Hot Takes: The Outlook for ETFs in 2020

end of the year. Market's way up for the decade, but we don't want to look back so much. On

this episode is look forward. Yeah, a lot has happened this year, a lot of unexpected things, some expected things, um, and it's a good time to take stock of that, but also look forward to what you know, some of the smartest people who cover the industry are thinking about looking for and um getting ready for so joining us on this episode a couple of regulars, Rachel Evans of Bloomberg News and Todd rosen Bluth with c f r A, where he's the director of Mutual and Exchange Traded Fund Research.

How many times have you been on the show, Todd, this is my fourth I think fourth or fifth time. I think you get a jacket when you hit the five times club or something year next year. Okay, you and Rachel might be neck and neck for most appearances. I think Rachel has you been. I think I'm I think I'm ahead of the game that Rachel. Okay, let's go eighties. You wanted eighties? Here you god, Rachel is

Paul Simon whoever that was the first five times? Remember on SNL Tom Hanks was he became the second or Steve Martin might have been the second. So maybe you're the Steve Martin, but she's the first. Thank you, welcome to be here this time on Trilliance, the Year Ahead and the e t s. Okay, we've got a bunch of topics we want to run through. We want to start with flows, winners, losers, year decade. This kind of looks backwards more than forwards. Eric, I mean we're sure

we want to do this? Yeah, I mean you have to look back to get a ground of where you're going. I'll just throw some numbers out and then you guys tell me what you thought. I mean, obviously, fixed income punched way above its weight. Why rates fell, I mean, fixed income definitely takes some money anyway, but rates falling is huge because it means bond prices go up, so

that's a big boost for fixed income. Equity had a slow start, but it's coming back as taught as you know, sweating because we have a bet um equity holding its own. And I think also International probably had an underwhelming year, but is had a little late run. But overall, I

think international is probably the weak spot among all the assets. Well, I think, just to give Eric credit for giving us the compliment for choosing fixed income, fixed income ETFs have more money going in for the first time in a decade. As Eric mentioned, it's a small part, it's of the pie. As we're doing this now, there's about a fourteen billion dollar lead for fixed income ETFs that doesn't have been in an environment when the equity markets are up more.

And yes, Eric and I have a bet on this. I brought my chop six to be able to commemorate the fact that we're in the fixed income camp right now. Look, we have a sushi lunch bet Okay, I'm gonna get the salmon Lover special with a dessert of green tea ice cream, and then you're gonna pay for my part in this case, Yes, I will. I might even I might even splurge on some saki. I don't know. We'll

say yea. But here's what Todd, here's what Todd is sweating about that he will not mention is right now, fixed income has a fourteen billion dollar lead on equities. But equity this year, Yes, on average, equity has taken thirty five billion more than fixed fixed income each December. So you do the math. So I'll do the math, and at some point we'll move and bring Rachel into this conversation. But I'm enjoy watching the But but let's

just put it in perspective. Equity versus fixed income flows has been two to one for the last five years. This is rare and it's something we should be celebrating. And even if and I think fixing InCom will still be ahead, even if equity does what it typically does, that's still reason to celebrate. Fixing. Comm ETFs as we look into are going to remain a key part of the portfolio. And I think we're gonna have another rending year in twenty the way that we had in two

thousand nineteen. But I think that's a good point. Like, I mean, if we're looking at the next couple of years, the next decade, even I think this is kind of like sort of fixed income sort of coming of age moment. You know, we haven't seen it kind of taking in the big flows and short you know, the rate outlook definitely kind of has a role in exactly where we're

seeing flows going this year. But just in terms of how people are using fixed in com ETFs, the use of fixing comm ets has really broadened over the last eighteen months two years. You're seeing people using bondy tfs and ladders as a kind of laddering sort of strategy that previously was looking at single bonds. You're seeing institutions using them. You're seeing hedge funds and other kind of

sophisticated traders using for hedging and sort of swaps. So I think kind of fixed in com ETFs are really sort of going to be the whether the growth is in the next decade. We've seen an awful lots of kind of equity so dominant in the kind of the previous sort of decades. I think looking forward, fixed income is is certainly an area where we could see some growth. Next topic returns. Yeah. I mean, well, first of all, just the SMP being up. I know it doesn't feel

like it, but that is an amazing year. I used to refer to seventeen as utopia. This was even better. Didn't feel like it, but obviously you didn't have to do much. This whole decade was just basically like by the market, you know people call it. So it's been very easy to make money. And of course there's some high flyers. Todd, you want to guess what the best performer was over the past ten years? Was it XBI the biotech ets He follows me on Twitter. Um, no,

