Inside "Inside ETFs," Part II

just big trade show, big trade show. It's you know again like last year, I called the Comic Con of ETFs. So last year you took your microphone and we did a little episode and this year it was a really Last year it was fun. I like that one, so we wanted to do it again. Yeah. No, I think

it's good. It's just a little little sound bites. And when I'm walking around, I'm busy, but I can get somebody for five minutes or less, and it's just a convenient way for me to get take a swab and try to uh, you know, give you a little taste of what what you missed. That's nice. I like that. What what was the theme of the Petrie dish this year? Um? You know, again E s G is relentless. The issuers are very excited about it. We'll go over that in

a minute. UM. I don't know how much the actual investors like it, but um issuers are into E s G. There was some still, like I guess a little hangover from x I V implosion and whether these exotic products are suitable. UM was like a year ago, right, that was a year ago, but there's still now there's downloads, defined outcome ets. There's still a lot of I don't know,

like power tool type products coming out UM. And then there was I think a lot of Thematic was a big one because again there's been some good money into them ETF. So that's where a lot of the smaller time people are excited, you know. And we have a couple of clips, clips of people with you know, basically an index, idea and a dream and they go to this event to try to hook up with an issuer. Oh, by the way, since last year trillions was brand new while you were at inside e TF, what do people

have to say this time? UM, so last year not so much. Maybe one or two people this year a lot more I think. You know, obviously issuers will take notice because they want to come on and promote stuff. So I'm not taking all of it. It's not all

going to my head. But there was some one guy in particular stop me and said, listen, I just was moved over to the E t F team at this big company, and um, I didn't know a lot and I sort of listened to your podcast, and I gotta tell you, like, I was not happy about being moved, but like your podcast really made it accessible fun, I understand it better. And now I even got my wife into it, and you know, she we both really love the R two Dad's episode, which continues to resonate. Um,

and that was really great. That was the one that stuck out, and I was just like to get like that kind of heartfelt compliment about it. Was nice. I gotta tell you so, because we worked hard on this. So this time I'm trillions Comic Con of E t F S Round two. All right, So you went around inside et F with the microphone sticking in people's faces. Who were getting here from first? First is Ben Johnson from Morning Starting. Now we heard from him last year.

He is my peer, kind of my competitor, but he's very articulate and um I just asked about a couple of the bigger sort of themes that were being buzzed out at the conference. The first one is on what one of the main presentations was on was what comes after the e t F? The e t F disrupted the mutual fund? What's going to disrupt the e t F?

And Dave naten Egg and Matt Hogan speculated that the disruptor would be something called direct indexing, where you just basically fill out some form and you get a basket of stocks that's right tier liking because the E t F is sort of like you have to take what's there.

But Ben is skeptical. Here's what he has to say. So, direct indexing is approach to creating portfolios that treats everyone is the unique snowflake that they are, that creates a very specific portfolio to meet their very specific leaves, which

in theories a great concept. It's an interesting concept, but I think in reality it has the potential to walk back a lot of the progress that investors have made over the course of the past four plus decades, driving towards ever lower fees, ever, greater transparency, less complexity across the board, and fundamentally lower costs. So to the extent that you take this wonderful rapper, the e t F that we've all come down here to Florida to worship too for every year for ten plus years now, I

think it could actually be detrimental to investors. That was a rain cloud. Well on their presentation. He was sort of saying, don't you know the e t F is going nowhere? I know what he's saying. Look, you can get an e t F now for four or five whole You get a whole portfolio. The world's cheapest TTF portfolio is now five basis points. That was another presentation.

That's an amazing thing. Direct indexing would cost more. The selling and buying of the stocks would create potentially capital gains which get are eliminated because the creation redemption mechanism and the E t F. I agree with them. You know what Ben was saying, and I agree is the mass customization is your portfolio using E t S The fact that you can get anything in the world now.

