Fast, Good, Cheap

describe the growth of ETFs. I think the most astonishing way is this bit of data here, which is that it took e t f s eighteen years to get to one trillion in assets, but then it only took four years to get to two trillion. Now they've reached three trillion in just over two years, and they're headed to four in just under two years. So basically, these trillions are starting to stack up a little bit like Lego blocks. Right, Yeah, I mean, look, I mean you've

got trillion after trillion coming in. But and it sounds like, oh, this is a new finance trill industry thing that they're making a lot of money, and it's not true. Unlike hedge funds and mutual funds, which do produce a lot of money for the financial industry, nobody's getting rich on ETFs. Inside the financial industry, the investors are where the trillions are because ETFs hardly charge anything, so ultimately those trillions

are really investors taking their money back. And when we talk about trillions, though, there is some projected growth of how big E t F could get globally bullish case, how how how big are we talking? Okay, so the most not sober cases twenty trillion by the year five. That's from State Street. That's crazy because there's only four point five trillion globally, so that would take a lot of things to fall into place. The more sober projections have them at ten to sixteen trillion in the US

alone in the next ten years. Again, that would take some step up years where you're seeing like literally a trillion flow in in a year. But this year we're almost gonna have five billion common, which is double almost the old record. So anyway you look at this, it starts to look like a hockey stick. And that growth is one of the things we're gonna be talking about here. So before we go any further, let's explain it the

most basic level. What in eat F is, Eric, I know that you like to say that in eat F is like a marriage between a stock, which is a share in a publicly traded company, and an index fund, which is basically a compilation of all those different stocks. Yeah, exactly. I mean I teach the new classes on ets here to new hires, and everybody can identify with that. You show a picture of a stock and an index fund.

And because look, a lot of products that people love and no came from two things getting combined, and so it makes sense. Sometimes you bring two things together, you get something better in the end. Yeah, basically, I mean, take, for example, the Reese's Peanut butter cup chocolate and peanut butter Right, I know you like those, God, I love this. Yeah. Or I mean your favorite band, Haul of Notates, Right, you got Haul and Oats. They are really bad individuals.

You put them together, You've got like a twenty hit songs, so much better together than apart. Yeah, throwing the must fashion, You've got basically a gold mine. The mustache was just gold. So what are the advantages of the marriage in the context of an ETF. So the good stuff people like about stocks, right, You like it's easy to trade, there's price transparency, it's convenient. Right. The stuff that people like about index funds is they're cheap and they're diversified, so

you get a lot of stocks in one shot. Let's actually dwell on that diversification idea for a little bit longer. I like to think of diversification like a carton of eggs. Right, so there's twelve. Maybe you drop that carton and you break one, but you haven't ruined the whole carton, right, you still have eleven others that are perfectly good. Is that a little bit like what an e t F is. My wife would still yell at me for the one that broke, but my issues aside. Yes, that's a great

way to put it. I'm a fan of metaphors, and I think you just nailed it there. That's exactly what diversification does for you. So as simple as I think that sounds, I want you to try and explain it to our producer who we've hired, because she actually knows nothing about E t F s. Jordan, Can you hear us? That's right? I can hear you and I don't know anything, alright, E T S you know, Jordan is basically our audience. Yeah, totally.

So so let's actually like try and explain it to Jordan. Eric, what's an example that you like to use when you're explaining what in the E t F is? Okay, so Jordan's let's let's create a scenario here. Okay, Let's say you live out in the suburbs, right, and you walk outside and you see somebody putting solar panels up on the roof across the street. Which, Jordan, you're from California.

Maybe you've seen that before. I've seen it go down. Yeah, there's solar streets there, right, Yeah, So anyway, you see solar or something going up, and you said yourself, you know, I'm seeing a lot of this. This is something i'd like to invest in. Now, you don't even know any solar stocks. I don't. It's who does, right, So how would you go about doing that? You'd have to go research the stocks and all this Already you'll be like, you know what, I'm late for the bus? That the

hell with it? Well? Eat, yes, make that very easy, because like take the solar energy E t F as a ticker Tan, which is one of the best parts about E T F are these crazy names. Not all the tickers are that good, but that that one's right up there. But Tan easy to remember. But look Tan. What it does is it serves up thirty solar stocks in one shot. Tan does all that work. You buy Tan and then you own those thirty stocks at once.

