Transcript: David Nadig of



The transcript from this week’s MIB: Dave Nadig,

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This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. His name is Dave Nadig, and really, if you’re at all interested in how ETFs are researched and put together and assembled and manufactured and regulated and traded and retired, well, really I don’t know any single person with a greater body of knowledge from more aspects of the finance industry about ETFs than Dave.

He was at Barclays in the early days when the predecessor to IShares came about, he spent time working with a number of consultants — as a consultant early on in the ETF industry and he has been working at which is probably the leading media publication about ETFs pretty much since the beginning of the world’s understanding that ETFs were significant, previously as chief investment officer, subsequently, when it became part of Factset as a head of analytics and now as CEO/managing director since CBOE bought, the Chicago Board of Options Exchange Global Markets is now the owner of

So with no further ado, here is my conversation with David Nadig.

When it comes to ETFs, my guest today is probably the single most knowledgeable person in the world. Dave Nadig is a managing director at which is a subsidiary of CBOE global markets, Dave was’s chief investment officer and he returned to as CEO in November 2016, he was previously managing director at Barclays Global Investors where he helped to design some of the world’s first ETFs including the development and marketing of the world equity benchmark ETF series. You probably know that by its current name, IShares, he’s conducted some of the earliest research on fee-only financial advisors and the rise of indexing, he is the co-author of the definitive book on ETFs, a comprehensive guide to exchange traded funds published by the CFA Institute, Dave Nadig, welcome to Bloomberg.


RITHOLTZ: So you and I know each other for a long time and I’m familiar with your career path. We will come back to that a little later. Let’s talk about this whole ETF thing. Is this going to be big one day?

NADIG: It’s just a fad, it’s just a fad.

RITHOLTZ: It’s just a temporary thing.

So the key question that comes up all the time, what is the underlying advantage of ETFs versus mutual funds?

NADIG: Well, if you think about it, mutual funds are actually one of the most ridiculous financial inventions in history. If I went to you and said “Hey I’m going to sell you a car” and you are going to give me a whole bunch of money right now, but I’m not going to tell you exactly how much the car costs, we will true it up later.

RITHOLTZ: Yes, I will get to that at the end of the day.

NADIG: You would never buy that car, right? You would never say, “It could be $35,000, it could be $40,000, we will tell you 4 o’clock, and that’s how mutual funds work it’s literally the only financial product that has forward based pricing which is kind of ridiculous.

And there have been innumerable cases over the last 40 years in which he had that been abused or misused, we had examples in the 80s, we had front running issues and so…

RITHOLTZ: Late 90s, early 2000s.

NADIG: Yes, exactly, I mean over and over again this happens, anytime you create that intense lengthy time arbitrage between 930 in the morning and 4 o’clock, somebody’s going to figure out how to game it.

And ETFs, in part one, of the things they do is they solve that problem because they allow that pricing to be negotiated. And I think that’s the…

RITHOLTZ: Meaning they trade intraday and you can see the price that’s on the screen is literally the price it is.

NADIG: Exactly and you can decide as an investor whether you want to pay that price. Now there are some costs to that and there are some benefits to that if we are talking about US equities, we’re trading USPI which is the biggest ETF, trades the S&P 500, anybody can tally up all the stocks in the S&P 500 in the spreadsheet and come up with what the right price is for that based on the last traded price of the stocks. A little tougher if you’re trying to trade Japan at 2 o’clock in the afternoon in New York…


NADIG: Because what are all those stocks actually worth? Well, that is a negotiation, that is price discovery. So ETFs not only give you access to those markets that are closed or less liquid but they give you another price discovery mechanism to go along with it.

RITHOLTZ: So in other words even though we don’t know the true arbitrage price of Japan 2 PM New York time, you get at least is a rough wisdom of the crowd estimate in how that ETF is trading assuming it’s liquid because as we will discuss later, some ETFs seem to trade by appointment only.

NADIG: Yet if you’re lucky if you can get an appointment yet is definitely some haves and have nots in the ETF space, I mean there’s just so many of them at this point.

RITHOLTZ: So one of the things that comes up all the time when we’re comparing mutual funds and ETFs is in a nonqualified portfolio, meaning a fully taxable account, you could have a mutual fund that doesn’t show any gains for the year and yet, you get hit with capital gains taxes, that doesn’t really seem to happen with these…

NADIG: Yes, there is a fairness issue in that and that’s and I think that’s the other big advantage of ETFs in a taxable environment because the way ETF shares are created and redeemed which is done through market makers, big authorized participants, they are able to wash out any gains from internal trading so if you know, even in the S&P, if stock X goes out and stock Y comes in and stock X had embedded gain, that creates a taxable gain in the portfolio even if at the end of the year, the S&P is down, they still have to distribute that taxable gain.

ETFs get away from that by allowing the washout that gained by effectively handing low basis shares out to the street.

RITHOLTZ: So the ETF loophole, what does that cover?

NADIG: Well from a tax perspective, it covers anything that you can do in-kind transactions with, and technically mutual funds could do this too but they don’t.

RITHOLTZ: Why don’t they?

NADIG: Because it’s complicated and it requires a lot of coordination with the street, you have to have a partner on the street technically called an authorized participant that is willing to do those in kind creations and redemption to shares.

RITHOLTZ: So complicated that you do profit distributions even on a losing or flat year, it’s not worth it, that just seems like that is a huge disadvantage for mutual funds relative to the ETF.

NADIG: Well one of the challenges in a traditional mutual fund environment is for you as an authorized participant to agree to do those in-kind trades, you need to know what’s in the basket, like what are you going to get, what do I have to deliver? If you’re going to know, then there’s got to be some transparency most mutual funds don’t want to tell you what’s under the hood, right? Most mutual funds are still actively managed by assets and most active managers don’t want to tell you what they’re doing on a day-to-day basis and that makes that arbitrage process really difficult, but it’s baked into how ETFs work. That in-kind creation and redemption is sort of the core of how ETFs work.

RITHOLTZ: And so that doesn’t make much of a difference in terms of the capital gains distribution or does the loophole cover that?

NADIG: No, the loophole and loophole is as I think — it’s an aggressive word but really what we’re talking about here is part of the IRS approach, right? How the IRS treats ETFs, it allows in-kind transactions to be untaxed, right? And that tax basis then can get washed out so that covers really any kind of ETF, any kind of investment do you want to make, whether it’s bonds, whether it’s, you know, equities, you can get away with that in-kind creation redemption to washout those capital gains. So for taxable accounts, ETFs have really caught on even for nontaxable accounts, the fact that you can trade intraday with some price certainty I think has been the other major issue.

RITHOLTZ: Let’s talk a little bit about some of the issues that are surrounding ETFs today.

We have a little bit of a fathead longtail problem…

NADIG: Who are you calling a fathead?

RITHOLTZ: That’s right, in that ETF issuance and underwriting is very top heavy. You have Vanguard Blackrock and State Street dominating I mean that’s the vast majority of…

NADIG: 70 percent of the assets.


RITHOLTZ: Assets not necessarily what — is there 2100?

NADIG: Yes, it’s over 2000 ETFs right now and by number, sure Blackrock in particular has a large number, I think it’s 400 ETFs in the stable.

RITHOLTZ: Wow. 20 percent.

NADIG: And to put that in perspective, you know, back into the 2000’s, early 2000, there were 150, 200 ETFs, so there has been really 15 years of phenomenal asset and product growth really now covering virtually every corner of the investment market from physical gold to junk bonds.

RITHOLTZ: So why those — well first of all, why the three biggest dominating and then the next question is why those three, but I kind of have a sneaking suspicion why…


RITHOLTZ: So why just — live just why is it so dominated by these joint firms?

