In this episode, the ReSolve team is joined by Eric Balchunas to discuss the current state of the ETF industry, the rise of active ETFs, and the impact of Bitcoin and crypto on the market. Eric shares his insights on the 'hot sauce' approach to investing, the role of psychology in investment decisions, and the future of the ETF market.

Topics Discussed

• Discussion on the concept of 'hot sauce' in investing, where investors allocate a small portion of their portfolio to high-risk, high-reward assets

• Insights into the psychology of investing and how it can sometimes overpower logical investment decisions

• Analysis of the rise of active ETFs and the factors contributing to their success

• Discussion on the role of traditional active managers in the ETF market

• Examination of the impact of Bitcoin and crypto on the ETF industry and the potential future of this market segment

• Insights into the concept of 'conversational alpha' and its role in investment decisions

• Discussion on the role of the Federal Reserve and its impact on the market

• Insights into the phenomenon of single stock ETFs and their place in the market

• Discussion on the potential for a bear market in the future and the factors that could contribute to this

• Insights into the concept of 'buffer ETFs' and their role in providing stability for investors

This episode is a must-listen for anyone interested in the ETF industry, active investing strategies, and the impact of Bitcoin and crypto on the market. Eric's insights provide valuable perspectives on the current state of the market and potential future trends.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

So they're like, you know, idle hands, and so that idea of packaging things to excite somebody or the opposite, calm them down, is really interesting to us because you could sit there and outline why you should not invest in this, but psychologically, that will overpower the logic.

He's covered the field since 2006. He's also the author of The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions. This is a biography of Vanguard and its founder and the impact on the industry. He's also written The Institutional ETF Toolbox published in 2016. Is that right?

[00:01:41] Rodrigo Gordillo: Yeah. And then he's also, uh, Prominent voice in the ETF industry. You appear regularly on Bloomberg TV. You do um, Exchange Trader Fridays. And the co-host of Trillions, the podcast. Not to be confused by Billions, the …

[00:02:19] Rodrigo Gordillo: It's almost like the show should have been done at a completely different time when people actually cared.

ETF Evolution

[00:02:57] Eric Balchunas: Yeah. So first of all, even though, us in the analyst and media world, we tend to follow the shiny objects and the new stuff because it's new, right? Most of the money goes to pretty vanilla stuff. So investors aren't losing their mind. It's just that the core of the portfolio is hard to compete with, right?

You got cheap beta, you got quants like you guys who are, have a brand name built up. If you want to launch a new strategy, a lot of people now are just looking to something that's like a structured product. That does, has an outcome targeted, or hot sauce, which can be used in small amounts just to give you some fun on top of the portfolio.

So, we've seen a huge increase in the use of derivatives. I think 25, 30 percent of all ETFs have derivatives in them now, that are launched. So a good example is the buffer ETFs. Think about this, like you're old, you're a boomer investor or a silver and you have a ton of money, and they have like three quarters of all the money in America, but you don't have a ton of time and you don't trust bonds as much. This thing is going to come along and say, some of them say, there will be no downside at all. It's completely protected on the downside. But we're only going to give you 9 percent of the upside. That's a pretty good deal.

And if you're that person, you're like, you know what, sign me up, because they want to protect the money, right? So that is a powerful concept. Now, if rates are 4 or 5 percent, you can get half that in a money market fund, with like zero risk, and still participate in equities. So there are some arguments against it, but this is part of what we think is the ETF industry producing things that help psychologically, for people. So evidence-wise, logic-wise, you can say all you want, but at the end of the day, if you can cure a boomer's fears and worries and anxiety, they'll forego a lot, and look beyond a lot of faults in that product, or the downside or whatever. And I think they're really, truly okay giving up a good chunk of the upside. I think that's a trade-off they're happy to make. So these buffer products now at 50 billion, I didn't think they'd sell. I thought they were too complex, but now when you realize how I just put it to you, I'm like, oh yeah, I get it. You know, advisors have to deal with the emotions of their clients.

And then on the flip side, you've got products coming out to stimulate, usually younger people. Double leverage NVIDIA. It's crazy to think just saying NVIDIA, you, it's a five billion dollar ETF.

[00:05:52] Eric Balchunas: Yeah. Well, that one, that one's been around a while. It's just having a moment now, but the single stock leverage is really interesting to me because again, I did not, I thought it would be like 200 million and traded by a real small group, at five billion, and the genius part of it is they charge like one, one to 1.2 per cent. It's over 1 percent.

[00:06:17] Eric Balchunas: And if you can just get a couple people in there, and NVIDIA will do a lot of work for you. Because the 5 billion isn't all flows. A lot of that's from NVIDIA going up and it compounding a little. I get it. So you've got these people who were, used to be like, like the guy who launched the 2X NVIDIA used to be a gold guy. He was like the GLD guy.

