Will Bitcoin Price Collapse? What ETF Data Reveals | Eric Balchunus

Eric balunas joins us today he is a senior ETF analyst of Bloomberg intelligence and the author of The Bogle effect how John Bogle and Vanguard turned Wall Street inside out and saved investors trillions we'll be talking about how impactful the Bitcoin ETFs have been on the price itself and ultimately the market of Bitcoin and cryptocurrencies how investors can benefit from ETFs and will be taking a deep dive into the world of passive investing with Eric who is an expert on all things to do with ETF yes first award from our sponsor it trust Capital an IRA that offers 35 crypto assets and the lowest trading fees in the crypto Ira space at 1% if you'd like to learn more about its unique tax benefits click on it trust. capital David in the link down below and get started also you get a $100 US funding bonus if you sign up a new account with my link down below anybody over 18 can sign up for a new account with new cash or if you like to roll over an existing account uh both work click on the link down below to learn more Eric welcome to the show good to see you great to be here yeah nice to be with you thank you Bitcoin is up about 50% year to date making it one of the best performing assets of 2024 how much of this bitcoin price rally can be attributed to the Bitcoin ETF launch uh yeah I mean it has to be pretty huge because I've been watch ever since the Black Rock filing last June uh Bitcoin I I think was around 30,000 and since that filing there was a more and more good news and it was sort of like a buy the rumor and that drove the price up 60% they when they approved it there was a little bit of a sell the news event there but then the inflows were so strong you know right off the bat they were strong but I expected that but then they had this really big second wind and it's really rare even for a hyped up new launch normally there's Fan Fair the first couple days then it kind of like settles into an equili and then maybe down the line it catches fire again who knows this one like caught fire like in the fourth week and went straight back up in terms of flows and that I think that helped the price kind of come back because in my opinion it feels like the there should have been more pullback after the selda news because you go up 60% in anticipation normally there's a sort of come down that's way deeper than we saw so I think that the robustness of the ETF flows helped SU Ain the runup and then some and so I do think it's very related because there hasn't been a ton of other uh catalysts in the Bitcoin Market some have even argued that a lot of the narratives are kind of gone um you know in fact this use of a currency um so I think that the ETFs were massive deal and they should be ETFs are the preferred vehicle of most professional investors and especially advisers they're fast they're good they're cheap they're easy it's like putting your band's music you know on Spotify uh you're just you're you're you are where the fish are biting so just by having a Bitcoin ETF it's very very um it opens up a ton of new investors so I think the price largely is moving off the ETFs I would I've seen some days where the ETFs taking money the price still sells off so remember ETFs only own 4% of Bitcoin so far when there 96 please go ahead so there's many other people who can move the price but I say it seems like half of them never trade so the float is smaller but still ETFs are still a minority owner but they're the new kid on uh new kid in town they're the ones that have been like the positive catalyst so I would say for now yeah the ETFs are a big deal the launch was really uh tremendous um it sort of cooled down a little bit the last week but uh overall we're talking about 12 billion inet flows um and 55 billion in total assets th those were those are numbers that I would that our our predictions had those numbers after 12 months not three so that just tells you where where they are and I thought we were one of the more optimistic teams out there so they've kind of already reached our 12- month predictions in two and a half months but when you say that ETFs have drawn new investors who are these new investors Eric yeah so there's three main types of investors retail this like do it yourself people who have brokerage accounts then there's advisors financial advisers they're like wealth managers they um if you have a lot of money and you help with like taxes and Estate Planning and all that they will help you and they'll like build your portfolio and whatnot those people manage 30 trillion dollars in America and that's where the bulk of the money is that's the crowd this ETF is namely going after and they love ETFs advisors ETFs are their favorite vehicle to use use for anything so they're very comfortable with them they trust them they use Black Rock ETFs all the time so that to me is the main Market that would open up with the ETF for Bitcoin then you have institutions this is like professional Traders hedge funds um endowments pensions big gigantic asset owners they are probably going to use the ETF but they'll probably only use the one that's really liquid they love liquidity um and they will I don't think they'll use it tremendously but I but there they have so much Mone money that even if like a if they 1% allocation that's a ton of money uh so I would see that down the line the owners of the Bitcoin ETF are you know maybe 20% retail 60% um advisors and maybe another 20% institutional but so advisors to me are the main Market here and again 30 trillion is a ton of money so if they just if they were to apply just a 1% allocation to bitcoin um it's going to add up pretty quickly I'm thinking about comparing this bull cycle to the last one we had in 2021 uh back in 2021 do you remember if institutional investors came into the space first or retailers came to the space first before the price uh of Bitcoin peaked at $669,000 I mean I'm again I'm not a Bitcoin analyst I I've basically been in the world of Bitcoin for about a year uh but I've been pretty heavy into it but I've observed it obviously um it seems to me it's driven by retail seems like once the price gets going then Institution are like oh hey maybe we should get into this too I think though what's interesting about this era of Bitcoin it's like the seems like the fourth time this thing has survived like a World War I mean Bitcoin is like a cockroach in terms of its ability to like come back from the dead and that's why I respect it it isn't going away I think it was supposed to go away three times now so I think now we're at this more mature level of like the mainstream ification of Bitcoin so I think institutions don't need to wait for a rally I think they're they're sort of like looking at everything and going okay it's not a currency but two things one we don't want to kick ourselves if it goes to a million bucks I call that like future fomo cure and number two everybody's sort of try coming Awakening the fact that like you know the dollar has been devalued and inflation can steal your money and you get less of your actual returns your real returns are less than what your portfolio shows and this could be a way to protect from that because it's you know again a store of value so I think for those two reasons even if people aren't true believers uh they might be interested to allocate to it and so I think that's that's pretty