Welcome to Inside Active, a podcast about active managers that goes beyond sound bites and headlines and looks deeper into that processes, challenges and philosophies and security selection. I'm David Cohne, I lead mutual fund and active Research at Bloomberg Intelligence. Today my coast is Athanasius Sarah Vegas, ETF analyst at Bloomberg Intelligence.
Ethan, thanks for joining me. Yeah, man, thanks having me on.
So we were recording live from the Exchange conference in Las Vegas hosted by Beta five. So I do want to thank Todd brosen Booth and the folks of Betterfi for having us. We are joined by our old friend Todd Son, Chief ETF Strategists at Strategists Asset Management. Todd, thanks you for joining us today on the sunny day.
Hey, it's great to be with you guys.
So this episode's gonna be a little different than our typical Inside Active.
I'm going to actually.
Ask you both questions as opposed to Ethan and I kind of going back and forth, and so I want to kind of get the current state of active ETFs and then at the end we'll do a lightning route. So Todd let's start with you, what flow has surprised you most this year?
So to start an active you're at twelve percent of assets and forty percent of year today flows. I don't know if any category specifically surprises me, but it's the balance right year to date or the trail or trailing year fourtune and twenty billion equity, three hundred and eighty to fixed income, and two hundred and seven billion to option incomes. Right, So this is everywhere, This is not just cornered into one area. I think that's the breath
of it is really impressive. What do you think, Eithan?
Yeah, I mean I kind of agree with Todd. Nothing really sticks out. So like you're saying flows into international Emerging Markets v X, you know it's passed, but like av EM has taken in quite a bit of money, you know, some of the optional overlays. So honestly, I don't think there's anything that shocking and active. I know it's not a debate with Todd, but I kind of agree there there's not really anything that stands out. What about like anything that should be getting closed but isn't.
Oh, you know, I would love to see more to active small cap because small cap industies are flood right Russell two thousand, which I think we all refer to, was it forty percent unprofitable zombie companies galore? And yeah, there's moments in market regimes where you actually want Russell two thousand exposure, Right, you want to go out and
buy junk. But as a cycle's mature and the credit backtop changes, I like having an active manager to be at the wheel to find those companies that eventually grow up in graduate of the bigger induscy. So I would like to see more activity down there. Okay, so I'll start again, Todd, what what's over hype right now? Not to btfs, it's oh, it's overhyped. I don't. We're sitting in front of a live batch of people are exchanged which are you sure I might get in trouble? So
there's two area. I think it's derivative based stuff, right. I think it's fascinating that in the last three years, option income ETFs have taken it more than divin and ETFs, so the way investors are getting income has changed. Does that mean it's overhyped? I think certain segments of it are right, Single stock income ETFs, I think are overhyped, and there's a lot of issues in terms of the tax front, and then I don't know buffers. I don't
know buffers. Depending on who I'm talking to, strike a chord. Some people love them and some people are like, I don't get it, and they're an eighty billion dollar category and I they're a little complex for me, and I'm wondering how much more ceiling there is. I get it that they're coming from the structured outcome space and that's
a big area, but I don't know. I think there's so many other alternatives now in the income space and the downside protection space that I wonder if maybe that's the overhype area.
Even yeah, I think with overhype, I know the leverage stuff that counts as active, that for sure, because you see all these filings coming out. It's companies that already have an ETF on them, So I don't really get what the advantage is. They're like, why are you launching another two x TESLA ETF that exists out there already, So unless you're literally competing on price point, but I don't even know if that's even a big advantage in something like single stock leverage buffers too, I think are
a little bit overhype. Not the strategy, but the number of products that are out there.
That's definitely it's.
Getting really kind of saturated product wise.
The buffers are the minions of the ETF industry, the little yellow guys, right, there's like a thousand of them and there's no difference. So this is more marketing than flows, you think in terms of it's such an easy message or an advisor, and I get it right, It makes sense, especially if you are an older generation. You're close to retirement, you're scared of an eighty seven moment, right, or you're about to buy a house or a boat.
You want the downside protection. Yeah, yeah, I think they agree with Todd. They're like really easy to sell, kind of taking the place of lovall, maybe even eating some of your bond exposure. So, like I said, you know your outcome, right, there's no surprises. And whether or not they're efficient and that's like a done a debate, but I think that I get why people investors want to use these.
So eighth, I'm gonna start with you on this one. Are we in a golden age of active ETFs or just a hot streak.
Oh man, I mean this is great. We do have more active ETF than passive. Again that includes all the definitions. Is not just like alpha seeking stock pickers. Probably, I think Golden age. I think when you know, with the ETF fool making active more conducive and easier, cutting costs down, having an index provider, things like that, I think it's definitely going to be, you know, opening the door for more active. Then you have share classes coming to again,
another big floodgate opening for active Golden age assets. And I don't know, but products probably like this is probably the start of just some massive influx of more active same question.