NADIG: Well, because the economies of scale here are dramatic and one of the sort of accidental advantages of ETFs, it wasn’t designed for this is that they have become incredibly cheap and were in the midst of a price war that’s driving them down toward the price of zero, they can be that cheap because running an incremental dollar in the S&P 500 costs literally no money. Right? If Blackrock which manages, I don’t — no idea…


RITHOLTZ: It’s $6 trillion…


NADIG: Probably $1 trillion of that is tied to large-cap US equity…

RITHOLTZ: Probably more.

NADIG: For them to manage an additional dollar literally doesn’t cost them anything and so the marginal cost of production in big index shops is so low they can price these products at three, four, five, eight basis points and still eventually make enough money to survive.

Very tough for Ritholtz Wealth Management to get into the ETF game at three basis points and ever make a dime.

RITHOLTZ: Yes, to launch an ETF and we I explored this last summer I looked at a couple of interesting ideas, it’s a couple hundred thousand dollars to half a million to launch, by the time you get done with record-keeping and custodianship and 2 BPs here and 3 BPs there and 5 BPs, there is a lot of expenses that go into it that it’s not like hey here’s an idea, let’s launch an ETF, it’s a complicated legal accounting underwriting issue for a small shop, but for a Vanguard, or Blackrock or State Street, if they want to crank out a different ETF every day how hard is that for them?

NADIG: Yes, it’s not hard at all, and it is getting easier, there’s a big new set of rulemaking out of the SEC that is actually in comment period right now that would clean up that process and maybe drive the cost for a new issuer down from that couple hundred thousand two maybe 100,000, you know, it will become less of an exception to the rule and more of an approved activity, but there is still work that’s got to get done and you have to establish all those relationships.

So those big players have that entrenched economy of scale that I think is really tough to compete with and that’s why you’ve seen very few upstarts if you will really get a lot of traction.

RITHOLTZ: So we’ve been spending a lot of time talking about equities let’s talk about bonds for a minute, there are lots and lots of dollars allocated to bond ETFs so much so that it’s had a giant impact on how bonds are traded and what Wall Street bond desks look like today, you’re the first person who brought this to my attention. Explain what has been taking place over the past decade?

NADIG: Well, we have two things going on at the same time. One is because of regulation, we no longer have banks having giant bond desks, right? They had to basically get out of that business.

RITHOLTZ: Was it regulations was at zero interest rates and they weren’t making any money?

NADIG: Both.



NADIG: So the hoops you had to jump through them to run an 80 style bond desk were significant and the capital allocation was no longer making all that much money, there are better things for them to do with that risk capital. So you had that sort of abandonment of the bond market by traditional players but at the same time, you have lots of folks that still wanted to invest in bonds, investing in individual bonds, I’m sure you know, is kind of a pain in the neck.


NADIG: Even if you are just trying to buy treasury. Sure you can go to and go do it all direct.

RITHOLTZ: You want to do a laddered bond portfolio where you want a portfolio of munis that are high-quality and if you were in a high tax state, it’s not easy.

NADIG: It’s not easy to do and even as a professional investor, you are going to pay significant spreads, 20, 40, 80 basis point spreads, getting in and out of these positions. To say nothing…


RITHOLTZ: If you wait you, can cut those 80 BP spreads down to like 60.

NADIG: There you go, it’s a bargain…

RITHOLTZ: If you would be patient, you could find something in the middle but it’s a valid point, it’s not easy to execute these.

NADIG: Right, but it’s an asset class most investors should be in an and so that’s why we had bond mutual funds. Okay, bond mutual funds are fine but again you have all these pricing issues you got these embedded tax issues which are even worse than those bond portfolios because most people in their bond portfolios want to hold a certain maturity like I want to hold for five years my target duration or something like that.

To hold that, it means you have to constantly be selling something and buying something else in order to hold that duration or that maturity and that creates taxes when you do that, particularly if you are in a bond market with rising prices and declining rates.

RITHOLTZ: So let me — let’s just delve into that, when you say people have to sell stuff to hold the same duration it’s as time goes by, hey suddenly things that were four-and-half-years become five years, that duration, that’s out and you have to add other stuff to make up for that.

NADIG: Exactly and so if you’re in a — you know, an IShare bond fund that says this is the five-year Muni fund or whatever, as that five-year becomes four, you have to sell it and as that seven year became five, you have to buy it. And if you’re an environment where the prices of those bonds have been going up which has been where we have been for a long time.

RITHOLTZ: Sure, 32 years.

NADIG: Then you got those capital gains from that sales process and the ETF helps you get rid of some of that.

RITHOLTZ: So the thing that I find fascinating is that the bond desks have essentially been replaced by Blackrock, now when people want to do a big bond allocation, they don’t call Goldman or Morgan Stanley necessarily or UBS or Credit Suisse, they call Blackrock, is that a fair assessment?

NADIG: Yes, it’s Blackrock and really it’s also folks like PIMCO, right? And you know, PIMCO, I think is mostly known as being for Bill Gross’ old big shop for actively managed mutual funds, that have a huge ETF presence now, they are actually the largest actively managed ETF provider and yet they have become the bond desk for the world.

If Mexico wants to float a new issue they call Blackrock and or they call PIMCO and they have to — they will take down the whole thing and that may never trade, you may never actually see it go across.

RITHOLTZ: Wow that’s absolutely fascinating. Let’s talk about your long and wacky career, you began as an accountant/screenwriter, how does that happen?

NADIG: Well, you know, I think like a lot of people, I went to college having no idea what I wanted to do and I’ve got a creative writing degree and then headed to Hollywood to write the Great American payroll check.

And I went to Hollywood and I ended up locked into a production company just because I needed work hoping that I’d be able to write for a living and actually found that I was more fascinated by the process of producing television than anything else and on and got really interested in the business itself, and that led me to think I should go back and get a business degree which is what I did, and then sort of fell in love with investing from there.

RITHOLTZ: So you go to Boston University for an MBA, is that right?


RITHOLTZ: And then how do you then move sideways into finance at what led you — you were at Cerulli Associates?

NADIG: Yes, so when I was at BU, I was studying with Zvi Bodie, relatively well known professor there on investments and really he sort of sparked a lot of my interest in investing and one of my classmates was the then wife of Kurt Cerulli and he and I started Cerulli Associates to do really, it’s for the consulting work and mostly advisor survey type work for big asset managers, because at that time, this was a very early 90s just coming out of the late 80s, we were in this phase shift from the traditional brokerage commission model to true independent fee-only financial advisors and that really was changing the game for asset managers/

RITHOLTZ: That was early 90s, that was, way, way early in the process. I mean Ken Fisher was doing his gig then and other people had started back then but was still a tiny percentage overall what made you say oh this is the future?

NADIG: Because that’s where consulting clients wanted to pay us, so we had…

RITHOLTZ: Market forces.

NADIG: Market forces, we had firms like Fidelity and what was then, Wells Fargo and [ECO] Investment advisers which became Barclays Global Investors and State Street, and actually one of my first clients was Jan Van Eck…

RITHOLTZ: Oh sure.

NADIG: And they were all trying to figure out how this shift both in the defined contribution space which was really kicking off hard in the early 90s and in the fee-only financial advisor business, how that was going to change their best management practices from a product structure standpoint, from a how do I sell to these people if I’m not giving them trips to Hawaii or paying them backend loads are all those horrible ways of selling product?

RITHOLTZ: Non-fiduciary sales.

NADIG: Yeah exactly. And so you know, at that point, I was fairly wet behind the ears, early 20s kid, I was making phone calls to financial advisors and asking them about their practices and that really was an exciting place to be because it was very new.

RITHOLTZ: When was the big move from defined benefits to defined contributions slash 401(k)? When did that really ramp up?

NADIG: Right but then, I mean it was it was sort of towards the end, I mean certainly coming out of the financial, what was — what we called then the financial crisis 1987.

RITHOLTZ: That was a hiccup.