powerful I think and it didn't have that before and I think the ETF and having people like Larry fank who is the head of Black Rock and Fidelity and these gigantic massive American institutions the asset managers having them involved and sort of like backing it is a big deal it gives a lot of people cover and even if it is not quite regulated and Banks can't even really deal with it um those big institutions getting involved Black Rock Fidelity Etc uh I think are really really big moments and institutions are probably not going to be uh it's all going to be come down to whether an institution thinks it needs it but I think at this point it knows what it is it can now easily access it and I do think there'll be some allocations how much we you know we don't know there's been a lot of new Bitcoin ETFs coming on line since Jan Arc grayscale ey shares Fidelity just to name a few off the top of my head how do you differentiate as an ETF Pro provider how do you differentiate your product against your competitor's ETFs if it's the underlying um uh asset is really just as as a cftc which is funded as a commodity you're not creating a basket of stocks you're not creating a niche ETF you're not creating a theme you're just making it ETF based on one thing so what are the differentiating factors if any yeah it's a great question um you know this is why we thought marketing would be extra pumped up for this because all of them are launching on the same day and they do the same thing we've never seen anything like this in ETFs it was a fascinating experiment and so I think the differentiating factors are distribution and marketing so this is why if you look at the flows and the assets they're largely cascading down in percentage the size of the firm so black Rock's at the top then you got fidelity uh bitwise and Arc are interesting I I'd say they're punching above their weight a little bit they're both popular bitwise in particular is known in the crypto world and they've taken in a decent amount of money and then down the list so I think distribution marketing is a big deal all of those nine etss are very cheap too they're all about 20 to 30 basis points the outlier is gbtc which is the one that converted excuse me that one is 1.5% so the other one the the nine collectively can at least say hey we're cheaper than gbtc but they're not really cheaper than each other they're all in the same you know rounding error basically in terms of fee and so it's going to come down to the relationships they have the distribution the marketing and it really has and that's why and one interesting thing about that is that if you look normally in an ETF um there's one that just really takes has the majority of the assets and sometimes you can have the two two or three at the bottom of the category completely ignored in this case even the one at the bottom is doing pretty well there's a strong middle class so everybody's kind of eating if you will that's how good the getting is right now so it's definitely the bigger uh firms doing better they have bigger distribution more brand power and so if the end if we're doing a business school case study on this uh I'm going to say that the B the variable was was just brand and distribution which obviously is huge because all else equal everything else was equal so that's the isolating variable well it occurs to me Eric that first of all some of these ETFs or most of them have to be backed by actual spot Bitcoins right they have to have them in reserve as real backing is it possible that a lot of the price rally was driven by these institutions buying Bitcoin ahead of the launches in order to back their ETFs with Bitcoin no because uh the way ETFs were these companies don't they're like Vegas they don't want to be like when the Vegas has a sports book They're not taking it aside they just want to make the small Vig in between the two sides these companies are just like that they don't want to be long or short Bitcoin so Black Rock was not going to buy Bitcoin before they were simply so when they launched it they may lined up an investor perhaps or a couple to give them money on day one and then as they went forward and got more flows every time they get a new investors they they go buy the Bitcoin and if an investor leaves they sell the Bitcoin they do not want to end the day long or short Bitcoin neither do the market makers this is they're just like a casino in that way they just take a small Vig which we call the expense ratio or in Market Maker's case the spread and it's a tiny tiny little big I think it's a fair tradeoff for the outs you know to be able to Outsource all this to somebody else and so they would never buy it before the runup before I think was a lot of crypto people and hedge funds a lot of hedge funds bought the discount in gbtc it was trading way below its nav and that discount was going to close if it converted so a lot of prop Traders were buying the the gbtc discount which to me probably also listed the price of Bitcoin so that's who I think bought it before it was all speculators it wasn't the asset the asset managers launching ETFs they only bought Bitcoin when they started to get customer orders for it okay uh let's talk about recent BTC uh ETF activity so uh Kathy what's our ETF uh saw 880 million $87 Million worth of outflows recently surpassing grayscales outflows um and you actually tweeted about this you were talking about um how we could start seeing outflows soon you said seeing some of CT up in arms over arcb having outflow day which really shows the greedy and shortsighted nature of some of the folks in the space to be honest let me offer some perspectives and then you listed a uh number of points uh that I'll leave on the screen for the audience but specific Point number four I'd like to bring up to your attention brace yourself going forward some of these ETFs will see outflows I'm personally surprised ibit and fbtc haven't yet not even one day but eventually they will it's okay sign of maturing category uh can you explain uh why outflows are significant to to look at yeah look I mean ETFs uh I equate them to hotels you know a lot of people go up and they're you know in their room chilling and sleeping uh but there's a bustling you know and those two people coexist totally in the in the same Hotel so people come in and out of a hotel right and I think ETFs are kind of like that they trade intraday so they do attract some Traders and sometimes there's just the re reason to get out it's possible in Arc B's case maybe Kathy Wood lined up a friend and family investor early on they gave her I don't know $80 million well they're like well Kathy you're fine I'm going to get out now maybe that was it maybe somebody was spooked by the volatility or a couple people were um and then maybe Kathy sold because when when when she put arcb in her fund if it gets over a certain waiting she'll take profits it could be anything all I know is that over time you're going to see inflows and outflows look at anybody could could see this if you look at like GLD or spy or even Vanguard fund see outflows that's just how ETFs operate but what I was trying to say was a don't let one outflow day make you cry like a little baby some of these some of these people I'll be honest like they they want like 10% returns every day and when they get nice rallies it goes on for like 18 straight days yeah on the 19th day it goes down they