At The Cash: How Large Can Lively ETFS Get? (Dave Nadig , October 22, 2025)
Full transcript beneath.
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About this week’s visitor:
Dave Nadig is President and Director of Analysis at ETF.com, and he shares with us how traders ought to navigate all of those new merchandise. Dave helped design and market among the first exchange-traded funds. He’s the creator of “A Complete Information to Trade-Traded Funds” for the CFA Institute.
For more information, see:
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TRANSCRIPT:
Intro: Pump it up, While you don’t really want it. Pump it up, Till you may really feel it
Once we take into consideration ETFs, we have a tendency to consider massive, low-cost passive indexes. In any case, these are the largest ETFs from locations like BlackRock, Vanguard, and State Road.
However after we have a look at all the brand new ETF launches, they have a tendency to not be passive indexes, not be low-cost, and never come essentially from these three massive corporations. They’re lively and they’re concerned in all kinds of various areas, which might be off the overwhelmed path.
To determine what this implies for you and your portfolio, let’s carry to determine what this implies in your portfolio. Let’s herald Dave Nadig. He’s the President and Director of Analysis at ETF.com and an ETF structural professional, actually because the inception of the total sector.
Dave, we’ve seen an explosion within the development of not simply new ETFs, however primarily lively ETFs in all kinds of niches. What are you seeing on this house?
Dave Nadig: Nicely, , for a very long time ETF meant low-cost index, proper? I imply you return to SPY after which the primary iShares merchandise, after which even after we began stepping into the massive growth of the 2 hundreds, it was all simply index, index, index. Then we bought some sensible beta the place we tried to be somewhat bit extra intelligent and it wasn’t actually till the late 2010 cycle the place Kathy Wooden at Ark Make investments, launched ARKK and actually put herself on the market because the portfolio supervisor in a manner that I don’t actually frankly bear in mind seeing because the dot-com increase, proper?
It’s been a very long time since we’d had famous person managers on CNBC speaking about, , pounding the desk for a single inventory. And Kathy did that and clearly had huge quantities of success, has had some efficiency hiccups alongside the way in which, however that kind of went somewhat bit dormant throughout among the pandemic when folks actually found buying and selling.
What we’ve seen now’s this resurgence – significantly to people I’d talked about Dan Ives Wedbush, folks know him; and Tom Lee from Fundstrat together with his Granny Photographs ETF, each of which have pulled in big cash,
Barry Ritholtz: Billions of {dollars}?
Dave Nadig: Billions and billions of {dollars}. And for the explanations you’ll count on since you’ve bought sensible folks speaking on podcasts and TV and on their very own air and their very own newsletters telling you why they personal what’s within the fund. I do know that sounds so dumb, however that’s why folks love famous person managers as a result of they will look they usually can see Tom Lee on display screen and he can sit there and say, yeah, that is why we like Bitcoin right here. Listed here are the three companies we have now in our fund due to it. We may be fallacious, we may be proper.
There’s a degree of authenticity to that that I feel is actually appreciated. I additionally suppose the truth that they’ve doubled the S&P this 12 months doesn’t damage.
Barry Ritholtz: So to place some flesh on the bones right here, Kathy Woods throughout 2020 was an enormous Tesla and Bitcoin bull. The fund arc put up large numbers, triple digit positive aspects. Dan Ives has been an apple and an Nvidia bull, just about for so long as I can bear in mind. He’s been an entire lot extra proper than fallacious, and Tom Lee has been very constructive precisely when it paid to be constructive and keep bullish.
All three of these managers have actually massive followings. What does the resurgence of name title lively managers imply for the ETF house?
Dave Nadig: Nicely, initially, I feel it’s nice for the ETF house as a result of I feel the dichotomy that we’d had the place folks considered lively as being a factor that occurs someplace else and ETFs had been solely passive, wasn’t useful. I feel we’re shifting in direction of a world the place your whole exposures, for essentially the most half are gonna be in an ETF wrapper. So by all means we must always get lively managers as a part of this combine. And now we’ve bought a number of them. You realize, we’ve bought a bunch of lively funds from PIMCO was early, we’ve bought tons within the bond house. You realize, every thing from Cumberland advisors to State Road with the double line and, and Jeff Gundlach. A number of lively managers in a number of completely different areas. I feel that’s very wholesome for the trade.
