Rabbithole: Bloomberg's Eric Balchunas on ETF Innovation

Is there such a thing as too much Hot Sauce?

On today’s Rabbithole podcast over at Excess Returns, I grabbed Eric Balchunas, Senior ETF Analyst at Bloomberg Intelligence, so we could continue the Twitter-skirmish we perpetually fight about wild new ETFs face to face.

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.