Welcome to Trillions. I'm Joel Webber and I'm Eric Bell Tunis Eric. This is a special episode of Trillions that coincided with a live event where you were on stage. I was in the audience actually, but it was like the old times, the before times, um, and it was part of this new Voices initiative at Bloomberg. Who is our guest? Yeah, it was the one or only Reggie Brown,
who a lot of people in the industry. No, I mean he's very popular inside the industry and out to a degree, and he was, um a perfect guest for a session like this in person, Um, somebody who can go anywhere in the conversation. Reggie is a market maker, so he's making markets in all different types of E t F s. And the reason he sometimes is called E t F Godfather is because a lot of times if you're a small issue or you go to him to see if he'll give you c capital, just a
little bit of assets to start your life. And so you know, people come to him. Um. And so that's sorry, you got how we got the nickname. And he's really good. He's well versed in all topics and so we thought it'd be good to interview him on stage live and it was really it was fun. And the part of Joel Weber on this episode will be played by Scarlet Foo, our colleague who's now at Bloomberg Quicktick and knows a
ton about et F s as well. Like I mentioned earlier, this is part of a the Bloomberg New Voices initiative that started in to increase the representation of women both online and on air on Bloomberg TV. It's since expanded to include a cohort of black executives as well as
Latin X executives. If you're interested in learning more about Bloomberg New Voices, or if your company would like to participate in the media training program, please go to Bloomberg dot com back Slash New Voices this time on Brilliance, Mr E T F. Reggie Brown, and we're now going to turn it over to the Trillions Podcast with Reggie Brown, principal at GTS and Bloomberg's Scarlet Food and Eric. Thank you attended, Thank you, hi everyone, Thank you so much
for joining us. Reggie Brown great to have you, of course, um principle at GTS, but also shares the et F Fund Board at America and Century Investments and Eric bau tunas co host of Trillions podcast. Also, he has a new book coming out in April called The Bogle Effect. It's on the massive impact that Vanguard's mutual ownership structure has and will have on the financial industry, investors and portfolios. He is my go to guy on all things et
F at Bloomberg. So let's get started here. Um, I just kind of want to set the scene Eric, with you kind of telling us what's going on in the markets right now, because commodities are on fire, stocks and bonds are stumbling because of rising inflation. We know the Federal Reserve has raised interest rates and will continue to do so give us a quick glimpse of what all this looks like through the length of exchange traded funds. Sure, So, I mean every year e t F has taken about
two billion a day. Really, It's it's almost like the way people move from CD s to the MP three or digital. There's just this baseline of flows. So even equity e t s are taking your money, even fixed in coming ts are taking money. But then there's this layer, which is where the flows are basically moving to where the performances and this year, we're seeing flows into things that have lagged in the past, like commodities. They've been
basically beat up for a decade. They're finally having their day goals, actually having a little revenge on bitcoin because bitcoin's down, gold is up, so that gold's catching a bid. Even broad based commodities, oil, natural gas, a lot of the stuff that people wrote off. To be honest, this is having a comeback this year. But that's I think the main theme. But I think still you have the blob of money is still buying into sort of cheap beta. In the core, that sort of massive retail money seems
to be pretty unshaken. But on the outer edges, people are rotating between sectors and asset classes and that's sort of what we see. And when you say cheap beta, you're referring to passive index funds. Yeah, like a total market fund that holds, you know, four thousand stocks and charges five basis points. It looks an awful lot, like the SMP five hundred or the Russell to it could be large cap or the whole market. Yeah, that's that's
what cheap data means. Okay, So Reggie, from where you sit, have e t s complicated the current market dynamics complicated or solved the problem? Well, which one? I think it's solved the problem so well. Look, I think as the marketplace reset around secumentation, ETS has offered liquidity, particularly this year where the marketplace reset based on rising rates, higher inflation,
judicial problems in Europe. Et s provided at the exhaust vow that the regulars look for and largely has solved a problem, allowing retail investors to come in to the marketplace that incredibly cheap prices is Eric reference and also allows for price discovery because Russia stock market is closed, but people are able to trade Russia through r s X and E t F or at least they were for a while. Yeah, I could see Eric signaling time out, time out, the second time out. Yeah, no, they were.
