Eric Balchunas, Senior ETF Analyst, Bloomberg Intelligence

[00:00:01] Hello, this is Dean Curnutt and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry. It is said that death and taxes are the only two certainties in life. Add to these the enormous growth of the ETF industry as a third irrefutable occurrence.

[00:00:30] Covering the landscape of exchange-traded funds for Bloomberg is Eric Balchunas, a man steeped in the most plain vanilla products like the spy to the newest flavors of underlying exposures and payout constructions, which he calls hot sauce. Our conversation starts with an overview of the massive ETF haul in 2024, and we learn that inflows were $1.1 trillion and each region set a record geographically.

[00:00:55] Eric stresses how effective the product has been in providing liquidity for end users and in the continuous decline in fees that the industry has successfully achieved. With this last point in mind, we touch on Eric's book, The Bogle Effect, which details his interactions with the pioneering founder of Vanguard, John Bogle. Eric estimates that on the very low side, Bogle's impact has saved investors $1 trillion through lower fees and increased competition in the industry.

[00:01:23] We next talk about innovations in the ETF market, including unique structures that embed both leverage and derivatives, touching on tail-wagon-the-dog scenarios in which the leveraged ETF amplifies volatility in the underlying. Lastly, we talk about ETFs that provide access to crypto exposure. With the resounding success of Ibit, the spot Bitcoin ETF, Eric sees XRP, Solana, and Litecoin among those that will hit the market at some point as well.

[00:01:53] I hope you enjoy this episode of the Alpha Exchange, my conversation with Eric Valchunas. My guest today on the Alpha Exchange is Eric Valchunas. He is the senior ETF analyst at Bloomberg Intelligence and someone who is absolutely in the weeds on this massive product set called ETFs that's growing exponentially. Eric, it's great to connect and have you as a guest on the podcast. It's great to be here. Thank you.

[00:02:20] Looking forward to a conversation where we do a little bit 30,000 feet about flows and just some of the developments and then get into some of the minutiae on some of the quirky ETFs, whether it's with respect to new underlyings like crypto. I know you're very focused on that. Some of the tail-wagging-the-dog type products like levered ETFs. So lots to talk about. Let's first start with flows.

[00:02:45] I'll set the table, which is 2024 was very much like 2023 if you're looking at the macro level of the equity index. The S&P was up 25% two years in a row. Relatively stable volatility. We all know about the MAG-7 and tech stocks, which are driving this index concentration, but also index performance. As you look at the flows in 2024, just give us the big picture with respect to what you saw on the ETF front.

[00:03:16] Yeah. So last year was the best year ever. It was a 1.1 trillion in flows. So it was, I don't know, about 15% beyond the old record. So that was crazy. I'm old enough to remember when 100 or 200 billion was a big year. So a trillion in flows is just enormous. The other step that stuck out to me was the flows were a record in every region. Europe even had more of an organic growth rate beyond their record, and so did Asia.

[00:03:46] So if you add all that up, the assets and ETFs in 2024 grew 32% globally. That is a shocking number, 32%. This industry is 30-some-odd years old. And that's a number that we would normally get in like year 12 or year 8. That is a big percent jump for a pretty mature industry. And about 40% of that number was from flows. 60% was because the market was up so much.

[00:04:15] So the market definitely helped in that asset jump. But our projections for the next 10 years are 10% annual growth rate. We don't think the markets will be as favorable. But to have 32%, we had a prediction saying that ETFs globally would reach $35 trillion by 2035. We actually move it up to 2034 just because of last year being so great. So a lot of ETFs that we don't talk about did really well. Yeah, VU crushed with over 100 billion in flows. That was a record.

[00:04:45] And the Bitcoin ETFs got a lot of attention. But the middle class did really well too. There's a huge middle class in ETFs. I'm talking like well over 1,000 ETFs that kind of live between 100 million and 2 billion. And those did really well. So there was flows for everybody pretty much. Some strategies obviously had a tough year. Not many. And when I did my presentation at our big ETFs in depth in December, I went with the phrase, this is probably as good as it gets.

[00:05:15] Between the equity markets and the Bitcoin and then the ETFs and the record launches and this. And I was like, I'm not sure it could get any better than it got last year. So I'm bracing for maybe a couple of years where we grind out 400 billion. I just don't know if we're going to get this again. But there's a couple of things coming down the road that could actually result in big chunks of money moving over.

