is the
(19:37):
Fidelity conversion of an index mutual fund to an ETF,
But that's a little out.
Speaker 1 (19:42):
There, okay. Next question comes from Liz Simmy who asked,
since active is the coolest thing in ETFs, can you
break down the difference between flows to traditional active strategies
in ETFs versus thematic in ets and how the flows
have changed over time.
Speaker 4 (19:58):
Yeah, Active is a pretty fluid turn and ETFs, and
it's not traditional stock picking like, so flows to that
type of stuff is pretty pretty low. When we say active,
it's more things like single stock ETFs option overlays buffers,
which technically get classified as active. I get it that
(20:18):
it's not the traditional like stock picking, but I feel
like with all these ETF options single stocks, people are
their own active managers now, right, So instead of like
going to Kathy Wood to buy these like stocks, there's
like single stock versions of all these so they're just
ended up doing on themselves. So the breakdown if you
if you really look at it closely, it's not going
(20:40):
to like the how we think active traditionally. It's sort
of like this new generation of active, like mostly derivatives
usage and things like that.
Speaker 2 (20:49):
Yeah, I think active is taking in forty percent of
all the flows, and that sounds like, oh my god,
active is back. It's a I could see a reporter
a tempted to write that headline, But as Ethan's said,
most of it is buffers and sort of you know,
derivative using stuff that is more solution oriented. That said,
there is some traction with traditional grandpa stockpicking active. You've
(21:12):
got Capital Group DFA, JP Morgan JP Morgan in particular,
and one of the reasons it's finally working is they
got cheap. Most of the products that take in money
from the grandfather active are now got their fun under
forty basis points. So I think there's a definitely a
group of advisors out there that still believes in Active,
but they want it served up a little cheaper. I
(21:33):
just want to pay for the active, not all the
beta which you can get for free and a Vanguard fund.
So I think Active is going through this repricing of
how much it's actually worth, and as it goes through
that it gets a little cheaper. I think it will
see actual real flows, But there's all the new fangled
stuff that kind of makes the active rebound story a
(21:54):
little more complex and just on thematic ETFs. I just
looked today. Actually they've taken in two billion this year
out of five hundred sixty billion to flows, so not
a lot when you look at themes. If you look
like some themes are on fire, like defense, everyone's taking
you money. It's a feeding frenzy. But then like ARC
and UH, the US infrastructure and the natural resources have
(22:15):
seen outflows, and so you tend to have like whatever's
going on in the market, there's always some theme ETF
like killing it, and there's always some that's suffering. So
them ETFs have a lot going on underneath and they're
they're they're viable to me. I think they'll be around
for a while, but I don't know if they're going
to like grow to any more than say, two to
three percent of all ETF assets.
Speaker 1 (22:35):
Okay, next question comes from a next user named market Wizard.
What do you think of multi asset ETFs?
Speaker 2 (22:42):
Oh, this is a good question. This is when you
combine like stock bond like it would be like a
target day fund essentially. I share just trying it. Everybody's
tried it, it it here's you know, eighth and alluditude early.
I think for the most part, when people invest in ETFs,
they want to be the decider. To quote w remember
(23:02):
in that movie W He's like, Dick, I'm the decider anyway,
great movie, underrated movie about George the b Bush. But
that word the decider always stuck with me, and I
think that the advisor wants to be the decider how
much goes in equity bonds. You can't be an advisor
and have one ticker and client portfolio because the client's
(23:23):
going to be like, why do I need you? I
think for four to one k is they're great, but
ETFs have don't really have an easy time penetrating four
one k, so outside of the form one k market,
I just think most people want to assemble the pieces,
and therefore a multi acid ETFs will always be relegated
to the fringe. Yeah.
Speaker 4 (23:39):
I agree, And I think people are just in general
questioning that sixty forty model with bonds and they like, well,
they don't want to own bonds as much. They want
to own alternatives like crypto or whatever, and I think
those haven't caught up yet. Like if you're buying one
of these funds, it's just a pretty traditional model. So
maybe if they start getting a little bit, you know,
more innovative in the allocations, but overall, Eric, I think
(24:00):
it's just the category that's never really taken off.
Speaker 1 (24:05):
The next question from Carrie Presley, who asks there are
a few clear explanations for the kind of redemption and
the tax efficiency of ETFs. Eric, a clear metaphor example
would be swell.
Speaker 2 (24:19):
Okay, I've I've spent years on this. I used to
teach the new higher class and I go over crash
redemption and their eyes would glaze over. And in my survey,
that's when they'd say that part sucked. Everything else is interesting.
So I actually reframed it and I told the story
of how the ETF was designed. And I start with, like,
you know, the American Stock Exchange was in third place.
(24:40):
They were looking for a winner. And Nate most was
I don't know, in his sixties or seventies at the MX,
and he had worked at the commodity's warehouse and when
he was thinking about how to design the ETF and
make it so that costs of trading wouldn't infiltrate the
actual costs of the ETF, which would affect all the shareholders,
Like how do you say break trading costs from like
(25:01):
the shareholders? And he thought about commodity warehouse that he
worked at, and he thought, well, in that warehouse, you
have a bunch of soybean oil and you bring it
to the warehouse. They give you a receipt for your
soybean oil and they store it for you in a locker.
