The Paradox of Choice

it's it's not easy. There's twenty Like you said, there's well, there's two thousand eighty seven. But he was counting. Who's got some good fact? Jack? Thank you? And my job at Bloomberg for half a decade was to make order

out of this chaos. I looked at myself in data when I worked there before I got to research as the guy running a Walmart, and instead of stuff, it was E t F s, and I had to organize them in like a taxonomy so that when you walked into my proverbial et F store, you know exactly where to go and could find the E T F that you wanted and evaluate it within say ten to twenty seconds, and so I'll share it a little bit about what I did, but ultimately, you know, there are a lot

of E t F s. Let's bring in one of the questions our listeners asked on Twitter because it was literally about one of the topics that we're gonna get to today. Yeah. So, and by the way, please tweet it at at Eric Beltnis or at Joel Webber Show if you have any questions. Will definitely pick some. This one was from Ken Natal, who's a financial planner in New York. He says, can you discuss the various structures

and E t F s? And he says, for example, s P Y versus V O O versus IVV, which are all really basic plane vanilla s t F H. We actually touched on these in the first one, but even those three that check the same index and they do have small differences. We'll get to it later in the show when we get to the equity aisle, so to speak, but that I think is indicative of the fact that there are a lot of small differences even

when you are in the same species. So this episode, meet the E t F s. Okay, So I just walked in to Eric's E t F store which looks a little bit like a Walmart. And I've got my grocery cart here and it's got a squeaky wheel. Can you help fix that? No, I work at Walmart. Okay, well maybe you can help me make sense at this store. What's your biggest department? Sure? So, if you think about a department in terms of organizing E t F s, we would say that mapping would be an asset class.

So when you think of departments in this E t F store, think of them divided by asset classes. The

biggest asset class, by far as equities. In terms of e t F S, about of the volume and assets are an equity TF so these are ones that hold stocks, and when you go to that section, there's different aisles for different types of equity t s. So when I think about how that responds for me, I think about walking in to a grocery store when I was a kid, and the cereal isle was a daunting place because my mom wanna only let me have sugar cereal one day a week, which was Saturday, and that was when I

watched Saturday morning cartoons. Poor guy, Poor Guy. So I basically got to pick the one sugar cereal that I'd have for that weekend, and it was like Lucky Charms, Cocoa Puff, Captain Crunch, and they're all, so that was your Monday through Friday days a week. So they're all yelling at me for my attention. And that's sort of how I feel about the equity aisle. Can you let me make sense of the et F? Iile like it's

a cereal aisle? Sure, I mean, And it's a good metaphor because some of the e t F is a little healthier for you than others. I think a basic way to divide equities is by market cap. So there could be like a large cap aisle, a mid cap bile, and a small cap bile, and within there there's different sections. But take large cap but that's probably I mean five six seven billion dollars somewhere in the ballpark. So I'd say a quarter of all assets are going to be

a large cups. So maybe there's two aisles, but you get the idea. So large caps are going to hold names like Apple and Google and and those are very popular have a lot of assets, but again there's differences between each of the products. And again the biggest large caps are ones that we've talked about before and that we had a question about, which are sp These are perfect example for why you need to Basically we say in the industry, open the hood, or in this case,

look on the back of the cereal box. You know, forget about the cartoon character that's like, you know, jazz handsing on the front. Yeah, that's like making you lose your mind. You turn the box over and you look at the ingredients, right, and this is sort of like looking at Okay, what are the holdings. So when you take the SMP five hundred, you're gonna see Apple X on.

It's gonna make you feel very safe because you're gonna recognize all the companies because in the smptfs and most ETFs in general, they market cap wait the stocks, so the bigger ones get the biggest waiting, and so ultimately when you look over at smp F t F, you're gonna see those companies. Now, the difference in the question that was asked is that s p Y is the biggest oldest e t F. Right, It's got two hundred and fifty billion dollars. It's a giant I called the