flip and it just reminds me of a little baby like a spoiled little baby and I'm like listen relax it's fine you're up like you're the as you said you're the best performing asset this year you're running circles around the NASDAQ 100 what else do you want so Arc has one outflow day the 10 of them still saw net inflows like I mean and they're going to focus on the one thing I don't know if you remember that play The Princess and the P where like she noticed the pee and like 13 mattresses down and she's like I I can't sleep here and I'm like dude you got to relax about this so anyway so Arc $87 million when Arc has seen 50 days of inflows out of like 55 it is no big deal like in fact that's why I was saying just relax what you'll see is people go in and out but over time categories grow in net positive so and I see the same thing happening here and there could be a downturn where Bitcoin is down 30% and maybe six out of 10 10 of them see outflows in a week well it's okay overtime as the category builds and ETFs are popular the category will grow and generally ETF investors are stronger hands than people think I do not see 100% of the investors running for the hills if Bitcoin goes down 30% % I bet you know you'll see some people maybe 10% uh right 10% of 55 billion is 5 billion so 5 billion outflows in a week people like oh my God but it's not that it's it's okay over time though I see that 55 billion slowly increasing and most of the people are going to stay ETF investors here's why most ETF investors are 6040 types they have stocks bonds and they they have it save for retirement and they're going to wait 30 years for that to grow like a tree because it's got a compound which is where the magic is in investing but they're bored so they leave that alone and then they have a little allocation which I call hot sauce and they'll go and they'll find stuff that makes their blood go you know gets their blood going or they feel like it's like GNA make them have fomo and Bitcoin to me is where this goes it's in the hot sauce bucket and because you have all all of your serious money covered in the 640 S&P 500 kind of portfolio you don't have as much jitteriness with this allocation to bitcoin that's why ETF investors tend to be a little better behaved plus if you're smart enough to buy an ETF because you know their preferred vehicle like if you go to like a party uh I don't know pick a town pick a party a random party non-financial people only half of them will even know what ETF stands for maybe even less so to even know what an ETF is and to know that they're a good deal and to know how to get one on a brokerage platform you're probably pretty smart you probably know Bitcoin is volatile you probably know you're not going to put your whole portfolio in it so you make a little allocation and then you put it on top of a nice uh more conservative base and to me that's why these flows will be stronger than people think but that doesn't mean they're going to be outflow days there will be okay so $11 billion dollar in volume of Bitcoin ETF trading in March which was double nearly double what it was in February most of this trading was that on the long side or the short side the long ETFs or short ETFs do you know in general uh in March specifically in Bitcoin or in all in Bitcoin in Bitcoin specifically yes yeah almost everything's on on the long side like there's an ETF called bid X yeah which is leveraged and I was amazed how much that grew that trades like 400 million a day now so almost everything was in the long side I you know if you were a short it was a tough time to be a short at that time now I heard hedge funds are starting to short Bitcoin and you can tell there's definitely a little tug-of-war in the price the problem with shorting in my opinion I mean it takes a lot of Courage because you don't you can't you can lose more like more than 100% And especially if something as volatile as Bitcoin so I I'm hopefully they have an exit strategy but there'll always be people trying to short but for now from what I've seen almost all the action is on the long side to me the people selling Bitcoin and the reason there's been a sort of you know um pressure on the price like it has a nice run and then it kind of goes down and it just can't take off is because you've got a lot of Leverage trading happening that is not in the ETF you've got um people who have owned Bitcoin for a long time who are cashing out and I don't blame them like you own Bitcoin you were early you probably want to get a house maybe you got married you need cash so I could see some continue selling pressure as the ETFs grow just because people do want to sell still I don't really I don't see we're not in a Mania uh in term like there's not a Mania out there where everybody on Earth has to have Bitcoin that was like October 2021 that was a Mania like everybody that's when the price went almost like hockey stick I just seems this feels more um sort of jittery and it looks like that you know just feels like every time it goes up like 3 4,000 there there's like a seal and it comes back down a little bit um but over time again it was $30,000 less than a year ago so that's the big picture I think people Miss sometimes because they stare at the screen every day right and like they they forget that it's only been nine months since it was 30,000 uh uh one last question on bitcoin we move on ultimately do you see this price rally being sustainable given the demand and Supply factors we've discussed so far I just don't know you know uh my job is total ETFs i i i here's what I would say I would say that that I just don't know short to medium term price action um I've been a little surprised that I just thought everybody was hoding yeah so when the ETF flows came if everybody had just hled the price would do God candles because there was only buying for a couple weeks there big buying sometimes the ETFs are knitting a billion a day and you know people are selling those so there are people in the crypto Market who are I just don't think they're going to let it go High they're they're going to there's a I think there's people like I said there's people who are waiting to sell at different levels and the higher it goes the more they'll be tempted to sell so I don't I that said this ETF catalyst is real ETFs are I dedicated my whole career to ETFs they rule they are the you know they say as a customer you can only get two of these three things fast good cheap right if it's fast and good it's not cheap if it's good and cheap it's not fast you get the idea ETFs are all three there's very few businesses Amazon I think is all three too like there's few things that are fast good cheap all at the same time and this is why just being in the ETF it's only three months over time this is definitely going to be a a positive Catalyst it's going to bring new investors into the market but in the short and medium term I mean who the hell knows there's there's just so much I keep learning new stuff every day I would have thought it'd be higher from here I was surprised that all of the waves of selling that have come along the way during the ETF flows aside from regulatory restrictions that may prevent an entity from owning spot Bitcoin what are the advantages of holding a Bitcoin ETF I'm just using the Bitcoin ETF as an example but speaking if you got an ETF based on one commodity or asset like a singular asset ETF why buy that