Then you can trade your receipts with other commodity traders
without having to move all the merchandise around. Right, it
makes sense. And let's you get a bunch of receipts
(25:24):
and you want actual soybean oil back. Then you take
your receipts and they give the exact proportion to soybean oil,
and then you have your goods. So all he did
was take that structure, that paradigm and say, instead of
soybean oil, what if I had the S and P
five hundred stocks. I could then take it to this
warehouse which is State Street and the custodian, and I
(25:44):
get a receipt for spy and that receipt is worth
fifty is fifty thousand shares worth of receipts, then I
can sell those in the open market. People can just
trade these receipts all day long, and then if there's
a surplus of receipts and we need to do a
creation or redemption, will go back to the warehouse. So
all it is is a commodity warehouse paradigm applied to
(26:06):
stocks and bonds. And the reason that's cool is because again,
when the receipts are trading, it's basically all everybody trading,
all the tax implifications and everything is on them. And
when a creation redemption happens, when you bring the stocks
get in exchange for the receipts or shares, there's no
money changing hands. And so when there's no money changing hands,
there's no taxation, and so there's no tax consequence in
(26:30):
the creation redemption process, which is the magic of why
ETFs don't kick out capital distributions capital gains distribution. So
that is I love stories like that because a lot
of times, you know, Steve Jobs always said like nothing
is wasted like that. You know the font he made,
the calligraphy and the early apple he got because he
just used to like skip class and go to the
(26:52):
this writing class. Things that happen in your old life
can come in really valuable or something you see overseas
you apply it to your country you're in. And that's
what happened here, and it was ingenius and that's the
secret sauce right there. Joel Eighthan, did your eyes glaze over?
Speaker 3 (27:08):
Yeah? I fell asleep a little bit too.
Speaker 4 (27:10):
That No, that was actually a really good explanation for
a topic that is kind of operational and dubba. And
this is why we talk about the share classes. Why
all met funds want to go towards that because they
get this benefit now, so which is why there's that
big push towards the ETF.
Speaker 1 (27:32):
Okay, next question from Crypto Roy, how much notice is
usually required to close an ETF or move to a
different ETF. Are there usually fees involved with closing an ETF. Also,
if you move from one ETF to another, is this
a taxable event?
Speaker 4 (27:49):
Oh, those are some good questions. I don't know about
the lead time from when they closed. There's definitely an
announcement they let you know, so you.
Speaker 2 (27:55):
Have like sixty days maybe something like that.
Speaker 3 (27:58):
Yeah, so they have a chance to get out.
Speaker 4 (27:59):
Yeah, so give me a chance to wap you into
some so like etn's do this all the time. If
the ETN is sort of coming to a maturity date,
they will offer you to switch you into another one.
So you definitely are getting notices. If you own the fund,
you know the cost. Obviously there's some unwinding, paying some
some of the fun administration costs, but you're pretty much
gonna get what.
Speaker 3 (28:18):
Nav is at that day.
Speaker 2 (28:20):
Yeah, but you get the tax then the tax, so
you're kind of Yeah, so when you if you want
to switch, like let's say the Wisdom Tree such and
such ETF clothes not to pick on them this whole show,
but anyway, you whether you sell or they send you
a check because they redeemed the funds, you got a
capital gains distribution if the fund went up as you
(28:41):
bought it. So that's why closure risk is like real,
but it's not huge. It's not like loss of principal risk.
You can never lose your principle in an ETF, but
the closure risk is just like annoying and nobody wants
to deal with that. Again, people hate taxes, so that's
the problem. So yeah, that's why you don't like to
see ETF's liquidate, but usually don't liquid if there's a
(29:03):
hardlybody in there. So like there's very few casualties to
ETF liquidations in general, but definitely, and this is part
of why it's hard in ETFs because a lot of
advisors in particular won't use you unless you've got like
five hundred million a billion dollars. But how do you
get that if you can't sell to anybody because people
don't want to be in there just in case you close.
It's a chicken and egg conundrum.
Speaker 1 (29:25):
Final question comes from Kyle four Kid, who asks on
a macro level, Eric, how do you and your team
see the ETF landscape evolving over the next ten to
fifteen years? Any improvements to the ETF structure itself if needed,
or we see a zero fee ETF like we have
with zero fee index mutual funds.
Speaker 2 (29:45):
Well yeah, I mean Bank Bank in New York alread
has zero that's hard that already exists. Here's the thing
about zero fee, they've if you talk to people, brand
is huge, and so unless Blackrock or Vanguard or State
Street did zero fee, it won't matter that much. People
are going to go with that brand and three BIPs.
In fact, I think some people like paying a little
because it feels less like you're gonna get like ripped
(30:07):
off somewhere else. So I think three BIPs, five BIPs.
You know, people are gonna want to build portfolios with
ETFs under ten basis points for the next ten to
twenty years. The only again, the tokenization is certainly one thing.
Perhaps tokenization can improve some of the back office stuff,
but again that wouldn't totally affect anybody. If anything, that
(30:29):
would just help the issuers more maybe save a little money.
But I you know, look, I think what's going to
be tested is that they're gonna put stuff in ETFs
that's just not liquid, and that's I think where we're
going to find some experimentation where I guess private equity,
private credit. Maybe they'll try to put something like I
(30:52):
don't know, farmland and Nebraska, you know, something that's just
like like that an endowment would invest in. We'd call
those real assets. I would be fine with that. I think,
you know, it's okay to break an egg once in
a while to get the omelet. So I'm okay with
experimenting with ets But it could get very interesting in
terms of testing the durability of the ETF. But the
(31:13):
other thing is you got to look overseas. That's where
a lot of a growth opportunity is. They're just waking
up to like what fees are and like how to
make money long term. And so to me, the ETF
story is like maybe fifth sixth inning in the US,
but it's like second third overseas. So that's what I
would look for. But I do think we're gonna see
(31:34):
a lot of crazy because the vanilla is so hard
to compete in that you will see more people launching
stuff that's pretty out there and it will get a
lot of copy because it's interesting. But just relax, almost
all the money is going to go to the VU
type stuff, and that's probably for the best. But some
(31:54):
of that experimentation will be interesting and there'll be some
evolutions there that will probably be pretty good in my opinion.