Then he launched commodity ETFs. But then he got into this, these, this more exotic area defines the same thing. So you found people who otherwise were more long-only types, sort of gravitating towards this, because all you need is like, one hit. And with that fee, you know, you're set.

So you're finding a lot of, it's almost like, lottery tickets, not from the investor side, but from the issuer side. And so we call that hot sauce and that stuff that you just, you know, 5, 10 percent of your portfolio, go wild, just get crazy. And I think there's a legitimate lane in the portfolio for this because you do find a lot of people who might have a core that's set and they understand compounding. You got to wait.

So they're like, you know, idle hands, and so that idea of packaging things to excite somebody or the opposite, calm them down, is really interesting to us because you could sit there and outline why you should not invest in this, but psychologically, that will overpower the logic.

[00:08:33] Eric Balchunas: This is a great point, and this opened the door for all this stuff, to a degree. I still think the thing I just mentioned to you is pretty appealing, but it's extra appealing when you have a boomer who just went through 2022. They see their stocks go down 18per cent, 19per cent, and then they see their bonds go down 13per cent.

So like you had, TLT was up 35 per cent. It completely offset your stocks. This is what people are used to. So when you have, the Agg is mostly Treasuries that that's just shocking, I think. So if you can't trust the bonds, then you're definitely going to be a little more open for something that can help, again, calm your nerves, because you have made a ton of money, and I think most boomers understand how lucky they've been. They've sat through these, like this mega-bull market and they don't want to lose the money now. And so, but they're also like, I just think that the investors who made all the money in the stock market, there's such greed. They just can't take it all and put in a money market fund.

[00:10:14] Eric Balchunas: They can't leave.

[00:10:22] Eric Balchunas: I know one more. I know.

[00:10:38] Eric Balchunas: By the way, I've told that story, I bring up that phrase and I go, listen, if you're sitting there going, WTF is this bullshit? I'm telling you, this is a normal reaction. I brought up, I was on a podcast with some really smart quants and their heads exploded. They were like, what are you talking about? It is a controversial term, and you're not alone. The people who are into it though, they're into it. But a normal reg-trained investor, they don't, they're like, what are you talking about?

And if TIPS would have existed, they probably would have been a good option, amongst other commodities or commodity driven economies. But we haven't, nobody's invested. Nobody can remember what it was like to invest prior to 1981, right? So now all of a sudden that we see that the other option is the fact that we now have many more options to hedge against that inflation risk, and they're coming in all shapes and sizes. So what are you seeing as the biggest drivers of those, what type of themes are really making a heyday out of this particular circumstance.

[00:12:49] Rodrigo Gordillo: Right.

[00:13:26] Rodrigo Gordillo: That's

[00:13:28] Adam Butler: What is it again?

[00:13:33] Eric Balchunas: 16 billion. Sorry, JEPQ is the fastest to get to 10 billion. The Bitcoin ETF beat it, but besides Bitcoin, the JEPQ is the fastest ETF to 10 billion. So all it does is it, there is a fundamental screen in there, but I don't think that's why people are buying it. They're really buying it to have the S&P or the NASDAQ, but with call options written somewhat out of the money where you get like 9-10 percent dividend yield, right?

Because the option premiums comes and gets back to you is, so A, people like income, and B, you have a little bit of buffer because the income acts as like extra return, right, if it's going down. But the problem is in an upmarket, you lag.

Every time we talk about our products, they say, what do you think about this? It is, it's just S&P 500 plus cash. You know, there might be some differences at the tail ends in like the worst part of 2020, but it's bonkers. Again, I mean, it doesn't matter. This is about conversation and positioning versus reality, right?

There'll always be some people competing for the core. You know, we have GMO at this panel tomorrow and they're not doing anything weird. You know, they're just like, we do our thing, but they have a brand, so if you have a brand, I think you can maybe like, keep some of those customers and just hang on. A lot of these are firms looking to innovate in some way. I mean, JEPI is a JP Morgan mutual fund based on the mutual fund, but to JP Morgan's credit, they did price it at the R6 level. A lot of mutual fund companies come into the ETF world and they price in between the I and the A class.

R6 is even below the institutional class. So it's 35 basis points. The advisor feels like they're getting a lot of legwork out of it, and it's a huge hit. So Goldman and everybody else has now copied with these equity premium. Then this new firm Yieldmax was like, why don't we just move the, instead of being out of the money way out here, let's go barely out of the money. Get a crap load of income and we'll give it all back. It's almost like stealing from your NAV to give you income. I mean, so…

[00:16:37] Eric Balchunas: So, but they yield a hundred percent. So you get this big shiny number. And we just interviewed a guy for the podcast and he claims they're qualified, and he's able to use the income as like, to show his bank that he has qualified income so he can get a mortgage for his house. So there is some, like, there's these under …

[00:17:05] Eric Balchunas: Psychological and structural.

