The 2025 ETF Mailbag

Bloomberg Intelligence, this time on Trillians bail Bag. Athanasos, Welcome back to Trillions.

lot of them. You'll be able to just transfer from your mutual fund share to your ETF share. So I think for people out there who are you know, have been wanting to leave and not have a tax hit when they leave, they can now do that and it should be very interesting. I think it will be a drain from the mutual fund to the ETF, but that

money was probably going to go over there anyway. This just makes it a little easier, more tax efficient, and lets some of these old legacy active managers save a client rather than losing one. So that's I would it's not the most interesting tech innovation. I think that's what they're talking about tech with the structure, would you do something different?

it cleans up the back office a little. Using the blockchain, you can have faster settlement times, you could do twenty four to seven, But I mean, how many people really need that. I think the big thing for tokenization is for people who don't have access to a stock market, right So for the developing countries, tokens can be a life saver, especially stable coins, which are just basically tokenized dollars.

There I'm very bullish on that. But for the developing world, for the developed world, where we all have the ability to roll out of bed in our underwear, still roll over to Schwab, open up the Internet and hit by and we can own almost anything under the sun in one second for almost no fee. I just don't really know how you're going to disrupt that. That's about is clean and easy and low cost as you could possibly get, and convenient so I think the tokenization story will be

one of a back office story. I think they'll use the blockchain to maybe streamline some stuff in the back office, but you, as the user, probably won't know that notice the difference. But I could be wrong. So I'm bullish tokenization as a back office a disintermediator, but I'm bearished tokenization in terms of killing the ETF at least for now. I'm evolving on this issue, but I just don't see enough to disrupt what I just described in the rolling out of bed visual.

with regulations. So the regulatory issue is a whole nother problem here that will have to be surmounted. That said, this particular sec somebody had commented to me when I was basically saying, I don't I'm not really bullish on robin Hood. And also, you see the guy from robin Hood with it looks like Johnny Depp from the movie Blow Yeah, and he's out there talking about tokenization and in like in con Paris or whatever, and I mean

it was pretty showy. And I'm I'm not saying he's not smart, But when I think about that company trying to advertise is like, oh, we're going to give you all this stuff for low cost, And then I think of like Jack Bogel and Vanguard. I just don't know if people are going to leave that boy Scout, trust the Vanguard and black Rock and move over to Robinhood at least the big giant blob of money. Maybe some of the younger people. I don't really see that being

that attractive. And if something's free, if Robinhood's saying it free, don't trust me. They are charging you somewhere else. It's probably going to pay for orderflow. They're probably selling your order flow to like Citadel, getting money there and you don't know it. So be careful out there when it comes to those kind of pitches, in my opinion, And so I don't know. I'm just skeptical because the US ETF market is the terroor dome. It is so hard.

I've seen so many legacy companies come here and get humbled. It's hell for issuers but heaven for investors. And that hell is something that I feel like Robin Hood's trying to sidestep here. I just I have more faith in a more bullish on companies that have come into the ETF terrodome and figured out a way to survive and thrive in an honest fashion. I'm just so I'm not willing to like let go of all that and be like, oh, token to the new thing.

and everything's gonna be on the blockchain. But a couple of things. A. I think you're gonna find percent prems and discounts. Some people say we can automate the market making. I don't know, Like I think the system right now is what we call antifragile. You can call somebody, people have experience, there's many of them. The token world seems like, okay, we could like save a little time on the settlement. You can trade twenty four to seven. Costs are gonna

be the same. It's not like token to be cheap. It can't be cheaper than ETFs. So again, it's marginal benefit for a lot more fragility, it seems to me. And as I've joked about with somebody on Twitter, centralization has its benefits, which is meaning you can call somebody if there's a real problem, you can take legal action. There's prospectuses. This is where I think centralization has its perkss you go full DeFi it's a little while west. So I don't actually know how all these questions will

be answered again. The reason ETFs were such a big hit is because mutual funds were slow, expensive, not that liquid, and a lot of the costs were internalized. The taxes weren't good. ETFs corrected like five things. I mean, it was like five evolutionary steps. Tokenization seemed like one little baby, like a little mouse step.