I did my research, did you? I did my research showing up? Okay, hey man, hat tip to you. That's right. XBI equalated biotech biotechs relentless. It's one of those areas that's just defied the high flying odds. Usually you high fly for a year or two and then you're in the tank the next year. Biotech is very persistent. So but outside of that, you've had some people come and go, but mostly it's been a beta, beta decade. Yeah, but I also is interesting when we looked at this year

and then the ten years. So this year ten, which is a solar e TF that invest Goo offers. I keep thinking of it as Guggenheim, but it's the investigal product now is actually among the worst performers if you look back at decade, So you know, just be careful when you're choosing some of these high flyers and expecting

that they're going to continue to perform. Well, we've seen it with some of them, and semiconductors are on the top of both charts, but there's a number of ETFs that are bounced around quite a bit when you get more niche with these industry oriented ets What other losers stand out? Yeah, the lisers for me, I was I was looking this morning at the moment at this point in the MJ is one of the worst performers of

the year, which is really really interesting. Marijuana it's like such a kind of growth industry and it almost it's kind of like sort of you think it might be more correlated with biotech, just sort of given a lot of it's sort of related kind of like health and medical kind of innovations. But MJ has been doing very badly this year, and it would actually be a second

year of losses. So cannabis it may be kind of a long time trend that maybe kind of a long time investment story there, but this year and last year it really hasn't been the case. And one interesting thing about cannabis though, despite that, you know, really rough for telling you it's not thirty or something. UM, it's pretty much retained a good amount of it hasn't really seen much outflows. This is a good sign, and it's also just remarkable. Normally, when you have these high flyers, the

money sort of follows the performance. But here, yeah, I mean, okay, all right, all right, well we'll we'll let we'll, we'll let that slide. You can. You can't talk about cannabis ets without a pune jumping in too quickly. Well, I will say, I do think some people forgot they bought it. I mean, and I'm not I'm kidding, but I'm not kidding. I also think it's the area that people are in

for long term. But that's kind of interesting. Another area that I thought was interesting that UM symbolized the comeback from two eight is a home builders I t b it just like a month ago past. It's two thousand seven high point. So it made this huge, huge trip down like the Grand Canyon, it's finally come back up. So homebuilders kind of like close the gap on that

story of the financial crisis. And well it's the other strong perform The other peer in that group is x HB And it's a thousand basis point difference between I t B and x HB. So two similar sounding et f s they're both working at. You would have still made a lot of money if you held those products, but a big difference because the exposure between those products are different. As we've talked about on prior Rillians podcasts

that I've been on. You love that, but I thought we're supposed to just pick on the cheapest e t F. Isn't that the rule? Yeah, you're asking me that we had c F. A would certainly disagree with with going against the cheapest of the largest ETF and focusing on looking what's inside the portfolio. Yeah. Actually, you want to get Todd's great on panels, but the way to get him started is just to say talk about everybody going

to the cheapest ttfs. Well, and we can do that, uh, and then we can certainly I think we have on the plan to talk about actively managed e t f s and whether or not they're going to be a star in the next decade. Next topic, let's talking about

the league table for a second. So the league table, we're looking kind of who's taken in the most flows this year, and there aren't really any great surprises at the top, you know, black Rock is still kind of dominant, followed by Vanguard, but the one that really stood out to me actually is a little bit lower down in the in the table, which is DWS, which is Deutsche Banks are newly rebranded or not that newly rebranded asset management a unit. They are poised to snap three years

of outflows. So they have been really struggling over the last few years because so much of their assets were in FX hedge products and that stopped really kind of being something attractive in or so this year they are looking to actually take in inflows and that seems to be mostly attributable to h y LB, which is a high yield et F that's pretty cheap and that they launched with kind of quite a bit of a plum a few years back, and also U S s G, which is an e s G product so they've really

been riding those two funds to actually coming back to having inflows for the first time in three years. League Table jumps out at you, Well, they're bright spot. I mean so two ends of the spectrum. SCHWAB, which is everybody in this room and probably listening knows, made an

acquisition recently of t D a Merra trade. SCHWAB is not approved but not improved UH, and so we probably won't we won't see the impact from a flow standpoint until late but they are the number three provider in terms of flows this year UH, then the fifth largest provider. It's just a sign that low cost products continue to resonate. And then Goldman Sachs UH is top ten flows perspective,

them catching up with what JP Morgan has done. UH. And Goldman is doing this even without having their low cost suite of ETFs that are in the hopper that are going to come out in and they've got some advisory parts of the business that will likely do well. So we've seen money going into GSLC, we've seen it going into some of their bond products as well, and I think they're a player to watch in the next decade um. Yeah, and you know, I kind of divide

the E T F fishers into two camps. Was early guys, you know, like so you've got black Rock, State Street and Guard they taken almost like eight percent of the money. Right then you've got the Wall Street banks, which were sort of like the freshman maybe six years ago, Goldman, JP Morgan, Deutsche Bank. They do very well. They do. They do better than some of these by side firms that have come in um like a leg Mason or an open Him before they got acquired, or Hartford they do.

