You can read the official ETF.com version over at … ETF.com, but here’s the same big ideas more as a musical vibe than market intel:

“We’re in this environment where something that’s like a fake ceasefire or not a real ceasefire feels like a relief because we’ve been so conditioned to expecting much worse news.”
— Matt Zeigler

🎶 “Trickle Down“ — Sprints (Spotify)

A fake ceasefire headline or a 90-day tariff pause isn’t good news. It’s just less bad news, and after months of being conditioned to expect worse, “less bad” is enough to send everything ripping higher. The bar is underground.

Dublin post-punkers Sprints may hit the nail a little too much on the head with their teardown of trickle-down economics and empty sentiment. Their Sub Pop debut is three minutes of fury about being told to stay patient while systems fail in slow motion — housing, climate, costs, all of it. Patience is not a strategy when the jukebox is broken.

“The third time it happens on a weekend, we’ve got to start saying somebody is front running oil. At some point we have to say this is no longer a rational market. This is a gamed market.”
— Dave Nadig

🎶 “Liar’s Tale” — Kneecap (Spotify)

At some point you have to stop calling it “smart money” and start calling it what it is: Crime. The pattern is too clean, the timing too precise, and the regulatory response too completely absent to pretend giant anonymous prediction market and oil winners are a coincidence.

So forgive me for leaning on highly-caustic Kneecap (Belfastian angryboys who rap in Irish and English). You can hate their politics, but they got charged in the UK with Terrorism for flying the wrong flag at a show. Given the state of things I’m feeling pretty OK standing on a few planks like “you shouldn’t throw people in jail for a flag” and “financial fraud is a crime” and “victimless crimes rarely are.”

“You can make a very strong argument that this economy has never been more leveraged to the fate of the S&P 500 than at any other time in history.”
— Cameron Dawson

🎶 “Flood the Zone” — Sleaford Mods ft. Liam Bailey (Spotify)

The implication isn’t subtle: the U.S. as a system can’t take an extended bear market anymore. The economy and the S&P are the same trade. It’s one giant THING — market and economy.

Sleaford Mods are a super acquired taste, but their latest, The Demise of Planet X, is actually LESS angry than a normal Mods album. “Flood the Zone” borrows its name from the Steve Bannon playbook: overwhelm the system with so much noise that nobody can tell what’s real. Here’s what AI suggested I should put here while checking for typos and links: AI SLOP: “Flooding the zone isn’t just a media strategy. It’s monetary policy.” Thanks Claude, I got this.

“I think that as time goes on, you should effectively have a decay curve of what the peak valuation should be. If the peak valuation six months ago was 28 times forward, think six months forward that should be 27 or 26 times, because every six months you’re getting closer and closer to the end of the cycle.”
— Cameron Dawson

🎶 “What’s Right” — RatBoys (Spotify)

At the end of the day, it’s always about valuations, and Cam’s point here is a good one: if 28 is the right PE now, what is it next year? Even if semiconductor earnings are still accelerating, the “right price” should be declining — because every quarter that passes brings you closer to the end of this cycle. Time itself is a valuation headwind. “Time is actually your foe, because you just get closer and closer to the end and further and further away from the beginning.” Banger

Ratboys are from Chicago and I think of them as kind of “MillenialCore.” Really just a classic indie-rock 4-piece with a great vocalist asking the same question: how the heck do you know what the “right” answer is? Don’t sleep on Ratboys 2026 album in it’s entirety: Singin’ to an Empty Chair. It’s diverse and fantastic.

“The digital world is actually far more physical than we thought... Are we in episode 3 of Revenge of the Real World? And does this suggest that we are going to have a prolonged upcycle in more physical parts of the economy?”
— Cameron Dawson

🎶 “Cruise Ship Designer” — Dry Cleaning (Spotify)

Every AI chip requires rare earths, water, electricity, and a fabrication facility that costs $20 billion and takes four years to build. The digital world runs on atoms. And a LOT of copper. The break between “real” and “digital” is getting bigger, and we’re going to see the real world side — all the STUFF — become more important than it has been in decades.

Dry Cleaning’s Florence Shaw is nearly as much an acquired taste as Sleaford Mods. On “Cruise Ship Designer” from Secret Love, they wrestle with this balance of real and fake. “I make sure there are hidden messages in my work,” she says, as if the only way to justify building something tangible is to smuggle meaning into it. Are we facing the same real/virtual dichotomy with AI right now, where we'll be smuggling Art into the Artifice every chance we can?

“It’s very difficult to say that the economy of the United States is growing if we are not hiring any new people. That just doesn’t make a lot of sense to me... Can Meta fire another 15% of its employee base and increase its valuation? Another 15%? Another? At some point that starts straining credibility.”
— Dave Nadig

🎶 “The Old Law” — Father John Misty (Spotify)

The party in power argues we don’t need new jobs because we’ve deported enough people. I find that largely a BS answer. At some point “fire people, stock goes up” stops working. I just don’t know when.

Father John Misty has built an entire career on the ominous self-interrogation of a man who suspects the old rules (like these) might not apply anymore. “The Old Law” is classic FJM: religion, ego, and a weird sense of unreality. FMJ may be one of the most quintessential “now” bands out there. They tell stories about an insane world that seems all to real, and yet still drench it all with nostalgia. I wanted pick “Screamland” — which is even more of the moment, but it’s not actually a new song. But listen to it anyway.

“I look in my area, my funny corner of northeastern Pennsylvania, where the increase in wages really helped push this area forward... A lot of people got nicer cars than they should have gotten. This is a couple more layoffs or a few less available jobs from having something that takes much longer to resolve itself.”
— Matt Zeigler

🎶 “Masquerade” — Cardinals (Spotify)

The car payment doesn’t go away when the job does.

Also: Cardinals rock. They’re an Irish post-punk band whose debut Masquerade is eponymously descriptive: peeling back layers to find the raw truth underneath. When the masquerade ends in NEPA, the cars will still be in the driveways and the bills will still be due.

“I can’t imagine being one of these guys who’s been having grand slam after grand slam for all these years and now has to make this decision. I feel like you’re in a lose-lose situation right now.”
— Matt Zeigler

🎶 “Sevastopol” — Mandy, Indiana (Spotify | Bandcamp)

Announce layoffs and you get hammered in the press. Say nothing and you look like Kodak in 2005.

Mandy, Indiana are (delightfully) not from Mandy, Indiana, but are a Manchester-based quartet who scream in French over industrial techno-noise. “Sevastopol” — named for the besieged Crimean city — captures a world where you’re under fire from every direction and there’s no safe position to take. Here’s Claude’s AI SLOP take on Mandy, Indiana: “It’s not music you put on to relax. It’s music that sounds like what it feels like to be a CEO right now.” ... Sigh Claude. Sigh.

“For a thousand bucks a month you can give five people superpowers in your organization that’s probably worth $10,000 a month — that’s being funded by venture capitalists. It’s a huge wealth transfer to small businesses... Everybody’s got to go abuse the heck out of it while the venture capitalists are still paying.”
— Dave Nadig

🎶 “Good For You” — Tuesday Night Curry Club (Spotify)

It’s the same pattern as Uber rides that used to cost $10. The subsidy won’t last forever, but right now, it’s the biggest wealth transfer to small business since the SBA loan program, and nobody’s talking about it.

You’ve never heard of Tuesday Night Curry Club. I feel confident saying so because their tracks have hundreds of listens. This is a mistake, and one you should fix. They’re reminiscent of the same UK Janglerock from the Kooks first Album, Inside In/Inside Out. I know of very few superlatives higher than that.

There you go. Eight ideas. Eight songs. See you next time.

It’s been a month since I started back over at ETF.com, and while I had originally hoped to “cross-post” ETF and capitalism related content here, the honest truth is we’ve made *so much content* in the last month it’s not possible. Dozens of articles, over 30 videos, a dozen media and conference appearances — it’s been a whirlwind.

I will admit that this has felt a bit like trying to build a sandcastle on an eroding beach. But I also don’t think that’s pointless. I think building sandcastles is an act of hopeful defiance. “See, cruel world, good people can still try to make connections and build communities in the face of a raging storm.”

So I’ve just been making. Making as much content, and having as many conversations as I can. And while I love all my darlings, like any insecure writer, here are a few things you might have missed that at least tickle me.

Cheap, Fat, Starving for Attention

Readers may remember this line from a post I made back in April here. Well, I did a full on presentation of it at FutureProof, and was lucky enough to have a full camera crew there. Here’s an article-version of it, over at ETF.com, with the full video at the top.

A Raft of Interviews

As neurospicy as I am in crowds, FutureProof is different: it’s outside, it’s easy to find space to chill, and there’s never that “trapped at a cocktail party” vibe. Put a microphone in my hand and it’s actually the kind of space I thrive in.

Over two days, we shot over 25 videos one on one with advisors, ETF issuers, service providers and other industry notables. We didn’t do it to make money — there is no sponsor. We did it because we’re serious about building a community around having real conversations. You can see the growing list of interviews we’re dropping here, but we’ll be dropping one a day until we run out, and by then, I hope we’re on to the next gathering. Of particular note to readers might be my longer sit-downs with Bob Pisani (former CNBC guru), and Caleb Silver (Investopedia, but now business editor for People, Inc.), or chats with Desarte Yarnway (Altruist), Guillermo Trias (Tidal) and Meb Faber (Cambria).

My goal for the next few quarters is to show up Mic-in-hand at every event I can get to, to talk to as many people as possible face to face. In trustless world, one-on-one conversations really feel like magic incantations which help heal the world.

Click Beta

I have learned a lot from Matt Zeigler over at Sunpointe in the last year — mostly about music, but a lot about all this “having real conversations” stuff. His “Just Press Record” series where he simply introduces two people and then steps back is one of the most uplifting things I’ve ever witnessed or participated in.

That’s the vibe we’ve both tried to create with our once a month “what the hell is going on with the world?” podcast, Click Beta, with regular special guest Cameron Dawson. And yes, I’d love you to go to YouTube and subscribe, But,, BUT!!! Also. Playlist.

Over at ETF.com I wrote up a full playlist for last week’s episode. You can read the article with the quotes and music references over at ETF.com, but also, here’s the playlist if you just want some new tunes.

Simplify’s Entering the Fall Event

I will give the team at Simplify a lot of credit for having me on-stage at their always-spectacular fall event at the NYSE. The agenda was a who’s who of modern finance, from David Einhorn to Cem Karsan to Josh Wolfe. And despite me being … unkind … to some recent product moves, they still saw fit to have me moderate a panel on real-world AI and the CapEx boom. I found the conversation super interesting, and helped hone my thinking about who the real long term beneficiaries of all this bubble spending are going to be.

What’s Next? More! But wait! It’s falling apart!?

It’s been great to be back just CRANKING out content for ETF.com, and we’re really excited about some crazy ideas we have for next year. In the meantime, I’ll repost juicy tidbits here every few weeks.

And for the non-ETF-Nerds, I’ll be writing more bloggy stuff here shortly. On my topic list:

• Disconnection as a form of rebellion.

• What we can learn from Thich Nhat Hanh in Vietnam.

• The challenge of non-violence.

• My “fall Ango” season of meditation.

• The shifting sands of consciousness research.

• Being your community’s “money person” in a time of crisis.

• Moar Zines.

But in the meantime, everything outside my immediate circle of work and family and friends seems, well, bonkers and broken. I wake up every day feeling like I should be doing more. And then this morning Hank Green snuck this in a video, and I’m trying to absorb it.

Two characters in his book (April and Maya) are trying to figure out how to solve a problem. Maya says “don’t worry, some other people are going to come along and solve that problem.” April says “Oh, so that problem will solve itself.”

And Maya says: “No. That problem is going to be solved by other people.”

Other people solving problems. That’s you. That’s me. That’s all of us. We’re all the other people. I don’t know how to fix much, but I have some inklings on how I can help some people talk to each other a little more sensibly, about real world issues like money and markets and defending the integrity of institutions we know work pretty well.

So I’m gonna try and solve what I can solve. And I’m counting on you to do the same.

Thanks!

Every so often I sit down with someone one on one for as long as it takes to get really darned nerdy about something.

This week, I asked Teddy Fusaro from Bitwise Asset Management to help me understand why their recent "first ever" in-kind creation of a bitcoin ETF (in this case, their BITB), is actually a big deal. I came away pretty convinced. Full video above, 5 key takeaways below, and keep scrolling if you want the whole transcript to feed your LLM.

1: Cash-only BTC ETF creation was actually helpful at launch.

[00:08:00]: "Something that I don't think was broadly anticipated is that this actually ended up working out better for most Authorized Participants, because most of the APs are big TradFi institutions... Do you think those companies were ready to turn around and deliver Bitcoin to us? Remember, this is a different era."

The back office of ETFs is just something most investors never have to think about. The SEC's initial cash-only in-and-out requirement seemed like a limitation, but it gave traditional Wall Street firms time to build their crypto capabilities without being forced to handle Bitcoin directly (and deal with the regulatory soup of the time). For ETF investors, this meant the major market makers like a Goldman Sachs and Jane Street could participate in keeping ETF prices efficient without needing to immediately develop Bitcoin custody solutions. This helped ensure that there was real liquidity back in January of 2024, which is one of the reasons we have .

2: In-kind = Efficient

[00:14:28]: "If the order is in kind, all we're doing is accepting the order. We don't need to go out and trade today. We just wait until the Bitcoin arrives. We don't have to pay for it. The efficiency comes in is because ... remember the example I used was that we paid BRRNY (Bitcoin Reference Price) plus two basis points? Someone's gotta pay for that two basis points, right?"

This is perhaps the most important development for cost-conscious ETF investors. Those two basis points (0.02%) in trading costs might seem small, but moving to in-kind creations and redemptions externalizes those costs -- they'll show up, maybe, in the spread, but they won't impact existing shareholders at all. Yes, we're already at the shaving basis points era of Crypto ETFs.

3: Bitcoin ETFs are inherently Anti-Money-Laundering.

[00:21:00]: "A regulated registered vehicle is just about the worst place that someone should try to launder money. What's the point of sending bad Bitcoin into an ETF when you're getting back registered securities that have to be traded and custodied in regulated institutions?"

"Bad Bitcoin" is something the crypto industry has spent a lot of time on. There are now multiple layers of KYC/AML checks - both at the authorized participant level and at the custodian level, leading to a situation where Bitcoin ETFs likely have stronger controls than most traditional ETFs or funds. When you buy an ETF, you get all the regulatory protections of the TradFi system (like, say SIPC protection if your broker goes under), and all of the additional blockchain analytics that make these products arguably "cleaner" from a compliance perspective than, say, a Gold ETF.