This is the I'd love to hear your take on this. Are normally E T F or like cockroaches. They trade through anything, um, ten years ago the stock market. Yeah. Well, if you come up with a better metaphor, let me know. But they're definitely survivors. And ironically people are like, oh, if the underlying is a liquid ETFs are going to have problems. Actually, ETS tend to be the one thing liquid when the underlying isn't. And we've seen this over
and over in different markets. But for the first time rs X was halted and it's still traded. But then the exchange that you and even trade the e t F. Obviously, this is a unique geopolitical situation involving our own government, but I've never seen that. In fact, we have Dave Dave needed gone last week talking about this and he said, you had to go back to Cuba or Iran, which predates the e t F to find anything like this.
It is unique. Um, But if you look at market closing for international investors, India had that problem once the way they close off inflows from foreign investors, but exchanges closed all the time. You hadn't in Greece, you had in Egypt, So it's not really unique. But this is unique where the exchange and the market value of that country with the zero from a U S perspective. Now, one thing that we should mention is Reggie Brown. You
are known within the e t F world. Forbes famously called you the godfather of e t S because you make markets in these products and you seed new funds as well, which means you have a front row seat to both innovation, new ideas and copycat efforts as well. Can you guess an idea of how you spend your day. What's the split between new ideas and recycled ideas? Is it fifty? Is it no? I think largely it's new ideas.
Uh lately it is Asset managers recognize the need to come into the et F space and talk to them largely about how to do that, and then around thematics. So right now that themes are rising rates inflation, their e t fdeas coming into the marketplace to solve those problems for investors. And then before then, you know, looking at ets to have options inside of it to buffer um certain market movements. So the the week to week
overall is pretty interesting. From a new idea situation, there are always um et sponsor wanted to leverage someone else's ideas because they have better distribution or they have better pricing power. But that's a spitter competition. Yeah, a lot of people would accuse the vanguards and the black rocks out there of doing just that, copycatting other people's ideas, but on a big their scale as opposed to coming up with their new interesting innovative e t S. Well,
I'll take you to task. I would think that I Shares have done a terrific job of opening new markets to two sectors. There first to launch a bond ETF, they were somewhat first looking at the style box UM for multi factor situation, so they have their role. Van Guard looks at it from I'm coming to marketplace and be the cheapest in the marketplace. And that's going to be uh competition between Schwab and Vanguard around the zero fee.
But look at it. Look in the United States, retail investors have the opportunity coming into into the marketplace selecting ETF and get exposure through some complex vehicles. It's important that we as industry provide the education for them, make sure understand what they're buying. E t F are complex, So walk us through how the sausage is made, how what happens when someone comes up with a new idea for an e T F. Who do they go to
how do they get that done? Well, largely um for a market maker like GTS, we're typically in the last phase of the cycle. But we'll hear about it. But you have to go through writing a perspectives got to go through hiring a lawyer and going through that phase. As a market maker, they're looking for us like would you make a market in this classification? Some of the stuff where it's like no way, stay away just because it has a lot of hair. For example, UH commodity
e t s to have futures inside of it. The futures are can be really thin, really difficult to trade. Is something that we're not gonna want to touch. Because a market maker such as GTS, we look at the trade ability of the asset class, the ability to get in and get out efficiently. For e t s to have futures in it, there's a role cost that gets pretty expensive, and that is a lot of complexity where
that cost is embedded into the spread. Most ets sponsors they want their ets looked like sp y whereas a penny what And a lot of times that's not practical because one you don't have secondary trading um where a
