Fun Shiny Object: FTX, Public, ETFs
2024-05-10 00:43:50
<p>The audio companion to Bloomberg Opinion’s beloved Money Stuff column hosted by its author Matt Levine, “whose deadpan style mixes technical elucidation and wit” (NY Times). Once a week, Matt and his friend, Bloomberg News reporter and TV host Katie Greifeld, talk about Wall Street, finance and…other stuff. New episodes every Friday.</p>
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I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players, and that's the lens we're going to use to approach this entire show. We're going to be discussing everything from high-stakes poker to personal questions.
Like whether I should call a plumber or fix my shower myself. And of course, we'll be talking about the election, too. Listen to Risky Business wherever you get your podcasts.
Bloomberg Audio Studios. Podcasts, radio, news.
Hello and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.
And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
What do you got today, Katie?
Today we're going to talk about FTX has a lot more money than it thought it did. Then we're going to talk about private markets and just how hot they are. And then we're going to talk about ETFs and some oxymorons in the industry.
Fabulous.
We were really, like, deliberating over what we were going to record this week. And then the most obvious Money Stuff story dropped, and that is FTX.
FTX. I've written a lot about FTX. I'm trying to get away from crypto, but it keeps pulling me back in. FTX found some money.
A lot. Billions.
A lot compared to.
A lot compared to what they had.
Yeah, like a surprising amount. A surprisingly large amount.
Should we say how much?
I don't know how much.
I have it in front of me. I've printed out some notes. $16.3 billion in cash, which it will distribute.
Yeah, I mean, the answer to how much is, like, if you had a claim at FTX, if you're a customer depositor at FTX, you'll get back something north of 118 cents on the dollar. You'll get back all of your money, plus, you know, two to three years of interest, because you'll get your money about two to three years after FTX went bankrupt.
Right. Yeah.
Now, there's a big caveat to that, which is, if you had dollars at FTX, or tether, or euros, you'll get back your money with interest. If you had Bitcoin at FTX, you'll get back the value of the Bitcoin on November 14th, 2022, in cash, plus interest. So, like, a Bitcoin back then was worth, like, $17,000, $18,000.. And so, if you were a Bitcoin customer of FTX, you'll get back about $20,000.. And a Bitcoin right now is worth about $62,000..
So, you get back, you know, a little less than one third of your money if you had a Bitcoin on FTX.
Yeah. And I know that that is a tough pill to swallow for many people, just judging by the reactions on X.
Right. It's harsh. It's like, the news stories are all, FTX has enough money to pay back all creditors at $118,000, and everyone on social media is like, ah, not me. I'm getting back less than a third of my money, which is true. It's true.
It's just the sort of fact of bankruptcy law and accounting that that's what you get. I will say, though, that most of FTX's customers seem to be owed dollars. Like, if you look at the numbers that they've put out, something like 70% of the customer claims were in dollars. And, like, you know, there's probably 2.5 billion of Bitcoin and Ethereum claims. Those are the main crypto claims.
There's a bunch of others, but it's, like, mostly Bitcoin and Ether. Like, 2.5 billion of that. But, you know, there's like 7 billion of dollar and tether claims. So, most people are getting most of their money back, but then the people who aren't are getting back, you know, 30 cents on the dollar.
And this is really unique. I mean, in terms of bankruptcy cases, I mean, what, the average is 118% that they're going to get back. I feel like it doesn't typically work out this way. We have had some recent examples, such as Hertz, which actually exited bankruptcy with money left over that they then repaid shareholders with. But this feels pretty unusual.
Well, yeah. I mean, one thing that's very unusual is, like, you mentioned Hertz. Like, it does sometimes happen that a company will go bankrupt and then, like, assets, will recover and it'll have more than enough money to pay the creditors. And then, as in Hertz, the shareholders get the extra money back. It's, like, extra weird here that they have extra money and they're like, we're just going to give that to the creditors.
Now, part of that is clearly because some of these creditors are, you know, not getting made whole, right? Like, the Bitcoin creditors, you know, you're like, oh, we'll give you a little 18 extra cents to make up for the fact that you've lost two thirds of your money. Part of it is that, like, if there were money left over, it would go to the equity holders. The equity holders in FTX are, like, incredibly unsympathetic. It's mostly Sam Bankman for it and, like, also some venture capitalists who enable them.
Also, like, in fact, not all of the creditors will be made whole because, like, actually between, like, the customers and the equity holders, there's this giant claim from the US government, which I've never really understood. It's like the IRS is like, FTX had huge profits and they need to pay us tens of billions of dollars of taxes on those profits, which is very weird because, like, out of the other side of its mouth, the government is saying FTX actually lost all the money. So there's, like, all these tax claims. There's all these regulators who wanted to fine FTX because it did a lot of illegal stuff. So basically, they all agreed, like, the fine claims, the taxes, everything like that is going to be subordinated to the customers.