I think it's got to be Golden Age, right, And the backdrop for me, I agree with everything insane. You got share classes, you have conversions. Everyone is coming into the pool now because they realize that's where the flows are going. Right. ETFs treat money better, largely speaking the mutra funds. But for the other art angle of this is we are in an environment where and I know everyone probably doesn't like this topic. Ten stocks make up
forty percent of the S and P five hundred. If you're on large cap blend, if you on large cap growth, if you're own quality momentum, you own the same stocks, right, So this is where active and depending on if it's large cat, midcaps, wall cap international, right, having a handed the wheel to at least differentiate or diversify portfolios. I think that's so important. And I as much as the concentration might be coming off a boil, it could come right back in a given environment. So I don't see
it slowing down. This is literally everyone is in the pool here in Vegas.
But if the regime changes, like say, we see less volatility, but could the momentum fade a little bit?
You probably see it slowed down. Like, I wonder if that forty percent of your today flows number start goes down to thirty percent. But I think you have a I wonder if there's a floor now in the twenty five percent area, right, whatever the number is, I think there's a floor on flows. And we just have to figure out what the celia is.
Okay, So Todd, I'm gonna start with you on this. What act did ETF change the game?
Is it? Arm Jep's a good question. It has to be ARC because they were the first one to say, hey, we're going to show you. We're literally going to email you our trades every single night. We're gonna be transparent about our holdings. And they proved you that an active equity fund can work in the ETF matter. And this was before the ETF rule of all that. I think
it has to be them. And then once JP Morgan had Premium Income come out, they showed that, hey, derivatives in ETFs in an active matter are also going to be important because people on income they went downside protection, they want leverage all that. So that would be the you know, the the second leg of the change in the.
Game was your pick, Ethan. I mean, Ark is a good one. That's probably the best pick, honestly, because then it kind of completely dismantled, like semi non transparent ETFs and all that. All that model then just became like obsolete when you know, Kathy was out there putting our holdings daily. But I'd say, if I had to pick another one, I think that whole buffer category not change the game. But it created a brand new category, which I think is so rare to see in ETF. So
it's there's very little white space. So to have a new product come out and literally create a brand new category. They became really successful. I think that was a big game changer, and they think that just feeds into what was Todd was saying was just the ability to put derivatives in ETFs. I think that was definitely a big whether you don't want to define that as active, but that definitely, you know, change the game a lot.
Okay, it's an if you're CEO of an issue and you could launch your own active ETF tomorrow, what would it be.
That's a scary thought.
Yeah, you know three x no, okay, just depending seeing where the market is now and when there's white white space, I'd probably try to crack the private equity like you know it probably work on something there just because you know, like we mentioned, there's there's more active ETFs than passive. I don't want to go into buffers is probably really competitive option overlay and covered calls that so is that?
So I think private equity, if you can get a jump on it and get in to that category pretty early, I think that could be a game changing ETF. I would be mentioned similar to ARC, but so I'd probably be trying to focus in that in that space, would.
You launch God, if it's already launched, is out a problem. I put on my Fatigua's hat. I'm just gonna copy somebody tigus Macro Thematic Opportunities ETF Thematic Diversification, Right, that's what I would launch. It is live, not to be the promo here, but it takes thematic funds and it puts them all in one fund together rather than taking the single theme risk. So that's what I would launch, even though it is live. I stay o by that.
If TRTIGAZ did not exist, what would I do? I would do something in the derivative space because there's still a lot of opportunity there and it fits both channels, retail and institutional. Right. Retail loves income. The institutions want the how to hedge, how to protect.
Okay, do you think active ETFs are competing well with mutual funds or passive ETFs right now?
Eighthan you go first, I think both.
Yeah.
I think it's just it's still the same argument, like active versus passive, but now it's just all being moved over into the ETF. So yeah, it's I think it's competing with everyone. You know, passive for sure. I think I don't know if it's a head to head competition. I think it's just evolving to live alongside passive, right. So a lot of the active stuff we're talking about, you know, buffers or see you know, leverage single stock, that's not going to be a core position, right, sort
of like a satellite position alongside passes. So I think that's how they're sort of learning to live.
Uh.
And then yeah, it's just this is all just the you know, the money moving over from mutual funds and the ETFs, so you're kind of competing with everything. And then also I think the thing to mention obviously ETF trading is so high even though it's a passive vehicle, right, people just constantly trading these passive ETFs. I think in a way that's active too, right, So they're also maybe kind of competing on that level.
But yeah, I.
Think in ETFs everyone's competing with everyone all the time.