4: Conspiracy Theorists Will be Sad: You can Audit the Vaults.

[00:25:02]: "Even compared to GLD -- and we know the fear-mongering and conspiracy theories -- Bitcoin is amazing because it is so transparent. You can look at the blockchain to see where the balances are in each one of these Bitcoin ETFs. Even if they don't publish their addresses themselves, there are block Explorer tools that you can use to see what their balances are on chain."

For years, goldbugs have derrided GLD and it's competitors as "paper gold," positing that there might not actually be gold bars sitting in vaults backing up the ETFs, or that the gold had been "rehypothecated" (loaned around). Despite years of audits and occasional stunt-tours and me making content about it, the unbelievers will never believe. But BTC is just different. You can do the audit yourself on chain. Whatever your opinion about crypto or Bitcoin as investments, it's just factually true that Bitcoin ETFs offer an unprecedented level of transparency that could make concerns about "paper anything" obsolete. This real-time verifiability also makes it much harder for any potential fraud to go undetected.

5: Real Big Fish will be the Norm

[00:34:12]: "If I can find a way to give my Bitcoin to someone and they can give me shares of the ETF back then I may be able to get out of that spot position and into an ETF without recognizing a taxable event... Even if I have a hundred million dollars worth of Bitcoin, I'm not a big client to the biggest custodians. But the ETFs are all big clients to the biggest custodians. So I can then outsource that custody risk.

There's a lot of misconception about how creation/redemption affects taxes. I was on air with a massive ETF/Crypto guy a few months ago who was absolutely convinced all the BTC in the ETFs had been "in kinded to was away cap gains." Which is just not how any of this works. BITB (or IBIT or any other BTC ETF) should never make a capital gains distribution, because it just owns the one, non-producing asset. You can't "wash out" gains by going in and out of the same security.

But, a large investor can work with an AP to "in kind" their securities to an ETF in return for ETF shares. This effectively keeps their basis intact for tax purposes (no magic), but they get their BTC exposure onto TradFi rails, and take advantage of the ETFs position as the 800 pound gorilla with the custody providers. While it's difficult to tease out in real time, I think Teddy's right that we'll see more and more large pools of BTC moving towards ETF holdings, at least partially.

--

Full Transcript

[00:01:04] Dave: All right folks. Welcome back to Rabbit Cave. My name is Dave Nadig, President and Director of Research at ETF.com and today, very excited to be joined by Teddy Fusaro, who's head of Trading Capital Markets. Teddy, what's your actual title over at Bitwise?

[00:01:19] Teddy: I am the president of Bitwise Asset Management and in my capacity, I also wanna say to you, Dave, since I have the honor of being here with you on the first week after the announcement. Congratulations to you on your new role as president of ETF.com.

[00:01:36] Dave: We can be, co-presidents here as we figure this stuff out.

[00:01:40] Teddy: That's right.

[00:01:40] Dave: But I'm not wrong that you are heavily involved in the deep weeds of how this thing trades, how all of these crypto ETFs trade now that they're alive. Right. That's, that's your core.

[00:01:52] Teddy: That's totally right. And like a little bit of background before I. Got into crypto full-time at the beginning of [00:02:00] 2018, end of 2017. That's how I grew up. I grew up as a portfolio manager, head of trading, head of ETF Capital Markets head of Operations at a handful of early stage and alternative types of ETF issuers. So just at around the same time that you and Bitwise, CIO, Matt Hogan, were running around and standing up. The first big, ETF publication companies, media and research companies. I was on the other side doing all of this stuff with market makers, with APs, with structuring, and I feel like in my mind, at least, it wasn't all that long ago that the same types of things that we're gonna talk about today related to Bitcoin and crypto ETFs were the hot topic for equity ETFs and fixed income ETFs. How does this stuff work? Oh my gosh. Is there risk here? I remember, ETFs were gonna be weapons of, financial mass destruction my whole career. They

[00:02:59] Dave: [00:03:00] have been, And, so in my mind this is like really, a repeat of those conversations. The mechanics are not exactly the same, but they really rhyme a lot.

[00:03:11] Teddy: and so yeah, that's, that's what I grew up doing. That's what I, I still oversee the portfolio management trading capital markets and. And product structuring teams here at, Bitwise, and this is the stuff I love talking about, and nobody's better at talking about it. so that others can digest it than you, Dave, and happy to be here to chop it up.

[00:03:29] Dave: Awesome. Well, let's dig in. So let's go back a little bit. It was January last year. We got the first of these things trading at all, and back then I approached them as well. They're just like bond ETFs because back then or still to this day, a lot of bond ETFs, if you show up to, with a billion dollars to get into a GG, chances are you're actually gonna be giving them mostly cash. Mm-hmm. And particularly some firms like pimco. Notoriously don't want in-kind creation. So if you want new shares, you've given them cash, they do the trading. If you wanna get out, they do some selling, they give you the cash and you're out. That's how things have been working. Right. What's different about how it had been working versus that base case for bonds?

[00:04:12] Teddy: Yep. So maybe we take a little brief detour down memory lane and we go back to the time that the, the Bitcoin ETFs were initially approved, as you said, January, 2024. So as we're in the run up to that approval process, one thing that was the source of a bit of consternation in the industry is all of the issuers were going to the SEC and, and, and all of them wanted to do in kind transactions. And all of them, if you're really deep in the weeds, all of them, up until really the last couple of days or weeks had the ability to do. In kind creations and redemptions in their regulatory documents, in their prospectuses, in their filings. At the time, in the, in the final mile, the SEC had said to them, we're not, we're gonna allow these things to go to market, but we're not gonna allow you to do in kind creations and redemptions, and here's why. The, the why is that in. 2020. So you gotta go all the way back to 2020. The, the SEC had issued a release, maybe we can put this in the show notes. It's release number 3 4 9 0 7 8 and this release. I'm telling you, I've been through the, through the ringer on this. This release has to do with custody of digital assets by broker dealers, special purpose broker dealers. And what they had said in that release is that you could be a special purpose broker dealer and you could take custody of either digital assets that are securities or other digital assets, or you can be a regular broker dealer, not a special purpose broker dealer that has. Custody of regular securities, but you can't do both, right? Can't have both. Bitcoin and. What we call in crypto TradFi securities. Right, right. And that was the loop that they couldn't close in this process. They still had this guidance outstanding. and they, and they, they had to approve these ETFs basically because of the grayscale lawsuit. but they wouldn't do it with the in-kind creations and redemptions. And so the way that these things came to market in January of 2024 and the way that they have been operating up until this month has been cash only creations and redemptions. And so that's just setting the stage.

[00:06:47] Dave: Got it. And let's talk about. What that looks like, because I'm sure in some of the other products, and certainly in other crypto securities, not everything's gonna be in kind outta the gate. So talk a little bit about that process. A normal authorized participant, and for folks who aren't familiar, that's generally a big market maker. A Goldman, a bank in New York, a, somebody like that, A GTS, a big one.. They show up and they're the ones that actually deliver a bunch of cash to you all and what they're expecting back is bit B, right? That's what they're, yeah. Hoping to get back after the end of that transaction. So that comes in like a normal creation, right? Sometime in the afternoon you get the notification, somebody wants 50 K shares or something, and then you end up with a bunch of cash. Can you walk through the, the process of that, if I'm showing up at three o'clock with a creation order for cash, how quickly does that turn into a transaction and who's making that transaction?

[00:07:40] Teddy: Yeah, absolutely. And I, and I, before I get into it, I'll also just say that. Something that I don't think was broadly anticipated is that this actually ended up working out better for most of those APs that you referenced, because most of the APs are big TradFi institutions, like you said, and [00:08:00] didn't yet at the time have Bitcoin trading, Bitcoin custody, Bitcoin transaction. So this, this got, this was actually

[00:08:06] Dave: a bit of a get outta jail free card for a while.

[00:08:08] Teddy: Yeah. it kind, it got a little like, and, and I remember saying this to our counterparties and to the market and to the SEC at the time, like, do you think those companies that you mentioned are ready to turn around and deliver Bitcoin to, to us? Remember, this is a different era. I know everybody's working on it now, but in December, 2023, in January, 2024, not all of these banks were standing up crypto trading desks for sure. So this, this worked out better for them in the, in the short run. Now. To go more to the heart of your question about how it works. Yeah. So you have every single day that the stock market is open, the ETF is also open to take these creation units, large blocks of shares that one of these APs, a registered broker dealer who has one of these. Authorized participant AP agreements with the, with the ETF can come in and they can enter an order. It has to go through another TradFi institution, usually Bank of New York or State Street, the custodian bank to say, Hey, I wanna create 50,000 shares of the ETF today. They've put that order in now. Instead of the regular way process that we all know in ETF land where they're gonna give us the underlying assets to settle the trade, they're not gonna do that. They're gonna deliver us cash. And so when an AP comes into our ETF today and says, I want to create 50,000 shares of the ETF out my portfolio managers. Know that they need to spend that cash today to buy Bitcoin. And so what do they do? They go out to the, to the market. And here, when I'm referring to the market, I'm talking about what we refer to as OTC trading desks in our regulatory filings, in our, disclosure documents like our S one or our prospectus, we refer to these as Bitcoin trading counterparties. Got it. Think about firms like. Cumberland Falcon X B2C two non co flow traders, Jane Street. These are the largest Bitcoin trading desks in the marketplace. And so what our team does, our portfolio management team does is let's say the 50,000 share create is worth $10 million. They go out to this roster of liquidity providers trading counterparties, and they say, Hey, I need to trade. $10 million worth of Bitcoin today, and they're gonna, those counterparties are gonna provide a quote back to our desk that is relative to a pricing benchmark. Most of the ETFs use a pricing benchmark that is from CF Benchmarks, which is effectively a one hour. Time weighted average price between three and 4:00 PM

[00:10:59] Dave: So that's [00:11:00] B-R-R-N-Y, right? That's the, that's B-R-R-N-Y. Got

[00:11:02] Teddy: it. On Bloomberg. Yeah, exactly right. You can find it on the CCF Benchmark website. And that's basically just

[00:11:06] Dave: telling you going into the close, which the Bitcoin isn't closing obviously, but going into the close of the ETF trading three to four, and that tends to be when most of the AP orders have rolled in by then, that's when I got 10 million to buy. And you're going out to one of these counterparties and you're saying, what's the best, what's the best you can do for me here? And they're gonna say, beer and y, plus or minus something, depending on which way it's going.

[00:11:32] Teddy: Exactly right. So they're gonna, they're gonna quote you, okay? Plus two basis points if you're a buyer, minus three basis points. If you're a seller, we're a buyer today. one of them comes back with plus four. The other one comes back with plus three, and the third comes back with plus two. We're gonna hit the plus two, or we're gonna lift the plus two offer, and we're gonna be buying Bitcoin on that day for B-R-R-N-Y, which hasn't been published yet, right? It's the three to four pricing window, and we're gonna buy that Bitcoin for two basis points above whatever the benchmark price is. Got it. Then. So that's on trade date. Today is the day that the order came in and the day that we traded, and then tomorrow settlement's gonna occur.

[00:12:18] Dave: So tomorrow, well, so let, let me tease that apart. Mm-hmm. The settlement in the Bitcoin that you're buying pretty much happens a couple blocks later, right?

[00:12:27] Teddy: So, no. So the settlement occurs on T one for all legs of the transaction. Okay. The important thing that we drove forward, a Bitwise that was very important to us is none of the first piece of the settlement. Has to be that Bitcoin arriving on chain at our Bitcoin custodian, and we can talk a little bit more about that if you want. But from a risk perspective, for the sanctity of the product, we don't want to be sending cash out and we don't want to be sending shares out until that Bitcoin has settled on chain at our custodian. So tomorrow, the first thing that is gonna happen that kicks off the settlement process is we're gonna be waiting for that. $10 million worth of Bitcoin that we just purchased at VRR NY plus two. We're waiting for that to settle on chain at our custodian. Once that hits, we're willing to send the cash to the trading counterparty and send the shares out to the AP, and that's how the settlement process unfolds. And

[00:13:34] Dave: is it still work through the overnight matching process at NSCC like most Creation redemption does, or is there a side card process here?

[00:13:42] Teddy: Yep. The, the equity leg works that way. Okay, so the, the settlement of cash versus shares works really synchronously with the existing TradFi. Pipes. Got it.

[00:13:54] Dave: So let's, let's, we're gonna come back to some of the custody issues here for in a minute, but let's just stick on [00:14:00] this money coming in thing, as of a couple weeks ago, that's different, right? Right. So now you guys have done the, the first, and I'm gonna guess there have been some more, inkind creations. I dunno whether there have been any incurring redemptions yet. Talk to me about what's different about that, because now instead of showing up with cash and then doing a buy and waiting for those, share the Bitcoin to actually show up. Now you're actually just getting like, Hey, here are the coins. Just like a wallet transaction like anybody else would have. Right?

[00:14:28] Teddy: It is totally right. So really like the way that I think about it simply, and then we'll go into the weeds as I know you like to do, and I like to do that too, is it just compresses down the complexity. So all the stuff that I described to you about going to three counterparties, asking them for a quote, considering which one is the best quote, lifting the best offer, or hitting the best bid, waiting for settlement tomorrow. Needing to wait to send the cash. None of that needs to happen. And importantly, that two basis points of slippage, that two basis points of trading cost that we paid above V-R-R-N-Y, that doesn't need to happen either. Here's why,. If the order is in kind, all we're doing is accepting the order, we don't need to go out and trade today. We just wait until tomorrow and then tomorrow we just wait until the Bitcoin arrives. We don't have to pay for it. Once the Bitcoin arrives, we can turn around and send out the shares to the AP that created it. Got it. And so it's, you've gone from needing, you've gone from needing. Every element of the cash transaction to just stripping that out, taking it away. And all you're doing is waiting for Bitcoin to be delivered, or in the case of redemption, delivering out Bitcoin. And that's all you need to do. And where I say the efficiency comes in is because going back to our transaction of my portfolio managers spending the money to buy the coin. Remember the example I used was that we paid VRR NY plus two basis points. Someone's gotta pay for that two basis points, right? That's gotta work its way into the spread. It's gotta work its way into either, a slight premium or slight discount to fair value depending on how, how, how wide that, that, that bid ask spread is on actually buying or selling the coin and that piece of it. Goes away, and that's why we think that this really collapses the cost structure for this because of that efficiency in the in-kind process.