So basically, if there's any money left over, it'll go to the government. And the government is like, fine, the customers can have some interest. So I think that's kind of how it worked out here.
So it feels like a happy end for some people, obviously.
Oh, people, you know, the Bitcoin customers are still real mad. Yeah. It's not, you know, it's, like, it's not that happy.
But it's better than it could have been.
Oh, yeah. Oh, yeah. And the claims have traded the whole time and it's... Claims trading is incredible. Like, they started at $0.03 on the dollar and they're now trading over $100..
Yeah. Well, it's really interesting. I mean, some people made a business out of that. I'm thinking about. there's this FTX creditor project.
It was started by this guy, Louis Durini, also with another group of people, which included FTX, former head of product. I remember speaking to him on BTV during the sentencing, Sam Bankman Freed's sentencing. And at that point, that was in late March, he had over $90 million of these claims. So, I mean, he's made out pretty well. Yeah.
And even at that point, when it was still seen as probably people are going to be made whole, people were, according to this guy, people were still eager and willing to sell their claims because they wanted liquidity now. They didn't want to have to wait several months to years to be made whole. They just wanted the money now. So, they could go buy more Bitcoin and more crypto.
Yeah, that's reasonable, right? I mean, if you were an FTX customer at the time of the bankruptcy and you had Bitcoin on the FTX and you couldn't get it out, what you might have done is said, I'm going to take all of my cash and buy that Bitcoin somewhere else, because I think Bitcoin prices are going to go up. And then you'd be made whole, right? You'll eventually get your cash out and you'll have been able to turn around and put it in Bitcoin. But a lot of people didn't do that, for one, because some people, all of their money was on FTX and they couldn't get more cash.
But also, I just think back to the collapse of FTX, that felt like a truly nuclear event for crypto, right?
An extinction event, yeah.
If you looked at that and you were like, Solana is going to trade up 1,000% in the next 18 months, people would have thought you were crazy. It really just seemed like such an end-of-the-world event for crypto that part of why the claims were trading at three cents on the dollar is. FTX had this pile of assets and it's like, well, they're not going to get any money for those assets. Those are all crypto assets. And then, of course, crypto recovered and they were able to get back more than the dollar amount of their claims.
But if you were buying those claims at three cents on the dollar, you're making kind of a bold bet that crypto would recover as rapidly and as much as it does.
Yeah. It begs the question, Sam Beckman Freed.
Great question.
What if he had another year, Matt?
Well, I mean, the thing with him is like, you know, his description of this made people so mad. It was like, he's like, we had a run on the bank, right? And it wasn't a bank. You weren't supposed to have a run on the bank, right? There were a lot of problems, right?
Like, one is that, like, he wasn't running a bank. He was definitely telling people things about FTX's balance sheet and about its risk management. that weren't true. And a lot of the money was being invested into weird stuff like paying Tom Brady a lot of money and buying apartments for his family and things like that.
But, but, but ultimately, you know, basically like 10 minutes after he signed the bankruptcy papers, he was like, if I had had another week, I could have saved this company. I could have made all the customers whole. I could have gotten us back on our feet. And the worst mistake was signing the bankruptcy papers because I could have pulled it out. No one believed that at the time, right?
Like, he signed the bankruptcy papers because, like all of his lawyers, all the people who worked at FTX were like, buddy, you gotta pull the plug on this, right? And like, no one's believed it ever since. And it's not true. I don't think, like, I don't think if he'd had another week, he could have like found a big equity investor who would have like underwritten all of these assets and said, we're going to make all the customers whole because we think there's enough value here. But, like, ultimately that worked out to be true, right?
Like, it worked out that there was enough value there and he couldn't find another investor to come in and underwrite that because, like, no one trusted FTX, right? No one trusted him. And also it was like crypto winter, right? Like crypto crisis had collapsed and it didn't look good. But the interesting thing about the bankruptcy system is that like sort of automatically becomes that investor, right?
Like when you file for bankruptcy, there's a stay on customer claims. So the customers can't get their money back, which is really helpful when you're running a quasi bank. And, like his, big problem was people wanted their money back and he didn't have money to give them, right? If the customer just can't ask for their money back, that gives you a lot of time to work things out. And then also the bankruptcy process was so slow and deliberate that by the time they got around to selling their tokens, the tokens had rallied, right?
So probably it would have been more sensible to sell sooner, except that prices went up a lot while they were waiting. So it worked out great. The bankruptcy system sort of worked out as like a patient investor who could step in and take over FTX, but it didn't work out for SPF, but it worked out for, kind of worked out for creditors. Understanding that the ones who called Bitcoin are still mad.
