Bogleheads® on Investing Podcast 080: Jeff Ptak, major trends in the mutual fund and ETF industry
00:00:00.000 | Welcome, everyone, to the 80th edition of Bogleheads on Investing.
00:00:15.460 | Today, my special repeat guest is Jeff Pitek.
00:00:18.740 | Jeff is a charter financial analyst and managing director for Morningstar Research Services.
00:00:23.960 | In this episode, we'll discuss major trends in the mutual fund industry with emphasis on
00:00:29.740 | the hottest area, actively managed ETFs.
00:00:33.440 | Hi, everyone. My name is Rick Ferry, and I am the host of Bogleheads on Investing.
00:00:47.720 | This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial
00:00:54.360 | Literacy, a nonprofit organization that is building a world of well-informed, capable,
00:00:59.480 | and empowered investors. Visit the Bogle Center at BogleCenter.net, where you will find a treasure
00:01:06.640 | drover of information, including transcripts of these podcasts. Before we begin today, I'd like
00:01:12.260 | to remind you of the 2025 Bogleheads Investing Conference to be held at the Hyatt Riverwalk
00:01:19.440 | in San Antonio on October 17th through the 19th. We have an incredible lineup of speakers. It's going
00:01:27.500 | to be a wonderful conference in a wonderful location. Go to BogleCenter.net, where you could sign up to
00:01:33.980 | receive more information as it becomes available. In this episode, we're welcoming back Jeff Pitek.
00:01:40.020 | Jeff is a charter financial analyst and the managing director for Morningstar Research Services. Prior to
00:01:47.400 | that, he was the chief ratings officer. And prior to that, he was head of global manager research.
00:01:53.780 | Jeff was a guest on episode 33, where we discussed the state of the mutual fund industry at the time.
00:02:00.080 | In this episode, we'll venture into new trends affecting the mutual fund industry with special
00:02:06.780 | focus on the exponential growth of actively managed ETFs. So with no further ado, let's welcome back
00:02:14.180 | Jeff Pitek. Welcome back to Bogleheads on Investing, Jeff.
00:02:18.820 | Oh, Rick, thanks so much. It's a pleasure to be here.
00:02:20.800 | Well, a lot has happened in the mutual fund and ETF industry since I had you on a few years ago.
00:02:26.380 | It's really accelerated, especially ETFs that have come out and the number of companies
00:02:31.920 | that are creating ETFs now. So today we want to go over the state of the mutual fund and ETF marketplace.
00:02:40.560 | Look at the new funds that are opening, funds that are closing. We'll get into the active
00:02:45.480 | versus passive debate again. I mean, is this helping? And we'll talk about some portfolio
00:02:50.500 | management items at the end. Why don't we start out with the state of the mutual fund and ETF industry?
00:02:57.900 | Sure. I think it's a picture of a vibrant industry, but there's a dichotomy for sure.
00:03:03.020 | When you look at what's growing and what's contracting. So let's start with what's growing.
00:03:07.820 | Indexing writ large is growing. ETFs is a category within indexing is growing. And then even within
00:03:16.860 | ETFs, you're seeing active investing growing, which is probably something maybe we'll touch upon a little
00:03:22.120 | bit later in the conversation because that's a burgeoning area. And then what's on the flip side?
00:03:27.240 | It's basically the opposite of each one of those things. You're seeing active in many areas
00:03:33.420 | contract. You're seeing open-end funds as a category shrink further. And the convergence of
00:03:40.680 | those two things, active mutual funds have really been under siege in recent years. So it's an industry
00:03:47.200 | that continues to grow. And in fact, just by virtue of the market, even active open-end mutual funds
00:03:54.480 | have seen growth, despite the fact that some of them have seen prodigious outflows over time.
00:03:59.520 | But you're seeing some real puts and takes.
00:04:02.800 | So let's get into the numbers here. How many mutual funds have been created versus how many ETFs have
00:04:14.400 | been created, say, over the past three years since I had you won last?
00:04:19.820 | Okay. So in terms of mutual funds that have been created over the last three years,
00:04:25.500 | around 1,300 have been created.
00:04:27.900 | Does that include money market funds, too?
00:04:30.060 | No. I'm sorry. I should have mentioned that. So that's just sort of your traditional sort of stock
00:04:35.320 | bond allocation funds. No money markets included in that. And then if you're to focus on ETFs,
00:04:42.420 | there were around 1,700 ETFs that were created over the last three years. So you've seen more creation
00:04:49.460 | within the ETF industry than you have in the fund industry. And so probably something you're
00:04:54.740 | wondering about, what about the converse, you know, the number of funds that have been mothballed.
00:04:59.940 | And this is pretty striking. So with respect to open-end mutual funds, around 4,400 have been merged or
00:05:07.620 | liquidated away in the last three years compared to 642 ETFs.
00:05:12.900 | Wow.
00:05:13.140 | And so it's a picture of an ETF industry that continues to expand, not only by assets, but in terms of
00:05:20.900 | net number of vehicles. And then with respect to open-end funds, you're actually seeing the industry
00:05:27.540 | contract. There were a number of years, as you well know, where the industry was growing like wildfire,
00:05:33.620 | both in terms of assets, as well as in terms of number of funds. But it's actually been shrinking
00:05:40.180 | in recent years. And you could argue that that's an industry that's adapting
00:05:44.340 | to a more sobering set of conditions than it faced in the past.
00:05:48.420 | So I just want to make sure I heard this correctly. Open-end funds, traditional open-end funds,
00:05:53.780 | whether it's indexed funds or actively managed funds. 1,300 approximately have been created
00:06:00.020 | in the last three years and 4,400 have closed?
00:06:05.460 | That's correct.
00:06:06.900 | Wow. That is a huge number. Did it include different share classes like A-share, B-share,
00:06:13.700 | Z-share, I-share? Are those part of the 4,400?
00:06:16.740 | Indeed, it did. So this is all share classes. And so you're right that some of this can be
00:06:21.780 | share class consolidation, of which there has been some. At the margins, there can also be a little bit
00:06:27.620 | of open-end ETF conversion activity that you might have seen take place in the last three years that's
00:06:33.300 | picked up a little bit. That's more of a rounding error in that number. It's more about the economics of
00:06:39.060 | running money in the open-end format. A lot of these, they're smaller in size, or they just want to tidy
00:06:44.740 | up their lineup, close some share classes so that they can gain a little bit of scale across a fund's
00:06:50.660 | various share classes. But yeah, the open-end fund industry is in contraction.
00:06:55.780 | You did mention something I want to bring up here, and that is converting from a traditional
00:07:01.300 | open-end fund to an ETF. How many funds have done that? And is that a growing trend?
