Invasion of the ANT ETFs

terms for them have been semi transparent ETFs, non transparent ETFs. Uh. Some people push for them just to be called active and that's it, but for the time being, they are

a new structure. There's a couple of different types of ANT structures and they're all born out of the same motivation, which is over the years, active mutual funds, especially on the equity side, have seen e t f s blossom and wanted to get in there, but I just didn't want to show their holdings every day, and that's really part of what E t F do, and they're transparent.

Active managers don't want to give that up. Ants. These structures, finally approved by the SEC, give them an opportunity to have some of the benefits the e t f s, namely tax efficiency, but without having to show their holdings every day. So to me, with Active has upwards of I don't know, fifteen to eighteen trillion dollars in assets. This is a big deal. That's that chunk of money now has a bridge over to the e t F world.

And we've seen companies like American Century, Fidelity, t Rowe Price, UH and a few others launch active, non transparent e t f s this year for the first time, and we're probably going to see about a dozen others in the next year. So so joining us to help us understand the structure and sort of the future of this Greg re Freedman of Fidelity, where he's senior vice president and head of et F Management and Strategy, as well Scott Livingston of t Rowe Price, who's of Global et

F Product. Also joining us as Morgan Barna, an e t F and mutual fund analyst with Bloomberg Intelligence, this time on Trilliance Invasion of the ants. Greg, Scott, welcome to Trillions. Thank you for having us. So I wanna I wanna start by asking you why does the world need aunt e t s. Let's start with you, Greg. First of all, uh, we don't believe you know the

term and I know is in house of brand. UM, we don't really believe in that these are just active equity e t f s. There's a notion that the semi transparent nature of it is you know, a negative, but it's really a positive. How do we protect our shareholders? How do we protect the value that they're getting from these active equity e t f s. And in some ways, you know, the structure of how these work aren't any different than how per say, you know non US equity

ETFs work today. You know, they're not hunt present progrative just because of the nature of the markets, the time zones, and the complications. So we've taken a model that exists already with non US equity ETFs applied it to an active strategy. And why this is important is if you look at the history of ETFs, we've had a tremendous growth with pure passive ribatis since the with the invent

of the Spider and through the Eye shares and Vanguard, etcetera. UM, we've seen a tremendous growth in the last five years around what I call Chapter two being smart data, which our outcomes and solutions, very tactical, surgical type of applications for institutional type of investing, for retail and individuals. And this is the natural third chapter. It's active, How do I get active equity and active fixed income? Active fixed income has been around for a while, but the one

piece that's been missing its active equity. And now, through the invent of the technology and approvals that a lot of us god from the SEC we're able to add to our clients repertoire a active equity e TP that gives int the excess return. So you know, when people are building these portfolios for themselves, either strategists, individuals, institutions, they've got all the tools in front of them. They've got passive, they got smart data, and now they have

active for both equity and fixed incomes. The biggest difference here is that the z t F side outphits an investor of portfolio, and we know that even a little bit of alpha can drastically have an impact on investor outcomes. Many of the strategies brought to market have had that track record of strong performance and increasing returns for clients. And yeah, so let me come in with my aunt defense I hear you, and I think ultimately, I don't

think transparency. It's arguably not the most important aspect of an e t F. I think it's probably fifth or sixth on the list of advantages or things people like about e t s, And especially here, I think people just want to see if it performs, right. I just think as us in the media, and uh, you know, looking at something new in the industry, it does moret a different label. That's how people so it's more of a communication. I will say that the et F industry

is full of unique term spiders. I mean that that worked out pretty well for State Street vipers. That worked out well for Vangard until they dropped it. But anyhow, um aunt seems to fit in that whole, like stuff you don't want in your house. But it has a cool acronym kind of thing, I guess. But anyway, let me ask some tough questions for you guys. I have I have a one two punch tough question. But I'm sure you're ready for it. Um You probably get asked