Those guys get maybe four, you know, three or four billion. But the Wall Street banks have been very good about seeing the writing on the wall and sort of being their own little van guards in certain ways, in particular JP Morgan. So I think most issuers now realize you have to have some line of dirt cheap products to just get in the door, get your call answer, get advisor's interest, and then you try to maybe sprinkle in

some of the more expensive exotic stuff. And they have quickly followed that template, which is basically the Vanguard I

shares template, and it's working. So as you go down you're gonna see I think the next decade I think a JP Morgan, Goldman, UM, You're gonna see a lot of vertical integration, uh you know, Fidelity, JP Morgan, Goldman, Vanguard, Schwab and these guys are going to have the platforms and the advisors also that's just gonna suck in money to their own e t f s And so I don't see anything changing, big getting bigger UM and a lot of the issuers sort of you know, you know

b y o A to an extent, you know, bring your own assets up using their other arms to just pull flows into their own funds. Okay, next topic, because the fee wars are totally over right, not even close, not even close. Let's just clear that all the time. It makes a nice headline. If anybody here rights headlines are is connected to headlines, please let me know about that. Uh So, let's just recap a bit of what happened this year. We had the first zero fee e t

F that came to market from so far. We had negative fee e t s from Salt Financial. We had JP Morgan coming in at two basis points, and to some extent seeming like a bit of a disappointment because there was a possibility that they might go to zero. We've seen Vanguard bring pricing down, We've seen things coming down. We're only in the middle of it, and I think it, as we mentioned, Goldman is coming out, they're not. They're not coming out with low cost ETFs and being at

a premium. JP Morgan has a an EFA based product that's been filed. If it's going to take share, it has to be seven basis points are less because that's what I EFA. What is that? What is EVA mar Yeah? Developed markets, so Europe, Australia, Japan, you know far Yeah, that's it, so you know, developed, none developed, non US markets. But I got stumped on that one. I was ready for, like tickers, I wasn't gonna be able to be prepared

for you. It is funny like you can use an acreative so much and then someone asks you what it stands for. Is possible not to know? But I think I think Todds right as well, just in terms of kind of like the few will continuing, Like I think it's it's going to broaden. You know, we're already seeing it EFA products potentially, but also high yield. We've seen kind of like big fee cuts in certain hi yield products.

This year, thematics are starting to kind of like trend not towards zero per se, but they're getting significantly cheaper. There's still a significant number of places where we could see fee cuts that kind of like see fee compression sort of happening before we really get to rock bottom or or what about below bottom when people continue to pay you. Yeah, I mean we we've already seen the first fund that was well, it's not gathered assets. That's

that's the thing that surprised me. I was expecting we would have seen more money going into these products. Distribution remains a bit of a challenge and a brand name that isn't as well known. But I don't think we're gonna I think we're going to see we should see more of these products. Instead of closing the doors, you should just rebate the fee and hope to get someone

in before closing the doors if it doesn't work. And also I'd argue the fee wars have spread to the commission free trading that was essentially part of the fee war, and it's spreading to advisors. You know, Schwab and Schwab this year announced they're going to be an advisor where they're going to give you a subscription services almost like Netflix, and you add up the math, it's very very low cost um. I don't see this really stopping for a

long time. I would argue that it's almost just beginning. Next what's the future of smart beta. I'm very bullish on smart beta. I think smart beta is here to stay. It's just about cross the trillion dollars and that's that's a trillion dollars the hard way. That's a trillion dollars in the terror dome, you know, after tax picky advisor money um and I think, look, Pete, not everybody wants to just get the the index right. A good group

of people who want to outperform. The problem for active managers is they want it cheap, rules based and tax efficient, and that's smart beta. Us m V is a great example the low vall minimum all et F from I shares what is it, fifteen basis points, So it's under that magical twenty basis point figure where most of the flows go and you get a chance to do something better, maybe a higher sharp ratio. You can talk to your clients about something that's a little more you know, sophisticated.

UM I am very bullish on this. It's just a great deal. The value proposition is there. I think investors have been bullish on it. It's now the third most popular HTF in terms of flows having a great year. It's you know, having what side of the pie is that now the pie? But that's about where it's been. Well the pie is continue with the pies to keep

up alone. Yeah, i'd say a fifth yeah, yeah, but we and what we're seeing is this year we're seeing even though people shouldn't be buying just on past performance, they will buy based on past performance. And two thousand nineteen has been a good year for some of these

flagship products. Us m V is keeping up with the broader market, lower risk and yet outperforming some of the multi factor e t s. I mentioned g SLC earlier, but O mf L, which is an investo multi factor product John Hancock's multi factor product j h mL on that one is also performing. I think if you're going to pay a little bit more than a market cap weighted portfolio, you want to hope that you're going to keep up with a broader benchmark and perhaps even beat it.