NADIG: It’s a little minor, minor hiccup then.

RITHOLTZ: Right. But back in the days of Glass-Steagall, a one day 23 percent collapse in the market doesn’t spill over. Today’s, it’s a little different…

NADIG: A little different, a little different. That was the first time I lost a lot of money, it was in 1987. But the — that was really the hockey-stick of the takeoff and 401(k), it’s when Vanguard really got into that business, it’s when fidelity got into that business.

And the assets really started flowing in and it implied getting rid of all these cost in the system, all these loads, everything else, you can’t put any of that into a 401(k), ERISA doesn’t let you.

RITHOLTZ: Right. So I sometimes describe you as there at the beginning when ETFs were created and you push back on that all the time. What was your role in the early days of ETFs?

NADIG: Yes, so the early days of ETS which is really 93 was SPY slightly before that with the Toronto index participation securities tips, and then the web products that I worked on was 94-95, I think they finally launched in 95?

RITHOLTZ: When this the Qs launch? It was not much after right?

NADIG: It was on the same window. I think the Qs may been a little bit later, it might have been 9,8 but the reason I push back is because this is a classic success, has a thousand fathers problem…


NADIG: You know, Jim Ross you know, who you’ve had on the show from State Street.

RITHOLTZ: He was great. I love him.

NADIG: He’s great. He often sort of tells the story of like yes, I was in the room when SPY was created, I was getting coffee, right?


RITHOLTZ: By the way, another guy who started as an accountant and could crunch the numbers and they said we better keep Jim around, he seems to understand …

NADIG: He seems to understand the plumbing, yes.

And I think that that’s very true, I was very young, there were — the people who were really the intellect behind us which really required a lot of thinking through the market mechanics and regulatory issues were folks like Nate Most at the Amex, or even Patty Dunn reason Patty done it Wells Fargo and ECO, both of whom have passed away, I mean it is a generation ago of some very bright thinkers that really drove the foundation of this and a bunch a Yahoo kids that were sitting there trying to figure out how to sell this to people.

RITHOLTZ: Quite fascinating. You know, there’s a little background, you were CIO at, right?

NADIG: Back in the day, yes.

RITHOLTZ: Then you leave and you run the ETF department at Factset?

NADIG: Yes, so originally, , founded by a guy named Jim Wiandt, he brought a bunch of us in to sort of built that business in the…

RITHOLTZ: I have been to Jim’s conference…

NADIG: You have been to Jim’s event.

RITHOLTZ: In Spain which was quite fascinating.

NADIG: Yeah, and he had the vision of building this business, you know, a decade ago and really there were three legs of that stool, there was an of the media business which we now know as, we published a magazine, “The ETF Report” which we’ve been publishing for 12 years, something like that now. There was a conference business which became Inside ETFs…

RITHOLTZ: I go to that event in January, that is a fantastic event.

NADIG: Thousands of advisors, huge event.

RITHOLTZ: Literally 2000 people, lots of — that maybe the biggest single room I ever stood at a podium and looked out at and it was — it just goes for miles.

NADIG: Huge, huge.

RITHOLTZ: It’s amazing.

NADIG: And then the third leg of the stool was the data and analytics business which was the part that I came in to build, and we were a venture capital-backed startup at that point, and we sold the pieces off over the course of a couple years, the conference business was sold to Informa which is a huge conference company based in London, the data and analytics business that I was running was sold to Factset and I went with it to fax it for a year, and then the media business was sold to what was then BATS and became CBOE Global Markets and then they brought me back into run it.

RITHOLTZ: So you were hired as CEO at [TAP], what is this managing director?

NADIG: Well, can’t have too many CEOs in a publicly traded company…

RITHOLTZ: I got you, that makes a lot of sense.

So let’s — you are the perfect person to ask this question. I’ve discussed how ETFs come to be someone has an idea and they run through a bunch of machinery and then out of the other end of that factory comes some ETF, but I don’t think people really understand how ETFs are actually put together?

Walk us through what an ETF launch is like from conception to trading?

NADIG: Well in the current environment, with the current regulatory structure, you’re actually a classic case of a large successful RAA believes they have a bit of a better mousetrap, whatever that is, they’re actively managed equity strategy, they got a great stock picker.

RITHOLTZ: We have a fantastic Bitcoin hedge we’re thinking of turning into a n ETF.

NADIG: There you go, right.

So what you do, you really got two options, one is you go down this path entirely on your own and effectively what you’re doing is watching a mutual funds, the 40 Act mutual fund, you have to get a board, you have to get a fund account, you got to get all that stuff in place, and then after you’ve done all that work, you have to go to the SEC and have this big mother-may-I conversation about whether or not you can break all the rules that are in the 40 Act, and it is called be exempted relief process, you are asking for exemptions, and they let you do things like treat authorized participants differently than common shareholders…


NADIG: And allowing it to trade on an exchange which a normal mutual fund can’t, and so there are all these rules that you have to break to be an ETF. That’s changing hopefully…

RITHOLTZ: What’s the new system going to look like?

NADIG: The new system is going to be very straightforward, it will just basically be the same set of forms you fill out for a mutual fund and you will check a box for ETF instead and all those distinctions about like being able to trade on an exchange will just come baked in, so you won’t need a special privilege you’ll just be part of an existing piece of regulation.

RITHOLTZ: Is that likely to occur?

NADIG: A hundred percent.



RITHOLTZ: So this is going to happen.

NADIG: This is going to happen, we are in the comment period for it now, it’s called the ETF rule is what it’s being called and it’s literally just a new piece of text that’s going into the 1940 Act…


NADIG: To allow ETFs to happen and it should compress the time to market right now, it may be six months for an easy ETF to come to market and we could probably get that down to two months and the cost will go from like you said, a couple hundred thousand bucks to maybe $20,000 to $50,000 if it’s really simple and you have those existing mutual fund relationships in place.

RITHOLTZ: So you specifically said to me earlier there are over 2,000 ETFs.


RITHOLTZ: Once we make it faster, cheaper, easier to launch these, what’s that number going to go? Are we going to have 10,000…


RITHOLTZ: Will there be more ETFs than the 11,000 hedge funds that are out there?

NADIG: Or the 8,000 mutual funds?

You know, I think there is a natural diminishing set of returns on that, I don’t think we are going to end up with 8,000 like we have in mutual fund largely because I think they won’t be successful in gathering assets and there are some fixed costs to running an ETF. So I think that will — it’ll slow down a little bit where we haven’t seen the big entrants yet is frankly the big active managers, right? There is no growth fund of America ETF, right?

Putnam isn’t in this space, there are all sorts of people who are not in the ETF space and even the big traditional asset managers like Fidelity really just stuck their toes in the water with a couple of index products, there’s no Contrafund ETF, there’s no Magellan ETF, and I think until that shoe drops, we’re not going to see massive inflows there.

RITHOLTZ: So you referenced the ability to gather asset, you need a certain critical mass the number I’ve heard kicked about is $50 million, some people have said 100 million…

NADIG: Yes, something like that.

RITHOLTZ: What is it that precludes an ETF from gathering that mass? I remember a couple years ago when the Hack ETF came out, the cybersecurity, that just came out and then suddenly there was the Sony hack and the North Korean hack, and that exploded, that became a billion dollar ETF.

NADIG: A billion dollars, yes, almost overnight.

The biggest issue with ETFs is they are the classic bought not sold product meaning you make this ETF, you put it out there on the exchange pretty much literally anybody who can get access to a US equity exchange will be able to buy it.


NADIG: But then how do you convince anybody that they should buy it?

And it’s a — it’s just classic push marketing, they have — you have to put out ads or you have to get a wholesaler to go call on your office and try to convince you to switch out of this other ETF in this new ETF, that just hard and it requires substantial capital if you don’t have an entrenched distribution system.