[00:16:33] Dave: Does it change the nature of the kinds of APs you're dealing with? Does it change that list? Like are there only a handful of them that can do the in-kind, but you still got some that are showing up with cash?

[00:16:44] Teddy: Dave, you always go right to the important questions. And there's a, there's a reason that I, that I had started with the, with the SEC release number that we're gonna put in the show notes because the, the, [00:17:00] like a complicating factor here is that while this past month, the SEC did approve the ability for in-kind creations and redemptions to occur, they have not yet closed the loop on the broker dealer custody release. Meaning they, they, they said, okay, ETFs, you guys can go ahead and accept in-kind creations and redemptions. They did not say, we are rescinding, SEC release number 3 4 9 0 7 8 and issuing new guidance for broker dealers. So that still needs to be. a loop that is closed. Now, by all indications, all the regulatory process and movement that we're seeing, we're anticipating that will get closed. But for now, all of these APs, which are also broker dealers, in order to be an AP, you need to be a broker dealer. They all need to figure out how to comply with this complexity on their side. It's not need to have, so you can only work with.

[00:18:01] Dave: You can only deal with the crypto native people at the moment for those kinds of inkind creates because they had to have made that choice about which BD they want to be when they grow up.

[00:18:10] Teddy: So there's a, there's a few different models that can work here. One that we have seen work the best is over time. A lot of the ETF and crypto market makers in general tend to be the same types of firms, because if you're good at. Making tight bids and offers in the futures market or the ETF market or the equity market, that technology ports over really well to being good at keeping tight markets in the Bitcoin market. Right, right. And they love the Bitcoin market. It's 24 7. It's global liquid. It's volatile. It's volatile, right. Like it's, it, it, it, it checks all the boxes. It's cracker

[00:18:51] Dave: candy. I get it. Yeah,

[00:18:52] Teddy: it is great. So, what has happened over time is that a lot of these global trading firms have [00:19:00] set up. Different entities than their US domestic registered regulated broker dealer that can handle their crypto trading Now. Some of the firms that you mentioned haven't gotten to that step yet, but others that you mentioned have and have had this infrastructure operating for a few years. So really it's a scenario where the ones that are now ahead of the game and have been, in the market from a regulatory perspective to trade Bitcoin spot or crypto spot, they can facilitate these types of transactions. There's another path. Where if you are a registered broker dealer that doesn't have a crypto trading entity, you can, you can effectively appoint an agent to do the delivery. Right. The you into it, right? Yeah. Yeah. So there's a few different models, but what I would say is that like this is still. System wide. This is still new and the market is still adjusting to it. We see a lot of demand for it. We can talk about some of the reasons for that, but the market is definitely still adjusting.

[00:20:05] Dave: Got it. Okay. Let me dig in a little bit deeper on some of this. One of the issues that I had read was a concern about doing in kind create people just showing up with a whole bunch of their coin, was that, some coins are good and some coins are bad. They're, they're addresses that are, excised and not on white lists. And there are, there are attempts in the A-M-L-K-Y-C process. To keep people from using things like a creation redemption process to magically blend their, their bad actor crypto. how is that resolved now? Because that was an issue, but apparently it's not anymore. Did the broker dealer community just figure their side of that out, or did you have to do anything?

[00:20:45] Teddy: Yeah, I would, stepping back from that, I, I would, I would first say, it was a concern that was often raised, but. In the first instance.

[00:20:57] Dave: A regulated registered vehicle is just [00:21:00] about the worst place that someone should try to launder money.

[00:21:03] Teddy: Agree. It's just not a good idea. it's not gonna work well for someone who's trying to, trying to do it that way. and it, it is a,

[00:21:12] Dave: it is been a common concern in Bitcoin and crypto over the years, but I think it's been overblown One of the things that's so amazing about the Bitcoin blockchain is just how transparent it is,

[00:21:23] Teddy: right? But how you deal with that as a practical matter, is that whoever you're, whoever a an ETF entity or a regulated entity, is going to accept a delivery of Bitcoin from needs to have KYC and a ML procedures done over that relationship you exchange. Test information with the wallets and you do K off chain, we refer off chain, on chain, off chain, K-Y-C-A-M-L, on the entity itself that's gonna do the delivery. And so like that's the basic practice for how that everything is, is going to be safe and sane. But the other thing I'll say is that we, we work with and all the, the Bitcoin ETFs do work with, with regulated institutional Bitcoin custodians. And they have very high standards for this too, as you can imagine. And they do things like run. Tests and ongoing scans on all of their incoming transactions. So even away from what the ETF is doing, the custodian is looking at all the incoming deposits to see what's happening here. Where has that coin been? Has it been in any quote unquote tainted wallets or tainted, locations that are known to be affiliated with any. nefarious activity. So it, it really, to me, once you start digging into how one would even consider doing something like layering or, or, or using one of these funds as a money laundering tool, it seems like a really bad idea. 'cause then remember also like. What you're getting back is US registered securities. Right. So like if, like what's the point? You're, what's the point of sending bad Bitcoin into an ETF when you're getting back registered securities? It, it's, it, it that have to be traded and custom and regulated institutions. That makes

[00:23:11] Dave: sense. So it sounds like there's at least the two different gates. There's the gates that are set up in the relationship that the ETF has with the broker dealer community and that whole process where there's one layer of check and then in the back you've got Coinbase custody or somebody else. Putting their own layer of checks on everything that comes in the door. So that makes total sense. Yeah. Let's talk a little bit more about that custody relationship. One of the myths I wanted to try to bust here, which I see every time I bother to wade into a terrible Twitter thread about people thinking the world's ending. Is that this is all paper Bitcoin and yes. How do anything is, it's the same thing we got with GLD. There's no gold in the vault. Yeah, it seems like exactly the same argument we've had forever. and for exactly the same reasons that I think GLD got heat on this, which is there's a difference between where all the money really is and the little sliver that you need to keep alive to trade and like have some cash to pay for things here and there. Can you talk a little bit about how that works? Maybe differentially versus something like GLD? There's still the same concept of the stable, secure pool that's really hard to touch, and the little bit that's actually getting traded every day, right?

[00:24:19] Teddy: Yeah. Yeah. Well, for us, I'll say for, for Bitwise, the difference in custody is that we, we Bitwise keeps every. Bitcoin every, every, all of the Bitcoin in the cold storage solution at the custodian, it doesn't, doesn't touch an exchange. It doesn't go through a hot wallet. It's all straight into cold, straight out of cold. And so that's one thing. But the other thing is really even compared to GLD, and we know that's fearmongering and, and conspiracy theories. We've, we've been through those, but even compared to that. Bitcoin is amazing because it is so transparent. You can,

[00:25:02] Dave: you can look at the blockchain to see where the balances are in each one of these Bitcoin ETFs.

[00:25:09] Teddy: Even if they don't publish their addresses themselves, there are block Explorer tools that you can use to see what their balances are on chain. One of the reasons that. Bitwise I think was very successful in the early going is because what we did was we actually published on our website all of our Bitcoin addresses so that people could go and check those themselves. It since became very difficult to follow them all 'cause we had so many different addresses. That we actually even recently upgraded to a new service that does a proof of reserves and we publish that on our website. Now, not all of the issuers do that. I think that they all should. We, we, we encourage all of them to do that, and I think that they should. but yeah, that the transparency of the blockchain, of the Bitcoin blockchain really makes this even more, of something that, that investors can get comfort in. When they're looking at an ETF. And then the, the other thing I would say is, and, and I'll, I'll come back to this as we talk about why. Some of the largest and, and, and most prominent Bitcoin investors over time are starting to switch into ETF holdings, which is an amazing development that I didn't anticipate that's happening now. One of the reasons for that is because. You get such strong comfort with the custody process that the ETFs have. Now, look, these are bearer instruments. Bitcoin is a bearer instrument. You can never completely rid yourself of the custody risk, but in an ET tf F, just like gold,

[00:26:50] Dave: somebody can break into the JP Morgan Vault Yeah, and walk out with a 400 ounce gold buck.

[00:26:55] Teddy: It's a risk. You need to disclose that risk. You need to comfortably talk about that risk. It, it [00:27:00] exists. But at least with the, with the ETFs, you can be sure that your, your, your ETF sponsor is an important client of a state-of-the-art custodian that is providing custody over those assets in, in the best way possible.

[00:27:18] Dave: What's your take on some of the criticisms around custody that well, you should have five different custodians to, diversify your custodial risk. People do that in gold like that. Some of the gold ETFs make a big deal about the fact that they have gold and 16 different vaults. Like is that a real issue? Is there really even a service industry that where you could say, we're gonna be in 10 different Custo cus custodians?

[00:27:41] Teddy: This is one that I think is a, is a thoughtful. Criticism or a thoughtful risk? I don't, I don't know what the right answer is. Certainly, we, we, we have chosen and we work with Coinbase custody. Coinbase Custody Trust Company, LLC. It's a fiduciary under New York State banking law. They hold themselves out as a qualified custodian. They are regulated by the New York Department of Financial Services. They have SOC one, type two, and SOC two, type two audits. Those are all things that give us a really high level of comfort with their service. They're also a legally separate entity from the exchange. Right? Which I think is really important. It's not, it's not the same as having your money at an exchange. It's a legally separate custodial entity. They have an impeccable track record, but when people say. Wow. the big players, Bitwise High shares, they have all of their assets with the same custodian. Is that a, is that creating a centralized risk? It, it's that, that I, that I am thoughtful about. I do think that the way that this resolves over the very long term is that there are multiple custodians for each ETF, but I would also say that like. What's the other side of that, Dave? It's like you, it. You're, you're diversifying your risk perhaps, but you're also creating more surface area for risk. Oh yeah. Sure. If you, if, if you, if you, it's not acceptable to lose one fifth of the Bitcoin, just like it's not acceptable to lose all of the bids. It's not acceptable

[00:29:19] Dave: to lose any of, I get that. I get that. But it does seem like, SAB 1 21, right? The accounting rule that got revoked. That's, that allows people like BNY to get into this game now, where before Coinbase had a bit of a monopoly because they weren't doing the other stuff and they weren't allowed to. do you expect that over the next couple years we're just gonna have a, like literally everybody who custodys anything is also going to custody crypto.

[00:29:45] Teddy: All of the big custodians will provide crypto custody services. There's no question about that in my mind, but there is a question about how much market share do they take and do they buy or do they build? Right? Because like I said, the, [00:30:00] the track record of Coinbase, of, of Anchorage, of, of Fidelity, these are really the, the, the three of the largest crypto custodians that we have. It's impeccable. They've spent the better part of a decade developing these solutions built, hardening them, building them such that they're the best in the world. It's, it's a pretty difficult thing to play come from behind with that tech stack and that moat that has been created by developing that business and that technology over the years. Right. What we're talking about when we talk about crypto custody is we're talking about. Generating a private key, storing that private key, and then using that private key to sign transactions, right, and getting the, the years of reps. Building a process that can withstand these service and organizational control audits that I talked about. These are things, getting these audits done from a big four auditor takes years to get done. You can't, you can't just get one in a couple of months. You, you're talking about needing to have auditors embed physically into the process to ensure that. The internal controls and systems over financial reporting or related to security are operating effectively. And so, like the, the SAB 1 21 thing was,. Bad for the industry generally because it didn't allow the big players to come in when they should have been allowed to. But it was also like a great moat for the early crypto custody companies. 'cause they got to get this multi-year advantage in building these systems and building these processes. Right.

[00:31:43] Dave: All right, a couple more myths I wanna bust here before I let you go.. I, I got into a little bit of a discussion with Tom Lee on CNBC about a month ago, where he was convinced that what was going on in the Bitcoin ETFs was a whole lot of tax washing. That's a whole lot of hooey, right? There is no tax advantage for this in kind creation, [00:32:00] redemption in the Bitcoin ETFs is there? my understanding was this was basically just like owning Bitcoin like a pass.

[00:32:08] Teddy: It is a pass through, but may, maybe this is a good point in the conversation to talk a little bit why, about why the in kinds coming online are opening up a lot of new investor possibilities and a lot of big bitcoin spot investors are thinking about moving into the ETF. So under, in under the tax law, generally just like for in-kind transactions in an equity ETF. If, if, if I exchange, like for, like, I don't have a taxable event right when that transaction occurs, right? So if I give you, the, the stocks in the s and p 500 and you give me an ETF back that represents those 500 stocks. I don't have a taxable gain on my, on my transfer out of those underlying stocks. The, the same thing applies in theory to bitcoin. So if I have Bitcoin that I purchased in 2015, that has now grown a lot, and I'm storing it on a, on a, on a ledger device, a ledger over here, a fresh ledger, if I'm storing it on a ledger device.. I maybe have seen the, the, the value of that Bitcoin grow tenfold or 15 fold. it's, it's outside of the financial system, right. But if, if I can find a way to give my Bitcoin to someone and they can give me shares of the ETF back then I may be able to get out of that, that spot position and into an ETF without recognizing a taxable event. Now, it's a little more complicated than that because of course, if I'm just sitting here at home with my Bitcoin on my ledger device. I'm not an AP. I can't do that directly. Right. We talked about KYC and am ML concerns, but if you can, if you can find a way to do it, there's a lot of reasons that in that early and large and other large Bitcoin investors are considering doing this, it's outsourcing the custody risk to a, to a registered transparent. Listed security that has an auditor that's doing this on chain analysis to make sure that their assets are there with their, with their custodian that's getting their financial statements audited every year. That has a big relationship with the custodian. Even if I have a hundred million dollars worth of Bitcoin, I'm not a big client to the biggest custodians. Right. But the ETFs are all big clients to the biggest custodians. So I can then. Outsource that Cofi risk. I can do it tax efficiently. I also, I, I, if I want to give some donations to my favorite charities, it's pretty difficult for me to give BTC to give Bitcoin, right? Some of them might take it, but, but everybody accepts all charities. Typically except securities.

[00:35:12] Dave: So I, I get that there's a convenience layer, like once you're, once you're on the TradFi rails by owning bit B versus owning BTC directly. Now I can, I can send it, I can, I can present it as collateral. Some places I can collateral sell it in small blocks here and there, like I can margin against it. I understand like there's real value in having. That investment now sitting on the trad fire rails. But there's not like a magic tax dodge here, right? It's not like you just get out of your 98% gains that you've been holding onto.