And that's working out in many cases. This year and that sets up well for for the future. Yeah, I think it's it's gonna be interesting to so see how these products to continue to evolved because a lot of sort of the main kind of areas for for creating

products have now been taken. But the key thing from my perspective is to make sure people keep looking under the hurt that should speak to you to your kind of focused taught on this as well, because a lot of these smart beta products are very different to one another, yet they sound very similar. You know, we've talked about this in the past with people a way that they're calculating value from one product to another is quite different.

So I think it's just important these products and you have those returns and that can be that to eric shiny object effects that can kind of let lure people in. But if you if you are buying one of these products, you should know exactly how they are calculating the particular fact that you're looking for exposure to. Um. My colleague Ethanacios in London did a study on the rolling twelve month return of value et f s and found that they normally have a twenty percent gap in one year returns,

which is still pretty significant. But in two thousand nine, when value came roaring back, there was a nine percent gap between the best performing value et F and the and the worst. That is astonishing to me, and I have a theory that right now a lot of the value and smart baty e t F to get them money are the ones that look most like the market.

They have a lot of beta low tracking error. I think when there's a sell off for some turmoil where value comes roaring back, the more pure ones will have their shiny object moment and have their day in the sun. But as Rachel mentioned, what goes up usually comes down, and I think that now would be the time maybe to look at a more pure one, given that beta has had this long run. But most people again look in the past, and they keep buying the sort of water down value ETFs like VTV and i w D

shiny objects thematic ETFs. Let's talk about that for a second. We talked about pot already, but there's some other ones. We'll just put it in perspective twenty. About twenty billion dollars are in thematic oriented e t s and there's about a hundred and twenty or so of these products they get a lot of attention because of as you mentioned, the shiny objects. So we now have six cannabis ETFs.

We had one when the year started. They're all underperforming the broader market because the socks inside them have have done poorly. We've got a whole range of video gaming oriented ets. Look at him, I knew he's gonna trash on the video games. I'm saying, there's three hundred and fifty large cap quality ets. Do we need a three D fifty first? Though, I'm not complaining that we have

these products. I think what's great about it is, as as Rachel talked about earlier, what is inside these portfolios is quite different. The definitions between a product like NERD and E s p O and Gamer, they're performing quite different because they are quite different from what's inside. So thematic is a great area to invest from the longer term. And you've got some mid size and larger players that

have that are playing within this space. No pun intended, and but what we are seeing is that how they interpret the theme can be quite different. And so when you have more only one of them that you just buy that product. But when you've got four or five or six of them then the homework is needed. Well, I just hearn a little bit of on the on the whole kind of UM thematic complex if from a UM but just because the assets have been relatively static

this year. I mean, we did see this really exponential rise like for a couple of years, and then over the last sort of eighteen months or so, it's kind of plateau. We've seen a little bit of a drop with the market, a little bit of a rise as the market picked up, but it's it's pretty steady with

where we were this time last year. And I think that's a little bit of a question mark really for for kind of issuers that have been coming out with these products, like how do you actually keep gaining assets?

Has this reached the top for now? Like the the ideas are all there, they're all good ideas and have a kind of truthiness to them in terms of like what's going to be going up in the future, but they're they're not actually sort of like really bringing in assets in the way that they were when you talk

about that plateau. And I think that's interesting. UM Robotics to me sticks out that definitely got a haircut this year in assets because the performance faltered, think it had four or five billion outstand like one or two, and I think that's sort of what happens. They'll they'll rise, they'll get X amount of dollars and then half leaves, and so that's part of the sort of topsy turvy nature of thematic ETFs what they do though that A couple of things I think they're the advantage of is

a you can understand them. The truthiness is definitely something you need to worry about, and how they're designed. But advisors having conversations, as our guest two weeks ago or a month ago called it conversation alpha. An advisor can talk about a story with and that's good for the advisor. So that may not even be a natural reason to buy it, but that's just a reality. So I think that conversations happening on these areas a lot of times.