But I'm generally optimistic. I have some colleagues that worry
more than I do.
Speaker 3 (32:06):
Nathan, are you one of those colleagues.
Speaker 1 (32:08):
Yeah, I think see what do you see evolving in
the YouTube landscape.
Speaker 4 (32:12):
I think sometimes someone will push it too far at
one point, but overall, these are fringe products, right, it's
not gonna I don't think it's gonna dislodge industry at all.
It's like absolutely on fire. But I think we'll see
every type of combination you can possibly think of. We
did max seven single stocks. Now there's like stocks pinned
against each other. Then there might be like five portfolio stocks.
(32:33):
So I just think it's gonna be any possible combination
of things you can think of. We'll be etf e's
and then it's on to the next frontier, whether it's
private equity, all coins, whatever. So I think that's just
how it's gonna gonna evolve, which is gonna you know,
products are gonna keep coming at a really rapid pace.
Speaker 3 (32:51):
Yeah, we probably might see a product blow up at
some point, but I.
Speaker 4 (32:54):
Don't think it's gonna be a big deal like one
of these single stock ones quantum stocks or something like that.
But I don't think it's gonna be up a bruise
on the industry at all.
Speaker 1 (33:04):
Pathan, As always, thank you for joining us on Trillions,
Thanks for having me on, Thanks for listening to Trillions.
Until next time. You can find us on the Bloomberg terminal,
Bloomberg dot com, Apple Podcasts, Spotify, or wherever else you'd
like to listen. We'd love to hear from you. Hit
us up on social I'm at Joel Weber Show, He's
(33:27):
at Eric Balchina's. Trillions is produced by Magnus Hendrickson. Brendan
Newman is our executive producer. Sage Bauman is the head
of Bloomberg Podcasts.
Welcome to Trillions.
Speaker 2 (00:06):
I'm Joel Webber and I'm Eric Belchunas.
Speaker 1 (00:12):
Eric, we have not done a mail bag episode in
a really long time, and people have questions.
Speaker 2 (00:18):
Yeah, and we have all kinds of vacation schedules that
we're managing around, so this is a good time to
just phone one in.
Speaker 1 (00:25):
Joel, Well, when we never phone anything in, I happen
to be remote in the off while we're recording this,
and I'm still gonna ask some questions on behalf of
many of our listeners and some of your Twitter followers
and your LinkedIn followers and anybody else who had some
questions that they want to get answered to help us
(00:46):
wade through some of the weeds. We're also going to
be joined by Athanasio Sarah Figus, an ETF analyst with
Bloomberg Intelligence, this time on Trillians bail Bag. Athanasos, Welcome
back to Trillions.
Speaker 3 (01:00):
Hey, thanks for having me on.
Speaker 1 (01:01):
Okay, so you know how this works. We've asked for
a bunch of questions and we're going to rattle through
as many of them as we can this episode. You're
going to hop in whenever warranted. Eric, the first question,
I'm going to ask of you comes from John Andrew
Carter Junior, who asked, what's the next big tech innovation
in exchange traded funds that will affect the way I invest?
Speaker 2 (01:27):
I mean i'd have to go with eat the ETF
share class which is coming out this summer, probably later
this summer or early fall, where a mutual fund will
just be able to bolt on an ETF share class.
Only Vanguard does that currently, but there's I think over
sixty different active managers that have filed for this basically
(01:49):
exception to a rule, and if they get approved, which
we heard they will, we're looking at basically all mutual
funds will I mean not all of them, but a
lot of them. You'll be able to just transfer from
your mutual fund share to your ETF share. So I
think for people out there who are you know, have
been wanting to leave and not have a tax hit
(02:09):
when they leave, they can now do that and it
should be very interesting. I think it will be a
drain from the mutual fund to the ETF, but that
money was probably going to go over there anyway. This
just makes it a little easier, more tax efficient, and lets
some of these old legacy active managers save a client
rather than losing one. So that's I would it's not
(02:31):
the most interesting tech innovation. I think that's what they're
talking about tech with the structure, would you do something different?
Speaker 4 (02:36):
No, I think that's spot on. I was thinking maybe
like tokenization, which is like what Robinhood's trying to do.
They just announced that that could be something, you know,
maybe allowing access to things that were not able to
fit into the ETF, like private equity. But that might
be a tall order, right. ETFs give you a really
good deal. You have pretty much access to everything. But
(02:59):
I think that the tokenization stories can be around for
some time.
Speaker 1 (03:04):
Okay, as long as we're talking about tokenization, Alvarro Martinez asks,
as tokenization of real world assets gains traction, how do
you envision tokenized ETFs transforming the traditional ETF structure, particularly
in terms of settlement efficiency, investor access, regulatory oversight. Could
(03:25):
this technology catalyze the emergence of twenty four to seven
ETF markets or fractional ownership beyond what's already achievable with
standard ETFs.