I fairn I agree with Athanasios I wonder I do lean though towards the passive, right, because we know, largely speaking, all the money that's coming out of active equity mutual funds is probably going to passive That's been a function of zero percent interest rates in the last decade and some other market mechanics. So now you have to negotiate with an advisor. You know, you have your core, but you should consider this active as either a replacement or
a compliment. Like you need to get the dollars away from the core now, which is largely passive, into active. So for me, I think, if I'm really choosing one, it's the passive index funds because they're too good of a deal.
Okay, but if we if we single out just you know, if we've got traditional active which is security selection versus kind of the new active which is to fly an outcome leverage and things like that, you don't think there's any movement with the traditional like styles and the active ETFs kind of taken away from passive at all or just more of a compliment.
I think it varies on where you are, Okay, honestly, Like like we could go, we could do a tour around this conference, and some people say, well, I don't like passive because it's skewed. Some people are I don't like active because sometimes I don't trust the managers. You know.
I think with a lot of the stuff that's come out, it's sort of like switched. Before it was like we mentioned Kathy, would you invest in the fund? You investing the stock pickers, right, But I think a lot of the ETFs have made you the stock pickers are sort of like replacing a lot of that traditional stockpicking and you're doing it yourself. So that's why I think some of the successful active stuff is not that stock picking security selection active. It's the derivatives, it's the leverage, it's
kind of that stuff. So I think in a way that's you've stopped subbing out that stock picking ability and just investors are doing it themselves.
But unfixing come side. You still see your role they fixing active. It's interesting because you know, you follow the mutual fund and full as closely active fixing commutical, but you still don't know, right yep. And yet there is a massive amount of active fixed income ETFs and they're doing well too. But it's like both sides of the industry are winning there. Yeah, right, a littly unique.
Yeah, it's a good point. They've been pretty safe, right, bond managers in mutual funds from the you know, competitive you know, like intrusion of ETFs.
For sure, what part of the active ETF story hasn't played out yet, so you can answer this question what part has not played out yet?
I wonder if it's fixed income maybe, you know, let's see in ETFs active fixed income I think is about twenty two twenty three percent of assets. I mean, that's still pretty good. But I just wonder if you're in this different rate regime than we've been in the last forty years, and that's gonna be where the opportunity. Yeah, now tricky parties. I don't know what's going on private credit,
what the implications does that have. Maybe having an active manager might make sense then, but I think there's more to go there. It's just a matter of where is it coming from, because if it's not coming from utral, it's got to be sourced from another area too, Right, But there's so many incredible exposures now in active fixed income. The due diligence process is going to be really competitive. But I think that that's one area. I'm sure if James Safer here you say crypto by the way.
Yeah, don't, yeah, don't don't remind them. What do you think an Yeah, I think bonds is a good point because, uh, they were doing active bond ETFs for a while, right, like some of their ones have been really really early on products. I don't know if some of it's just because tax wise, it's not a huge advantage to being an ETF and versus a mutual fund on the bond side, just because you know how income gets distributed and whatnot. But could also be what Toddo was mentioning just kind
of the rate regime. So that area, for sure, I think probably could be developed. I think also issuers kind of pivoted away from focusing on bond ETFs for a while just because you know, buffers had come online and people kind of get annoyed with the egg after twenty twenty two, so they're like, hey, you know, I'm not going to be focusing on bonds as much. So there's that, and then yeah, maybe like alts, like you know, I know, hedge funds, you know, people weren't buying all ETFs, like
you know, in huge numbers. But I think if someone can maybe figure out a decent old space, if you want to put crypto in that profile, fine, but sort of like you know, how can we get like true alts in an ETF could be an interesting on tap.
I like the managed futures. I'm a little bit of a junkie with that. Try me. I have a CMT, right, I like trends. I don't know how big the managed future space is an estimate neutral funds, but it's tiny and ETFs and depending on the environment, Like right now, managed futures have outperformed the Q since October. Right there's a place for them. So I have to imagine that's another big, huge area of opportunity going forward. So where you think about it.
As a baseball game, and you take active ETFs all encompassing, whether in traditional or the newer styles, what in.
And were you in man the second third? It's early, okay, I mean I think it's super early, encompassing super early.
I was ben going little further like fourthly, but we're not out of like the seventh in stretch yet or anything like that. But I was gonna, uh, but there's gonna be a lot. It'll be interesting to see how much like we can always launch products, right, but how that asset transfer works and how successful they're gonna be in raising assets. I think that is still we have to see kind of more in that. But I think said twelve percent twelve percent of assets, and what was
the percentage of flows forty percent, that's pretty good. Yeah, and obviously the end every year that flows total folds keep going up, right, So it's forty percent of a growing number. But again, is that enough to justify that half the market, more than half the market is active ETF? So you know, so I still agree that we're early on, but I don't know if we're whether in the market.