They don't track stocks that are in the big indexis takes a lot for a big index to take in a new stock, so you can capture an area before. And the third thing is we talked about XBI is the best performer in the decade. It's a hundred percent more than IBB, which is the other biotech ETF that market cap weights, and a big reason is M and a pop um if these things go to mid and small caps a lot of times in the marijuana has had this a couple of times, they will own just

randomly own a small cap that gets bought. So you have a little M and A action in there, which I think is an underrated part of them. But that's it. I do think they'll be niche. But remember everybody's on and on on about E s G that has Third Team billion. This has about fifty, So I think fifties pretty significant. But yeah, it's nowhere near like say a smart beta with a trillion. Okay, let's let's use that moment to transition to s G S. Let me start,

because I'm so hot on this right now. Look, I've been in this a lot. I have found that E. S G. We've always look at the assets and like, why aren't they gaining assets? That's been a question we've But recently I've looked at the actual stocks in the in the E t F and I've found something that's just stunning to me that just apparently nobody really knows about, which is there's a lot of stocks that don't make these funds that you would shock people. I think Amazon

semi shocker. And then that brings to the question is how many people who are thinking of E s G are willing to forego the next Amazon that's a thousand percent gain over ten years in order to sort of do good. I think there's a lot of slacktivists or tourists who probably don't have the stomach to withstand what could be potential in the performance. Another example is Berkshire Hathaway. Warren buff has just said I'm not filling out your questionnaires.

His board is not independent, but he says independent boards aren't really independent either. He makes some good points, and Berkshire is unless e s GT S and Exxon and who doesn't want Warren Buffett in their portfolio. These exclusions bring up really interesting questions about the metrics used and what's in what's out, And I think there's a lot to sort out here. And you know, they could outperform,

but they could also underperforming. You have to be ready. Well, the same screens that are being done now for E s G are being the same approach to it is being done for value oriented et F. You know, VTV value UH In undervalued securities or growth oriented ones, you don't get the full market, and you are likely to underperform or outperform based on what's inside the portfolio. So yes, we knew that what's inside these et f s is

not the broader market. But what I think is appealing about some of the newer products that have come to market that we don't have that longer track record. You mentioned the DWS product U S s g H s U s L, which is another I shares product that's tracking the same m M s C I index, s n P E which is another product that's tracking the S and P index. They're more inclusionary and so companies make it into the portfolio as opposed to companies being

excluded from the portfolio. They're more sector diversified, and they cost nine ten eleven basis points, so they're close to the overall market from an index perspective. They're gonna be niche initially, the same way that some of these thematic oriented ones are. I think we can't get our too far ahead of it as to how much money is going to go in, but we are going to see more money going in as people care about this are you supposed to use this in place of your whole

equity portion of your portfolio? Well, I think over time that there are people who are doing that versus then again, it's so crucial to understand what you don't own. If you use it as an overlay, then what's the point because then you already own those other stocks anyway. And so I think the difference between E s G and and a factor focus fund is that the factor focus

fund is is looking at something that's very measurable. You know, it's look, let say, kind of you know, whether a stock is undervalued versus the rest of the market, and it's looking at sort of price to earnings or something

like this. You know, these these E s G funds are are largely based on ratings, and the ratings of these companies is actually pretty oblique, Like it's quite hard to find out exactly what criteria and exactly how certain kind of like factors and how a company is managed or what it does rolls up to this overall rating and how that then gets incorporated and into an index. Believe me, I've tried to figure out. It's quite complicated.

So I think there is kind of like a few question marks there about kind of how some sort of companies sort of like end up being sort of very low rated and others end up being very high rated, and then how that's been kind of like package altogether.

Like certainly, like you know, this year, we've seen kind of huge amounts of inflows into EARSC funds, but it is really kind of like those those big funds that have kind of like marketing powerhouses behind them, you know, your black rocks, your DWS is that really can kind of like throw money and making sure these funds are

in the right place. And let's not forget that those two funds, which are now I think the second and the third biggest EARSC funds in e t f s in the in the US, are both backed by I think it's a finished pension fund. So we're not talking about a huge amount of kind of retail or diversify money coming in. It's still fairly sort of sporadic investment in these products. Next worries about e t f s

are those going to go away? So you know, I'm in research and a lot of the analysts I work with they'll kind of like you know, kind of complain a little bit about earning season, because it's like the same thing every quarter, the earnings. They get busier, they gotta work a little longer, and I'm like, myth busting is my earnings. Because about once a quarter someone says something and then everybody forwards me the email. I'm like, okay, let me write our sort of response. The last one

was Michael Burry. This was a huge one, and everybody thinks this guy is great, right, this is the guy Christian Bill portrayed the big short. He even said they're the next cdo, which was just really damning, and that was one of the worst I've heard in a while. But um, I wouldn't expect this to slow down. I think to a degree. There's some that are going to

take be be taken more seriously, like Michael Burry. Um, and there's some that I think you need to just say, Okay, this is a guy from this active shop who's like one time there was a guy who called them weapons of mass destruction and I looked at who the source of the article was, a guy un performing his index by and I'm like, all right, come on, like this guy probably shouldn't be the guy quoted on this that said you know, like I said, I do think E t F s you gotta there's a couple of things