[00:05:40] But I'll table that for a minute and just say it's important to savor years like 2024 because they don't happen all the time. It's a tremendous year as you break it down. You've got obviously a very strong equity market. So that's driving flows. Folks like a winner. Perhaps there's some version of cash on the sidelines. There was a lot of money has been and continues to be in money market funds. And then there's that chart I'm sure you've seen and probably created a million times,

[00:06:08] which is mutual fund assets versus ETF assets and the perhaps emerging view that the structure of the ETF as a product has just got some really superior elements. It could be a tax efficiency element. It could be just a liquidity element. How would you characterize the strength of those flows in terms of where they're coming from and what motivates them? Yeah. So the primary audience for ETFs user is advisors.

[00:06:39] You can't ever tell exactly who owns the ETFs because there's no real paper trail except for 13F filings. But like a 13F filing can be a little misleading. We would put Goldman. We tag them as an advisor. But a lot of Goldman might hold the ETF in a mutual fund or possibly as a market maker. So it can be a little tricky sussing out how much is actually advisors.

[00:07:04] Plus, the RA market, you might have thousands and thousands of advisors that just aren't big enough to file a 13F, but they love ETFs. Because why wouldn't they? You get everything under the sun for almost no fee. And so if you're an advisor putting together a portfolio, you can put together an institutional caliber portfolio for very low cost and no friction. And so this democratization of everything is very powerful for them.

[00:07:33] So I would say that if you took all the flows last year or all the assets, we get $10.6 trillion in the US. I would say two-thirds, maybe even 70% are advisors. And I think 10%, 15% of the average advisor's portfolio is now ETFs. And that's important because advisors have $35, $40 trillion in assets. So that's a huge market. They love each other. Thank you.

[00:07:59] The rest, I would say, is 20% is do-it-yourself retail. That number is growing every year. Because these retail investors, some of them like to just boo and chill. Others do like to gamble. And there's been a lot of people trading the leverage ETFs, the thematic ETFs. So we call it hot sauce. There's a big legitimate lane for hot sauce and marketing directly to retail.

[00:08:26] Then there's probably the institutional slice, I would say, is probably 5% to 10%. And that would be like endowments and pensions and family offices. Those institutions are really spoiled. They can get whatever they want from an asset manager for almost no fee already. So they were already getting the world delivered to them for low costs before ETFs existed.

[00:08:53] Because when you have a lot of money, the world bends over backwards to serve you. And so an institution could get the S&P 500 in a separate account for one basis point. And they can lend out some of the stocks and yada yada. So institutions, what they really love ETFs for is liquidity. Because none of the other stuff they have is as liquid as ETFs. And this is real organic liquidity. This is not fake liquidity. Between privates and real assets and all this stuff, it's not liquid.

[00:09:22] So they definitely like to have what we call a moat around the portfolio or a liquidity sleeve. And they'll use SPY and HYG and GLD. And it's just they'll have an ETF in that bucket, maybe as a small percentage, just so they can tweak their portfolio in times of stress or do some kind of options on top of the ETF.

[00:09:46] I think they use ETFs really more as portfolio adjustment mechanisms on the outskirts of a portfolio. But the more smart people come into the ETF space, Simplify comes to mind. They're a hedge fund type ETF shop with people who would otherwise be working for a real hedge fund. Some of their ETFs are small and they already have big pensions in as holders. So I think as the talent gets better, institutions may actually buy an ETF long term like they

[00:10:15] would a hedge fund or a private equity. But for the most part, they are also a little elitist. They like to have like the real private equity fund or hedge fund. It's a competition between them to who can get the best actual hedge fund. And I think some of them look at ETFs to put the whole portfolio in the ETF would be like admitting defeat somehow. Or if the ETF is like the city pool that anybody can use and they're like, I need a custom tailored. I need a private pool. I need a pool in my backyard.

[00:10:43] So I think institutions have those issues with ETFs because everybody asks me like, why aren't they more into them? And I'm like, well, that's why. But they do love their liquidity. And so they can't get that anywhere else. So I would say that's the users. That's where the flows and volumes come from. Generally speaking, again, we cannot pinpoint this, but that's the best I can tell you with all the data and experience I have. And one part of your message is just around fees.

[00:11:11] And it's just very difficult not to call the ETF industry a resounding success with respect to how competition is creating some version of a fee war that's just ultimately a benefit to the consumer, the buyer base. I'd love for you to give us a little bit of context.

[00:12:01] And in terms of that trajectory of fee compression, are we about as far as we can go? What's coming in terms of the efficiency of the product? Let's go back to the launch of SPY. I think when you talk about this fee compression, you do have to go even beyond SPY back into the 70s with the inception of Vanguard. I wrote two books in my life. One is ETF Toolbox.

