ETFs, Explained

Bloomberg Audio Studios, podcasts, radio news. Sarah David, I wanted you to come into the studio with me today because I have to ask you about ETFs and what you know about them.

Okay, ETFs, I feel like I usually hear about them in the context of, don't kill yourself researching all these individual stocks. Just find an ETF, put all your money in the ETF basket.

These things really can change how we think about investing. We have this like great loophole, Like, let's try to use it in new and creative ways.

So over the last twelve months, ninety four percent of ETFs have posted a positive return.

You know, it's it's a big tax advantage for a lot of people.

But Sir, to be honest, I am not like one hundred percent sure how they work. And also like why they've gotten to be so popular.

Yeah, I'm not sure about that either. Why are they such a great investment, David, what's actually in them? How are they different from a mutual fund or an end All.

Of these such good questions, Sarah, ones that I have as well, which is why today we are continuing with our ongoing collaboration with our newsroom colleagues Bloomberg.

Explains, Thank God I need that.

This is our series where every now and then we break down the biggest parts of our financial system. We take a look at how they came to be and what they mean for all of us. Even if you're a finance expert, or.

If you're just someone who wants to find out more about what's actually in your portfolio.

I promise there's going to be something in here for everyone. I'm Sarah Holder, and I'm David Gerra today on the Big Take from Bloomberg News. ETF's explained exchange traded funds or ETFs, are one of the stars of the investment world these days. They've got Meryl Streep status. They are respected, beloved, and adored by professional investors and amateurs alike. Since ETFs were created over three decades ago, they've become one of

Eric Belcunis, I'm senior ETF analyst, and I write about analyze and talk about ETFs and lead a team of about ten people around the world who do the same thing.

Do you have a favorite ATF?

So it's hard to pick favorites, you know, I'm so into this stuff. I don't say the look at my children. I wouldn't go that far.

Eric says, ETFs were born out of one of the darkest periods on Wall Street.

This has, by any measure, been the worst day in stock market history.

In Black Monday, which was in October nineteen eighty seven, the market went down I think a twenty four percent. I mean that's a lot in percentage terms. That's like a quarter of the market erase.

The now industrials have declined by nearly three times the previous one day record.

In the wake of that crash, the Securities and Exchange Commission the SEC wrote a report analyzing what had caused it, and it also made some recommendations about how to avoid another one. Buried in the middle of that report, Eric says, was a modest suggestion from an SEC lawyer, what.

If we came up with some kind of market basket instrument that traded under our supervision on the New York Stock Exchange.

Enter Nate Most and Steve Bloom, two traders working not at the New York Stock Exchange but at its competitor, the American Stock Exchange. Most was in his seventies. He was a Canadian physicist who'd served in the military.

Steve Bloom, his partner, was like a Harvard whiz kid, wonder kid, rocket sciencest type, very good at math and younger. So they were an interesting sort of duo. I think name might have been two or three times as old as Thief. But they worked really well together.

The problem was where they worked.

The American Stock Exchange was not doing well at that time. They were in third place in terms of listings in trading life, behind the New York Stock Exchange and NASDAC.

What the American Stock Exchange needed was an edge, and that's when Most in Bloom got their hands on that report from the SEC, that eight hundred page Black Monday post mortem.

Well, Nate and Steve read this whole book, the nerds they are, and were like, wait a second, a market basket instrument and the SEC's kind of asking for it, and they probably would approve it. Let's do that, so no stocks will list with us? So why don't we invent something that will create more trading on our exchange.

So they went about trying to design a market basket trading instrument, something that could be bought and sold on a stock exchange that acted like a stock, but was instead a basket of stocks, a basket that mirrored the market.

The idea literally was born out of some lawyer's brain from the SEC, which is interesting that laid the groundwork for them to find the ETF invent it because they were desperate, really.

But turning that idea into an actual product that could be bought and sold was not easy.

