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

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
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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

Sign up for an IRA with ITrust today using this link: https://itrust.capital/David

Eric Balchunus, Senior ETF Analyst at Bloomberg Intelligence and author of “The Bogle Effect”, discusses Bitcoin ETFs, and the trends in the ETF industry.

*This video was recorded on April 4, 2024

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*This video is not financial advice. The channel is not responsible for the performance of sponsors and affiliates.

0:00 – Intro
1:25 – Bitcoin price and ETFs
14:00 – Bitcoin ETF outflows
18:24 – Shorting Bitcoin ETFs
21:00 – Bitcoin price prediction
22:30 – Bitcoin vs Bitcoin ETFs
27:16 – ETH ETF
30:00 – Ultra low cost ETFs
31:28 – Criticisms of ETFs
39:11 – How to pick ETFs
41:20 – ETFs vs stocks
48:00 – The Bogle Effect
57:0 – Passive vs. Active investing

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