I'm sure he's just sitting in jail, so frustrated.
Oh yeah. I mean, he's been frustrated all along. Yeah. You know, the interesting thing to me is like, when this collapsed, one question that you'd have that I had was like, what was he thinking? What was the end game here?
Right? It's like, you've taken so much customer money, put it into such, like. no one knew where the money had gone. It seemed like a lot had been lost on weird trading things. It seemed like there was these big holes.
Conceptually, if you have a big hole in a very lucrative business, you can like earn your way out of it by just continuing to print money. And I guess that's what he hoped he would do. But it's like also, I don't know, the whole was kind of like prices fell, the balance sheet didn't work, and then prices did come back and the balance sheet kind of worked and had no one noticed for a few more weeks, it might've been fine. I don't know.
We'll never know. But what we do know is that, at least for these creditors, the payouts are several months away. I basically want to get to. what do the next couple months look like? Because I am not a bankruptcy expert.
I'm not afraid to say it. Where does this go from here?
Well, I think they have to like confirm the plan. I think there are a lot of people who get a vote on it. I think, you know, in general, the majority of the creditors are probably pretty happy with this because they're getting like kind of more than they're entitled to in bankruptcy. I think a large minority of the creditors, the ones who hold crypto, are not very happy. But it's also like, it's not really a debate, right?
Like, I mean, this is how bankruptcy works. And there have been any number of crypto bankruptcies. And I think there was some uncertainty early on, like, how do you value these things in bankruptcy? Like, how do you decide whether people get back their bitcoins or their dollars? And I think it's now pretty accepted that, like, this is the way it works.
And it sucks if you're a Bitcoin holder and Bitcoin prices have rallied. But yeah, I mean, what's going to happen is they'll confirm the plan. I mean, the plan is kind of estimates, because they sell a lot of stuff. They still have billions more of tokens that they're selling. But assuming all goes well, they're going to get the money and then they're going to slowly pay it out to creditors.
It's a whole like process of you send in forms and I don't know, like, it's like.
I'm just wondering, when is the story truly over, you know?
I mean, like, they expect the plan to be confirmed in around September. They expect the payouts to take another year after that. So it's a while. But you'll stop caring about it at some point. I'm almost there.
It'll be, yeah, right. It'll be like, oh, they've gotten 107 cents. And like in six months, they'll get four more cents. Like, OK, fine, thanks.
Yeah. Imagine if crypto prices actually like break 100,000 by the point where these payouts are actually paid out.
Yeah. But at this point, you can sell your plan for 100 cents and you can put that money into Bitcoin, right? If that's your bet, like you kind of know where you are and just put the money into Bitcoin. I will say that, you know, we talked about Hertz, like the closest analogy is actually Mt. Gox.
Do you remember Mt. Gox?
I have to reach far back, but yes.
Magic the Gathering online exchange.
Yeah.
The first big crypto exchange. A lot of its Bitcoin disappeared in the hack.
Yeah.
There were swirling questions about whether it was an inside job and so forth. But eventually, you know, they got back. I don't think they recovered all the Bitcoins, but they got a lot of the Bitcoins. And they went bankrupt when they were hacked. And then Bitcoin prices rallied so much.
This is like from 2014.
. Yeah. Bitcoin prices rallied so much that by the time they were like ready to exit bankruptcy, they had not only enough to pay off all the claims of 100 cents on the dollar, but they had billions of dollars left over for like the owner of the exchange, which I think ultimately like. they ended up giving that to, like the Bitcoin holders, because there were a lot of lawsuits. But that was the sort of case that kind of set the tone for like, if you go bankrupt as a Bitcoin exchange, you only owe the dollars.
You don't know the Bitcoins. It just suggests that someone doing it as a trade, like everyone who's like, actually like run a bankrupt crypto exchange, has gotten in a lot of trouble. Not necessarily. It's not like a good trade, but someone's going to crack the code of like you run a crypto exchange. Crypto prices are really volatile.
When they go down, you file for bankruptcy. Then you've crystallized what you owe people. Then they go back up again and you get all of the excess. You get like a free option on the excess of the crypto price appreciation.
Maybe the person who will do that trade is listening to this podcast right now.
This podcast is supported by Apollo Global Management. When it comes to building and financing stronger businesses, Apollo turns some of the world's most complex challenges into growth opportunities. Apollo's customized capital solutions help drive innovation and growth, turning the great businesses of today into leaders of tomorrow. As one of the world's largest alternative asset managers, Apollo is helping to fuel the real economy by generating investment-grade credit, helping to fill gaps in America's financial ecosystem, and providing greater access to more resilient and diverse pools of capital. By providing companies with access to flexible financing solutions and partnering with management teams to help grow their businesses, Apollo is there every step of the way to drive positive outcomes for companies and power economic growth.