this a lot. First of all, you look at these strategies, they're all large cap. Now, if you look at the flows of active mutual funds, all cap sizes, all international, all fixed income. The worst hardest hit is large cap. People just say, you know, Amazon's got fifty analysts covering it. There's no new information there. I'll just go passive. That

seems to be a lot of what advisers saying. When it goes to small cap or international, they think, okay, well there's less coverage, there's more opportunity for alpha uh and the flows show it. So why go to large cap? What's to say these will succeed if the mutual fund struggles, and you know, why not put out something that's maybe a little different, like international or small. I'll start with Greg. Sure, No,

it's a question we've heard before. You know, in three to five years, no one should talk about the structures. All the structures out there work, and they all are produced by quality shop. It's really gonna be how's your client experience? What is your fund perform? What's my client experience? Build on to what you're you're asking Eric. You know right now the SEC is only allowed us to do large cap us equity um. It follows the same pattern we saw with the h F industry. You know, if

you look at the spider. In the early et F they're all large cap. Then they went to MidCap, small cap, non US equity, fixed income, commodities, et cetera. We'll probably follow the same game plan. So right now, the only reason you're seeing large cap US equally only if that the only thing allowed by the SEC. You know, they want us to test and make sure this works. You know,

we've spent fidelity. We really started the first application two thousand seven and really started working with the SEC and earns in two thousand and twelve, so it's taken eight years to get the SEC comfortable. So they're not going to allow any of US sponsors to go out with an emerging market small cap. It's gonna be a large cap US equity and proved that works, and every product

so far that's not launched has worked. Now. In terms of flows, yes, we've seen some outflows in the mutual fund industry, but remember that the client based avias ETFs are different, the different user, the different profile, it's a different client. So for us, each F client is very different than the mutual phone client. The each of clients seems, you know, in some cases are no more sophisticated, more educated using more of the offerings that a fidelity has.

So it's it's it's a very profitable client where in some cases the mutual clients, it's a different client base and a lot of learned DC plan so you have a different flow pattern just because of that alone. Um, we've got some experience through our sectors and our fixed income. Yet when we launched the US the active ETF for the path VTS, we didn't see cacunibalization. In fact, we saw both tides rise. Scott, do you have I mean, I'm guessing you echo of that or it. Do you

have anything else to add? It's it's hard to continue to agree with Greg, but I think he did a nice job there and honestly, I think it was reasonable. So t RO has had a similar timeline and while over a decade trying to bring this to market. Um, you know, really constructive conversations with the SEC throughout. I think they were very thoughtful about this, and you know, one of the key requirements was you know, we're hearing from from you and from others that this will work.

You know, we worked with market makers who are very thoughtful through the design phase. Tons of different tests and back test and and tools we played put in place to ensure that these ets trade efficiently. Um. So we're able to convince the SEC, but they really wanted to make sure that we started in in the most liquid area of the market, which is which tends to be larger cap us names. But I think the best thing that Gregg said, um, was this is early inns. So

this is very early on. Um. You know, I think all these firms that have come to market have truly been innovators and offering their client's choice. And this is going to play out over many years. And I think it's a relatively easy argument. Eric, you commented on the amount of money that's that's managed by active investors or active managers excuse me at the top, Uh, it's a

big bucket of of money. And to package that invest the active investment and potentially a more efficient rapper for certain types of clients is is a pretty easy argument to me. Okay, So here's my second tough question, which is just how the environment has changed since the nineties. Right. You know, when you think Fidelity tro you guys kind

of ruled the nineties. The vanguard was even a small layer until the mid nineties, and they really blew up in two thousand and eight till now, and passive has become a huge deal in that process. Active has then taken the index and done active things with it. So you have smart beta where you take fundamental strategy put into a rules based index. You've got themes, You've got

E s G now which is active. You've got Cathy Wood who's like high Babe Ruth Swing for the Fences active, and now you've got something like d f A coming in as cheap active. And I just wondered how you evaluated that landscape and if you thought of any other possible ways to enter the E t F world, and how you chose to do this method. I'm assuming it's because this is your DNA, this is what you do.