[00:17:12] Eric Balchunas: Yeah I mean, there's like I said, we talk about these products, but even buffers are 50 billion. That's 0.3 percent of all ETF assets. The Bitcoin ETFs, they are 60 billion, again, 0.4per cent. The bulk of the money is still in, pretty much long-only stuff, but something that has 50 billion today could have a trillion in a couple of years.

So we track them early because they're, these are swells that turn into waves and also, if you do this every day and it's your job, when something's new you're like, okay, what's going on here? And then we get the bigger firms jumping in. You're like, okay, BlackRock's doing it. I mean that tells you some, the wholesalers came back to management and said, all the advisors are asking for this, we need, unless you want to give the money to JP Morgan, we need a product.

And so they launched the copycats. That's usually when BlackRock or Fidelity or State Street gets in. That's when I'm like, okay, it's legit. So even like BlackRock launched a B level CLO ETF, and I remember Larry Fink like, trashing senior loans back in the day, but that's how you know CLOs have arrived, because they have the A now, and the B, because Janus has basically, has a mint with, there are two products, but hard to get a…

[00:18:35] Eric Balchunas: You know, the return, I would give the Return Stacked ETFs are, there's something going on there. You guys have good assets for the size of your firm and the idea, you have to explain this to somebody, so watch out, you know, here comes iShares.

[00:19:06] Eric Balchunas: About 520.

[00:19:10] Eric Balchunas: 420.

[00:19:14] Eric Balchunas: In the whole year. So basically, on average, about 1.3 ETFs launch a day. 1.5 in a good year. This year, three are launching a day. So it's, we're almost double the pace of ETFs per day. Three a day. Globally, it's like eight.

[00:19:35] Eric Balchunas: Search for the…

[00:19:53] Eric Balchunas: Well, yeah, the ETF rule allowed, which was like six years ago at this point, I think, allowed for derivative usage in a more liberal way. One firm that jumped all over that was Simplify, but they're not alone. So you have a lot of these firms who are now really using derivatives. I'd almost argue is like you're painting with like six colors, but then now that you can use derivatives, you've got like 50 new colors.

They're all like, they're not the main ones, but they allow you to really fine tune a vision. And so the issuers are now basically trying to figure out all these designs. I heard somebody is going to try to merge the covered call with the buffer. Hey, why not peanut butter and chocolate? Let's go. Well…

[00:20:47] Eric Balchunas: You know, what's funny, the biggest buffer ETF is the one that just puts them all in one. So it's got like, it's like all the buffers. So it goes out and buys the buffer ETFs for you. It's like a buffer of buffers.

[00:21:05] Eric Balchunas: Yeah, it's the First Trust Laddered Buffer, 5.4 billion, and it charges 1per cent. And that might be, I would hope the underlying ETFs fees are included in there, but I'm not sure. But the Innovator and First Trust are the two biggest issuers in the buffer. Their fees are 90 to 100 basis points. That's another reason.

If someone finds success in a Vanguard Free Zone, the word gets around a little quicker, I think. Then, like, if GMO has some success getting their quality ETFs and flows out, people are like, well, it could be their existing clients. But if somebody finds success somewhere out there, people are like, oh, wow. You know, and you're going to find a lot of product, then the salespeople are going to figure out how to sell it, and you'll find some buyers.

[00:22:31] Eric Balchunas: So when we talk about active, so three quarters of all ETFs launched this year are active. That's a lot. That's like four-something-hundred of the 515.

[00:22:41] Eric Balchunas: But let's break this down. 20 percent of that is buffers. I wouldn't call those active. They're active technically, but not like your grandfather's active.

Then I would take the single stock ETFs out. They're also active, but technically. Then you're left with a good chunk of traditional active, okay? Why are they selling? Okay. Well, we looked, I think advisors want to differentiate. I think they're like, I don't want to just hold three Vanguard funds. I want to actually add some more value.

And what happened to the active funds, the Avantis, DFA are probably good examples. Capital Group’s another. You've got these firms, and even Federated came out with, they're taking their mutual fund active, that maybe some of the clients know, oh, I know who Capital Group is, but they're giving you the institutional fee.

So they're charging you like 35. So a lot of traditional active that you used to buy for 80 is now like 35 to 30. And in DFA in advance in this case, their fees are down to like 15. DFA has one under 10. And I think for advisors who are cost obsessed, but they also want to tell a story, I think now that you have active bringing their fees down a bit, to compete more with smart beta and even passive, you've got the fee check. It's like, okay, it's cheap enough that I feel like I'm going to get a good deal, but I also have the story. So I think that's part of it.