Apollo. Investing in tomorrow, today. Learn more at Apollo.com slash private investment grade.
I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players, and that's the lens we're going to use to approach this entire show. We're going to be discussing everything from high stakes poker to personal questions.
Like whether I should call a plumber or fix my shower myself. And, of course, we'll be talking about the election, too. Listen to Risky Business wherever you get your podcasts.
Private markets.
Well, I'm trying to remember. Did we speak about Destiny Tech in a real episode? We did. Was that our first episode? It might have been then.
It was either number one or number two. I think it was number one.
I think it was number one.
Is this our fifth episode? I believe it is. Okay. So, somewhat recently...
It's all somewhat recent.
We spoke about the Destiny Tech 100 Fund, which is a publicly traded fund that says that it invests in hot tech private companies. And this is all an inelegant intro to basically say that Aaron Griffiths from the New York Times wrote a really interesting piece this week about private markets and just this boiling point that it feels that we're at, especially because it feels like companies just stay private forever right now.
Yeah. I mean, there's two things, right? One is like these big private household name tech companies that stay private forever. Stripe has been private for more than a decade, and it's a giant company. SpaceX.
SpaceX has been private forever and is a gigantic company. It's like easier than ever for like these big tech startups to raise money and be big, famous companies while staying private. So, you know, if you want to own these cool household name companies, you can't get them on the stock market. But the other thing that I was thinking about is like, sort of technically, what private means is that only accredited investors can buy it. So, like anyone can buy stock of a publicly listed company, right?
But if you want to buy a stock of a private company, they're only allowed to sell it to you more or less if you are an accredited investor. That kind of just means, like a wealth standard, you need to make, like more than $200,000 a year, have more than, I think, a million dollars of assets. And.
Like a dentist.
Like a dentist. So this is what we talked about last week, that, like dentists, are like the sort of paradigm accredited investor. But like. one fact about accredited investors, like the SEC put out a study a while back that found that in 1983, when these rules were set, there were 1.5 million accredited investor households in America. In 2022, there's 24.3 million.
Basically, what that means is that the American investor class, like the people who are going to have investments, you know, are going to like play the stock market, are largely legally eligible to invest in private markets. And so what that means is there's just a huge business of selling to them. because, like if you are a broker or an asset manager and you can sell someone private company stock, then you can charge a big commission, you can charge a 2% management fee, you can charge all sorts of fees. If you are an asset manager, like the paradigmatic public company investment is like an asset manager charges like two basis points for an S&P 500 ETF, and the person buys that from, like Robinhood, with zero commission, right? The economics of public market investing for, like the industry, are just like not that great, right?
Yeah. Whereas, like the economics for private investing are amazing. So there's all this demand from investors who are eligible to invest in private companies, all this demand for them to invest in hot tech startups and there's so little supply because these startups don't want people to buy their stock.
I'd like to just talk about some numbers, because I feel like the accredited investor number probably speaks for itself. But I mean, in this New York Times article, another way to put it is that the secondary market right now, it's on track to hit $64 billion this year, which is a record. A decade ago, that was about $16 billion, the secondary market for these private companies.
Which is like nothing compared to the daily trading volume of like Tesla, right? But like if you're making 1% on each trade, it's a nice little business.
Well, at the same time, you take a look at the public equity market. In the US, there used to be 7,500 public companies and right now there's about 4,000 today. So I mean, public markets are shrinking, private markets are getting even hotter and even bigger. And, like you said, there's this scarcity. And I mean, hearing you describe that dynamic, I mean, why would a company go public right now?
I mean, the answer used to be that that was where all the money was. I don't think that's really true anymore. It's still kind of true. Like it's still like the biggest investors are still in the public markets. It's still like if you need to raise a lot of money, it helps to be public.
But I do think that the main answer for a lot of tech companies is that you have given all the stock to either employees or early investors or your founders, and they eventually want to be able to sell. And it is hard for them to sell if you stay private, because there's like a relatively tiny secondary market for private stocks. And if you're like founder, CEO of a private company, you know, your ability to get billions of dollars and spend it on stuff is kind of limited. Whereas, like if you go public, you can sell your stock and get billions of dollars. But if you've raised money from venture capitalists, and if you've given stock to early investors, like they just expect you to do an IPO at some point.
There's like a sort of traditional expectation within, like, you know, five to 10 years, you're going to do an IPO. So all those people who trusted you with their money can get their money back and can hopefully make a huge profit, because hopefully you'll go public at a large multiple of where you raise money. But, you know, for some of these companies, like there is a temptation not to do that, because going public, you have to disclose all your stuff. You get sued a lot for securities fraud. They're like short sellers and activists.