00:07:08.980 | It is a growing trend. In terms of numbers, I don't have it right in front of me, but we're talking
00:07:14.900 | about hundreds of funds that have been converted. Hundreds, wow.
00:07:19.380 | Yeah, there's been a good number of them. What we have tended to find, with a few exceptions,
00:07:25.780 | is that the traditional fund providers, who are the ones that are typically converting these,
00:07:29.620 | they are picking and choosing which they're going to convert. So they might have a colossus of a fund
00:07:36.740 | within their lineup, but it might have a lot of assets in the retirement channel, or it might be spread
00:07:43.860 | across a multitude of different share classes. In circumstances like those, it doesn't facilitate
00:07:50.020 | conversion because you can't have an ETF in a 401k plan, or it's just a logistical nightmare to go and
00:07:58.180 | basically consolidate the multiple share class assets into a single share class so that it can be converted
00:08:03.860 | to an ETF. So what it's tended to mean is that fund companies have been more picky about what they
00:08:10.580 | convert. But we have seen some large fund families that have converted, probably most notably Dimensional,
00:08:16.820 | has converted a number of their mutual funds, and that's real money. There's been significant,
00:08:22.100 | we're talking billions of dollars in assets that have converted. JP Morgan is another name that springs
00:08:27.780 | to mind. But then we've also seen some traditional, very large open-end active players who've opted to go
00:08:34.580 | a different route, just launching DeNovo, like good examples of that. Probably the most prominent would be
00:08:39.940 | capital group, capital group, also known as American funds. They brought out a number of active ETFs,
00:08:46.420 | and those are not conversions. A few years ago, Vanguard held this patent on being able to launch
00:08:54.020 | an ETF share class against their traditional open-end funds. That's how VTI, the total stock market ETF,
00:09:02.900 | and VTSAX, which is the total stock market fund, are the same fund, just different share classes. And for
00:09:10.500 | many years, almost 20 years, Vanguard owned a patent on this, and no one else could do it. That came off
00:09:17.540 | patent, I want to say, a couple of years ago. And I've seen a lot of companies doing that. Is that something
00:09:25.460 | that's a trend? Not yet. Because I believe that we've got a number of fund companies that have applied
00:09:31.140 | to the SEC to do this. My colleague Ben Johnson has done a really good job of chronicling this. I think
00:09:36.980 | there's dozens of fund companies at this point. But what we have typically seen the traditional active
00:09:43.940 | providers do is either convert, like we had talked about before, or they will just bring out sort of a
00:09:50.820 | version of an active strategy that they offer, but it will not be a just sort of a new share class that
00:09:57.860 | sprouts from the existing fund, if that makes sense. So if you've got like a fund that's got like four or
00:10:02.580 | five share classes to it, we're not yet seeing them at that fifth or sixth share class, the fifth or sixth
00:10:08.020 | being an ETF. It's a new offering essentially that resembles maybe the traditional open-end fund
00:10:15.380 | that they offer, but isn't an exact replica like you would have if they just sort of sprouted a new
00:10:20.340 | share class. And is that because it's still in SEC registration, and the SEC is working on it,
00:10:26.020 | and that's the reason why this hasn't happened? That's right. But I know that it's awaiting regulatory
00:10:30.740 | approval. I think that there's also an operational dimension to this for some fund companies. But as Ben
00:10:36.740 | has done a really good job of chronicling, that hasn't stopped many of them from going and applying
00:10:41.540 | for this, notwithstanding whatever sort of operational hurdles might stand in their way,
00:10:44.980 | clearly they feel like they can surmount those challenges. Let's look at some of these new offerings.
00:10:50.740 | I'm a casual observer of some of these new ETFs that are coming out, and there are a lot of
00:11:02.100 | interesting ones. Very niche, very specific, even single-stock ETFs leveraged. So let's go ahead and
00:11:12.820 | start at the top of the three categories that I found. The first one is thematic funds. It seemed to be
00:11:20.820 | very popular. Yep. So thematic funds, you're quite right. That has been a very popular category. I would
00:11:27.620 | say it peaked a few years ago back, probably 2021. I think that we saw 57 thematic ETFs launch it since
00:11:35.380 | tapered off a bit. For instance, in the last year ended February 25, there were only 17 new thematic
00:11:43.380 | ETFs that were launched. So it's definitely cooled down. And I think that's attributable to a couple of
00:11:49.460 | things. I mean, one is, I think the industry maybe got shook out a little bit. 2022, by the market downturn,
00:11:55.620 | which hit some of these strategies really hard, and even some of them hit a harder times even before
00:12:00.900 | that. I think the other factor is investors have had some difficulties using these successfully. I did
00:12:07.220 | a little bit of work on this a month or so ago, looking at how the average dollar invested in thematic
00:12:12.980 | strategies had done over a period of time. I think I looked at the trailing three years, maybe as of
00:12:19.060 | January. And what I found is that the average dollar had lost money, despite the fact that it was a
00:12:24.900 | pretty hospitable market climate. What's more, you found that the average dollar in thematics,
00:12:31.220 | not only did it lose money, but it badly lagged how the average dollar had done in just a plain old
00:12:38.340 | target date 2050 fund. You know, I picked a 2050 because it's a lot of 25, 30 year time horizon,
00:12:44.740 | which mimics what you'd see with a thematic. And those made good money. It was like 67%. So it was
00:12:50.340 | basically a 14% per annum difference in the return to the average dollar of a thematic.
00:12:54.420 | And I, so I think the fact that, you know, you've had these very divergent sort of experiences,
00:12:59.860 | sort of rates of success in thematics, that probably also has induced some of the slowdown
00:13:05.540 | that we've seen in those, but they're a big category. They have at last count around $113 billion
00:13:12.340 | in net assets in thematic ETFs. And so the fact that there's a good amount of money there,
00:13:18.660 | there's been some legs of growth to it. It'll continue to attract some activity, which we've seen,
00:13:22.980 | like I said, 17 of these launched in the last year. A lot of times these thematic funds, which might be
00:13:28.260 | artificial intelligence or that, whatever the theme is, the investment theme is of the fund,
00:13:34.500 | there's a lag. I mean, it gets hot, it gets popular. I've been, I've been around the industry
00:13:39.540 | for almost 40 years now, and it's constant, right? If something is hot, then a fund eventually gets
00:13:48.260 | created, but it does take time to get the offering through the SEC.
00:13:53.300 | Exactly.
00:13:54.260 | So by the time the fund launches, the shooting star is beginning to burn out in a way.
