ETF Edge, August 7, 2023

and welcome to ETF Edge your go-to place for everything exchange traded funds I'm your host Bob pazzani it's put up our shut up time for the SEC they are required to give a response to ark's application for a Bitcoin ETF spot Bitcoin by August 13th with many other Bitcoin ETFs including BlackRock and Wisdom Tree just a few days behind will they say yes no or punt it down the road let's talk with a man who has one of those applications in that's Matt Hogan he's Chief investment officer for bitwise Asset Management Matt you have also filed for the bitwise Bitcoin ETF trust just behind our handicapped this for us does the SEC say yes no or punt it down the road yeah if you look at the history of ETF applications around spot Bitcoin ETFs Bob they've historically punted it down the road in every case since 2016. they've taken up to or entirety of the 240 days they have to review these applications these are complex applications with a lot of data I think they're likely to extend this until the final review which comes in January so if if they want to push this off further the drop dead date is the is January is that right they can extend it again that's right the law gives them up to 240 days what this August 13th deadline is an interim deadline sort of like a check-in can we decide now or do we need more time to review my guess I don't know but my guess is that they'll need more time to review as they have in each instance in the past yeah we got a long line here I mean besides Arc we we have bit you bit wise BlackRock van heck Wisdom Tree Valkyrie First Trust Fidelity and grayscale wants to convert into uh into an ETF as well so talking to the community and just getting a sense they seem very excited the crypto Community because the current crop of applicants has this surveillance sharing agreement in it with exchanges like NASDAQ and Placebo that would allow for the sharing of information about market trading activity and clearing activity and customer identification and supposedly this will reduce the chance for Market manipulation which is the main complaint the SEC has it also seeks to ensure that investor assets can't be diverted by the exchanges to an unauthorized party that was the big issue I know at FTX so is this enough is this sufficient to address the sec's concerns about fraud and manipulation it's a great question Bob you know I think it's very helpful but it's not a silver bullet look what the SEC wants is for a spot Bitcoin ETF that the American public can trust that provides careful exposure to the price of Bitcoin that doesn't lose customer assets Etc so they're evaluating a totality of circumstances the surveillance sharing agreements between traditional exchanges and crypto exchanges like coinbase are helpful but it's also helpful that we've had a Bitcoin Futures ETF on the market for almost two years it's also helpful that the regulated Futures Market is large and robust and growing it's also helpful that we have a better understanding of crypto custody of broker transfer the totality of circumstances is what the SEC is looking at I don't think there's any Silver Bullet but I do think if you step back and look at those totality of circumstances we're in a very positive State I think the market is ready for a spot Bitcoin ETF I think investors deserve a spot Bitcoin ETF and I'm hopeful we'll get one sometime in the coming months yeah I'm in agreement with you there is a lot of optimism out there in the crypto Community I've heard several reasons some say well look the SEC has just approved a two-time leverage Bitcoin ETF well that's got to be a sign that they're sort of softing up a little bit but the biggest thing that I've heard which makes a lot of sense to me is this lawsuit that grayscale has brought against the ace the SEC so grayscale wants to convert its grayscale trust to a Bitcoin spot Bitcoin ETF the SEC has denied them and in some of the hearings the judge seems to have been very hostile as to why the SEC has approved a Bitcoin Futures ETF and not a spot ETF very aggressive in his questioning I just spoke with Michael sonnensheim from grayscale he tells me a ruling in the case as expected any day now could that move the dial if it went in grayscale's favor I definitely think it could move the dial Bob you know you and I love ETF history we know that in Canada which has spot Bitcoin ETFs it was a lawsuit that provided the initial breakthrough that got us over the hump there to get those listed in trading I think this would be an important Catalyst the you know grayscale is arguing that you can't have a futures-based Bitcoin ETF and say that there is something wrong with the price of Bitcoin that doesn't allow you to have a spot Bitcoin ETF that has a certain amount of logic to it and if the courts can enforce that that narrows the window of the questions that the SEC can ask about in this space again it's not a silver there is no Silver Bullet but it is another piece of helpful evidence that might help push us over the edge yeah I was very impressed with how aggressively the judge questioned the SEC in the grayscale case they seem to imply uh that the SEC hasn't really explained grayscale exactly why they have been turning them down so if a spot Bitcoin ETF is approved should the SEC approve all of them at once what what happens let's assume something happens should should they approve them all at once do you think that should be the case I think there should be a fair playing field that allows us to have multiple spot Bitcoin ETFs that compete in the market that's actually the best outcome for investors it will allow prices to be the lowest it will allow competition to be the highest it will allow service to be the highest it's what investors should want and it's probably the fairest to the industry there maybe shouldn't be just a lottery based system based on when you filed and when you get approved let's line up the best spot Bitcoin ETFs at the starting line say go and see who can win the market you know we're confident at bit wise that if we have the opportunity to