Avantis has this one ETF, AVOV. Maybe you guys have some comments on this. I, the performance has been crazy. I mean, it's basically doubled like the small cap ETF. It might've even doubled the small cap value benchmark. Russell, small value, it's the biggest small cap value ETF, all of a sudden. It somehow passed Vanguard and iShares. So it did it through its low cost and it's in a category maybe where active could find more opportunities, I guess. But the performance was good and it got, that got around. I think Morningstar probably gave it a good rating. So AVOV.

And this is pretty impressive because small cap value has been out of favor, but AVOV right now is 13.8 billion. That's a ton for, to come out of nowhere. We launched five years ago. It's 25 basis points, but in fact, at one point it was beating the S&P and I was like, how the hell is a small cap value fund beating the S&P? That's how good the performance was. So I would call AVOB a little archish in that it's got this shiny object moment. That certainly helps. So overall though, I think Capital Group lowering their fee to like the I class of the mutual fund, and then, those kinds of big firms, Fidelity, Federated, once they finally got the upper management to agree to a lower fee to sell to advisors, I think you do get some advisors biting on that because they want to, I think they want the portfolio to be a little more than just two funds.

So let's have an active manager pick stocks that have, are a better deal. So I think between all that, you're getting some takers. Remember, there's a lot of friends and family with these firms. Capital Group, salespeople are friends. They go golfing and like, they just know all of these advisors. That matters too.

[00:26:32] Eric Balchunas: Yeah so that's why I think it's finally starting to sell. I think all that doesn't mean anything if they're still charging 50 bips for slightly like, slight tracking error large cap. I just know that it's 15 bips now, it, more the advisor considers it. I made this chart, 45 degree line, the top 10 most successful active equity ETFs are all above the line. So even in ARK, which is real expensive, but high active share, as you get down, JEPI is like in the middle and then the lower end is Avantis and DFA. So as active share comes down, your fee sort of has to too.

And to me, this is almost like, just charge me for the active because beta can be gotten for free. So in your question, I do think the rise of passive, even if they're not buying passive, it has had an impact on these other areas. And it's sort of, I always, and in the Boggle effect, I think that beta being free is a big bang event that everybody has to orbit around now. You have to deal with how to deal with this. And if you are giving mostly beta for a high fee, that's the endangered species I think, barring any like, First Trust friends and family, where they're able to just get flows into anything no matter what, most of these new products are adjusting. They're either going high active share or low active share but lower fee.

[00:28:04] Adam Butler: Good. Good.

What was that dispersion? Who made a lot of money, and then trying to understand why, has driven a bit more of an interest towards active. And of course, the only way you can get that level of dispersion is if you have a lot of active share in stock selection, and then on the derivative side, just what was different, right? So being able to see it clearly. We've been talking about it for 15 years that one day that'll happen. Nobody cares until it actually…

[00:29:21] Rodrigo Gordillo: So yeah, I think active, I think a lot, like you said, there's an aftershock from Agg going down at the same time as equity. And I think the aftershock has left an opportunity set there for active that'll maybe even last longer than we think, like, maybe we'll get into a decade of active from here, but who knows?

And so that's why I think you see, or our ironic theme is that the more the core gets boring, the crazier the new launches will get, like the more passive takes and flows You will see an ironic byproduct of launches getting really way more creative, to put it to be nice, creative. So, yeah, because I was, funny, I was looking at the biggest ETF hits from the last five years. And besides the Bitcoin, all of them are like JP Morgan, Capital Group, DFA, they're all active, kind of traditional active too. So, if you go 20 years, you're going to see all iShares and Vanguard. So that tells me that active will have a long runway.

I also think there's just a lot of people in the mutual fund wrapper that are clients of that firm. Maybe they don't even understand what they're even in, but they're going to try to move them over to the ETF wrapper. So there could be a lot of flows. DFA is a good example. Like, if you look at their flows on the ETFs, it's almost the exact amount that's left their mutual funds. So that said, if they were trying to move you into something that was more expensive, people might not go. But so the fact that the ETF is as good or better deal, I think makes that transition to the ETF better.

So I'm not saying it's not worth anything, but Avantis, meanwhile, everything's new because they're a new company. Capital Group, hard to tell, you know, they actually did better than I thought when I looked at their five-year flows. I thought they were just going to be an outflow city, but they hold up pretty well. They're the biggest active manager. They have like, I want to say like two and a half trillion or something, but they have a lot of active money. So a good portion of that's going to end up in the ETF wrapper. So as we see active grow, it's not all organic hits. You know, you can, a lot of it's going to be like that BYOA money coming over, I…

[00:32:42] Eric Balchunas: A save is better than a loss. Yeah.

[00:32:49] Eric Balchunas: Better than dying.

