Crypto News: ETF IQ: Jack Bogle's nightmares

Welcome to ETF IQ, a weekly newsletter dedicated to the $12 trillion global ETF industry. I'm Bloomberg News reporter and anchor Katie Greifeld.

Two weeks ago, this newsletter meditated on the existence of one-day-only ETFs — leveraged funds that track just a single stock, amplified several times over. The only realistic holding period for such products is just a single day, as the nature of the options rebalance means that long-term performance is often devastating.

Good news: a closer look at the trading dynamics of the most-popular single-stock funds shows that traders are seemingly using them as intended.

Take the largest such fund, the $4.8 billion GraniteShares 2x Long NVDA Daily ETF (ticker NVDL): dividing its average trading volume by its average market cap produces a turnover rate of about 35.9%, meaning that it takes just under three days for all of its shares to change hands, Bloomberg Intelligence data show. That compares to about 185 days for the $503 billion Vanguard S&P 500 ETF (VOO), which is popular among buy-and-hold investors.

So that metric, used as a very rough proxy for a fund's average holding period, suggests that traders are rotating in and out of these ETFs with stunning velocity. Still, someone's probably getting smoked.

"Inevitably, there are going to be unsuspecting victims of these products, for whatever reason — there aren't adequate guardrails in place to prevent them from using them without adequate knowledge of how to," said Ben Johnson, Morningstar Inc.'s head of client solutions.

The mere existence of single-stock funds and the various other breeds of high-octane derivatives ETFs speaks to the cultural shift underway in the $10 trillion US ETF industry. The first ETFs were born in the early 1990s, the offspring of index funds. The late Jack Bogle — father of the first index fund — famously loathed them, saying that ETFs only encourage trading among "fruitcakes, nut cases and lunatic fringe." And that was years before the first such US product launched.

"For people stuck in the 1990's and the 2000's, when ETFs were all about tracking an index fund, this stuff bums them out, but it's an evolution of the technology," said Eric Balchunas, Bloomberg Intelligence's senior ETF analyst and the author of The Bogle Effect. "Bogle didn't like that ETFs tempted you to trade and he didn't like the mutations and marketing. A leveraged, single-stock ETF has both of those in spades."

Meanwhile, in mutual fund land, something important happened at the Securities and Exchange Commission: the regulator backed away from its plan for so-called swing pricing.

The price-adjusting mechanism would have meant that in periods of high redemptions, a cost would be imposed on investors attempting to withdraw. The measure also would have required funds maintain at least 10% of a fund's assets in highly liquid assets. SEC head Gary Gensler said in 2022 that swing-pricing would have helped prevent liquidity shortfalls during intense market volatility.

As you might imagine, the proposal drew fierce criticism from the asset-management industry, with titans such as T. Rowe Price Group Inc. and BlackRock Inc. leading the push back. The opposition argued that swing-pricing would only serve to increase costs on investors while doing little to protect long-term shareholders.

While there's a possibility that the issue could resurface — the agency indicated that was a possibility back in July — the retreat appears to be a win for asset managers. And it may free the SEC up to focus on matters that the ETF industry cares deeply about.

Morgan Stanley, Fidelity and Dimensional are among the nearly two dozen ETF issuers who have lined up to ask the SEC for permission to add ETF share classes to their existing mutual funds — an avenue that could birth "thousands" of new ETFs. It's a structure that Vanguard Group enjoyed exclusively for nearly two decades.

Even though Vanguard's patent expired last May, the SEC has yet to bless widespread adoption of multi-share classes. Because the firms applied for exemptive relief, the regulator isn't obligated to respond to any of the applications by a certain deadline.

While speculative, the industry chatter has been that the SEC may have wanted to resolve the swing-pricing proposal before turning its attention to the petitions for multi-share class approval. With the matter dropped, maybe there's some action in the offing.

Investors are set to have their first shot at buying European collateralized loan obligations through an exchange-traded fund, following the growth of the asset class into a multi-billion-dollar market in the US.

Bitcoin trails traditional assets in August as the month draws to a close, hampered by ebbing liquidity and lingering worries that governments may sell from their stockpiles of the cryptocurrency.

The popularity of ultra-low cost passive ETFs is fueling a surprise shift in fund management: New entrants are getting pricier.

In this week's Drill Down on Bloomberg Television's ETF IQ, Corey Hoffstein of Newfound Research joined us to talk about the Return Stacked US Stocks & Managed Futures ETF (RSST). As Lu Wang of Bloomberg News wrote in a recent article, the fund buys a dollar's worth of exposure to US equities for every dollar in the fund with the help of leverage, and then using the leftover cash to "stack" another trade on top. In RSST's case, it adds a trend-following strategy.

It's a fresh take on portable alpha, a leveraged trade that blew up in the 2008 financial crisis. But in Hoffstein's telling, the issue with the 2008 vintage of portable alpha was that managers would take the freed-up cash and invest in hedge funds that were quite correlated to equity markets, and which then gated redemptions once stocks starting spiraling.

What we're ultimately trying to solve is that the fundamental concept here — freeing up capital to add a diversified return stream to your portfolio — is incredibly powerful, but we want to solve those other issues. We want to avoid using too much leverage, and we want to have this nice liquid structure with which investors can easily get in and out.

RSST has returned 17.4% so far this year, slightly lagging the S&P 500, and charges 0.98% annually.

Rob Arnott of Research Affiliates and Simplify's Harley Bassman join me, Eric Balchunas and Scarlet Fu on Bloomberg Television's ETF IQ. We'll be live at noon on Wednesday given Monday's US holiday. Watch on Bloomberg Television's ETF IQ, on the Bloomberg Terminal at TV <GO> and on YouTube.

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