00:14:01.700 | That's right. Exactly. By the time it gets to you, by the time it resonates with you,
00:14:07.780 | I mean, that story might have been played out. Those of us that have been inculcated in sort
00:14:12.180 | of passive investing and market efficiency, even in perfect forms of it, I think that one of the first
00:14:18.180 | questions we go to is, well, why wouldn't this have already been priced in, right? And so I think that's
00:14:22.660 | one of the difficulties that investors in these products have encountered. And just to, so it's a
00:14:29.620 | little bit less abstract. I mean, just looking at the top products, China internet, cyber security,
00:14:34.980 | US infrastructure, Dow Jones internet, arc innovation, which is probably the most famous of these medical
00:14:41.700 | devices, cloud computing, exponential technologies. I mean, these are the sorts of stories that basically
00:14:48.900 | make up these types of strategies. And in most of these instances, at the time they launched,
00:14:53.460 | that was a story that kind of had entered the zeitgeist, had its hold on a segment of the market,
00:14:58.740 | and yet it was probably already priced in and then some. And that's why it hasn't conferred the sort of
00:15:03.540 | outsized returns that maybe one would have thought it would have given how hot these themes were at the
00:15:08.820 | relevant times.
00:15:09.700 | Hmm. Solar energy, cannabis companies, all of that.
00:15:13.940 | That's right. Uranium, artificial intelligence, which you mentioned,
00:15:18.420 | water resources, quantum investing, if we can even call it that. These are all examples of thematic
00:15:25.380 | strategies one would find.
00:15:26.580 | I remember reading a book about fidelity years ago, it was published, must have been 35 years ago,
00:15:33.860 | with the authors quoted. I think it was Ned Johnson who said, you know, if the public will buy it,
00:15:40.820 | we will create it, but I wouldn't put a dime of my own money in it.
00:15:44.020 | Yep. No, no, for sure. And I think I did maybe write a little bit about this in the piece that I wrote,
00:15:49.380 | the headline of which is that the average dollar in these thematics had badly lagged,
00:15:54.020 | the average dollar in target date 2050s. If you're going to do it, and it seems strange to say this,
00:16:01.620 | you want to be a bit contrarian about it. Like if you believe in the theme, you've done your homework,
00:16:07.380 | you think that there's some durability to it. Well, probably the time to get in is after it sells
00:16:12.820 | off. And it's more invitingly priced, not when it's basically cocktail party chatter, that sort of thing.
00:16:20.020 | Very good. The next group leveraged ETS. And these can get very specific, like 2X, 3X up, 2X, 3X down,
00:16:29.860 | and even get into single stocks. This is getting to be popular.
00:16:33.380 | Yes. To say this category would leave Bogleheads colds is, I think, the understatement of all
00:16:42.100 | understatements. So yeah. So maybe a few facts and figures that I'll hang on this one. There were,
00:16:48.500 | last year, dozens of leveraged ETFs come out. And why did the number pick up? Because one of the
00:16:58.980 | emerging trends that we've seen in that space is single stock leveraged ETFs. So think of
00:17:05.380 | Nvidia, think of MicroStrategy. I mean, typically, these are kind of growth names. They've got some
00:17:14.020 | curb appeal to them. And they attract the trading crowd. And that's really what these ETFs are designed
00:17:21.860 | to appeal to. And so, but the new wave in these have been single stock leveraged ETFs. You know,
00:17:28.500 | this is something else I wrote a little bit about. There was a piece that went up a bit,
00:17:32.900 | just, you know, focusing on, this was as of early February, the sorts of results
00:17:36.420 | that it looked like investors had seen in products like these, again, focused on the average dollar,
00:17:43.140 | which is sort of an internal rate of return calculation, dollar weighted return calculation.
00:17:47.300 | And what you found is if you actually took the reference assets, whether it's a single stock,
00:17:54.020 | like it could be an ETF, more commonly, it's an index, and you just basically ran their return
00:18:00.580 | without the leverage, you only earned about five percentage points more in these products than
00:18:08.660 | would have the underlying assets without any of the leverage and certainly with far
00:18:13.140 | less volatility. So granted, these are not really built for somebody that's going to hold for a
00:18:18.180 | year, which was the time period that I examined in my study. But I think it does underscore the fact
00:18:23.460 | that there's real issues with these. The providers, they certainly disclose that these are designed
00:18:30.900 | for a single day, and you should not expect to be able to earn some multiple over periods longer than
00:18:36.100 | a day. So they're fulfilling their obligation. But you know, it does seem that that probably there are
00:18:41.780 | there are investors who stick in these for longer than that. And they probably are doing so to their
00:18:46.260 | detriment because there's more volatility. There's certainly more fee.
00:18:49.060 | I do see that when a new person comes to me and I look and see what they own. Occasionally, I'll see
00:18:55.860 | a 2x or 3x. And they've held it for quite a while. And their rate of return isn't 2x or 3x because
00:19:07.700 | there's also 2x and 3x volatility. And when you compound volatility, you erode away whatever excess
00:19:16.020 | return there is. That's right. The SEC has put out multiple advisories to investors on these funds,
00:19:24.500 | and even put out warnings to broker-dealers, because I remember in the past some broker-dealers got in
00:19:30.820 | trouble for not telling the clients how risky these things are. Just be careful with these things.
00:19:37.540 | They are meant for one day, which is really a bit strange because it really kind of circumvents the
00:19:43.220 | margin laws. You could leverage something within a fund without actually having to have a margin
00:19:48.820 | account. It's not something Bogleheads probably would be investing in, although I have seen a few of them
00:19:54.580 | in accounts. The last category I want to discuss is private equity inside an ETF. And the big one is
00:20:03.940 | SpaceX, right? Now you can own SpaceX if you buy this ETF, even though SpaceX doesn't trade. You wrote some on this.
00:20:10.740 | So this is maybe one of the hottest themes going, the public-private convergence. For the record,
00:20:18.100 | I don't have an issue with the notion of investor investing in both public and private, as long as they
00:20:23.620 | understand the associated trade-offs. What's been new is ETFs and open-end funds entering this space. The
00:20:31.060 | reason why it has not been common to this point, as we know, these are daily liquidity vehicles. They
00:20:36.020 | need to be able to fulfill buy and sell orders. And so what that means is that the underlying securities
00:20:41.300 | they invest in need to be sufficiently liquid and have readily ascertainable market values. And that doesn't
00:20:46.900 | really describe private equity or private credit for that matter. And my colleagues, especially Jack
00:20:51.940 | Shannon, have done lots of work on open-end funds that have owned stakes in private equity. Some of the
00:20:57.380 | big complexes, Fidelity, T-Row, and the like, they do have positions in private equity in their open-end funds,
00:21:03.620 | but they have tended to be at the margins. And Jack has done a really good job of covering that for us
00:21:08.820 | over time, as did Katie Reichert before him. I focused on a newer ETF. It's called ER shares, private public
00:21:16.740 | crossover ETF. The ticker is XOVR. And what's notable about what it's doing is it is committed to investing
00:21:24.660 | more meaningfully in private equity up to the 15% limit on a liquids. And to do so, it took a sizable stake in
00:21:33.620 | SpaceX. It's around 11% of its net assets. And that's a pretty chunky position in an illiquid for
00:21:42.900 | an ETF to have. And so what I try to do with the piece is just kind of go through the progression to
00:21:48.660 | ask the questions that I would think somebody that's diligently a product like that would ask themselves,
00:21:54.180 | which I think it's probably advisable for us to all ask as this sort of trend plays its way through
00:22:01.380 | open-end funds in ETFs. It's questions like, how do they access and transact in the private equity
00:22:07.300 | securities concerned? How do they value it? How do they manage the associated liquidity risk?