For the person investor, it doesn’t essentially make your life simpler as a result of as a lot as I occur to, like all of the folks we have now talked about, Dan, Dom Lee and Kathy – personally as folks I might have dinner with, the mathematics just isn’t on their aspect as an trade, proper?
Barry Ritholtz: Why is that?
Dave Nadig: As an trade, we have now to level out lively managers categorically underperform over time. Doesn’t imply all of them do, but it surely implies that you’ve gotta be the particular one who managed to choose the proper lively supervisor on the proper time. That could be a powerful enterprise and even the lively managers operating these funds will let you know attempting to time when to get out and in of their very own funds is gonna be powerful. In order that’s the issue is
that lively administration is hard to guage.
Barry Ritholtz: Yeah, and to place some numbers there, half of all lively managers underperform in any given 12 months. You exit to 10, 5 years, it’s 80% underperform; at 10 years it’s 90%. So it’s a troublesome street to hoe
However let’s speak about what makes lively ETFs considerably completely different than lively mutual funds. And that information I referenced the place all mutual fund information, mutual funds must do a daily submitting every quarter about their largest holdings, there was loads of backwards and forwards about
how clear lively ETFs must be versus different lively funds. What’s the state-of-the-art immediately? What’s the regulatory setting?
Dave Nadig: So there are answers if you happen to’re an lively supervisor and also you don’t need to inform everyone what you’re doing daily. There are answers and there’s loads of funds which were launched on them. Constancy has their variations. T Rowe Value has been one of many extra profitable funds on the market. They’ve a reasonably widespread blue chip technique known as T Chip, which isn’t semi-transparent, which means they’re not telling you the entire portfolio daily. They’re telling you every now and then they usually’re giving the road simply sufficient info to make a superb market, not realizing all the knowledge. So it’s kind of a, a clue, a little bit of a hack to be semi-transparent.
This solves an issue for some asset managers. It doesn’t clear up a single drawback for a person investor, proper? So like I’ve by no means heard a person investor say, golly, I want I knew much less about what I owned. Proper?
Barry Ritholtz: Let’s speak about why it’s an issue for fund managers. Fund managers don’t purchase a inventory on a Monday after which they’re performed. If they are saying, “Hey, we like XYZ, they’re shopping for that inventory attempting to reap the benefits of drawdowns shopping for it over days, weeks, even months. So there’s a worth benefit to the investor if the fund supervisor generally is a little much less clear. Truthful, truthful description.
Dave Nadig: That’s the, that’s actually the argument that the lively administration trade who doesn’t wanna disclose what they’re doing would provide you with.
So you’ve articulated that aspect of the argument. Nicely, my counter to that might be in case your technique requires you shopping for securities the place your motion goes to maneuver the market absent disclosure or absent, , obfuscation, then that technique in all probability doesn’t belong in an ETF since you’ve bought larger issues, proper? Meaning that you’re in one thing small or a liquid or micro cap, at which level already, my query can be how do you propose on operating a $10 billion ETF with that technique?
As a result of you may’t actually shut an ETF. So if you’re a particular conditions supervisor, if you’re a very kind of obscure nichey discovering these shares, no one else is aware of about supervisor, you don’t belong within the ETF trade. I’ll simply flat out say it so simple as that. The mutual fund construction and even higher, a liquidity cap construction like a CEF or an interval fund is definitely a greater construction for these sorts of investments. All people else, CEF, actually there’s a lot liquidity. I feel it’s powerful to argue that anyone like Tom Lee is being significantly damage by being clear. He’s double, he’s at 30% for the 12 months. The S&P500 is up 15%
Barry Ritholtz: CEF stands for closed finish funds versus ETFs.
Dave Nadig: Sure.
Barry Ritholtz: So, let’s speak about another kinds of lively funds which might be somewhat bit on the market. We see funds with choices, futures, derivatives, inverse leveraged, and together with some wild earnings guarantees in an ETF wrapper. Inform us about a few of these merchandise.
Dave Nadig: Yeah, the, the fascinating factor about these is most of them are very mechanical, proper? So if you happen to’re operating a leveraged technique, you’re not making any choices, proper? I’ve bought Apple, I would like 2X Apple, I’m gonna go to my swap counterparty in a single day they usually’re simply gonna settle up my two x swap. That’s the entire administration course of.
However technically that’s gonna be an actively managed fund as a result of you may’t simply automate that entire course of. Anyone nonetheless has to make a name about whether or not or not you’re teeing up the swap at this fee or that fee.