You know, kind of induces this, but we see like rationalization a little bit too, right, because you know, we did a panel yesterday, it was a thousand plus these TF launches. I mean, there's a quite a bit closures, but nothing like the ratio that we've seen from launches. So at some point some of these might need to close, right, which is I don't know how many can actually be like supported.
Okay, so I got one last question before we get the lightning round, so you can do this one first.
What actually makes an active ETF stick differentiated portfolio or a differentiated solution? Like why am I offering it?
Right?
Okay? If it's stocks, I just need something that's uncorrelated or just different than the mag seven or I'm offering a solution like a buffer or option income or tail risk right, hedged equity, That to me is what makes it stick if it's just kind of run of the mill chasing performance. But you can get an active thematic funds single themes. That is, you're gonna get slippage when the time runs out.
Okay, I think that was a good answer, But I'm gonna say the performance, I think Kathy is why that product was so successful. But to Todd's point, you can't control investor timing, right, So yeah, she had the good performance run people piled in later the performance sort of you know, didn't do as well, so maybe your experience with it might not be as great. But the reason
she got really popular was because of performance. But then to his point about buffers, that's not a performance story, right, that's a solution story.
So I think.
Kathy also had a solutions story too. She was creating a new category like innovators, right, Like that didn't really exist before Kathy. So if you're gonna be like a stock picking one, it's got to be performance. If you're gonna be something like derivatives or options overlay, it has to be some sort of uh, you know, Todd mentioned some solution based thing.
Okay, so it's time for our lightning round, Todd.
You're our guests, so you're gonna go first, okay, And actually the first question you touched upon a little bit. And so the question is active small cap ETFs? Are you bullsh or cautious?
Super bullish? All in? Okay?
Great?
What do you think? Yeah? Bullish?
It was just like performance you think or is it like m I have a lot to ask questions.
You just can't head yourself.
You ask in little uh, I guess both on the maybe performance and like you know product that can that potentially come to market? Yep, but either way bullish Okay. The next one is buffer the ETFs. Is it crowded or is it still runway left crowded? More crowded than a Vegas night club on Saturday night.
What do you think that?
Yeah, this is a kind of a dull lightning round because I agree to this is a it's crowded.
Raithan and I are cut from the same cloth where I was listening very much.
So yeah, we can align on a lot of stuff, but I'd say on the crowded product wise, yes, assets probably can grow a little bit more there.
But I think there's definitely a lot of a lot of products, and I know this is a lightning on like one more thing to that. You have not seen buffers from guard maybe you never will, but I'm just I'm just throwing it out there. Let's just never thought of that. I'm just throw it out there. Right. You got some people from my shares there they launch buffers.
Okay, that's a good food for so you know, I think we've all seen the robot out on the floor.
So the next question is AI related When.
You think of AI AI driven active strategies, is does that really provide a real edge right now?
Or is it just kind of marketing. We've had that Watson ETF for almost a decade. I don't know the performance off the edge, but I don't think it's been magnificent. I wonder if it's gonna be like certain models would do better than others, and it's gonna be dependent on the guy who writes the models, like some crazy PhD was smart and all three of us combined. I probably more lukewarmonta though. Okay, I like you. I like the human touch. Okay, what do you think?
Why don't you have the robot on the podcast?
Isn't it tod I'm be hosting pretty soon.
I think it's overhyped out the under I don't think it's gonna be able to provide you like a meaningful edge in like outperformance.
Okay, and the last question, I already know our boss Eric Beltunez's answer to this, but I'm curious on.
Both of yours.
It crypt no direct indexing versus active ETF a compliment or a.
Competitor compliment, a high net worth compliment. Okay, uh yeah, compliment, the the retail the reddit, retail Reddit guy person trader. They don't they don't need that. They want to know where the next big move is coming from and how to play it through leverage in an ETF. No, that's just my thing. I think direct thing is it's great for certain individuals, not for the mass. Yeah, I agree, I think and Eric has brought this up four too.
And obviously you see, like there are five thousand ETFs, right, we mentioned like if you can't find what you need in that five thousand, you know, I feel like it covers a lot of strategies. You know, while it's not like exactly custom, you can pretty much do almost everything right. And it's too good of a deal. ETFs are just sufficient, they're cheap. I just think it's really really hard to come in and dislodge that.
So I'm what's he says? He does the Jerry maguire right, show me the money he does with that, or show me the flows like that? Shout out Derek, Well, this was a lot of fun.
Todd, thank you for being.
R that's my pleasure. I enjoyed this very much. And Nathan, thank you for reading myke ohs for this one. Yeah, I'm glad. I just agreed with everything Tod.
It's said basically, and I also want to thank our listeners. If you like the episode, please share, subscribe, and leave a review. You'd like to see more of our research on the Bloomberg terminal, go to BI fund go for a mutual fund and active research, and go to b I ETF go for ETF research until our next episode. This is David comb with It's that active
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