King of ETFs. You could argue it's the king of equities because it trades four times more than Apple, the second most trade equity anyway. S p Y is structured as a unit investment trust. That was how the first couple of e ts were designed the mid nineties, and the other ones I VV which is I shares, and VOO which is Vanguard are structured is open end companies. Now for you out there, if you haven't fallen asleep already, we're not going to spend much time in these structures,

but it does make a difference in small ways. Unit investment trust s p Y can't invest the dividends back into the fund every day, and it can't do securities, Lenny, there's there's small little things on the margins. It's not a big deal. What I was gonna say about this. It reminds me of vanilla. There are different types of vanilla. There's vanilla being there's fringe vanilla, and that's sort of what these are. Yeah, exactly. And if you pick SPY I V V your VO and you held a ten years,

it doesn't make a difference really. I mean, you're going to get the SMPF having to return minus a couple of basis points. So large cap we're talking cheerios, grape nuts, raisin brand a little bit, maybe good one. Let's talk about MidCap, sure, mid caps a little little you know. I always refer to mid cap as the Jan Brady of market cap. Well, it's overlooked all the time. It's

the middle child. Large caps are the biggest, and small caps are like you know, they're a little more volatile, they're more fun, you can make or lose more money. Midcaps are kind of stuck in the middle, and you know there you don't hear a lot about They have a hundred billion dollars. That's a pretty big section. They

could be their own aisle for sure. And mid caps will be companies that I would say, if you opened up a mid cap etf and you looked or you want to turn with the box over and looked at what's in it, you probably would only recognize a couple of companies, like something like Urban Outfitters. I believe is a mid cap. I shopped there, But some of these other companies that are in the energy business and industrials. You are so an an outfitter shopper says it all.

I love that about you. Yeah, the ironic T shirts. At least the Urban Afters has those ironic T shirts before they make it a target two years before. So small cap this is like the spicy stuff. Okay, you know, this is like the stuff you had on Saturday. Maybe not that bad, but definitely raise raisin brand, a little sugar on it. Whatever. Right, small caps, there's actually more of them. So like a typical small cap ETF like i WM or VV, those are the tickers for two

big small cap ETFs. They're gonna have two thousand plus or stocks and they might even dip into what's called Yeah that's good though, because remember we talked about diversification. You definitely want to be diversified there if you pick the right small cap small caps are ultimately like investing in like Toddler's, you know what I mean? They you know, they haven't really like they're not mature. I know about Toddler's. Oh yeah, I know, me too. That's why my voices scratchy.

My two year old God knows what he's bringing home from daycare. You know, as long as we're hanging out in this serial aisle. Remember those little combo packs that you could get like eight different types of cereal like apple jacks and everything in one, and they'll always be like one leftover. Yeah that nobody ever wanted geaties usually, Yeah, it was all the fun ones. And then that's like the freed to lays of the cereal pack. What is

that combo pack in your world? Great metaphor if what we just said about going through different aisles and picking large caps, what a lot of people do is say the hell with it. I just want the whole thing in one shot. And that's called broad market ETFs. They're very popular. So here's where you get the best bang for your buck in my opinion, because you're gonna get the whole stock market. We're talking about four thousand stocks roughly for point oh four percent or point oh five percent.

So if we talk about that ten thousand dollars proverbly that you put into an ETF, here, you're gonna get one thousand stocks per dollar per year, and that is that's almost free basically. I mean that talk about the pizza slice that I could that's even cheaper than pizza in like Kansas, let alone penn Station. And then you're invested across all equities, right, not just large cap, mid cap, small cap. But again back to the whole diversification paradox.

If you do that, you're so diversified, you're certainly not going to hit the lottery. You're just gonna slowly move with the whole market. And again, some people like to the juice of picking an individual name, but for most people that is really a good a good deal, a good method. So broad market ETFs are hugely popular. They don't make the press a lot because they're so boring, but they're they're very popular. Eric, that's my my cart.

I'm ready to go check out the next biggest section of your store, which is which is what Yeah, good because I thought you were sick or something. Anyway, Um, the next biggest section easily fixed income, which is bonds. Right, so bonds can be boring, do not fall asleep, you know. The way I try to explain bonds of people are exciting them about them is that fixed income is really

like like a three dimensional game. It's like chess, whereas equities are like checkers because bonds have a maturity date, so there's an extra time element in valuing them and stuff. But the good news about e t F s is you don't really need to worry about a ton of that. Ultimately, in the fixed income section, it's the same thing. There's highly popular areas where they just throw a bunch of the bonds into one shot, and that's called aggregate bonds.

So you said something and that that was interesting, which was maturity date, which speaks to the bonds duration. In a grocery store, that would be probably the vegetable section right where this vegetable is going to go bad. Right, So let's think about this, because bonds are boring. Vegetables are boring. I don't really want to eat them, but I'm going to. They're totally good for diversification, and that's why most the older you get more more people have

more bonds than stocks. And here's the thing. E t f s have transformed fixed income because on e t F is an equity. Before you couldn't really like interact with fixed incoming in the same way. You're You're right. In fact, stocks trade on exchanges, bonds don't. It's called over the county. You gotta call people literally, yeah, And I always tell people I think the fixed income et F showed the hunger that people had for a bond exchange.

