Should I Just 'VTI and Chill'? Your ETF Questions Answered

similar situation. It's nice to talk directly to the people because a lot of times we're working with advisors or the ETF industry itself, who's like talking shop constantly. But BA is a good time to go back to, like the basics, get the temperature of what people are thinking about, and you know what they don't know and are asking about. So I basically polled or solicited both LinkedIn and Twitter.

Interesting the contrast on the types of questions on each site LinkedIn a little more longer and professional sounding as you might imagine Twitter, a little more quick, some trolling, and even some weird questions in there, but all pretty good. I thought. I thought there a lot of them are pretty solid questions, so looking forward to answering them best I can.

at a lower fee. This way for the people who really need volume, like the professional traders and hedge funds who are going to use SPY regardless, you can still earn your nine basis points, but you then have a cheaper version to help keep flows in house and coming in. So SPLG would be Spies Mini me, and this charges three basis points and it's been doing really well, like it's got forty one billion dollars now, and this has

been happening for a long time. I Shares kind of invented this trend when EEM was losing a lot of assets to Vanguard's VWO, so it came out with IMG, which was a mini me at about a fourth of the cost, and it did a good job. IMG is now I think around as big as VWO and so this minime move is a business decision from the issuer's point of view because they just you know, they're trying

to appease everybody without hurting their revenue too bad. Like they could just cut SPI's feet to three basis points, but that would be instantly killing a lot of their revenue in one shot. Sometimes they do do that, but for these gigantic products that have so much liquidity, you do have some pricing power there, so there you can keep that cash cow alive and still serve the cheap obsessed investors who don't care about volume. That's that's why.

like now you can get just triple c's. You know, I Share already has a double B. So they're going to go out and I think they're probably going to are slicing up sectors and they might even like do interesting things like maybe in the muni space they just give you like hospitals and schools. What would call that niche bond investing because you know, when you buy the AG, you know, the AG is like huge, you get a

bunch of bonds. But what people are doing a little more because the AG hasn't worked as well, is trying to find pockets of fixed income that can like have more juice in it. One filing we recently saw was for catastrophe bonds. I don't know if that'll go through the SEC, but that would be really interesting. But yeah, I think that's what we're going to see is just

more slicing and dicing as well as more active. But they people already do active, but there will be new managers coming in for sure, So I think that's probably what we can look forward to.

trade your fund, so the intrade liquidity goes away. In a four one K plan, you typically get the institutional share class of a mutual fund, which is the lower fee class because you're pulling all your money together with other colleagues, and so the cost goes away that advantage, and then the tax efficiency of ETFs goes away because it's a tax deferred plan, right, so you lose basically the three main superpowers of ETFs. In a four to

one K plan. So what people do in four one K plans is if they want low cost pass that they just buy like any black Rock, State Street, Vanguard. They all have index mutual funds that are dirt cheap and the same thing you'd get from like vou or spy. You just buy the mutual fund version. So people are satisfied with that, again because they don't need to trade it. The tax efficiency is not there. So I just am a big fan of the marketplace needing it and it

doesn't need it here. So even though I think ETFs are great, I think you know, they solve a lot of problems. The only caveat to that is if you have a small business and you can't afford the institutional class like this. It's like I don't know a dozen employees and collectively you don't have enough minimum investment to get the E class pricing, that might make sense for

an ETF. The other situation would be to get really like unique new stuff, like there's no way you can get a bitcoin mutual fund, right, but if you wanted a bitcoin ETF, they're available now. So a lot of mutual funds will have a brokerage window where you can go out and like add to your mutual funds with some ETF and I think that's probably the perfect solution. So they'll have a tiny little role, but I don't

think they'll ever like push out mutual funds. Four one K plans are sort of going to be filled with mutual funds for a long time. There is one other thing is mutual funds are actually also offering CIS. I won't go into that, but it's a customized mutual fund and those are actually getting traction inside plans too because people want to like negotiate the fee a little bit. But yeah, so I'll leave it there, but I don't really see much movement there.

have two hundred percent exposure essentially. So I think in the institution world they call this portable alpha, and so in a way you're able to sort of like have two things at once using leverage. Now, of course, if both of those things go down, you can get hit with a double whammy. But the idea here is just getting more bang for your buck, and I get it. I think you know, some of them are like ninety sixty. They have different varieties, as every ETF category does, but

you know, I'm okay with them. I think, like I said, this is something that an institution would do normally regularly, and people are trying to again try to democratize this for regular investors. Just obviously, you know, make sure that you understand the category and that anything that has leverage does have that. You ask yourself, Okay, what's the environment where both things go down? And I think you have we make sure you're ready for that.