ETF and not just the underlying asset itself yeah because okay let's having your own wallet is uh it's a couple steps I'm not going to say it's like rocket science but it's annoying there's friction we'll call there's a lot of friction in it then you add this idea you got to remember like 12 words for the rest of your life yeah okay and most people can't remember their Amazon password if they're you know forget it they're like I don't forget what it is I I have this problem all the time I got like 20 20 passwords I'm out of passwords and you know I don't and then then you read these stories about these people who lost their password and they're going crazy because it's now worth like $500 million and i s the I always tell people when I see those articles I quote tweet and I say an ETF fixes this and of course the crypto faith will freak out because not your keys not your coin but again for the vast majority of people uh they want to Outsource this you know take the S&P 500 ETF do you want to track that index yourself and keep up with corporate actions and the new ads and and the things that come out and the dividends it's just easier to say Let me give it to Vanguard I'll pay three basis points and I'll get exposure to the S&P which with near per Perfection the people who should definitely buy their own Bitcoin to me are the ones that really see the the sort of like maybe apocalyptic endgame here where Society collapses and it's like Mad Max Fury Road and like the person with the Bitcoin controls the water and all the people and it's like a dust it's like all dust out there and I call it the Mad Max uh Vision that you should own your own Bitcoin if you think it's going to come to something like that but for most people they just think it's a good hedge on the dollar devaluation or a fund speculative asset they don't care about that that whole religious side of it they just want that they're going to pick the ETF and and they should because Black Rock will always have the ETF at coinbase so you'll always be able to cash out in dollars and that another thing people like well you're only going to get dollars back I'm like no one wants Bitcoin back dude no one who would use the ETF wants Bitcoin back they just want dollars back when they cash out well what one of the risks uh of an ATF is tracking error um How likely do you think that these Bitcoin ETFs will trade at a significant premium or discount to nav they won't because they could be Arbitrage so let's go over ibit right I'll tell you what ibit is the tracking error is compared to the its index it looks like it's five basis points so far that's really it's pretty good so it I'm telling you uh because the reason ETFs rule isn't just because they're cheap or funds there's something called The Creation Redemption process it means that at any time if the price is trading away from the nav you can just simply do a new creation or a new Redemption this is uh people who are market makers and authorized participants and they can just make a a risk-free profit arbitraging that so anytime it gets out of whack there's machines set up to just orbit that's why the ETF price and the nav are always very close gbtc is a great example of what what happens when it's not an ETF and you see a wide discount or premium so you know if we have a day where like bitcoin's down 20% in a day or up 20% in a day it's possible you might see a little extra premium or discount because uh there is so much pressure one way you you brought up gbtc so just explain to the audience the difference between gbtc and let's just take an ibit for example right if I I think at one point yeah I'm looking at the chart December 2022 gbtc was trading at a 48% discount to nav so I mean that's huge right so what's the difference there yeah because gbtc had a fixed number of shares trading on the market so those Shares are just trading and they're not always going to trade with Bitcoin right if the price of gbtc gets a far away from the price of uh Bitcoin uh nobody can Arbitrage that Gap because you can't create new shares and so it's you can't do anything about it an ETF has uh the ability to create and Destroy shares on demand there's speculation now that an e ETF will launch soon you actually tweeted about this uh you said that I expected at uh but our odds for an eth ETF approval it may remain an optimist or pessimistic rather a pessimistic 25% i' go lower if I could to be honest uh is there a reason why you have this p is yeah um you know we're the the final due date is May 21st I believe uh we are now what's what's yeah we're we're six weeks away the SEC hasn't given any comments yet to the issuers comments mean the issuers give them these regulatory filings the SEC normally would write back to them and say hey we have 10 questions for you can you please um address these and send us a new filing then they read the new filing and they give him another set of comments that takes weeks if not months and that hasn't been started yet and so from our we have good sourcing too it feels like the SEC has deliberately and has chosen not to comment now let's add some a couple of things gendler in his heart I think we all agree thinks ether is a security he doesn't want it to be treated like a commodity so if he approves it he would be saying it's a commodity so it goes against his very fabric um and then and then the other thing is there is no lawsuit right grce scale didn't sue on ether only Bitcoin so there's no other Catalyst or pressure on the SEC in fact there's a reverse pressure I think the Bitcoin ETFs were so successful they create a little buyers remorse among high ranking Democrats who are now like dude why did you approve these so I I don't think there's any political wiggle room at all for Gensler and I don't think he wants to anyway the Bitcoin has all those things going for it it had a case they lost genser was okay with it being a commodity and the political situation wasn't as tense um they didn't they didn't have the buyers remorse because the Bitcoin Futures ETFs didn't really get any assets so I think there was like it wasn't as I don't know looked at as a big deal but these ETFs have grown so big I think there's a little bit of like oh we can't we gota we can't do this with the next one the next one the next one I think they feel like they let the genie out of the bottle a little bit personally I think they should all be approved I think the ether people get mad at me sometimes because I I seem so pessimistic but I just want to be right we're we're we're three for three in our predictions and we want to be four for four and I think we will be before we move on to the last topic what do you think is in your opinion the most exciting ETF launch uh that you're anticipating this year oh man geez uh that's an interesting question I mean let me do this let me give you uh something that's going on that's very interesting that that is a trend and that we're looking for more and more which is ultra low Ultra lowcost active so you know how active like died nobody likes active and Vanguard came along and passive was ruled well active is is slowly getting cheap and so Morgan Stanley Capital group these gigantic firms that sell active management they're starting to finally like break and they're coming out with ETFs charge less than 40 basis points for active management and so we've been watching some of these firms you know come out with these