Speaker 2 (03:34):
So it's very interesting, it's exciting to Robinhood just announced
their tokenizing everything for Europeans who want to get easier
access to US equities, and they even said, oh, we're
going to tokenize VU. But there's already a Vanguard SMPO
five underd ETF in Europe called v USA, which is
easily accessible and cheap. So I think, you know, when
(03:57):
you think about tokenization, what is it actually do? If anything,
it cleans up the back office a little. Using the blockchain,
you can have faster settlement times, you could do twenty
four to seven, But I mean, how many people really
need that. I think the big thing for tokenization is
for people who don't have access to a stock market,
right So for the developing countries, tokens can be a
(04:21):
life saver, especially stable coins, which are just basically tokenized dollars.
There I'm very bullish on that. But for the developing world,
for the developed world, where we all have the ability
to roll out of bed in our underwear, still roll
over to Schwab, open up the Internet and hit by
(04:43):
and we can own almost anything under the sun in
one second for almost no fee. I just don't really
know how you're going to disrupt that. That's about is
clean and easy and low cost as you could possibly get,
and convenient so I think the tokenization story will be
one of a back office story. I think they'll use
the blockchain to maybe streamline some stuff in the back office,
(05:05):
but you, as the user, probably won't know that notice
the difference. But I could be wrong. So I'm bullish
tokenization as a back office a disintermediator, but I'm bearished
tokenization in terms of killing the ETF at least for now.
I'm evolving on this issue, but I just don't see
(05:26):
enough to disrupt what I just described in the rolling
out of bed visual.
Speaker 4 (05:32):
I mean, I mostly aligned with Eric on this, like
the back end, Like do people really care about that
for the most part, Like it's for the you know,
it's pretty good already we already have you know, they're
already trying to move the T one settlement.
Speaker 3 (05:43):
Anyways, I think.
Speaker 4 (05:44):
The benefits are marginal, like okay, twenty four seven trading whatever,
So just it's not it's not enough benefits to be
a disruptor like the ETF was to the mutual fund.
You know, I might give you act some cool stuff,
but I'm still I'm with Eric on this one.
Speaker 2 (06:00):
The other thing is, what is an etfis that would
be cool if it was tokenized. Okay, private equity maybe art,
you know, stuff like this, but a lot of that,
like private equity, let's take that. You can't really like
sidestep to the regulations and just have a token out
there for retail. I believe that the regulators won't really
(06:21):
appreciate that. So even if something seems like, oh it
hasn't been etfised, a token would fill in. I don't
know how cleanly you can get that done without dealing
with regulations. So the regulatory issue is a whole nother
problem here that will have to be surmounted. That said,
this particular sec somebody had commented to me when I
(06:42):
was basically saying, I don't I'm not really bullish on
robin Hood. And also, you see the guy from robin
Hood with it looks like Johnny Depp from the movie
Blow Yeah, and he's out there talking about tokenization and
in like in con Paris or whatever, and I mean
it was pretty showy. And I'm I'm not saying he's
not smart, But when I think about that company trying
(07:05):
to advertise is like, oh, we're going to give you
all this stuff for low cost, And then I think
of like Jack Bogel and Vanguard. I just don't know
if people are going to leave that boy Scout, trust
the Vanguard and black Rock and move over to Robinhood
at least the big giant blob of money. Maybe some
of the younger people. I don't really see that being
(07:25):
that attractive. And if something's free, if Robinhood's saying it free,
don't trust me. They are charging you somewhere else. It's
probably going to pay for orderflow. They're probably selling your
order flow to like Citadel, getting money there and you
don't know it. So be careful out there when it
comes to those kind of pitches, in my opinion, And
so I don't know. I'm just skeptical because the US
(07:47):
ETF market is the terroor dome. It is so hard.
I've seen so many legacy companies come here and get humbled.
It's hell for issuers but heaven for investors. And that
hell is something that I feel like Robin Hood's trying
to sidestep here. I just I have more faith in
a more bullish on companies that have come into the
(08:08):
ETF terrodome and figured out a way to survive and
thrive in an honest fashion. I'm just so I'm not
willing to like let go of all that and be like, oh,
token to the new thing.
Speaker 3 (08:18):
Can't do it now, I'm with you, okay.
Speaker 1 (08:21):
Just on the topic of tokenization, Brian Tovar asks, from
a custody ownership perspective, what's the difference between owning a
tokenized stock versus an ETF stock?
Speaker 4 (08:35):
I mean, that's kind of where I get hung up,
is I don't understand the difference. Like, if Microsoft is
Microsoft stock and you knowing that in a token form,
why not just own the ETF owned Microsoft stock unless
they're issuing tokens like Microsoft tokens. Why I don't Still
I'm struggling to wrap my head around. Besides the back
end benefits and maybe twenty four hour trading, those sort
(08:56):
of marginal benefits, what's the real meaningful difference between the two.
Speaker 2 (09:01):
The other problem is, you know, you got all these
market makers and aps involved that people don't see. And
this is like heavy duty liquidity and financial institutions, and
they're smart. They arbitrage the price and the underlying all
the time. And I've asked people, what's gonna happen if
people start using tokens? Well, will the whole Wall Street
apparatus just move over? Because then what about exchanges too,
(09:24):
And there's some people say all that's gonna go away
and everything's gonna be on the blockchain. But a couple
of things. A. I think you're gonna find percent prems
and discounts. Some people say we can automate the market making.
I don't know, Like I think the system right now
is what we call antifragile. You can call somebody, people
have experience, there's many of them. The token world seems like, okay,
(09:46):
we could like save a little time on the settlement.
You can trade twenty four to seven. Costs are gonna
be the same. It's not like token to be cheap.
It can't be cheaper than ETFs. So again, it's marginal
benefit for a lot more fragility, it seems to me.