[00:12:26] And I realized that was almost like the third part of a trilogy. The first part of the trilogy is Vogel Effect. And I wrote that book recently. And the reason I wrote that is because that company is designed as a mutual ownership structure. And that one thing really is the impetus to all this.

[00:12:47] And so by the time 1993 rolled around and SPY was being launched by two gentlemen at the American Stock Exchange, they totally knew who Vogel was. They were investors in Vanguard and stuff. And Vanguard's index mutual fund for the S&P 500 was at 20 basis points in 1993. Vanguard's structure is that when it gets more assets, it actually uses the profit to lower fees because the investors vote for that.

[00:13:15] So it was 60 basis points when it launched. And it kept coming down every year through the 80s. So by 93, it was 20. SPY decided to price itself at 20 basis points so it could compete with the Vanguard index fund. So that's a huge, important part. Because if Vanguard doesn't exist, do ETFs exist? Probably. I just think it'd be way more expensive. So by starting at 20 bips, though, what I found when I talked to people and interviewed people around that time, they were like, the product was launched to be a trading vehicle.

[00:13:44] And it definitely served that purpose. Institutions could now use something that was like a futures contract but had something physically backing it, which was a solution to what the problem was on Black Monday. With the futures market destroying the equities. Anyhow, but by coming out of 20 bips, the market makers even were like, you know, I could see my mom in this. Because it's cheap, it gives access to the S&P 500. Vanguard didn't advertise. Some people didn't even know who they were.

[00:14:14] So I think the ETFs, by being low cost right off the bat, helped a lot. And so Barclays comes along in 1998, 99. And Barclays says, this is a retail product. And they really deserve a lot of credit. They invented iShares. So they basically bought webs off of Morgan Stanley, renamed them iShares, and the rest is history. Then BlackRock bought iShares from them, and it really went crazy.

[00:14:42] And so at the most part, ETF was invented to be a trading vehicle to give more volume to the American Stock Exchange. But it ended up becoming much more of a retail vehicle. I would say that look on the Stock Exchange every day. ETFs are a quarter to 30% of all the volume. So certainly they are a trading vehicle for sure. But that's why they're so interesting to me. Never in the history of Wall Street has a product come along that can appeal to my mom, Bridgewater, a pension plan, and like an RA in Nebraska. And they all might find different advantages.

[00:15:13] One may just want the liquidity. One may really be after for the lower fees. One may want the tax efficiency. You know, they don't like capital gains. So all those things are powerful. But honestly, if they were all costed like 80 basis points, they would be a fraction of what they were today. And over the years, I call it the TerraDome for a reason because I've seen legacy managers come in, and it's brutal for them. They don't usually...

[00:15:39] You know, I used to have this PowerPoint that showed Castaway, that movie with Tom Hanks. First picture was him as that sort of chunky FedEx middle manager guy with a double chin. And this is like when a mutual fund enters the ETF market day one. And then I put a picture of him weighing 140 pounds of the beard spearfishing. And I was like, this is year three. And I've seen many companies go through that. JP Morgan's a good example. They become TerraDome warriors, but it takes a little while.

[00:16:07] And I think that's part of what has to happen. Nowadays, I think a lot of managers, they don't want to do it, but they are forced to play ball in the ETF space. Because of that brutal TerraDome environment, investors love it. So that's where the fish are biting. And so it's like any other business. If you're a retail, you've got to deal with Amazon. They've really changed the game. So the low cost, I'd probably put that as number one or two benefit advantage of an ETF.

[00:16:37] And the asset weighted fee is now down around 18 bps. That said, the asset weighted fee has been coming down for years, but it's plateaued. And it's not because money still doesn't favor low cost stuff it does. It's that the hot sauce has actually started to find a home in a small slice of the portfolio. And the hot sauce charges a lot. But people usually don't care that much when it's a 2% allocation or a trading tool. And that's why we've seen so many new products come out there, because you can charge more.

[00:17:07] Yeah. And that's what I wanted to talk about next, which is this is not your father's ETF market. There's innovation in terms of go back and just start to introduce non-US underlyings like EEM and then non-equity risk characteristics like TLT. And then you get into things like volatility. We know about the vol-ETP complex and some of its bad days.

[00:17:33] And then you start to introduce even newer assets like crypto and structures, things like overwriting. You mentioned Simplify. They're among a handful of very derivative-centric ETF providers who are embedding optionality in products. And then, of course, the leverage complex. So there's all this new innovation.