[00:32:51] Eric Balchunas: A lot of them are coming around to, I think that you, I think a lot of medium to big size firms, small firms, and when I interviewed Bogle, he said the same thing. He goes, small firms, whether it's Pfizer or Asset Manager, they're usually fine. They somehow can just live underneath all these tectonic shifts because they usually have good relationships with their own clients.

If a personal relationship is like, the mid and big ones are where you're going to see a lot of consolidation, and I think in this, if once we finally get a bear market and the bull market subsidy stops lifting, like, the Fidelity Contra Fund's assets go up every year, even though it sees like 40 billion of outflows. Once a bear market hits, I think, if you don't have some kind of a stake in the ground on the ETF side that's growing, I think you'll probably just be like a takeover target. You know …

[00:33:51] Eric Balchunas: What is that? Yeah. Okay. Well, was that what you said? Yeah. No, I, maybe I was somewhere like last week and I said, but I don't know, maybe we'll never see one again, because there's a, I'll put my tinfoil hat on for a second. So, there is a decent theory that, you know, how COVID hit and the market goes down, and the Fed buys bond ETFs and the market goes back up, and we're good.

So I think, if you have a massive selloff, it's very possible someone from one of those firms calls and says, we're about to have a liquidity event. You want a run on mutual funds, then fine, don't do anything. And it's almost, so we actually had a theme two years ago, it was out of COVID, that we think bond mutual funds in particular are like too big to fail because there was a point when the selling was getting so great. You saw it in the discounts and the bond ETFs. And there was one or two bond mutual funds that the NAV went down like 30 percent in a day because they were having a run on that. And there…

[00:35:35] Eric Balchunas: Well, that was the canary in the coal mine and the PIMCO income which is the biggest on the planet went down 12 percent in a month, and it saw 15 percent of its assets leave in a month. So do the math, you only need another month that, before you have to stop redemptions. And India's bond funds had to freeze, the mutual funds implode and have, people won't be able to get out. That almost puts, that almost tells you the Fed put has to exist.

That's kind of their job is to keep stability in pricing, right? So I would imagine, and especially now so coordinated, the amount of interventions are much higher than we've ever seen them. They're likely to be there over and over and over again. So I…

[00:37:28] Rodrigo Gordillo: Well, it depends on how you perceive a debt.

[00:37:31] Rodrigo Gordillo: I think. What you're talking about and what I agree with is that not notionally you're going to have over the nominal exposure of bonds, needs to have a constant bid. The world needs to see an equity line from bonds going up. They need to see an equity line from equities going up.

But if you were to look at the real return line of bonds, it continues to be in a massive bear market, right?

[00:37:56] Rodrigo Gordillo: The actual return of your product.

Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast, and we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non-correlated to traditional equity and bond portfolios.

So we actually manage private and public funds, as well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we've been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:39:00] Eric Balchunas: So look, a lot of issuers have tried to fake put privates in ETFs. We actually wrote saying, you just can't do it. This is one thing that's not ETF-able. Let's just all live with this. But you know, they're always going to try. The ETF market is like the Silicon Valley of the asset management world.

They're just going to keep pushing the technology as far as they can go with it. Well, this filing came in from State Street that was a novel approach. The other ones that came out would try to, they'd buy like micro-caps and be like, well, micro-cap stocks have the same attributes as private equity, but that's, I call that fake, okay? So this one is a little closer to real.15 percent of this fund will be in actual private credit.

[00:39:47] Eric Balchunas: 15per cent. Well, there is some debate on whether you can go higher because of, it's a long story on what you consider liquid, but for now, let's just say my guess is it will be a portion of the portfolio, not the whole thing. And the, and Apollo, whose name's on the fund, by the way is important, they're going to provide the liquidity backstop. So they promise to buy all the bonds back in the sell off. They'll have bids and asks and work with the market makers and APs for the private portion. The rest of the fund will be like high yield bonds and other publicly traded bonds. And this is novel because you're bringing in a legit private credit issuer, I mean company, and they are willing to put up that capital, and…

[00:41:04] Eric Balchunas: I didn't see anything about other funds, so my guess is that it could have come from that. My guess is that, I think Apollo is like, look, if there's a huge sell-off in private credit, that's like the best time to buy. So they're probably like, yeah, we'll take it off your hands at fire sale prices. So I think that's one reason they came to that conclusion.

The other is, the guy who is the CEO of Apollo is Mark Rowan, I think it's his name. There's a good interview with Jonathan Farrow that just got put up like two weeks ago. I would listen to it. He says, private credit is not as illiquid as people think, and public credit is not as liquid as people think.