[00:35:44] Teddy: No, because you can't, you can't erase the unrealized gain, right? That's right. You can, you can, you have to carry it over. You're gonna have to pay taxes on it eventually. Right. Okay. But you, you can get it into the system. Another, another big reason is estate planning, right? Like. Okay. My, my, my, my wife doesn't, may not know how to access my, my Ledger device, but if it's in my Fidelity account or my JP Morgan or my Goldman account

[00:36:10] Dave: Right. Just goes through the trust accounting then that be Yeah, yeah. Exactly. Get the step the whole nine yards. Yeah, yeah, yeah. Mm-hmm. I totally get that. I totally get that. Okay. So I just wanted to make sure, 'cause that's, that is another thing that I hear people saying is that everybody's loading into the Bitcoin ETFs 'cause they get a magic tax Dodge, which just, I've never been able to figure out why people think that. No. And the other, the other big tax efficiency we get with ETFs is irrelevant because you aren't making capital gains distributions out of a single asset fund. Right? That's right.

[00:36:39] Teddy: Yeah. And there is, there is no tax dollars. We get that question too. It's like. Again, not, not the place for it and it's not gonna happen. And whether or not people are paying all the taxes that they owe on their own personal crypto holding, different question. But just like the money laundering thing, not the place to do it in a regulated wrapper that has to settle through a broker dealer.

[00:36:59] Dave: All [00:37:00] right, let's, let's close up with one thing. So this has been a big deal from the perspective, like from my perspective, it feels like an actual bridge, right? We're going directly from the crypto rails directly to the TradFi rails and skipping a whole cash step in between. So it feels very much like we're finally getting the promise of ETFs as the bridge product between the two ecosystems. But that's just BTC right now. How do we think about how this is gonna impact something like the BITWISE 10 or other potential future index products or actively managed products where you've got multiple coins trading against each other and then you may actually have capital gains that need to be washed out or distributed. How do you think about the impact of this on portfolio management for the funds that you guys run that are really portfolios, not single assets?

[00:37:47] Teddy: Yeah, so I, I, I have, maybe obvious answer and then I have another little bit, little bit Zainer answer for you, Dave. One, it's gonna take a little bit of time, but I think it's gonna happen for all [00:38:00] the assets. All the portfolio strategies. So Ethereum, Solana, XRP, down the chain, I think is they're all gonna be operating in this world eventually where we have in kind in, in kind out index products. I think it's gonna happen there too. And I think the same tax efficiencies that you get. In the traditional world with the, with custom redemptions and creations and the ability to move things in and out through the in-kind process without recognizing taxable events at the portfolio level, I think those are gonna happen too. But the crazier thing that I wanna say is in a, in a sense, right? What we've done with Bitcoin ETFs is we've taken the on chain asset. Then we've moved it off chain so that all the normal people who wanna manage their wealth and their financial lives through their brokerage account can access it. What I think is gonna happen in the next five years is the ETFs are going back on chain.

[00:39:00] Dave: So the, ETF itself, just like I think all stocks, bonds, securities, and assets are gonna get tokenized. I think that the ETFs themselves are gonna get re tokenized and put back on chain. And then as we're doing everything else on chain in the future, ETFs are gonna be still first packaged in the security traditional security wrapper traded as they are.

[00:39:26] Teddy: But there's nothing to stop anyone. Once we figure out how tokenization works at scale to re tokenize the un tokenized version of Bitcoin. Yeah. Okay. And put it back on the blockchain.

[00:39:37] Dave: All right. You're right. That is crazy. I'm, I'm, I'm a seller on that, only because I don't want it to be true, not because I don't think we should tokenize assets, but because I want us to actually tokenize the assets, not wrap everything in another layer, because that just adds complexity and risk. But that is a story for a whole nother day.

[00:39:56] Teddy: We're coming back to talk about this soon, Dave, and then [00:40:00] 2030 when this has all happened. I'm gonna be the one here who's saying I told you so.

[00:40:03] Dave: No, I think it's, look, I think you are right. It is going to happen. I'm just sad about it because what I actually want is Congress to write real laws that change the infrastructure. So that DTC is tokenized, not that we're wrapping a bunch of crap in another layer, so, but I can dream about that. Teddy, this has been a lot of fun. I will get you back on to talk about real world assets and tokenization. I promise. Thank you for joining us. Anything, where can people find information about what you guys are doing? What's the best way to find you?

[00:40:33] Teddy: It was investments.com and I'm on Twitter. At Teddy Fuse.

[00:40:38] Dave: All right. Thanks so much, Teddy. Cheers. Great to be with you. Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the ExcessReturnsnetwork@excessreturnspod.com. If you have any feedback or questions, you can contact us at excessreturnspod@gmail.com. No information on this podcast should be construed as investment advice securities discussed in the podcast may be holdings of the firms of the hosts or their clients.

(Alternate Tunes: Legend Has It by Run the Jewels, Guess Whos Back by Eminem, The Boys are Back by the Dropkick Murphys, On Hold by XX)

Greetings, my excellent friends.

I say that because as someone who’s helped support me and my work over the last year or so, I consider you a friend-of-Dave, and hopefully, I’ve had the chance to connect one on one with most of you this year.

Today’s a weird and exciting day. I’m joining ETF.com as President and Director of Research. (Here’s the whole press release!).

It’s weird, because I am returning to ETF.com, a business I helped grow from the seeds of Index Universe in the halcyon pre-GFC era with Jim Wiandt, Don Friedman, Fernando Rivera, Matt Hougan and so many other amazing folk.

It’s weird, because ETF.com has been built, sold, remodelled and reconfigured about a half dozen times since then, with pieces of the business ending up everywhere from FactSet Data Systems to CBOE global markets, and yet the brand remains a central pivot-point for the ETF ecosystem.

It’s weird, because while in some sense I am “returning”, it’s also a completely new business. Just a handful of us, looking to build something fresh and amazing.

But mostly, it’s exciting.

It’s exciting, because I’m joining up with CEO Matt Middleton and his crew of event masterminds — the folks who built the Future Proof franchise not out of conference rooms and agendas, but out of sunshine, music, big ideas and real connections.

It’s exciting, because there’s a freedom and possibility that comes from building with a small team.

It’s exciting because we’re going to try a bunch of different things, some of which will be wildly successful, and some of which will be glorious failures.

Meaning what, Dave…

Here’s what I can tell you today.

• ETF.com is going to build communities and conversations. ETFs have become the center of gravity for the entire investing world. Every interesting conversation about money, power, wealth and markets runs through ETFs, from crypto to corn to Coca-Cola. We’re going to highlight those conversations, engender them, celebrate them.

• The old content models are pretty spent. The era of handwringing about search-engine optimized content streams to drive raw traffic to feed display-ad clickthrough rates is fading with the rise of AI, and the massive changes to how smart people interact with their investments.

• In an increasingly trustless world, ETF.com will aim to earn and keep your trust. When I talk to advisors and high net worth investors, they all tell me the same thing: they want fewer, deeper relationships. We do too. So we’re going to have a lot of conversations about what’s really going on in ETFs, in trading, in markets, in regulation. In life.

• There’s a lot (like, almost all of it) still to build, but I can say we’ll be building towards a big event, and I’m really passionate about the magic that happens when like-minded people gather for a purpose. Building a no-holds-barred, no-pay-for-play ETF & Investing event around a genuine community is pretty much all I’ve ever wanted to do. Wish us luck.

Practically, this means …

• All the juicy ETF Dave-content you’ve gotten used to I’ll now be publishing at ETF.com, with no paywall. I will continue to post articles I write to this list, but increasingly, there will be more and more over at ETF.com, so I look forward to seeing y’all there too.

• “Hey wait a minute, I just sent you money …” — I’ve turned off any future billing, but if you feel in any way due, please just drop me a line and I’m happy to send you back whatever you want. I appreciate the support over this last year, and it frankly allowed me to clarify what I really want to do, which is help folks cut through the BS and understand each other and what the heck’s going on with their money. But if you want a refund, all good. Or dinner’s on me next time we’re same place/same time. If you paid for an annual subscription and would like Zines, drop me a line too.

• I still plan on writing here, but you’ll mostly be getting music, culture, and weird stuff about meditation.

And Next …

Look, you’re obviously on the inside here. I’d love to talk to you. You can ping me here on DMs or in all the usual places.

Dave Nadig

This is a topic that makes people deeply uncomfortable for one big reason: it forces us to embrace a seeming paradox. It is, to my mind, almost irrefutable that the mathematically correct allocation for most investors will include at least some, if not a predominance, of low cost, passive products. It’s how most of my money is invested. It’s likely how most of your and your clients money is invested. And that is good, smart, and logical.

At the same time, the impact of passive flows (not ownership) have demonstrable, now multiply tried and explained impacts on how capital is actually distributed, which axiomatically impacts prices and how markets function.

This is uncomfortable because it feels like you should do something about it. If passive is breaking price discovery, driving real capitalism into the less-regulated dark, changing volatility and how news is processed and favoring certain kinds of activity over others, it really makes my brain itch to not do anything with that belief.

So why learn about it? Because it will help you understand reality, and as my friend Barry Ritholtz says/steals all the time “Your first job as an investor is to accurately perceive reality.”

So here are three additional resources for ya:

• Key Quotes

• Academic Research

• Full Transcript

Key Quotes

[00:04:58] "There is no such thing as a passive investor. There can't be a passive investor."

This is the brain breaker for a lot of people. One can only be passive if one never takes action, and the simple act of buying and selling the supposedly passive vehicles, like an index fund, actually have “active” market impacts in unintuitive ways. Quite a bit of the recent research shows mathematically how this sharp departure from Bill Sharpe's original theoretical framework has manifested. For all the big “it can’t be!” hand wringing about this observation, I’ll reiterate one of the the most important footnotes ever, from Sharpe’s original work:

“We assume here that passive managers purchase their securities before the beginning of the period in question and do not sell them until after the period ends. When passive managers do buy or sell, they may have to trade with active managers; at such times, the active managers may gain from the passive managers, because of the active managers' willingness to provide desired liquidity (at a price).”

Obviously, this is a ludicrous assumption about how actual trading and price setting happens. Sharpe assumes that NO AMOUNT of passive buying — a Trillion dollars at the market — has NO impact on pricing. That’s obviously silly. Just consider that last week, 0.4% of Bitcoin being sold (the ultimate passive, inelastic security), resulted in about an initial 10X reduction in market cap (about 4%).

[00:25:45] "For [the mag seven stocks], the multipliers are now crossing into triple digits."

I think this is something folks really, really miss about the passive-perterbs argument. Think about how likely a non-index owner is to sell you stock if you show up with an order. If you want to buy out all their NVDA, well, that’s a big market risk for them. NVDA is *important*. It’s performance is wildly idiosyncratic. It’s a meme. If you want to buy out all their Mohawk, a midcap industrial with .01% in the S&P 500, the really don’t mind just taking the spread. It doesn’t impact their portfolio that much.

That “reluctance to sell” is also known as “inelasticity.” You can express it as “how much something moves based on a unit of flow, ” or “k” in the literature often. In Oil, for example, k can be 20. $1mm in new flow — new demand for oil — translates into $20mm in “value” (like market cap) to the market. A small movement in price is a big movement in “capitalization.” A lot of oil trades. But it’s hard to turn on new supply overnight.

Not every individual stock shows aan identical elasticity or “k”-multiplier effect. There are multiple reasons for this (well documented in the literature now). The most obvious is substitution. Active managers don’t mind not-owning a little Mohawk (MHK) (0.01% of the S&P 500) if a big buy order comes in. They really care about being light Nvidia (NVDA). There are lots of substitutes for mid-cap industrials. There’s really no substitute for NVDA. It’s more important, so active-management sellers are reluctant.

Another reason for elasticity differences is that liquidity doesn’t scale with size. NVDA isn’t 740 times more liquid than MHK at the top of the book, where prices move. If NVDA is even SLIGHTLY less liquid than that capitalization spread suggests, then there are in fact real “run the book” issues with the larger stocks, more than there are with the smaller ones, for a given amount of index-allocated buying.

So, every stock in the S&P has it’s own supply and demand influences, and thus, it’s own elasticity. It’s own “k.”

For these reasons (and more), the actual elasticity of big “liquid” stocks certainly seems to be lower than that of less-headline stocks. This isn’t theoretical, it’s observed (links below, but here’s a banger). So if NVDA’s elasticity is lower than MHKs, each incremental dollar into the index increases the next index-strike’s NVDA weight. I’m doing an ELI5 on this this week, but it’s an important nuance.

I have a lot of concerns about the runaway nature of American capitalism right now: it seems that more and more power is accreting to fewer and fewer actual individual decision makers — billionaires we all know by name. Being at the top of the index-cap-table actually accelerates this problem, driving the top firms to higher and higher multiples. While I’m skeptical of some of the wildest claims not in the research, Mike highlights that these inelastic market pricing effects can become extreme — with Bitcoin being a petri dish.

[01:20:09] "What we have actually created is a narrative that, oh my gosh, we're losing control of the long end. My work says there's absolutely no truth to that whatsoever."

Bond indexes are nearly a self-writing joke: they’re almost universally based on giving more money to the biggest borrowers, and within a given borrower (like the Treasury), giving the most money to whatever that borrower issues. This has the effect of, essentially, forcing the bond indexes to “chase” the issuance pattern of the Fed. So if the Fed never issues anything but 2-years ever again, over the next 20 years, the indexes would all just be come 2-year Treasury indexes. It’s a sort of dumb point but one that obviously has market impact. Mike identifies a specific distortion: older bonds (issued with low coupons) now trade well below par, and thus will get less pressure from passive flows. This technical factor, (more than or in addition to) fundamental concerns about inflation or fiscal policy may be driving the yield curve. A new angle I hadn’t thought through.

[00:33:47] "Eventually you get to the point where the withdrawals exceed the contributions and then it becomes a question of does it correct quickly or does it correct slowly? … What passive suggests is that it would be a very quick, very sharp and nearly continuous correction."

This is the kind of “doom quote” that gets headlines and which I have mixed feelings about. Yes, mathematically, there is real, measurable inelasticity, and that should be bidirectional. So yes, if a LOT of passive all sells at the sametime, you would expect a dramatic and violent reaction — like, say, perhaps we saw in April in both directions.

