MI Rewind: The Bogle Effect w/ Eric Balchunas

23:38And the head of Capital Group, which is a big active mutual fund company, said, I heard you set up a mutually owned fund company. And he said, yeah. And he goes, if you do that, you're going to destroy this industry. Because he knew the flywheel and the upward spiral that would happen. And the fees would get lower and lower the more assets come in, and then more assets would come in, which is exactly what happened. And what's fascinating about that story, why I focus on the book, is that was a year before the index fund was ever filed or registered by Vanguard. In other words, the structure is the thing.

24:06The index fund was a nice byproduct and a perfect match for that structure. But anything that structure did was going to work because it was going to end up lowering fees. And anytime you lower fees in asset management, usually the investors do better. Fees can really get in the way of returns, but people do need to get paid. I have a whole thing in the book about how fees aren't bad if you're starting out. If you run$10 million, you need to charge 1 % to keep the lights on, hire people. what the problem was for active funds in the 80s and 90s is they got to be$30 billion, $40 billion,$100 billion,$200 billion, and they kept the 80 basis point fee.

24:41So you're making 75 times more dollar fees, but the fee still seems small to every investor in the fund, which is 80 basis points. But dollar fees to me are one of the most underreported stories, but it doesn't matter. Investors sniffed it out by realizing, wait, Vanguard actually charges 10 or 5, you charge 80, I'm moving over. But I think active did themselves a disservice by not sharing some of those economies of scale. They didn't even need to go as far as Vanguard. They could have shared just a little and lowered their fees, banked some goodwill, and their outperformance rates would have been better.

25:13So it is a classic business story also of the Steve Jobs rule, which is if you don't cannibalize yourself, somebody else will. And they didn't do any cannibalizing of themselves over the years when they really could have. They had a lot of gravy. And so I do write about why they were disrupted. And I do it gently. Some of these firms are clients, some are adapting. And I probably would have done the same thing. And I say that. I wouldn't have lowered the fees myself. I would have sponsored a sports stadium. I would have hired a bunch of people, gotten a shiny new office. It's human nature. But that's why the book's about this other guy.

25:44Robert Leonard Yeah. He truly revolutionized the industry. One of the ideas that stuck out to me in the book was Vanguard offered this extremely low cost index fund because they wanted to. And that led to all these other companies having to lower their fees because they saw all these assets go into Vanguard. So Vanguard offered these products that had low fees because they wanted to, whereas the other competitors, they were just forced to bring them down. Yeah. And that mattered to a lot of people. I think people can sniff that kind of thing out. That said, the people who lowered them, they swallowed their pride and said, okay, we've got to get into this business.

26:18Some of those companies are very well run like BlackRock and Fidelity, and they have customers who like them. So in a way, as Bogle said, if they have to be forced kicking and screaming, there's a lot of social work from them doing that. And this is also part of why I wanted to write the book is that I just talked about Vanguard taking in the money, but most of the rest goes into Vanguard funds that people just basically were sort of forced to create because of them. And that explains almost all the money invested in America today. In a way, even though nobody else copied the mutual ownership structure, they kind of are governed by it in a way.

26:49This is what Bogle did. And Bogle went even further in one of his quotes, which I didn't even know until I researched this project, was he said that we'll know Vanguard's mission has begun to create a better world for investors when our market share starts to erode. And again, I found that really wild because can you find anywhere else in the history of asset management, if not business, where the CEO tells the staff our market share eroding would be good and it would create a better world. And that, I think, speaks to a different trip he was on. This guy was not out to do what most people do in capitalism, which is to make a lot of money.

27:23He was just out to do something different. And it's fascinating. And the thing is, Vanguard's market share is not going to erode for a while. It will eventually, but it's still on its own, this hockey stick trajectory up. So his dream is really far from even being realized, let alone over. Robert Leonard Yeah, that reminds me of a stat you mentioned in the book where Vanguard currently has 29 % market share in assets, yet they only bring in 5 % of the revenues. And that stat alone is just very telling. And I want to talk a little bit more about John Bogle. In the foreword for your book, Matt Hugen calls Bogle a personal hero of his.