00:22:13.940 | I mean, when you're kicking the tires on vehicles like those, there should be sort of satisfactory
00:22:18.980 | answers that are forthcoming on each of those questions. But I was having a hard time with that
00:22:22.580 | particular ETF and kind of getting at the answers to those things. So that's why I wrote the piece.
00:22:27.780 | But it's a hot area. There's, as you know, there's a new SSGA ETF. It's a partnership with Apollo
00:22:35.860 | that will invest meaningfully in private credit. That's just getting off the ground. It was recently
00:22:42.740 | approved. And so all eyes are on that to see sort of how this experiment will play out in practice. But
00:22:48.260 | that has been a much talked about area. I recall back in the 1990s, a fund manager by the name of
00:22:57.940 | Garrett Von Wagner, who was very successful growth stock manager and started to left the company he was
00:23:07.300 | with, started his own group of growth stock mutual funds. And he did this. He put private equity in a
00:23:18.180 | mutual fund. The problem was, there's no valuation model where you could say this is what the daily
00:23:27.620 | value of the value of private equity was because it's private equity. So he didn't trade. And the SEC
00:23:35.540 | called him out on it. And without admitting anything, he paid the SEC something like a $600,000 fine
00:23:43.860 | because it was the contention of the SEC that he was mispricing
00:23:49.860 | these private equities in the fund. And it was an open-to-end fund. So that was a problem because
00:23:55.300 | that means the people who were buying the fund would be paying too much. And the people who were
00:23:59.940 | selling the shares would be getting too much. So it wasn't a fair market. Do you recall that by any
00:24:04.980 | chance? It predates my arrival at Morningstar, but I certainly have have read about it and familiar
00:24:10.260 | with it. It's a pretty sort of famous example episode within the industry. Yeah, I could see that coming
00:24:16.340 | around again here with what we're seeing today, but we'll see. All right. So Jeff, I mean, is there
00:24:23.780 | anything else that you're seeing out there? Any other area that ETFs are being created?
00:24:29.380 | You know, I would say the other thing that our team and our manager research team is led globally
00:24:36.500 | by my colleague, Laura Lutton. One thing that they're really focused on is as categories. One is
00:24:43.220 | sort of in the public private realm. We're seeing quite a bit of activity in the interval fund space.
00:24:49.620 | And interval funds, not my cup of tea. You know, I like my managed investments to be liquid. That's
00:24:55.460 | not what interval funds are meant to be. At least they're not fully liquid, like an ETF.
00:24:59.780 | What are interval funds?
00:25:01.380 | They're sort of a hybrid between an open-end fund and a closed-end fund. A closed-end fund,
00:25:07.060 | as I think many of your listeners might know, it's different from an open-end fund in that
00:25:12.020 | they don't issue new shares when demand exceeds supply. The number of shares is fixed. And so
00:25:18.420 | closed-end funds, they're probably most notorious for trading away from their net asset value. There
00:25:23.700 | can be a premium or commonly there's discounts. And so that's one of the trade-offs that you face.
00:25:28.420 | They've typically been used to invest in less liquid assets and also because they can employ leverage more
00:25:34.020 | freely. They've been used for income-generative types of strategies just because you can sort of
00:25:40.420 | gear up your yield and deliver more income to your investors. That's one of the reasons why they've attracted
00:25:45.380 | investors, but they're closed. Again, you can't create new shares. Interval funds are a little bit different
00:25:50.420 | in that they have a little bit more latitude to create additional demand and also typically in a quarterly or
00:25:58.340 | maybe a semi-annual interval. They will basically tender for a certain percentage of the shares.
00:26:04.740 | Yeah. So it's almost like a combination between an ETF and a closed-day fund.
00:26:09.300 | Exactly. This has become an area where there's quite a bit of activity because it's conducive,
00:26:16.180 | I think, in the minds of many to investing in privately held assets, but to offer a little
00:26:22.180 | bit more liquidity than you would typically have if you went the usual route of directly investing in
00:26:26.100 | private securities or investing, say, through a private equity or a private credit fund.
00:26:31.860 | A lot of private equity has a limit to the amount of redemption that can occur in any quarter and then
00:26:40.100 | it stops. Do these funds have that same limit?
00:26:43.860 | They do. They limit it and so that's what makes them more conducive to holding private assets.
00:26:50.740 | Yeah, but everybody runs for the door at the same time when they need liquidity.
00:26:55.060 | So pensions, sovereign wealth funds, foundations, endowments who have a lot of
00:27:01.460 | private equity that's illiquid. What do they start selling when they need money? They start selling
00:27:07.780 | the public stuff and then eventually they get to the point where they've got to dump something else.
00:27:12.020 | It could be a fire drill here. Everybody rushes to the door at the same time and then you can't get out.
00:27:18.020 | You got it. Yeah. So that's, that's definitely one of the more salient trade-offs that I think an
00:27:24.260 | investor in these would want to consider is, you know, you might feel pretty laid back sanguine about
00:27:29.860 | not needing the money right now, but when the market experiences some tumult, you might feel very,
00:27:35.140 | very differently. And so may many of your co-investors in the strategy. So it's certainly
00:27:40.740 | something that they need to bear in mind before they plunk their money into it. The other thing with intervals
00:27:45.460 | is, and our team will go through and diligence these using a similar methodology at the appointed
00:27:50.820 | time to what we do for open-end funds and ETFs. They can be very, very expensive and it's not uncommon
00:27:56.420 | for them to utilize pretty large dollops of leverage, which obviously have trade-offs associated with it.
00:28:03.380 | So it's the sort of thing where, you know, probably buyer beware applies and, and our team led by Laura
00:28:09.460 | Lutton will go through and, and they'll diligence these in the same way they do the other types
00:28:13.300 | of products that they evaluate, trying to make sure that they hold them to the same high standards.
