Name: Why We're in the Biggest Financial Bubble in History (w/ Steve Bregman & Mike Green)
Uploaded: 2020-03-03T21:11:05.000Z
Duration: 54 min 30 s
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MIKE GREEN: Mike Green, I'm here for Real Vision at the Real Vision Studios in New York

Basic passive voice

Today, we're going to sit down with another individual who is known for his work in the

past of space, in particular, his work on ETFs.

Steven Bregman has a been on Real Vision before with an extended series called, "The Dark

Side of ETFs," where he sat down with Grant several years ago.

We're going to revisit that, particularly in the context of some of the stuff I've talked

I'm really interested in how Steven thinks about the endgame of the passive strategies

and how to think about the influence in the market.

Steven, you and I have not had the chance to talk for a couple of years, you've been

one of the other voices in the wilderness shouting about the risks associated with passive

I'd love to pick into your brain and understand the approach that you're taking to some of

these challenges and some of the opportunities that are created by the growth of passive

One of the places to start is one of the areas of difference.

I focused primarily around the indexing component and you've spent a lot of time talking about

STEVEN BREGMAN: Well, essentially, they're one of the same.

Sometimes people use the terms interchangeably because they don't know the difference, and

they're being casual about it, and I do the same actually, ideal primarily with direct

They don't have an institutional mindset.

They're unaware of the fact that asset management companies, Wall Street is not really about

They would be unaware, for instance, that how does an index come to be.

An index comes to be because a certain asset management specialize in this might be under

pressure from ever declining fees and you can't charge a premium fee for a commodity

Once upon a time, I think the fees on S&P 500 index are like 50 basis points 60 basis

What do you need to do to justify a higher fee?

Create something that seems to have, at least has the fig leaf of differentiation.

You can charge more for that, at least for a while.

You invent a new index, you do some back testing, you find some bucket of 20 or 30 or 40 companies

that fit some theme that back test well for the last five years.

By definition in this industry in modern portfolio theory, as applied nowadays, that means, some

positive rate of return with some relatively low comparative volatility, beta correlation,

what have you, and then you can float a new index, and they're from offering ETF against

You can't even get it off the ground unless it back test well.

Indexes don't just come about because they're good investments, they come about because

it's an opportunity for a management company to gather assets through a new ETF for which

at least initially, they can charge 45 or 55 or 65 basis points.

They can keep that fee, except if they're lucky enough to gather enough assets, not

10 or 20, 30, or 40, 50 million, not even enough to break even, but if I gather some

hundreds of millions of dollars, well, then somebody else would come and knock them off,

like Vanguard and drag the fees down again.

People don't even get these basic concepts and because my natural audience are individuals,

who really are the victims of this asset gathering business that parades as an investment business,

MIKE GREEN: Well, you and I originally started in the same space.

You come up from the classic stock picker, single stock focus, run a highly concentrated

portfolio and by some measures, you found a few names that you think are truly extraordinary.

We can talk about a few of them if you'd like, but your insight into ETFs that I know you

from the Grants Conference discussions is largely around the dynamic of many different

ETFs buying the same underlying products, and this tendency to overlap.

You'll see very high representation of Exxon Mobil, you'll see very high reputation representation

The dynamic that you're talking about now, where effectively you offer a good back test

to try to offer something that you can actually charge fees for and the potential for if that

gets to scale, either you to lower your costs so that new entrants can't come in and replicate

it or to be disintermediated by one of the giants in the industry.

STEVEN BREGMAN: They're very disinclined to do that, they need every penny.

How do you think about this dynamic of the difference between a Vanguard model and a

BlackRock type model where they are charging rock bottom fees and the need within the industry

for innovation in order to push forward how thought process is going?

STEVEN BREGMAN: The whole thing doesn't even make a difference.

The whole thing, I'm going to say something, it sounds incendiary, I don't mean to be incendiary,

but well, I shouldn't say it's a lie, but it's false.

We now have a couple things I'll mention.

First of all, the great indexation passive investing ETF experiment, which took off for

Slowly at first, but it was given a real boost in the wake of the 2007-2008 financial crisis

Now, they did everything that people do, which is act reflexively, which is not necessarily

helpful, which is first of all, sell your securities and memorialize a perhaps temporary

Then when they get back in after there's confirmation that things are going up, which means they've

What they did is they defaulted immediately to ETFs.

They're a better mousetrap than a mutual fund and people had been really traumatized.

Traumatized, by the way, not just individual investors, but their brokers, financial advisors,

trustees of pension funds, [indiscernible] they all work.

They were scared of risk, all kinds of risk; manager risk, security specific risk, everything.

The proposition of an index made a lot of sense.

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Why We're in the Biggest Financial Bubble in History (w/ Steve Bregman & Mike Green)

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