compete in that space we'll be able to win our fair share but most importantly that would be what's best for investors and that's really what we should be arguing for here well certainly we have seen the first mover advantage in anything that's out there in the business particularly in ETF so this would make a lot of sense to me and what do you make of this idea oh BlackRock got in because BlackRock must know something or gee BlackRock has a great record of applications but I'm not so sure that they're not simply watching what everybody else is watching uh particularly this whole debate with with grayscale and the lawsuit going on I mean what are you making when people say oh BlackRock must know something yeah I don't think there's any conspiracy theory there's no Whispering of messages to Blackrock what there is is the world's largest asset manager a very sophisticated player in the ETF Market looking at the totality of conditions and saying they think the time is right for a spot Bitcoin ETF and on the other side of the of the aisle equally important BlackRock saying we think Bitcoin is an important asset for investors to get exposure to for the next year the next three years the next 10 years again I don't think there's any special conspiracy but they are a sophisticated player so it's another sign that the best ETF experts in this market thinks conditions have matured enough to allow the SEC to say yes and I hope that's what we see and and what about this endless debate about whether cryptocurrencies or Commodities or not we haven't even addressed that can you explain simply Matt you've done this before for us why is Bitcoin considered a commodity but the SEC contends other coins apparently are not what is it about Bitcoin that makes it somewhat special it seems to a certain extent yeah it's a great question because the SEC has singled out Bitcoin and said it's clearly a commodity and the cftc has agreed it's all about centralization Bob you know Securities laws are designed to protect investors from insiders knowing something about a company or an investment that the public doesn't it's about you know let's not let those insiders pull the wool over the eyes of the investing public but with Bitcoin it's so decentralized we don't know who created it there's no single person in charge of it it's globally distributed around the world there are no insiders all the information is public and that's what makes it clearly a commodity as you go from Bitcoin to ethereum to other assets the degree of centralized control increases and the question gets more complex eventually I think we'll have legislation solve that but what's important for investors to understand is that the regulatory status of Bitcoin specifically is very clear it's a commodity it could fit into an ETF trust and I think both of our major Regulators in the U.S agree on its commodity status you mentioned legislation what are the chances of getting Congressional rules on on crypto everybody seems to want that it seems to be very far away though you know I don't think it's as far as people think Bob I've been on Capitol Hill recently meeting both with Republicans and with Democrats and I'd say two things from those meetings one the level of understanding about crypto is extremely high Congress didn't know much about crypto a few years ago now they're really experts and two the bipartisan sense that we need legislation to provide a firm regulatory framework for crypto in America so we can compete internationally is very clear look you have the two largest Regulators disagreeing on whether most crypto assets are securities or Commodities the right solution there is for legislators to come through and make that clear so that U.S innovators can win in the market I'm actually optimistic we'll see that sometime within the next two years even with the challenging sort of network in Congress we have there is real progress there being made all right two years that I'm going to hold you to that now stay there Matt I want to I want to Pivot for a moment I want to bring in a special guest a friend my legendary Financial author William Bernstein joining us now with a new addition of his investment Classic this is the four pillars of investing on how to use ETS partly I'm going to talk to them about I'm building a long-term portfolio but he's the author of many many other books including the birth of Plenty one of my favorite book A History of the World standard of living essentially and the delusion of crowds why people go mad in groups Bill thank you very much for joining us and before I get to your book uh I think you were listening there to our discussion on bitcoin do you have any thoughts on crypto crypto is it money does it deserve to be considered an asset class what are your thoughts well I think that the key term is is the word itself crypto currency it is a currency and one generally doesn't think of currency as part of an Investment Portfolio it's a unit of account but it's not an investment product per se so I would no sooner invest in cryptocurrency than I would in you know Swiss Francs or English pounds and then stick them in the mattress and there are some people would argue that it's not not money of course but uh I want to turn to your book uh because that's why I'm having you here today the four pillars of investing this book came out 20 years ago I read it then it was it's become a bit of an investment classic before I get to the four pillars I want to let the viewers know you were a very early proponent of indexing you're one of the championship champions of that uh you have generally argued against stock picking and Market timing uh is there anything that's happened in the last 21 years that has altered your your fundamental views on this uh the only thing that's happened is I'm nailed 20 years older and I would like to think I've acquired some useful experience uh and one of the things that I acquired and and learned both in 2008 and more recently during the march 2020 covid uh Swoon was that how you behave in the worst two percent of the markets probably