He equated it to going to Chipotle and like picking out all your ingredients, the ingredients or the E T F s. What Dave and Matt were kind of saying was like, maybe you want to like really get specific about the pork, and maybe you wanted from a certain you know, distributor with a certain uh, every ingredient of that particular ingredient would be your customized to you. I don't even think people care that much about that level

of detail. I think an E s G that is maybe where they want that kind of customization because it is so personal. But I think if your portfolio, i mean, look a total market, a total bond, I think most

people were just fine with that. Isn't it interesting though, how the word direct has a little bit of buzz to it because you know, in in I p O Land, which is what you have historically done to go public, Spotify last year did this direct listing thing and basically said we don't need this I p O and cuts out a bunch of fees and everything else, and and it's a little similar and that it harnesses the fact that at this day and age, people can just take

things to market places with a different vibe than they've previously been able to. Yeah, there's just you know, the fact that these e t f s are on in exchange. You can trade them there regulated by the SEC. They're in a pretty prospectus rapping a lot of that official nous and liquidity is don't It's gonna take a long time for that to go away. But Matt and Dave are as sharp as they get, and you know, you gotta. Their presentation is always provocative, and it was again this year.

So it's food for thought. Okay, now we're gonna hear from the legendary Paul Tutor Jones, who I um he spoke and then Paul Tutor Jones, the hedge fund manager. Jones got Jones, Yeah, he was up there presenting on

e s G. He is all in on this. His company has built an index that a Goldman Sachs et F trap tracks with the ticker just and what I found interesting about his presentation was he doesn't do e s G like a lot of the funds, and a lot of the funds have their own special way of e s G. So I asked him about how he kind of puts worker compensation above climate issues, which most e s G might not do that, and that's why Exxon lands in his e t F just which a lot of people would be shocked at exons in your

E t F. He justifies why. Oh and by the way, if you hear some dishes in the background. I after his presentation, I went backstage and uh, we had to go into the kitchen area, so it could be a little clangy back there. So just f why, Hey man, I'm working hard for the team here. The biggest difference between us and other e s g s we had no negative screening. So we listen to American public. The

American public says climate changers are really important. But you know what, someone making a living wage, having being treated well, having a decent income is two and a half times support his climate change. And so again what we do is we listen to American public, and just because someone doesn't score great on climate change isn't a reason to exclude them from other things they may be doing great.

Exion is a great example. Exxon has the third highest pay UH in the oil and gas industry and the energy sector has the third and they have tenuere track record of the greatest gender equity screening, so that they're making sure they have a diverse, diverse workforce both on race and gender, virtually anyone in that whole sector. So it's not just about one event, it's about our one factor.

It's about multiple factors. And that's why this is such a great et F So I hadn't heard about just what's your take on it when you look at what it's holding are I? Well, look, I agree with him. I do think workers compensation, quality of life. He basically showed a chart of what people think is most important from companies, and that's how he designed it. And the public is more concerned about workers compensation and treating people nicely than they are about the climate right now. So

he's basically doing it structuring it that way. And I gotta tell you, this guy was very convincing. Um that's why he's probably such a success. The guy next to me, he sat down, Um, he goes. I gotta be honest, I was. I was pretty skeptical, but he kind of sold me on this and I told him that afterwards. He was pretty pleased by that. But just as off to a good start. I think it's about two million. That probably ranks it in top seven biggest d S

g A t F S already. But he's ambitious. He wants this to be you know, a huge e t F billions of dollars. Uh. He's pretty aggressive, grassroots sounding for you know, try. He wants to take the fight to the c suite, make them hear people, and he thinks that you know you're by investing in that way, that's the best way to send them a message. And Excellent is not one that you would maybe expect to haven. And he has lens right, yes, And that is why I find it so interesting. What else is in there?