It's like a big pain. You have to pay a lot of banks. So it's tempting not to. And then you just have to solve the problem of like, what about all these people who trusted you? Like, how do you give them their money?
And there are answers to that, right? You know, the Stripe and SpaceX's of the world, like OpenAI, will do tender offers where essentially they'll match some big new outside investor with, like their early investors and their employees and say, hey, if you want to sell some of your stock, we have someone who's willing to buy $5 billion of stock. And so then you can sort of control who buys the stock.
It's like a closed circuit.
Yeah. The company is staying in control of who's buying and selling the stock, but you're giving people the opportunity to sell. The other option is, just like, you can say, look, we're going to stay private because we don't want to do the disclosure stuff. We don't want to be a public company, but we're going to let you trade the stock on the secondary market. And then anyone who wants liquidity can like find a buyer and sell their stock.
You don't see a lot of that. Like, it's striking to me how resistant a lot of these companies are to allowing secondary trading. You know, there's in that story, the Aaron Griffith story. at the time, she talks about, Destiny, Tech 100 has, like, bought some forward contracts on Stripe.
Which is a no-no.
Which is a no-no. So part of the secondary market is these forward contracts, because, like these, employees are not allowed to sell stock. And so people will come to them and say, well, why don't you sign a contract saying that when you are allowed to sell the stock, you will. And all the companies are like, no, that's not okay. That's cheating.
That's not allowed. But so Stripe actually put out a statement saying, Stripe does not offer opportunities for retail investors to invest in the company, nor are the majority of Stripe shareholders permitted to transfer their shares without Stripe's consent. As such, any offer to invest in Stripe that does not come from or through Stripe is very likely a scam. They don't want people trading their stock in the secondary market. They want to keep control of what's going on.
And yet, I mean, Destiny Tech still says it owns Stripe, by the way.
Ah, well, you know, at some point, will they litigate? that? I don't know.
If you go to the website, it's still there.
I just want to mention, do you remember the Carta scandal?
No.
Okay, so do you know what Carta is?
No, I was hoping you'd tell me.
Carta is a company that helps private companies, tech startups, run their cap tables. So if you're a tech startup, you have a bunch of employees. You're giving them stock. You have a bunch of venture capital investors. You have all sorts of different classes of stock which have different rights.
You probably have a spreadsheet where you keep track of this. in a sort of not very good way. Carta's like, no, no, we'll keep track of it for you in a good way. so you'll know exactly how much stock you have outstanding and who has what rights and whatever. And we'll track who your shareholders are.
And that's a valuable service that they provide to companies. But it's also an incredibly valuable list to have, because there's so much demand for private company stock. So Carta knows who all the people are who have the stock, right? So it's like, we just have the list of every private company, every tech startup's shareholders. And like that list is so valuable.
So many people would want to pitch those people on selling their stock for cash or whatever. And Carta got caught using that, because Carta was running a secondary market and they got caught pinging a shareholder of a private company who had not publicly said anywhere that they were a shareholder. But Carta knew from running that company's cap table that this was a shareholder and the company's CEO complained and Carta was very embarrassed. And they actually shut down their secondary market in like a couple of days.
Yikes.
And it's like, I very much see where Carta was coming from, because, like, that's a valuable list. Yeah.
I would like to look at it.
People want to sell the stock. It's a useful service to put those people together. And, like the company was mad, but it's like, who cares? Like why does the company, like these tech companies, like, really believe that they have a proprietary right to, like, restrict who trades their stock? And like, this is not how public companies think, right?
Like public companies can't do that. Like public companies, if you want to buy their stock, if you want to sell their stock, you can buy it or sell it. And in the tech startup world, companies seem to be a lot more proprietary about who gets to own their stock and like offended when someone tries to buy it away from current shareholders. I don't know. It's like an interesting new norm.
Yeah. To the point that, you know, there's a lot of employees within these companies that would like to sell. There's obviously a lot of investors who would like to buy those private shares. I thought it was interesting. There is this little anecdote in the New York Times piece, quoting Jeff Parks.
He's the chief executive of Stack Capital, which is one of those platforms. He said, quote, you want to be on the golf course? Like, hey, I own some SpaceX. And I thought that was pretty funny because in February, actually, I was at this fundraising event for a foundation at this swanky New York City apartment. And I was in conversation with this guy.
And he said, yeah, I own SpaceX. And I was like, oh, my God. So that was pretty fun.
I mean, he's right. When Stripe says that any offer to buy Stripe shares is a scam, they're not just talking about people doing forwards. That is, in fact, a popular scam, right? There was like a rash of these when Facebook was a private company. Like, everyone, was offering fake Facebook shares.