00:28:18.340 | You wrote a piece recently,
00:28:21.540 | Vanguard's Jack Bogle was right again, because what you looked at was
00:28:29.940 | trading, the amount of trading that goes on between ETFs and mutual funds. And you found that mutual
00:28:38.500 | funds, there is less trading ETFs, there is more trading, and that had certain results. Can you talk
00:28:45.380 | about that study? For sure. The proxy that I was using for trading was the volatility of net flows to equity
00:28:54.340 | ETFs. And, and what I found by that measure is that trading in equity ETFs is about three times
00:29:02.100 | as volatile as trading in open-end mutual funds. And so, you know, we've long studied the relationship
00:29:11.460 | between investor activity and the sort of outcomes that they achieve. And sort of the way we try to
00:29:17.140 | measure that is through an internal rate of return, a dollar weighted return of calculation in our
00:29:20.900 | power balance, it's an investor return, it's how much the average dollar does. And long story short,
00:29:26.740 | so I took a look at this big picture, and then more specific to Vanguard, what I found was that
00:29:32.660 | from a time weighted a total return standpoint, equity ETFs were earning just as much as open-end funds,
00:29:42.020 | in fact, a little bit more. By time weighted, you simply mean ignoring cash flows, you're just
00:29:48.100 | looking at the actual return of the fund, it didn't matter how much money was coming in or going out.
00:29:53.940 | Exactly right. I should have clarified that. Yeah. So it's assuming a buy and hold investment. You
00:29:57.540 | invest a lump sum at the beginning, you hold it to the end. And so it's agnostic to the timing and
00:30:02.740 | magnitude of investor cash flows along the way. And so what you found on that basis is that ETFs actually,
00:30:10.820 | equity ETFs, I should say, over the, I think, 10 year period I looked at ended January 2025,
00:30:16.020 | they were slightly out earning comparable open-end funds over that period of time, which is kind of
00:30:21.380 | what you would expect. They're a little bit cheaper. However, when you looked at them on a
00:30:25.300 | dollar weighted basis, and so this does take into account the timing and magnitude of investor cash flows,
00:30:30.660 | what you found is that they were actually lagging comparable equity, open-end mutual funds. This is
00:30:37.460 | true for the industry at large. It was also true for Vanguard. They weren't capturing as much of the
00:30:44.020 | potential buy and hold that is total return that they could have earned. Well, there's no smoking gun with
00:30:49.940 | these things we can't know whether that's directly attributable to over transacting. You know,
00:30:56.180 | circumstantially, it does lead you to conclude that some of the trading activity that we've seen
00:31:03.940 | in ETFs has been detrimental in the sense that their average return in equity ETFs hasn't been
00:31:12.180 | as high as it could have been if they had traded less, which is sort of what you see in open-end
00:31:16.020 | mutual funds. And like I said, found this not only for equity ETFs and mutual funds for the industry
00:31:23.460 | as a whole, but also for Vanguard more specifically. The good news for Vanguard investors is the gap that
00:31:29.700 | I saw for ETFs between the total return of the dollar weighted return was narrower than what I saw in the
00:31:35.700 | ETF industry as a whole. And even when you looked at the average dollars return in the equity ETFs that
00:31:41.460 | Vanguard offered, they still exceeded that. The return of the average dollar for the industry as
00:31:46.980 | a whole. So those are things that I think Mogul, if I could presume, would have felt good about.
00:31:52.900 | You know, he's a very competitive guy, wanted to beat the competition.
00:31:55.220 | Vindicated. He would have felt vindicated. I can see him now, right? That's exactly what I said.
00:32:00.100 | Why didn't anybody listen to me? Right?
00:32:01.780 | Yeah, you can hear it, right?
00:32:03.780 | It was the reason why Jack turned down the idea of doing an S&P 500 ETF back in the mid-1990s. Great
00:32:14.420 | idea, but he didn't want to get involved. He saw ETFs as pouring gasoline on a fire.
00:32:18.740 | One thing I would add though, to be fair to Vanguard, and it may reassure a few of your listeners,
00:32:24.740 | we don't typically publish gap data between dollar weighted returns and total returns for particular fund
00:32:31.300 | families. But when I've studied this just on my own time, what I have found is that the gap
00:32:36.900 | for Vanguard funds and ETFs has been meaningfully narrower. And so what that means is that Vanguard
00:32:42.580 | fund investors are earning more of their funds' total returns. A different way, I suppose, to put
00:32:48.100 | that is they're doing a better job of timing their cash flows or just being disciplined than we're
00:32:54.580 | seeing elsewhere in the industry. And so that's to their credit.
00:32:57.940 | Talking about cash flows, we've got 1,300 mutual funds created, 1,700 ETFs created
00:33:04.980 | in the last three years, although there's been a lot of mutual funds that have closed,
00:33:09.140 | a lot less ETFs that have closed. We've got all these funds, but where is the big money going?
00:33:15.220 | Okay, so I'll run through them, sort of the broad categories. So it's going to indexing,
00:33:21.060 | it's going to ETFs, and it's going to Vanguard and BlackRock primarily. They're hoovering up cash at an
00:33:31.540 | almost historic rate. And we can get into the specifics here, but maybe I'll focus on the trailing
00:33:37.300 | year ended February. So with respect to ETFs, they saw $1.2 trillion in net inflows. And so I think for
00:33:47.060 | the year 2024 was the biggest ever for ETFs, 1.1 trillion of net inflows. And so that's equivalent
00:33:54.900 | to a 14% organic growth rate.
00:33:57.460 | Well, this is inflows. This is not gain in the market. This is actual new cash coming in.
00:34:02.740 | That's correct. Exactly. So again, that was $1.1 trillion of net inflows last year, which was
00:34:09.460 | equivalent to around 14% of what would have been the beginning net assets in the US ETF industry at the
00:34:17.780 | start of that year. And contrast that with open end funds. Last year, they shrank by around 2% of their
00:34:25.220 | beginning net assets. So it was around half a trillion dollars in outflows, give or take over the course of
00:34:32.100 | last year for open end funds. So you've really seen a sea change. And this is just the past year that trend
00:34:38.020 | has been playing itself out. The ETF industry at this point, for those who are wondering, it's a nearly $11 trillion
00:34:45.540 | industry.