[00:17:56] Is there an event or a change in the regulatory climate that helped facilitate this onslaught of new products that just look nothing like the spy sometimes? Yes. About five years ago, the ETF rule and the derivatives rule were put forth and tweaked. And I think they both happened within like they might even be connected. My memory on that's a little hazy. But it was two things that happened, I want to say 2019-ish. And that's when Innovator started.

[00:18:26] That's when Simplify started. And because it was easier now to use options, it also helped active management because you could do custom baskets. I won't go into the details, but it just makes creation and redemption a little easier for active to deal well on the tax front. Anyway, those two rules changed a lot of the ETF trajectory. Cheap beta is still a massive hit. Okay, that's there. But this is a baseline. But added on top was active and derivative using ETFs.

[00:18:55] The derivative usage is pretty responsible, though. I mean, there's some crazy stuff, no doubt, like the 2x NVIDIA. Maybe that's not as responsible. But the good news is you can't really do 3x. So 2x is not that bad. But you just got to trade those things. You don't want to hold them because a volatility drag corrodes your returns over the long term. But they simplify and to fund like JAPI, the JP Morgan premium income. They use options in a way that an institution would.

[00:19:23] It might be to generate income. It might be to play if the market goes to one of the tails to buffer there. There's a lot of things you can use the options for. And honestly, this is what ETFs, I think, deserve to charge a little more. If you're doing all that work with these options, you're doing a lot of legwork. I used to call them package trades because you click buy, just click a button, and you own this trade that they keep moving for you because the options have an expiration date.

[00:19:53] So you have to keep fresh writing the options in a similar way to a commodity ETF has to keep rolling the futures. Actually, it's a similar way to the way an S&P 500 ETF has to keep up with all the corporate actions. So all of this is a lot of legwork, a lot of smart people using derivatives in a very interesting way to customize an outcome for you. And in my opinion, we actually have this theme that we thought the white space was gone, but

[00:20:21] the white space is now solutions. You can even say it's the white space is changing your mood. So if you take an older boomer investor, they have a lot of money. They've done well in the market and they're scared of losing it. And the market's been up a lot and bonds didn't protect them in 2022. The ag fell as much as the S&P almost. And so they're like, whoa, this is a great opportunity for something to help them sleep at night.

[00:20:48] So the buffer ETFs, which use options to target an outcome, some are completely downside hedged, 100% hedged. You basically give up upside to eliminate downside. It's a trade-off many are willing to make. Options do that. And so a lot of products are designed to help boomers sleep at night using options. And on the flip, a lot of products are designed to cure boredom. You know, younger investors are looking for some fun and 2x this and that.

[00:21:15] These ETFs, to me, are using options to give you some adrenaline or something. So both of those are, in my opinion, interesting. And we study them because those two areas, they're able to charge more. They can charge over 60, 70 bps and still get organic flows. So we have to study that. I was looking at the levered products written on top of NVIDIA, of which there are a number. The Granite shares one is NVDL.

[00:21:42] And that traded by itself 90 million shares yesterday. A staggering number of shares, but set against the underlying liquidity of NVIDIA didn't actually add all that much. But there are instances where the tail truly can wag the dog in some of these leveraged products. And so investors have to be careful. There's also the opposite, which you and I talked about a number of years ago. And I think it might have been in the context of ARKK. It might have been ARKK.

[00:22:12] And you have developed a function on Bloomberg. I think it's called ETFL. It's the fund liquidity. And it's basically where the ETF becomes more liquid than the underlyings. And that sometimes when something like ARKK becomes so popular and ARKK owns names in a pretty good size, that the underlying could get really overwhelmed if ARKK had to do something. I thought that was super interesting work that you guys did. Yeah.

[00:22:41] That was originally made the implied liquidity tool. I read Dave Abner's book called The ETF Handbook. And he was a market maker at Bear Stearns, early market maker at ETFs. And he made this implied liquidity formula. Because if you're a market maker and you're making a share, you're basically having to create a spread for shares of an ETF. You need to hedge yourself using the basket.

[00:23:07] So if the basket is very liquid, you can basically make a tighter spread, even if the ETF doesn't trade that much. And so looking at the basket liquidity is what a market maker would look at. And so we wanted to make that number come out so that if an ETF was new and the implied liquidity was high, you didn't have to worry that the on-screen volume wasn't that high. You could definitely negotiate a good price for a market maker. And in doing that field, you're right.

[00:23:37] There are cases where the basket isn't as liquid as the underlying HYG. I mean, as the ETF, HYG, ARK, sometimes when it invested in those smaller biotech stocks. And so you would find more liquid in the ETF, actually. I've actually become comfortable with that. In COVID, there was an ETF called the VanEck High Yield Muni, HYD. It traded 29% away from the NAV. But the NAV was full of bonds that hadn't traded since the crisis started.