And he just has, he thinks like, in Australia you can get private credit in your, in the retirement plan there, and those returns have been great. So this guy has big plans and vision to bring private to retail. The reason that matters is because they're huge and they're, if they're promising that, then it answers the question, how do you make something illiquid, liquid? Well, you have somebody who promises liquidity. Whether the SEC says yes or no, we'll see. BlackRock also bought Prequin, which is another move, and Larry Fink has said we want to democratize this. I don't know if that means the ETF or not. My guess is after seeing this filing, they're going to have something brewing.

Now, everybody will say, well you should put all this in an interval fund, you know, where you can only get out every quarter. I get that, and, more power to people doing it, but like, nobody wants it in that format. It'd be like putting up your latest album on a track, cassette tape, only like who would do that? Like, there's a couple like, you know nerds who like care that much but…

[00:42:52] Eric Balchunas: They just don't want it in that format, and so they won in the ETF format and I have this note, that is, that I feel as though ETF investors over the years have gotten, the ETFs have built up so much trust in, with the investors and the traders, that even when there's a huge discount, like a bond ETF, I think they trust the price of the ETF more than the NAV, which honestly, they should. A lot of the NAVs are just not quite up to speed with what happened.

So, there was a case of the VanEck High Yield Muni ETF, HYD. It traded at 20 per cent, 29 percent discount during COVID. Today, since then it's taken in a billion dollars of new cash. It trades just as much as it did. Like, nobody gave a shit. So I think that's crucial because you could put the, even if 15 percent never trades at all, I'm going to leave it to the APs and the market makers to figure out something to proxy, and they're going to let the arbitrage stretch until it's profitable for them, but there will be a point where they'll arb it.

And I think that the end investor trusts that process to play out, and they're happy getting the price minus all the costs. Whatever the arb people need, and I think that's why it'll succeed. And I think there'll be others to follow and why it's a little disingenuous to say you can't put anything illiquid in an ETF.

I mean, every day that Japan ETF’s illiquid, there's been the Egypt ETF was trading for three months during the Arab Spring where the stock market was closed. So there's plenty of cases of this, and obviously the COVID was another one and you can tell like nobody's turned off by this. These funds do the same volume or more and everybody moves on. So I just think this is the vehicle people want and they're ready to trust the price.

[00:44:54] Adam Butler: …

[00:44:57] Rodrigo Gordillo: … can buy your ETFs. You can buy the security, but why do that when you can buy an exchange traded fund that does the same thing? Like what the hell's going on there?

[00:45:11] Rodrigo Gordillo: But it's not even, are they two times levered? Are they just single, like single exposure?

[00:45:54] Rodrigo Gordillo: Does the currency hedging for you on single stocks, amazing.

[00:45:59] Rodrigo Gordillo: That's something I never thought I'd see, to be honest.

[00:46:03] Rodrigo Gordillo: The other one I…

[00:46:07] Rodrigo Gordillo: The other one I didn't think I'd see coming back with a vengeance is that CLO market. Why don't you tell us what's going on there?

[00:47:16] Rodrigo Gordillo: I was going to say, whether this is mostly institutions.

[00:47:24] Rodrigo Gordillo: Hmm.

Anyway, these things have good returns, almost no volatility, and no correlation. So they check a lot of boxes for a solid alt. And I didn't appreciate that until we had it on the show when I charted it. And I was like, holy moly, there's some good numbers here. Now, this is the curtain. It might change in a different environment, but in this environment we're in, the numbers these things are laying down are really, like, they're attractive.

Bitcoin, Crypto and Hot Sauce

[00:48:44] Eric Balchunas: Everything I just explained to you about like the modern portfolio and like, okay, I've got my serious stuff. I'm going to wait 30 years, whether that's a quant approach or, you know, beta, passive, the key is we got to wait. Even like factors, you got to wait it out. So people are like, great. But then they're like, bored.

And, you know, I think that would go in the, it fits in the hot sauce bucket perfectly. It's something that's very volatile. To me, it's like young gold. It's like gold as a teenager. You know, this is like, what, 20 years old, 18 years old. Gold's like 4,000 years old. Same purpose, store value against a declining dollar. Pretty simple message. But it's got the volatility that can excite you a little to fit more in the hot sauce bucket versus an alt. So to me, people are using it more as something to spice up the portfolio and to cure future FOMO because they're like, I don't want to kick myself if it goes to a million, because I saw that happen last time.

And now that it's an ETF, I don't have to like deal with all the bullshit, the friction of like getting your own wallet. You just click buy. And I, and this is BlackRock or Fidelity. I trust those guys. So, you got brand names involved, low fees, they're all 20 to 30 basis points, high liquidity, and this practical place they fit in the portfolio, which is the spicy side.

So to me, I could see a lot of people doing 1, 2 per cent allocation in these, so it's not a surprise to me that they're successful. That doesn't necessarily mean that it will go to a million dollars, but 63,000, because there's a bunch of dumps that happened in the past like year, and it was trading at 30,000 when the BlackRock ETF filed.