Identical factor with nearly something within the choice house, as a result of the choices are continuously altering and continuously repricing and continuously rolling off. It’s very troublesome to create stable index product round actively or excessive frequency shifting positions within the choices market. So for comfort as a lot as something, nearly all of these kind merchandise you talked about are listed as lively merchandise.
I consult with them as AiNOs — Lively in Title Solely, as a result of they’re actually, there’s no Tom Lee saying I really need Apple choices immediately. There’s some man typically Jay, pastor Elliot at title, sitting on a desk someplace pushing a button to say sure, we would like these choices as a result of the mannequin says we have to roll. And that turns into lively administration.
And consequently, I imply it’s lively administration, it has larger prices related to it for a motive. A few of that’s the revenue that the issuer desires, however a few of it’s legitimately you want a buying and selling desk with a bunch of individuals doing work.
Barry Ritholtz: So let’s speak about one other area of interest. Illiquid alts, issues like non-public fairness, non-public credit score, non-public debt, actual property. Are we gonna see these asset courses that basically don’t commerce on their very own — as a result of they’re not public – are we gonna see these in an ETF wrapper?
Dave Nadig: We’re beginning to, we’re beginning to the, the canary within the coal mine right here was some merchandise from State Road, the massive ones, priv, PRIV for personal, which has a bunch of Apollo non-public credit score in it. Typically fairly quick maturity stuff, two, three 12 months sort of issues and, and pretty easy, comprehensible non-public credit score. Intel must invoice a fab in Eire. They go get a mortgage, Apollo offers ’em the mortgage, you get a slice of it.
Nothing tremendous sophisticated, nothing tremendous fascinating both. I imply, it’s not, you’re not getting 20% yields out of or something like that. You’re getting some marginal enhance within the yield you’ll get if you happen to had been merely investing in say, junk or quick time period co corporates.
So these merchandise are beginning to come to market. The considerations I’ve about them is that they’re simply gonna be untested. We’re not gonna actually understand how they’re going to carry out when the markets go hinky, proper?
And, and likewise what does that even imply? Like if we had a company bond blowout and we noticed a bunch of triple C stuff begin defaulting, I do not know what the affect on Apollo non-public credit score issued in Eire to Intel goes to be when that occurs.
I additionally do not know how they’re gonna reply if half the fund decides they need out on that Tuesday and now you’ve bought a bunch of illiquid stuff, which will be as much as 35% of the portfolio that actually the one purchaser is Apollo.
Technically they’ve bought solutions to all these questions. I’m, and I learn all of the solutions to these questions and I’m kind of not satisfied, but it surely’s a type of issues that if you happen to wanna be, if you happen to wanna be on the market on the sting, by all means go forward. However I feel the non-public securities within the each day liquid automobile has probably not been by way of the ringer but, so I stay very skeptical.
Barry Ritholtz: So let’s speak somewhat bit about crypto and, and the way that’s going to affect in each investor habits and portfolio building. Final 12 months, BlackRock, was it final 12 months or this 12 months, BlackRock launched IBIT. 2024. So it’s a 12 months in the past developing on a 100 billion {dollars} in belongings, in all probability the quickest ETF ever to do this. What does this imply? And clarify the idea of tokenization.
Dave Nadig: Yeah, so what it means is all of those belongings are going to be increasingly obtainable to the common Joe like us who’s simply buying and selling of their Schwab account or one thing like that. And since the SEC has stated they’re gonna make it very simple very quickly, we’re gonna have each main coin that folks find out about a Solana and Avay no matter. There’ll be a sleeve of that in an ETF that you simply’ll have the ability to commerce. That’s all nice.
Then having these constructing blocks is superior, additionally as a result of it can now enable portfolio managers to create portfolios of these particular person securities, which proper now you may’t even do, you may’t even purchase an index proper, of the highest 10 cash as a result of there isn’t a goal for the highest 10 cash to put money into. In order that will likely be enjoyable after we get that, and I think you’ll see companies like Bitwise and BlackRock who’ve bought some actual bonafides within the crypto administration house, begin bringing fairly institutional lively administration merchandise there. That’s in all probability a 2026 aspect.