way more money. That's why when I go to these crypto conferences and they think they're like the big disruptor, and I'm like, dude, ETFs are way more punk rock than you think. That's why all the money goes into the bitcoin ETF is because it's so cheap and easy that the ETF has a lot of disruptive power because the consumers know it's a good deal and they will sell you out for an ETF that's like two basis

points cheaper. I mean, they are brutal consumers, but when you service them, and like you said, if you can make it there, you're going to do well. Now, there's certainly room for some etf to be profitable. You know, you can carve out a good living there. Black Rock probably the best example. And then there's some hail mary's that do well, like the two X Navidia that makes six million a year. So there's been some like one off Hail Mary ones that have really done well. But

for the most part, it's a hard business. It's tough. Wall Street would rather ETFs have not been this successful. I can tell you that.

maybe not profitable. I would say, if you're going to charge twenty five thirty BIPs, which is what they most charge, you would need like about eighty million right to be profitable, and I don't know if all the ether have that. So over the next five years, you know, the spot ETFs look pretty good, but there's going to be some like you know, option overlay. It's not going to try all kinds of stuff. And there will be closures that

are in the crypto ETF space for sure. And if a closure happens, if it's a company like Wisdom Tree and they close a fund, there's the company's still profitable. They just choosing to close that fund rather than sort of like you know, put more money into to try to sell it to make it profitable. It's really no different than any other business.

absolutely bonkers. So that said, people are like, oh, Blackrock is getting away with murder. He I'm like not really. Twenty five BIPs for that is pretty fair. Up until Blackrock came out, you had to pay two percent or one point five percent at best in Europe or in hedge funds, so twenty five is dramatically cheaper. I think this is a win win. You know, in capitalism, you want to if somebody's first has a good idea, has a good price, point, it's okay to make some money.

I just so, I think this is a case where everybody won here.

instantly cannibalizing. But for JP Morgan, because they got so much going on, it's a little easier to have that intestinal fortitude.

would have to like Quinn triple its flows. WU would have to chill, and the S and P would have to stop going up, and Bitcoin would have to rally. So a lot would have to happen in that scenario. I think you have a case where maybe the US stock market has real issues and somehow Bitcoin is looked at as the savior asset like and it just goes up and up while the stock market goes down. That

scenario hasn't really happened. Bitcoin tends to have a little more correlation to stocks, So as long as it's correlated, I stn't see how that's possible, but I bits rise. It's now the twenty third biggest ETF of all time at one point four years old, which is insane to be that high that quickly. I will never say never with IBIT. I thought vt I would be bigger one day because VOO and IVV be fighting over that same

assets and the total market. But it turns out people want the S and P so bad, especially over any other index or the total market that they just VU and IVV can actually split some of that money and VOU will still be the biggest. So I don't see anything passing VU for at least a decade.

which technically get classified as active. I get it that it's not the traditional like stock picking, but I feel like with all these ETF options single stocks, people are their own active managers now, right, So instead of like going to Kathy Wood to buy these like stocks, there's like single stock versions of all these so they're just ended up doing on themselves. So the breakdown if you if you really look at it closely, it's not going

to like the how we think active traditionally. It's sort of like this new generation of active, like mostly derivatives usage and things like that.

got cheap. Most of the products that take in money from the grandfather active are now got their fun under forty basis points. So I think there's a definitely a group of advisors out there that still believes in Active, but they want it served up a little cheaper. I just want to pay for the active, not all the beta which you can get for free and a Vanguard fund. So I think Active is going through this repricing of how much it's actually worth, and as it goes through

that it gets a little cheaper. I think it will see actual real flows, But there's all the new fangled stuff that kind of makes the active rebound story a little more complex and just on thematic ETFs. I just looked today. Actually they've taken in two billion this year out of five hundred sixty billion to flows, so not a lot when you look at themes. If you look like some themes are on fire, like defense, everyone's taking

you money. It's a feeding frenzy. But then like ARC and UH, the US infrastructure and the natural resources have seen outflows, and so you tend to have like whatever's going on in the market, there's always some theme ETF like killing it, and there's always some that's suffering. So them ETFs have a lot going on underneath and they're

they're they're viable to me. I think they'll be around for a while, but I don't know if they're going to like grow to any more than say, two to three percent of all ETF assets.

great movie, underrated movie about George the b Bush. But that word the decider always stuck with me, and I think that the advisor wants to be the decider how much goes in equity bonds. You can't be an advisor and have one ticker and client portfolio because the client's

going to be like, why do I need you? I think for four to one k is they're great, but ETFs have don't really have an easy time penetrating four one k, so outside of the form one k market, I just think most people want to assemble the pieces, and therefore a multi acid ETFs will always be relegated to the fringe. Yeah.