27:58And in the intro of your book, there's a Warren Buffett quote. It says, if a statue is ever created to honor the person who has done the most for American investors, the hands-down choice should be John Bogle. Now, why has Bogle been so monumental to everyday retail investors? And what might some people miss about the impact he made? So over the 45-year period that Vanguard's existed, I come up with about a trillion dollars that they have saved investors. That's not how much money Vanguard has taken in or has moved. that's how much revenue would be in Wall Street versus in an investor's pocket.

28:33That is a stunning amount of money. So you could argue he was the greatest philanthropist ever, just for that effort. And people know this. I mean, I'm not inventing... I didn't uncover Bogle out of like... He wasn't hiding. People may have heard of him, but I will say it was a millennial publication that gave me somewhat of the motivation to write the book, because I wrote a story for Bloomberg Opinion about how the money savings, I did the calculations to get to that number. Then somebody from Deadspin wrote a piece about my piece with a much more millennial type style. And then someone from the Billfold, which is a millennial publication, basically wrote about that.

29:11And their headline was, some guy you've never heard of saved us all billions of dollars, which kind of sounds like a BuzzFeed headline. And there's some guy I thought, okay, well, clearly, maybe the younger generation doesn't know. And it's a good story. And it's a timeless story. This story, it's captured, it will last, hopefully will inspire younger people as well. But I had to get over the fact and I was challenged by the fact people did know who he was, a lot of people in the industry, especially. So I went above and beyond with data. And I went above and beyond by interviewing so many people who could put their two cents in.

29:43And all of the interviews you read are exclusive interviews I did for the book. I had to interview somebody for an hour, listen to it back on the recorder, take like, say, two pages of the best those two pages. So you're seeing the best stuff out of 50, 60 hours of interviews. And I did that because I'm trying to really bring to life something and offer something new to a story that is somewhat known. But that's, I hope, of what to accomplish. But I do think it's interesting to read a book about somebody on Wall Street who did something good also, because most of the stuff you see and read in the movies is The Wolf of Wall Street, Wall Street, Gordon Gekko, The Big Short.

30:21It's a lot of people just trying to actually rip off small investors or they blow themselves up. This is probably the biggest and best happy ending of a Wall Street story. But that's also a challenge because people like dirt and juice. And there's not a ton of that in the year. I try my best to give conflict and stuff, but there is no destruction or fall in the end. But hopefully the amount of impact that I'm able to capture and all of those interviews helps offset that. Yeah. I think what you're getting as just people came around to really trust him and trust Vanguard. He's dealing with people's real money.

30:56And there's almost this stigma, like you mentioned, around Wall Street and society that they're just out there to take your money. And this has led to many people, sadly, just completely avoiding the stock market. I agree that he has made just a tremendous impact on the financial sector that many people don't appreciate. And it reminds me of Buffett, how people would invest fortunes with him because not only was he a genius, many of the investors would bet their life savings on Berkshire stock because they knew they could trust Buffett and Munger and the board. And I think something similar applies here to Bogle.

31:29Robert Leonard Yeah. And you bring up the word trust. And I get asked this question a lot from people. They're like, well, why is Vanguard still taking in a billion a day when all these other companies have low-cost index funds? And some of them, by the way, have gotten cheaper. Bank of New York has zero fee total market ETFs these days. I mean, it's only three basis points cheaper, but Vanguard isn't the cheapest anymore. Even Fidelity offers cheaper index funds. Remember that Billy Joel song called It's a Matter of Trust? And I keep thinking of that when I think of the answer, because trust is huge.

31:56Trust takes a long time to build, whether it's a company or a relationship, but it's built over time. And people have so much trust for this company. They are Boy Scouts, I think, and seen as just very honest and trustworthy, and especially when Vogel led it. And he frequently called all the investors to honest to God, real human beings with souls. And he wanted Vanguard to stick to that and remember that these people are all actual people. It's not just a bunch of numbers. And that's something that Vanguard is challenged with today. There are now 30 million investors, 8 trillion. And there's been some complaints about the customer service that they have is not as efficient.