You know, it's a lot of the tex stalks. Like I looked at it recently, I think it's like Google's in there. Um, you've got um apple. Most of them are ones you tend to see. But again, Excellent sort of you know, sticks out like a sore thumb. But he just you know that he's in there for a reason, according to him, who're gonna hear from? Next? Okay? Next is Perth Toll. She is one of these people who

has an index in a dream. So she was there, you know, to do a lot of networking and she just landed a deal to get her index with an actual e t F and she found her first like anchor tenant or client like seed capital. And so she talked a little bit about what what this new ETF will do. So she had the idea for an index, and now she has to go around finding how do I get a wrapper for this? Yeah? Her index is

freedom weighted Emerging Markets. Yeah, so we are instead of market cap waiting the emerging markets, we freedom weight the emerging markets, which means we're looking at seventy nine different freedom variables and getting a UM composite country score and using that country score UM that freedom level to wait and select countries. So our country weights and country selection

comes from freedom waves in those countries. And that freedom weight comes from UM three different categories of freedoms, the rights of life, the rights of liberty, and the rights of property. And what made you think of this? So I grew up in China, and uh, I grew up, you know, half in China, half in the US, and I saw some things. UM when I went back to you know, live in Hong Kong and traveled a lot to mainland China over that time. UM, that made me

realize that freedom was important for a market. And UM, I saw the difference between the mainland Chinese market and the Hong Kong market and you know, frankly the US market and just noticed that freedom has a huge impact on market. So that's a fascinating idea that that markets are better off when they're free, right, and that there's

different types of freedom that she's come up with. How do you think that's gonna work in an e t f Uh, We're gonna have to see she you know, she's basing it on the more freedom, the more democracy, the better capital markets do. So look, the performance will probably drive most of the flows here, but I just love that this is I love this part of the ETF industry where somebody who has a real life experience that's you know, across borders comes here and turns it

into an actionable idea. It's very Silicon Valley esque. And you know, you don't get these kind of stories at the big issuers very much. So there's a lot of these small indies I call them who are just on the grassroots with a you know, an idea, looking to get it going. And you know a couple of them will will become hits. So so you got like China, Mexico, Nigeria, and how do you put all those together? Well, clearly, look, most emerging markets ttfs are like twenty China. This will

be something else. There are some fundamentally weighted emerging market tts or that do it different ways, where China is a lower weight. UM, so I would imagine it would look something more like that, and so you'd probably be looking at if one of the countries that wasn't China did really well, you would do better. My guess is this thing kind of fluctuates and performance and it probably will catch some people if it has a good run.

But I do think that it's an E s G play like it can appeal to the E s G investor in the into the in terms of the emerging markets. Okay, so we've talked to Ben and bottle Lightning with a big idea. Who's next. Next up we have is Michael Steele Um if you much MSNBCU, he's on a lot um. He's the he used to be the chairman of the GOP. I believe he was there with Donna Brazil doing this just sort of like political roundtable. Not for nothing. You've

got some names I did. He was pretty easy. He came out after into the public sphere and a lot of people were talking to him, and I just walked up real quick and asked him. I had to ask him about MAGA And you know, there's a MAGA et F that invests in stocks that have heavy GOP donors. What do you think of that? I did not have to check that out. Really really, that's a real thing. That's a real thing. Yeah, God bless him. Is it?

Is it a good return? No? It has no Tech's only industrials and energy, So yeah, without tech because they don't they don't donate top so that you know tech. Yeah, yeah, where we got Look, we can have a better relationship with the tech community, for sure, because I think a lot of the things is that the tech community is concerned about. At least old school conservatives like myself would be there advocating to support them, but it's kind of

hard these days. So dude didn't even know about MAGA. Yeah, he didn't know about it. I mean it's pretty small e t F. But um, you know his reaction was I think interesting. You know somebody who used to be uh, the GOP chairman, That is an interesting idea that that would be the target market, right there is somebody like that. It is also interesting that he understands why it wouldn't have tech right, and it's so and it's a problem, and and and then it's a problem. I think it

was just really interesting. And maybe someday, someday MAGA will have overweight tech. Who knows that'll be the day. Uh. And if you want to learn more about MAGA, Rachel Evans did a great episode with us where she went and talked to the founder down in Texas, what what instigated the idea and how it's constructed. Okay, so the first guy that we talked to was Ben Johnson. You talked to him more than once. What was what was