And Tan's actually a really good example to explain diversification because there was a stock inside TAN called g T Advanced Technologies and it declared bankruptcy after Apple had decided not to use some of their glass and one of the iPhone six screens. So the stock drop in one day. So Jordan, if you had picked that stock, you would be sucking win basically, oh my gosh. But that only

contributed to negative one percent of Tan's performance. So in other words, Tan barely felt it because it was just one of thirty six stocks. And that essentially is why you want to be diversified. So you avoided huge risk of a single stock blowing up, but you also gave something up to right. Yeah, So this is why stock picking will probably never die as an art form because Jordan's let's say you bought solar City a couple of years back, and that went up two in a year,

and that year Tan only went up. So that's the downside is you aren't gonna sort of win the lottery if you pick the right stock. So it's almost like passive investing and diversification is you saying, you know what, I'd rather give up a potential home run to ensure I don't strike out, which passive investing. E t f s are mostly passive. It's also worth noting that that stock got booted out of TAN. Yes, so after declared bankruptcy,

it was gone within a couple of days. That's the thing with e t s. They track indexes, and those indexes have all these rules that look for certain requirements. So if the stock gets weak, declares bank upsee, or just just starts lagging and becomes a bad actor, it's going to get kicked out of the index and replaced by a stronger up and comer. So there's a regeneration process to the index, so you don't have to do any work. So even though you picked it, it's not

just those thirty six stocks in stuck in time. They actually change and regenerate over time, so that you have to worry about it. So, Jordan, do you have a little bit better sense of what ETFs are about? Now? Yeah, I can get an e t F in something I'm interested in, but I, you know, diffuse my risk because of how they're set up, but I also forego my chance that hitting it real big. There you go, she said, diffuse my risk. I think she knows more than we think.

That's pretty good. Did you just pick that up from our little discussion? Wow, Okay, we're on the right track, quick, learner. So Jordan's understands what in e F is, and she understands what TAN is. But Tan's like a really small niche player here, right, Like, let's talk about like the rest of the E t F landscape. Yeah, totally Tan is. Yeah, niche is the right word. But it's just good for

a scenario, you know, solar energy everybody. And she, you know, Jordan's a millennial, so I figured she'd respond to that and she did. Um anyway, but most of the money is going into what we call in the analyst world, plain vanilla e t F s. TAN would be like Rocky Road, a little more exotic, a little more volatile. But most of the money goes into stuff like e t s that just basically tracked the SMP five hundred.

There's a couple of those, Yeah, there's a couple of those called like Spy, Spy, Spider has one, black Rock has one. Their brand is called I Shares, and Vanguard has one. Most people out there probably no Vanguard at this point. Vanguard's a pretty big player in the ETF space. They are only plain vanilla. Black Rock does a little of both, and the same with State Street. But like, take the SMP five majority tfs. They collectively account for nearly one five of all e t F sets. That's

how popular they are. And there's f so just buying the SNP what these things are doing, I mean, that's ultimately that's what Warren Buffett as to do. I mean, just buying the SMP five hundred is arguably the most popular investment move right now. And are these buy and

hold investments or are people trading them? Good questions. So Spy, which is the Spider product that was the first TTF, that one has a lot of liquidity, trades a lot, so that one's used a little more from like for traders going in and out of the SMP five hundred black Rock and Vanguards are a little more used by buy and hold investors. They're also a little cheaper, you know, the low expense ratio attracts more of the buy and hold investors. But ultimately all three could be used to

hold twenty years if you wanted, or twenty minutes. And how cheap are these things? And let's kind of use a real number. I'm gonna say I have, right, sure, how much does this actually cost me? Right? So, say you have ten thousand dollars, If you put that into s p Y, they would basically take out nine dollars and fifty cents a year. If you put it into v O O, which is the Vanguard, they take out five bucks a year. And if you put an IVV,

they take out four bucks a year. So talking about you know, a slice of pizza, you know, two slices of pizza. Maybe not in penn station, but yeah, it depends on where anyway, that's true. So for a couple of slices of pizza, you can have the whole entire stock market. That's a revolutionary moment totally. That That is why these are powerful, you know, explosive tools that are sweeping the nation literally, so you don't have to go out there and buy individual stocks and then try and

like manage that portfolio. You get one thing. Yeah, And you know, when I wrote this book on et f s, the word that kept coming back to when I spoke to a lot of people about the advantages was convenience. And ultimately I went through advantages of ETFs and at the end, I'm like, it's really convenience. I mean, cost is a big one, but you know, people love things that are convenient. Any business if you can serve up convenience and make life easier. I mean, look at Amazon.