32:31And Vogel feared this. He feared it getting so big that it'd become like a bureaucracy where people wouldn't have that connection with the investor base. That said, Vanguard has so much trust built up, they can withstand a little bit of an issue here or there. And it's still a very sturdy foundation. Which by the way, what's interesting about Vanguard is 97 % of the assets that are in Vanguard came after Bogle stepped down as CEO. This guy built a foundation that is so sturdy. And that's what also I thought was fascinating is 87 % of Apple's market cap came after Steve Jobs left. There are cases of very visionary people who do all what they do, and then it just takes off, like that flywheel effect that you mentioned.

33:15But the foundation is hugely strong, but it doesn't mean it can't change. And Bogle, in many of his books, said Vanguard is the fourth company to be the leader in the fund industry by market share. And the three others thought they were going to be around for a while too. and they fell from grace. How will we make sure Vanguard doesn't do that? And his two big things are, we don't really focus on active funds. We just give you the market. Therefore, you can depend on that. That's different than buying into a hot active manager. The second thing was the treatment of and seeing the investors as human beings and acting that way.

33:47Those two things he thought, as long as we do that, we'll be good. What do you think drove Bogle to operate the business the way he did? He certainly didn't do it for the money. So I'm curious what your thoughts are around what drove him to set up the company the way you did in that mutual structure. I asked everybody that question. And everybody's answer was, that's a good question. Because again, it's just not normal to turn over all the future profits and then make a whole career out of saying this is the way to go. So I have a chapter called Explaining Vogel, where I try to break down the ingredients that would make this person.

34:17And there's a couple of things I think that are important. One, he grew up in the Great Depression. He knows what it's like not to have anything. He's also of the World War II generation, which was like, I remember my grandmother, she didn't throw anything away, like Sprite cans in her closet, or you couldn't even see the Sprite label anymore, but she would not throw them away. Bogle, I was told by his son, wore the same khakis for 50 years. So he was just a guy who saved and didn't spend. And that's a classic World War II generation. He's not a boomer. So I think the Great Depression helped. His great grandfather was also a sort of antagonist and populist.

34:50And he wrote about the fireman's insurance in the late 1800s. And he sounded a lot like Bogle. So there's a little DNA involved. I also thought that the 60s, that period I mentioned where he took the bait of the high flying gross era and tried to sell donuts. And when it blew up in his face, he thought, I'm never selling donuts again. So real life experience is almost better than anything you can read. If you feel it, go through it. And that happened early. He was in his early 40s when he set up Vanguard. So he had that good lesson of don't take the market bait. These are cycles. Just stick to the bagels.

35:23And I think that was important. And I also think Princeton, obviously, was a great university for him. But the other thing is his heart. Here's a guy who was told he wouldn't live past age 35. He had a very bad heart. Had to go to the hospital constantly. When he played squash and racquetball, they would bring it to the lair onto the court with him just in case he passed out. He had a heart transplant later in life in the 90s. And so this guy was always... Death was always lingering. And I think it actually motivated him to have a purposeful life in a way. And then I also think things like, he was a big, big Bible guy.

35:55Not that he was like hardcore, but he loved the text. The text is a lot about the underdog eating the big guy. And he always bring up that quote of the cornerstone, the rejected stone becomes the capstone. And he loved the stories in the Bible. Although he wasn't heavy-handed religion, but he loved the stories. And I think he felt he was a character in that book, to be honest with you. I think he really got a lot of that. And he also is a fan of poetry, old poetry in the 18th century. So I think he almost does that phrase, make your life the own movie you want to see. And I think he did a lot of that.

36:26And I think this mutual ownership structure gave him such a sense of purpose. And it filled a lot of what he needed. And what he needed wasn't money, it was this. And I think that's really what drove him. Again, that's unusual for this industry. I love it. The rise in the assets under management for Vanguard over the years is just astonishing. They started in 1975. They hit a trillion dollars in AUM in 2006. And today their assets sit at around 7.2 trillion. And it makes me wonder if you've studied the idea if there is an index fund bubble. We have these trillions of dollars flowing into index funds.