the next question that you asked him? I asked him about the There was two big bombshell news that was there's always somebody putting out news around the conference. Fidelity and Schwab literally within an hour of each other, put out news that they were increasing the amount of e t s you could trade for free, because last year Vanguard said you can basically trade all of them eighteen hundred and everybody was like, oh my god. It was

like a bombshell. And so now Fidelity and Schwab said, okay, we're gonna up ours now you can trade five hundred for free. I asked Ben about that and what he thought. I think the important point for investors is to understand that free is not free. That although it's a fantastic thing that fees had been compressed to near zero levels, there's a handful of funds that charge nothing, that commissions

have gone away. In the case of an ever larger list of e t s that the real risk here is that they're an implicit costs that are hidden elsewhere. So I think the first place you should look is what are you learning on your cash account, what are you earning on your money market account, and how does that stack up relative to say an online savings account. Okay, so that's interesting. Yeah, again, you know low cost e t f s low cost you're free trading. There's a

bit of a loss leader angle to this. They're trying to get you into do other things. He made a good point that if you're doing free trading and using their platform, and like you have a cash account there, look at how much you're getting on that cash account and compare it elsewhere. That's one thing. The other thing is did e t F that trade for free on schwab and fidelity other places they are paid a play.

So a lot of those issuers are giving them money to make them free trading their subsidizing that, and they picked the e t f s to push that. They don't have as much assets, so a lot of times the ones that are free aren't the ones you that might be most popular, that you might want. So it's another thing to look out for. You know. Another thing that I was wondering about Eric last year, Uh, you had to go up on stage and make a pitch about something. Oh God, you didn't do well? What how

did you do this year? Not good? What happened? I don't know what it is? And what's the format? What are you guys? What are you doing? It's Uh, it's basically called Battle of the Pundance and we all make a case for the best new e TF launch. We have two minutes. Somebody's assigned to rebut you for one minute, and then you have thirty second response and then the audience cheers. The cheering of the audiences decides the winner. And I don't know, it's probably middle of the I'm

always middle of the pack. Um, what was your pick? What was your opony? This year? I picked a A A U a new gold ETF from Perth, and I picked it because it it's a cheap, it's physically it's physically backed, it's backed by the Australian Government. It's it's just it's got a lot of features, it's low cost, and I really wanted to talk about how I think gold is misunderstood. So I made the case for gold and the e t F. But who took you down? Uh? The person Dave not A had me and he his his.

The two things he said weren't that hard to overcome. But I just got a little flustered. Again. I was running on empty at that point because it was later in the conference, and uh, right afterwards, I was like, I had the two responses have been perfect, but I just didn't work out. And I think that's where I lost some points. Is responding to his rebut all I was just a little Yeah, I was on my I was on my back heels a little. Yeah. So you

were focused on getting interviews. But the highlight obviously was clearly Todd Rosenbluth did a actual rap. Yeah, he did quality et F and he and he did a rap about it is hilarious. There is if you go to his h If you go to his Twitter account, he posted some video of it and it's pretty much musty TV. Yeah, graded one of them and Walhart I still loving pretty good. This is where you wanted can join in again. Matt Hogan one. He always wins. This guy could sell ice

to Eskimos. I think he could win doing x I V. I think he'd go up there right now do x IV and beat all of us. I will say it is kind of like a home game for him. This is like playing Tom Brady at Gillette Stadium. Okay, but he's he's just the reigning champ. He's the Tom Brady of this format. And I'm I'm good at other things, but I just this this particular format. I just never feel comfortable. You're good at asking for questions? What other

what other questions did you ask? Okay? So I didn't get to interview Michael lewis per se, but I did turn the mic on when he was speaking with Barry red Holts on stage, So this audio isn't quite as good. But there's two things I thought were interesting. The first was on um, you know how he said the markets were rigged? Yeah, Barry just said, are they still and he kind of doubled down a little bit and here's what he said, which I thought, this is kind of shocking.