But, the trigger for this kind of coordinated unwinding isn’t obvious. Yes, a narrative common-knowledge panic where everyone from Boomers to Zoomers smashes the Red Button would be bad, and passive dominance would make it worse. But structurally, the simple “rolling off” of Boomer portfolios into bequests doesn’t get it done, because one would expect the risk tolerance of those inheriting boomer portfolios to be higher — more market oriented — then the 90 year old dying with their bond ladder. You have to imagine all the boomers selling their last slugs of equity perfectly to spend on consumption before they die, which seems unlikely. The devil, as always, will be in the minute details of who sells, why, and how quickly.

[00:45:00] "Is it a great thing to provide [people] with an incentive to encourage people to save for retirement? Absolutely... [But] now the government is very firmly putting its thumb on the scale and providing differential capital costs for this selected group of companies."

And here’s the uncomfortable nugget laid bare: “Trump accounts” are both doing a good thing and a problematic thing. $1000 accounts for every child? Honestly, as a left-leaning person, I love it. It’s one of the most progressive redistribution policies I can think of, given that birth rate is inverse to wealth (while the very wealthy have more kids than the middle class, by numbers, lots more poor kids are going to get these accounts than rich kids).

But even as someone who’s “pro indexing” for most use cases, I found the mandate of sub-10bps indexing in a piece of legislation to be pretty wild. I’m not saying its a bad idea for Junior’s account to be in VOO, I just think it’s a pretty clear giveaway to the largest asset managers — no upstart asset manager can run a fund for 10bps. These accounts, if successful, will simply funnel more “never-selling” money into the S&P 500, which will keep the inelasticity train rolling.

Something can be both great and problematic at the same time.

Academic Research

Here are all of the key academic citations followed by the full transcript. Note these are just the ones I have read, and generally in preprint. If you want a quick take on the latest research, read Larry Swedroe’s piece at Alpha Architect. For anyone else wading into this debate, I’d suggest spending a weekend with a notepad seeing what the PhDs have been up to (AI used to help format, not read):

Dozens more, and transcript, follows:

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The story is simple: Simplify launched a 15bps money-market ETF (T-bills+Repos), SBIL, that seemingly overnight went from nothing to $2.1 billion. It should be the most boring ETF launch in history, except it’s not, because it’s really just a money grab on their own shareholder base.

Here’s the quote:

Funds owning other funds in the same family isn’t new, but Simplify’s recent SBIL launch reaches a new level of greed-before-good. What used to be included cash management services inside the firm’s derivative-based strategies (like CTA), is now a behind-the-curtain 15bps add-on that shareholders didn’t ask for, but are now paying for. I’m not sure this is the “innovation” investors needs.
- Dave Nadig, Independent ETF Expert

Acquired Fund Fees & Expenses

The problem with SBIL isn’t the fund — cash funds aren’t that interesting, and 12-15 bps for a cash product isn’t absolutely insane (just mostly insane).

The problem is that Simplify’s end investors now “own” the $2.1 billion at 15bps inside other Simplify ETFs, which is a fee hike on most of their existing shareholder base (and has the side effect of balooning their apparent firm size in a matter of days.) It’s a nice way to manufacture $3 million in annual fee revenue I guess, but just like tariffs, it’s always us suckers who pay. Cascading fees like this are the ultimate black hat move.

(Details and Conclusion Follow below the paywall)

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He laughed.

“When crazy stuff happens to my clients? I’m their ‘money person.’ I’m the one they can call, and trust.”

The Knothole

I think that the man is at a dead set who has got through a knot-hole or gateway where his sledge load of furniture cannot follow him. I cannot but feel compassion when I hear some trig, compact-looking man, seemingly free, all girded and ready, speak of his "furniture," as whether it is insured or not. "But what shall I do with my furniture?" - Thoreau, Walden

Life happens. Instead of hiking a few hundred miles and cranking out Substack content and Zines, my wife and I have been dealing with a sour-soup of death in the family, an unrelated set of hospitalizations and most pressingly, moving a last family elder into assisted living from an ancestral homestead. Challenges every Gen-X parent/child is facing now, or soon.

We’re a resourceful and competent and love-endowed family. “Compassion without delay” meant relocating for a few months to manage households, real estate transactions and legal documents. My wife and I simply packed up and got on a plane without much discussion. It’s family. Our lives compressed to carry-ons for a few months.

Going through, as Thoreau called it, a knothole, is always a transformative experience, where the scales and detritus and “furniture” gets stripped away. I have my laptop and phone, and a week’s worth of continuously-in-laundry clothes, and some toiletries. It’s hardly privation, but it is focussing in a way a work-trip isn’t.

Learnings?

• Practice is a Piggy Bank. Whether it’s prayer, yoga or meditation, I’ve made a lot of deposits in the practice bank over the last 5 years, hours sitting “for no reason.” This knothole summer finding the space, time, or quiet to really sit has been hard. And that’s OK. There are hills to walk, flow-states to chase, manual labor to be done. And for a while, this can be practice enough. This is a big deal learning for someone as neurospicy and routine-dependent as me.

• Packing light is liberating. I’ve never been an over-packer, but simply culling down to survival clothing and one backpack full of objects has been pleasant. When you’ve only packed a half dozen shirts and one pair of pants, and when your only dopamine hits come from the laptop and iPhone, the narrowed choices are freeing. This is part of why I love Zen practice so much: it gets rid of all the BS we tell ourselves “we need.”

• Yet Being Virtual is hard. It’s never been easier to live an entire nomadic life on-screen: reading or writing, listening to or making music, watching or making art. It’s all “doable.” And yet, I’ve personally become much more physical in the last 5 years. Whether it’s Zines or gardening, I work with my hands as much as my brain. That’s really hard to let go of, no matter how cool the tools are.

But perhaps the biggest learning of all has been a simple one: being the center.

We Are the Centre of the Widening Gyre

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
- Yeats, The Second Coming

My friend Ben Hunt wrote a banger a few years ago — “The Widening Gyre” — about the ravine — the chaos and confusion — we now find ourselves in as a people, as a country, as a global economy, as a culture. And he appropriately draws Apocalypse from the poem, submitting that

“We are the falcon, and the falconer is … God, if you’re religious, the Old Songs of reason and empathy and reciprocity if (like me and like Yeats) you’re not… In the widening gyre, we are deafened by Big Media and its New Songs of schadenfreude and I-got-mine-Jack, unable to hear the precepts of our better natures or the lessons of the past. … The widening gyre is a profound social equilibrium where bad people and bad ideas drive good people and good ideas out of circulation.”

While I agree with the core metaphor, I don’t think my role is to be the falcon, caught in the wind, struggling to see the Center-that-cannot-hold. No, my role is to be, or to try and be, the holding-Center. Stillness in chaos. Because while I can’t solve everything for those I love, I can be insoluble - incapable of being dissolved.

And bluntly, constant reader, that’s probably your actual job. If you have a title that includes a word like “coach” or “advisor” or “planner,” your role is to be that Center for your clients.

At a very real, but also very Woo perspective, that-we-are-center is axiomatically true. From the solipsistic black box of our skulls, we re-open our eyes each morning — each and every human on this planet — and discover the world anew. Generally, it bears a lot in common with last night. Our awareness, sense impressions, our sense of self all return quickly on waking. The world creates itself around us.

If we can recapture that beginner’s-mind morning-feeling, we know that at some level, we are the center of our own world. There is no internet. There are no preferences or desires. There is no widening gyre. There is simply miraculous awareness. There is stillness, which is, conveniently, the best seat in the house for observing, and managing, the storm.

This is what you do, as an advisor, or as a coach, like a therapist or spouse or friend. When the world is all spun up in a maelstrom: you’re the one who sits in the middle and anchors reality. You’re your clients “money person.”

There are Advisors, and “Advisors”

I got to really feel this firsthand over the last few months. Because I have the career I’ve had, when it comes to money, I get tapped by friends and family for at least my opinions, if not my recommendations.

So, I took a look when asked, and unfortunately I have now witnessed the insanity of a life-long “Wirehouse Frankenfolio” first hand. There’s no malfeasance, honestly. It’s the business. This business has changed a lot in 70 years or so. So embedded gains and inattention have left a slime-trail of “state of the art” products from decades gone by, all lumped together in hundreds of pages of statements. Variable Annuities (with all those juicy extra boxes checked), A- and C-share active mutual funds from decades-long underperformers. “Managed Accounts” with enormous-yet-hard-to-find annual fees. I suspect there are hundreds of thousands of elderly folks similarly “trapped” in such relationships.

When I first started wading through, my initial thought was just to “do a little housekeeping,” but honestly, there’s no point in trying to “fix” a lifetime of relationships while transitioning to elder-care and estate-planning. The industry number is “70%” — that’s the percent of clients that leave their advisor after a death or other major life transition.

I deeply, deeply understand why now. Because as soon as I felt the winds of the widening gyre bashing me around, as soon as I started feeling a bit upset, I paused and realized:

I don’t have to do this. I have a “money person.” I have a great advisor.

They get to be the Centre for us now.

That’s the business I see great advisors building. I may not have to talk to my “money person” on the phone very often. (I’ve learned a few things.) But at the precise moment I recognized the wind gusts, I had him on the phone. Calm. Empathetic.

Centered.

P.S. - Advisors: if you’re not doing a regular “sanity check” on your senior clients combined (including held away) assets, to ensure that every single line item has a reason for existing, you’re going to lose that family. And if you let a C-share sit on the books paying you a trail for a decade, or slipped a few A-share mutual funds in the last rebalancing, you deserve to.

Here’s the video:

And here are key quotes and my takeaways. Full transcript below the paywall

On Tariffs and Trade Policy

"Our view has been and continues to be that you have to take the president both seriously and literally when he talks about trade... This is something he believes in; he's quite ideological about this…. We think that trade policy uncertainty and higher tariffs are something that investors and the markets will just have to navigate over the next three and a half years, if not longer term."

I’ll be honest, I have a very hard time knowing what to take as “real” about any aspect of the U.S. economy right now. I’m old enough to remember when the tariffs were just about Fentanyl. It’s useful — to me at least — to have someone as sharp and even-keeled as Libby telling it like it is: We are NOT in some narrow bubble of uncertainty. This is the new normal.

My takeaway: Repositioning or speculating based on headlines around trade policy is a stupid way to spend your time and money. Most investors went into this chaos under-invested internationally, and have been penalized for it. Recent ETF flows suggest at least the buyers of cheap beta (most advisors) are increasing their exposure, even if just at the edges.

On the 2025 Tax Bill

"I do think that's one thing that's been somewhat under-reported: these business tax provisions... I think that is likely to catalyze CapEx and could be more front-loaded in terms of stimulus than people expect."

"You're having your dessert first and pushing your vegetables around the plate. The vegetables are delayed."

The One Big Beautiful Bill Act (or OBBBA Because we’re apparently now a country of middle school dropouts) has plenty for advisors to bone up on (great summary over at Kitces.com), but less attention is being paid to the significant benefits for businesses in the short term. The OBBBA changes a whole bevy of rules about how Capex & R&D are accounted for, all of which have the same basic effect: pulling forward deductions.

Of all the stuff in the OBBBA, this one seems like the cleanest piece of stimulus. While the net effect will likely juice reported earnings (if you expense your whole physical plant instead of amortizing it, it makes for lower taxes, which means higher net-income), it’s not just a gimmick — it could pull forward real CapEx and R&D, and generally that’s a good thing. That’s the “dessert.” The “vegetables” are both the delayed cuts (minimizing short-term disruption ahead of the mid-terms) … and of course the loss of tax revenue from the accelerated depreciation.

On Housing Finance (Fannie & Freddie)

"Our view is that even if Fannie and Freddie were released with a lot of capital, they would still be perceived as having credit risk... For borrowers, that changes the borrowing rate. There will likely be upward pressure on mortgage rates… At the end of the day, is it good for borrowers? Not really. And is it good for the taxpayers? Probably not."

Despite the headlines around tariffs and trade and all, the ending of Fannie/Freddie conservatorship is the biggest moral hazard proposal to worry about. While there are plenty of details, I can’t get past a single line item: How can the U.S. taxpayer provide an iron-clad guarantee to a private company, when only the shareholders of the private company benefit from the guarantee?

That’s the problem with spinning out these Government-Sponsored Entities. I have no problem with making them private companies, as long as they play by private company rules. I have a big problem with taxpayers being the uncompensated backstop. It’s crystal clear to me that a spun-out Fannie/Freddie increase mortgage rates while simultaneously increasing risk in the real estate market. It’s a bad idea unless we restructure the entire ecosystem to actually get taxpayers out of the mortgage business which, for sure, will lead to higher rates.

On the Federal Reserve

"We entered this year with a '2-2-2' forecast... Now we're at '1-3 and then 0-to-4,' meaning 1% real growth... 3-ish percent inflation, and anywhere between zero and four cuts. This is not an enviable position…The bottom line is we continue to think that the Fed is independent. We do not worry about Chairman Powell being fired."

I put the Fed on the list of things to pay attention to but not worry about, so Libby’s comments make a lot of sense to me. The Fed, for all its power, isn’t so much becoming less relevant than the past, but may be less effective going forward. Today’s Fed has to worry about the threat from inside the house, not just the global marketplace. The constant chaos of tax and trade policy simply makes their job harder.

In the Greenspan Era, we used to talk about the Fed “Driving the Bus.” Today’s Fed seems less driver and more driving instructor: sitting in the passenger seat, white-knuckling the e-break while a stimulant-addled teenager is trying to merge in traffic. I’m not excited about the “1-3” Growth-Inflation prediction, but here we are.

On Investment Philosophy

"I'm biased here, but I would say that Washington matters a lot more to markets than markets think it does or appreciate… [Her advice?] Probably just staying invested... It's very difficult to time the market... maybe thinking like an institutional investor and not reacting to every headline."

I, for one, continue to think it’s really really a bad idea to bet against the house in this environment. There are plenty of distractions vying for your attention — from insane income promises to crypto to private credit, but ultimately “the house” here is the Corporate State. The large, influential firms and individuals who are, if we’re being honest, really driving most of what happens in Washington, and thus (to Libby’s point), markets.

I may not like this Casino. But pretending it doesn’t exist won’t win me any chips.

(3700 words of edited transcript follows).

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The ETF Market in 2025 remains on fire. Net-new assets from launches and organic growth are $556 billion at the 6 month mark, bringing the total to $11.5 Trillion. In just the second quarter we’ve had 215 new ETFs came to market with a total of $7.6 Billion and a shockingly high median expense ratio of 0.715.