NADIG: So if you’re Fidelity and you’ve got hundreds of wholesalers that are out there talking to people all the time, tossing ETFs in the bag isn’t a big deal, if you’re an RA building something from scratch, you’re not in the business of distribution…


NADIG: That’s now what you do…


NADIG: You are an RAA. So figuring out how to catch lightning in a bottle and get all these other people to start participating in your big idea, it’s not obvious and I think we’ve seen a lot of people come to market with some pretty interesting ideas that never get that traction.

RITHOLTZ: I remember SHE, when SHE first came out between the stock symbol which the urban studies that shown…

NADIG: Tickers matter.

RITHOLTZ: The global ticker symbols make a difference…

NADIG: Oh yes.

RITHOLTZ: To the whole controversy of the girl…

NADIG: Right.

RITHOLTZ: Facing off with the bull down in the Lower Broadway or near Wall Street to, is it CalSTRS…


RITHOLTZ: Was the one who funded the original couple hundred…

NADIG: Which is kind of still where it is. It’s still a couple of hundred…


RITHOLTZ: Right. How has that not caught on? I’m kind of shocked.

NADIG: Well, who knows what catches and what doesn’t, right? That is a classic first mover into the ESG space and limiting governance is the core behind that product and it has definitely resonated with a certain institutional audience but it hasn’t resonated with mom-and-pop investors, it has been resonated with a raft of financial advisors, I have some theories on that, it is a one-off product, it’s not part of a suite of ESG products, I think that can be tough to sell a one-off product because what are you going to do? Take out billboards that just talk about [ESG]?




NADIG: The marketing spend that would be required would be enormous.

RITHOLTZ: What about there’s been a new pot ETF floated? I think it should go with the symbol WEED.

NADIG: Of course it should.

RITHOLTZ: But every — but I don’t know if that’s available, if someone else has it or if it’s too in-your-face?

NADIG: Probably too in your face.

RITHOLTZ: For the SEC if it’s a medical marijuana.

NADIG: Well the other one is MJ which is pretty close.

RITHOLTZ: Right, which is Mary Jane and how is that — well they could say that it stands for Marijuana, but we know what MJ really is.

So what are your thoughts on these real niche specialty ETFs?

NADIG: I think they have a place right? I mean niche products in the financial markets are not something new, there are tiny little niche mutual funds that are covering a lot of the same spaces. I think they have a place in the market for folks that are speculating on those narrow themes. The danger is because these are bought not sold, you can create a story about how you know my mom ends up reading something or seeing something on TV and gets all excited about it and it turns out that it’s triple leveraged oil or something like that which she has no business investing in.

And because ETFs are the sort of great democratizing flattener of investment assets, really almost anything you could want to do, you can do in ETF whether that’s a good idea or not…

RITHOLTZ: That’s a whole different.

NADIG: And so I think there are some issues around that but I tend to be a little bit of a libertarian on these things I think we shouldn’t stop, we shouldn’t keep people from making these products because we’re concerned they will be misused, we should focus on investor education.

RITHOLTZ: So eventually there will be a Darwinian competition and when there’s whatever — 3,000 10,000 ETFs, some will catch a little bit of lightning in a bottle as you mentioned, others won’t, is this just can eventually winnow down to a core — or is it going to be like the mutual fund world where there is tens of — if you include all the share classes, it’s like 28.

NADIG: Well, the one thing that ETFs have going for them in this regard is that it actually is expensive and problematic to let a tiny little ETF — a $1 million ETF it never trades, that thing eventually will get delisted.


NADIG: These things are listed on exchanges, exchanges don’t want to have their product list just filled up with the scruff or junk…


NADIG: So these products will eventually get delisted, there are some ongoing maintenance costs, you got to have a board meeting for this darn thing every year, right?


NADIG: There are hard costs associated with it. So we do see ETFs close with I think a higher frequency than mutual funds, that’s a good thing so you know last year that we had a couple hundred ETFs launched, we had a couple hundred ETFs closed we ended up positive by maybe 100 new ETF’s.

RITHOLTZ: That’s all it was.

NADIG: I think that’s a very healthy thing.

RITHOLTZ: We have been speaking with Dave Nadig, he is the managing director at If you enjoyed this conversation be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things ETF-related.

You can find that at iTunes, Overcast, Stitcher,, wherever finer podcasts are sold.

We love your comments, feedback, and suggestions, write to us at, you can check out my daily column at the opinion section of Follow me on Twitter @RITHOLTZ.

I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

Welcome to the podcast. Dave, thank you so much for doing this. I’ve been thinking about having here for forever and I know you are kind of mobile these days…


RITHOLTZ: Back and forth between Boston and New York.

NADIG: Usually we do this over dinner so it is…

RITHOLTZ: That is actually true in a every time I finish, I’m like, I got t get that guy in the studio, he really knows these ETF things. One day they are going to catch on.

So there is a bunch of stuff we didn’t get to. Let me go through some of the questions we missed although you really touched on. So we talked about the new regulations, we talked about the number of ETFs winking in and out of existence. You have a bird’s eye view, what’s the biggest mistake people who are developing new ETFs make in the process from conception to launch?

NADIG: Oh, I think it’s absolutely distribution.

RITHOLTZ: That’s it.

NADIG: It’s 100 percent distribution. If you look at the folks that come in and are successful now, not 10 years ago but now, they come in at — your colleague here at Bloomberg, Eric Balchunas says, bring your own assets, BYOA, right?

And we have recently seen J.P. Morgan just basically decide to get into the space, they decided by moving a bunch of internal assets out of other funds, maybe separate accounts, may be institutional clients and is rolling that into ETFs, boom, their multibillion-dollar complex.

RITHOLTZ: How do you do that? Hey that SMA you have? Congratulations, it is now an ETF.

NADIG: But that’s what we’ve seen, right? So Goldman did this when they launched GSLC which is the Goldman Sachs large-cap is what it stands for, and e smart beta fund, they launched at nine basis points and everybody was like, “Ooh, Smart beta at nine basis points, you know, that’s really smart of them.”

I was like. “No, that’s probably what the SMA was charging. And that’s only way they could map that in.”

RITHOLTZ: Right, so that’s just rolling it for me to be in this…


NADIG: Right and there may be here depending on the kind of investor maybe there’s tax implications that keep you from doing that, but for the most part, if you are mapping institutional money in, their taxes are not an issue.

RITHOLTZ: So what I’ve been hearing from you is that the ETF space now dominated by three giants and a whole lot of small little guppies nipping at their heels is can be dominated by three giants plus 100 other really big companies and a handful of guppies still nipping at everybody’s heels.

NADIG: Yes, I think we’re going to see a healthy middle tier, right below that –and I would actually…

RITHOLTZ: Which doesn’t exist now, it’s a barbell.

NADIG: Well, there is a healthy middle tier, it is firms like Goldman and J.P. Morgan and Schwab, I don’t think anybody is going to worry about Schwab being a guppy in this space, right?



NADIG: They are throwing in tens of billions of dollars in the space, now that’s not a lot compared to the 6 trillion Blackrock runs or whatever it is today, but there’s they are healthy in it for the long haul players and then there’s a tier of folks that a been in this business for a long time and aren’t going anywhere, Wisdom Tree, Van Eck, Oppenheimer, folks like that, they are in this for the long haul and they are doing just fine, thank you very much.

We’re going to see more and more new players, some of those new players are going to have big old names and some they’re going to be people we never heard of.

RITHOLTZ: You mention your mom is in the 3x leverage oil ETF, explain the mechanism why all these leveraged ETFs have such dramatic slippage due to the cost of their carry?

NADIG: Yes, well, it comes down to compounding math and math is always great for radio, right? We can illustrate it.

RITHOLTZ: Sure, absolutely.