They were looking for a winner. And Nate most was I don't know, in his sixties or seventies at the MX, and he had worked at the commodity's warehouse and when he was thinking about how to design the ETF and make it so that costs of trading wouldn't infiltrate the actual costs of the ETF, which would affect all the shareholders, Like how do you say break trading costs from like

the shareholders? And he thought about commodity warehouse that he worked at, and he thought, well, in that warehouse, you have a bunch of soybean oil and you bring it to the warehouse. They give you a receipt for your soybean oil and they store it for you in a locker. Then you can trade your receipts with other commodity traders without having to move all the merchandise around. Right, it makes sense. And let's you get a bunch of receipts

and you want actual soybean oil back. Then you take your receipts and they give the exact proportion to soybean oil, and then you have your goods. So all he did was take that structure, that paradigm and say, instead of soybean oil, what if I had the S and P five hundred stocks. I could then take it to this warehouse which is State Street and the custodian, and I get a receipt for spy and that receipt is worth fifty is fifty thousand shares worth of receipts, then I

can sell those in the open market. People can just trade these receipts all day long, and then if there's a surplus of receipts and we need to do a creation or redemption, will go back to the warehouse. So all it is is a commodity warehouse paradigm applied to stocks and bonds. And the reason that's cool is because again, when the receipts are trading, it's basically all everybody trading,

all the tax implifications and everything is on them. And when a creation redemption happens, when you bring the stocks get in exchange for the receipts or shares, there's no money changing hands. And so when there's no money changing hands, there's no taxation, and so there's no tax consequence in the creation redemption process, which is the magic of why

ETFs don't kick out capital distributions capital gains distribution. So that is I love stories like that because a lot of times, you know, Steve Jobs always said like nothing is wasted like that. You know the font he made, the calligraphy and the early apple he got because he just used to like skip class and go to the this writing class. Things that happen in your old life can come in really valuable or something you see overseas

you apply it to your country you're in. And that's what happened here, and it was ingenius and that's the secret sauce right there. Joel Eighthan, did your eyes glaze over?

You can never lose your principle in an ETF, but the closure risk is just like annoying and nobody wants to deal with that. Again, people hate taxes, so that's the problem. So yeah, that's why you don't like to see ETF's liquidate, but usually don't liquid if there's a hardlybody in there. So like there's very few casualties to ETF liquidations in general, but definitely, and this is part of why it's hard in ETFs because a lot of advisors in particular won't use you unless you've got like

five hundred million a billion dollars. But how do you get that if you can't sell to anybody because people don't want to be in there just in case you close. It's a chicken and egg conundrum.

You know, people are gonna want to build portfolios with ETFs under ten basis points for the next ten to twenty years. The only again, the tokenization is certainly one thing. Perhaps tokenization can improve some of the back office stuff, but again that wouldn't totally affect anybody. If anything, that would just help the issuers more maybe save a little money.

But I you know, look, I think what's going to be tested is that they're gonna put stuff in ETFs that's just not liquid, and that's I think where we're going to find some experimentation where I guess private equity, private credit. Maybe they'll try to put something like I don't know, farmland and Nebraska, you know, something that's just like like that an endowment would invest in. We'd call those real assets. I would be fine with that. I think, you know, it's okay to break an egg once in

a while to get the omelet. So I'm okay with experimenting with ets But it could get very interesting in terms of testing the durability of the ETF. But the other thing is you got to look overseas. That's where a lot of a growth opportunity is. They're just waking up to like what fees are and like how to make money long term. And so to me, the ETF story is like maybe fifth sixth inning in the US, but it's like second third overseas. So that's what I

would look for. But I do think we're gonna see a lot of crazy because the vanilla is so hard to compete in that you will see more people launching stuff that's pretty out there and it will get a lot of copy because it's interesting. But just relax, almost all the money is going to go to the VU type stuff, and that's probably for the best. But some of that experimentation will be interesting and there'll be some evolutions there that will probably be pretty good in my opinion.

But I'm generally optimistic. I have some colleagues that worry more than I do.

of things you can think of. We'll be etf e's and then it's on to the next frontier, whether it's private equity, all coins, whatever. So I think that's just how it's gonna gonna evolve, which is gonna you know, products are gonna keep coming at a really rapid pace.