But! The discrepancy between who’s gaining assets, and who’s making money has become stark. Flows remain dominated by cheap beta this year, with <10 bps products continuing to get more than 46% of the flows, and >80bps products pulling just 5% of new assets. Revenue is a different story. The cheap bucket’s new flows imply just 8.9% of the new $1.2B in annualized revenue that flow will generate, while new products over 80 bps will grab 26.6% of the pie.

Meanwhile, active management and international funds are having their best years in ages.
- Dave Nadig, Independant ETF Expert

Flow Time

Let’s get under the hood (Note, all charts and tables should be interactive through column headings or tabs, and where there’s excess data, you should now be able to expand it or search.)

Here were my “huh” and “aha!” thoughts from this

• While we’re far from 50/50, this is as close to parity in terms of flows between Active and Passive as we’ve really ever seen. Even in U.S. equities— the stalwart domain of indexing — we’ve had 30% of flows go into active funds.

• In Bonds, Active is becoming dominant in terms of flow.

• Non-traditional (where most options, income and weird products live) has slowed its roll a bit. The first quarter saw more than $10mm a month in flows into these things. Now it’s about half that.

• If you’d told me we’d have $146 billion in crypto ETFs two years ago, I would never have believed you.

Zooming in

The most useful “buckets” for thinking about the ETF market I’ve found are the Factset/ETFAction “Category” buckets, which are about 100 common ways of slicing up exposure.

Looking recently, Large Cap equities in a few varieties dominate, but this has been true forever. Sort by AUM and you’ll see the three Large Cap US style boxes with a massive 2.5B in assets out of an 11T market. What stands out to me?

• Gold, Crypto and Synthetic income continue to draw big flows month to month. This is pretty clear anti-S&P positioning to me, but none of it’s nearly large enough to dwarf the endless bid for US stocks.

• Type “small” in the search bar on that table. Everyone still hates small cap value, but broad and growth oriented small caps seem to be breaking their long term losing streak. YTD, small caps are about flat, but there’s been a big shift from US to Ex-US broad exposure, and from Value to Growth in US exposure.

• Health Care, Consumer Cyclicals and Energy — despite speedrunning WW3 in June — are the most hated sectors, with over $10B in outflows so far this year between them. I can’t even begin to predict energy prices, health care policy or retail demand, but investors are voting with their avoidance.

Below the fold: another 2000 words and a pile more data on new launches, and a deep dive on who’s actually making money as an ETF issuer these days

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Here’s the video:

And if you’re pressed for time, you can find it on any podcast app, or you can read …

… the TL;DR

The End User Problem: Who Are ETFs Really For?

• We Agree the core challenge in evaluating ETFs is defining the end user - products that are terrible for retail investors might be perfect for sophisticated hedge funds, and vice versa.

• Eric proposes that rating ETFs requires a "movie rating" approach rather than thumbs up/down - some products are rated R for good reason but shouldn't be banned or ignored completely. (Dave isn’t a fan of banning anything either).

• We definitely agree that the real sin isn't launching niche products, it's "truth in labeling" problems where funds don't deliver what their names promise.

Product Proliferation: Innovation vs. Gimmicks

• We're seeing an explosion of filings in derivatives, options-based income products, and private markets - areas where the ecosystem infrastructure hasn't been as fully tested as other parts like junk bonds.

• Many "Yieldmax" like covered call ETFs are essentially repackaging your own money as income distributions while underperforming a volatile single stock, but there is genuine retail demand, logic be damned.

• The industry experiences periodic "hard rains" that wipe out speculative products, followed by rebuilding cycles. We haven’t seen one since the ESG and Smart Beta storm cleansing.

Systemic Risk Concerns in New Markets

• The real worry isn't individual ETF failures but systemic stress on market infrastructure - derivatives markets, Options Clearing Corporation, and settlement systems.

• Most new option-based products are net-short volatility, concentrating risk with dealers who may become "the whole market" in smaller underlying securities. Not a now problem, but something to watch.

• Historical precedent: the 2010 flash crash required rebuilding entire market structure around reopening ETFs from halts; similar unintended consequences possible in newer product categories

Private Markets: The Transparency Problem

• Putting private equity in ETFs isn't inherently bad, but "mark to magic" pricing creates dangerous illusions of stability.

• SpaceX trading at the same price regardless of Tesla's 14% daily moves during the MAGA divorce exemplifies the core problem with stale private market valuations.

• ETFs could actually help price discovery in private markets, but only if issuers commit to real mark-to-market discipline.

Crypto and the Regulatory Wild Card

• Crypto ETF approvals represent the most genuine innovation opportunity, with tokenization offering legitimate infrastructure improvements.

• Trump administration creates unprecedented regulatory uncertainty - if the $TRUMP+$MELANIA ETF gets approved, "all bets are off" for what follows.

• Most speculative products will likely remain tiny in assets but generate outsized attention and trading volume.

There’s lots more, and if you’re hunting for quotes, the full transcript is below the fold here for paying subscribers.

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As this is almost an hour, and we’re all busy, here are two tools for my hardcore readers: An AI-derived-but-me-edited summary of key assertions/points I try to make, and the complete transcript, in case you want to cut and paste it into your own LLM.

THE TL;DR

The Evolution of Capitalism and Collective Action

• Capitalism is a modern expression of humanity's ancient superpower: collective action and cognition, which began with activities like group hunting.

• The fundamental purpose of an economy should be to allocate resources effectively for "species-level flourishing." An investment is only truly meaningful if you can trace its contribution to this goal.

• Modern markets are built on two key inventions: the rule of law and the role of capital. Both of these foundational systems are currently in a state of transition and stress.

The Democratization and Evolution of Investing

• The concept of pooling risk through funds is not new, dating back to Adriaan Van Ketwich & the Dutch East India Company in the 1700s.

• Direct investment by the average person is a relatively recent phenomenon. Before the 1980s, a lack of access to information & infrastructure made it an arcane hobby for the rich or highly dedicated.

• Technology created a "phase shift," democratizing investing but also leading to today's problem of information and product overload.

Gen X, Distrust, and the Rise of the Individual Investor

• The rise of the individual investor was — at least in part — driven by Generation X, whose "latchkey kid" upbringing fostered self-reliance and a deep-seated distrust of institutions.

• This generational distrust led Gen X to embrace individual control over their finances through 401(k)s, IRAs & brokerage accounts.

• In contrast, Millennials have shown a greater tendency toward communal risk-sharing models like indexing and target-date funds (although both have broad penetration now)

From Tech Bubble to Financial Nihilism

• Gen X's institutional distrust was validated and hardened by a series of crises, including the dot-com bust, 9/11, and the GFC.

• After repeated cycles where investors felt "fleeced," the "Fed put" became a nearly universally accepted way to socialize risk—a solution Gen X remains highly skeptical of.

• This history of distrust has fueled "financial nihilism," where Gen X has become a primary source of capital for speculative outlets like crypto, day trading, and sports betting.

The Crisis of Agency and the Allure of Crypto

• When mainstream investing feels like just "betting with the house," people seek a sense of agency and the opportunity for significant wealth generation elsewhere.

• Crypto, particularly Bitcoin, functions as a "societal catastrophe hedge"—a foundational bet against the current financial and political system.

• The bull case for crypto is morally complex, as massive appreciation likely requires the collapse of the dollar, the US economy, and global stability.

Navigating the ETF Landscape: White Hats and Black Hats

• The ETF world (and market participation in general) can be viewed through a "white hat vs. black hat" lens, where trust is paramount. This trust is not about contracts, but about how a firm behaves when things go wrong.

• "White hat" firms are transparent, educational, and client-focused. "Black hat" firms often feature high fees, opaque & needlessly complex structures, and promises that are too good to be true.

• In an environment where the rule of law feels less certain, the quality of the relationship with an asset manager matters more than ever.

Feel free to disagree with me on all of this violently in the comments.

THE TRANSCRIPT

(11,000 words follows)

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I was asked to participate alongside Samara Cohen (CIO of ETF and Index Investments at Blackrock), who’s one of the best and brightest human beings I know, and Gerard O’Reily (Co-CEO/CIO of Dimensional Fund Advisors), who I know from the conference circuit and find intellectually impressive and intimidating. I suspect I was included precisely because of my (ahem) current status not representing any firm. I’m representing, if anyone, you all: advisors and investors trying to make sense of a chaotic market. And I don’t much care who gets mad at me anymore.

The topic was “Product Proliferation.” Here’s my quote:

The current regulatory environment can best be described as “I dare regulators to stop me.” With the launch of $PRIV, the U.S. markets crossed a Rubicon, where an actual, live, trading product is launched against the concerns and objections of regulators. Recent filings by Rex-Osprey similarly drew SEC ire, causing Commissioner Crenshaw to comment last week that “Even our staff can’t reconcile these inconsistencies, though their concerns seem to matter less to certain industry participants these days.”

The current filing-and-launch environment creates enormous risk for investors looking at new products in 2025. While “buyer beware” has always been good advice, in today’s market, it’s beyond insufficient. For new hot-sauce products coming to market on 75-day (or shorter) approval clocks, the new mantra should be “Assume toxicity until proven otherwise.”

So looking at the recent rash of filings, let’s dig into last 8 days of ETF filings, focusing on the ones that should be euthanized on their way to launch.

(1100 words follows)

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Every month, I then take the episode and curate a playlist of new and classic indie tracks to echo the themes of the month. If you want to skip the discussion and just listen to 9 great tunes, I got you:

But by all means, please watch the entire hour and seven minutes of insanity. Here were my big takeaways and the indie songs they brought to mind.

“We have — through our collective bodies — decided we don't want to pay for the things that we want." – Dave

🎶 Song: “Been Caught Stealin’” – Jane’s Addiction

I’m not saying any of us has the magic answer, but I do think it’s worth remembering that this is really the nut of American politics since 9/11: we want low taxes, we want strong economic growth, we want to take care of (insert your personal belief system). But perhaps we are a selfish nation, and don’t deserve nice things.

Ben Hunt’s absolute banger of a piece today put a fine point on this: if it is now common knowledge that the U.S. fiscal situation is intractable, well, that sets us up for bad things. As he says: “The risk is a steady, long-term melt-down in the value of the US dollar and a steady, long-term melt-up in inflation and interest rates.”

And I don’t care if Dave Navarro and Perry Ferrell can’t get along. Jane’s Addiction is still one of the greats.

"Doesn't this just turn into: don't break the toy. Don't break the toy. Because when the toy breaks, you're gonna cry about it." – Matt

🎶 Song: “Broken Toy’” – Veronica Falls

The analogy of a child and a toy poignantly illustrates the perceived recklessness in economic policy. There's a sense of impending consequence, a fragile system being pushed too far, with an underlying frustration that warnings go unheeded until the inevitable breakdown occurs.

Veronica Falls is one of those “whatever happened to…” bands from the lost decade of the 2000s. Apparently their drummer passed away before the pandemic, and the URL has disappeared, so: let me introduce you to a great album from a great band.

"To reduce the government deficit, then that inherently causes austerity to the private sector, to individuals, and I'm not sure people are willing to take that pain." – Jason

🎶 Song: “Bovine Excision’” – Samia

Here lies the uncomfortable truth of the now: we aren’t going to get what we want, and (whether you’re rooting for it or not), there will be suffering. I’m not smart enough to know the exact right thing the entire country is supposed to do, and I’m certainly not in charge. But I can mourn, and lament the American wound.

Samia’s new album, Bloodless, is full of this tension, no song more-so than the breakout (for an indie darling) with the uncomfortable name: Bovine Excision.

"There have to be implications for spending money you don't have over and over and over again." – Dave

🎶 Song: “Harsh Love’” – Blue Foundation

Does the future matter? I mean ultimately that’s the question. I’m not sure we’re going to ever come to an agreement — that’s kind of the point of Ben Hunt’s banger of a piece this week talking about the common-knowledge shift that the U.S. debt issuis intractable.

We spent a lot of this episode dancing around the edges of modern monetary theory: can a country that mints its own scrip really go bankrupt? The answer of course is “eventually” and the challenge is having clear enough eyes — as a country — to “pull up” when the MMT-fighter jet is diving towards the canyon floor (runaway inflation).

Dropped just this week, “Harsh Love” by shoegaze specialists Blue Foundation has the too-apropos-to-skip lyric: I don’t Want, Tough Love, Tough Love, Tough Love.

"Peter Atwater said FX is a sentiment gauge for all policy decisions right now. If you wanna see how policy is actually being viewed on the global stage for resetting cost of capital, just watch FX on the announcement." – Matt

🎶 Song: “American Food’” – They Are Gutting a Body of Water (TAGABOW)

A lot of what’s going on geopolitically can be summed up as “retrenching from globalization.” It’s not just conceding the soft-power politics to China (and that won’t be easily reversed), and it’s not just the tariff insanity. There’s a very clear, real, and vocal group of Americans who genuinely think we can pull up the ladders around the U.S. and let the world take care of itself. And, as Atwater is saying here, the rest of the world gets to decide what that means, largely in F/X.

They Are Gutting a Body of Water (unfortunately often shortened to “TAGABOW”) is an incredible experimental Philly band who’s 2022 release, “S”, blew my mind. This new single track from them is more approachable shoegaze with reversed-and-burried lyrics that eviscerate modern America. Enjoy.

"Eventually, every 50, 100, 150 years, you have to have some sort of jubilee where we burn the tally sticks." – Jason

🎶 Song: “The Catastrophe’” – Car Seat Headrest

Jason has a historical but also fairly depressing and radical perspective to the debt cycle. He’s suggesting that some form of a “great reset” is inevitable — that is, a time when we forgive debts (or burn them), and reset the economic system (or burn it down and see what happens next). I am NOT that much of a pessimist, but I do think there’s a lot of “find out” to come.

Car Seat Headrest is one of those bands with a sound, and this new track slaps.

If you think you’re unworthy of life
If you’re tired of just playing nice
If you’re looking for one light of hope
Inside the last days of Rome
Well, you can come with us tonight
Maybe you can recognize
There’s still some life inside
These bones, dry bones, in American towns.

Heck yeah.

"If you're gonna put us through all this pain, please let us actually get some result from it." – Dave

🎶 Song: “Sweet Danger’” – Obongjayar

I have never been more aware of my utter powerlessness than the last few months. I know, I know, we all have all sorts of things we can do to react to insanity, but when my heart is all shriveled up and black, my silent prayer is for there to at least be some good that comes from the chaos.

Like, if you’re Steve Martin as the Dentist in Little Shop of Horrors, the audience all knows you’re going to cause an enormous amount of pain. But at least get the root canal done. Don’t make all the screaming for naught.