NADIG: But it really comes down to the fact that when you go up 10 percent and then you come down 10 percent you don’t end up where you started, right? If you have $100 and you go up 10 percent, you are at $110, at $110, you go down 10 percent you don’t go back down to $100, you go down $11, you re at $99.


NADIG: Right? That compounding math up and down is exactly what messes up most of these daily reset leveraged or inverse products because they reset their exposure every single day…

RITHOLTZ: And they’re using futures and other products that are not cheap…

NADIG: Usually swaps.


RITHOLTZ: There is a cost of carry every day.

NADIG: There is usually a cost embedded in those swaps which is less transparent than I would like, I’d love to see explicit swap pricing out there, but as I’m sure you know swap pricing tends to get buried in the total return of the swap it doesn’t explicitly get called out all the time…


NADIG: And so that’s problematic but most of these products work with a giant cash balance which is the technically what they own quote unquote is this giant cash balance which is why they’re allowed to do it, and then they had this notional overnight settled swap for whatever the pattern of returns is they want, triple leveraged oil, inverse S&P, you name it.

RITHOLTZ: And we didn’t get to the Bitcoin ETF that is supposedly coming out, before we do that I have to touch on GLD, the Gold ETF. There was a wonderful Wall Street Journal column on how GLD was created by the World’s Gold Council that had a problem with all this gold piling up in warehouses in — what was that? Early 2000s, and GLD is launched and it just becomes the timing was just fortuitous, it becomes briefly bigger than the spiders a one point, are we going to see — so it made trading gold, you don’t have to buy physical gold, you don’t have to buy gold futures and the hell with the junior minors which have always been problematic, you could buy GLD, are we going to see something similar with the Bitcoin ETF?

NADIG: I think we are eventually, I’m not I’m not involved in the regulatory process you know, CBOE Global Markets has a group that is working on some of the stuff, so it is sort of out there in the sphere around me but I think ultimately I think about Bitcoin is being a digital gold variant.


Some people have argued the rise of the coin is like gold despite all of the craziness in the political world…

NADIG: Hasn’t rocked it, yes.

RITHOLTZ: This should be a good environment for gold but it’s not, and low inflation aside and the Q.E.

NADIG: The problem I have with Bitcoin is the same problem I have with gold in the structures which is if you’re buying it from sort of a guns and butter fear perspective, you can’t go get a Bitcoin out of a vault and do anything with it anymore than you can get gold out of a vault and do something with it if what you did was buy it on an exchange somewhere.

Now you’re living with the custody issues that are inherent in that. Now, I’m not worried about that, I’m not a guns and butter investor…

RITHOLTZ: Guns and bottled water investor.

NADIG: There you go.

RITHOLTZ: More accurately…

NADIG: More accurately.

RITHOLTZ: By the way, the Bitcoin question I didn’t ask you during the broadcast portion was, Bitcoin, a fraud or merely just a scam? But the reason I didn’t ask is because I didn’t want the email to light I don’t believe it’s a full on scam, I suspect North Korea is involved, and I suspect Iran is busy mining Bitcoins and there a lot of other unsavory characters.

When I have people killed, I do it, I pay for it with Bitcoin.

But you know, all kidding aside…

NADIG: Modern assassin.

RITHOLTZ: Isn’t that some of the issues that the SEC has to be considering when gee, it’s such an unregulated currency, we’ve no idea what’s going on with it, is it legitimately used for money laundering, for drug trafficking, for whatever, how can the SEC approve that if the IRS and the Treasury Department is fighting their own war against Bitcoin? Or does that enter the calculus?

NADIG: Well, so I have no idea what is going on the regulator’s head, it’s not my job but I would say people made this argument about gold for a long time…


NADIG: Right, people made this argument in the 60s and 70s and 80s about [crew grandes] right and I remember one of my very first jobs before like while I was in college was helping somebody in a treasurer’s office at a global manufacturer, they made water treatment…

RITHOLTZ: I never heard that, that is fascinating.

NADIG: And they actually transacted in some countries where we had hyperinflation, Zimbabwe…


NADIG: Places like that. Transactions were literally getting done in stacks of [crew grandes] and there were real concerns about like well, gold has become in this post Bretton Woods environment effectively the currency of criminals.

That is the exact same set of argument we are having right now.

RITHOLTZ: That is amazing, that is — you know, I used to speak at the Agora Group, we used to do this wonderful conference, annual conference in Vancouver every August around the time we are recording this and it was another giant event and if you’ve ever spent any time in Vancouver, it’s a fantastic…

NADIG: Beautiful city.

RITHOLTZ: Yes, love, love, Vancouver…

NADIG: Great food.

RITHOLTZ: Fantastic food, everybody in the city is beautiful, it’s such a like…

NADIG: Except when we show up and then…


RITHOLTZ: Yes, exactly right.

So I remember they would do this whiskey bar which was a panel where the audience would throw questions at people and on this was 09, 10, 11 and I remember being when the only [stock bulls] there not exactly especially in 11, I talked about why how gold will end its run not with a whimper but with a spike and a collapse, and the fascinating thing was someone asked the question don’t you want to have some bars of gold in case you have to up and flee?

And I’m like, well, listen dudes, all you folks up here, I don’t see a whole lot of fellow tribesmen here and Jews have learned always have a bag packed by the front door by the back door, because you never know when there is going to be a knock and you have to flee and gold is heavy, you can’t take a lot of gold…

NADIG: But you can carry a lot of Bitcoin with you/

RITHOLTZ: You can carry all the Bitcoin you want, or a bag of diamonds but to flee with any sizable amount of gold is just not going to happen and it was said in jest but the people who are claiming you could do these giant gold trends, you can’t move millions of dollars worth of gold as easily as you can do that with Bitcoin…

NADIG: Right.

And I tend to be — I’m a bit of a Bitcoin skeptic not because I think I think the underlying technology is super interesting and actually think that there’s something like there will be something that the block chain ends up driving that will change the way we think about financial transactions, I just…


NADIG: I just think probably, I think we’re in the MySpace era, I don’t think we’re in the Facebook era of Bitcoin.

RITHOLTZ: Dogpile and Alta Vistas…

NADIG: There you go. Exactly.

RITHOLTZ: I call Blockchain and Bitcoin LINUX for libertarians.

NADIG: There you go.

RITHOLTZ: So I think that works. So send your angry emails to and he will be happy to respond to any of your Bitcoin questions.

You know I left I left out a question about your background that I want to get to. In the late 90s, you were running an experimental or co-running an experimental fund, tell us about that.

NADIG: Yeah so after the Barclays bought the indexing business and became BGI, myself and my then partner, Don Luskin…

RITHOLTZ: I’m sorry, who?

NADIG: Don Luskin I know one of your favorite people…


RITHOLTZ: I have crossed swords with him, I used to do Kudlow and Cramer, he was my foil and heading into the financial crisis he seems to think I like actively disliked him, I don’t, he just could not have been more bullish and more wrong in 07 and 08 and I feel an obligation to call people out when they are wrong.

I read something the other day where he thinks I’m like after him or hate him until you mentioned to me that you were working way back when which I was stunned to learn, I harbor no animus I just think dude, your, whatever your methodology was, it was — you missed the worst financial — Don wrote a piece was that “The Washington Post” piece?

NADIG: I don’t know.

RITHOLTZ: So I believe there was a piece that was written, I don’t remember who wrote it, maybe it wasn’t him. Somebody wrote a piece on the — in “The Washington Post” an opinion piece on this Saturday saying you know the economy is fine everything is great, and then Sunday, Lehman quoted and…


NADIG: Those things always happen.

RITHOLTZ: I mean but the timing could not have possibly been any worse.

NADIG: But we did really well on the timing of our venture too because we launched the tech fund pretty much at the tail end of the hockey stick and the tech boom.

RITHOLTZ: Late 90s.