[00:24:07] And so when you get to some of these areas where there's some illiquid stuff, the ETF kind of turns into a hybrid closed-end fund for a little while. And at first, back in the day, like 15 years ago, reporters would be like, the ETF is broken. But what's interesting is the ETF still trades. And in COVID, we saw that the ETFs actually became like thermometers that you put in a turkey. The percent premium became a gauge of how illiquid the underlying had become.

[00:24:36] But the ETF was still highly liquid. In fact, more liquid in sell-offs. And everybody seems fine with that now. So I think we are beyond worrying about premiums and discounts. And people trust the ETF industry. They trust the price generally. Now, the price is going to be net what the market makers have to account for for a little risk and the arbitrage cut they want.

[00:25:04] So it's not like the ETF price is totally pure. It's got a little cost bake into it for sure. But it's pretty close. And sometimes the NAVs are just stale. And so there's more to meet the eye there with liquidity on both sides. But I just think that when a case like ARK, the new one is cap. That's the small cap cash flow ETF. Sometimes I call these small fish and small ponds that turn into medium fish.

[00:25:29] Because cap still is relatively small, but it got pretty big for the small pond it deals in. And because of the way that index is designed, it really rewards high cash flow yield. And so some of these small stocks have a huge high cash flow yield. And they became cap owned like 15% of the stock. We also had it with a high dividend ETF back in the day too. So there are these quirky instances where ETF can wag the dog a little bit, no doubt.

[00:25:56] It's usually in a space that's a small pond where they put a small ETF thinking the ETF will remain small, but happens to get hot. ARK was probably got way hotter than even CAF who thought it would. CAF got way bigger than I think Pacer thought it would. And then another one that junior gold miners had to do some shifting of the index because it got way bigger, GDXJ. That's where you're going to see that funky stuff. And we study it for sure.

[00:26:24] But for now, the wagging the dog will be limited to those areas. It won't be really as much in the bigger areas because there's just too much going on with like an Apple or Microsoft. You referenced HYG, and I wanted to just get a little bit of your thinking on the credit side of things. So ETF is very much an equity product. But as we've been saying, they're bringing in more and more different types of exposures. And some of the innovation in the ETF is going on the bond side.

[00:26:53] There's a shop called Bond Blocks that's doing some, I think, interesting work on parsing up the HYG into sectors, into ratings categories. And the trading technology in fixed income, and specifically credit, is far behind equities but catching up quickly too. The ability to do algorithmic trading is a newer thing. It's very much facilitating that growth. What do you see on the credit side of things in terms of ETF development and expansion?

[00:27:23] You are right. The Bond Blocks, honestly, they came out. I was like, I don't know. But they found white space in niche. So niche is definitely one way to innovate. The company FM also did it with single bond ETFs, which is kind of shocking. Those are so popular. But I guess if you can decrease a little bit of friction for somebody, you're going to get takers. But I think in the bond world, HYG is a blunt instrument.

[00:27:52] And people wanted more scalpels. It's like a machete versus a scalpel. And so there's been a lot of innovation on the bond side. And I think that the bond side is, at least for me, I've got to be honest, even though the aggregate bond index, like Bloomberg bought it and it's our index, it's just not that good. It's weighted by debt. It's got a lot of treasuries. And so it's very easy to beat it. I'm surprised I still get so much in assets.

[00:28:20] I think advisors are scared to use something that's a little more novel. It's like you can't get fired for using the ag or something. But I actually like the universal, which is the ag plus a little high yield, a little international. I think it's a better all-around bond ETF. But USHY is actually innovation at HYG. And USHY is a little further out in the junk spectrum, more bonds and a cheaper fee. So USHY is now the biggest junk bond ETF, believe it or not, past HYG.

[00:28:49] So these innovations actually work. Bond Blocks has several hits. They even came out with an all-triple-C ETF, which is pretty wild. But it had a great year. I think people are a little scared to use it, but it's done really well. And obviously, one of the biggest hits that came out of nowhere was from Janus, JA. This is CLOs. This is all AAA, so pretty safe. That ETF took in $11 billion last year. It was the third highest grossing bond ETF. And it's killing it this year.

[00:29:18] It's created a whole category. And one thing interesting about that is Janus had not much going on in the ETF space. They were a little lost. They just kept trying. I love that story. They tried some weird stuff. I won't go into the details. They actually had an ETF for obesity. They lost themselves a little trying to figure out the ETF space. They were like Tom Hanks. They hung in there, and they finally learned how to spearfish. And they came out with this really novel product. And it's now their big hit.