Nigerian singer Obongjayar dropped his first album a few years ago, and his latest, Paradise Now, is fantastic and worth a whole headphones-on listen. He jumps in and out of genres, falsettos, lyricism and electronic experimentalism, but Sweet Danger is for sure the break out approachable track.

"Who needs traditional banking when you have private credit?" – Matt

🎶 Song: “Safeandsound’” – Parcels

A tongue-slightly-in-cheek that points to the uncomfortable reality that the U.S. has likely created it’s own shadow banking system which is, itself, too big to fail. Add in the private-investment-banking world known as Private Equity and a rather large part of the countries capitalism no longer happens in daylight. Personally, I think that’s a problem. I think well-regulated public market capitalism has incredible societal superpowers. We’re way, way far away from that.

Smooth-Indie masters Parcels dropped Safeandsound a month or so ago, and while the music is delightful, the words nailed it for me:

Who is to say
They know what they’re doing?
They probably are just faking.

"The tipping culture's gotten outta control in this country, right?" – Jason

🎶 Song: “Tell me I never knew that’” – caroline, Caroline Polachek

I don’t think I’m alone in thinking the whole “no tax on tips” thing is mostly a popular idea that doesn’t really help many folks at all. It incentivizes employers to push tips up and wages down, which seems bad. I suppose it means marginally more reporting of tips, but if some waiter is already underreporting their cash tips, I don’t think you’re going to start reporting more tips because you won’t get taxed.

It also seems like bizarre forced economic interaction. I’m not all that neurotypical, it’s already hard for me to understand the social dynamics of a retail transaction. The insane rise of “tipped everything” in the last 5 years is, at a minimum, a source of anxiety. Please just let me pay the amount I’m supposed to based on someone else’s social convention algebra so I don’t have to figure it out?

Caroline Polachek is indie-pop-dance royalty for good reason. This surprise collab with the band caroline (who reminds me of Sigur Ros in the best way) is just too good to miss. Sure, I can stretch it to the theme of the quote, but mostly, it’s about not knowing what to do. A feeling I think we can all relate to.

But I gotta call it: this filing from F/m is worth celebrating. Here’s what they filed for:

Six boring fixed income buckets. But boring, they ain’t. Let’s just pick the first one, CPHY: instead of investing in a pool of junk bonds, the fund invests in other junk bond ETFs as a fund-of-funds, but with an extremely clever kicker:

Let me simplify this:

• The fund buys Junk Bond ETF A - its “Core” position.

• When that Core position is ready to go Ex-Dividend — that is, when the dividend has been announced, but is still included in the NAV of the ETF, the fund rotates out of ETF A into an identified, very similar Junk Bond ETF B, the “Substitute” position.

• Once the dividend has been paid out, the fund rotates BACK into the Core position.

Why is this so cool? It has several big, positive impacts on the holding investor:

• The fund will likely never have to make a distribution of any kind, because it never receives any dividends, instead accumulating the total-return of the asset class. This makes it essentially a European style accumulating share class where dividends are automatically reinvested, or like an Exchange Traded Note that promises total return. This is extremely helpful if you’re holding in a taxable account and don’t actually want current income.

• The fund will easily maximize its tax efficiency: like any other ETF, it can (probably) heartbeat trade a low-basis Core holding out to effect the “rotation” between ETFs, or, should it be holding the Core ETF at a loss, it can simply sell the position on ex-date, book the loss, and buy the Substitute.

• This might even be an Alpha generating strategy (if they extend this strategy to dividend paying stocks) — at least according to academics and wonks like Brent Sullivan at Tax Alpha Insider, who note that “dividend-paying stocks tend to rise 41 to 53 basis points in the month they're expected to pay a dividend, only to drop 72 basis points over the next 40 days.” I am not holding my breath on this specific pattern holding for, say, rotating between JNK and HYG dividend dates, but at least the weight of the data is on this being a benefit, not a cost!

So What, Big Deal

There’s no magic here. This is actual investor-focussed innovation. While most of the industry seems to be content to try and slap leverage on everything and call it new, advisors know that the biggest game in wealth management is actual the Tax Game.

The challenge with tax-based innovation — as we’ve seen with 351 transfers, Box Spreads and Exchange Funds — is that the IRS looks unfavorably when the only purpose of a trade is to avoid taxes — that’s why the wash sale rule exists. Part of why this abysmally named “Compoundr” approach is so smart is that it fundamentally remaps the pattern of returns in a way that just so happens to be tax efficient, but also genuinely simplifies exposure to “high yielding” assets.

Could there be warts? I suppose the funds could come to market with too high a fee, or flop-on-arrival, like any other ETF, but the core logic seems sound to me. Turnover will obviously be high. But given that the target-ETFs are massive, highly liquid and easily arbitraged, I suspect the transaction costs will be de minimis. We’ll know more when the funds launch, most likely in August.

Although, I’d still like to buy F/m a vowel.

Bonus Non-ETF Nerdery for Subscribers:

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This full transcript is for paying subscribers, and is a companion to a second piece published today on the Elder Crisis. Enjoy.

Edited Transcript:

[00:00:00] Dave Nadig:
We're not going to go deep into what generational theory is, or the Fourth Turning. We're going to talk about the now being the frog in the boiling water of the current crisis.

Where are we in your cycle and how does it feel in terms of how you would expect it to have gone when you started this process 20 years ago?

[00:00:31] Neil Howe:
I have to say, this has played out pretty much as we expected.

I'm speaking honestly from when Bill and I first started writing about this in 1991, that was in our book "Generations" where we first talked about American history and by extension much of Western history being cyclical, modern history, being cyclical.

We talked about a crisis of the 2020s. It's in that book. And we foretold something that would be the way this generational cycle plays out would lead to that. Now, at that time, we often thought about something peaking in the year 2020 or in the early 2020s.

And I would say the one difference is that due to the lengthening of generations, the slowing of the timing of generations, that we're pushing. The cycle is dilating slightly, and this has happened over time. This happened over the centuries.

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Here’s the video, and also, a bunch of nuggets I wanted to expand below:

Scarcity

"I definitely ended up with a scarcity mindset." - (5:04)

Nobody likes hearing anyone’s “farm wisdom” B.S. from their hardscrabble childhood, and as a white-kid from New England, I have missed few meals and have always found a roof. But money left its hollow mark in me, and I ignored that most of my life. Wanting, having, needing, obsessing, making, spending, lamenting or just thinking about money has occupied me a lot. I’m trying to reframe that for myself.

Peter Koenig (Econ elder) says money is an “inspirational element - “A client paying me, if things are working well, will receive inspiration through paying me as I will in receiving the payment … that’s what I call Love.”

I have not gotten there yet, but I see it in the mist. I see that money can be a tool for love, and I understand having a relationship with tools. I can pick up my grandfather’s 90 year old hammer and I know what it has done and can do, and I appreciate it. I may even form an attachment to it from the stories I tell myself about it. But I doubt I will ever love the hammer in the same way, with the same valence and amplitude, with the same bilateral exchange as I do a person.

Scarcity robbed me of some of that appreciation. It robbed me of some trust. It put blinders on me, and as often as not, I mistrusted the toolness of it, like a hammer with a wonky handle.

The Why

“We all use the tools of finance to advance our objectives. What it comes down to is why.” (9:53)

After savaging a levered-MSTR-income product last week, I feel like reiterating that there is nothing inherently “evil” about leverage, or options, or Bitcoin, or Bitcoin-treasury companies, or any other tool. What firms and individuals do with those tools, and why they use them, actually matters.

I’m naive enough to think that you can take two products that have almost the exact same pattern of returns, and recognize they have different emotional, personal, political and yes even moral implications that matter. A product like TCW’s $VOTE, which is all about direct engagement, voting and shareholder transparency, is actually a different thing than $SPY, even if the pattern of returns is almost identical. The how, and the why of a thing matter.

This seems important for the global political environment too. (Social)media is swamped with folks saying “well, I hate how we’re doing it, but someone need to {constrain China, re-shore, close the border, bring down drug prices, cut spending}.” There are good ways and bad ways of doing things. The good ways tend to not just work better, they preserve the soul of the thing being done. We — the ETF industry, the USA, you pick — has become less trustworthy less because of the what, and more because of the how and why.

Capitalism & Private Markets

"Capital markets are largely the casino where real capitalism cashes out." - 25:20

It’s a nice little rant leading up to this quote, but I keep coming back to this core problem with the now. I’m a capitalist! I think market capitalism is an amazing system that can achieve all sorts of societal objectives. I also think the current U.S. market environment leaves capital-C-Capitalism to private equity and the U.S. shadow banking system (Private Credit). These are bugs, not features.

At the core, what it means to be “public” is going to have to change. Whether that happens in a controlled way (congress actually passing laws, like we’ve done for every other market structure change in U.S. history), or whether it happens through spontaneous disassembly (which is the path we’re on), is a societal choice we’re making without even talking about it much. “Opening up Private Assets” is not a solution, it’s a white flag.

Meditation for Investors

“Meditation gives you tools in the space and the acuity to recognize your own internal monologue… as different than reality. That’s the thing I think most investors don’t get. Your perception of things is inherently, and always, not reality." -35:50

If you want to be better at almost anything I can think of, having a sharp mental model of the world is important. You wouldn’t start your trading today without looking at the news, your charts, or your account balance, would you? Meditation is nothing more than brain-training for reality.

Once you start, you might find that there are lots of ways in which your beliefs about reality, your self, your body, your mind, or anything else are not what you thought. But even if all you want to do is get rich from degen crypto trading, I suspect you would still probably benefit from a practice of some kind.

You go to the gym. You do the workouts. You drink the probiotics. Give your brain the same love.

Success

“Success is having control over my own time.” 1:02:35

Bogumil often asks guests to define success, or wealth, or happiness (check out his interview with Dan Crosby!) And it’s not surprising that so many guests give the same answer I did. Time.

My friend Cameron sent me a few stanzas for a speech she was working on last week: Longfellow’s Psalm of Life, which is a banger. This weekend, I read the whole poem, and an entirely different part stuck out for me than for her (which is why Poetry is awesome):

It may not seem like we get to choose. That we’re stuck with our debts and obligations and our karmic baggage. There’s some truth to that.

But we get to choose the How and the Why. We get to choose not to be like dumb, driven cattle. We get to act in the living present, heart within, and God o’erhead.

Here’s the quote:

ETF investors have put another $50 billion to work since the April lows, with big wins for active management, short-dated bonds, non-U.S. equities and “safety” plays like gold, and, shockingly, Bitcoin? This month’s un-ownable Black Hat ETF is the The Defiance Levered Long+Income Strategy ETF (MST), a movie-monster mashup of (Micro)Strategy, wildly unpredictable leverage, randomly distributed income, unknowable tax treatment and shameless fees (Black Hat). Thankfully, we can give the White (or at least Gray) Hat to the Capital Group KKR Core+ Public-Private credit Interval Funds, which might make both private credit and interval funds palatable for the first time.
- Dave Nadig, Independent ETF Expert

I started looking at ETF flows on May 1st like every ETF pundit, and decided it was exactly the wrong date. Between window dressing, index rebalancing and various derivatives based structural flows, it’s hard to tease sentiment out around a calendar marker. So this is all for the Month ending May 7th, 2025, or a month from recent lows.

Let’s dig in.

Credit Collapse? Or Safety Zone?

The amazing Matt Bartolini, Head of SPDR Americas Research at SSGA, produces one of the best monthly briefs on the ETF market out there. Here’s the excellent chart:

His point: the previous year and change was amazing for three credit categories of Investment Grade corporates, Junk, and the Super-Junk in the Loan and CLO markets. The promise has been “yield yield yield,” which is also the default marketing message for everything from short term treasury funds to crazy income products using leverage and options (Such as $MST, which I cover in depth below the fold).

But as markets got wonky in the last month, folks headed for, if not the exits, more well understood alternatives to SPY, like short term government bonds and international equity.

It’s not that investors went “risk off” in the traditional sense, it’s that they rotated their intra-asset class tilts. Gold, Bitcoin, and short duration bonds essentially absorbed all the selling from Small cap equity (-$5.8 billion), Cyclical sectors (-$52 billion), Long bonds (-$4.7B) and China (-$3.7B).

In thinking about how this compares to recent history, I thought this awesome chart from Todd Sohn at Strategas made an interesting point:

Which is — the big winners and losers were set a while ago: safety plays winning (a category which newly includes Bitcoin), small caps and cyclicals bleeding. It’s consistent enough to call a trend.

Fees Matter Again

So what’s new? The era of super expensive products gaining assets seems to be coming, if not to an end, to a pause…

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You can just skip all the talk and listen to this 11 song playlist. I think it’s pretty great for the weekend.

Or you can watch the actual youtube video. You’ll probably at least laugh at how stupid we are once or twice.

Or here are my 11 favorite quotes from the transcript, and songs that seemed to line up (and still be great):

“We’re so far away from NBER actually declaring recession. But boy, doesn’t it feel like we’re heading towards it?” - Dave

🎶 Song: “The Rip” – Portishead

There is a sense of impedning doom as we watch the soft data become hard data in this tariff war. I still don’t think there’s much to do for most investors. I can’t see selling everything, I can’t see buying super-expensive hedges. Geographic and asset class diversification have made sense my whole life, and that still seems like the right call while the synth swells and we await the bass drop.

“We’re one tweet away from so many outcomes.” - Jason

🎶 Song: “Waiting Room” – Fugazi

When Jason said we’re one-tweet-away I think it captured a lot of the anxiety I’m feeling personally. I’ve caught myself more than once these past few weeks mindlessly refreshing news or twitter just because it seems like we are waiting for so many shoes to drop. Who knows, maybe in the next tweet we declare war on distortion pedals. Or kale. Anything seems likely.

“We can hold this choke for so long, but I can’t imagine a scenario where there’s a real downturn and the government doesn’t just open the throttle.” - Matt

🎶 Song: “Seether” – Veruca Salt

If we’re waiting real shocks, the big ones may be stimulative. Whether it’s an interest rate cut, some form of stealth QE, or just literal airplanes dropping toilet paper and Chinese-made dolls on the suburbs, I for sure have the sense of impending rescue behind any market drop. The market seems to think so too, which is why every dip seems to get bought instantly. It’s the Seether under the surface. Can’t fight the seether.