SEC commissioners. They all said markets rigged. They will say back then he said, no, no, it couldn't possibly be. Um So this this shift inside the SEC, the shift in signs design. But at the time, UM there was this is outrageous scandal. Scandals interesting because a the SEC admits it, and I mean, are they doing anything? Um be what he talked about in Flashboys. When he put the dollar amount, it resonated because he's like, look, this

is tiny, little fractions of sense. But if you added up over the course of a year, he's between about twelve billion and ninety billion that go into these high frequency trading pockets. And that is a lot. I mean when when you talk about like there was a study last year that eleven billion was spent on underperforming active managers, and I thought that was a lot. So this is a much more than that, and so I do think

it adds up. That said, I moderated a panel on trading and a lot of the people on there, I said, what do you think of high frequency trading? They said, it's it's actually more positive than than negative because it does provide liquidity. It fills a lot of liquidity gaps, and they just think that twelve to ninety billion is just worth worth the causing. Yeah. So anyway, interesting little side point. Now, he was also asked about what he invested in with his personal money, and uh, let's see

what he says, very simply, uh sexy. So oh, I actually knew he was going to say that because he's been quoted a couple of times. So he's one of the people. Like all celebrity Indexer, they're people who are kind of famous, and he's probably one of the most compelling because here's a guy who has sniffed around all the sort of battels of Wall Street and the financial system and used to work on it. Yeah, and used to work on it, and that's where he puts his money.

I can't think of a more ringing endorsement for Index funds than him buying him and Berkshire Hathaway. Again, that's also on the flip side a little. I mean, Warren Buffett's argubably the most famous active managers, so it's not like he's all into Index. But I thought his answer was pretty good. Okay. Next up Hector McNeil, who runs an ETF issuer in in Europe. He's actually start up a few companies. He's a veteran the industry. He was over from Europe and there's a lot of build up

in Europe. People are like claiming their it's like a land grab. He talked about the European et F market A little thought was interesting. We're based in London as usual, pretty much no further two into meets from every other business that we've set up self are. But we believe that, uh personally, we believe Europe's where the growth is because I mean, you look at the US's four trillion dollars of assets. Europe's under a billion, one half times population

than the US. Similar wealth demographic were probably five or seven years behind Europe still less than ten percent and passives as well, you know, you here so you can see how the the US will probably go to six seven trillion and easy fs you know where Europe, you know, we'll probably get to two three trillion. So the growth is there for me. So here's a guy who is talking about the European market, very optimistic over there again

it's way lower than the US. There's some I don't know, artificial barriers with brokers and you know, not switching to the fee base. But I'm going to need details. But I think look, Europe reminds me of the ETFs. Are technology, and a good technology usually just breaks down the walls eventually, and I think that's what everyone's thinking. So there is a European inside et f s. But it was interesting to see somebody from Europe here sort of you know,

making connect. We got we gotta work on our ground and we got to do a Europe episode and by the trip, well you know, Tom Sara Fagus, this is public. Now he's moving to Yeah, he will be heading up the ets European I know will know he's officially entrenched when he says smart Beta. Do you think people over there will understand how to pronounce his name better than they do here? I still can't say his first name. I got his last name down. Yeah. My goal for his first name is by end of this year. So

we have two more. Yeah, two more. So let's go to um Alex Moazid. Hopefully I didn't butcher his name, but I think he did. I never met him before here's a guy who wrote a book and he is basically taking his book, made an index out of the concept in the book, and now he's running around looking.

He'll tell us about it. I'm going to launch a e t F based on platform and marketplace business models and the next few months and I'm here to learn about the e t F landscape and who the different players are and how this whole industry works, and what's the premise of the e t F, Like how did it come about? The e t F is based on a book I published in twenty sixteen called Modern Monopolies, and it's all about how these platform business models really

control every major vertical in the economy. There has been a couple of e t F s born from books, um, but this one's uh, you know interesting And again I think this is the kind of thing if you're look, if you're picking stocks and you have a new way to do it, it's a little bit of a uphill battle. The large cap stock picking smart baid areas pretty crowded. That said, if you can capture the imagination, like if that phrase what was a market monopolies? You know, if