[00:29:44] And JA is interesting to me because the volatility on it is almost nothing. It's way lower than even the Agribonidex. It's got no correlation to any of the benchmarks. And it's doing pretty well. So the Sharpe ratio is staggering versus anything else. And I know institutions love HighSharp. It just checks a lot of boxes for like a good alternative. Yet it's a bond ETF. Anyway, advisors are taking to it.

[00:30:14] They like it. And it's offering something new. So there are several examples where someone comes out of the blue and just finds something and creates a whole new category. And that's why I'm a fan of innovation. There were 700 launches last year. A lot of people roll their eyes, a lot of them. But you've got to break some eggs to find that omelet. You know what I mean? So we'll continue to have these things come out of nowhere. And you're like, oh, that kind of works. So that said, for every job, there's probably two or three that are just living in oblivion.

[00:30:42] If Cliff Asnes happens to listen to this podcast, he'll bemoan the statement about the Sharpe ratio and call it vol laundering, which is not marking to market. When it comes to those private funds, I agree. Because I studied institutions. And they do sometimes do things that are not for the cleanest of reasons. I'll just leave it at that. Well, one asset that definitely marks itself to market 24-7 is Bitcoin.

[00:31:11] And so that's not running away from vol at all. Oh, yeah. It's a fascinating asset. And its ETF launch on the spot ETF, of course, and then the more recent options ETF is just so promising. You mentioned there's already, I think, a simplified product that overwrites. There could be an entire new category of investors who is not all in on crypto,

[00:31:35] but recognizes in some ways the need to have this potentially uncorrelated different category of risk exposure, but just can't stomach the potential sell-offs. And so that's where overlaying some version of a collar, the buffered strategy, could be really, really interesting to me. I'd love to get your take.

[00:31:59] I know you focus on not just the Bitcoin part of crypto, but just the crypto landscape is a big passion for you. What do you see coming with regard to, let's first start with Bitcoin product development in the ETF space. And then, again, I know you've written about Ether and others as well. Yeah. Anytime there's a hit ETF, think of the movie business. There's a hit movie, then Hollywood just basically copies that movie, adds twist to it, builds franchises around it.

[00:32:29] So Bitcoin is a huge hit. So now there's buffer Bitcoin, there's income Bitcoin, double leverage Bitcoin. There's Bitcoin theme ETFs. So the Bitcoin ETF complex is really doing great. It's been a huge hit, and I think it'll continue. It's interesting, Bitcoin versus gold. And I've actually found that in the modern portfolio, as I said earlier, there's a growing bucket for hot sauce.

[00:32:55] And to me, Bitcoin provides that store of value to currency debasement, but it's also a risk asset. So it moves like high beta, and that shiny objectness, there's a demand for it because people have all the serious stuff covered at the 60-40. And so they're looking for a little excitement, and they don't want to kick themselves if it goes through a million. So Bitcoin checks the box, it's hot sauce, gold doesn't. And that's why I think it has really taken all the flows.

[00:33:23] Even though gold had a great year, it has hardly seen any inflows. So that's an interesting little side story there. But I really would caution people. I think Bitcoin, I would treat it almost like a very young gun tech stock, to be honest, for now. But I've come around with Bitcoin. Now, the other coins, they're a little different. I just think Bitcoin's special. It truly is a digital gold. It's secure, truly decentralized. There's no boss, and you can't kill it. There's just some special qualities.

[00:33:51] Now, these other coins, they're a little touch more centralized. Things issued on a platform, I feel like you've got to be a little more careful there. But there's nothing wrong about it. I would just look at it like stock investing in a way, although they don't have any cash flow. So anyway, extra caution. But it's going to get crazy. We've got Ether already. But we're probably going to have XRP, Solana, Litecoin. Now they're filing for Trumpcoin, Dogecoin, Melania. There's a 2x Melania.

[00:34:19] It's going to get absolutely silly. But I would say 80% of the assets in this category will be Bitcoin, spot Bitcoin. That's what it is for gold. I remember when the commodity ETFs hit. Gold was a big hit. Say, oh, let's launch silver. Let's launch palladium, platinum. Then they're like, let's get really crazy. We'll do oil futures. Then they're like, oh, let's do aluminum futures. Coffee, cattle, live hogs, all this stuff. Most of those commodity ETFs are gone.

[00:34:49] Nobody really cared. You do have a touch of money in the coffee ETF. Corn, wheat is still alive, but there's only one. So some of this stuff on the fringe, it might get $100 million. But $100 million is like what Bitcoin ETF take in every three hours. So you got to look at this and just be like, that's fun. This is like little mini lottery tickets for the issuers and for the investors. But spot Bitcoin is where it's at. That's legit. It's real. We're bullish.