You're not going to stray from it. But some of the firms have converted some of their active into smart beta or these other methods. Um, so can you just talk about the changing because all that to us is active. Yeah, I think it's I think it's a good question. Um. You mentioned smart data and I think it's a form of active, right, So if you think about the penduloum er or the or the scale from from passive to

fully active. I think that's probably in the middle. Um, you know, it's still a benchmark, it's still it's sort of an automatic rebalance in many cases. Um, but it's it's it's a smart index, right, So I kind of laugh. You know, we certainly are aware of the growth of

those strategies. We've looked at it. To answer your question initially, be where you go down the path, Erika, you know this this is our d n A, right, So when we thought about coming to e T f s, this was a play for us to bring our best strategies to market, and to do that, we really needed the

ability to shield IVP and protect investor performance. So I think it's logical that we started with flagship funds that tour Price is known for that have large retail franchises investors that wanted to access these strategies through an e T A crapper. That's not to say longer term, we won't consider uh smart data or some of the other

types of products you mentioned as it pertains to smart data. Um, you know, there's some interesting ideas in that space, but it still goes back to the fact that they're sort of automatically rebalanced. There's not really a PM, you know that that has this hand or her hand on the wheel. Um. We still prefer the way that we do active. I think there's uses for some of those other types of strategies. UM, but ultimately what we're talking about is full active, where

a PM has the ability to make decisions intra day. Uh. They're not constrained of a specific index or um, you know, some sort of calculation on the back end. They're really able to monitor the markets, kind of work through the volatility, identify interesting opportunities. Um. Everything he's here, It's true. I mean your passive has been great acid gather and our minds. However, smart data is outcome and solution oriented. So the focus

is like, how do I fix volatility. I've got a concern around that, or I'm looking for extra yield or I'm looking to farmer French is you know a guide to factors? How do I get very scalpel type precision into my investment with the solution or outcome. So that's how we think of smart data. Active is just that excess return. So when we think about our landscape and how we build out our et F enterprise, it's the passive building blocks with our own sectors one queue and

our partnership with black Rock too. It's the smart data, which are solutions or outcomes, volatility, momentum value, et cetera. And then the third piece of it is the active piece, which is the excess return above benchmark. Now, you know, as you said, there's other flavors out there which we're excited about and we're thinking about as well. Thematic In our minds, it's a compliment hip, you know, the next

wave of sector investing and thematic investing. So there's no clear delineation, but our goal is how do we take our fundamental research and our bombs up approach and our heritage and put into different products and different strategies that our clients can can use. I think one thing that's really interesting, you know, how are you going to introduce the active managers of these strategies to this new audience.

I think that is one of the more interesting areas here where you know, the the former um you know, base of investors that are typical mutual fund investors maybe sought out or were placed into these funds by advisors. And you know, I'm curious, you know, with with your familiarity of of the E t F distribution landscape and and through the channels, especially Fudelity has some of its

own distribution channels. You know, who you you intend to be these incremental investors and how you plan to introduce the portfolio managers to them. Well, yeah, it's it's a interesting question. You know. Our first three tfs are what we're calling clon is, where they're similar to existing strategies, you know, the Scott point, and we have a heritage of successful mutual funds and the ones that we think would translate well into an ETF form as well. In

addition to you know, we've made clonish. Our job is to present clients solution and philosophies to help them with their investing. Whatever vehicle they want, they can choose the I T S, S M as models ETFs except for mutual funds. UM. Not every of our active equity ETFs are gonna be clonish. Some are a good brand new strategy. So while you know, the stars of the show are still the investors and they're still the ones that creating the alpha, we're producing products that fit clients needs. So

it might be clonish UM like our first three. We might have a series that aren't run by you know, an existing strategy that they're run by new managers, So more important to us it's you know, what's the strategy, How's it solved a client's needs necessarily than UM you know the manager's name behind it. You know, I think the days of single ticker sales either stocks or funds have diminished. Investors are now looking for how do I

sell my needs? Isn't ETF? Is a mutual fund? Is a model, is an s m A. And for advisors like Fidelity, it's how do we add all our capabilities and put into a position where clients can then choose what's the rapper? What's the strategy? Why you use? Yeah?

