At The Money: The Flood of New ETFs

Episode Summary

Executive Summary: In this podcast, Dave Noddig, president of ETF.com, discusses the explosive growth of ETFs, with 600 new launches in early 2025 and potentially thousands more. He highlights the dominance of low-cost index ETFs for core investing, but notes a surge in expensive, speculative products like single-stock and leveraged ETFs. The conversation covers crypto ETFs, share class relief, and the tax advantages of ETFs over mutual funds, concluding that ETFs are the future of asset management.

Main Topics: ETF Industry Growth and Trends (Priority: 5/5): Discussion of the rapid increase in ETF launches, with 600 in the first eight months of 2025, and the shift towards expensive, niche products alongside traditional low-cost index funds. Low-Cost vs. High-Cost ETFs (Priority: 5/5): Comparison of cheap index-based ETFs (e.g., S&P 500) that dominate assets versus new expensive products (over 1% fees) that generate significant revenue but are speculative. Crypto ETFs and Innovation (Priority: 4/5): Exploration of crypto ETFs like BlackRock's iBit, which grew to $82 billion, and the upcoming launch of ETFs for other coins like Ethereum and Solana, including staked versions. Single-Stock and Leveraged ETFs (Priority: 4/5): Analysis of new single-stock ETFs offering 2x, inverse, or options-based exposure, which are expensive and suited for traders, not long-term investors. Share Class Relief and ETF Expansion (Priority: 3/5): Explanation of how expired Vanguard patents allow other firms to create ETF share classes for mutual funds, potentially adding thousands of new ETFs. Tax Efficiency of ETFs vs. Mutual Funds (Priority: 3/5): Comparison highlighting ETFs' tax fairness, as mutual funds distribute capital gains to all investors when others sell, while ETFs avoid this through creation/redemption mechanisms.

Key Arguments: Most ETF assets will continue to flow into low-cost index products (e.g., S&P 500, broad bonds) because they are hard to beat and offer institutional prices. The industry is launching many expensive, speculative ETFs (e.g., leveraged, single-stock) that generate high revenue but are inappropriate for most long-term investors. Crypto ETFs like iBit have been beneficial for average investors by solving custody issues and providing orderly exposure, despite crypto purist objections. The permissive SEC environment is leading to a flood of single-stock ETFs with various leverage and options strategies, potentially creating thousands of new products. Share class relief will allow mutual funds to offer ETF share classes, dramatically increasing the number of ETFs and improving tax efficiency. ETFs are inherently more tax-fair than mutual funds because they avoid distributing capital gains to remaining investors when others sell. The ETF structure is the most efficient vehicle for investment exposures and will dominate asset management, with tokenization as a potential future replacement.

Data Points: New ETF launches in first 8 months of 2025: 600 - Mentioned as a sign of explosive growth, with expectations of 800-900 by year-end. Implied revenue from flows for products over 1% fee: 25% - A significant portion of new money is going into expensive ETFs. BlackRock iBit ETF assets: $82 billion - Launched at $5 billion, it is one of the fastest asset accumulators ever. Number of stocks in Wilshire 5000: 3,500 - Compared to potential thousands of new ETFs, highlighting the proliferation. Potential new ETFs from share class relief: 5,000-6,000 - If all filers convert, this could be the scale of new ETFs. SEC applications for share class relief: 70+ - Indicates imminent approval and subsequent flood of new products.

Pivotal Quotes: "Most of the money is going to continue to flow into low-cost asset allocation targets, right? The SP 500, broad bonds, broad commodities at very, very cheap institutional prices. It's just hard to beat that." — Dave Noddig: Emphasizing the enduring dominance of low-cost index ETFs for core investing. "The implied revenue of the industry now has, you know, probably about 25% of the implied revenue from flow is going to products that cost over 1%." — Dave Noddig: Highlighting the significant revenue from expensive, speculative ETFs despite their niche use. "The ETF structure is the most efficient vehicle we've come up with for taking exposures and getting them traded on exchanges. And it's hard for me to see how we're going to make it any more efficient." — Dave Noddig: Concluding that ETFs are the future of asset management due to their efficiency.

Implications: Investors should stick with low-cost index ETFs for core portfolios, but be cautious with expensive, speculative products like single-stock or leveraged ETFs. The ETF industry will continue to expand rapidly, offering more choices but also more risks, especially for inexperienced investors.