these products the other interesting one is products that use derivatives to Target your outcome like you can pick the range of return you want they use options to do this and we call those buffers and those are really they're like Structured Products so I think that issuers are getting creative and cheap and to me those are where a lot of the new interesting launches come from the vanilla stuff is you know passive vanilla is pretty much already like taken up and so you don't see last year 81% of the filing of the launches were active believe it or not that's a crazy number and so I'll give you that answer for now I mean for for many years my answer would have been the Bitcoin ETF but they are here here's some scathing criticism of ETFs in general as an asset class class if you want to call them an asset class this came in from the uh Journal of alternative Investments a report from 2021 um the abct reads that okay I think you see where I'm going with this um the abstract reads ETFs are commonly regarded as an efficient lowcost alternative to actively manage mutual funds yet their perceived superiority is largely anecdotal and then and then in the key finding says ETFs have collectively lagged the market by about the same amount as active mutual funds and it goes on to list in returns um can you just respond to this well look I I'm a fan of the sniff test go go to some find some service put in spy and just start throwing in active mutual funds throw in hedge funds they're all going to lose and that's a real ETF in the market those are real returns that you would have gotten it's not academic so I think here's what's going on like if if you're an alter it's a called the alternative Journal hedge funds have have been one of the victims of all this and they're used to charging 2% for their services and a lot of ETFs have come along and turn what used to be Alpha into beta okay value picking value stocks doing long short doing this doing that ETFs come along say okay I see what you're doing there and they turn it into an index and they sell it for a tenth of the price it's almost like generic drugs in a way and investors love it and study after study after study has shown that the most uh predictive power for performance is fee it the lower the fee the more it predicts how much your returns will be because fees can be killer especially over the 5 10 15 year range so I'm yet to see a study that would or or even any fund we went back actually you know the q's which is the NASDAQ 100 ETF we went back because the q's is like powerful it outperforms the S&P and everything we said did anybody beat QQQ in like 15 years we only found one active manager out of like 14,000 and that was the baron fund and the reason the only way they beat it was this guy just basically went all in on Tesla and he became like the Tesla mutual fund which is weird to have a mutual fund I think 40% of the fund is Tesla so only that one guy beat the q's and the q's would be example of an ETF that's that's obviously very cheap you can get it for 15 basis points so look our clients of Bloomberg are some of these hedge funds and active managers and I understand their frustration uh but we also have to acknowledge that I think what's happening is over the next 10 years a lot of active is just going to have to go through The Crucible of like lowering their fee to a more fair price um unless you do something really great like if you can if you're like a special kind of manager you could probably get away with a higher fee but the majority of the ones that are not welln or have anything great going on they're probably just going to have to go and get more competitive beewise with passive once they do that their hurdle to Alpha form will actually be smaller and I do think the active will continue that's why I said one of my things I'm looking at is how cheap active can get in the next year they keep getting lower and lower and lower I'm guessing and correct me if I'm wrong but I'm guessing just based on your tone you're not a fan yet of actively managed ETFs I mean how how's that different from just a closed down fund no I like active actively managed ETFs ETFs are a better vehicle like if you're in an active fund like a capital group fund if you're in their ETF they're going to charge you 35 basis points that used to be only what the institutional class got charged for the mutual fund so at least you're getting institutional pricing and you don't get any capital gains distributions so you got better pricing and no taxes or at least you defer your taxes you don't you don't get hit with any distributions just for sitting there those are two major milestones and there's no reason not to show the Holdings every day and so I think active has a real home in ETFs like I said ETFs are not active or passive they are simply a vehicle they're like the MP3 they just completely revolutionized music but you could put any band you could put classical music digital you could put rock it doesn't matter ETFs are like that they started out as passive prominantly but lately active has been finding a way and even these Structured Products that use derivatives are finding their way so and now we got Bitcoin so the ETF structure has been through many crisis uh many crisises after crisis and it's very durable because of the Arbitrage mechanism and so over time um I think active will be have a great success so but 90 well one quote so far of all the active flows 95% of those flows go into active that charges below 40 basis points so the customers are speaking they're open to active but they they want it more like they want a fairer deal they they don't feel like 1% is really worth it but they they'll pay 2530 okay here here's from the same report here's a uh here's a chart that they've shown in this report it uh highlights the return volatility and sharp ratios of ETFs versus the market so um about 40% of ETFs have a higher return than the market uh yeah uh most of them 20% have a higher Sharp ratio in the market so the majority do not uh and 80% of them have a higher volatility than the market hence a sharp low sharp ratio the author claims the weak performance of ETFs turn out to be driven by the large number of ETFs that do not aim to replicate any of the broad market indices um can you evaluate the St yeah I know what's going on here okay that guy is just looking at a bunch of products you have to understand that if you take vanilla areas like S&P 500 total Market Total Bonds and we'll call this vanilla right pore yeah the majority of ETF assets are in these core areas and they're and they charge three basis points it's beautiful that's where almost all the money is however who would launch a new product and compete with Vanguard and black rock there you'd have to go to like zero fee and who wants to do that so all the new stuff the spaghetti they throw at the wall is to try to get in your hot sauce bucket or do something interesting that targets your outcome so or leverage products so the the majority of products and a lot of them are obviously don't make any don't get any assets he's looking at those and those do some wacky things those are like smart bet thematic and maybe that's true but what what that study should do is asset weight that study right my guess is the majority of the products are outperforming the I mean the majority of the assets like Vu ibv and spy those three tickers alone have like 20% of