[00:35:18] The rest of this stuff is going to be a little circus. But I'm okay with it, whatever. I'm a big believer in breaking those eggs and a big tent for this industry. But especially with the new SEC chair and Trump, expect a little Pandora's box type situation. Yeah, I guess the one area I get a little concerned about is just having some version of a product that just blows up. We all know about the XIV in 2018. A lot of retail folks got carried out on that one.

[00:35:48] There's been a lot of discussion on MSTR and specifically the 2X levered longs that are built on top of that, MSTX, MSTU. And folks just really don't know what they're getting oftentimes. The thing I struggle with a little bit is absolutely believing in innovation and freedom. And then also just seeing the accident in the making, you kind of know it's coming. The XIV, you could have seen it coming in 2017.

[00:36:16] And so you don't want the progress to get really hampered by one of these accidents. How do you balance those two? How do you think about that? I would say right now, if you're looking for a possible blow up, you got to look at the 2X micro strategy. They move 20%, 30% irregularly. Now, I think for them to blow up, it would take a pretty steep and consistent downturn in micro strategy, but it's possible.

[00:36:44] I think for the most part, when we had XIV and then we had some of the 3X oil ETFs had problems and they went away. And in COVID, 72 different leveraged ETFs went away. Some voluntarily did. Some neutered themselves. They went from 3X to 2X. My colleague, Athanasia, has to talk about this a lot. Whereas when the ETFs get a little too crazy, a VIX spike becomes like a hard rain. It cleans the streets up a little bit.

[00:37:13] And I think you'll find some of these will go away. Now, I have to say, since XIV blew up, ETF industry has grown like crazy. I think most people who are in VU and these more legit capital group and all these mainstream products, I think they understand this is just a weird wing of the ETF area. And it's just not something they're into. We have a system called the traffic light. And if you leverage or roll futures, we give you a red light.

[00:37:41] And then we have green light for all the vanilla stuff. And then we have yellow for senior loans or courtesy hedge ETF stuff. It's a little weird, but not too crazy. And I really modeled it off of the movies because I think you don't want, even though there's some really crazy movies being done, you don't want to stop letting filmmakers do what they do all across the board just because kids exist.

[00:38:07] So I think, I understand, I think a traffic light system would be the way to have your cake and eat it too. Just label everything that's a little dangerous with a tag or our system. Green, yellow, red. And if it's red, here's why. They don't have that. And so I agree with you a little bit where there's a lot of products out there that you could stumble into and not totally understand and be like, whoa, I didn't know MSTU was going to lose money even though microstrategy went up over two months.

[00:38:33] Somehow I lost money because you don't understand volatility drag or a product just blew up and that's the end of it. And so I agree with you in a sense, but I will say most of the stuff that you're worried about is real fringe. And usually that crowd of degenerates, they don't care. Fine, it blew up. Give me the next one. So that's what I would say to all that. Well, I look forward to actively trading the options on the two times levered Melania ETF

[00:39:01] and perhaps doing some variant swaps on it as well. And by the way, don't forget for every MSTU, which is 2X maker strategy, there's a 2X inverse. So our team is looking at MSTZ. Someday that is going to be one of the hottest ETFs in America. Yeah, I totally agree. They're so interesting to look at when you have an underlying, i.e. Bitcoin, that's extremely volatile.

[00:39:26] And then you have a stock that just buys Bitcoin, MSTR, that's insanely volatile. And now you introduce all the products on top. It's just amazing. Let me just take two things on that real quick. Microstrategy is 2X Bitcoin. These are 2X that. So you can't do 3X or 4X, obviously. So these kind of got it. They found a backdoor to give you 4X Bitcoin. That's what they are. Yeah. What's really weird is they have a 3X microstrategy in Europe. We got to see that one blow up first. Right.

[00:39:56] But what's so ironic is Europeans don't care about any of this. There's no degenerate factor over there. I go to travel to Europe. They don't touch this stuff. In America, we're like, we are gamblers, man. We're like speculators in our DNA. We love to bet on everything. Asia has a couple of countries that are just like us. Europe, they're different. So ironically, there's even crazier stuff in Europe, but they don't care. It's the wrong market. So we always talk about, damn, if that was in the US, that would be the goldmine. There's a 5X cues in Europe.