Long run although, if we wanna speak 10 years from now, that’s when crypto begins changing into an fascinating competitor to the ETF house. I feel we are going to ultimately find yourself in a world the place how you progress your possession of Apple round goes to occur. Not by going to the New York Inventory Trade and exchanging ledger entries to maneuver round your Schwab account. As a substitute, you’re gonna have an precise token. You’ll have the ability to have a look at the serial variety of it, you’ll have the ability to put it in a pockets and say, “Oh no, that is price 100 shares of Apple.” And that pockets will have the ability to immediately transfer that safety to your pockets with none trade being a part of the method.
Most of it can occur, like crypto occurs now on large exchanges as a result of worth discovery. However similar to with Bitcoin, I may stroll as much as you after we may have interaction in a direct transaction, you’re gonna begin seeing that with different securities.
It’s occurring extra in bonds and actual property now. To do it in equities is gonna require some precise laws and we don’t make so many legal guidelines lately. So that will take a while. As a substitute, what we’ll do is we’ll wrap loads of stuff. So that you, you’ll in all probability hear about issues like Wrapped Apple and wrapped Cisco and what that’s gonna be is a token that owns the safety in some kind of belief pool. That’s a child step, however that’s what we’ll begin listening to first. So be skeptical when folks say we’re tokenizing every thing ’trigger it’s gonna be a decade.
Barry Ritholtz: I had a dialog with Jose Minyana who’s the top of wealth methods at funding Big BNY (Financial institution in New York) and he was saying, Hey,
we went from T+3 to T+1, which means it used to take three days to settle a commerce. Right this moment it’s gonna take in the future. If we wanna get to T+0, we have now to actually believe in each side of the transaction. And theoretically, tokenization solves that drawback.
Dave Nadig: It does. Though take into consideration what number of massive transactions on the planet that we may very well be doing simpler. We intentionally put breaks on, take into consideration shopping for a home…
Barry Ritholtz: Wiring cash?!
Dave Nadig: BarryProper? So it, there’s, , the, there’s escrow, there’s secondary inspection processes, there’s separate contracts round simply the intention to purchase and promote. So the larger and extra fascinating a transaction will get, the much less T zero is definitely a good suggestion, proper? I imply, I, the, the factor I all the time say about T zero is, did you really need T zero throughout the flash crash in 2010? Like, did you really need no recourse for that? That fats fingered billion greenback pennies on the greenback commerce? No. You needed this ecosystem that protects you from a nasty actor spoofing one thing into the system. So we we’re gonna have quite a bit to guage as a market, what we really need. The thought of slowing down markets has really gotten loads of traction, like velocity bump markets, issues like that, that, which might be really pushing towards this concept of instantaneous settlement for something. I don’t even need instantaneous settlement for my checking account. I like realizing that I’ve bought anyone I can name when one thing goes fallacious.
Barry Ritholtz: So, so that you’ve written about volatility and liquidity laundering. Clarify what that is and are these actually gonna be ETFs?
Dave Nadig: They already are, man. So volatility laundering is solely shifting volatility from one bucket to a different and charging one thing for the privilege of doing that. Proper Now you should purchase one thing like MSTY, which provides you with 100% earnings return on a MicroStrategy place by way of the magic of choices, proper? And it creates an artificial lengthy place. Then it does an artificial lined name towards the artificial lengthy place, after which it does an entire lot of return of capital to provide you your a reimbursement and guarantees you this limitless stream of excessive distributions, a excessive share distributions that’s volatility laundering.
As a result of what you’re really doing is you are attempting to promote different folks the volatility of MicroStrategy, which might be not a improbable concept as a result of it, the vol of all is excessive in these instances. So you’re being the individual selecting up the, on this case, quarters in entrance of the steamroll, not the pennies, however you’re nonetheless uncovered to MicroStrategy collapsing and going to nothing. That volatility laundering is what all of those choices methods are actually doing.
Barry Ritholtz: So actually to wrap this up, the underside line is carry the identical degree of frequent sense and scrutiny to new ETFs that you’d to any monetary product.
Be sure to perceive what the product is, the way it generates positive aspects, the kind of dangers you’re incurring, particularly with these unique merchandise — And the prices. Are these merchandise price spending 75, 100, 125 foundation factors greater than what you’ll get for a plain vanilla passive index that appears to be dominating the asset allocation house and the house for ETFs? Be sensible, be considerate, do your homework.
I’m Barry Ritholtz. You’ve been listening to Bloomberg’s on the Cash.
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