37:03These people are buying every month regardless of the prices of these stocks that are in the funds. So I'm curious what your general thoughts are on that idea. Robert Leonard I try to break this down in a chapter eight called Some Worry with quotes, because some are worrying. And I think most of it's meaningless. Look, at the end of the day, all that's really happened over the past 20 years is people went from buying an active sort of, let's say, fidelity fund that owns the popular stocks, but maybe in weightings that are slightly different than the benchmark. But you're still owning JP Morgan and Apple and Amazon and AT &T.

37:35We call that closet indexing, where you're pretty close to the indexing. We charge 70 bps. All that's happened is people went from closet indexing to actual indexing. So they're just owning all those stocks for three basis points. The metaphor I use is the CD to the MP3. I think indexing and ETFs are similar to the MP3. They're just way cheaper and more flexible to get the same thing. It's not like indexing has invented stock investing, just like the MP3 didn't invent music. You're just buying whatever music you like in a better way, cheaper way. It's a format change. That said, index funds do buy stocks indiscriminately.

38:08If the stock has a higher market cap, it's going to buy it more because that's where it sits in the index. The market cap, though, is determined by active managers. And that's why the S &P 500 can have a stock like Macy's fall out of it and Tesla comes into it. The reason Tesla got into it is because active managers like Tesla. And the reason Macy's fell is because active managers hated Tesla. Active controls what's in the indexes. So in the indexes, you are somewhat riding the coattails of active, but they are definitely dictating pricing. That said, let's say a stock like GE, which went to the gutter in early 2018, I believe it was, went down 50 % in like half a year because of the bad earnings report.

38:46And then ETFs and index funds, the LG took in a ton of money during that period, but it still went down 50%. Now, would it have gone down 52 % if it wasn't for those bids coming in from the index fund flows? Maybe. So I think if anything, index and the rise of indexing might put a little bit of a baseline on stock sell-offs because there's a bid coming in. But overall, I think anybody over the past couple of years can see with meme stocks and Tesla and Peloton that indexing is not controlling prices here. Otherwise, we wouldn't see some of these stocks go up and down. So until we stop seeing that, I'm fine with this.

39:19I mean, indexing is a great way for people to get the value. Also, keep in mind, indexing is not uniform. The S &P 500 actually has criteria to get in. There's a human committee that has absolute discretion over it. That's why Tesla was late to get in. And then the Russell 1000 has their rules. Then there's like, oh, I'm going to own maybe the total market, that's different. And then there's different indices within mid-cap and small-cap. And then you get to international. Now some hold China, some don't. Indexing isn't really all uniform either. Just like active isn't that active either. So in the book, I sort of try to explain to people that the real trend here isn't active to passive because some act is very passive and some passive funds are pretty active-ish.

39:58It's not broker to RAA, which is also another big trend. And it's not mutual fund ETF, which is a trend. It's high cost to low cost. Within every one of those categories, you just see people, I call it the great cost migration. So I try to explain that that's really what's happening here. Also, one of those steps that I think your listeners will like is that if you take the last 10 years, people are like, oh, well, passive equity index mutual funds and ETFs took in$2 trillion in assets. And some people even say, they're creating a stock market bubble. I'm like, dude, the stock market grew by$43 trillion over those 10 years.

40:33There are many other forces at play here. Households, institutions, hedge funds, foreign investors, ETFs and index funds, or quote, passive, own about 17 % of the stock market. So they're still a minority owner. Households own 40 % of the stock market. Again, there's plenty of things going on. And the other thing is a lot of times people say, oh, well, indexing ETFs distort the market. They distort things. I think distorted is the natural state of the market. Because then those people will also say, well, the Fed is distorting the market or options. The rise of options trading by Robinhood people is distorting the market.

41:08So distorting the market has now become the way active managers sort of skate their underperformance or frustration with how things are going. Because going back, I had this guy who's a history buff that I interview. This distorting thing and claims of distortion has been going on since the market started. It's just the way it goes. People always think it's distorted. They always worry. And so, I don't know. I think most of it is way overblown from parties that might feel a little threatened by this potential trend or this trend. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message.

