At The Cash: How Large Can Lively ETFS Get?

 

 

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 writer of  “A Complete Information to Alternate-Traded Funds” for the CFA Institute.

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TRANSCRIPT:

Intro: Pump it up, If you don’t really want it. Pump it up, Till you’ll be able to really feel it

After we take into consideration ETFs, we have a tendency to consider giant, low cost passive indexes. In any case, these are the most important ETFs from locations like BlackRock, Vanguard, and State Avenue.

However after we take a look at all the brand new ETF launches, they have an inclination to not be passive indexes, not be low cost, and never come essentially from these three massive firms. They’re lively and they’re concerned in all types 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 for the reason that inception of the total sector.

Dave, we’ve seen an explosion within the progress of not simply new ETFs, however primarily lively ETFs in all types of niches. What are you seeing on this house?

Dave Nadig: Effectively, you realize, 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 moving into the massive growth of the 2 1000’s, it was all simply index, index, index. Then we acquired some sensible beta the place we tried to be just a little 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 means that I don’t actually frankly keep in mind seeing for the reason that dot-com growth, proper?

It’s been a very long time since we’d had celebrity managers on CNBC speaking about, you realize, pounding the desk for a single inventory. And Kathy did that and clearly had monumental quantities of success, has had some efficiency hiccups alongside the best way, however that kind of went just a little bit dormant throughout among the pandemic when individuals actually found buying and selling.

What we’ve seen now could be this resurgence – notably to of us I’d talked about Dan Ives Wedbush, individuals know him;  and Tom Lee from Fundstrat together with his Granny Pictures ETF, each of which have pulled in large cash,

Barry Ritholtz: Billions of {dollars}?

Dave Nadig: Billions and billions of {dollars}. And for the explanations you’ll anticipate since you’ve acquired sensible individuals 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 individuals love celebrity managers as a result of they’ll look and so they can see Tom Lee on display screen and he can sit there and say, yeah, for this reason we like Bitcoin right here. Listed below are the three companies now we have in our fund due to it. We may be mistaken, we may be proper.

There’s a degree of authenticity to that that I believe is absolutely appreciated. I additionally suppose the truth that they’ve doubled the S&P this 12 months doesn’t harm.

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 features. Dan Ives has been an apple and an Nvidia bull, just about for so long as I can keep in mind. He’s been an entire lot extra proper than mistaken, 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: Effectively, to start with, I believe it’s nice for the ETF house as a result of I believe the dichotomy that we’d had the place individuals considered lively as being a factor that occurs elsewhere and ETFs have been solely passive, wasn’t useful. I believe we’re shifting in direction of a world the place your entire exposures, for probably the most half are gonna be in an ETF wrapper. So by all means we should always get lively managers as a part of this combine. And now we’ve acquired plenty of them. You already know, we’ve acquired a bunch of lively funds from PIMCO was early, we’ve acquired heaps within the bond house. You already know, every little thing from Cumberland advisors to State Avenue with the double line and, and Jeff Gundlach. A number of lively managers in plenty of completely different areas. I believe that’s very wholesome for the business.

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 individuals now we have talked about, Dan, Dom Lee and Kathy – personally as individuals I might have dinner with, the mathematics just isn’t on their aspect as an business, proper?

Barry Ritholtz: Why is that?

Dave Nadig: As an business, now we have to level out lively managers categorically underperform over time. Doesn’t imply all of them do, nevertheless it signifies that you’ve gotta be the particular one that managed to select the appropriate lively supervisor on the proper time. That could be a robust enterprise and even the lively managers working these funds will let you know attempting to time when to get out and in of their very own funds is gonna be robust. 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 highway to hoe

However let’s discuss what makes lively ETFs considerably completely different than lively mutual funds. And that information I referenced the place all mutual fund information, mutual funds need to do a daily submitting every quarter about their largest holdings, there was a whole lot of forwards and backwards about

how clear lively ETFs need to be versus different lively funds. What’s the state-of-the-art in the present day? What’s the regulatory surroundings?

Dave Nadig: So there are answers in the event you’re an lively supervisor and also you don’t wish to inform all people what you’re doing day-after-day. 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 well-liked blue chip technique referred to as T Chip, which isn’t semi-transparent, which means they’re not telling you the entire portfolio day-after-day. They’re telling you from time to time and so they’re giving the road simply sufficient info to make market, not figuring out all the data. 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 discuss why it’s an issue for fund managers. Fund managers don’t purchase a inventory on a Monday after which they’re finished. If they are saying, “Hey, we like XYZ, they’re shopping for that inventory attempting to make the most 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. Honest, honest description.

Dave Nadig: That’s the, that’s definitely the argument that the lively administration business who doesn’t wanna disclose what they’re doing would offer you.