retailer inside the trading spread. But then again, the onnerlying asset class is a little bit wide expensive like international securities, stamp taxes are embedded their access to the market real time United States, So if you're you an US investor, you want to invest in Japanese equities to two pm in New York time, you need a market americrant to
give you a synthetic price. I have to go up by futures, and then I'm taking you on risk and that risk is transferred into a spread that with delivered to you. So I think it's really important to understand um the ask flass you're trading in and how best to access it. So if you were to look at a chart of state oil prices oil futures and then looking at et F that trades oil, they don't line up exactly because of the role, costs and all the
other complexities that you're just referring to. So there is a whole cohort of commodity ETFs that are to relate it that the role is either a contango of backckwardation and that's reflecting in e t F. So again I go through the complexity of the online asset class. It's important to note that an e t F or mutual fund has the same risk characteristics. A separate e t F is traded on exchange open to global amount of investors, where you don't have the filter provided by an advisor,
for example. So it's important that the individual investor understands what they're investing in. Yeah, your music to my ears, I will say those complex commodity type there three or four percent of the assets I called the exotics, where the rated R section of the industry. We actually created a system to give green, yellow, and red. I think this should be widely adopted. So if you can help
me out, I think you should. If you pull up a robin Hood account and you want to buy like I don't know VXX or USO, it should say bluebrig Intelligence red light, and then you have to go and we'll tell you why and then hey, if you're still find buying it, fine, Um. But I think this would be a way to protect the innocent while allowing innovation in the exotic areas. Thoughts well, Eric, I'll take it a task here. I think that there's levels of understanding.
I think that unlike the United States, Singapore had creative a classification that if it was a complex CTF had an X in front of a ticker, he had to take a test. You know, the United States is free and fair, and I think that we want to promote competition to marketplace and allowed investor to make your own choice. So you're talking about red lights. I think he's bringing complexity because no one don't understand that understand the red
light to want to stand, but they copyrighted it. I wanted to I actually literally wanted to use gpg p R but NC seventeen maybe t vix so there was only like four four products in the n C seventeen category. So Eric, about leveraging here right, your your leveraging ideas here right, it's some journalists here, Eric. So given all that, Eric, just for a moment moment here, I feel like we need to bring in bitcoin. What would be I T O B. Would that be a red light? Would that
be a yellow light? Anything that rolls futures is a red light because most people just don't, you know, normal people don't even like you said cantango, most people think that sounds like a dance, and really it's a punishing term. Bid is contango is okay? When you when you buy oil futures and they're going to expire soon, most people know you don't want to take delivery, so you are going to have to roll to the next one, and the next one is going to be a little higher
to maintain that exposure. Do that twelve times and that could be a year. And so if you hold a long term that's mentioning e t F with with an expense or issue of thirty, no one would buy it. But most people don't understand that. And every now and then when oil gets hot, people pile in the USO or they pile into one of these ETFs. But I would say it's it's usually at the fringes. Most of the big, gigantic blob of money is into the rated G stuff, the vanilla stuff. But I like that it's
a big tent makes my job interesting. I have a short attention span and a love of novelty, and there's always something new to try to figure out. So I like the big tent aspect of it. But there are definitely some products you can get hurt on. So we're talking about new issues and how you spent a lot of time focusing on that. There have been a lot of attempts to have new biitcoin ETF spot bitcoin e t s, but they've all been rebuffed by the SEC.