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44:53That's theinvestorspodcast.com slash TIP-finance. All right, back to the show. You mentioned a ton of great points there. And I can't help but think of recently, Facebook and Netflix will miss earnings and they'll go down 20 % or 25%. And that's not like the ETFs are just dumping their Facebook and Netflix shares. It's because these active traders and these algorithms, it's hard to say that ETFs have this just massive impact on the market when you see these 20%, 25 % fluctuations. And you mentioned one big chunk of Vanguard's AUM, and that is their advisory business, which I don't think a lot of people know about.

45:32I personally didn't know a lot about it before reading your book. How has Vanguard helped transform this industry in particular? Well, it's just beginning. They're kind of where Vanguard was in the 80s with mutual funds. They just started it like five, six years ago. And they really started it because there used to be, you had to go find Vanguard on your own. So you went as an individual investor and started investing with Vanguard, sort of do-it-yourself style. Those people are now pretty wealthy. They're boomers. They're older. Even though millennials like Vanguard too, those early investors are wealthy.

46:03They need help now with estate planning and taxes and this stuff. So Vanguard's like, okay, well, why don't we help we create wealth management for them? So it was originally created to help the Vanguard mutual fund investors that were already there. But the good thing is, and the reason I think it will grow is that it charges a fraction of what a normal advisor charges, and you get a certified financial planner. So you get a human investor. It's not a robo. It's actual advice and planning. I wouldn't say it's the level of advice and plan that some very mega wealth of people will get from their own personal advisor.

46:31It's not that level. It's a little more widget-ish, but it's still powerful because it charges between 5 and 30 basis points. An advisor, they're more like 80 to 100 basis points. So they have 300 billion about in assets. They have 1 ,000 certified financial planners already employed there. And as we know, the more assets they get, they're going to lower the fees because that's just how they roll. I have no reason to believe that Vanguard won't impact a big chunk of the advisory business, which ironically, a lot of advisors really helped force and expedite the move out of active mutual funds into ETFs and mutual funds, because they switched from getting paid by the mutual fund in form of a kickback or a commission or a load to getting a percentage of the client assets.

47:10But the percentage they take is like 1%. So in a weird way, they're kind of making a similar mistake that the active managers made in the 80s and 90s. As they get bigger and bigger, I would advise them to share those economies of scale now and create goodwill before the Vanguard effect hits them too. But I think there's a good chunk of advisors that will get disrupted. And Vanguard isn't alone. Schwab has an advisory business. And the robo-advisories, like Betterment, I think really spearheaded a lot of this. A lot of younger people use Betterment for the same reason. They're like 20, 25 basis points.

47:39And I think for most people, that's fine. I will say the 1 % of advisors, there's going to always be a market for real high need wealthy people or people who are specialized, say they just service the bass fishermen of the world. And if you can get into one community or a local area, or do a specialty, let's say you're really good at the tax part, those people probably are going to do fine, even with Vanguard in the picture. Vanguard doesn't disrupt everybody. They just tend to disrupt anybody overcharging for an under-delivering. And again, that's why I call it the Bogle effect and not rise of the index fund, because this effect is not limited to index funds.

48:14And being an advisor, by the way, if you're going to be a true advisor, wealth manager to wealthy people, you can't just have mutual funds and ETFs. You have to have private equity. And so Vanguard just partnered with a private equity firm. Imagine if they get into that business. They charge a lot over there. And then it's possible they move to crypto. They keep denying it. I actually wrote a bit saying they will be in crypto within 10 years. But the more they have to service very wealthy people who want things that are not just mutual funds, it's going to push them into all these non-Boglian places.

48:42And it's going to get interesting. The wealth management isn't just something to watch for the wealth management business. it's where it's going to push Vanguard. And again, that also inspired me writing the book because I wanted to try to explain to people, this is way bigger than the index button. Robert Leonard You mentioned crypto, and I'm pretty interested in Bitcoin in the cryptocurrency space. One of the big issues is that Coinbase and all these other companies are charging transaction fees in excess of, say, 1%. And I just think of Coinbase, Vanguard's going to eventually come out to eat your lunch, Vanguard doesn't, it's going to be Fidelity or whoever else is ahead of the curve on that.