NADIG: Late 90s, 99, 2000, and we did — we raised a bunch of venture capital money, we launched an actively managed tech fund called open fund which was…

RITHOLTZ: Now, that was the most interesting part of what you guys did. You was the first totally transparent mutual fund.

NADIG: Yeah and even more transparent than ETFs, we actually had a camera in our trading floor and broadcast our tickets like ticket by ticket.

RITHOLTZ: So you couldn’t have been short a whole lot of stuff.

NADIG: No, no. But we — you know, we mostly — we did very, very well in our first like six months, we were if you remember the Munder Net Net fund…

RITHOLTZ: Absolutely.

NADIG: We beat that one for the first six months, we’ve skyrocketed, raised a bunch of money and then…

RITHOLTZ: The Ryan Jacobs fund…


NADIG: Went crazily down the other end of this.

We just roller coastered that thing.


NADIG: Because the timing was awful, if we launched two years earlier, I probably would be sitting here talking about ETFs. It was a humbling experience in that I think until you’ve sat in the chair of an active manager on a trading desk…


NADIG: You don’t quite understand what it’s like to lose a lot of somebody else’s money.

RITHOLTZ: It is horrific…

NADIG: It is a humbling experience…


RITHOLTZ: Even if you were in a retail brokerage shop, if you are trading a house account, any time you do anything like that where it is someone else’s money and market forces go against you, it’s nauseating, you want to throw up.

NADIG: And I had plenty of folks actually throw up off my trading desk during. the worst of it and it was — you know, it was a lot of fun, sure, we raised a bunch of money, we were masters of the universe for a short period of time, t but it was, I think that experience of losing other people’s money and my own obviously because we were, all of my money was in this fund too.


RITHOLTZ: You mentioned ’87, so 2000 left a mark also.

NADIG: Yes, that one hurt a lot too, and that was, you know, it was to some extent, humiliating you don’t love it when your ideas go that bad.

RITHOLTZ: But it wasn’t the idea that was bad, it was just the timing. The idea of transparency in investing transactions and not hiding what you’re doing although you always run into the issue of front running another question…

NADIG: Sure.

RITHOLTZ: So if you were transparent on a 30 day delay or even a week delay that pretty much covers a lot of that issue.

NADIG: Well, and a lot of what we were doing was not particularly chaseable because what to be blunt, what we were doing was flipping IPOs, right? We were getting good IPO allocations from the Bear Stearns of the world et cetera in the midst of the Dotcom boom…


NADIG: And we rode those things and then we flipped and that’s basically a core of the strategy was new tech, that’s what we did was new technology.

And so we day traded new technology which looking back on it is like the most ridiculous sense I have…


RITHOLTZ: Have you kept those IPO issuances, how would you have done?

NADIG: Not so well because if you think back on those, that era, it’s Juniper and JDS Uniphase…

RITHOLTZ: The great…


NADIG: There was a lot of garbage in there and we were all drinking the Kool-Aid of the new economy, man, this time was different.

RITHOLTZ: So Mark Andreasen, apology for the name drop, but Mark Andreasen says there’s no bad ideas, just early ideas and was a disaster but Chewy is now a giant success story and it’s effectively

NADIG: Well, and I’m sure Amazon is probably the largest seller of pet food in the country…


RITHOLTZ: Shows up (inaudible) and I don’t even do anything it is just on a regular subscribe and save and all the little dog treats they all show up every month.

NADIG: I think if I look back and say there was one thing that I got most wrong about my sense of the economy in 199,9 2000, it wasn’t that the rise of the Internet was going to change how everything works, it was that it would be concentrated in so few winners. Like looking at it now, there actually were so few winners from that era, just handfuls on and yet there were hundreds of companies that we were all excited about back then.

RITHOLTZ: I remember ’96 when Wall Street Week with Louis Rukeyser, the [irrational] exuberance speech happened, the general recognition that, hey these tech stocks have become unmoored from normal valuations and a lot of these companies have no you know, Netscape went public and then was a success, there was a giant hunger and a demand for these companies and it was five more years before the…


NADIG: Four more years, yes.


RITHOLTZ: And that was pretty much it.

But you know, if you follow traditional metrics, you missed a huge run up, so you know they were a handful of — all right, Amazon survived, Apple survived, Microsoft clearly survived, all these company Google came out afterwards but all these companies had giant drawdowns, 70 percent, 80 percent, 90 percent I remember post dotcom you could have bought Amazon for $8 and it would have cost you nothing.

NADIG: Well, all it did was turn me into a passive investor again. You know, I started my career in the indexing space, I had this brief you know dalliance with ridiculously active management, literary daytrading tech stocks and then I sort of came back to religion, if you will.

RITHOLTZ: So you briefly were eating trays and then you went right back to the — I got it, I understand how that works.

That’s interesting.

So that we pretty much went through most of the questions I prepped on the way here, is there any ETFs thing that you want to talk about? That is a technical radio term, by the way, ETF thing.

NADIG: ETF thing.

RITHOLTZ: Is there anything I didn’t ask that you think is important that should the listener should be aware of?

NADIG: Yeah I think that there — it’s reasonable to ask questions about this concentration of assets we have at the top, I think that was a good question and when we look at the Blackrock and State Streets and Vanguards of the world, and their ownership of equities, it is intense, right? They combined between all of them, if they all got together as a block to decide how they wanted to vote Apple shares…


NADIG: Would have substantial influence on what Apple’s board did/

RITHOLTZ: That’s the push back to passive is…

NADIG: A hundred percent.

RITHOLTZ: All these guys what are they going to do? They can’t sell the shares so what do I care what they have to say but they can vote the shares, can’t they?

NADIG: Exactly.

And I think…

RITHOLTZ: What determines how an ETF manager votes their shares?

NADIG: Well, they have a proxy department and I think there’s been a lot of discussion about this and there have been — I had to I had lunch yesterday with a mutual friend, Jan Van Eck from Van Eck, and he, we a great conversation…

RITHOLTZ: I should get him in here, he is a fascinating guy.

NADIG: But we had this conversation about corporate governance and he’s a proponent of actually limiting the vote-ability of the shares held by past managers which to me is a bridge too far…


NADIG: Precisely for the reason you’re doing — what you’re saying which is that what they told the shares forever and they are never going to sell, then effectively they are just going to be rubberstamps for management forever and they should block…

RITHOLTZ: Not if they vote their proxy.

NADIG: Well not, and this is my counter which is that I think if you look at for instance just the S&P 500, three huge ETFs, one from Vanguard, one from State Street, one from Blackrock, I think in 10 years when you go to decide which S&P ETF you want to buy, you are not going to care much about cost, they’re all effectively to be free…

NADIG: They are all going to be well managed…


NADIG: The performance is going to be within a basis point of each other.

RITHOLTZ: Right, it will all be identical.

NADIG: But what will be different is well how does Blackrock vote their shares? How does Vanguard vote their shares?

And I think that transparency about what is important in corporate governance is going to start being much more transparent and much more important to investors not just at the institutional level where it is now.

RITHOLTZ: So we haven’t really talked about ESG and that’s really a whole another conversation, but even non-ESG holdings like the S&P 500 could have an ESG differentiator depending on how Blackrock, Vanguard or State Street votes…


NADIG: And State Street has been really upfront with this, where there is a push on women and diversity, they actually were very vocal and said hey we actually just voted against management on 400 board seat elections in large cap US companies because we wanted to increase the diversity on their board, that’s a pretty bold move and we’ve seen you know a letter from Larry Fink of Blackrock…

RITHOLTZ: Right, that was a big “Wall Street Journal” op-ed piece about get your acts together.

NADIG: Yeah and so there’s a lot of discussion going on around this and some of this is a reaction to demands from the institutional and endowment community of which often has strictures in their investment guidelines that says you know we won’t invest in fossil fuels or something like that, they are the ones who are pushing this but I think it’s going to become a marketing issue in the next 10 years. I think that’s really cool.