They're they're not moving forward with that. What's going on when what is it going to take for the SEC to approve spot bitcoin e t s, which clearly are in demand by people. What do you think, Eric, Well, you your opinion is worth more than mine because he well, well, I have an opinion here. Yeah, people call him for advice. I'll just put it down. I have an opinion. If you look at UM, the e t F industries, first of all ec F industry, UM came in existance in
ninety nine. They started in Philippi stock Change. I'm from Philadelphia. Seven UM lawsuits went to Canada, came the United States. So you know, we have thirty two years of empirical data around around how ets behave in various markets. So you look at bitcoin, there's a lot of investor interests and Eric and I are talking earlier. To trade the actual bitcoin, it's pretty expensive and no one understands the
implicit costs that you're paying. If you're buying a bitcoin, you're gonna probably pay one and spread or commissioned to buy that. Think about that. That's a hundred and fifty basis points of your money going to someone's pocket. And if you look at the exchanges, there's four and fifty bitcoin exchanges around the world, and none of them are connected. So like if you want to buy ge for example, right, you pull up your retail trading app, I won't you say a name? Then you get a price and you
hit a button and Edward comes to gts. Oh, by the way, we are retail market maker. Um, when you're buying a bitcoin, you're trading on that specific exchange associate with their fee structure. So the e t F community does a really good job of democratizing those costs pretty quickly. And so we're looking forward to trading a spot bitcoin e t F because we're going to flatten the costs, open it to a wide range of investors, and then
bring liquidity. So for me to make a market and a Bitcoin spot e t F, I need to essentially have market connections to every four and fifty of those exchanges in order to arbitrage the various prices, to close down those prices and lower costs. So I'm advocating for a bitcoin e t F. My friends a bit wise are looking for an e t F. My friends at great scale are eying to close up that discount in
their vehicle. Look, there is nine billion dollars of investor money locked up in that product at a discount that is not fair, and the government is holding that back from being arbitraged. So I look at it as an opportunity set um in my business. I've traveled the world talking about e t F and liquidity and household inclusion. In the higher feed countries. Japan, for example, the the unitary fee is three. That means that the average fee is three to invest in vehicles on that exchange in
that country. If you look at the United States, the average fees hovering around fifty semi five basis points. Lower prices bring more people into the marketplace to participate, So I advocate for household inclusion through lower prices and competition. What you're saying is sort of one of our theories, which is the crypto really captivated the E t F world. When's it going to launch? What's it going to be like?
And you know, James and Tom are back there. We covered this like crazy for a year, but then we started to realize, wait a second, be careful what you wish were E t F s are going to rock the bitcoin world. In the crypto world, especially the exchanges, because some of these exchanges are used to getting like a lot of money for trading, and we did the numbers of crypto exchanges make about thirty to forty billion dollars a year at least in the last twelve months,
and they do one trillion dollars worth of trading. E t F market makers like Reggie do thirty six trillion dollars of trading and make one fourth of that money. So e t F s I think are going to disrupt some of these changes and flatten those costs because you'll be able to go and buy a bitcoin et F for a spread of one basis point, not one fifty.
And I think the expense ratios will probably get down to the forty basis point level and it'll be liquid, and I think that's going to be a good competition. I think the exchanges are probably due for a little disruption. I mean that hiring Matt Damon left and right and Larry David and they've got so much money there, you know, they own the super Bowl. This your uh so if they approved the spot bitcoin ETF crypto exchange, stupable commercials will go down. So this sounds like it's a good
thing for retail investors. Then why is the government so cautious. What is it waiting for in particular before it does give the green light. There's a lot of fraud out there, unfortunately. If you look at them the I c O market where you're raising capital through internet offerings of securities, those
offerings are fraud. If you look at sanctions UM that President Biden has placed on a country of Russia, the Augo guards can transfer their wealth using bitcoins, so it's unregulated, and I think that's fearful for the regulators, and that where there is unregulation and gray areas, invariably mom pop retailers are being run over. So I think there's a
lot of things that has to happen. I think we made a lot of strides to entering recordtory concerns UM, but there's still a lot of analysis that needs to occur to bring comfort to folks in Washington and Brussels, to globalize the regulation. I will say, though, you know, there's probably what nine or ten countries who have approved spot bitcoin ets and they seem okay with all that. Why is the US in a different mindset empirical empirical evidence where it's just you know, if you can't tax it,
you can't oversee it. They're not going to approve it. It's just the way our government works. You know, I can't necessarily argue that that's not incorrect. But again, what I don't want is verbial. My grandmother trading and something she heard on to on TV and then she looks up and she paid two percent over what she uh what was supposed to be paid for. So you know, these are all just good examples of the need for investor protections, transparency, and oversight for the best parts of
the market. I hear you that there's a lot of market chasing. You know, if you approve if e t f A spot e t f UM is approved, exchanges will be flattened out through competition in the real estate market, and UH in Puerto Rico will actually collapse because because all those big boys guys will come out of Puerto Rico and then come back to New York because accentsion has gone away. So obviously there's a lot of clamoring for bigcoin e t s, But you also hear a
lot of pitches um for everyone's ideas. People come to you to get funding. You hear the good pitches, the bad pitches, the ugly pitches. Can you give us a sense of some of the ideas that you've turned down that you said, you know what, I don't think this is gonna work well. Famously I told the big was twins, no, no, no,
in two thousand and twelve. I've been right so far. Um. But there are a lot of wacky ideas where folks want to use the e t F rule to bypass capital games and bring um, you know, non traded assets and e t F format. I stopped those at the door, Like what was the most wild one? Kind of put my hedge fund inside of an ETF structure and launch it as a structure we don't have marked the market.
