Invest Like the Best with Patrick O'Shaughnessy
Eric Balchunas – The Past, Present & Future of ETFs - [Invest Like the Best, EP.93]
Episode guests
Podcast summary created with Snipd AI
Quick takeaways
- ETFs offer low fees, tax efficiency, and liquidity, making them a preferred investment choice for many.
- ETFs present opportunities in alternative strategies like market-neutral funds, reflecting evolving investor interests.
- A focus on investor discipline and education is crucial in promoting long-term investment strategies through ETFs.
- ETFs face challenges related to accessibility, tradability, and potential market distortions, prompting the need for evolving strategies and structures.
Deep dives
Evolution of ETFs and Why They are Popular
ETFs have evolved to become the preferred investment vehicle for many investors. The podcast discusses the broad appeal of ETFs, citing their low fees, tax efficiency, and liquidity as key factors driving their popularity. By tracking indices and providing exposure to various asset classes, ETFs offer a cost-effective way to diversify portfolios and access different markets. The podcast emphasizes how ETFs like VT and VTI exemplify the ideal investment products that provide broad market exposure with minimal costs.
Exploring Alternative Investment Strategies with ETFs
The podcast delves into the potential of ETFs to offer alternative investment strategies, particularly in the realm of market-neutral funds and multi-strategy ETFs. It highlights the appeal of these strategies in potential market downturns and the growing interest in incorporating hedge fund-like approaches into ETF structures. The discussion points to the future trends in ETF launches, suggesting a rise in products catering to unique investment needs and the democratization of previously exclusive hedge fund strategies.
Challenges of ETF Marketing and Behavioral Discipline
The podcast addresses the marketing challenges of promoting long-term investment approaches through ETFs. It underscores the importance of investor discipline and long-term vision in contrast to short-term trading behaviors. The discussion highlights the success of Vanguard's marketing strategy, emphasizing investor education and discipline during market volatility. It advocates for an investor-led marketing narrative focused on the art of long-term investing and the significance of resisting impulsive trading actions.
Potential Risks and Future Innovation in ETFs
The podcast touches on the risks associated with the accessibility and tradability of ETFs. Concerns are raised about the temptations of frequent trading and its impact on long-term investment outcomes. It also explores future innovations in the ETF landscape, including the potential introduction of Bitcoin ETFs and the emergence of opportunities in the alternative investment space. The conversation anticipates evolving trends in ETF structures and strategies to meet the changing needs of investors.
Significance of Tax Efficiency in ETFs
The podcast stresses the importance of tax efficiency in ETFs and how it sets them apart from traditional investment vehicles. It explains the creation-redemption process of ETFs that enables tax-efficient trading without generating capital gains. By focusing on after-tax returns and minimizing taxable events, ETFs like VTI demonstrate the benefits of tax-efficient investing and the potential cost savings that can significantly impact long-term investment outcomes.
Impact of Passive Investing and ETFs on Asset Managers
The podcast discusses how passive investing and ETFs have impacted asset managers, emphasizing the challenges faced by active mutual fund managers due to outflows and the potential risks in a downturn. It highlights the importance of engaging with investors and the shift towards effective communication strategies for asset managers to differentiate themselves in the industry.
Distortions in Price Discovery due to ETFs and Passive Investing
The episode explores the argument that ETFs and passive investing could distort price discovery in the stock market, focusing on the impact of ETF ownership on market dynamics and the debate surrounding the influence of passive investments on stock valuations. It addresses concerns about market distortions and the role of ETFs in shaping investment trends and market behavior.
My guest this week is Eric Balchunas, the senior ETF analyst for Bloomberg and the author of the Institutional ETF toolbox. This episode is intended for those in the asset or wealth management industry who have considered using ETFs in their portfolios, or for the individual investor who likes to stay up to date on trends in the market for asset management products. We cover all aspects of ETFs in some detail, and luckily in ways that have little overlap with a few other recent ETF-centric episodes on two of my favorite podcasts: the Meb Faber Show and Capital Allocators with Ted Seides with Matt Hougan and Tom Lydon respectively.
We open with Eric’s favorite ETF tickers, discuss the pros and cons of ETFs versus other investment vehicles, and explore the largest areas of opportunities for new ETFs coming to market in the years to come. ETFs have become the vehicle of choice for many investors, so it was about time we covered them in depth in this forum. As you’ll hear, Eric is the right person to teach the world about ETFs, thanks to deep domain knowledge and unflagging enthusiasm. Please enjoy my conversation with Eric Balchunas on the past, present, and future of ETFs.
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub.
Follow Patrick on Twitter at @patrick_oshag
Books Referenced
Quantitative Momentum: A Practitioner's Guide to Building a Momentum-Based Stock Selection System
Links Referenced
Chart – There Are Now More Indexes Than Stocks
Show Notes
2:32 - (First Question) – Eric’s favorite ETF tickers
4:07 – How Eric got started into his career and how it led him into the ETF world
8:04 – An overview of the ETF landscape
10:10 – Active managed ETFs
12:17 – Chart – There Are Now More Indexes Than Stocks
13:32 – Key variables he thinks about when assessing a new ETF
15:18 – Evaluating shiny object ETFs
17:30 – The appeal of ETFs
20:18 – Future regulatory concern of the tax treatments of ETFs
22:10 – The liquidity advantage of ETFs and why that can actually be bad for investors
24:19 – What would Eric do to build the perfect ETF
26:03 – What are the future trends for new ETF’s launched
29:40 – Categories that work well in the ALT world of ETFs
31:32 – Most effective marketing strategy for ETFs
35:50 – Quantitative Momentum: A Practitioner's Guide to Building a Momentum-Based Stock Selection System
36:28 – How will the winning asset managers have done differently in this space
41:56 – How the next downturn could impact ETFs
46:17 – Do ETF’s create pricing distortions
50:33 – What trend is Eric most interested in right now
53:21 – Alpha through Beta
55:51 – Kindest thing anyone has done for Eric
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
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