all the assets and the S&P as we know Beats 90% of managers over 10 years so that that that's all that study that study is a lot what Jack Bogle said which is the book I wrote yeah he didn't mind going into Vu which is the S&P but what he didn't mind all the Frankenstein products the crazy they threw out there let just like it goes this and that I'm okay with that because I think sometimes it's fun to have a little fun here while your safe stuff is compounding over 30 years because it's kind of boring so I think a lot of the market and the product is aimed here and not over into the core but the majority of the assets are in the core that study is basically being disingenuous by focusing on the products that are a little wild that don't have any money I understand ultimately how should an investor pick an ETF for himself or herself uh criterias they should be looking for questions they should be asking themselves before selecting an ETF yeah if it's for your core you want to focus on big popular indexes like the S&P 500 the A and then you want to just look at the Holdings make sure it looks like the S&P you're not picking something that's different because you don't want to totally ever trust the name even though they're pretty good but you want to look at the Holdings always and look at the fee you know three basis points you should demand Perfection for the core so if you're buying like large cap Equity us or bonds you should demand like really good liquidity really low fee and and maybe even a big brand name however if you go for the hot sauce and the fun stuff that's where you actually may want something that is a little sounds a little out there you may want a thematic ETF that equal weights and has a higher volatility but generally speaking if you are analyzing an ETF you want to look at the the Holdings at least the top 10 do you recognize them and what are the waiting then you look at the fee and then if anything I like to look at the standard deviation why standard deviation why even pay why even pay a fee Eric why can't I just look at the fact sheet and do it myself I'm just hypothetically what on the fact sheet will be the fee I know but why can't I just why can't I just replicate the ETF portfolio myself yeah well you can but but I'm telling you like the S&P 500 it's only 500 stocks these stocks have um corporate actions every day right they have spin-offs doing all that would be a pain in the ass I see dividends like you would never track it well on your own David yeah and also it's nice to have one ticker at maybe six tickers covering everything it's beautiful it's clean it's easy versus a thousand tickers and like wait where what are the waiting it'd be like papers all over your desk so this is why ETFs I think just they fit real perfect in the modern sort of portfolio they're easy they're clean they're cheap and that is why you would pick the ETF versus doing it yourself I want to finish off by talking about your book for a few minutes the BOGO effect how John BOGO and Vanguard turned Wall Street inside out and saved investors trillions I I want to ask you about the core findings of your book but first I'm going to give you an anecdotal a story here I talked to somebody who has researched specifically uh mining stocks um you know physical not Bitcoin mining but physical mining stocks and his argument is that ETFs have been the worst thing to have happened to the mining sector because instead of just buying the you know the shares of these Junior mining companies people have just bought the gdxj or whatever other index there is and and what you're seeing actually is right now the uh uh these miners are not just are just not doing well whereas the underlying medals have outperformed so um can you just evaluate that criticism I I you know look um the ETF is is largely going to move with sentiment in the whole sector let's say ETF didn't exist yeah and there was a uh inflation dropped quickly gold would be out of favor well GDX gonna sell off I mean sorry the gold minor stocks are going to sell off it's just a fact it's not like the ETF people are are behaving in some strange fashion they're going to move a lot with the ETF and also the stocks themselves lead the ETF like for example this people forget this active still drives the car take Tesla yeah right I'll just use this happens in the mining too Tesla was like real hot right and it went from like this market cap to this market cap so as it got bigger market cap it started to get higher weightings in the index but how did the market cap go up well active liked it so it bought it the price went up therefore the market cap went up active bid it up so high that it became like big enough to enter the S&P now it's going in the and so it's trickling down and why because active saw earnings and they're selling it so if you look at an index You' think it's all Flatline but it's actually moving like this some come in some come out all of that chaos is actives decisions the index is merely riffing off of what they did so if anything thing they are riding the cailes of active and I would say the same thing for GDX that said there are a couple areas where the ETFs become like a medium fish and a medium Pond and I think Junior Gold Miners is a very good case so that particular criticism isn't totally unfounded in fact the Junior Gold Miners ETF got so popular that they had to like expand the index because a couple of the stock it was holding more than 10% Market uh it was more of a 10 that ETF was holding more than 10% of the shares outstanding and that's against the law so they had to like expand what Junior Gold Miners were so that 10% went down anyway they diluted the index so occasionally there is a spot usually it's in a small area like Junior Gold Miners where the ETF becomes pretty popular beyond what it really should so I think that I'm not going to say they don't have a point overall but generally speaking if you put in all the gold miners and you put the gold mining ETF you're you're going to see a lot of difference it's not like they're all moving together and you're going to see some stuffs come in and some come out um but the ETF is certainly a player I'm not going to say it's not part of the action but um and again we've because we study this we look at it and so mostly I blow off those criticisms the you know it depends on there's there's a couple that I think are a little more legit but for the idea of like destroying fundamentals again look at a stock does it have good earnings it typically goes up does it have bad earnings it typically goes down and the index isn't doing that because it the only time it touches the stock is on rebound I wonder have you have you spoken to um many companies uh publicly traded companies and Executives of these companies how do they feel about ETFs I mean presumably the argument is that well if someone's buying an ETF that contains my stock they're not buying my stock so I would assume they have similar sentiments as gentlemen who had that criticism right so I studied that there was an a stock called Tanger Factory Outlets and I called this the canary and the coal mine because it was 55% owned by ETFs and index funds that was the highest passive ownership of any stock in America so we were tracking it as like a guinea pig anyway long story short I called the IR woman and I was like do you know that like you're this is how owned you are and she