if that's the right phrase, that just sears through the noise. Um, he could have a hit on his hands. But you know, again, here's somebody out there think about platforms, right, you think like Spotify or an Apple or a Netflix, and you put all those together and overweight those things like whoa, that could be really interesting. Yeah. Look the robotics CTF when it came out. Yeah, I mean, robotics wasn't that

big of a word when it came out. So if platforms, you know, you never know what's just gonna like rise up above the noise and capture imagination or just like hidden in plain sight. Yeah, having that little lens right there. Unfortunately, the odds are for these small issuers that the product will kind of FAILU rude awakening. Yeah. Well again I've read as that that apps, you know, never make it.

Only one percent survives. So in the ETF industry, in the small space, the thematic ETFs, the percentage a little higher, but it's similar to that drum roll last one. So I also spoke to Shelley and Tonio Wicks from the Investment Company Institute Institute. She's an economist there. She does a lot of great research, and I just asked about mutual funds because a lot of people focus obviously on e t f s here, mutual funds tend to be

sort of, um, I don't know, cousin, that's forgotten about. Yeah, and some charts show how they've lost money, and it's a little bit of a you know, um tribal situation for e t f s and against mutual funds. But I just I thought it'd be cool to end on the fact that even though all this stuff is going on at the e t F industry, um, you know, mutual funds are alive and while they're far going anywhere,

and uh so I decided to ask about that. I think that everybody looks at the J curve growth of e t s and just extrapolates that, and that's not going to be the case. There is always going to be a role for mutual funds and e t s. There are investors who are mutual fund investors that will never move over to the E t F space, and

maybe they shouldn't. You need to take on the responsibility of trading that et F and if you're not comfortable with that secondary market trading and how the equity markets work, the mutual fund might be where you want to be. It's where your comfort zone is. And also, um, E t s. You know, in the four oh one case space, tax efficiency doesn't matter. It's broke, you need brokerage windows. It's not necessarily a fit for you know, mutual funds. They're a great fit for the four oh one case space.

So they're not going away. I mean these two things are going to co exist for years, years, years, years, decades. Also, mutual funds. Mutual funds incorporate index funds, and they taken a lot of money. They took in I don't know, maybe a two billion last year. UM, so they're passive. So inside mutual funds is passive in a way. UM. And the four one K argument was very strong E t F s. You ever see Superman two, of course, when he goes into that box and he loses his powers.

That box is the four one K market to the E t F just does not have all its superpowers. Go away because you don't need to interday trade. The tax efficiency goes away. You can get cheap institutional classes because the four one K market can pull the money together, so the cost issue goes away, and actually you can actually rack up more costs because of buying. Um, you have to pay the spread every time you buy the e t F. So the four one k market just doesn't really make any sense for e t f s.

So the mutual funds definitely have that. But again their asset growth has come from market returns and that's been great. So they've taken in on average six billion a year just on the stock market going up, even though they lost on average a hundred billion a year. So again they're not going anywhere. But the organic growth is definitely

a problem for especially active mutual funds. And just to come full circle, active was a big conversation here, Um, there's a lot more optimism about active ETFs non transparent active ETFs, which is we should do an episode on at some point down the road. And a lot of the traditional active funds that you love and know are all there now right. You know, You've got Fidelity was there. They have a booth, you know, so you know, it's

very much all together at this point. I think a lot of these funds, and Shelly reiterated this, they look at the e t F as just another distribution vehicle. I'm sure they wouldn't like this to happen because the e t F makes them less money. But at the end of the day, it's another distribution vehicle. Look, you know, if you're a musician, you want my music in the c D, you want it in vinyl, where you want it through iTunes. Um, you know, I don't care as

long as you're listening to it. Thanks for listening to Trilliance until next time. We can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, where else can back to listen. We'd love to hear from you. We're on I'm at Joel Webber Show, He's at Eric Balcunas. Trillions is produced by Magnus Hendrickson. Francessica Levie is the head of Bloomberg Podcast by