RITHOLTZ: Larry Fink is another one I have to get in here, he is on my list, if he can make it into the show, I would appreciate it.

NADIG: I will do what I can.

RITHOLTZ: All right, I don’t have you all day so I want to get to some of my favorite questions, these are the questions I ask all of our guests and they often are revealing and let’s start with what’s the most important thing that most people don’t know about you?

NADIG: You know, I think we hit briefly on sort of my initial foray into the screenwriting and trying to be a creative writer, I tend to actually think about myself first and foremost being a writer. I happen to have ended up in finance for most of my career, I happen to have been locked in the passive investing ETFs for the last 20 years, but ultimately, I think of myself as a writer and a communicator and an educator, and it really does come — I mean if I had to go back and change one thing in my career, it would not be getting a creative writing degree from the University Massachusetts, I would hold on to that forever. I might give up the business degree.

RITHOLTZ: Really, that is interesting, there are some parallels there that I didn’t realize. That is quite fascinating.

Who are some of your early mentors?

NADIG: You know I would say, I went to Hollywood with some pretty grand ambitions and the woman that I ended up working for was a woman named Tara Sandler and she wouldn’t recognize me probably and in retrospect it all but she was the producer for this live TV reality show that we were doing everyday 90 minutes live TV, called Home and she was an unbelievable force in that business, in a very male-dominated culture, very young culture, and she sort of showed me that you can be both compassionate and a hard ass at the same time, and was both of those things to me and sort of whipped me into shape in a way that I think I desperately needed at the age of 20 or whatever it was when I ended up in Hollywood.


NADIG: And so she’s gone on to produce literally hundreds of reality TV shows since then, House Hunters and things like that.


NADIG: And has had a hugely successful career but I look back and I’m like, bosses that I’ve had and mentors that I’ve had and yes, there are investment folks, I got to work with the night is work with Larry Fink at Blackrock and Blake Grossman and folks like that, who are super influential but you know, would I be the same person without her kicking me in the backside? Probably not.

RITHOLTZ: That’s quite interesting.

What about investors? Who influence the way you think about the world of investing?

NADIG: You know, it’s not hard not to say Burton Malkiel…


NADIG: Just because, you know, if I look at the view my current thinking about markets and the difficulty of active management, not the impossibility but the extreme difficulty of successful active management, I always end up coming back to “The Random Walk” it just rings true. I guess the counterbalance of that would be on this for the same year of my life my early 20s, looking at you know, Peter Lynch and his you’re much more go to the mall find the stories you like figure out how they run their business learn about it and then invest in it, which is sort of the antithesis of “The Random Walk.”


NADIG: I think — and then the sort of Ben Graham “Intelligent Investor” version of that which is like really understand where the values are in a company. They are almost diametrically opposed in some ways, I tend to think of Peter Lynch and Ben Graham as sort of opposite ends of the active investing foodchain.

But I think that really helped shape my worldview, having those three in the mix.

RITHOLTZ: Let’s talk, you mentioned “Intelligent Investor” Ben Graham, what are some of your favorite books, fiction and nonfiction, investing related or otherwise?

NADIG: Oh boy, so…

RITHOLTZ: And you and I have talked about books…


RITHOLTZ: We talked about a frightening overlap between our bookshelves.

NADIG: I tend to read a lot of genre fiction science fiction in particular, I’m a big Heinlein fan.

RITHOLTZ: Heinlein you say?


RITHOLTZ: Do tell, mention a few Robert Heinlein books.

NADIG: Well, “A Stranger in a Strange Land” is one that I.

RITHOLTZ: I’d grab that book for sure.

NADIG: Definitely, that’s one that — I don’t reread it every year, my wife does, there’s a copy that just sits on her nightstand.


NADIG: And she just sort of rolls through it every — across the year.

RITHOLTZ: I used to do that with “The Lord of the Rings” Trilogy but I had to stop that at a certain point.

NADIG: Yes, so but more recently…

RITHOLTZ: Wait, before you move beyond Heinlein.


RITHOLTZ: One of my all-time favorite quotes comes from “The Notebooks of Lazarus Long” which is “Never try and teach a pig to sing, it wastes your time and it annoys the pig.”


RITHOLTZ: I just love that and that having read that 50 years ago and then rereading it a decade ago, it was like a lightbulb went off and I’m like, “Oh, I’m teaching pigs to sing in the have to stop that.”

NADIG: The other one, for years my password for like it’s not anymore so I will say it, but TANSTAAFL, There ain’t no such thing as a free lunch.

RITHOLTZ: Right, that’s right.

NADIG: Which is another Lazarus Longism that all of my password had TANSTAAFL in the middle of it somewhere.

RITHOLTZ: Built in somewhere.

You could go through a hole run of Heinlein books, they y were like every 10-year-old science-fiction geek…

NADIG: A hundred percent.

RITHOLTZ: Discovers Heinlein and works with the whole catalog.

NADIG: To me, the new Heinlein is China Mieville.

RITHOLTZ: We would…

NADIG: Who wrote — the most recent book I read was called “The City And The City” which is this bizarre book about how through effectively a new Jerusalem in which you have — it’s not explicitly saying this but you have two cultures that don’t agree with each other and can’t get along for deep held reasons.

RITHOLTZ: “City in a city.”

NADIG: The City And The City” — “And the City”, and they sort of live in the same physical space but ignore each other, and it’s a really interesting construct and then there’s a detective story that happens in the middle of it.

RITHOLTZ: Quite interesting.

NADIG: And she’s sort of my current favorite.

RITHOLTZ: What — tell — what else do you will see like outside of or from within science fiction.

NADIG: I tend to also read stuff that’s as far afield from my day-to-day life as I can get I like to read science…


NADIG: And philosophy…

RITHOLTZ: Give us a few.

NADIG: Well the “Godel, Esher, Bach” is one of my favorite books of all time.

RITHOLTZ: God, didn’t we talk about that?

NADIG: I don’t know whether we talked about that.


RITHOLTZ: So I had a philosophy class in college and that was one of the books. It’s amazing, it holds up, it’s not at all dated, it actually — someone else mentioned it, I will have to go through the my list of books and see who else but that is just an unbelievable book.

NADIG: Yes, so things like that.

RITHOLTZ: There aren’t many things like that.

NADIG: No, there aren’t, that is — like “The Panda’s Thumb”, like anthropology stuff.

RITHOLTZ: “Panda’s Thumb” I haven’t read.

NADIG: Yeah.

RITHOLTZ: Did you ever read “Last Ape Standing” we talked…


NADIG: Yes, yes, yes.

RITHOLTZ: That’s a really fascinating the science book and “Soul of an Octopus” was another one.

NADIG: You turned me on to “Soul of an Octopus” which is right up my alley that kind nonfiction where you go into a world that is not related to anything that you normally just…

RITHOLTZ: Just a — give me more, I have my own list books, I want to get your books.

NADIG: So I’m a big John Scalzi fan, John Scalzi is a science-fiction writer, I’m reading a great one right now that won the Hugo I think six years ago called “Red Shirts” which is trying to explain why all the redshirts in Star Trek are always getting killed.

RITHOLTZ: That’s fantastic.

NADIG: And it creates this whole sort of feasible construct about what would — how Starfleet could exist in a world where they are just killing off all the people in red shirts.

RITHOLTZ: Canon fodder.

NADIG: And I love stuff like that, I love…

RITHOLTZ: That’s great.

NADIG: That sort of break the mold, and actually you had — pardon the name, you had a Gentleman talking about blockchain six or seven episodes ago..

RITHOLTZ: Paul Vigna.

NADIG: Yes, I read his book on blockchain.

RITHOLTZ: Two books.

NADIG: Two books, right.