that are more legitimate. They could be brought up less, but the illegitimate ones seemed to get brought up more. They're distorting fundamentals. Everybody's going to their weak hands. The opposite seems to be true. So look that people are gonna worry. I think they're not perfect. You have to decide what you would buy the stocks and bonds yourself, use a mutual fund or using E t F and then take it from there. Rachel, Yeah, I mean I think this is kind of a sign that the ETF

industry is being such a success. Really, you know, it's past four point two trillion an asset, and I think active managers you know, obviously see that and I'll certainly to some extent threatened by that. So this, I mean, this is the fact that people question kind of the basis of the industry. I think it is actually a positive thing because the more people talk about this, the more opportunity is there are to educate about what are the real and what are that the potentially not real

risks out there. So I kind of us of all these question marks as being a positive, and I think, you know, any sort of attempt to kind of you know, dial those back would be bad for the industry. It's good to have people that are asking those questions, holding the institute to account and making people educate in a more articulate and more thorough manner to actually make sure

that everyone's the questions are addressed. Wow, Rachel had a cup of sunshine this morning, because I love the opportunity to educate and have a rational conversation. But eats distorting the market, and weapons and mass destruction, those are not things that normally you get said. Macy's is one of the worst performing stocks this year. It's in the SMP five hundred. It's down something like You've got semiconductor stocks that are have doubled this year, also in the same

SMP five index. If money is driving and distorting the price of these stocks, that God help these companies. If they were not part of the SMP five index and they weren't being propped up by by having ownership within I, v V and v OH, the market is not being distorted by the et F. It's gonna be interesting to see what happens. And in a downturn. I mean, because there is this whole kind of and some people would say this is a myth about this idea that you know,

a t s haven't been tested yet. Now I think the jury is a little bit out on that. We have definitely seen tests. However, until we see something of the kind of magnitude of Lehman, and no one is going to be satisfied that the test was big enough

for that when the assets have been large enough. So I think it's gonna be interesting if we do see a correction to see how the market does, because it might put some of those concerns to bed or show that there are market structure issues that still need to be fixed. Post August. Yeah, I would agree with that. I also think that mutual funds in a downturn, it's going to get interesting. Those are the bond funds have gone into more liquid stuff to outperform. That's gonna be

tough to sell. And also think just generally, people who were are in active mutual funds were likely put there by their broker, and people who bought an e t F for an index fund bought it themselves, and I think they're going to have a little more loyalty, and that's why you tend to see them not panic in a downturn. So far we've seen them largely hang in UM. In fact, they'll take in money net, So I do think that matters. The loyalty and the commitment to that

low cost long term story I think is stronger. I think active mutual funds you could see some really wild things happen if all the boomers who were already you know, getting up there in age, plus the market downturn, I'll try to sell their what fifteen trillion of ACTI mutual funds or a portion of it. That's a lot more selling than a t F S could ever drum up. Talking of things closing, let's talk about et F closures as well as launches. What's left a lot of closures

this year. Death is a part of the part of the industry. It's just this part of life. Death is part of life, and UM I salute it. I think it's good to get these UM non traded duds off the market because if you put a market order in overnight, it's possible you get hit at a bad price in the morning. So I just clear them out, except you know, admit, defeat um, and there's a lot more. I think also the fee war that Todd mentioned earlier in the year

has scared investor issuers, made them think twice. I think the spaghetti bazooka or cannon that Ben Johnson from Morning Star free is a great phrase. I think it's kind of turned more into a rifle. I think they are throwing spaghett at the wall, but it's a little more targeted these days, a little more thoughtful. The launches just don't seem as as wild as they were, so I think that's just maturing industry. Well. A couple of things

to add to that. One is that we used to be roughly three years before in et F would have a chance and then see what would happen uh, and we're seeing that sped up to some extent. There's e t F that have launched in two thousand nineteen that are already will be closed by the end of two thousand nineteen. That's a very short shelf life that's out there. But we did we ran some data using what we rate at c f r A, and there's a hundred and seventy five e t F s that are more

than three years old. That have less than fifty million in assets under management, which is sort of the threshold, right which it tends to be the ballpark where it is, you know, fifty or a hundred million. You know, it tends to be the thresholds where it is. So these are products that have had it hands for success that have not been able to do. So there's some wine ups that are out there that probably would shock people that that still have a place on the shoulder. Could

be a calling. I think there's going to be an ongoing calling. And as asset managers decide what are their priorities for and as we get to it the new active, non transparent ETFs that are coming out, if you if you offer those or you plan to offer those, and you offer some of these products that have no money in it, you want to put your bang where your

buck is. Yeah, And I think that's kind of a positive, right, you know, if we start to see less froth in the industry, I mean Derek's it's like it's kind of a pruning of the industry more than kind of like a sign of failure. But we were seeing some pretty