This is an ETF that uses flexible options, which are just ctimize options that the issuer negotiates and so they come up with these customize options that limit your downside. So they'll be something like, okay, for the next two years, we will give you up to ten percent of the returns of the S and P, but on the downside, you will only have to eat five percent. The rest the options will cover, and so you give up some of the upside. Usually it's the big upside for downside protection.

And many older investors, this is why we call them boomer candy. Many older investors are very happy to make that trade off because they want to be in the market. They like the market, but they want protection. They want to sleep at night. Reminds me of the biotech industry making drugs for boomers to live longer and sleep better and all that, Like, this is the same thing. These are etfishoers trying to make boomers feel better and manage their nerves. And honestly, when they first came out, I

didn't see it that way. I thought these are just too complicated, but they sold them, and I'd heard of advisers who were like, nah, I'd rather just stay diversified with stocks and bonds. These aren't really worth it, because remember, you can buy a money market fund now and get five percent a year locked in no risk. So a lot of of I was like, why don't I just do that? Then I can almost replicate the buffers with

the regular portfolio. But the clients were like, no, I want these, Like they were like chomping at the bit to get these products. So these were a grassroots hit, and I think the door on these opened big time in twenty twenty two when the bark the aggregate bond INDECKS, which is agg went down thirteen percent. So stocks were down nineteen percent, but your AG was down thirteen percent. In other words, your sixty was down and your forty was down. Normally, boomers in particular are so used to

as bonds going up when stocks go down. So when the AG went down with the stocks, they're like, wait, well, where's my protection now? And they got all this nest egg and they're like, I'm scared now. And so also, the AGG hasn't kept up with inflation at all, and so I think this opened the door to something more crafty, some kind of a solution, and these are you know, essentially structure products, and so I think we're going to

see a huge boom in these. You've now got black Rock getting into this game, a lot of other big firms have jumped in, so so I think we'll continue to see more and more firms get get involved here and you can make more money. The fees are higher, so we call these vanguard free zones. So issuers love vfzs, So you know we're going to see a lot of action here.

tours and that's it. And I think direct indexing is the same thing, because direct indexing is essentially saying, hey, instead of buying a cheap etf and you know, let's sell that, give me your money and I'll buy I'll recreate the ats by buying all the stocks. But if you want, we can pick out a stock or two to customize it to your needs, and then we can do some tax loss harvesting maybe to give you some extra basis points of return. There. It's a pretty decent idea.

I think for very wealthy people that tax benefit could be helpful, but arguably it charged it. They want to charge you like three or four times more than an ETF, even ten times more. I think schwabs and fidelities di I products are forty. But again, you can the whole

market for four or three basis points. You also find that once you buy all these stocks and people start moving stuff around, you're you're kind of being active, and you can underperform, right, And I think people generally like an incomes like a statement with like six or seven tickers,

not like thousands of stocks. And I think it can get confusing with di I. So d I to me tries to reverse three massive trends, simple, passive, and cheap, and I just think those trends are way too powerful, and so it'll be a niche vehicle at best.

but a retail investor, no big deal. But if you're like a big institution, you want an ETF that trades over a billion dollars a day, so you can come in and out without anybody noticing. Low impact cost. Our ETFs also tend to be cheaper than elsewhere in the world, so you get lower expense ratios. That's an interesting question also this year because this year in particular and last year, we've actually seen more people using ETFs in their own countries to get into the US. Like in China, they're

rushing to buy the NASAQ one hundred. That said, it's through an ETF there that invested in NASDAC. So I do think that the fifteen percent's probably got somewhat of a lid on it. It's just big institutions who need liquidity. But the money pouring into the into the US itself via local ETFs that invest in the US is going up quickly. And in Europe. Get this, there's more money the Europeans have in US stock ETFs than in their own local European stock ETFs.