So I have been digging deep into that sort of part of the technology.

And then I read a lot of really boring plumbing books about the industry so like…

RITHOLTZ: So nonfiction.

NADIG: Nonfiction stuff.

RITHOLTZ: About the mechanics of how finance works.

NADIG: Yes, this is like this is the nerdiest one you’ll ever hear of, Rob Pozen who is at Fidelity for years wrote a book called “After the Trade is Made” which is about trade settlement, it’s like 1000 pages long and it is so great, it’s one of these books where when you read it you now know this like arcane knowledge that like eight other people the industry actually understand.


NADIG: I love that kind of thing. I love digging deep into something that we all take for granted and then teasing out the actual under nice — underneath the underpinnings of how it all works.

RITHOLTZ: All right so I’m going to make a book recommendation for you and I’m assuming you haven’t read it because of the date of it but did you ever read “Black Monday” by Tim Metz?

NADIG: Nope.

RITHOLTZ: All right, so it’s the entire history before during and after the ’87 crash and all of the things you’re describing, the mechanics of the introduction of futures and how portfolio insurance work and how the trades were executed and settled and where it broke down, and it’s a world that doesn’t exist anymore. But..

NADIG: It surprisingly does, actually…

RITHOLTZ: Some of it.

NADIG: So much about it that actually still that we replace portfolio insurance with Swaps markets and all sorts of other things but the surprisingly number — a surprising number things that are still true today that were true in 87. That is a good one though, I will take that one.

RITHOLTZ: Absolutely. So what do you find most exciting right now about the ETF space?

NADIG: Well there is no, obviously new ideas like the Bitcoin ETF I think are interesting, I think the stuff we talked about in corporate governance I think is interesting, I actually think the most interesting thing related-ish to ETFs is what’s going on in direct indexing, which is what…

RITHOLTZ: Direct indexing, you and I have had this conversation before with custodians. explain what direct index is.

NADIG: Yes, so there are firms like M1 finance and Wealth Front are two that come to the top of my head that are doing this effectively instead of going to an ETF provider, you go to a broker, like M1 finance and you’d say, “Here’s my 100,000 bucks” and you would subscribe to a portfolio, so you would say “I would like to be in the S&P 500, here’s my $100,000.”

Well, you can’t really buy all the stocks in the S&P 500 and the rate waits because the values don’t line up so instead what they do is they just roll your desired position into the firm’s overall desired position and assign you your fractional ownership of the shares that make up the S&P 500, so at the end of the day M1 knows we have $1 trillion whatever it is and Dave’s 100,000 is this economic exposure so we need to own these shares to back up that economic exposure.

So they do the fractional sharekeeping, so I own a quarter of share of Apple as opposed to a whole share of Apple.

RITHOLTZ: Now, why is that superior to just spending $8 and 3 basis points and buying the ETF?

NADIG: Well it cuts the issuer out of the equation entirely.

RITHOLTZ: But it’s 3 BPs, or 5 BPs, who cares?

NADIG: Well, if that 3 BPs can be one…

RITHOLTZ: It’s 4 BPs, to me, look there is a huge difference between 1 percent and zero…


NADIG: So the reason why it’s interesting is not because it cuts the three basis points down…

NADIG: The reason it is interesting is because it makes a direct connection between the intellectual property of investing which is really all we care about.


NADIG: And me as the investor, removing effectively at the all of the middlemen except to the transaction engine which is always going to be a broker somewhere in the middle making the right transaction.


NADIG: So what that means is I can now go and say instead of I want the S&P 500, I can say I want the S&P 500 but I don’t want Apple, that’s impossible to do with an ETF, like I would have to go short Apple out of the portfolio, it’s impossible.

RITHOLTZ: So taking the best part about indexing and adding human terrible judgment to…

NADIG: Well.

RITHOLTZ: You and I have disagreed about this.

NADIG: So yes, it does open up that but what it really does is it lets an index provider mass customize any useful fashion so now all the sudden you could come up with six different versions of the S&P 500 that have different ESG Slants, no gun ownership or no sin stocks, or load up on the sin stocks because I think that that oversold or whatever.

RITHOLTZ: Got you.

NADIG: And now I can have that sort of personalized index service and also let you do things that can be very useful so I can put the tax account you can do single stock — tax laws harvesting and those kinds of issue, you can take into account the fact that you know I as a CBOE employee have CBOE stock, maybe I don’t want to load up with more CBOE stock in the S&P 500…

RITHOLTZ: That makes sense.

NADIG: Sure.

RITHOLTZ: If only GE employees had that.

NADIG: Yeah exactly. And that is a real problem for a lot of corporate America so I think that direct indexing model eventually supplants the entire package product market. Like why do I actually need a mutual fund company in the mix if I want to be in of smart beta product, why do I not just have a direct relationship with Rob Arnott and Research Affiliates like why can’t I just subscribe to his RAFI…


RITHOLTZ: I got you. That is intriguing, we will see if that catches on.

Tell us about a time you failed and what you learned from the experience?

NADIG: Boy, other than the big one like and we talked about open fund…


RITHOLTZ: Give us a different one.

NADIG: And that one crashed.

RITHOLTZ: Give us an educational one.

NADIG: Boy I made some really great mistakes as a parent. Parents big mistakes all the time and you I think I underestimate my kids a lot. So specific examples you know I’ve traveled with my daughter pretty extensively, she’s now college and we went to Paris when she was like 14 or something like that and we were walking through some museum and I was like “We should see this and we should see that we should see this other thing” and she and she got really annoyed and then did end just saying, “I have already seen all these things on the Internet I want to see all the things that I can’t see” and created our own — her own path through the Louvre that never get photographed and like my failure to realize her intelligence is something that I think I’ve done over and over and over again.

RITHOLTZ: That’s kind of interesting. So speaking of youth, give us this sort of advice you give to a millennial or recent college grad who was looking for career advice?

NADIG: Yeah and I actually get this one a lot the number one thing I can say is pick up the goddamn phone.


NADIG: Like the number of — and this isn’t a millennial thing I’ve had people — folks that I’ve hired who were in their 40s and who are in their not quite 20s yet, there is this reluctance in modern culture to actually pick up the dang telephone and have a conversation with somebody as opposed to send them an email or sending them a text, and the difference is enormous.

That human connection of talking to somebody often is the difference between a lifelong relationship where you can get something out of that relationship in a bilateral way and a transactional relationship where you just simply get a thing done and then forget about it.

So actually learning how to make and have good conversations on the phone and in person is a dying art and it is not something anybody teaches.

RITHOLTZ: Interesting and a final question. What you know about the world of ETFs today that you wish you knew 25 years ago?

NADIG: Oh boy, I know a lot more about how you can step on your own feet with trading, I used to — I sort of dismissed that like other trading infrastructure works fine whatever you work with a broker, most of the horror stories that fill up my mailbox are people who don’t have good trading hygiene, who you know…

RITHOLTZ: Good trading hygiene.

NADIG: Right, they do something they shouldn’t do right? They put in a market order in the midst of a crazy volatile day and they put in a market order and some tech ETF and are surprised when they get an execution 5 percent different than what they expected.

And that’s not ETFs being broken it ETF relying on an ecosystem which is inherently chaotic.

RITHOLTZ: Quite fascinating.

We have been speaking with Dave Nadig, he is the managing director of If you enjoyed this conversation, well be sure to look up an inch or down an inch on Apple iTunes, Stitcher, Overcast, Bloomberg wherever finer podcasts are sold and you can see any of the other 200 plus conversations we’ve had.

We love your comments, feedback, and suggestions, write to us at I would be remiss if I did not thank my crack staff who helps us keep these conversations together. Medina Parwana is our producer and audio engineer par excellence. Taylor Riggs is our booker/producer, Michael Batnick is my head of research.

I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.


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