So you've gone from that BlackRock filing, and that's with some dumps. So the ETF, I think, has really, in a way, just revitalized Bitcoin, I think. And I was just looking at something last week where Jay Jacobs, who's a really polished, uh, salesperson for BlackRock, he is out, you know, he's giving a presentation to their clients on digital assets, and he has a huge chart of the decline of the purchasing power of the dollar.

And you just got to stop and remark on this moment that like, here's the biggest asset manager, basically with a message that just comes from like the corners of Twitter. Do you know what I mean? And for those kinds of firms to adopt this, and then Larry Fink goes on Fox and says, if you don't trust your government or you think they're going to like, destroy the currency, this could help.

That's, they've gone a long way, and that's going to provide good amount of cover and convincing for some of the intermediaries out there. So I don't, whether you're, it's hard to be bearish on that, which is, these firms who finally have a product that like Vanguard doesn't compete in, and they never will.

We can get a little thing going on here. Let's pour some resources behind it. And of course, the people who are buying it, the intermediaries and even retail, they were getting screwed on Coinbase with commission fees. Sometimes some of them pay like over 1 percent just to do a trade. Well, the ETFs one basis point.

So it's a hundred times savings, right? And the expense ratio is only 20, 25 basis points. I think for the amount of outsourcing you get here, I think they're like, this is a really good deal. So I just, but still 60 billion is 0.4per cent, 0.5 percent of all ETF assets. But to do this in nine months is absurd. The numbers were ridiculous. A lot of records were broken. So, I think a new category has been born. It's going to be, like, adjacent to gold. I think they'll both be, like, equal assets someday, and that'll be that.

[00:52:55] Adam Butler: …

[00:53:02] Rodrigo Gordillo: I'm trying to figure out what I, what I can say about it.

[00:53:06] Rodrigo Gordillo: We can't say much. There's, we'll just leave that there for now, but yeah, that's, I'd…

[00:53:13] Rodrigo Gordillo: Look, I was looking at the, I was looking at that chart that you showed of the depreciation of the dollars, the 66, you know, the depreciation of the dollars since 2020, like your purchasing power, all in, has gone down around 20 per cent, and in Europe probably more, right? So that's a modern day, a last four year type phenomena that those prices aren't going back down again. This is the thing, like things got expensive and it's not like when inflation goes away, we're going to get cheap again. We're stuck at new levels.

So this idea of hedges to that. Whether it's commodities, gold, and Bitcoin, I think are going to continue to be in the zeitgeist as more and more interesting topics to explore.

[00:54:27] Rodrigo Gordillo: … your market that I was saying.

It does its own thing, but it's not going to like go crazy in a bad way. You have that, you always have that potential with Bitcoin now. So the combo is interesting. I also thought somebody would put one out that's like Bitcoin minus gold for the haters. Other Bitcoin people who hate gold. And then gold minus Bitcoin, because there's definitely some bad blood between those two, even though they have a lot in common.

[00:55:22] Eric Balchunas: So much in common. Like someone could definitely bring them together. But they, I think they're competing with the same mindshare.

Forget about the economic reasons why it should, why it shouldn't. It just, it has delivered. It has delivered. It is a competitive asset class, and whether it continues to do so, I don't know, but they have been right. And, I don't know, Bitcoin? Bitcoin?

[00:56:13] Rodrigo Gordillo: Yeah.

[00:56:25] Eric Balchunas: Yeah, I mean, this is a whole other wing of innovation, which is, let me help with taxes. So, people who are sitting on a lot of gains, Wes has a white label and he's seen people want to take their existing bulk of separate account stocks ETF, to be able to manage the taxes on it, because you can use the creation/redemption process in creative ways on that front.

DFA is a good example. I think it's DFA, I forget the ticker, DFAC. If you look at the creation/redemption, it looks like a heartbeat trade, is a tax trade. Normally it's like this and then like this. This one's like, it's like somebody going like, you know, on speed or something. They converted it and then instantly just went wild with the washing machine.

So, I think what Wes is trying to do is say, instead of a separate account from a rich person or an institution who's using the ETF, why don't we open this up for anybody who wants to seed it. So we'll let all the little fish in who want to do this and then we'll move it into an ETF. I just talked to him before I was on with you, and I'm still trying to get my head around a little bit about what's possible.

Hard for me to understand, is just that now you're in this ETF with all these other people's stocks. That's what's new and weird. I can't quite crystallize that yet, but I'm working on it, but that's good. If something is new, sometimes it takes a little bit to figure, but for the same, it took me a little while to wrestle with the concept a little bit.