goes yeah but you know the only differences we have less people you know up our butt about earnings and stuff like there's less people who go on the earnings call that's it that's the only thing she noticed because she goes I don't really care who owns this we're trying to meet payroll we're trying to do this they were under pressure these stocks you know I always say like Steve Jobs didn't make the iPhone because the t-o price active manager was telling him if you don't do something great I'm going to sell your stock like knowing these CEOs don't really care that much who owns the stock right they I mean they care a little but mostly they have bigger fish to fry so again you got to look at like okay fine uh they have third owners are passive I don't really think it affects their judgment and their um motivation for running a business and doing all the things you have to do so that Tanger woman was a real eyeopener that she could really care less but other thing is we took the Tanger stock and we we uh looked at the flows and the performance versus two or three of the ETFs that were the biggest owners and they weren't even that correlated the stock was definitely moving independently in fact what I think will happen and I think what we will see as a byproduct of larger passive ownership is that there could be more volatility that would be one thing to look out for in smaller names for example let's say a stock like Tanger has 60% passive ownership that means only 40% of the shares are really being actively traded the less people trading them the more a buy order will move the price right so the smaller the float the more volatility you could have so I think one of the byproducts we will see that's legit is smaller names that start to get bigger passive ownership are probably become more volatile and could be held hostage easier like a GameStop but I I haven't seen any real you know examples that look like they're harming anybody or the market so but that is one thing to watch okay so your book came out in 2022 um it's based on the conversations you've had with John Bogle um I know it's difficult to summarize an entire book in a couple minutes but can you just answer this first how impactful was bogle's work in other words how impactful was he was him and Vanguard on Corporate Finance in America and argely around the world uh huge I think I thought their impact is most felt with just investors I don't think anybody has had a bigger impact any human even Buffett Buffett was an was a great model for how to ex you know model a company and active managers but that doesn't totally affect Everyday People Vanguard has literally taken over a trillion dollars out of Wall Street and moved it back into investors pockets and by having a company that is mutually owned the company is owned by the investors so anytime Vanguard got money instead of like saying hey let's take these profits and sponsor a sports Stadium pay ourselves more hire a bunch of people they largely said hey we're the investors let's take let's actually use the money to lower the fees so over 40 years the fees kept coming down to almost nothing and that is the only structure like that everybody else is either trying to make money for shareholders or for their private investors and so they're serving two masters so Vanguard was unique and Bogle was an anomaly he was a weird guy the fact that he would choose to walk that path because when you set up Vanguard he he turned over all future profits to the customers he could never be that rich most people do not go to Wall Street to do that and so he's a fascinating story and he did I think more he had bigger impact on on people's uh investing but also in Behavior I think just by introducing a lowcost Index Fund into the market he drastically changed Behavior because you know in the 80s and 90s it'd be like oh here's the top manager and people would buy them then they would not be the top manager and they'd sell them and then go to the next festar manager it's bad B once you lock into a lowcost Index Fund people are it's over it's like getting married you're off the market so anytime there's sell-offs these Vanguard investors they don't budge they're stronger holders than any crypto person I've ever met and so I think he had massive impact on funds Behavior and in terms of like you know being an owner of corporate America he was a big advocate for Less CEO pay and whether Vanguard is doing a good job carrying that torch I cover in the book a little bit but I think the biggest thing to focus on is just not only Vanguard lowering fees but everybody who wants money now if you're an asset manager unless you're Kathy Wood and you get kind of Lucky and hit the ball out of the park you have to be cheap you have to get on vanguard's level so the Vanguard effect or the Bogle effect is way bigger than Vanguard itself so I I I say in the book about 90% of all the Assets in America today the flows are somehow linked to 1974 when Bogle set that company up as a mutual ownership structure that's how if any company was having an effect on 90% of all the customer activity you'd be like wow but it's not a public company plus we're talking about mutual funds so I think it slipped by a lot of people's radar so I I want to highlight this crazy guy did this crazy thing and here's how it all trickles out and I have the data to show it and the interviews could you make the statement that had Bogle and Vanguard never existed uh the average retail investor today would have a much more difficult time accessing Capital markets I think they could still buy a mutual fund relatively easy they would just have much less money uh that's the that's the big thing because like I said he ushered in a whole wave of low cost uh not just Vanguard like I said earlier active is now under 30 basis points active in the 80s and 90s was was 120 basis points and you were happy to pay it and they had loads where you had to pay the broker by the time you got done you barely got any money how much was that just du to more competition and you know more funds out there a little so I I would say my thesis is that I think cost pressures are natural part of the world they would have come down a little bit but we wouldn't be in a spot where like basically everybody can get any asset in an ET F right now for what I call dir chep under 10 basis points under five I I don't think we'd be anywhere near there I think we'd be you know index funds probably would exist without Bogle but they'd probably be 50 to 100 basis points in my opinion I mean I I have a part in the book where I look at the second Index Fund ever launched was from Wells Fargo and that one still charges 45 basis points and that's with Vanguard um so I think that's how it would have played out you only reason look index funds are only popular and passive is only popular because it's Dirt Cheap that's what this is really about so sometimes when active managers get disgruntled I'm like look you're going to own the big stocks of the day like everybody's going to own Apple JP Morgan and Google and Amazon you're either gonna own it in active fund paying 1% or you're gonna own in a passive fund paying three bips so everybody's like you know I'm just going to own in a passive fund so a lot of people said this this era has gone from just closet indexing active to just indexing so you're owning the same stocks you're just owning it for way less price and