People want to trade bonds like stocks. In fact, that's again back to e t f s. They're big advantages. They've standardized everything, just like a U S P port or a gas pump. Everything now trades like equities, and that's what people like trading the most. It's the best, most transparent way to trade. So yes, that's a huge benefits. So there's a lot of volume in fixed income ETFs, but there's also a lot of long term investors, and the most popular areas aggregate bond ETFs, where they basically

take a bunch of bonds, different types of treasuries. We're talking how many bonds are we talking here? Somehow have as much as seventeen thousand bonds and they charge the six or seven basis points. So in a way those are even a better bang for the buck per bond than the broad market equities. So you've got an equity wrapper wrapped around seventeen thousand vegetables. I don't know what that is, maybe something like a crate a V eight

juice from Costco or something. That's basically what an aggregate bond is. Just to kind of like talk about this time thing, the thing about an e t F is is the bond gets close from maturing, the e t F has a goal and it would kick out the bond as it gets closer. It's almost like the way Walmart would just get rid of the old vegetables and put new ones on the stand. That is again back to the regeneration process of an index, and index is not fixed in time. It's always regenerating because it looks

through criteria. Do bonds check off all these boxes? Yes, they do, they're in the index if they don't boom there out, So that is something that we need to, like, I think, make clear. So my cart only has the good vegetables in it. Yes, okay, what other kind of bond E t F are there? So big pop there is treasuries. Um again, boring is dirt, but they're very popular. Treasuries don't yield a lot right now, so they're you know a lot of people come in and out of

them based on where where rates are going. But treasuries are really good as a buffer. You know, they can provide a hedge in a portfolio. Typically treasuries go up when you know the s H I T hits the fan and everybody's like running around like crazy. Treasuries are usually what the flight to quality. So people have a little treasury. Even though it slows you down a little in the rough days, they can really come in handy and limit the losses on the equity side of the portfolio.

What have e t f s done for them? Right? So treasuries, there's all kinds. You can get a treasury e t F where the bonds are all maturing within you know, six months to a year. That's called ultra short term, then their short term, which is you know one year to three years about, then there's intermediate, and then down the line there's all all the way ones that mature in twenty years. So it just depends on what your time frame is and what you want to have.

The further you go out, the more they typically yield. But that also means that they're more sensitive interest rates. There's always a cost benefit you need to decide. And by the way, we're not advisors here, you know, this is definitely not but I think ultimately in the bond space, this is where I shares rules. Vanguard's pretty big too, but I shares really they came out with the first bond ETFs l q D, which is the corporate bond ETF t L t H y G, which is high yeled.

They really, I think innovated on the bond section, and when you come out first with an e t F, you typically get almost all the assets, and it's hard to unseat the first to market products. So when you look at I shares, they dominate, and so most people use I shares for fixed income, but Vanguards coming up and Schwab in State Street, they definitely have their little niches, but that's definitely the dominant brand. So the egg bonds all that that's plain vanilla stuff, there's also some stuff

that's not so plaint vanilla. That's right, you know. E t F s. Again, they've they've wrapped up everything, and that means sometimes they wrapped them some things that are a little um more danger than others. And one area that I think, I don't know, I think it's a little bit more of a bad rap than it deserves, but it definitely you should tread with caution is high

yield debt otherwise known as junk bonds. These are wrapped up in our e t fs, and some people are concerned that the e t F trades like an equity, but the bonds aren't his liquid, and that's called a liquidity mismatch. You know, high yield bond e t f s have been around for eleven years and have survived many sort of market spasms and sell offs, and you know, people keep using them. The road tested. But I just think it's important to note you are holding junk bonds.

