Eric Balchunas – The Past, Present & Future of ETFs - [Invest Like the Best, EP.93]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews Bloomberg Intelligence ETF analyst Eric Belchunis on ETF history, structure, taxes, investor behavior, and future growth. The episode explains why ETFs won, where they still struggle, and which new categories—alts, crypto, fixed income factors, ESG, and advisor-led portfolio design—could shape the next decade.

Main Topics: Eric Belchunis’s path to ETFs (Priority: 5/5): He moved from journalism and PR into Bloomberg data work and became an ETF specialist. ETF landscape and flow concentration (Priority: 5/5): Most ETF money still goes to cheap broad beta, while flashy themes grab attention. Active strategies in ETF wrappers (Priority: 5/5): Many “smart beta” ETFs are really active ideas repackaged as rules-based indexes. Taxes, liquidity, and structure (Priority: 5/5): Creation-redemption mechanics make ETFs tax efficient and highly tradable. Behavior and investor discipline (Priority: 4/5): The biggest ETF risk is not the product but investors trading it too much. Future growth areas (Priority: 5/5): Alts, Bitcoin, fixed income factors, ESG, and advisor-driven portfolios are next. Marketing and narrative building (Priority: 4/5): Winning ETF firms use clear stories, personality, and trust, not just product features.

Key Arguments: US equities dominate ETF assets, but most new launches are smart beta or thematic. About 90% of ETF flows go to products charging 20 bps or less. Smart beta is often active investing repackaged into an index with lower fees. ETFs are tax efficient because creations/redemptions usually avoid fund-level gains. The biggest ETF weakness is behavioral: investors may trade too much and erase benefits. VTI is presented as near-perfect: broad exposure, liquidity, low fee, and zero tracking difference. Alt ETFs could grow if strong brands like JPMorgan, Goldman, or Vanguard enter at lower cost. A Bitcoin ETF would likely be far better for investors than GBTC, with tighter pricing. The S&P 500 may be the most distortion-prone benchmark because so much money tracks it. Asset managers must engage directly and humanly with investors to win in a transparent media era.

Data Points: Vanguard/BlackRock fee bucket concentration: about 90% - Belchunis says this share of flows goes to products charging 20 bps or less. Smart beta share of ETF launches: about half - He says roughly half of new ETF launches are smart beta. Active ETF assets: about 1% - He notes actively managed ETFs remain a tiny share of total ETF assets. Active ETF assets if smart beta counted as active: about 20% - He argues most smart beta is active investing repackaged. Active ETF assets in dollar terms: about $700 billion - His estimate of active-like ETF assets when smart beta is included. ETF share of stock market: about 7% - Used in his argument that ETFs are not the sole cause of price distortions. Passive share of stock market: about 16% to 17% - He cites this as the broader passive ownership figure. Passive share of fund assets: 35% - His estimate of passive’s current share of all fund assets. ETF flows last year: $486 billion - He cites this as a recent annual intake into ETFs. Active equity mutual fund flows over four years: a trillion in outflows - He says active equity mutual funds have seen major outflows. Active debt mutual fund flows over four years: about $70 billion - He notes bond funds have held up much better than equity funds. Vanguard total assets: about 5 trillion - Used in a discussion of the firm’s fee generation and scale. Vanguard annual fees: 3.7 billion - He cites the firm’s annual fee revenue estimate. ETF industry revenue: about 7 billion - He contrasts ETF revenue with mutual fund economics. Trading revenue from ETF turnover: another like three - He says ETF trading generates additional revenue, though less than mutual funds. Alt mutual fund assets: about $200 billion - He compares liquid alt mutual funds with alt ETFs. Alt ETF assets: about $2 billion - He uses this gap to show room for growth. Bridgewater ownership: huge owner of IMG - He cites institutional use of emerging-markets ETFs. ARK active share: about 95% - He uses ARK as an example of a high-conviction active ETF. ARK organic asset growth: about 100% last year - He says strong performance drove massive asset growth. DXJ being the first single-ticker marketing success: not quantified - He cites WisdomTree’s Japan currency-hedged ETF as a marketing template. USO roll costs: about 30% a year - He warns that the oil ETF’s structure can be costly despite its plain name.

Pivotal Quotes: "the greatest ticker, the Mona Lisa of ETF tickers ... is Moo" — Eric Belchunis: On why ticker symbols matter in ETF branding and asset gathering. "The art of doing nothing" — Eric Belchunis: His idea for the next phase of investor education and behavior management. "It’s not ETFs that need testing. ... it’s investors and ETF investors that need the testing." — Eric Belchunis: On behavior being the real source of risk, not the wrapper itself.

Implications: ETF winners will likely be the firms that combine low cost with education, brand trust, and behavioral coaching while new categories battle for proof of demand.