You can't do that, you know. I think that, Um, when you get into some of the hairy parts of the industry where liquidity is then I mean, right now, we saw an example of the London Metal Exchange around nickel not performing well because as a class is thinly traded, there's not enough supply and that you can get cornered in the marketplace with the wrong side. Should you have an e t F structure built on nickel solely? I think you're seeing examples of just the problems around thinly
traded marketplaces. We at GTS, we thrive on efficiency and we thrive on transparency putting capital to work in the marketplace. It's very difficult for us to do our job if the marketplace UM is then in the number of participants, and then there's no depth in the marketplace associated with what those market because you're seeing and in market wide issues like what we went through UM with Ukraine and
just rising rates. When the market goes one way, it goes one way pretty hard, and then we're seeing issues right now in the treasury market there's less liquidity and treasuries UM hide the bond ets to trading in a discount right now because there's massive outflows. The mutual fund managers are using the e t f s to priced or mutual funds, but the spread to treasury is at a historic gap that is signifying that the U stock
market is going to rise eight. So you're seeing all this, but a lot of it's around illiquidity or the less liquidity and how prices are being forecasted for the future. Is there any new e t F that has come out that you were not in favor of before, but now you're like, I wish I could get a do
over on that one. Yeah, we we we we missed a few over my long horizon in the career that I've seen UM famously, I think we were slow on on g l D and then and then in the gold ETFs UM at that time Bear bear Stearns brought that out. Um. We've seen iterations where it was like time and place. So right now we talked about earlier, um my friends at bomb blocks or bringing up sectorized high yield um e t F s UM that was tried by another issuer. Um it wasn't ready then it
seems like it's ready now, you know. So it really comes down to what the market is thinking, market psychology,
investor mindset, and then what works given you know, other factors. So, Erica, it seems like fun flows are you like to call it barbelling between cheap beta which are those passive index ones that often look a lot like the some or other benchmarks like the Russell two thousand and therefore are fairly cheap versus what you cause shiny new objects, new fangled ideas with higher expense ratios that get people's attention because the returns are astronomical at least initially. What are
you seeing there in terms of that balance. Yeah, this is something that really challenges people, especially ARC. I think ARC really showed this Woods Arc. People are mystified that everybody hasn't left and there's like zero dollars left. Well, and I will say, we correctly call this because there's not there's not going to be a run on the CTF. And here's why people have largely replaced this sort of legacy active mutual fund with a like index fund or
we call cheap beta in their core. So they have like a sixty forty that's probably five basis points in cost. That's what the flow show. Well, that's really efficient, really good, and if you wait a long time, that's probably the almost the best thing you could probably do. But it's so boring. It is, so it's like watching paint dry. So people tend to want to have a little fun and apply some hot sauce on the outside. So they go and they buy ARC or theme ETFs which they
can relate to, or crypto. I think anything that is has a possibility of asymmetric return, and it's very different than the index, so it can compliment. We say, Cathy is complimenting Vanguard, not competing with them, and that's a good spot to be right now. And that's why I think you're going to see more and more crazy, wacky, hot saucy and products get launched because the lane for complementing cheap beta is going to be vital and growing, but the lane to compete with cheap beta will always
be very difficult. The value proposition is so good at anybody who owns a four basis point total market fund, it's just very difficult to let go of that or replace it because you own all of the fundamentally way to fundamentally sound serious investor stocks. There Therefore, if you own all that, you have more patients with your hot sauce.
