In this week’s ETF Prime, host Nate Geraci talks to ETF Trends financial futurist Dave Nadig about the potential ramifications of relentless flows in passive investing strategies. Fidelity’s Greg Friedman is also on hand to offer perspective on thematic ETFs. Finally, Kelly Ye from CoinDesk Indicies discusses current crypto markets and the future of investing in digital assets.
In a recent article, “The Ethics of Redux Indexing,” Nadig explored the idea of the growth of passive investing and the potential ramifications. These insightful takeaways were worth exploring since Nadig and Geraci are the proponents of passive investing as a whole.
Looking at the impact of passive flows and how price discovery actually works in indices, Nadig has been keeping tabs on the progress of this line of thinking, which prompted the previously mentioned article. There were three key questions to explore – 1) Does the current dominance of the passive strategy in flows have an impact on the functioning of the markets? 2) If so, is it possible to determine how in a way that might influence the decisions we make as investors? 3) Does the pooled property create winners or losers in a way that is not representative of this property?
Digging into where these questions come from, Nadig thinks that while the logic suggested by experts (and the calculations to back it up) for the efficient markets hypothesis scares some people, many rational people already know that this hypothesis doesn’t hasn’t been proven for some time. while.
Examining why there is a higher multiplier for money invested in an index fund, Nadig notes that several explanations are beginning to establish an understanding. Simply put, “If you’re a market maker,” says Nadig, “And you have to sell someone your Tesla that you have in stock to make a trade, that’s an easier thing to do in terms of inventory and liquidity management in your book rather than doing it with 500 stocks at once.
So it’s about understanding that there are many ways to substitute for a large company in a series of stocks to find similar exposure, while it’s very difficult to find a substitute for the top 1000 stocks in the States -United.
As for what to expect, if everything Nadig says ends up being completely verified (which doesn’t mean that anything is necessarily wrong), it would mean that the characteristics of the markets are different from what to what to expect. “That means there’s a reason to expect long-term flows to continue to support markets regardless of short-term volatility…until it doesn’t.”
“We have to be careful of these tipping points,” adds Nadig. Sitting on either side would mean that the markets will move more than expected.
Later in the show, Geraci is joined by Greg Friedman, head of ETF management and strategy at Fidelity. The company has continued to grow its ETF business (currently at over $30 billion). Additionally, they have become more aggressive in launching thematic ETFs, including, most recently, the Fidelity Crytpo Industry and Digital Payments ETF (FDIG) and the Fidelity Metaverse ETF (FMET). Speaking to Geraci, Friedman has some thoughts on how investors should view crypto longer term.
As for what has driven the recent production of thematic ETFs, Friedman explains that it comes down to customer demand and trying to solve their financial needs. There are all kinds of things, such as the metaverse, cryptography, and cloud computing, that people have a view on and want to be a part of in some way. Fidelity sees this and wants to have a way to provide a product that meets this demand while still feeling unique.
As for the overall strategy on the ETF side, Friedman notes that it’s all about feeling different and adding value. He says, “We have always focused on innovating the value of choice. In this regard, the focus is on smart beta, active and thematic investing.
Closing the show this week, Geraci is joined by Kelly Ye, Head of Research at CoinDesk Indicies, who is there to discuss the future of crypto. She has some thoughts on how things have been going lately, with crypto essentially being cut in half. There are also discussions about what CoinDesk is doing as they are building a powerful indexing business.
As for what Ye examines to determine which aspects of cryptography are most interesting, she notes how important it is to think about their use case. Then there is the underlying technology. This understanding will allow investors to do more homework to understand the fundamental drivers of the appropriate sectors.
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