It's novel. Now, his Box ETF is basically using derivatives to track the, I think it was like a short-term Treasury bill, but you don't get any income. So you, so again, creative. And there's been a couple filings since that to do similar things. So you are going to have a whole, if I went over psychologically earlier, there's going to be a whole wing of ways to help with taxes.

So the specificity of this stuff is really getting wild. I mean, like I said, this is the most creative industry, or I'd say sub-industry in the broader industry, in my opinion, in product design, and it's good at democratizing things that they see elsewhere and like, oh, let's bring this to the ETF market. So I'm not surprised, but I didn't think this would exist. I didn't like, say this should happen. I get it now in retrospect.

[00:59:14] Eric Balchunas: So, moving your, somehow you're able to work with Schwab to get, you have to fill out a couple forms, but they'll move the stocks over to the ETF.

[00:59:47] Eric Balchunas: You essentially defer them by putting them in this thing.

[00:59:55] Eric Balchunas: So again, I had five minutes on the phone with him. That was one thing I didn't totally get, which is that, okay, if you're not dodging the tax, if you're not able to wash all the gains out, you move all your stuff. Why not just hold it in your account until you're ready to sell anyway?

[01:00:53] Rodrigo Gordillo: So it's, I'm just reading here the kind of the top line, which is…

If what you said was true, that's what looks like happened with DFA. They convert it and they start to wash. That doesn't sound exactly like what's going on here, because he says you carry your tax bases over with you. And I say, well, can't they just wash away the gains? But he's like, no, you still have to pay when you, anyway, I got to, I don't want to give misinformation here. Like…

[01:01:42] Eric Balchunas: You said to me, is what I thought it was, but then he pushed back a little and I was a little lost at that point, because then I was like, well, why would you do it then? So, I…

[01:02:03] Eric Balchunas: Yeah, but if the ETF goes up, that's new. And in that example, you've washed out all of your old gains. But I don't think that's exactly what happens.

[01:02:12] Eric Balchunas: If that was it, that's, I thought that was it, to be honest. So, I…

[01:02:22] Rodrigo Gordillo: … you to, if you have a big, if you have two or three big stock positions with a big capital gain…

[01:02:29] Rodrigo Gordillo: Can you guys hear me? Okay.

[01:02:32] Rodrigo Gordillo: Yeah, if you guys, like if there's two or three, four or five ETFs that have massive capital gains and you want to get off them, you want to reduce your position, you want to, you're terrified that you can't sell them because they're so concentrated, you seed this ETF and they swap your positions for the ETFs quality and value position kind of portfolio, and I think you somehow, you get that, you're still on the hook for the capital gains. You're just not paying to get out of those risky positions into a more diversified portfolio.

[01:03:01] Eric Balchunas: It, that makes sense. That's a little less powerful than what you said and I thought, though, in my opinion, because I'm thinking, you put all your stuff in there, they wash it out, then you just sell, tax at a small gain, if it even went up at all, two months later.

[01:03:19] Adam Butler: For sure. For sure.

[01:03:25] Rodrigo Gordillo: Yeah, I think

[01:03:35] Eric Balchunas: There's another thing there. That's the other variable. Yeah. So…

[01:04:02] Eric Balchunas: Not really. Obviously, you guys, we can't talk about your funds, but congratulations.

[01:04:09] Eric Balchunas: I had Corey on my podcast

[01:04:13] Eric Balchunas: Six weeks ago or so. So, yeah,

[01:04:20] Eric Balchunas: That's right. I would, I actually, way less because it's about the passive indexing. It's going to be, it's going to, I'd have to think that, yeah. But yeah, anyway, good to…

[01:04:34] Eric Balchunas: You can couple places, LinkedIn, Twitter, and then, the podcast Trillions, is free. So you could just like, go to Spotify or wherever, and get me there.

[01:04:45] Adam Butler: Just like Eric, we got to…

[01:04:48] Adam Butler: We not…

[01:05:11] Rodrigo Gordillo: Nice, nice. Okay. So anybody with a terminal, I can go there. I'd just say, and then of course, Eric has written a book recently, The Bogle Effect: How John Bogle and Vanguard Turn Wall Street Inside Out and Save Investors Trillions. I would highly recommend going to Amazon and downloading that book and, or through your Kindle or getting it. I don't know. Are you doing signed copies there, Eric? Can you send those out to…

[01:05:46] Rodrigo Gordillo: And there are a lot of work and there are a lot of work and it's actually very, very entertaining. So very beautiful.

[01:06:04] Rodrigo Gordillo: Awesome. Thanks, Eric. Thanks for coming.

[01:06:07] Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind our listeners that the team works really hard on these podcasts. We spend a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we're asking the right questions. So if you do have a second, just do hit that Subscribe button, hit that Like button, and Share with friends if you find what we're doing useful.