kind of crazy launches out there. Some of them are still in the market, and I think, you know, any kind of like sort of reckoning where we see some of those slightly more out their products sort of curved, it has got to be kind of a positive in terms of the long term outlook for ETFs and making sure that people are in sensible smart investment strategies rather than fats speed round Bitcoin. We're gonna see an e t f UM. James safered on my team is up

to odds. I'm I'd be in that ballpark because the SEC just approved an interval fund that uses futures. I think if they do approve, then they might start with the futures et Fdhlia Blast came out with some interesting comments that said, every time I've given odds, it hasn't happened. So um, you didn't give him? You give James God, I feel like I come every time and I got asked this question and my answer still is the SEC doesn't seem comfortable. I don't think they're gonna get any

more comfortable about fraud. So no, I don't think it's gonna happen in WOWO. Well, it's good. We'll see what happens. We'll have Todd back if it happens. Okay, the answererce, what is that. I'm gonna throw this to Rachel. She's the source of the term, and I love. I think it's gonna happen. Good dame, We're making it happen. Making the name, not the success. That's a whole different stat is active non transparent UM so active non transparent answers. I'm trying to get this to be a thing because

it's like spiders and vipers, you know. UM. It is basically kind of the idea that you can sell an exchange trade of fund that doesn't disclose its holdings every day. So instead of kind of the daily transparency that we sort of see from most ETFs are currently out there, you would have kind of more of a mutual fund esque disclosure. Now, there are a few models out there that would kind of give different ways of doing that.

Typically they fall into kind of like the proxy model, which we've just seen approved Fidelity t row Blue Tractor, and the Texas UM all the kind of indicative value model that Presidian has been pushing. We obviously had dam a capon a few months ago now to kind of talk about that. So those are kind of like that. The models are out there. We are expecting to see the first funds launched in Q one of next year.

And the big question from my perspective is really kind of like whether we see investors kind of moving into these products. I think there are some philosophical questions about whether investors really want to go into active now if they're not there already, and of how sort of putting in an e t F wrapper will make it more or less appealing. So that's a nice transition to there's some regulatory stuff on the horizon here. How do you think that's going to implicate? Uh, what are the implications

for that stuff? Well, we believe that we're going to see success. I think that we've we've got the approvals so far. We think we're gonna make it's gonna be easier to launch in e t F than it ever was beforehand with the et F rule going into effect at the end of this year. And we think that firms like Fidelity, like tiro Price, that have strong brands in active management, that already are a relatively low cost provider, that have strong track records, they're going to be able

to have some success with these products. You know, Fidelity gathered three billion dollars of money into their E t F s in two thousand nineteen without their flagship active equity strategies being available. We think they're going to have that and then some going forward, right, but that fidelity, it's only three billion b those A lot of those are the cheap sector ones, low cost, which brings me

to the three reasons ants will struggle. Number one, Active transparent already exists, been around for ten years, and all through those ten years they now have managed to scrape up point four percent of totally t F assets. It's it's like nothing. Nearly every dimond flows goes to E E t F charging twenty basis points are less. These are all going to be above that important line. Number three, A trillion of outflows from active equity mutual funds over

the past few years alone. Those are really hard, almost insurmountable. And then there's the anecdotal. When I talk to advisors, they'll say, yeah, look, um, I know some managers will perform each year, some funds will do better. But the problem is I don't know ahead of time who that will be. And by if I chase ones that already did a lot of times, they won't persist and then I'll lose more because I bought at the top. And so the persistence has become such a damning mental state,

uh for the advisors. So whether the hard data matches that mental mindset from advisors and night Like I said, there's probably a couple of hits, but I see largely a lot of struggle. And we've seen big issuers come to the ETF industry and get humbled. Well, we've also seen big issues come to the t F market and use their scale to their advantage because to do that, but like a JP Morgan and a Goldman, it's a largely because they followed the vanguard model to a degree.

If you're coming in with ants at fifty basis points since your value or growth active fund, that's a whole different story. Who's been successful with that? That's the thing. We haven't seen that. So your ten years of history. The providers that were out there a long time ago in the active equity space are not providers that are household names that have for that. Who's a household name? You mean the brands, not the people, the brands, the brands.