So what Nate most did that was genius, and really the secret sauce of the ETF was he remembered his time at the Commodities Exchange, and there you have something called commodities warehouse receipts. A commodity's warehouse is where you store different commodities, for example, soybean oil. You go there, you put your soybean oil in a locker, You get a receipt for the exact amount of soybean oil. Then you trade the receipts. You don't have to move a

The idea was to create a commodity's warehouse for stocks or bonds or pretty much anything you'd want to bundle together and lo, the exchange traded fund was born. The very first ETF, created by Nate Most and Steve Bloom, contained all the stocks in the S and P five hundred and they called it the S and P Depository Receipts ETF or Spider. The firm State Street launched it in nineteen ninety three with a lot of fanfare.

I remember they had like spiders hanging from the ceiling. They gave out hats. It was a fun day, and they traded. I think it was like a million shares the first.

Day, a million shares on the first day. Eric says that eventually the money being invested in ETFs started to double year after year. That's because people started to realize that ETFs had some real advantages over other bundled investments like mutual funds or index funds.

Generally speaking, they're cheaper, right, so that's big. The second thing is they are transparent. You know, you know what's in them every day. Other mutual funds and hedge funds you don't know for either quarterly or even at all, So the transparency's nice.

Another big appeal of ETFs taxes. With an ETF, you only pay taxes when you sell. With mutual funds, it's every year. But the other big advantage, according to Eric, is that, unlike a lot of investments on Wall Street, ETFs are very user friendly.

Like you have this computer and you have a mouse, whatever you want to invest in, and all you do is click buy and you own it. The amount of friction that has been eliminated in that is major. It's it's almost like Amazon in that way. It's they're other, fast, good, and cheap. It's hard to get all three as a customer.

Today, some three decades after Spider debuted, there are now thousands of ETFs with trillions of dollars invested in them. Coming up after the Break a user's guide to the best, the worst, and the weirdest ETFs out there. To talk about the current state of play for ETFs, We found yet another Bloomberg person who is obsessed with them, and that's one Katie Greifeld.

I am the co host of Open Interest on Bloomberg TV. I write the ETFIQ newsletter for Bloomberg News. I also anchor the TV show Bloomberg Etfiq, and I also co host the Money Stuff podcast with Matt Lvien.

Katie has a lot of jobs.

I'm so tired, but she.

Is so excited about ETFs that she dropped everything to talk to us about them. Cany you told me that ETFs are your favorite thing they are? Explain that. Why is that the case?

Boy? So I've been covering ETF since January twenty twenty, and January twenty twenty was such a strange time to come into a new beat. But the most exciting thing, and the reason I think I love ETFs, is because over that time span, I've just seen this industry grow and evolve so much at such a rapid pace.

Give me a sense of how big the ETF industry has become.

It's big and growing. So there's about nine and a half trillion dollars in US listed ETF trillion with the t oh yeah, there's about twelve point eight trillion worldwide.

Now that's not even half the size of the market for mutual funds, the traditional choice for more conservative investors, but ETFs are gaining ground. A lot of the reason for all that growth is that ETFs, like mutual funds, are seen as safe investments that, along with ETF's lower fees, have made them very appealing to people who want a safe, low cost place for their nest egg.

One of my favorite charts out there, and I recognize that we're on a podcast, but if you take a look at annual inflows into ETFs and out of mutual funds for some years, it's basically a zero sum game.

But not all ETFs are the same. There are gold ETFs, palladium ETFs, corn futures, ETFs. There's an ETF that only has in video stock, and now there are spot bitcoin ETFs. We're among the most popular ETFs out there. How do they work? Is Blackrock buying a ton of bitcoin and holding it?

Yes, that's that's basically it's It's something that I found helpful is comparing it to spot gold ETFs because the spot gold ETFs do have to buy a bunch of gold.

They have to be backed up, yes, with the actual thing.

Yes, there's a lot of conspiracy theorists out there who say there's no way State Street owns that much gold, but they do. They keep it in a vault in London underneath the City of London. If you take a look at the spot bitcoin ETFs, you do have the likes of you know, Fidelity black Rock just buying up a bunch of bitcoin, the spot ether same thing.

