Introduction

Harold Bradley, a long-time investment manager and chief investment officer, joins Julia La Roche on episode 77 to discuss why Exchange Traded Funds (ETFs) have distorted the role of equities markets in capital formation while posing systemic risks.

Bradley has broad and deep experience in mutual funds, foundations and endowments, exchanges, and private equity partnerships, including venture capital and hedge funds. His experience also encompasses investments in farmland, metals and mining, futures and options, and a track record of successful engagement with venture-backed technology and FinTech companies, including W.R. Hambrecht's OpenIPO, Euronet Worldwide, StarMine Corp (sold to Reuters) and Archipelago, LLC (IPO).

In 1982, Bradley introduced first of a kind cash-settled stock index futures contract in the Value Line Composite Index while at the Kansas City Board Trade before purchasing a membership and trading for five years on the floor. In 1988, he was hired at Twentieth Century, now American Century, as the first equity trader, and built a globally recognized trading operation over the next ten years. He was the lead portfolio manager of small-cap growth funds from 2003 to 2007. He was later appointed Chief Investment Officer of aggressive growth strategies before being named President of American Century Ventures in 1999, which invested $63 million in businesses likely to disrupt the mutual fund industry. From 2003 to 2007, he managed American Century Tomorrow and a team of software engineers and developers who used artificial intelligence, fuzzy logic, inference engines, and pattern recognition to develop manager compliance systems and quantitative investment strategies for American Century growth mutual funds managing $10B. The American Century trading desk received global recognition as an innovator of electronic trading techniques and protocols, including the Financial Information Exchange (FIX) Protocol steering committee that created open source standards for order, trade and settlement instructions between investment firms, brokers and exchanges in global equities and foreign exchange trading.

Throughout his career, Bradley delivered Congressional testimony on stock market regulation, electronic trading, soft dollars, decimalization of stock prices, and ETFs. As Chief Investment Officer of the Kauffman Foundation from 2007 to 2012, he co-authored a vital research paper with Robert Litan highlighting risks to market stability from lax regulation of ETFs. He also co-authored widely-cited papers on subpar venture capital fund returns, with recommended best practices. He's been interviewed by CNBC, Wall Street Journal, New York Times, and others.

Read Harold Bradley's October 2011 testimony on ETFs here: https://www.etf.com/docs/Bradley_Testimony_10-19-11_SII.pdf

0:00 Open

1:21 Harold Bradley

2:15 Accidental investor

3:00 Agricultural commodities reporter

5:43 A major structural shift

6:45 Pace of change

7:50 Wheat pit to stocks

10:29 1987 crash

13:04 Black Monday blamed on portfolio insurance. ETFs 'a form of portfolio insurance'

13:45 20 Building trading operation

16:30 Electronic trading

21:15 Fees

22:40 Flawed system was a bug, not a feature

23:01 Soft dollars

28:59 Testified before Congress six times

30:10 Risk in ETFs

32:00 Drawback to mutual funds

35:12 Why did ETFs start

38:22 Decimalization

40:30 How D.C. works

43:00 ETFs are presented as a passive investment, but they're not

48:30 KRE

53:29 ETFs have instant liquidity, but the component securities within an ETF aren't immediately liquid

57:00 Gold/silver ETFs

1:00:45 Margin lending

1:03:18 How are ETFs distorting markets and the systemic risk they pose

1:06:00 Undermining price discovery

1:10:38 Bubbles

1:11:50 AI next ETF craze

1:13:00 Punishing good management

1:17:00 Investing today

1:20:00 Investing challenges

1:22:54 Why market won't go down?

1:27:00 Fragile markets

1:28:00 ETF risk likely won't go away

1:34:00 Markets today