00:34:47.880 | Open end funds, believe it or not, despite the fact that we've seen this torrent of flows out of
00:34:53.640 | open end funds into ETFs, it's still a $21 trillion industry. So when you look at the market share of
00:35:01.080 | open end funds versus ETFs, it's still about two to one open end fund assets to ETF assets. Open end funds
00:35:08.760 | still have about two thirds of the market compared to the ETFs, one third. I mentioned index versus active
00:35:16.600 | being the other line of differentiation, kind of how it cleaves. As I mentioned, index is dominating. So if
00:35:23.800 | you're to focus on the year ended February, $918 billion of net inflows into index funds, and that's
00:35:32.280 | what's going to be the other year. It's going to be the other year that's going to be the other year.
00:35:36.680 | Wow.
00:35:37.560 | 2024 was the second biggest year for index funds on record. It was a very, very historic year when it
00:35:44.600 | came to ETFs and index funds more generally gathering assets from investors.
00:35:51.240 | You know, sort of the more popular categories for discretionary active ETFs, in case you were
00:35:57.720 | wondering about that, were ultra short bond, large blend, derivative income, which is sort of like,
00:36:05.160 | you can think of that as sort of covered call, sort of option writing strategies, core plus bond in large
00:36:12.520 | value. That's where we've seen sort of the active ETFs come to the fore. We've seen more launches in that area
00:36:19.720 | in the past few years than we have for some others.
00:36:23.000 | But have they gathered assets? Are they just launching these things with the hope of stopping
00:36:29.080 | the flow out of their actively managed mutual funds? We may be cannibalizing our own open end funds,
00:36:36.280 | but at least we'll be stopping the flow going to somewhere else. So I mean, are these things attracting
00:36:41.880 | meaningful assets?
00:36:42.920 | Yeah, that's a great question. The short answer is they are. So 2024 was a banner year for active ETFs.
00:36:50.760 | They saw around $290 billion in inflows, according to our estimate.
00:36:56.280 | Wow.
00:36:56.680 | Over the past three years, they saw around $560 billion of inflows, which is equivalent to around
00:37:04.520 | 24% of all flows that we saw to ETFs. And so like the biggest ones that you would see are the bestsellers.
00:37:13.000 | So there's a Janice Henderson, AAA CLO ETF, which I think has seen around $15
00:37:20.200 | billion in flows over the last three years. I think I mentioned JEPI, which is the JP Morgan
00:37:26.760 | equity premium income ETF. There's a NASDAQ version, which has been a hot seller. And then Fidelity
00:37:31.160 | has an active bond product, Fidelity total bond ETF, which has also been hot selling as well.
00:37:37.160 | You know, this has definitely been an area of real interest and activity for the providers,
00:37:41.720 | as you can imagine, and it's paid off by some measures. So let's get into the active versus
00:37:48.200 | passive.
00:37:48.760 | We chart comparisons.
00:37:50.280 | And by passive, I'd like to stick with Jack Bogle's view of a traditional index fund versus
00:38:01.720 | a, what I call a Spindex, which is a special purpose index fund. And call it a, you know,
00:38:11.160 | a NVIDIA 2X. You've done a lot of work. Morningstar has always done a lot of work,
00:38:15.720 | as have other companies on active versus passive. You just recently have come out with your annual
00:38:23.240 | report looking at 2024 and previous to that going back many, many years. What's going on? Are these
00:38:32.680 | newfangled ideas that are coming out in ETF format? Are they outperforming? What is going on in the
00:38:38.600 | active versus passive debate? Yeah, great question. So we did put out a report recently. We call it
00:38:43.480 | the active passive barometer. My colleagues, Brian Armour, Ryan Jackson, Eugene Gorbatikov,
00:38:47.640 | and Human Kim put it out. And it looks at active fund success rates versus a style-appropriate
00:38:54.040 | passive composite over different trailing periods. To answer your question, Rick, we're seeing far more
00:39:00.120 | failure than we are success, especially as you look at the longer period. So just to give you an example
00:39:04.760 | for the U.S. large cap categories, only about 6% of active U.S. large blend funds beat their passive
00:39:13.560 | composite composite over the 10-year period and to December 2024. For large value, it was around 14%.
00:39:19.640 | And for large growth, it was only 3%. And so those are very, very sobering figures indeed. As you range
00:39:27.240 | out to some of the other areas, you would have seen the success rates perk up a bit. For instance,
00:39:32.120 | as you move towards small cap, you're talking about 20% to 30% of active small cap funds that started
00:39:40.280 | the period survive to the end and beat their passive composite. But that's still less than
00:39:45.640 | a coin flips chance. Where you do see the success rates get meaningfully better, at least in relative
00:39:52.440 | terms, is within active bond funds. And so as you move to areas like intermediate corporate bonds,
00:39:59.000 | high yield bonds, that's where the success rates can approach 50%. But again, in a number of these cases,
00:40:05.560 | you're talking about a coin flips chance for many investors, they'll conclude that's not good enough
00:40:10.440 | odds, and they'll opt to index, which I think for many investors is advisable anyway. But it's an excellent
00:40:16.040 | report my colleagues put out. It is. You do a great job with this. It's hard to categorize some of these funds,
00:40:21.960 | but I mean, you do the best that you can do. I would like to point out a couple of things. As you go further out,
00:40:29.720 | I mean, time is not on your side, right? I mean, over a one year period, it might be some years 60%
00:40:35.880 | of active outperformed, some years 40, some years less. But as you move out to five years, the number
00:40:42.200 | drops. You also have a survivorship bias. I mean, a lot of funds just close, and so they're not included
00:40:47.000 | in the data anymore. And the only data you can include is the funds that's still around, and maybe
00:40:51.560 | the funds that were around before they closed, you can include that data. But once you go out to
00:40:57.000 | 10 years, the percentages drop even more. 15 years, they tend to drop more. And by 20 years, you're really,
00:41:03.400 | really dropping. And I found this to be true, regardless of the period of time you're looking at. It could be the
00:41:10.000 | last 20 years. You could start in 2000, looking backwards 20 years. You could start in 1980, look backwards 20 years.
00:41:15.880 | And these numbers are very consistent. The longer you hold your active funds, the lower the probability they will
00:41:23.960 | outperform the index. And you talk about that phenomenon, that recurring phenomenon.