[00:40:25] Well, let's circle back maybe and start with something very basic, but so important. I think important to you and clearly just unbelievably consequential for the industry, which is John Bogle. You're obviously a huge fan. You've done a lot of work. I enjoyed your book. I learned a lot. Maybe just starting with the trillion dollars of savings, which is the low estimate, which is just going to compound on a going forward basis of his impact.

[00:40:53] It's just an incredible donation to make. It's a real gift for an individual to leave behind. Maybe just reflect on Vanguard and him, why he's so important. Yeah. I had interviewed him three times before he passed away. And as I told you earlier, every time stuff's going on in my world trends, you pull the thread on this trend and you end up in 1974 over and over. And I thought that mutual ownership structure was so important.

[00:41:22] And I also remember Bogle on Bloomberg TV and CNBC, and he was so different. He was just talking about a different game. And I just found him to be just, he looked like Henry Fonda from On Golden Pond. So he had this very professorial Wall Street look. But what he was saying was really radical sounding. And so I was just fascinated by him. And then I had time during COVID and I said, let me just write a book about the effect he had.

[00:41:52] And I tried my best to trace it, not just passive. If you look at all the money that would have been in active mutual funds and you look at what Vanguard funds. So 50% of the money in sort of cheap index funds is in Vanguard. But the other 50% is in other people's cheap index funds and ETFs. But those people would not be doing what they're doing if Vanguard didn't exist. So I give them credit for that 50%. So you look at that, the fee difference, and you say, well, this has $14 trillion here and it would have been here.

[00:42:21] And that's how you come up with that fee savings. There's also index funds don't have turnover. So you're looking at way less turnover costs. And you could even add in behavior. I didn't add in behavior, but I found that when people invest in a cheap index funds, they get married to it. So they might flirt with other things, but they marry an index fund. And during sell-offs, you can see the flows come in, even if the sell-off is scary. Whereas other stuff, labor of the month, some active funds, if they start doing,

[00:42:50] the flows will come out when the performance sucks. But in the index funds, it just comes in rain or shine. And I think there's a resignation that people have is, I don't really care what's going on. I've decided to marry this fund. It feels like the best deal. The behavioral savings is also underrated. I didn't even include that in the number. And then the hot sauce to me is a result of what he did is, if everybody's married to this cheap core and they got a good deal, they do want a little spice.

[00:43:17] And so there's an ironic part to the fact that he made active get cheap or shiny. And so active really has had to get creative and evolve. So it's still alive and thriving, but it's had to work around Vanguard. And so that's the book really traces the initial impact of like, okay, I created an index fund. But it looks at the company, the mutual ownership structure, and the index fund combined were powerful.

[00:43:42] And then it looks at how everything has had to orbit now around this thing that he did that took 40, 50 years to really get big. But once it got big, it grows every year. And to me, it's the most impactful thing in the investment space in the last 50 years for sure. And so even the ETF business, again, as I said earlier, is kind of linked to him. So if you look at that guy, why would he do all this?

[00:44:08] Because when he set up Vanguard, he could have easily gone to a different investment company and just gotten a job as a CEO. The idea to consciously set up a company where you could never make a lot of money, that's what made him unusual. And then he really became this almost like Martin Luther character, not Martin Luther King Jr., but Martin Luther, where he pinned a thing on the church saying, this is wrong. And he became this evangelist for this cause.

[00:44:35] And he would preach right in front of them like Martin Luther did, your church sucks. And he would go to Morningstar conferences and say, lower your fees. And this guy was just wild. So the personality combined with all that is why I called the Bogle effect. I didn't call it the Vanguard effect. Because if Vanguard is now run by a guy from BlackRock and over the years, watch Vanguard is going to be a little more Wall Street-y. Bogle was the anomaly in physics. And he just was studying to me.

[00:45:04] And I did my best to put it all on the book. Yeah, fantastic. And I really enjoyed going through it. Congrats on putting that together. And Eric, I've really enjoyed the conversation. We've covered a lot of ground there. And I think our listeners who are very macro-centric and trying to keep abreast of an industry that has not seen the last of its own innovation. A lot of new products are being developed, some of which may succeed, some of which won't. But it's keeping us on our toes. And thank you so much for sharing your insights today.

[00:45:34] Yeah, never a dull moment as an ETF analyst. It's great to talk to you. Thank you. You've been listening to The Alpha Exchange. If you've enjoyed the show, please do tell a friend. And before we leave, I wanted to invite you to drop us some feedback. As we aim to utilize these conversations to contribute to the investment community's understanding of risk, your input is valuable and provides direction on where we should focus. Please email us at feedback at alphaexchangepodcast.com.

[00:46:02] Thanks again, and catch you next time.