Yeah. It's such a scam because it's not just an investment opportunity. It appeals to people's sense of exclusivity. It's like, oh, I get to go to a party.
It's a status symbol.
It's a total status symbol. And so it is true that, one, there's a lot of demand for it as a status symbol. And two, a lot of people sell fake shares to meet that demand.
This podcast is supported by Apollo Global Management. When it comes to building and financing stronger businesses, Apollo turns some of the world's most complex challenges into growth opportunities. Apollo's customized capital solutions help drive innovation and growth, turning the great businesses of today into leaders of tomorrow. As one of the world's largest alternative asset managers, Apollo is helping to fuel the real economy by generating investment-grade credit, helping to fill gaps in America's financial ecosystem, and providing greater access to more resilient and diverse pools of capital. By providing companies with access to flexible financing solutions and partnering with management teams to help grow their businesses, Apollo is there every step of the way to drive positive outcomes for companies and power economic growth.
Apollo, investing in tomorrow, today. Learn more at Apollo.com slash private investment grade.
I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players, and that's the lens we're going to use to approach this entire show. We're going to be discussing everything from high stakes poker to personal questions.
Like whether I should call a plumber or fix my shower myself. And of course, we'll be talking about the election, too. Listen to Risky Business wherever you get your podcasts.
So, exchange traded funds.
Yeah.
The name implies a portfolio of different assets, a lot of different securities. But this interesting thing has happened in the ETF universe, where I live. You have single stock ETFs. You have leveraged single stock ETFs. They only track one stock, and they do it a lot.
And it's fun because it kind of feels like an oxymoron. And I remember when these things launched, which was one or two summers ago. Time is a flat circle. But a lot of people asked, who are these for? Why do these exist?
These shouldn't exist. It's a subversion of the structure. And they're actually super popular.
Oh, sure. By the way, it's not really that ETFs have to be flat. Other very popular ETFs include the gold ETF.
For sure.
The Bitcoin ETF.
For sure.
It's a structure that I think started as like, let's have a mutual fund that is exchange tradable and tax efficient. But it turns out it's like a box that you can trade on the stock exchange. It's useful for lots of things that you can't otherwise trade on the stock exchange, like gold or Bitcoin, or twice the price, or negative, two times the price of a stock.
Yeah, that's a fair point. But I will say there was just so much skepticism about these things.
I believe there is still a lot of skepticism.
There is still.
Not about their retail appeal, because they are doing great, but about their usefulness.
Well, for a while, it looked like, I mean, for every popular single stock ETF out there, and we're going to talk about some of them, there are a lot of ones with very little money because they track boring stocks. But the ones that track interesting stocks, such as Tesla, such as Nvidia, have really popped off. It is like a winner-take-all sort of situation.
You're the ETF business expert. How bad is it for you to run a single stock ETF that doesn't attract a lot of money? Like, how much does it cost you?
How much does it cost to run an ETF? That's the thing.
It's just like a box.
It is a box. But I mean, you still have people that need to keep the box alive.
Yeah, there are paths to feed, but like.
Actually, I'm so glad you asked me this question, because I was just reading this article that I wrote.
That was an embarrassing sentence. It's like when someone walks by my desk and I'm watching myself on TV. But anyway, I was reading this article that I wrote in October of 2023.. Citi had a report, actually, on this, and they found that roughly a third of ETFs that exist right now in the U.S. don't make enough to cover their operating expenses, which is just a reality of the ETF world.
that costs have gotten so low. Like, there's so many funds on offer that charge less than 20 or 10 basis points a year, that unless you have enormous scale, you're not going to make any money.
But like, the single stock ETFs, first of all, when you say single stock ETFs, like, they're all, I think, levered or inversed.
Yes.
So you're effectively charging people for, like, you can get better margin terms than they can, right? You can borrow more cheaply from your broker to buy twice as much Nvidia stock or whatever.
It's a really neat solution for the retail investors that are in these projects.
Right, because, like, one, they can, you know, the ETF can probably borrow cheaper than they can. So you get, like, better economics, even with the ETF charging a 1% fee. Yeah. And also, like, I assume, some retail investors are, like, a little afraid of margin and, like, you know, you don't want to go negative, right? You don't want to owe your broker money.
That's, like, the worst you can do is get a zero.
So this speaks to one of the big appeals of ETFs, especially for individual investors. It's just convenience. I mean, I write about a lot of ETFs, and, just, like, pretty vanilla ones, too, where, you know, people always grumble and sometimes on Twitter, like, why does this exist? This doesn't need to exist. You can do this yourself.