Last week, I mean, Dimensional Fund advisors said they're going to convert six mutual funds um directly to an et F. These were tax managed strategies, but but basically, you know the way we were speaking with the team, I mean they said, shareholders are are going to go to sleep with mutual fund and wake up with with shares of an e t F. I mean to me, that is

a very customer centric way to do this. UM. There are obviously some some technical hurdles, but they're going to start off with the assets that they formerly had in these strategies, which is around twenty nine billion for the six funds. You know, what does this mean for you know, for you guys, and what does it mean for the mutual fund companies that haven't yet launched? You know, do you think they'll take a harder look at conversion. We've heard and I know you can. There's a lot of

technical steps that have to be done. I think some of the concerns around broke which accounts happen to be open shareholder approval, so there's some some sticky issues out there as well as you know board responsibility. Um, we're rap agnostic. We believe in in mutual funds. We believe in ETFs, s M A s C I, T S models,

et cetera. So you know, we don't at this point see a huge need for us to convert because some of our our mutual funds are still being used across our different platforms and in some cases the mutual fund outperforms and it's better for some clients and some platforms in the e t F. So we want to be

rapor agnostic and offer our clients all the different rappers. Um, if we think of strategy is good, we might open in et F and a mutual fund, but then the client can choose between SM a mutual fund and ETF because once again the client base we're scene is different that the actual client of mutual fund is very different as I said in the beginning, than a client in

the ETF. And we don't want necessary alien or force someone into a rappid it in by initially, so you know, for us, it's choice value innovation rather than necessary emergence. So I want to ask, I mean, you guys have given us a pretty high level overview, um uh. And I want to kind of dive into just a very kind of specific example. So I pulled up the t rowe price blue Chip growth e t F, the tickers tc HP, and I'm also pulling up the the holdings on on the Bloomberg terminal so I can see what's

in here, and it shows Amazon, Facebook, Alphabet Apple. But this this is actually a proxy, right, So I'm curious, like, what what is that showing? Exactly what am I? What would I own as an investor? There? What we've done is what you've pulled up is our proxy basket. So if we think about what we view as the reason for Delhi disclosed holdings and passive products, it's for pricing

and valuation of products that are trading intra day. Passive products are UM in our case, you know, for the reasons we discussed, we're not able to show those those daily holdings disclosures, so instead we're producing. Just as Fidelity is a proxy basket or tracking basket, and that basket really is intended to give market makers the information they

need to accurately price ets in market. What I mean by that is essentially that's a basket designed to as closely replicate for performance of the underlying fun as possible. But that basket isn't a percent overlap. Um. There are names that we're working into are out of each day. Those are the names where we have the most sensitivity from an IP perspective in order to keep our transaction costs inlineing and seek best execution for our clients. UM,

they're not in our proxy basket. So the proxy baskets the primary pricing signal. Market makers use that just like they would a daily disclosed basket for a passive product. In addition, the proxy basket serves as our creation redemption basket. Again that's really important in the e t F construct. There's the create redeem is really where you get that

tax efficiency. So when we publish our proxy each day, market makers use it for pricing, they can use it to create redeem if there's excess supplier demand and market for shares. Again, that's how ets have operated here in since ninety three in the US, so it just really uh fits right into their existing workflow. In addition to that proxy basket, we give a fifteen second i D or INTROD excuse me, interday indicative value UM every fifteen seconds to seminating via the exchange of our actual fund.