And that's why we haven't seen the kind of outflows from our or theme ets that people thought we would see, because they already have all the serious stocks covered and so they're actually what people see as a bug with her fund and others, and that why she keeps doubling
down on these crazy stocks. It's a feature to the people who are looking for something to distract them and possibly give them asymmetric a turn in the future, and they don't want to miss out and so it would be stupid of her or these funds to shift into cash or value stocks. Uh. And so this is an interesting phenomenon. And so I do think we're going to continue to see this barbelling and the cheap lane is
obviously pretty saturated. I think Reggie's going to probably turn down a couple more ideas in the next year because I think they're gonna get crazier and crazier and stuff you laugh at. I've laughed at many at E t F. When I saw the filing and they got it's got a billion dollars today or more. I swear to God it's I don't laugh anymore. Every now and then I laugh.
I can't help it. But I don't doubt that some of these products that sounds silly today will actually catch on in the future because of this practical purpose they serve in the portfolio. What do you think of that, Reggie, Well, I think that the themes are nothing more than momentum trades that folks are bringing out, and and those moment trades are just grabbing a cheap beta. So to your barbelling analogy, I think it's one transferred to another where
the themes around either housing or anti arc. I see my friend Matt Tuttle there, um, who's a sponsor of that E T F. You know, you know he's just making a call, not necessarily on Cathy Would, but the sector around the evaluation, and you know, is it time to place a hedgebat against it? You know? So look, Cathy Would. I know her when she left A and B and had an idea. I think she's done incredible job of bringing a new investor class into the marketplace.
You know, I joke with her when I see here um that she's responsible for fifteen year old boys tearing down the fair faucet poster and putting up the Kathy Would poster in a bedroom. And then these fifteen year old boys are opening up a robin Hood account, and then their parents are finding out all of a sudden they're buying their father a Mustang with worth their gains. That is a society good because you brought a new investor class in. So everything has his time in place.
I think as far as you know the themes, the thematic stuff, I mean marijuana, you know when it came out, No freaquing way what I touched marijuana when I don't smoke it, uh, full disclosure, but literally, I think that the banks didn't want to custody the cannabis because of their f d I c um stance and regulation of that. So it's very hard for a market maker to take on that liability risk. So there are areas that we missed on, missed out of because of just hypersensitivity around
just the optics around regulation. You've shepherded so much of the development of the E t F industry since its birth. Do you think we've reached peak e t F or is there a lot more market share for this product to take. I mean, you're you're looking at me like I'm crazy right now, But we at different points we all said we've reached peak ETF. Do you see those
mutual funds over there? We're coming for you, baby. So I think there's an opportunity to transfer UM the mutual fund industry and convert them into e t F format and give investors lower pricing and choice around entry and exit. It really comes down to UM retirement platforms and allowing e t F s in our ecosystem and how people get paid. But I think that there's a lot of
opportunity for growth. I see it. Every asset manager additionally, who has an open to find complex wants to convert into e t F s to offer their investor choices, even at risk of cannibalizing their own fund. So I think that long term, the E t F industry will get to twenty five or thirty trillion UM in my lifetime and I have another forty years ago. So you're gonna have to change the name of your podcasts to
what what's after trillion? My son, actually, just my eleven year old just told me I learned that word the other day. He said, did you know that galaxies are gonna cease to exist in the quadrillion years and there'll be nothing but black holes left over? I was like, oh, I was like, where did you hear that? He's like YouTube, So anyway, f y YouTube quadrillion and it means one thousand trillions, So anyway, Reggie, Thank you so much. Brown, his principal at GTS, also chairs the et F fund
Board at American Centry Investments. Of course, our own Eric out Tunist, senior et F analyst at Blomberg Intelligence, also co host of the Trillions podcast and new author of The Bogl Effect h Thanks for listening to Trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple podcast, Spotify, and wherever else 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 Fautuness.
This episode of Trillions was produced by Magnus Hendrickson. Francesca Levie is the head of Bloomberg podcast by