And as I've joked about with somebody on Twitter, centralization
has its benefits, which is meaning you can call somebody
(10:07):
if there's a real problem, you can take legal action.
There's prospectuses. This is where I think centralization has its
perkss you go full DeFi it's a little while west.
So I don't actually know how all these questions will
be answered again. The reason ETFs were such a big
hit is because mutual funds were slow, expensive, not that liquid,
(10:33):
and a lot of the costs were internalized. The taxes
weren't good. ETFs corrected like five things. I mean, it
was like five evolutionary steps. Tokenization seemed like one little baby,
like a little mouse step.
Speaker 4 (10:45):
Yeah, I feel it doesn't change the experience, right, go
one to your schwabap whatever you buy Microsoft boom, and
I feel like when the market's open, I get a
fail fair price on Microsoft. I don't know what I'm
doing if I'm trading at like three am right like
on the blockchain, it just feels like I don't understand
how that really like improves the user experience.
Speaker 1 (11:06):
Okay, there are a number of things in there to
follow up on, but I want to start with one
from an ex username discover Lightcoin, who asks how profitable
are ETFs really to the issuers and what variables determine
if a new ETF launches a success or failure.
Speaker 2 (11:24):
ETFs are not that profitable for the assets they have.
So they have like eleven trillion in assets and they
bring in what like ten billion in revenue every year, right,
so maybe a little more, and then market makers make
about that too. So but to contrast, I believe mutual
funds pulling like one hundred and twenty five billion in revenue,
(11:45):
so it's just like and hedge funds pulling like triple ETFs,
and they have less assets, so every other structure makes
way more money. That's why when I go to these
crypto conferences and they think they're like the big disruptor,
and I'm like, dude, ETFs are way more punk rock
than you think. That's why all the money goes into
the bitcoin ETF is because it's so cheap and easy
(12:05):
that the ETF has a lot of disruptive power because
the consumers know it's a good deal and they will
sell you out for an ETF that's like two basis
points cheaper. I mean, they are brutal consumers, but when
you service them, and like you said, if you can
make it there, you're going to do well. Now, there's
certainly room for some etf to be profitable. You know,
(12:28):
you can carve out a good living there. Black Rock
probably the best example. And then there's some hail mary's
that do well, like the two X Navidia that makes
six million a year. So there's been some like one
off Hail Mary ones that have really done well. But
for the most part, it's a hard business. It's tough.
Wall Street would rather ETFs have not been this successful.
(12:50):
I can tell you that.
Speaker 1 (12:51):
Okay, follow up question from the same user, what will
happen to see a bitcoin or Ethereum etf sell off
their assets and shut down and say they're on the
bottom of the list for flows. Are they still profitable?
Speaker 2 (13:03):
So at Bitcoin ETF, even the lowest one of the
spots is totally profitable. That's why this was such a
crazy launch, is that I think wisdom Tree might have
the least of the eleven or twelve out there, maybe hashtacks,
but they're all in profit mode already. That's rare. Now
on ether, I believe the couple towards the bottom are
maybe not profitable. I would say, if you're going to
(13:26):
charge twenty five thirty BIPs, which is what they most charge,
you would need like about eighty million right to be profitable,
and I don't know if all the ether have that.
So over the next five years, you know, the spot
ETFs look pretty good, but there's going to be some
like you know, option overlay. It's not going to try
all kinds of stuff. And there will be closures that
are in the crypto ETF space for sure. And if
(13:48):
a closure happens, if it's a company like Wisdom Tree
and they close a fund, there's the company's still profitable.
They just choosing to close that fund rather than sort
of like you know, put more money into to try
to sell it to make it profitable. It's really no
different than any other business.
Speaker 3 (14:02):
You know.
Speaker 2 (14:02):
You you attempt all these products, you hope some of
them hit. Usually have a couple of blockbuster hits, a
couple in the middle, and then maybe a couple duds,
and some issuers will keep those duds alive longer than others.
Some close quicker. But I'd imagine in the crypto space,
since it is so fledgling and new, you'll probably have
(14:23):
them hang in a little longer than if they were
trying some random theme ETF.
Speaker 4 (14:28):
Oh okay, you now understand, Yeah, you're Right's probably punched
his way above its weight, like profitability wise and some
other categories. And I think Bloomberg News just covered this
right that black rocks ibit is like one of their
most profitable. I think third or second. It makes more
than their SMP product, So yeah, it definitely it speaks
to the demand there too, and the ability to be
able to charge a little bit more.
Speaker 3 (14:48):
Yeah.
Speaker 2 (14:49):
Joel Ethan actually helped News with this data. Ibit is
third in profitability out of twelve hundred ETFs that Blackrock has, Joel,
it's number three, and if it gets nine billion more
based on the fee, it will be the most profitable.
And nine billion is only a ten or eleven percent
increase in Bitcoin's price, so it doesn't even need any
(15:09):
new flows, just a nice little run in bitcoin. It
will be the number one most profitable et from black
Rock at a year and a half old. It's it's
absolutely bonkers. So that said, people are like, oh, Blackrock
is getting away with murder. He I'm like not really.
Twenty five BIPs for that is pretty fair. Up until
Blackrock came out, you had to pay two percent or
one point five percent at best in Europe or in
(15:31):
hedge funds, so twenty five is dramatically cheaper. I think
this is a win win. You know, in capitalism, you
want to if somebody's first has a good idea, has
a good price, point, it's okay to make some money.
I just so, I think this is a case where
everybody won here.
Speaker 3 (15:47):
Yeah, I agree.