I mean it's not like anything to get on there you can't get anywhere else. It's just convenient. And ETFs ultimately provide convenience in multiple times over. So we talked about the plain vanilla side of the et F world. What are some other sides? Right? So you got bonds, right, So bond markets a huge thing, and there's I would consider a few plain vanilla bond e t f s, some that just give you like all bonds sort of all collectively. Then there's things that are a little more risky,

like high yield debt. You know, some people call them drunk bonds. There's an e t FS for that. Then you've got areas like commodities, a big et F in the commodity spaces g l D which basically, you know, you think that some hundred is convenient. G LD essentially gives you exposure to a bunch of bars of gold sitting in a storage facility. So it's like having a way to own goal with having to pay insurance, you know, or to worry about anybody stealing it. Own a vault, right,

No need to own a vault. You can just own a little bit of E t F. Yeah. I mean you're essentially buying shares in physically back gold. So there's a there's basically in g l D s case the gold is stored in London, there's a guy there with a machine gun, probably like standing outside the vault. Um, I'm not sure if that's true, but I imagine that's true. But anyway, it's in a bank. It's a good mental image.

Let's just say it's secure. Okay. You know this isn't like you know, the Pink Panther, where a group of bandits are going to be able to get in there and steal it. But ultimately, and I hope one day we can go look at the gold. You know, now that we're yeah we have this podcast, maybe I'll let us look look at it and then we can interview the gold. Yeah, it's going to be. So that's all domestic stuff here in the US. What about international internationals?

Growing area definitely, And what I find interesting what ets internationally is a lot of them. I mean they all hold local shares in local markets. I mean used to need a broker to get say like local Egyptian stocks, right E t f s do that for you. So even institutions use ets international play, but mostly the big plain Venila international ones are for example, international developed, which essentially is the countries that are more developed, like European

countries in Japan. They all package that in one E t F Vanguard has a couple, black Rock has a couple. Then you could look at something like emerging markets. Those little more risky, but you package all of them together. You get countries like China, right, Brazil, um in some of them South Korea, and they put all those together, and then you can go further out there's frontier market e TF. Those are countries that are like on the like JV of development and that they're not even emerging yet.

And the difference between the emerging markets and that frontier markets is pretty amazing. For the countries that are in them. You've countries that are like, you know, really out there, like Kenya and Vietnam, and there's ets that serve that up. And there's there's et F T tracks Africa, like all the stocks that are in African countries. So you go down the list, I mean you throw out a country,

I can tell you how to play with. The t S is basically the whole the whole world pictures like a rememberable the game risk, you know, you put your little men all over or propoily whatever. The whole world has been e t F I. So if you want to say France, how do you want it? You want individual France ETF? Do you want a Eurozone e t F. Do you want a Pan European et F? Or do you want that in international developed? So it goes from more you know, very narrow, to more general and everything

in between. And now they'll do ones where it's like, oh we'll give you French stocks, but will wait them by their fundamentals. So I think when the average investor, here's something like E t F. Not only do they get a little confused, but they also get a little scared because the financial industry is really good at coming up with scary acronyms, things like C d O S that brought down almost brought down the world with the financial crisis. So they hear E t F and it's

yet one more thing. So, even though this thing has grown so rapidly, I think there's still this apprehension around here's this thing from the financial world. Should I trust it? That's a completely fair feeling for people to have. And I feel the same way. I think the thing with E t F though, is and again, like you said, this is this acronym really the greatest name ever? Maybe not, But the F is key. It's a fund, it's a

mutual fund. In fact, E t F s are registered with the SEC under the same act as mutual funds. You know, some people call them mutual funds with benefits. And ultimately that's important understand because they are not derivatives. They are actually funds. They just happen to trade on the exchange their shares do. And so I think that's a key point to feeling safer about using them is

that they are fiduciary vehicles approved by the SEC. Although I should just sort of evolve what I just said to say that there are some types of products at the fringes. Right. What I just described is basically there's some stuff at the fringes. Stuff that say tracks oil futures or three times leverage dtfs. Those are don't they don't have much in assets, but they do get a lot of attention. But those are not those are not