00:41:29.720 | Oh yeah, for sure. No, I think that point's really well taken. I would say the common denominator across
00:41:35.720 | all these different time periods that we might have measured, you know, going back in time, funds come
00:41:41.480 | and they go. My colleague found that, you know, over a typical 10-year time horizon,
00:41:47.480 | 30 to 40, in some cases, even 50% of the active funds that began the period did not survive to the
00:41:54.360 | end of the period. And so, the common thread here is sort of the perishability of some of these active
00:42:00.280 | funds. That plays a large part in explaining why success rates aren't higher than they are. I'm not
00:42:06.040 | suggesting that they would necessarily be markedly better, even if all of these active funds that die in
00:42:13.320 | droves were to somehow survive to the end. There's a number of other factors that probably portend
00:42:19.480 | against that. But nevertheless, one of the overarching factors in why active funds have struggled to beat
00:42:26.680 | their passive composites in greater numbers is the fact that they just don't make it to the end. They
00:42:31.160 | don't have the staying power. The other thing I wanted to bring up about the data is that you mentioned in the
00:42:38.520 | last 10 years bond funds, if you bought an actively managed bond fund, it's maybe a coin flip. You've
00:42:45.400 | got a 50-50 chance of outperforming the bond index. However, I do want to point this out about the
00:42:51.960 | difference between bond funds and stock funds, is that when you look at the range of returns of the stock
00:43:02.600 | stock funds over that 10-year period, it's an 80 percentile of the funds fall into a very wide range,
00:43:10.040 | like 5% between the ones that do come close to beating the market or even maybe beat it by a little
00:43:16.600 | bit, and the ones on the other side of the chart that underperform that 80 percentile. It's a wide range,
00:43:25.720 | like 5% difference. But that's not the case with bond funds. Bond funds is a very narrow, peaky
00:43:34.200 | graph, where the ones that outperform might outperform by a half a percent. The ones that
00:43:41.400 | underperform, underperform by maybe a half a percent. And if you just bought the index,
00:43:47.320 | which is in the middle, you did just fine. So if you're going to try to beat the market,
00:43:53.000 | and you want to beat it meaningfully, and you're trying to do it in a balanced portfolio,
00:43:59.320 | it becomes very difficult because the equity side of that has a very low probability of outperforming.
00:44:04.360 | And you could underperform by an awful lot. So if you have a three-fund portfolio of U.S. stock,
00:44:10.280 | international stock, and bonds, you could pick three actively managed funds. The bonds might actually
00:44:15.080 | do okay. They might outperform by a half. But if one of your stock funds underperforms by three percent,
00:44:20.440 | I mean, you just blew the whole thing out of the water, and you should have just had three index
00:44:24.280 | funds. No, I think that's exactly right. If we look at this on two different axes, one being likelihood
00:44:29.560 | of success, the other being expected payoff, I suppose. Like you say, what you would find is that
00:44:36.280 | you probably have a lower likelihood of success in equity, albeit with maybe a larger potential payoff,
00:44:42.840 | should it survive to the end and actually beat the passive composite, should it do so. Whereas
00:44:47.960 | with fixed income funds, there might be a slightly higher chance to succeed to beat the passive
00:44:53.320 | composite. But as you say, it's not going to do a moonshot. You're not going to get this huge payoff
00:44:58.760 | where it's beating the benchmark by multiple percentage points. If it's doing so, you actually
00:45:04.120 | probably want to diligence further just to make sure you understand your strategy and why there's
00:45:08.280 | that sort of tracking error to it, because it can obviously go the opposite way. So you should be
00:45:12.680 | thinking of it along both of those dimensions, as you rightly point out.
00:45:15.960 | I wrote about this in a book called The Power of Passive Investing, and I said the same thing. It's like,
00:45:20.680 | you might be able to pick one fund out of three that outperforms, but unless that outperforms by a lot,
00:45:25.240 | your portfolio still underperforms. So just do all index funds, and you have a high probability of
00:45:31.640 | outperforming a portfolio of active funds. I do want to get to a couple more items. And you did a lot of work on
00:45:39.800 | active funds again, but here looking beyond the fee. Clearly, everyone agrees that active funds have
00:45:47.160 | higher fees, and you have to get over that hurdle rate first. But your research even went in a little
00:45:53.960 | bit deeper, at least recently, that says, well, you know, if you buy the past performing funds that have
00:46:00.440 | low fees, something might be there. Can you describe that? Yeah, so we took a look at what might be doing a
00:46:08.200 | good job of sorting based on future performance, as it were. And so we looked at a couple things. One
00:46:12.120 | was past performance before fees. The other was fees themselves. And what we actually found is that
00:46:18.440 | if you favor the funds that had the best past performance before fees, and then furthermore,
00:46:23.800 | within that cohort, you favor the lowest cost, you greatly boosted your odds of success of beating
00:46:29.480 | your average peer over time. So I think for a lot of your listeners, they're already sort of well
00:46:35.720 | accustomed to sort of pinching pennies and favoring lower cost funds. I think that probably they would
00:46:41.080 | be less inclined to factor past performance in. But what our research found is that actually past
00:46:46.200 | performance before fees has done a more than respectable job in recent years of sorting funds
00:46:51.480 | based on past performers. Those which outperform before fees, this was across asset classes and across
00:46:57.560 | years, were likely to outperform their average peer going forward than were the low performers in the
00:47:03.560 | past which tended to lag their average peer peer over future periods.
00:47:08.040 | So the message is that if you are going to pick
00:47:10.280 | a active fund, let's say you're in a 401k plan and they don't have any index funds, which would be
00:47:16.280 | very unusual, by the way, because most 401k plans at least have an S&P 500 now. But let's say you're in
00:47:21.560 | a 401k or 403b, you know, legacy thing that's really not good investment options. Then you should opt for
00:47:29.640 | the highest past performing active fund that has the lowest fee and that gives you the highest probability
00:47:37.720 | of at least getting maybe close to the market return, if not maybe outperforming.
00:47:42.200 | I would start with fees. I think that's your best starting place. And my colleague Russ Kinnell did
00:47:47.720 | landmark research some years ago on which variables do the best job of predicting future fund net return
00:47:54.280 | performance and fees shine through. And so if anything, I think the research that I did more recently
00:48:00.680 | builds very slightly on the work that Russ had done previously. But fees not only tilt the odds in your
00:48:07.880 | favor if you're looking at it versus other funds that are relevant peers, but also some of the more
00:48:13.640 | recent research I did, you know, I found that cheaper funds are likelier to survive over a longer time
00:48:19.000 | period than our pricier funds. So you also tilt the odds in your favor that way. Then secondarily,
00:48:25.160 | you can look at performance, you know, we have tended to find in the last, you know, 10, 20 years,
00:48:30.760 | that past performance before fees has done a pretty good job of sorting. But I would start with fees. I
00:48:36.520 | think that that's the most reliable starting point. And certainly Russ found that some years ago.
00:48:40.840 | I think I'd just make one last comment on past performance. It's been a momentum market in the
00:48:46.440 | last few years where the magnificent seven, you had to have them. And it's been that way for several years.
00:48:55.640 | And active managers who did have them probably kept them at least a portion. In fact, you had an article
00:49:00.920 | on that talking about the portfolio construction of active funds, where they look a whole lot more
00:49:06.600 | like closet index funds than what the active managers would say. But the bottom line is there's been a
00:49:11.400 | lot of momentum in the market. Does some of that research about past performance have to do with recent
00:49:16.600 | momentum?