Speaker 4 (15:47):
I mean they're giving you IVV at three BIPs, right,
like everything can't be free. But yeah, overall, it's a
tough business. It's not even for these ascid managers. ETFs
are such a small part of their revenue. Like JP Morgan,
who's killing it, it's still like one percent of their
total revenue.
Speaker 2 (16:02):
They're so lucky. Some jol some of these companies. I
always said, the Wall Street banks probably have the best position.
If you have other things that make you money, you
can afford to get guts when it comes to your
ETF business. And JP Morgan did. They had the guts
to get cheap. They sold active at vanguardian fees and
they're killing it. But it's harder for a company to
(16:24):
do that when that's your only thing, because then you're
instantly cannibalizing. But for JP Morgan, because they got so
much going on, it's a little easier to have that
intestinal fortitude.
Speaker 1 (16:40):
Okay, next question from pick god on X looking forward,
is there ever going to be a product that catches
or matches VU, which is obviously vanguards just and P
five ETFs interesting.
Speaker 2 (16:59):
I think VO will be king for I don't want
to say ever, but I'd say at least ten years.
So Michael Saylor, famous for micro Strategy CEO, replied to
one of my tweets colored weeks strategy. Sorry, yeah, it's
just hey, it's cleaner, that's okay. Anyway, strategy, he said,
(17:22):
mark my words, ibit will be the biggest ETF. So
I did the math on this, and I think he
said within ten years. I did the math, Joel. It
would have to like Quinn triple its flows. WU would
have to chill, and the S and P would have
to stop going up, and Bitcoin would have to rally.
So a lot would have to happen in that scenario.
(17:44):
I think you have a case where maybe the US
stock market has real issues and somehow Bitcoin is looked
at as the savior asset like and it just goes
up and up while the stock market goes down. That
scenario hasn't really happened. Bitcoin tends to have a little
more correlation to stocks, So as long as it's correlated,
I stn't see how that's possible, but I bits rise.
It's now the twenty third biggest ETF of all time
(18:06):
at one point four years old, which is insane to
be that high that quickly. I will never say never
with IBIT. I thought vt I would be bigger one
day because VOO and IVV be fighting over that same
assets and the total market. But it turns out people
want the S and P so bad, especially over any
other index or the total market that they just VU
and IVV can actually split some of that money and
(18:28):
VOU will still be the biggest. So I don't see
anything passing VU for at least a decade.
Speaker 4 (18:34):
Yeah, it's too it's too big, and we can't live
in a world where ibit is the biggest ETF. VU
keeps us in check, right, It's like it is going
to quit.
Speaker 2 (18:42):
He yeah, I will quit if I'm going to retire
if I BIT passes VU. It's like you know that
phrase no country for old analysts roll like this is
another one of the If I bid is the biggest ETF,
it's like a whole generation of people are just gonna
be like, I'm out.
Speaker 3 (18:57):
Yeah, VU VO gives us some hope.
Speaker 4 (19:00):
But all the point you said, though, they're spot on
that people you know, ibit's still always going to be
like a satellite position, so it's got to all come
from price, which vol you know, people can have sixty percent,
seventy percent allocations to VOO.
Speaker 2 (19:14):
There's one black sheep here and that is a Fidelity
We're to do a conversion of its index SMP five
entered ETF. I believe right now that's already bigger than SPY,
So that would come in almost that where VU is.
And if Fidelity were to really you know, put in
its advisor network and Vanguard, you know, stumbled a little.
There's an outside chance that could be something is the
(19:37):
Fidelity conversion of an index mutual fund to an ETF,
But that's a little out.
Speaker 1 (19:42):
There, okay. Next question comes from Liz Simmy who asked,
since active is the coolest thing in ETFs, can you
break down the difference between flows to traditional active strategies
in ETFs versus thematic in ets and how the flows
have changed over time.
Speaker 4 (19:58):
Yeah, Active is a pretty fluid turn and ETFs, and
it's not traditional stock picking like, so flows to that
type of stuff is pretty pretty low. When we say active,
it's more things like single stock ETFs option overlays buffers,
which technically get classified as active. I get it that
(20:18):
it's not the traditional like stock picking, but I feel
like with all these ETF options single stocks, people are
their own active managers now, right, So instead of like
going to Kathy Wood to buy these like stocks, there's
like single stock versions of all these so they're just
ended up doing on themselves. So the breakdown if you
if you really look at it closely, it's not going
(20:40):
to like the how we think active traditionally. It's sort
of like this new generation of active, like mostly derivatives
usage and things like that.
Speaker 2 (20:49):
Yeah, I think active is taking in forty percent of
all the flows, and that sounds like, oh my god,
active is back. It's a I could see a reporter
a tempted to write that headline, But as Ethan's said,
most of it is buffers and sort of you know,
derivative using stuff that is more solution oriented. That said,
there is some traction with traditional grandpa stockpicking active. You've
(21:12):
got Capital Group DFA, JP Morgan JP Morgan in particular,
and one of the reasons it's finally working is they
got cheap. Most of the products that take in money
from the grandfather active are now got their fun under
forty basis points. So I think there's a definitely a
group of advisors out there that still believes in Active,
but they want it served up a little cheaper. I
(21:33):
just want to pay for the active, not all the
beta which you can get for free and a Vanguard fund.