But keep in mind, this is the world we're living in. The FED has suppressed rates and force people to look for yield in some unusual places. I love the fact that these things are called high yield by professionals and junk bonds by everybody else. Junk bonds gets you more reads if you're a reporter, so you know, if you put that in your headline, you get like double the hits. So you see junk bonds more. But really, professionals call

them high yield. High yield means the company is more likely to default, but also means they yield more, so you know you got that going for you. Yeah, So again there's the risk reward thing in all this. But h y G is the big high yield one from my shares Spider has J and K it's the junk and these yield about five So compared to a treasury right now that which is like what two point two

percent something like that, it's about double the yield. So because rates have been low, especially from the FED and the you know, the QI, over the years, it's pushed a lot of regular people into high yield e t F. But keep in mind high yield mutual funds have way more in assets than high yield ETFs, but it's important to determine it. High yield ETFs, in particular, most of the things we talked about today and every day are going to be playing vanilla. I would not consider high

yield ETFs playing vanilla. So Eric, we checked out the two most popular sections of your store. My toddlers crying at me. I've got this squeaky wheel on this grocery cart. Where else can I go? Well, there are smaller sections in the store, for sure, but for some people those

are important. International, I think is when we missed. I guess that would be in the equity section, but sort of like connected, It wouldn't be really part of it because international some people invested in naturally, some people don't, you know, but international could mean like a NETF to invest in developed markets were emerging or single countries. That's a pretty big area. We're talking upwards of maybe four

dollars as well. Um, that's a chunk right there. And then you could look at something like commodities that really is at its asset class unto its own and in there you've got stuff like gold is very popular, there's even silver, platinum, palladium. Then you've got like oil, there's even a corny TF But you say those things, A lot of that stuff it makes me really scared because what business do I have buying oil? You probably don't

have any. So what you're bringing up, I think is something I talk about a lot, which is the difference between investment vehicles and trading tools and t F assets are investment vehicles, again plain vanilla stuff that normal people use, but ten percents in trading tools. I would put oil in the trading tool category, but I put gold g l D in the investment vehicles category. So when you're in the commodities aisle, you really that's an extra care aisle.

In fact, in my book, I had two sections. One was physically backed commodities, which is like gold and silver more safe, and then futures based or derivatives. So in Bloomberg we have a field called derivatives based or not, and that's where I would separate them so fewer. In my store, one of the aisles would be futures commodities and one would be physically back commodities, and the one

that was future commodities would have like a dark curtain. Yeah, I was gonna say, there's a guy standing the gatekeeper allowing you entrance into that section. It's sort of like the video store, which is a knock on ets. You can trade these things as much as you want any of it. And as an investor, and especially if I'm not a professional investor, really all I should be doing is buying and holding good products. Yeah, if you can do that and withstand the temptation to trade a lot,

you'll do great. And that it's hard though, and this is one of the criticism, especially from Vanguard's founder John Bogel. He thinks e t f s trade a lot, and therefore people are doing the wrong thing, which is trading, and he's not wrong. He's not wrong. But there's also a lot of buying and holding going on in e t f s. So again, if you can withstand the

temptation to trade, and you can buy and hold. You can benefit from the low cost, the lack of capital gains which is good, and the diversification, so you get all the benefits if you can just sort of, you know, hold back from trading a lot. So Eric, it's time for me to escape from your E. T. F fun house and headed towards the door. As I'm heading to the door, you're picturing me in a clown outfit, absolutely picturing Thanks for coming. Did you enjoy your time? Anyways,

you're you're leaving. My my, why did I come here in the first place? Because this is again we're gonna basically go way down right here, we're gonna break it all down, break it down. Ultimately, investing is about participating

and benefiting from capitalism. Right, if you hold all these stocks, all these bonds, really what you're doing is you're just benefiting from the value created every day by people who go to work at these companies, make products, sell the products, and a lot of that value has passed on through dividends and the price of the stock going up. So if you do that, you know, on average, the SMP goes about eight percent a year on average, it's gone up a little more than that lately. But that is

what you're doing it. The value created by all these companies doing these things is what you're essentially doing. And why are you doing that? Because if you held the money under your mattress a, you wouldn't make any money and be you would lose money because inflation would make that money worth less. Yeah, so this is so you can retire, get your Winnebago or in your case, and jets right and go and play all the bingo you want. I will take my jet ski to Florida and hit

the jackpot. I'm just you know, I can't help the picture you with with a nice mullet. I love that you think I'm going to be on a jet ski. That's just like two. I think of you as being in a Winnebago. I wouldn't mind that. I actually think that seems like a good lifestyle writing the next great American novel, you know, just going to general stores. General stores. Yeah, I like general stores. You can't get away from the competition. Dan, It's like check out what they got in their store.

Loo kind of etf she got over here over yonder. Thanks for listening. To Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, and probably a bunch of other places I haven't heard about yet. We'd love to hear from you on Twitter. He's at Eric Baltunus, I'm at Joe Webber Show. Trillions is produced by Jordan Bell with help from Magnus Henrickson. Francesca Levie is the head of Bloomberg Podcasts. By m H m H