describes 90 of your overall investment performance because compound interest is Magic and the prime directive of compound interest as Charlie Munger famously said is to never interrupt it and so that you should design your portfolio with those two percent of the world's two percent of the world in mind yeah that's a very good point let's go over the four principles because it's important if you've got the book title four principles let's say what the four principles are uh so number one here is the four principles of investing number one is Theory here risk and return are joined at the hip the higher risk you get higher return if you desire safety you have to accept lower returns so that's the theory behind this and of course a lot of people understand this intellectually they don't necessarily do it though that's right I couldn't have said it better uh myself I felt you know risk in return or joined at the hip and if you want uh perfectly uh perfectly safe portfolio you're not going to have high returns and if you want the high returns that come with equities then you're going to have to sustain bone crushing losses hopefully they will be temporary from time to time and basically you don't get those stock returns for free you have to pay for it with stomach acid all right number two of the four principle of investing is the the History part of this and that is the Market's uh overshoot on the upside and the downside but there's only so many plot trajectories now what do you mean by that bill and said there's only so only so many plot trajectory what's the takeaway for investor to say markets overshoot on the upside and downside well markets don't get either very expensive or very cheap without a good reason so at Market bottoms uh everybody likes to say that you know we're gonna I'm gonna buy at the market bottom but you don't know where that is except in retrospect and the narratives at Market bottoms are really scary it looked like in the end of 2008 that our entire Financial system was collapsing uh it looked like in 20 early 2020 like there were going to be tens of millions of world wide vets in the markets uh uh and the economies of the world are going to completely shut down and remember that in March of 2020 there was no vaccine in sight all right so the world look looked very scary then so you have to just be able to keep your discipline and understand that the market expected law could return has to do with the perceived risk of the market and the perceived risk of the environment that you're in so the risks seem very high same things things very things seem very scary then you have to be paid with a high expected turn to compensate for that risk yeah let's move on this is a investing pillar number three here and that's the psychology part of all of this uh you are Your Own Worst Enemy one of my favorite lines from from you which is true this goes through behavioral psychology and people don't Buy Low and sell high they do the opposite and investors tend to be overconfident about their ability to pick stocks and about their own risk tolerance there's a lot in here but you I want to start with that point about they're overconfident about their ability to pick stocks if there's anything that you stood for and and a number of other uh people out there it's that market timing generally does not work and picking stocks doesn't work over investing in indexes the academic literature is pretty overwhelming on this bill and and how do we keep emphasizing this to the new generation I guess well you tell people a couple of things in the first place whenever you buy or sell a stock the guy on the other side of the trade isn't some dentist from Peoria who doesn't know what he's doing all right it's generally that person on the other side of the trade generally has a name like Warren Buffett or Goldman Sachs and that's not even the worst case scenario the worst case scenario is that you're trading with the CFO of the corporation who knows more about it than anybody else on the planet and the analogy I like to use or the metaphor I like to use is you're playing tennis against an invisible opponent and what you don't understand is the person on the other side of the net is Serena Williams all right so that's that's the main thing now the other thing has to do with timing the market and all you have to do is just look at the history of newsletters and Market timers to see that no one and I mean no one consistently calls the market with even 60 or 70 accuracy more closely more more likely it's more like 30 to 50 which is worse than a coin for them right and by the way you have to you have to hit 70 to win because not only would you have to decide when they get out but you have to decide when to get in when you get in that's yeah and the math says you have to be right about 70 of the time you do both of those things successfully and no one does that it comes even close right you also said investors are overconfident on their risk tolerance that that's very interesting and this ties in what you said earlier uh how you behave in the worst two percent determines what you're going to do so it turns out people are risk tolerant until the Market's down 30 percent and then all of a sudden they're less risk tolerant how do you convey that how do you make that into something real for somebody well I quote that famous Financial Economist Mike Tyson who said that everybody's got a plan until they get punched in the mouth yeah that's true so the bottom line is I think the simple way to do this is prepare yourself for like last year the market was down 20 percent most people were very very worried and I got lots of emails so we pulled money out and I say you know if you were a long-term investor this year is not going to matter in the next next 20 years I think that's the key Point here let me just move on here and go to four pillars of investing number four and that's understanding the investment business and who you're dealing with the primary business of most fund companies is collecting assets it's not managing the money that's very profound