So you might have articulated that aspect of the argument. Effectively, my counter to that will be in case your technique requires you shopping for securities the place your motion goes to maneuver the market absent disclosure or absent, you realize, obfuscation, then that technique most likely doesn’t belong in an ETF since you’ve acquired larger issues, proper? Which means 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 working a $10 billion ETF with that technique?

As a result of you’ll be able to’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 business. 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, truthfully there’s a lot liquidity. I believe it’s robust to argue that any person like Tom Lee is being notably harm 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 discuss another kinds of lively funds which might be just a little bit on the market. We see funds with choices, futures, derivatives, inverse leveraged, and together with some wild revenue 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 in the event you’re working a leveraged technique, you’re not making any selections, proper? I’ve acquired Apple, I want 2X Apple, I’m gonna go to my swap counterparty in a single day and so they’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’ll be able to’t simply automate that complete course of. Any individual nonetheless has to make a name about whether or not or not you’re teeing up the swap at this charge or that charge.

Similar factor with virtually something within the possibility house, as a result of the choices are continually altering and continually repricing and continually 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, virtually all of these kind merchandise you talked about are listed as lively merchandise.

I seek advice from 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 in the present day. 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 increased prices related to it for a motive. A few of that’s the revenue that the issuer needs, 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 discuss 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 lessons 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 Avenue, the massive ones, priv, PRIV for personal, which has a bunch of Apollo non-public credit score in it. Usually fairly brief maturity stuff, two, three 12 months form of issues and, and pretty simple, comprehensible non-public credit score. Intel must invoice a fab in Eire. They go get a mortgage, Apollo provides ’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 in the event you have been merely investing in say, junk or brief 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 in addition 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 influence 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 acquired 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 acquired solutions to all these questions. I’m, and I learn all of the solutions to these questions and I’m kind of not satisfied, nevertheless it’s a type of issues that in the event you wanna be, in the event you wanna be on the market on the sting, by all means go forward. However I believe the non-public securities within the each day liquid automobile has probably not been via the ringer but, so I stay very skeptical.

Barry Ritholtz: So let’s discuss just a little bit about crypto and, and the way that’s going to influence in each investor conduct 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 property, most likely 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 property are going to be increasingly out there 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 individuals learn about a Solana and Avay no matter. There’ll be a sleeve of that in an ETF that you simply’ll be capable to commerce. That’s all nice.

Then having these constructing blocks is superior, additionally as a result of it should now enable portfolio managers to create portfolios of these particular person securities, which proper now you’ll be able to’t even do, you’ll be able to’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 spend money on. In order that will likely be enjoyable after we get that, and I think you’ll see companies like Bitwise and BlackRock who’ve acquired some actual bonafides within the crypto administration house, begin bringing fairly institutional lively administration merchandise there. That’s most likely a 2026 aspect.

Long run although, if we wanna discuss 10 years from now, that’s when crypto begins changing into an fascinating competitor to the ETF house. I believe we are going to finally 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 Alternate and exchanging ledger entries to maneuver round your Schwab account. As a substitute, you’re gonna have an precise token. You’ll be capable to take a look at the serial variety of it, you’ll be capable to put it in a pockets and say, “Oh no, that is price 100 shares of Apple.” And that pockets will be capable to instantly transfer that safety to your pockets with none change being a part of the method.

Most of it should 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 taking place 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 nowadays. So which will take a while. As a substitute, what we’ll do is we’ll wrap a whole lot of stuff. So that you, you’ll most likely 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 individuals say we’re tokenizing every little 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 Large 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 at some point. If we wanna get to T+0, now we have to actually trust 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 this 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, you realize, 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 through 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 foul actor spoofing one thing into the system. So we we’re gonna have lots to guage as a market, what we really need. The concept of slowing down markets has really gotten a whole lot of traction, like pace bump markets, issues like that, that, which might be really pushing in opposition to this concept of instantaneous settlement for something. I don’t even need instantaneous settlement for my checking account. I like figuring out that I’ve acquired any person I can name when one thing goes mistaken.

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 just shifting volatility from one bucket to a different and charging one thing for the privilege of doing that. Proper Now you should buy one thing like MSTY, which gives you one hundred percent revenue return on a MicroStrategy place via the magic of choices, proper? And it creates an artificial lengthy place. Then it does an artificial lined name in opposition to the artificial lengthy place, after which it does an entire lot of return of capital to present you your a refund and guarantees you this infinite stream of excessive distributions, a excessive share distributions that’s volatility laundering.

As a result of what you might be really doing is you are attempting to promote different individuals the volatility of MicroStrategy, which might be not a unbelievable concept as a result of it, the vol of all is excessive in these circumstances. So you might be 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 you perceive what the product is, the way it generates features, 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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