49:19When the Bitcoin crowd saw that all the ETF people were so excited about the spot ETF, I think they felt like, oh, we're about to rock the ETF world. All these fuddy-duddy advisors and ETFs and this. And I said, guys, be careful what you wish for. ETF world could very much rock the crypto world, at least the intermediaries. The intermediaries, the exchanges in particular, are paid a lot. The fees are ridiculous. They're almost, I would say, make stockbrokers from the 70s jealous. Once you get a spot Bitcoin ETF, and once the BlackRocks and potentially the Vanguard's come in and have a little price competition, in five or six years, what you're going to have is a spot Bitcoin ETF, a spot crypto basket ETF.

49:59They're going to charge, my guess is, they'll get down to 30. Custody will keep it above like 10, maybe 30, 40 basis points, and it will trade at a 0.01 % spread. And you're getting quite commission free. So the trading cost is nothing. And you pay 30 basis points for them to just take care of everything. That is going to sweep the country. And that's a powerful thing. And so the exchanges are going to get disrupted. And the market makers who can keep that 0.01%, that's important. Those market makers, I did a study that the crypto exchanges make four times the revenue that ETF market makers make for doing 136th the volume.

50:35Think about that. That's how efficient, lean, and mean the ETF world is versus the crypto exchanges. That said, capitalism is a sport and it's a great way to get new inventions and the first to arrive should get rewarded. So to the people who are getting rich in crypto and set up the exchanges early, hey, look, that's capitalism. I'm not blaming them. I'm just saying that compression, you're going to get cost compression one way or the other. I think a spot Bitcoin ETF though, even though they want it because it'll make the price go up and they love the idea that the Bitcoin ETF will open up all this advisor money because advisors tend to like that structure and advisors have 26 trillion in assets.

51:13So even like a 5 % allocation is a ton of money. I'd still think if you're an intermediary crypto, I would fear the spot Bitcoin ETF. I mean, I'd like it because it probably will help the price go up a little bit because you'd have more people coming into crypto, but I would fear your margins because this is just what ETFs do. Robert Leonard For investors in Bitcoin, you would expect a Bitcoin ETF to be positive for Bitcoin in the crypto space. Am I understanding you correctly there? Robert Leonard Eventually, yeah. There's a real problem with Gary Gensler, who he wants to show, I think, that he can put some regulation around the crypto exchanges.

51:45As my colleague, James Savert said, he's sort of holding the spot Bitcoin ETF hostage. But the SEC put out a proposal to change the definition of the word exchange. And if it goes through and they're able to do this, crypto exchanges will instantly be under the SEC's regulatory eyes. Once that happens, I think Gensler's fine with ETF. He just wants it all to be within the Gensler world. He wants to oversee everything. That we see maybe summer 2023. I don't think all that needs to happen. My personal opinion is they should have approved it seven years ago. Because an ETF, honestly, if you're worried about the exchanges, is if a spot Bitcoin ETF is approved, obviously, we just talked about how it would cause cost compression, which is good for investors.

52:22The market makers who are big and have a lot of liquidity, they're not going to mess with shady exchanges in order to make markets in crypto. So if you want to work and get those big time US market maker dollars on your exchange, you're going to have to shape up. So it creates a natural police force by just approving the spot Bitcoin ETF. But I think that Gensler himself wants control, wants to check a box on his resume in order to... And that view is just something in the way. But I think if you polled 100 people, 98.99 would say, yeah, a spot Bitcoin ETF makes a lot of sense. And it certainly makes more sense than a futures Bitcoin ETF, which introduces 10 % to 20 % roll costs a year, which makes the crypto exchanges seem like child's play in terms of cost.