And it's like, yeah, you could, or it's really easy to go to Robinhood and buy an ETF with no commission. that does it all for you. And that's what these leveraged single stock ETFs do.
Yeah, I used to be skeptical of, like, structured products, because it's like they've packaged a bond of a bank with, like, a weird option. And, like, you could recreate that on your own and save, like, the 5% fee of the bank charges. But then people are like, what are the odds? you're going to recreate that on your own? Like, you're charging a convenience fee.
And I, like, I sympathize with that. Now, what I will say is that it's not super obvious that, like, a lot of people need to be trading NVIDIA on margin. Like, you're making it more convenient to kind of gambling-y trade, kind of. Like, do people, do retail investors need to make levered bets on NVIDIA?
Oh, yeah. I mean, if you wanted to clutch your pearls here, you certainly could.
Right. It's like, it's fine. I enjoy a gamble here and there. Clearly, like, the people doing this, some of them are making money, some of them are losing money. A lot of them are enjoying it.
They're adults. If they want to bet on NVIDIA, they can bet on NVIDIA. But it's like, it's funny the way these products are described, because no one is, like, we're writing a way to make it more fun to bet on NVIDIA stock. Yeah. Because, like, you, for some reason, you can't say that.
I know. No, the thing is, I interview ETF issuers who offer these products all the time, on TV, for example. And they can't say that.
This is fun for retail.
Yeah, they can't just say that. Like, this is a fun, shiny object, you know, go wild with it. They usually talk about it in terms of trading tools. Like, you can use this as a trading tool for some trade, which maybe the trade is just having fun. I do think it's really interesting to approach this, because, I mean, from the perspective of an investor, it's fun to talk about, and they're having fun doing it, probably.
But also, just from the perspective of the ETF issuer, I can't do math, Matt, so I'm hoping that you can do that. Let's talk about NVDL. That is the GraniteShare's two-times-long NVIDIA daily ETF. Its market cap is $1.8 billion. It charges 99 basis points.
Pretty good.
How much is it making annually?
It's making $18 million, right?
Annually? That makes sense.
1% of 1.
8 is, yeah, 18.
That sounds pretty good. Okay, now let's go to VU, for example.
I don't know what their expenses are. I guess they have to pay margin.
Yeah, but we're just doing napkin math.
But, like, think of a company, an investment fund, where your job is to buy one stock and hold it. Like, it's pretty, yeah.
It does sound pretty good.
You pay $18 million to do that. It's pretty good. But there is margin. Actually, I assume the margin cost is all baked into the price, so the 99 basis points is pure profit.
Wait, I want you to do more math. VU. It's the Vanguard S&P 500 ETF. Its market cap is, let's call it, $440 billion. It charges two basis points.
So how much do they make annually?
Like $90, right?
That sounds right, too. Is that right? Yeah.
1% would be $4 billion. 10 basis points would be like $400.. Yeah, it's like $90 million.
Yeah. So you think about, there's not as much daylight between how much these two funds are making versus the AUMs of these funds, which is a long walk to get to my point of, if you're an issuer with a stable of these sorts of products that actually do get up to some respectable amount of scale, you're making a lot of money. Like the vanguards of the world, at least when it comes to their ETF business, they have trillions of dollars in assets under management. They just don't make that much money. Vanguard doesn't care because they have their unique ownership structure.
They're owned by their investors, et cetera. But a lot of issuers in the ETF industry that are trying to compete, they really do.
This goes back to what I was saying about the private markets thing. People have figured out how to do stock investing. It's like you index, it's a competitive market. It costs one or two basis points, right? And so a lot of error has been sucked out of the asset management and investment management and broker and a financial advisor business, because there are a lot of people who are like, wait, I know how to do responsible investing.
That costs one basis point. Don't need a financial advisor, don't need an active mutual fund manager. All I need is like a Vanguard ETF. So at the margins of that, there are a lot of people who are like, you know what's fun? Two times Nvidia, right?
Because there's this huge business out there. that's like the sort of core of it is being hollowed out. And so people are like, oh, you could buy some straightforward contracts. But you also have people who are like, you could buy two times Nvidia. If you buy one times Nvidia on Robinhood, right, you're paying zero commission, right?
Yeah. If you're buying two times Nvidia, you're paying nine basis points.
I mean, it's interesting to see the sorts of ETFs that are launching now to deal with that problem, that things are so cut down to the bone and you basically have the mid-tier being hollowed out, like you said, the death of the middle class, if you will. The consequence of that is you have seen new launches in terms of the size of the portfolio become more concentrated because more active ETFs are launching and they're getting more concentrated. And actually, there's really interesting data from Bloomberg Intelligence that recently the new launches have been more expensive as well.
Like who's going to launch an S&P fund?