It strikes me we're seeing this kind of ETF fication of all kinds of assets, Like, can you really get an ETF that is tracking anything?

Almost almost there is almost an ETF for everything under the sun.

There was an ETF invested in every stock CNBC's Jim Kramer recommended, and there was also an inverse Kramer Tracker, which bet against all of Jim Kramer's stock picks. Both of those closed last year, but others like them launch every day. Katie says, a lot of these are not meant for run of the mill investors. They're more for sport.

In Nvidia single stock ETFs in particular Tesla. So those are definitely fun to watch day to day because they go up by a gazillion percent and then they go down by a gazillion percent.

I asked Katie, what's next for ETF.

One of the interesting conversations that's happening in the industry right now is whether you can put private assets in an ETF. The private market so hot right now, especially with companies just not going public anymore.

But even as the number of ETFs has exploded, the number of firms making money off of them has stayed pretty concentrated among some big name players.

The economics are tough when it comes to ETFs because they tend to be much cheaper than mutual funds. I thought it was really interesting that Vanguard is your number two ETF ISSU or second to black Rock. Bloomberg Intelligence founds that their average fee is just nine bases points and even though they have something close to two and a half trillion dollars in ETF assets in their ETFs, they're only making one point three billion dollars annually off

Now, there are a few downsides to the proliferation of ETFs. Bloomberg Intelligence ETF analyst Eric Beltunas says that because they're so easy to use and easy to launch, there can be issues.

If you can't control yourself and you're just like kind of a gambling mindset, Like you know, you may want to go to a mutual fund, even one that has an early withdraw fee, if it helps you from trading that that atfs could be dangerous.

A lot of the safer, more obvious investments have already been covered, Eric says, so many of the new ETFs can be a little out there.

That's sort of the Frankenstein factor. It's like nobody's launching vanilla stuff anymore. Really, they're all trying to invent new things that will appeal to investors, and that's where you get into a little bit of Frankenstein situation.

In fact, the advent of Franken ETFs was something that I worried the legendary Jack Bogel of Vanguard. He was an early backer of index funds and advises Nate Most and Steve Bloom early on when they were developing the ETF. According to Eric, when Bogel saw how creative everyone was getting with ETFs, he got concerned.

Bogel said he woke up some days feeling like doctor Frankenstein, because he sort of is the father of the index fund and he would be like, what have they done to my boy?

Frank and ETF's aside, Both Eric and Katie agree that the more basic ETFs are generally speaking, getting all the hype. They're transparent, easy to use, and they cost less and all this is thanks to the Great market Crash of nineteen eighty seven, the afterthought of an sec lawyer and two traders with an entrepreneurial spirit who saw an opportunity and Sarah, well, that got me thinking, yes, maybe we should launch our own ETF.

Seriously, like a big takeaway ETF exactly, Okay, do you mean podcast related stock. I don't know about that.

Yeah, me either. That doesn't sound like a good idea, But I did run this idea by Eric and he agreed to advise us on our launch.

Well, the ticker could be take if you ever have topics and guests on, you could just basically invest in that area until the next one comes on and then trade to the different area and just see where it happens.

So, Sarah, that take ETF. What do you think about that? What kind of newsy investments do you think you're put in the ETF?

That's easy. We're going long on election twenty twenty four. We're making targeted investments in k pop. Got it hit the Olympics. But honestly, let's just bet Gratt.

This is the big take from Bloomberg News. I'm David Gera. This episode was produced by Alex Sagura and Adriana Tapia. It was edited by Stacy Vanick Smith and Joel Weber. It was also mixed by Alex. It was fact checked by Thomas lou Our senior producers are Kim Giittleson and Naomi Shavin. Our senior edit is Elizabeth Ponso. Our executive producer is Nicole beemster boor Sage Bauman is head of podcasts.