“The bullwhip effects on supply chains are wild—people use different points in that wave to describe whatever their political or economic beliefs are.” - Jason

🎶 Song: “See No Evil” – Television

Jason with another killer observation: you can see what you want in the data. While this is always true to some extent, the silliness last week about “Biden’s Market” vs “Trump’s Market” depending on — literally — what day of the week you read statements from POTUS, show just how disconnected political dialog is from reality. Everything is strong! Everything is awful! Selective amnesia is a hell of a drug. Reality, however, has a way of eventually showing up.

“Household formation is the single cleanest metric… less and less since the 1950s.” - Dave

🎶 Song: “In My Room” – Yaz(oo)

Nobody ever seems to care about this chart or think it’s important:

In a few generations, we’ve gone from 12% of households — adults with their own housing — being single people, to almost 30%. Every other metric of household formation (marriage rates, fertility, home ownership, % of adults living with parents) shows the same pattern. Americans increasingly live literal lives of solitary, quiet desperation.

Also it’s a great excuse to play one of the best tracks from the best New Wave albums of all time: Upstairs at Eric’s by Yaz or Yazoo, depending on which side of the atlantic you’re on.

“One of Domino’s projections was that people are ordering less and less… either people are picking up or not even ordering fast food anymore. It’s interesting to see where that’s hitting.” — Jason

🎶 Song: “Olive Garden” – PUP

My go-to economic sentiment indicator is, of course, my own behavior. A week ago I went to grab a bag of little gouda cheeses — the Babybel ones in the red wax? — and they were $11!! I bought a chunk of Vermont cheddar for $5 instead. This week, we hopped in the car to grab pizza rather than relying on the unfathomable luxury of delivery (we’re rural enough that Dominos is literally the only delivery available.) There you go. The Dominos Recession Indicator lives not just in Jason’s telling, but in my own house (it’s weird to be part of a statistic). Also new PUP slaps.

“We could end up with an earnings recession without an economic recession—with some policy reversals. There are lots of ways out of it if we stagger.” - Matt

🎶 Song: “Down to be Wrong” – HAIM

The one thing that is absolutely certain right now is that nobody knows anything. Everyone is claiming they have the end game mapped out, and of course, none of us do. Matt’s point is probably the most important one in the whole episode — there are so many weird and unpredictable ways this could play out, and not all of them are disasters. While I am not optimistic, I am, as Alana Haim sings, very down to be wrong.

“Retail’s been wild—Costco vs. Target is the biggest foot-traffic bloodbath I’ve ever seen.” - Dave

🎶 Song: “Hard to Explain” – The Strokes

While I personally stopped bothering to shop at Target when they turned tail on the LGBT community with breathtaking speed, I’m very skeptical this is a boycott story: I think it’s mostly a cost savings story. But facts are facts: February and March saw Costco experiencing near-record increases in foot traffic, while Target experienced pandemic level declines. The economy is definitely reshuffling, one way or another. And that’s even without Chili’s rise to greatness!

“It’s like standing waves. You have a bunch of waves that get layered over each other, and as soon as you combine waves that are at the same peak or trough, weird stuff starts to happen.” - Matt

🎶 Song: “Wave of Mutilation” - The Pixies

The moves in markets and the economy aren’t going to be smooth — this isn’t like dealing with a normal exogenous shock, like the Asian currency crisis or even a major bank failure. Messing with supply lines, currency, the tax code, government spending, tourism and higher education all at once may yield the results the admin believes will be positive, but for sure it’s going to be a lumpy experience. Waves of volatility (Mutilation) will be the norm for a while.

“It seems hard to bet against the top of the market cap food chain when that food chain is dictating pro-company policy for themselves.” - Dave

🎶 Song: “Champagne Tastes” - Sunflower Bean

We used to talk about “regulatory capture” and “conflicts of interest” seriously. We did a lot of handwringing when some oil executive would end up in a policy position. We’re in a very different world now, and I doubt there’s ever a return in my lifetime. It is now the norm of American politics that the Executive Branch will be explicitly pro-certain individual companies, and anti- others. We’ve already seen this in Musk’s very specific gutting of NTSB investigative bodies, in the Trump aligned crypto businesses, and in the family-owned asset management business soon to directly invest in favored individual equities. None of this is up for debate — it’s in press releases. You can be all in favor of the corporate oligarchy, but I don’t think you can calim that corporate influence and governmental interconnection has declined.

Also new Sunflower Bean is awesome.

“Raising prices doesn’t magically manufacture more money—people buy less. That’s micro 101.” - Dave

🎶 Song: “Had To” – Esther Rose

Honestly, it’s the weirdest market of my entire life. None of it makes much sense. So what better way to end than Esther Rose’s Ode to Inebriation:

Drinking is a gift for any season.
And drinking is a way to pass the day.
Drinking is a sin to some believers.
And drinking is a reason to be saved.

Cheers. Literally.

Hey, I helped write a book! Actually, I helped revise the Comprehensive Guide to ETFs from the CFA Institute Research Foundation with my extremely smart and high-integrity co-author’s, Elisabeth Kashner, CFA (FactSet) and Joanne Hill (Bear Creek/Vest/CFA Institute).

Since their invention in the early ‘90s, ETFs have saved investors countless billions of dollars, helped them retire or pay for their kids education, and largely destroyed the access and quality difference between retail and institutional investors. ETFs winning is cause for celebration.

The book (DOWNLOAD NOW!) is completely free to the reader (a major reason I continue to work with the CFA Institute Research Foundation), and is designed to be somewhat definitive: it’s the baseline reality injection of what the modern ETF market actually is, warts, diamonds and all. What we just completed is Module 1 — the real nuts and bolts of ETFs and where they fit. Modules 2 and 3 — coming along nicely — will cover a framework for picking and choosing ETFs, and a nerdy run through the regulatory environment.

But not every thought about how things work belongs in a formal, quasi-academic guide to ETFs. I have thoughts. Here’s the quote:

ETFs didn’t just make investing cheaper and faster. Over 30-odd years, ETFs upended the entire old investment management apple cart. Since the 1990s, ETFs have taken an industry built on opacity, friction, and inefficiency and countered with transparency, speed and easy access. Today, ETFs dominate. But with dominance has come contradiction: radical transparency paired with deep misunderstanding, zero-fee products wrapped in hidden gatekeeping, democratization built on centralized control.
- Dave Nadig, Independent ETF Expert

ETFs won, and indeed, that’s a great thing. Now what?

The Old Way Was Rotten. Like Bad Food.

"Electronic trading replaced in-person trading and 'upstairs' market makers. The exchange-traded index fund was the right vehicle for the moment." — (p. 2)

"Mutual fund assets remain significantly larger than those of ETFs... but ETFs captured nearly all net new inflows over the past decade." — (p. 4–5)

This may be the most telling chart from the proto-book, and it’s one you’ve probably seen from the Investment Company Institute before: ((new ICI Factbook dropped today too!)

When I started in this biz (Bush the First) Wall Street was a sewer-maze of handshakes, favors, and hidden fat margins. It’s not that everything was a scam, it’s just that it was impossible to know whether everything was a scam. From the actual timing of tick-level quote delivery to getting IPO allocations, who you knew mattered a lot. Entering that environment, the ETF wasn’t just a new wrapper—it was a 1,000-year flood wiping clean the marketplace. The ensuing mutual fund apocalypse destroyed the old active management business, and despite the ongoing run of mutual fund conversions and coming (soon) share class issuance, there’s no going back.

Data Nugget:
48% of all US registered fund assets were passive by 2024, up from 19% in 2010​.

Fee Compression: Savior and Curse

"Investors use fees as a key criterion to select an ETF... Competition has driven the fees of the S&P 500 Index ETFs down to the low single digits or even zero." — (p. 6)

"The lower costs of investing in ETFs are also the result of competitive forces... [ETF issuers] have only a handful of 'customers' — the authorized participants." — (p. 5–6)

The headline story of ETF cost savings is completely true, but the easy wins are largely gone.

Read more

So let’s take a break.

Let’s step away from the ETFs you should absolutely not buy, and the ones that quietly don’t deliver while collecting fees. Today, I want to highlight the most boring corner of the market, because it's where actual innovation seems to be happening: nearly-passive bonds.

Here’s the quote:

"For years, the ETF industry has been a race between innovation and obfuscation. Somewhere along the way, we stopped asking if products were designed for investors or for marketing decks. But in the quiet corners of fixed income — where there's no hype and no leverage — folks like F/m Investments and LifeX are quietly rebuilding trust, one coupon payment at a time."

— Dave Nadig, Independent ETF Expert

Today I want to highlight two firms that are pushing the envelope in thoughtful, white-hat directions: F/m Investments and LifeX by Stone Ridge,

IMPORTANT NOTE: I am not currently compensated by these (or any other) ETF firms in any way. That's the point of being independent (please subscribe!). If that changes, I'll be loud about it.

Boring Bonds Made Boringer

We've had super-boring bond ETFs for a while now. In 2010 the first BulletShares ETFs were launched by Claymore (which became Guggenheim Investments, which became Invesco by 2018). These aren't bond-ladders so much as bond-rungs: each ETF holds either Investment Grade, Junk, or Muni bonds all maturing in the same year. So, for example, you could buy BSCY, and get a bunch of AT&T and META bonds all coming due in 2034. And because all the maturities are matched, you can hold BSCY and feel pretty darned confident that between now and then, you'll receive the "Yield to Maturity" of 5.48%, and eventually, in 2034, you'll get all your principal back, assuming no defaults.

These are good white hat products if that pattern of returns matches your need — like, say, you want to buy a fancy car or a year of law school in 10 years. You could put $100k in BSCY, and while there’s SOME risk you might loose some money in a rash of defaults, most likely, you’ll get about $5,000 a year in dividends, and then your $100,000 back at the end. These are successful, good-idea products, and between them, BulletShares and the comparable products from BlackRock and State Street have a combined $57 billion in 94 funds.

But, based on where the assets are, most folks are using these for making big bets on, say, the short end of the corporate bond curve, not building long term income portfolios. (The top ten by size are all corporate bond versions maturing in the next few years.)

F/m Investments: Better (Still Boring) Rungs

In 2022, boutique bond manager F/m Investments (who also run the Oakhurst mutual funds), came out with Benchmark Series: one of the only lineups of ETFs that's easiest to explain with a picture.

Each fund owns the on-the-run Treasury for the appropriate bucket — that is, the most recently issued, highest-liquidity bond(s) that make up the index of bond(s) people mean when they talk about "the yield curve."

It seems nuts now, but until these folks launched, if someone said they wanted to "play the 2s and 10s", how they might be making that trade was open for debate. Futures? Cash bonds? A swap contract?

Now you just buy or short UTWO and UTEN. Honestly it's one of those product suites I am genuinely annoyed I didn't think of for the 25 years we've had Bond ETFs. They only charge 0.15%, which — given they actually have to trade these things to keep the maturities pure — is fine.

Of course that’s not all the issuer does. They just launched a 1–13 month TIPS product (RBIL), which I suspect will be quite popular, and a set of 2-, 3-, and 10-year Investment Grade Corporate Bond ETFs, with, you guessed it, constant 2-, 3-, and 10-year maturities. Most recently, they launched ZTOP which — ignoring the fantastic ticker

— tracks the Bloomberg U.S. High Yield Top 100 Quality Select Equal Weighted Index. That much less fantastic index name is actually a fantastic methodology: it only invests in the largest, most liquid garbage bonds, and equal weights them. That's not sexy. It is honest.

I can't vouch for how well the bond markets are going to do. What I can say is this is a clever-yet-boring approach to bond portfolio building blocks.

White Hat is Simplicity as a Service.

Sidebar: BondBloxx (itself an interesting player for future discussion), has a series that looks like these, but aren’t. Their versions manage each fund to maintain a constant duration (rather than specifically targeting the on-the-run liquid bond. So while UTEN has 1 bond inside right now (The 2/15/35 Treasury), XTEN (the BondBloxx version) owns dozens of bonds that average out to a ten-year duration.

The results aren’t bad, necessarily, they’re just different. In every case I looked at, the F/m version is simply a tighter, lower beta version of the same pattern of returns.

LifeX by Stone Ridge: Bringing Not-so-Sexy Back

All of the above products let the enterprising investor build bond portfolios. And there is no bond portfolio less sexy than a bond ladder:

A bond ladder is just a string of individual bonds all maturing over the next however long. So, a simple bond ladder might be 10 Treasuries ranging from 1 year out to 10. If you intend to hold the bonds till each matures, this ensures a stream of entirely predictable cashflows from semi-annual coupon payments and yearly principal repayments.

It is truly "fixed income" (unless the U.S. defaults), and for that reason it used to be a go-to strategy for financial advisory clients in retirement.

A lot of advisors still ladder bonds or even CDs for some clients when they have really predictable cash needs, but LifeX makes that pointless now.

Each LifeX fund has a maturity year. Each portfolio is designed to hold a ladder of bonds, but instead of semi-annual coupon payments and annual principal return, LifeX distributes both income and principal every month.

The simplest versions pay literally the exact same dollar amount every month until the fund’s due date.

For example: at today’s levels, a $100,000 investment in LifeX’s 2035 Term Income ETF (LDDR — the largest of these) throws off $952 per month — an annualized distribution of $11,421. That’s an 11.4% distribution yield (not your total return). You’re getting paid your principal back over time instead of in once a year chunks. So, visually…

… it’s pretty obvious that what we’re really doing is smoothing the investor’s ride. We’re adding a level of even-greater predictability (and a huge slug of simplicity and efficiency) to the already useful bond ladder.

Sidebar: Not all of LIfeX funds are just like this. Longer-dated "Lifetime Income" versions front-load the payouts on the theory that many retirees' cash needs drop a bit over the long term (say, if you're buying the 2048 version). They also offer one non-dated ETF (LFDR) that makes annually-reset, level monthly distributions on a more traditional perpetual portfolio — currently distributing over 5%, with 30% from return of capital, about which I have no real opinion.

White Hat is honest, useful complexity that serves investors, rather than confusing them. There’s no leverage. No magic yield math. Just a straightforward value proposition: buy this, and it will pay you back, month by month, until it stops. If you die, your heirs get what’s left and a nice step-up in basis to boot from the Return of Capital.

I'm not suggesting that a return-of-capital embedded bond ladder is a magic bullet, but it absolutely does solve a real problem that real human beings have — and at the pretty-darn-reasonable price of 0.25% on average.

White Hat is Boring and Forgetful

Jack Bogle, Vanguard's patron-saint of rational investors, once told me in a green room that "Sometimes boring and forgetful is the best thing you can be."

I think Saint Jack would approve of these folks making boring, well-made products investors can feel confident forgetting about.