00:49:17.240 | Yeah, I think that's very astute. So I, I owe sort of our readers a follow up article to sort of dig into
00:49:23.080 | what some of the factors that explain it. But, but I think that you're keying on on some of the most
00:49:27.640 | important factors. We've seen an unusual persistence of large beating small of growth, beating value of
00:49:36.680 | domestic, beating foreign, of spread within fixed in, beating govy. These are areas which, in some cases, you'll see
00:49:46.200 | the best past performance having had favored, and they'll stick with that. And it's tended to reward them if
00:49:53.880 | they've stuck with those things. So yeah, there has been a certain pro cyclicality to it. And I think that explains
00:49:59.240 | some of the trended performance. But as we know, that can reverse itself quite dramatically in the markets. And so that's why I think,
00:50:06.360 | I think probably people are best served to start with cost rather than past performance.
00:50:10.200 | Last area I want to get into is portfolio management. And just a couple of items here.
00:50:14.520 | Sure.
00:50:15.000 | A couple of reports that you did looking at the asset allocation of portfolios. And we tend to, I don't want to say we're trend
00:50:25.740 | followers. We, we are, but the fact is we are trend followers, at least to the point where we don't like to rebalance.
00:50:33.860 | And that when U.S. equities are doing well, we tend to let that become a greater and greater portion of our portfolio
00:50:39.460 | than rebalancing, say, to international. Or if equities in general are doing better than bonds,
00:50:45.860 | or bonds are not doing well, so you really should be selling some stock and buying some more bonds,
00:50:50.580 | we tend to not do that. At least that's what I read from your data. Is that an accurate assessment?
00:50:56.740 | That is an accurate assessment. Inertia is very powerful. And on the flip side, it can be very
00:51:01.860 | uncomfortable. Indeed, when we go through a rebalance take from our strong performers and give to our weak
00:51:07.380 | performers, there's a natural aversion to doing so. It's incidentally, it's one of the reasons why
00:51:12.900 | I think that strategies which automate those tasks, like target date funds, like target risk funds,
00:51:19.780 | are so useful to investors. Certainly, there's probably an optimal solution out there, quote,
00:51:26.020 | unquote, that could maybe carve the asset allocation more precisely, or do the rebalancing and reconstitution
00:51:33.700 | in a more tailor made way. But I don't think people should make perfect the enemy of good target date funds,
00:51:39.220 | target risk funds, are perfectly acceptable solutions. They help people to earn more of their
00:51:45.060 | funds, total returns to participate in markets, and to do so in a way that appropriately balances risk
00:51:50.500 | and opportunity. And so I think that helps you to overcome inertia, and there's no real action that's
00:51:57.700 | required on your part. But the research that we did recently, you know, in a sense, it tried to quantify
00:52:02.500 | some of that inertia. And what we did was we just went through and we tallied up all the assets by
00:52:08.020 | type of fund, and literally the securities that they held. And what we found that there was some drift
00:52:13.780 | into equities, US equities, large in particular, and away from some of the areas that haven't performed
00:52:19.300 | us strongly. So cash bonds, foreign stocks. And so, you know, when you kind of went through and sort of added
00:52:26.020 | it up, it was around we found $800 billion in assets that probably ought to be rebalanced, assuming certain
00:52:34.660 | things about what kind of the baseline allocation should be. It's not huge in percentage terms. I think
00:52:40.020 | we're talking about 3% of the equity allocation would need to be moved back into cash and bonds,
00:52:46.340 | let's say, and then within the equity sleeve a little bit of rejiggering around of the domestic to foreign
00:52:51.860 | split. You know, but it's real money in dollar terms. And we've seen in periods like the one
00:52:57.060 | we're coming off of that we can all get a little complacent as investors in doing some rebalancing
00:53:02.340 | and adjusting given our objectives and circumstances can be very much worthwhile. And this was our attempt
00:53:07.380 | to quantify that. One last question. We're talking about the creation of ETFs and target date funds.
00:53:14.260 | I still am yet to see any kind of a push by the fund companies to create balanced ETFs, very low cost,
00:53:25.060 | balanced ETFs that do, let's say, a life strategy fund at Vanguard. In fact, Vanguard hasn't even created
00:53:32.260 | a life strategy ETF yet that we could use, say, in an IRA. Why is that? Do you have any idea?
00:53:40.100 | David Stein: So I think that probably just one practical operational reason is that target date
00:53:45.780 | funds, they've been used most often within the context of a 401k plan. The 401k plans,
00:53:52.420 | their pipes and plumbing aren't set up to hold ETFs. And so I suppose from that standpoint,
00:53:58.180 | if they're just to look at it as capitalists, they would conclude it's not worth their while to develop
00:54:02.100 | these because they can't put them in the place where they enjoy the most uptake. But I completely agree
00:54:07.140 | with you that from just from an overall investment utility standpoint, they make a great deal of sense.
00:54:14.180 | David Stein: You know, particularly, you know, maybe they would need to get a little bit creative
00:54:18.580 | on the fixed income side. But if you think of taxable money, we know that equity ETFs, you know,
00:54:24.820 | they excel in keeping cap gains distributions to a minimum. In theory, you could deploy some of the fixed
00:54:30.820 | income sleeve into things like munis. Maybe they don't scale quite as well, but that would be a nice
00:54:35.620 | solution for taxable investors. In particular, I would warmly welcome target date and target risk ETFs.
00:54:42.900 | Because like you said, I think they've got lots to offer investors. Simplicity is the key. And so as
00:54:48.180 | people move into ETFs, being able to offer them simpler, more ready made options like target date,
00:54:53.460 | target risk ETFs, I think that would make a great deal of sense.
00:54:56.660 | David Stein: Index ETFs, meaning, you know, very, very low cost, few basis points.
00:55:01.620 | David Stein: Right. Well, Jeff, it's been wonderful having you back on Bogleheads
00:55:04.900 | on Investing. Thanks for all that great information. And hopefully, we'll see you again sometime.
00:55:09.220 | David Stein: Thanks again, Rick. It was a real pleasure.
00:55:10.820 | David Stein: This concludes this episode of Bogleheads on Investing. Join us each month as we interview a new
00:55:18.660 | guest on a new topic. In the meantime, visit Boglecenter.net, Bogleheads.org, The Bogleheads Wiki,
00:55:25.780 | Bogleheads Twitter, The Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit. Join one of your
00:55:32.180 | local Bogleheads chapters and get others to join. Thanks for listening.
00:55:37.940 | David Stein: Thank you.