So I think Active is going through this repricing of
how much it's actually worth, and as it goes through
that it gets a little cheaper. I think it will
see actual real flows, But there's all the new fangled
stuff that kind of makes the active rebound story a
(21:54):
little more complex and just on thematic ETFs. I just
looked today. Actually they've taken in two billion this year
out of five hundred sixty billion to flows, so not
a lot when you look at themes. If you look
like some themes are on fire, like defense, everyone's taking
you money. It's a feeding frenzy. But then like ARC
and UH, the US infrastructure and the natural resources have
(22:15):
seen outflows, and so you tend to have like whatever's
going on in the market, there's always some theme ETF
like killing it, and there's always some that's suffering. So
them ETFs have a lot going on underneath and they're
they're they're viable to me. I think they'll be around
for a while, but I don't know if they're going
to like grow to any more than say, two to
three percent of all ETF assets.
Speaker 1 (22:35):
Okay, next question comes from a next user named market Wizard.
What do you think of multi asset ETFs?
Speaker 2 (22:42):
Oh, this is a good question. This is when you
combine like stock bond like it would be like a
target day fund essentially. I share just trying it. Everybody's
tried it, it it here's you know, eighth and alluditude early.
I think for the most part, when people invest in ETFs,
they want to be the decider. To quote w remember
(23:02):
in that movie W He's like, Dick, I'm the decider anyway,
great movie, underrated movie about George the b Bush. But
that word the decider always stuck with me, and I
think that the advisor wants to be the decider how
much goes in equity bonds. You can't be an advisor
and have one ticker and client portfolio because the client's
(23:23):
going to be like, why do I need you? I
think for four to one k is they're great, but
ETFs have don't really have an easy time penetrating four
one k, so outside of the form one k market,
I just think most people want to assemble the pieces,
and therefore a multi acid ETFs will always be relegated
to the fringe. Yeah.
Speaker 4 (23:39):
I agree, And I think people are just in general
questioning that sixty forty model with bonds and they like, well,
they don't want to own bonds as much. They want
to own alternatives like crypto or whatever, and I think
those haven't caught up yet. Like if you're buying one
of these funds, it's just a pretty traditional model. So
maybe if they start getting a little bit, you know,
more innovative in the allocations, but overall, Eric, I think
(24:00):
it's just the category that's never really taken off.
Speaker 1 (24:05):
The next question from Carrie Presley, who asks there are
a few clear explanations for the kind of redemption and
the tax efficiency of ETFs. Eric, a clear metaphor example
would be swell.
Speaker 2 (24:19):
Okay, I've I've spent years on this. I used to
teach the new higher class and I go over crash
redemption and their eyes would glaze over. And in my survey,
that's when they'd say that part sucked. Everything else is interesting.
So I actually reframed it and I told the story
of how the ETF was designed. And I start with, like,
you know, the American Stock Exchange was in third place.
(24:40):
They were looking for a winner. And Nate most was
I don't know, in his sixties or seventies at the MX,
and he had worked at the commodity's warehouse and when
he was thinking about how to design the ETF and
make it so that costs of trading wouldn't infiltrate the
actual costs of the ETF, which would affect all the shareholders,
Like how do you say break trading costs from like
(25:01):
the shareholders? And he thought about commodity warehouse that he
worked at, and he thought, well, in that warehouse, you
have a bunch of soybean oil and you bring it
to the warehouse. They give you a receipt for your
soybean oil and they store it for you in a locker.
Then you can trade your receipts with other commodity traders
without having to move all the merchandise around. Right, it
makes sense. And let's you get a bunch of receipts
(25:24):
and you want actual soybean oil back. Then you take
your receipts and they give the exact proportion to soybean oil,
and then you have your goods. So all he did
was take that structure, that paradigm and say, instead of
soybean oil, what if I had the S and P
five hundred stocks. I could then take it to this
warehouse which is State Street and the custodian, and I
(25:44):
get a receipt for spy and that receipt is worth
fifty is fifty thousand shares worth of receipts, then I
can sell those in the open market. People can just
trade these receipts all day long, and then if there's
a surplus of receipts and we need to do a
creation or redemption, will go back to the warehouse. So
all it is is a commodity warehouse paradigm applied to
(26:06):
stocks and bonds. And the reason that's cool is because again,
when the receipts are trading, it's basically all everybody trading,
all the tax implifications and everything is on them. And
when a creation redemption happens, when you bring the stocks
get in exchange for the receipts or shares, there's no
money changing hands. And so when there's no money changing hands,
there's no taxation, and so there's no tax consequence in
(26:30):
the creation redemption process, which is the magic of why
ETFs don't kick out capital distributions capital gains distribution. So
that is I love stories like that because a lot
of times, you know, Steve Jobs always said like nothing
is wasted like that. You know the font he made,
the calligraphy and the early apple he got because he
just used to like skip class and go to the
(26:52):
this writing class. Things that happen in your old life
can come in really valuable or something you see overseas
you apply it to your country you're in. And that's
what happened here, and it was ingenius and that's the
secret sauce right there. Joel Eighthan, did your eyes glaze over?
Speaker 3 (27:08):
Yeah? I fell asleep a little bit too.
Speaker 4 (27:10):
That No, that was actually a really good explanation for
a topic that is kind of operational and dubba. And
this is why we talk about the share classes. Why
all met funds want to go towards that because they
get this benefit now, so which is why there's that
big push towards the ETF.
Speaker 1 (27:32):
Okay, next question from Crypto Roy, how much notice is
usually required to close an ETF or move to a
different ETF. Are there usually fees involved with closing an ETF. Also,
if you move from one ETF to another, is this
a taxable event?
Speaker 4 (27:49):
Oh, those are some good questions. I don't know about
the lead time from when they closed. There's definitely an
announcement they let you know, so you.
Speaker 2 (27:55):
Have like sixty days maybe something like that.