So the brands that are act there, you're not mean blowing your manager into it. You're going to get the tax efficiency benefits. I've gone to many events that are held by asset managers that the primary audience are existing mutual fund investors, and they need to be educated about et s. The other thing you have is demographics. A lot of the big mutual fund esters are boomers who are, if anything, selling to give to millennials who are not

mutual fund investors. So there's that other larger drink, you know, headwind on this whole situation. Eventually, if you label something as an e t F, those those millennials might be interested in it, whether it's active or paths. That's a good point. I think it's gonna be a distribution kind of challenge. Really. It's like it's it's going to be like the marketing tactic is going to be to emphasize how the strategies are different and how the content is

superior to the pass if I would imagine. But I think in terms of the actual success, it's going to be can you get that into the hands of investors and present it in a way where it can compete alongside mutual funds which they may already own, or e t F so they may be a bit skeptical. Well, I think that's the challenge if I can real quickly on it is the distribution. So will brokerage platforms allow these to go sit side by side with the mutual

funds alternatives? I hope that they will. I think that they're going to understand that this is a different product from the same asset manager that they were familiar with. But if they're not allowed on these brokerage pot forms, then you're gonna be the same thing, like the low salt ls LT product that's giving away money and still can't get money coming in the door. Um. I had a real quick one for for you guys, and you

can weigh into dull if you want. Um yeah. Um. If we look at the top E T S by flows over the past decade, uh, this decade, it was I V V and VOO at number one and two. The in the outs or outs it was a SPY and e F A, and in the nineties it was SPY in qq Q. But largely the top five and ten lists haven't quite been the same. They've been different each decade. What's an E T F or two that you think could just end up being one of the

leaders of the next decade. So I think A g G uh So this is I shares core bond ETF I mentioned earlier, bond etf are gaining market share. We think they're going to continue to gain market share, and you're going to see roughly at some point more of the asset allocation that you'd have with the equity and fixed income. Everybody owns the AGG. Whether you hate the egg or not. People still own NIAGG. It's from my shares and it's all costs, and I think it's going

to be extremely popular in the next decade. I tend to time in with one. I'm not going to pick a favorite, because I shouldn't play favorites, but I would point out that, I mean, if you look at kind of like the top flow in takes this year, B N, D G, O V T T L T I E F and M b B and A G G just outside all kind of like big bond funds that have

been kind of taking in significant flows. To my point earlier, I really do think like in the next decade is going to be about fixed income and people using that more and more. So I think some of those broad bond funds will be great for buying a hold investors. And I think you kind of also got to count out some of the ones that traders are going to use.

If we do see kind of institutional and tactical traders kind of using e t F s more in place of kind of swaps and options and other kind of derivative type functions, then I think some of those products have the potential to end up with a lot of assets, you know, just because people are using them so frequently. And I'll trymem in with a couple, Um, you could see what going to like skip me there. Oh sorry, geez, geez, geez. Sorry, you know you were on your phone. I know, I

know that's his research. So I actually think, um, you know, I know you're cool on the E S G thing that I think the between E t F s and the millennials and being able to actually like put your money and things you believe in. I don't know if it's gonna have like it might not take on agg I totally think you're right, it's probably one out there.

But the fact that there are like low carbon E t F that track the benchmarks that they're up against and have a fraction of the carbon footprint at a moment in time when we we think that, you know, millennials are going to probably invest some money into causes that they believe in. I think that something like that, like that, what's the m s C I, the I shares,

MSCI spy X. I think that's an interesting play. I don't think it's gonna be like a number one thing, but I think if it's like you're passionate about climate change, you actually have an ability to like invest in stuff thing that might feel good. That's a good out of the box answer. Um, it's inspired. I like it. I

don't agree. Okay, I'm going with B y O A. I think you're gonna have this vertical integration and like six big companies start to control most of America's money, and I think you could see s c h X, the Schwab large cap sort of rise above and really start to challenge the eye shares and vanguards of the world. I also think you could see something like a beat towel, which is the anti beta. It's possible the whole next decade is just rough and things that are supposed to

go up when the market goes down go up. Maybe some alternatives you could have gold up there. I will bet you will come back here in ten years and I will have the susy lunch of my dreams that beat Howe will not be within the top ten of the list. I will pay for that lunch. Okay, yeah, I don't think so either. I'm saying something that does the opposite of the market. I'm not s h something could be a deep value. Who knows value, by the way, is just do for a long, long stretch, We'll see.

I'm just saying something out of the box that's um, you know, not what you'd expect, not the cheap beta, typical fair. And on that note, we have another year decade since seeing him. In ten years, it's just an interesting visable. I can't get out of that in my head. It's like I have no hair. Now it's gonna have hair. It's gonna be swinging. Todd Rachel thanks for joining us, Trillian,

thanks for listening to Trillions. Until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and Warbelis you like to listen, We'd love to hear from you. We're on Twitter. I'm at Joel Webber Show. He's at Eric Faltrins. You can find Rachel at Rachel Evans Undersport, n Y. And you can find Todd rosen Blues at Todd c f R. Trillions is produced by Magnus Hendrickson. Francesca Levy is the head of Bloomberg podcast by