assets under management is what matters not necessarily managing the money and pay close attention to fund fees and of course this was Bogle Jack Bogle Central Insight that even when you get a fund manager who might have some Alpha that's often destroyed by the fact that their fees are are are too high here so I think a lot of people have absorbed this um idea bill I mean this is one of the reasons ETFs have proven so popular how do you feel about the ETF business and it its role in reducing fees for example generally pretty positive uh one can purchase a lot of investment products now uh for next to nothing in terms of expenses a couple of basis points uh and you know this was you know Jack Vogel wasn't wrong about very many things but he was wrong about his opposition uh to ETS and thank goodness that Gus solder was able to convince him in the Vanguard group to go ahead with their ETF offerings yeah the very few things Jack was wrong when he was wrong about that and Jack thought there was going to be too much trading around ETFs and there is uh but the benefits far outweigh anything else Matt you've been sitting there quietly any thoughts on this uh the the academic literature certainly supports the idea that market timing and going in and out of stocks is a bad idea but there's a whole new Young Generation of Traders particularly since coven who seemed to love doing this they love doing options too um Matt how do you convey Bill's wisdom in history without those younger people saying you know yeah guys are all a bunch of old fogies doesn't matter that much anymore what what any advice Matt you've been around a while great question and it is true wisdom it's extremely true you know indexing always appeals to the head but there's always a part of people's heart that thinks they can time the market My Hope for people is they put the vast majority of their portfolio in low-cost index funds and buy and hold and then if they have to have a small portion that they try to time the market and learn those lessons individually that's fine but protect the bulk of your assets in low-cost index funds for the Long Haul it's extremely good wisdom and Bill what do you say to people when Gamestop happened people message me immediately said aha you see this proves fundamentals don't matter the company's not making any money it doesn't look like it's gonna make any money look at the price of this this crazy thing it makes no sense at all on a fundamental basis and ultimately of course those of us who are fundamental investors believe that long term that this will play out but you have to admit short term they can certainly make things a little crazy what's the correct response to people who say well look at GameStop fundamentals don't matter that much anymore yeah almost 100 years ago my father kept trying to convince uh my grand my grandfather to invest in in stocks during the 1920s and he just kept saying no son I'm not gonna you do it and then finally my father in exasperation about him and said my dad shouldn't I invest in stocks and he just said you'll see and of course 1929 happened and that was that was the answer that's my that's my that's my response to people who are enthusiastic about neem stocks is just wait a few years you'll say well so you broke up a little bit there bill but your point was what this craziness happened in the 1920s too and eventually fundamentals caught up with everybody is that that was the point exactly yeah that was the point it was just a story of my between my father and my grandfather and my grandfather find the exasperation look at my father and said just waited for a few years in the 1920s and you'll see what happens to all these high-flying stocks yeah well my response has always been the reason people buy stocks is to participate in a future stream of dividends or or potential earnings that would turn into dividends and I am not aware of any reason why that has changed over the years um but you can get groups of people to suddenly believe in other things do you I don't know if you remember bill but in the 1980s and 1990s we used to have on a fellow Arch Crawford who used to buy recommend buying stocks based on astrology so the the moon was in Venus by Microsoft literally like that and we all sort of said you've got to be kidding me here at CNBC 30 years ago but he had a very large following of people and obviously this had nothing to do at all with the fundamentals but I guess my point here is if you could convince this officially large number of traders to suddenly believe in sunspot activity and that was going to affect something I guess you can move stocks for for a while but ultimately you got to go back to fundamentals somewhere yeah I mean it's called Data Mining there's you can always find spurious correlations most famous example of that was about 20 or 30 years ago somebody uh figured out uh that when he plumbed the um United Nations economic database that butter production in Bangladesh precisely predicted uh the movement of the S P 500 well if you're looking at 100 000 different parameters you're liable to find one that's very accurate but of course there's no guarantee that's going to do terribly well going forward yeah or that there's even any correlation there that it's any but statistical anomaly there this has been a great conversation we go on all day but I've got to leave it there that does it for this week's etfas my thanks to Matt and to bill now we've asked Matt to stick around and offer a little bit more perspective on ETFs and crypto for the ETF Edge podcast that's coming up and remember you can see all of our shows on our website etfedge.cnbc.com everybody have a healthy happy and safe trading week get the ABCs of ETFs with the ETF Edge newsletter your weekly update on the hottest Trends expert analysis actionable ideas and exclusive Insight from host Bob fasani sign up now at cnbc.com forward slash ETF Edge newsletter [Music] foreign [Music]

Channel: CNBC Television

Views: 2,240

Keywords: ETF Edge

Id: EJU8S3OQTMI

Length: 24min 12sec (1452 seconds)

Published: Mon Aug 07 2023