registered under the forty Act. Those would be called exchange vehicles or or you know e t p s. Those are a little different, and they sort of got under the same sort of tent of e t F. But ultimately I think for most investors they're going to use these, you know, the plain vanilla e t F to get exposures that are more normal. But you know, you will find some investors will be curious and maybe go outside

of that. But those are the areas where I think, especially this podcast will let you know why there's some areas and ETFs that are dangerous where you could lose money. I mean, I'm developing a rating system and I talked about this in my book, where if you rated e t f s like movies, you'd ultimately find there are some R rated e t s. The bulk of the assets and the bulk of the e t s would be P, G and G, but they do go into

some areas that a little more risky. And this is where the buyer beware thing comes in, because you ultimately sort of need to know what you're buying. And the risk here is that everything kind of looks the same. Yeah, and the idea that the whole market has become so easy to buy, no matter what corner of the market you want, it's easy to buy is clicking buy and Microsoft shares. I agree, there is some degree of maybe

that's made stuff that's more dangerous seem less dangerous. But again I take a step back from this because if you look at the assets and e t F that three trillion, almost every dime of it is in stuff that is not dangerous. It's just you know, plain van It's like stuff mutual funds hold. But yeah, at the fringes, there are some products that are beloved by people who use them, you know, stuff the tracks, the vix uh

stuff features. Yeah, there's some there's some stuff that you know you might not even heard of that eat that some ETFs track. But ultimately I think that's why it's important to look at those. But they are not they're the exception, not the norm. So ultimately et fs just made things really easy because you can do all these things that used to be really complicated and now you can just do it on a button on your smartphone.

You know. Yeah, it kind of reminds me. There's a phrase out they're fast, good, cheap, and they say that as a con numor you can only get two of those three things, right, So something's fast and good, it's not cheap. It's cheap and fast it's not good, and so on. And I think, you know, I feel like the you know, there's a couple of things that that basically blow that rule away and give you all three at once. So one thing just personal to me is

Vietnamese restaurants. They really are fast, good, and cheap and E T F S. I. I do believe they deliver all three of those things in almost every case, not every but that to me again, and this goes back to when I got them in two thousand and six. After you start sniffing around them and you kick the tires on them, you realize, you know, they're they're a special kind of structure. So, Eric, we've talked about the growth of ETFs, We've talked about what these things look

like and what's in them. We've talked about the risks. We broke it down for Jordan's where are we going? This is a question I ponder a lot. I think, you know, when you look at the future of the whole, the whole enchilada, right, I think you're just gonna see more and more investors demanding free exposure based or low low cost to the point where it's free. So I think one evolutionary line of e t F growth is going to be what we call a race to the bottom,

and the bottom being good here means zero fees. Right now, like we said, e t F s are three, four or five, maybe six basis points, especially in the plane vanilla categories. You know those are being driven down. They were fourteen basis points ago. Yeah. In fact, they did a study over at et f dot com that showed that the cheapest the e t F portfolio drops by a basis point of year. So right now it's at

point oh six percent. I mean, you can get a whole, fully diversified portfolio ets for point six percent all in that drops a basis point of year, So that puts us on track to have free exposure in the next five or six years. And I think most people think that's going to happen, and that's a beautiful thing. I mean, think about that concept. That is going to up end

the entire financial system. You think, you know Bernie Sanders, he probably wouldn't even even imagine how much this is going to change things, and likely probably just gonna shrink wall straight to a degree because just be way less money. The retail host organism is going to be tiny if people keep going to that point and the people issuing the ETFs are dropping the fees. Why because people are

buying the cheaper ones. If a e t F, for example, goes from tied for the cheapest to the cheapest, I've seen it happen, billions will go to the cheaper one almost nothing like one basis point almost right. Yeah, it's people are cost obsessed, and even we're talking to people who might not even know much about et f s. Something shifted back in the nineties and eighties. It was all about the hot manager, the five star manager. You know, you talk about at the party, Hey, I picked the

best doc, or are the best manager? That's changing now you go. People are bragging about how low cost their portfolio is and how cheap they're getting things. So I think that there's a cost obsession that is just going to continue to drive fees lower on the plane vanilla side, and ultimately that's going to be very tough if you're in the financial industry, but it's going to be wonderful

if you're an investor. So great for investors, and you've got that pressure pushing on this what you'll call like an evolutionary line. There's this whole other evolutionary line though, what do you see over there? So in the play vanilla category, I just think a lot of investors are just not satisfied with say a couple you know, the stock market. It's like okay, yeah, okay, so I got a SMP, I got a bond index, and you know that's good and arguably if you just hold that for