53:04This is the world we're in. We're all cheering it on. And I even... I wore a shirt to the recent ETF conference that I got custom made it says, and still no spot Bitcoin ETF. Because a lot of times on Twitter, we'll see the SEC approve something like double leverage VIX futures ETF. We'll be like, and still no spot ETF. Or we'll see in Europe that they're already in a fee war over Polkadot ETPs. I haven't heard of some of the stuff they're launching out in Europe. And obviously that phrase, and yet still no spot Bitcoin ETF, because the products they approve and the gap of time keeps getting larger and larger where that phrase makes more and more sense and comes up more and more often.

53:39And it's a big deal for us. We've read about it a lot. And obviously, we think this Bitcoin ETF category could be easily 100 billion, 200 billion pretty quickly. A lot of money could be, is at stake here. And then, of course, there's the race. If you're an issuer and you're out first, you're an instant millionaire. It's going to get crazy. I think we want them to approve three or four at once at least to give it a fair fight. But whoever's out first wins. I mean, the futures ETF pro shares had a, I don't know, three or four day head start, and they probably have 90 % of the assets and volume. That's why this is fun to cover, A, because of all the stuff at play, probably one of our top three topics that we cover because of all of the drama and what's at stake.

54:14It's endlessly fascinating. Yeah. I constantly see the grayscale guys posted on Twitter saying that they're pushing for the ETF. They're pushing for the ETF while they're charging a 2 % fee and have a 25 % discount on their net asset value. Now, even with Vanguard, as big as they are today, I'm curious what your take is on the role of an actively managed fund. Bogle's son was actually an active manager himself, and he was actually supportive of him choosing that path. So what are your thoughts around the role an actively managed fund can play? Bogle wasn't necessarily anti-active. And I talked to John Bogle Jr.

54:48And he said that his father always said, good luck to you. It's a tough business, but some people can succeed. He never said active couldn't succeed. He said as a group, it's largely detracts from value because only the costs are so much that they just eat up a lot of the return. And again, they're all trading with each other. So only some can win, right? And then when you X out costs, you see the majority of them lose after costs. That's all Bogle was saying. I will say Bogle was proud of some of their active funds at Vanguard. PrimeCap is one and the Wellington Fund. And he writes about them a lot.

55:19Although he doesn't say like, oh, our active funds are so good because the manager has a PhD or this formula is so good. He really just raves on how the ownership structure was able to get their fees down low, and the fund doesn't trade a lot. And by removing those costs, it lets the active fund have a better chance at success. And it's like bringing a gun to a knife fight in a way. And so that section I call Bogle metrics, because it almost seems like Sabre metrics, where in Moneyball, the A's manager valued things like on-base percentage more than batting average. So he didn't look at the sexy stats.

55:51He looked at some of the ones over here and built a team of lower-cost players. So I feel Bogle metrics is how Bogle saw active. At the end of the day, I think Bogle, because Vanguard does have plenty of active funds, what he was really about was stewardship. And I think he felt some of the active funds weren't good stewards in not sharing those economies of scale. And that, I think, he thought was the problem. Not that they were active per se. And he also goes to great lengths, even though he's pretty savage, to say that these are nice people, they're smart people, that's not their problem. The problem is they just take too much out in costs and it's like trying to start a race like 200 yards behind the starting line.

56:30And you have to make that up just to get even with the runners. And that was his problem. And that is a problem. It's not really disputable. The math is there. It's hard. So where I think active is going to go now is people are not going to use the active that sort of takes little risks outside of the benchmark. They're just going to buy the benchmark in a cheap index fund. But what they're going to look for, as we talked about earlier, is crazy high active share active like ARK or thematic investing something that can complement it. So active will still be there. It's just going to be a supporting player, I think, in the portfolio.

57:02And it's going to have to be very different. We actually have a theme we're working on this year that says that active share, which is how different you are from the benchmark, is going to replace alpha as the most important metric for an active manager to show. And active share doesn't necessarily mean alpha. And that's a lot of people steeped in studying this stuff are going to find that hard to swallow because alpha is supposed to be what you're trying to get. I think institutions will still like Alpha, but I think for the advisors and the portfolios that want passive, you're going to prioritize how different you are, because they want a lottery ticket.