that's the main thing because indexes are all designed differently it's not like a they're not homogeneous the snps has different uh ways it's designed than the Russell 1000 so in the end this whole thing the mother of all Trends and what this guy Unleashed is what I call high cost to low cost and that is also taking place in the advisor world the how about the discount trading platforms Vanguard went to zero before all those other guys that kind of started that off too right but to me that's the big and and the the I'll just wrap it up with this um yeah addition by subtraction I said in the book that if bogle's life bogle's life's work could be defined in one phrase It's addition by subtraction so he came along and said let's remove the expense ratio let's remove your broker let's remove um you having bad behavior and basically just killing all of those bad frictions and in the end you're going to get 99.5% of your investment return back instead of like 50 yeah but how do they make how do they make money you're if you're eliminating the expense ratio and the brokage fees I how how does m Vanguard make money well they have8 trillion dollar so their asset weighted average fee amongst all funds is nine basic points because they do have some active funds nine basis points on 8 trillion is 6 billion it's still not much to your point that's why one of their seals as customer service um that's that's a problem they have uh it's still decent but it it needs work but listen to this stat this going to blow your mind because you talk to people like this Vanguard has 28% market share of all fund Assets in the US but they only account for 5% of the revenue that's a wild difference isn't it yeah well makes sense are so low yeah but that's why that's so that's how they do it they they just are such a they have a small Revenue share because remember they're not really a like for-profit company there's nobody nagging them for more money oh it's the investors who are sort of democratically elected one could argue they've squeezed out a lot of new entrance because you can't have low fees if your AUM is small right you can't just you know start a shop with a couple million dollars and and you know launch a fund you've gotta be you've got to be huge well you have that's where the study comes into play that way people are like okay we're not going to do the S&P what should we do okay let's do the S&P but just dividend weighted okay let's try that so that's that's how it evolved and personally a dividend weighted S&P 500 ETF that charges 20 basis points to me is a new form of active it's using the index and saying hey let's add active plus the index let's see if we can get something going there so to me Vanguard also and Bogle shifted how active has now evolved it's no longer like hey I'm a genius stock picker pay me all this money yeah but people will pay for active in certain forms it's evolved into ESG thematics smart beta um but largely a lot of those are lower fee active um all right we'll wrap this up this is fascinating for me um thank you for your time has Bo ever spoken to you about uh market efficiency whether he um is a supporter of the notion that you can't beat the markets you shouldn't try so just buy passive has he has you talked to you about this concept at all oh yeah I mean his famous phrases instead of searching for uh the needle and the haystack just buy the hay stack so he definitely pushed passive he thinks he should own the total market index fund and just call it a day he um spent his whole life promoting the index and the index funds beating active managers he said he uh over 15 20 years if you look at all funds active and passive at the top you're going to see you know lowcost index funds and so he said he had a dream that he was on the cover of Fortune as the best money manager in America because he beat all of the active funds so that's how into this he was now that said his son became an active manager and he supported his son um which is also kind of interesting and then you know Vanguard has some active funds but if you read when Bogle writes about these active funds he also writes about how cheap they are so vanguard's active mutual funds are all like below 20 basis points I mean they're really low fee and he says that's why they're better isn't necessarily the skill of the manager but I I basically like give them a head start by making their fund so cheap so in the end I think he was really more about low cost than active or passive but certainly if you asked them should I invest in an active fund or an index fund he would say Index Fund what's your personal view on this matter so I am part of what's the trend right now which is I like to go cheap passive in the uh right so I 85% of my portfolio would be a total fee of like eight basis points large cap stock small cap International whatever bonds then I again I have a 10% hot sauce and I go buck wild in there um you know I'm I'm speculating in there I'll do other things in there my wife um enjoys deep value stocks like if G's trading at like 13 bucks you'll be like oh this looks good so like I just think that's how when we at the flows we see this barbell going on with the bulk of it going to Dirt Cheap and then the other part of it going to like more shiny objects so that's why the going forward it's not are you active or passive it's are you cheap or shiny so it's not like so active is alive and well but it it has to get in one of those buckets but so does index funds if you're an index fund and you're low tracking error but you charge 50 basis points like the Wells Fargo you're also in the in the middle that dead zone in the middle so you have to sort of pick one of those areas in as we go forward here and so my and the reason those are the two areas is portfolios their makeup now is changing to what I just said so largely speaking that's that's how I design mine okay well thank you for your time so the book once more is called the Bogle effect how John Bogle and Vanguard turn Wall Street inside out and saved investors trillions we'll put a link to the book Down Below in the description so check it out where else can we find your work uh Eric and read about you and learn about you um Twitter is really good I update there a lot Eric balunis pretty easy somehow that handle was available um and then you can find me on b space etfo if you have a Bloomberg terminal I think those would be oh one more let me plug my podcast trillions I do a podcast on ETS called trillions which you can get anywhere you get podcasts oh yeah is that is that on YouTube as well or just podcasts it's just podcasts okay um I do a TV show that's all on YouTube a little bit but I'll just that aside I'll say trillions on iTunes or Spotify or wherever all right so make sure to check that out thank you very much Eric we'll have you on again soon thank you hey it was great talking to you thank you thank you for watching don't forget to like And subscribe

Channel: David Lin

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Keywords: david lin, the david lin report, david lin youtube, david lin finance, david lin investing, david lin trading, david lin economics, economics, finance, business, macroeconomics, trading, investing, financial news, finance news, economics news, business news, economy, bitcoin, bitcoin etf, etfs, eric balchunus

Id: RfjoREQ3ihw

Length: 60min 46sec (3646 seconds)

Published: Tue Apr 23 2024