twenty years, you'll probably do better than everybody. But people are itchy, they want to outperform, they want to try to do better. There's a whole group of ETFs being launched that allow you to try to outperform using strategies right there, packaging trades, you've got themes, and that's in

for an analyst. That's where the fun stuff is. To be honest with you, I like covering all the new stuff they're launching, and over there you can charge a little more because if your goal is to kind of beat the market or provide some exotic exposure, something that's new and fresh, Ultimately people are willing to pay a little more. But even fees are still coming down over there. But ultimately I think that is where you'll see sort of a lot of the other like you'll see some

really wild stuff being launched the DTF. In fact, this year's satire is tomorrow's new ETF. For instance, let's talk about whiskey. Yeah, there's a whiskey et F, which essentially is tracking stocks that are in the whiskey production. But you know, honestly about whiskey, even though it sounds silly, there is a fundamental story there. If you look at the stock prices and some of these liquor companies, they've been doing pretty well. There's a global demand for for alcohol,

and the guy who started. The whiskey TF is from Lexington, Kentucky. He's around that industry. So even the gimmicky ones, it's funny. You start to unpeel a little bit and you realize there's somebody who really believes in that industry. Somebody thinks it's a fundamental story. But on its surface, do you really need a whiskey et F in your portfolio. That's where people think it's gimmicky, it's you don't need it.

But ultimately that's an example I think of of the kind of thematic ETF that you see launching a lot more lately. That's one of the things that I think is so fascinating about this particular space is that a lot of these things just started with somebody having an idea. Yeah.

I was just talking to the guy who launched the reverse market cap weight at et F, which essentially waits the lowest stock in the SPF with the biggest waiting, and he said, he just got the idea, and then he back tested it looked good, and so he launched then e t F. Ultimately, this is what I love about the ETF industry. It is the Silicon Valley of the financial world right now. This is where all the innovation is happening from big companies like JP Morgan and

Goldman as well as small independent issuers. I call him the indie the indie guys, sort of like indie rock. Yeah, these are independent issuers. A big indie one that's been hit it big was the robot which is the robotics industry. That e t F is now almost two billion dollars and it just had a good idea these stocks weren't really represented other benchmarks, and then it outperformed like a madman. And ultimately it is interesting seeing some of these smaller

niche independent ones actually work out for investors. And ultimately, I think the idea of outperform warming or having something that's got a little extra juice in it that will never die. Performance chasing is as old as you know the world, and you're going to have people who performance chase, and that's why there won't only be the play ven

la side. You'll also have this side with people packaging everything they can into an e t F. And we just saw one that was coming out, like calling package trades. There's ones that will go long say local stocks, and then short the currency and a good example of one that packaged in actual trade was clicks. It goes long online retailers like Amazon and short brick and mortar stores like Sears and J. C. Penny and that you know, again, you could do that on your own, but now they're

doing it for you. So now you see trades being packaged into an e t F or strategies like value or momentum. There is so much going on, it's it's fascinating. And you you see about four e t F launch a day in the world and about one in the US, so every day there's something coming out. I mean, ultimately, just like apps. You know, there's all these apps coming

out because the iPhone is bringing this to people. All the money is going into et s, right, so that's why you see a lot of innovation and on the side that's more that does more niche stuff. Most of those are going to fail. There's you know a lot of them will just not have any buyers. But for every twenty that fail, there'll be a robotics CTF or a cybersecurity et have to get to billion dollars and that's going to keep this independent spirit, which I think

is healthy for the industry. But at the end of the day, the big money, the real money, it's going to go to Vanguard, black Rock, State Street in the plain videll stuff that costs almost nothing, which brings us back to Trillions, because that's how much money is actually pouring into these things. Thanks for listening to Trillions until

next time. You can find us on the Bloomberg terminal, the Bloomberg app, Bloomberg dot com, as well as on Apple podcast, Stitcher and probably a few other things I don't know about yet. While you're there, take a minute to rate and review the show. It helps other people find us. We're also on Twitter and would love to hear from you. I'm at Joel Webber Show. He's at Eric Baltunas. Trillions is produced by Jordan Bell with help from Magnus the Swede Hendriksen. Francesca Levie is the head

of Bloomberg Podcast. Bye M M M