ETFs Are Eating the Financial World and They're Not Done Yet

Joe Weisenthal (0:08)

Hello, and welcome to another episode of the Odd Lots Podcast.

I'm Joe Weisenthal, and unfortunately, this is terrible news. My co-host and colleague Tracy Alloway is traveling this week, and couldn't join me for today's episode, so I'm already starting the episode in a bad mood.

Nonetheless, I persist, because I'm very excited about today's topic. Probably one of the biggest stories, themes, whatever you want to call it in finance right now, and that is the rise, the seemingly inexorable rise of the ETF. Exchange traded funds, completely changing the way how people invest, being able to invest in an index or a strategy or all kinds of other stuff, just as simply as buying a stock, completely revolutionizing the industry, striking terror in the hearts of many managers. People say ETFs are this godsend that have made investing much cheaper and simpler for the average person, enabling more complex strategies. Other people say it's going to be the end of capitalism and that it's the road to Marxism. Nothing quite causes controversy like ETFs. Some people think they're gonna be the source of the next systemic risk. So there is literally an endless amount of stuff we could talk about with ETFs. And to do that, we have two great guests who are also my colleagues. Joel Weber, he's the Editor-in-Chief of Bloomberg Markets Magazine. And Eric Balchunas, he is a ETFs Analyst for Bloomberg Intelligence. He's literally written the book about ETFs.

Knows all about how they work. And so today we're going to talk to both of them, or I'm going to talk to both of them, about how ETFs have eaten the finance world and where they're going next. How they're going to evolve, how they're changing the industry every single day. So without further ado, let me welcome Joel and Eric.

Joel Weber (2:11)

Thanks for having us.

Eric Balchunas (2:12)

Thank you.

Joe Weisenthal (2:13)

Thanks to both of you. So Eric, I want to start with you, but you know, both of you just jump in. Let's have a conversation. I always like to make sure that I introduce things correctly. Cause I think, you know, I want to make sure that I set it up. But when you look at the ETF world, and this is what you do at Bloomberg from the minute you get on to the moment you log off.

Joel Weber (2:35)

And even after that.

Joe Weisenthal (2:36)

And even after that. You're thinking about ETFs all the time. This is your life's work, understanding this behemoth.

Was that a reasonable characterization of what's going on?

Eric Balchunas (2:46)

Yeah, I mean, you know, I remember I was in Bloomberg data back in the early 2000s. And the only reason I got ETFs, I was covering mutual funds. I had been a fund reporter back in the day, and I got ETFs assigned to me because the woman covering them went on returning leave and never came back. I remember it was 2006 It was just right after GLD had launched.

And it took me, you know, I can't remember exactly the timeline, but it just took me very quickly to realize that these things were gonna be a big deal. And I just saw an opportunity, so I was already familiar with funds. And I think that when you're familiar with mutual funds and hedge funds and close-end funds, and you start to sniff around the ETF, you realize this thing isn't just like one little notch better than the rest. It's like six notches better. It's a game changer. So I definitely, I guess, life's work seems strong, but I guess it is.

I have been doing it for a decade.

Joe Weisenthal (3:39)

So you mentioned something there that's very interesting, which is the GLD ETF, which is the Spider Gold Shares ETF. It tracks the price of gold. It launched in late 2004

More or less, buying it gives you exposure very directly to the price of gold. And that seems very simple.

You buy this, it holds gold. But it is revolutionary, isn't it? Because prior to the existence of this ETF, if you wanted to have exposure to gold, it was not easy. You had to go out and buy, maybe buy physical gold, and that was difficult, and there was this huge markup, and then you had to figure out. You get a safe, you're gonna figure out how to store it.

Joel Weber (4:19)

Remember the password for the safe.

Joe Weisenthal (4:21)

Remember the password. And suddenly, this very complicated, costly, time-consuming strategy is as simple as buying a share of Microsoft.

Eric Balchunas (4:32)

I think what you're describing is two things that come to mind to me is convenience. I mean, everything in this world that's a business, usually convenience is a big part of why people like it.