Speaker 3 (27:58):
Yeah, so they have a chance to get out.
Speaker 4 (27:59):
Yeah, so give me a chance to wap you into
some so like etn's do this all the time. If
the ETN is sort of coming to a maturity date,
they will offer you to switch you into another one.
So you definitely are getting notices. If you own the fund,
you know the cost. Obviously there's some unwinding, paying some
some of the fun administration costs, but you're pretty much
gonna get what.
Speaker 3 (28:18):
Nav is at that day.
Speaker 2 (28:20):
Yeah, but you get the tax then the tax, so
you're kind of Yeah, so when you if you want
to switch, like let's say the Wisdom Tree such and
such ETF clothes not to pick on them this whole show,
but anyway, you whether you sell or they send you
a check because they redeemed the funds, you got a
capital gains distribution if the fund went up as you
(28:41):
bought it. So that's why closure risk is like real,
but it's not huge. It's not like loss of principal risk.
You can never lose your principle in an ETF, but
the closure risk is just like annoying and nobody wants
to deal with that. Again, people hate taxes, so that's
the problem. So yeah, that's why you don't like to
see ETF's liquidate, but usually don't liquid if there's a
(29:03):
hardlybody in there. So like there's very few casualties to
ETF liquidations in general, but definitely, and this is part
of why it's hard in ETFs because a lot of
advisors in particular won't use you unless you've got like
five hundred million a billion dollars. But how do you
get that if you can't sell to anybody because people
don't want to be in there just in case you close.
It's a chicken and egg conundrum.
Speaker 1 (29:25):
Final question comes from Kyle four Kid, who asks on
a macro level, Eric, how do you and your team
see the ETF landscape evolving over the next ten to
fifteen years? Any improvements to the ETF structure itself if needed,
or we see a zero fee ETF like we have
with zero fee index mutual funds.
Speaker 2 (29:45):
Well yeah, I mean Bank Bank in New York alread
has zero that's hard that already exists. Here's the thing
about zero fee, they've if you talk to people, brand
is huge, and so unless Blackrock or Vanguard or State
Street did zero fee, it won't matter that much. People
are going to go with that brand and three BIPs.
In fact, I think some people like paying a little
because it feels less like you're gonna get like ripped
(30:07):
off somewhere else. So I think three BIPs, five BIPs.
You know, people are gonna want to build portfolios with
ETFs under ten basis points for the next ten to
twenty years. The only again, the tokenization is certainly one thing.
Perhaps tokenization can improve some of the back office stuff,
but again that wouldn't totally affect anybody. If anything, that
(30:29):
would just help the issuers more maybe save a little money.
But I you know, look, I think what's going to
be tested is that they're gonna put stuff in ETFs
that's just not liquid, and that's I think where we're
going to find some experimentation where I guess private equity,
private credit. Maybe they'll try to put something like I
(30:52):
don't know, farmland and Nebraska, you know, something that's just
like like that an endowment would invest in. We'd call
those real assets. I would be fine with that. I think,
you know, it's okay to break an egg once in
a while to get the omelet. So I'm okay with
experimenting with ets But it could get very interesting in
terms of testing the durability of the ETF. But the
(31:13):
other thing is you got to look overseas. That's where
a lot of a growth opportunity is. They're just waking
up to like what fees are and like how to
make money long term. And so to me, the ETF
story is like maybe fifth sixth inning in the US,
but it's like second third overseas. So that's what I
would look for. But I do think we're gonna see
(31:34):
a lot of crazy because the vanilla is so hard
to compete in that you will see more people launching
stuff that's pretty out there and it will get a
lot of copy because it's interesting. But just relax, almost
all the money is going to go to the VU
type stuff, and that's probably for the best. But some
(31:54):
of that experimentation will be interesting and there'll be some
evolutions there that will probably be pretty good in my opinion.
But I'm generally optimistic. I have some colleagues that worry
more than I do.
Speaker 3 (32:06):
Nathan, are you one of those colleagues.
Speaker 1 (32:08):
Yeah, I think see what do you see evolving in
the YouTube landscape.
Speaker 4 (32:12):
I think sometimes someone will push it too far at
one point, but overall, these are fringe products, right, it's
not gonna I don't think it's gonna dislodge industry at all.
It's like absolutely on fire. But I think we'll see
every type of combination you can possibly think of. We
did max seven single stocks. Now there's like stocks pinned
against each other. Then there might be like five portfolio stocks.
(32:33):
So I just think it's gonna be any possible combination
of things you can think of. We'll be etf e's
and then it's on to the next frontier, whether it's
private equity, all coins, whatever. So I think that's just
how it's gonna gonna evolve, which is gonna you know,
products are gonna keep coming at a really rapid pace.
Speaker 3 (32:51):
Yeah, we probably might see a product blow up at
some point, but I.
Speaker 4 (32:54):
Don't think it's gonna be a big deal like one
of these single stock ones quantum stocks or something like that.
But I don't think it's gonna be up a bruise
on the industry at all.
Speaker 1 (33:04):
Pathan, As always, thank you for joining us on Trillions,
Thanks for having me on, Thanks for listening to Trillions.
Until next time. You can find us on the Bloomberg terminal,
Bloomberg dot com, Apple Podcasts, Spotify, or wherever else you'd
like to listen. We'd love to hear from you. Hit
us up on social I'm at Joel Weber Show, He's
(33:27):
at Eric Balchina's. Trillions is produced by Magnus Hendrickson. Brendan
Newman is our executive producer. Sage Bauman is the head
of Bloomberg Podcasts.
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