So if you're a market maker, you have a proxy basket your primary pricing signal, you have a fifteen second I I D every fifteen seconds you get a check of the real fund value. And then third we give risk metrics. And these risk metrics are produced daily, published on our website. And really what they do is they quantify the close relationship between that proxy basket you pulled up Joel and the current fund holdings. So I think they're going to show that there's a high degree of

of of overlap portfolio overlap between the two baskets. They're going to show that there's a low degree of tracking or high degree of correlation. And again that's really to get people comfortable, people meaning market makers comfortable that the proxy basket is really an accurate representation of the current basket and they can use a price and purposes for the end investor. The proxy basket does show you the

types of names you can expect to own. You know, our clients are used to getting full holdings on a quarterly basis, on a fifteen day lag for our mutual fund holdings, they're going to get the same thing here for the e t F they get top ten holdings monthly and some other portfolio information. Again, they get the same thing here for the e t F S. I look at the the all the list of the active non transparents et F s here, there's about a dozen. The assets are about seven forty one million, and some

have over a hundred millions. So you can't knock that. Within six months now, Todd rosen Bluth and I have a bet and it's made its way on Twitter. Basically he said they're gonna these will have over ten billion with in a year. I said, no, I'll take the under on that, and a year would be April one, So we still have five months, but they're barely at

a billion. I guess could you guys provide insight. I think Todd was thinking that you might actually have more of your existing clients come over, like maybe transfer over, and and I think he was expecting more of that. And I'll be honest, I thought there would be a little more already too. Can you talk about when we might see ten billion? You think I'll I'll win the bet or we'll Todd or if not, when when do you think ten billion would be something we'll see? Yeah,

you know this is a slow process. Um. You know, these have been around for six months, their new technology, they are launched, you know, in the pandemic, during a controversial presidential election. There's a lot of things going on in people's lives. So we're pleased with where we are. Room set a billion at you know, as an industry, after six months for a rollout, that's gonna take time. It's gonna take education is a new product type, this

is gonna be months and years. So I think, you know, the under is probably a safe that after one year, and I'll be happy to take the art if you want to at least give me an appetizer of your stake. Um. But it's gonna grow over time. So once again, you know we have EKF users. They have been looking for act for excess return in the e KF package. You'll see some conversions of people. But so far, you know,

our numbers for campbelization are extremely low, single digits. So, Scott, I'm going to guess you are agree with most of that. So let me just get you to answer the other part of the question that was in there, which is do you think we'll see some of these issuers move over existing money as we frequently call b y O A bring your own assets? So far it looks like

they're out there looking for organic growth. But do you think we'll see any any migration from the mutual funds to the these new e t F s. Sure, so I think Todd's right to be bullish. I think Eric, You've got a pretty good timeline us to say it with that though, Uh, it was a pretty smart that again, early very early dings, I would say, first inning. So

this is over a decade into making. We're just you know, from a trow perspective, and since August UM, I think you will start to see managers use the structure more

and potentially bring some assets over um. For us, this was an accountabilization place, so I don't think we were expecting to see a tremendous amount of um, you know, from one vehicle into the e t F. You've got to remember that these are very successful strategies that in many cases have large embedded games for the end client, and it doesn't make a whole lot of sense to take that out of if it's a mutual fund for example, and put it into an e t F. So longer term,

we think this is a really attractive place to be and we're going to see tremendous growth in active ets. What's your favorite E t F ticker that is not your own? Throw out? There was My initials are GAFF and uh, some individual I won't use his name, UM left.

I shared when I was I shares and launched a fun with my the Spider SNP Emerging Middle East and Africa e t F, which I used to use as an example of why you should never trust the name because this thing was seventy percent South Africa where's the Middle East? Right? And the name is not anyway, gaff? Did you have bigger aspirations for an E t F with your initials? I did, I did, and I was taken away from me now all right, Greg Scott, thanks so much for joining us on Trillion, Thanks for having

thanks for listening to Trillia until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever else you like to listen to podcasts. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show, He's at Eric Call Tunas, and you can find Morgan Barnett at him Barna Sex. This episode of Trillions was produced by Magnus Hendrickson. Francesca Leady is the head of Bloomberg Podcast. Bye.