with the five star manager. When they went down, they'd go with the new five star manager, and they were trading their cores a lot. And then Vanguard came along made cheap index funds, and people got married. To be honest, they stopped dating active managers and got married to the index fund that said married life is a little boring, right, So you got to just wait thirty years for that index fund to compound. So they like to have a little fund. So there's a little portion of a portfolio

for fun and games. We call it the hot sauce bucket, and there's a lot of product coming out. You can charge a little more there. People have a higher feed budget to spend there. So I'm okay with it. And if playing around and having fun and games and you know, having a little you know, scratching your speculative itch a little bit, if that keeps you from touching the core that has to comp that you know, has to grow for thirty years, it may even serve a behavioral purpose.

So that's how I see it, and that's why I'm okay with the crazy stuff.

tax free, but removing that unique situation aside. I think in general, again, if you're in a fidelity index mutual fund that charges two basis points or VOO, which is a ETF that charges two basis points, no big difference. I think that it's harder, though, for an active manager to peel away money in passive because, like I said, most people who are impassive, especially you know, because they had to find it themselves. Passive doesn't pay any brokers

to put people in it. So if you were in a passive fund, you had to find that thing, and then you're like, damn, this is a good deal. It's like getting married. And so an active manager promising like, oh I think I can beat the market is just not going to be enough to get someone out of a happy marriage. So all the money is going away from Active generally. That said, there are portions of the portfolio that people do available for Active, and one thing

Active has done that's worked has gotten cheap. So now Active is getting like below twenty even ten base points and people are like, okay, well that's almost as cheap as the next one. And I know you're Active, so well you know, you're only charging me like ten basis points for the quote Active and they're getting a little more. It's more, a little more seducing droll. Low cost Active is probably pulling from high cost Active, to be honest, more than it is from passive. But you know, who knows.

We'll see what happens. But right now, again, if you can get the whole market for like three basis points, and the market keeps going up like ten percent to twenty percent every year. I mean, it's just impossible almost to like disrupt that at this point.

sort of third party service to do it. And that's how pre market volume happens. I think the big dogs out there, like big trading shops that there also obviously can do this. And so when there's something massive in the market that happens, like you know, after a major event, I will go to Spy, like seven thirty eight in

the morning and just see where it's moving. And so now you don't have to use the futures market anymore to find out how people are reacting, can actually use the pre market trading.

at their core. So, as Reggie Brown put at, ETFs are essentially mutual funds with benefits.

is going to try. We'll see if they can get that out. Physical diamonds, there was a couple of ets filed to track physical diamonds like physical gold. They never got through, but I could see somebody trying that again, and then like something like physical farmland or even physical real estate, that would be again. I don't know how they'll do it, but that's something that I think would

play well. I think some of these things are going to be tokenized any area that can't be ETF as I think tokens using the blockchain down the road will be how they solve that. But there is one product that Ethan and I talk about, a lot that actually Tom Keen back in the day used to bring up a lot as a joke. I'd go on his radio show and he'd be like, when's the triple leveraged cash

ETF coming out? And because there was all these crazy launches, but now that cash yields five percent we're surprised nobody has tried a two x or three x money market type like a treasury built fund where you could double or triple that that yield. Just like that, I think people would like that load duration and plus the yield

with a little leverage. I can see something like that coming out too, but that's just it's an example of like a product that I that I could see coming out, But those other areas are bigger, but it'd be interesting. You know, the ETF industry, as you know, joels like the Silicon Valley of the asset management world, and they are going to just keep you know, experimenting and trying what whatever they can because there is it's like a

you know, it's like the gold rush. There is rewards to be had if you can get into something first, and that will keep people trying almost anything and pushing the envelope.

Netflix and Chill. I guess for Vanguard, Vanguard should run with that there, you know, stop the commercials with like old people going to graduations and run with something more fun like this. If people are naturally coming out with these sort of viral phrases about your products, I think it's great. I mean VO and chill, VTI and chill. That is a pretty good way to invest. I mean, that's smart in my opinion. So it's good they're saying that. I'm surprised.

wherever else if you'd like to listen. We'd love to hear from you. We're on Twitter. I'm at Joel Weber Show. He's at Eric Baltuna's. This episode of Trillions was produced by Magnus Hendrickson. Bye