Yeah. But I mean, we're talking about like. on average, it's like 61 basis points is the average right now, because you do have more of these relatively expensive ETFs launching because issuers are just like, how am I going to make money here?
Yeah. I mean, 10 years ago, I would not have said 61 basis points. was that much for an active management strategy. But it's like, yeah, the market has completely changed. Oh, yeah.
And you're not getting paid 61 basis points for managing a portfolio of one stock, right? You're getting paid 61 basis points, or 100 basis points for thinking up the idea of like, you know what people want is two times in video, right? Yeah. You're getting paid for ideas. It's like a marketing job.
almost. It's like figuring out consumer psychology and figuring out what to sell people, and then they'll pay you for it, because everyone knows the cheap, responsible thing and you have to find the appealing thing, which is like, it's not exactly the casino business, right? You know, there's a lot of businesses in the world that are like, go on, live a little. Have a little fun. Let loose.
Listen to a podcast called Money Stuff.
Mailbag.
Mailbag.
Are we setting this up?
Well, we both sang. So I feel like.
It's all set up.
That's in.
Should we talk about pudding?
Shall we? So pudding. I said on the pod last week that one of my rich.
I want to go a little further back.
Okay.
Years ago.
Yeah.
I wrote about filling a swimming pool with simple syrup and I got a reader email explaining that you can swim as fast in syrup as you can in water. And then you.
I said that one of my rich person dreams is to like fill a swimming pool with pudding or jello and see what would happen. Like if I could swim in it or if I would suffocate. And wow. We got a lot of engagement.
It's just like, I've been doing this for long enough that I refuse to speculate on whether you would be able to swim in pudding, because I knew. Yeah. I knew that we would hear from the world's leading pudding physics experts.
Well, we got some video too, which was great, from Chris. Oh, I obviously put it on the video.
Well, we'll have to make this a video podcast. Oh, there it is. Oh, no. This kid is falling into a pool of red goo pudding.
Oh my God. It looks amazing.
Yeah. This is like really.
Doesn't that look satisfying?
No.
So go watch.
This is fascinating. Go watch the video.
We're going to link to the video in the show notes.
This is like truly a thing you're interested in.
Yeah, definitely. I'm so into this.
Wait, is he just lying on the floor or is.
No, that's the. He's like floating on the floor. That's the jello, Matt.
This kid just cannonballed in.
Yeah, well.
No, okay. Oh, no, that's. Oh, that's messed up. Okay. Nice.
Looks delicious. You could eat as you swim. Looks so good. But anyway, so we're watching a video from a former NASA guy.
This is great audio content.
He did fill a swimming pool with jello. And then he had a lot of children try to jump in and they couldn't. They couldn't break through to get to the bottom of the jello, which is exactly what I wanted to know. So that's one question answered. But I do want to know about pudding.
Pudding buoyancy. Do you want to tell us about it?
Oh, I'm going to quote one email from a physics grad student at Harvard. Okay.
Can I tell you a secret?
Sure.
I've never taken a physics class, which might explain a lot of things.
What if your school's physics class offered jumping in jello or pudding?
I probably would have taken it.
Charles, a physics grad student at Harvard, wrote, I'm pretty sure that pudding is denser than water, so it would be easier to float in it than normal. You can check the relative densities of your pudding of choice versus water by pouring some of it into the water carefully and seeing if it sinks. If you are really concerned, you can probably start by standing in the shallow end of your pool of pudding and then try swimming. That's good, practical advice.
I do.
I was expecting more physics and less like, maybe don't dive directly into the pudding from the physics grad student.
I find that really endearing. I am pretty concerned.
What if you just cannonballed into eight feet of pudding?
Well, that's the thing.
You'd be fine, it turns out.
I don't think I would float back up to the surface, would I?
This video suggests that you wouldn't even sink.
Well, that's jello, Matt. We're talking about pudding now. Please try to keep up.
And that was the Money Stuff Podcast. I'm Matt Levine.
And I'm Katie Greifeld.
You can find my work by subscribing to the Money Stuff Newsletter on Bloomberg.
com.
And you can find me on Bloomberg TV every day between 10 to 11 a.
m. Eastern.
We'd love to hear from you. You can send an email to moneypod at Bloomberg.net. Ask us a question and we might answer it on the air.
You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.
The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andom.
Our theme music was composed by Blake Maples.
Brendan Francis Newnham is our executive producer.
And Sage Bauman is Bloomberg's head of podcasts.
Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.
I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players. And that's the lens we're going to use to approach this entire show.
We're going to be discussing everything from high stakes poker to personal questions. Like whether I should call a plumber or fix my shower myself. And, of course, we'll be talking about the election, too. Listen to Risky Business wherever you get your podcasts.
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