57:33They want the chance at a home run in that outer layer. They don't want the same stocks put on top of the same stocks they own, but with, oh, you had some Alpha in the past, let me try to get that and double up. I just don't think that's going to happen. So Active is not going away. It's just evolving. And honestly, it's evolving because of what Vogel did. He's forced it to become supportive and different. But honestly, if you're an active manager, and I talked to the guy from the Janus 20, which was a concentrated active fund that was like ARK back in the day, I've got to think that they might be more happy ultimately buying their 20, 30 best ideas.

58:06Instead of buying the index and like, should we overweight Amazon at 3 % instead of 2%, I honestly think that's going to be more fun for them. Or offering up some private equity, or even crypto, crypto trading, NFT trading. I think active is going to find more fun and excitement away from that sort of closet indexing active anyway. So it could be a win-win for everybody. Robert Leonard Are there any trends in the ETF space you're looking at or any trends you're excited about? One of the things we found that we found has a lot of value is you've got dirt cheap and shiny objects. We know those are two viable lanes, but there's a third lane opening, which is package trades.

58:41And this is where the SEC relaxed rules where you can actually use derivatives more liberally in an ETF. So there's a few companies, Simplify in particular comes to mind that are able to use options and futures and derivatives and swaps in a way to really sculpt some interesting return streams and provide hedges, especially with the 60-40, maybe both going down for a while because they both went up for a while. Some of these package trades that offer non-correlated returns, hedge fund type strategies, I think they're going to find a home. I think that is a lane that could grow. And I think it also shows that the ETF industry isn't just like SPY, it's just a wrapper.

59:19And you can put a lot of interesting things in that wrapper. And I think that outside of Bitcoin and crypto is probably the most interesting lane, which is using derivatives to sculpt return streams. There's even an issue that has innovator buffer shares where it says the first 5 % of the loss is on you, but from 5 % to 30, you don't have to suffer. If it goes over 30, then you're back on the hook. And then it will do it like up to 10, over 10. It basically got all these ways to limit your downside. Of course, you have to limit a little upside too. But these kind of targeted outcomes are going to be interesting.

59:51And I'm excited. That's where a lot of the innovation is happening. That is very interesting. Now, Eric, thank you so much for joining me. I loved your book and I'm really, really glad you took the time to come onto the show today. Before we close out the episode, where can the audience go to connect with you and find out more about your new book? Yeah, sure. First of all, thank you for having me. I had a great time talking to you. I guess you could go to Amazon to buy the book. That's probably the easiest, most direct way. But then to find me, I'm on Twitter at Eric Valchunas. Believe it or not, that handle was not taken.

1:00:22I'm one of the few people, anywhere I sign up for a social media account, my name is totally available. And I think Twitter is probably the best place. I have my DMs open. I'm pretty available. I've had people from Rutgers where I went to college, reach out to ask for some career advice. I'll sometimes answer a question there. Sometimes it gets some crazy that I'm just not replying to. But that's probably the best way to reach me. I also put out little sampler platter charts and stuff from our research. You get an idea of what I do. Those are the two places to find me. I will also plug my podcast, which is called Trillions, which is all about the ETF world.

1:00:52That's anywhere that you can find podcasts. And I do a TV show with Matt Miller and Katie Greifeld called ETF IQ on Bloomberg TV every Monday at 1pm. You can always go to ETFIQ on the internet and find all the past episodes. That's a fun show because it's very aesthetic. We have graphics and we have cool guests. A lot of people who we have on become bigger deals later. We had Kathy Wood on four or five years ago. That show and the Sculpted Returns I just talked about, we had that guy on two days ago, the guy who runs Simplify. It's a good show to get ahead of what's happening because I always think ETFs are the Silicon Valley of the investing world and that's how we cover them.

1:01:28So anyway, that's how you can find me in the book. And I'll end the plug there. That's plenty. Awesome. Thank you so much, Eric. Thank you. All right. I hope you enjoyed today's episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you've been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you're on. This will really help us in the search algorithm so others can discover the show as well. And if you haven't already done so, be sure to check out our website, theinvestorspodcast.com.

1:02:01There you will find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional.

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