ETF Edge - Live From the Biggest ETF Conference: Exchange Miami 2/12/24

Episode Date: February 12, 2024

We talk the biggest trends, concerns and opportunities among 2,000 advisors, money managers and fund companies. Among them: Bitcoin, Mag 7, AI and much more.   Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you are in the right place every week. We're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. We are live from the Exchange Conference in Miami Beach, the ETF Exchange Conference, with more than 2,000. and attendees. It's in especially big show today. Here's my conversation with Allison Doyle,

head of ETT listings at NASDAQ. 20 Rocky is the global head of ETFs at Morgan Stanley. Rob Harvey is the vice president of dimensional fund advisors, plus Jason Pereira, senior market, senior partner and financial at Woodgate Financial and Brian Portnoy, founder of shaping wealth. Allison, let's start with you. You're running things for NASDAQ, the ETF business. What's hot here? Give us three or four topics that's on everybody's mind right now. Yeah, Bob, you know, I think in general, you know, active ETFs. You can't talk about ETS without thinking about active management right now. I know it's a big focus at this conference.

Over 75% of all ETF launches in 2023 were active. But I think most notably within the active ETF space are, you know, portfolios that have options embedded strategies within the portfolios. Go ahead. So thinking about those 75% of ETF that were launched last year, 70% were either active equity or equity derivative strategies. So active is really hot. Tony, last year,

ETFs I know that used option overlays. That was a really hot topic. They collect premiums. You protect against the downside. But is there still a market for those kinds of products in a rising market? They don't outperform. Is there still a market for that?

Yeah, as Ali said, there's no doubt, almost 23% of all flows last year were active. And options-based ETFs have grown quite fast. There's two use cases. Bob. One is for income. The second use case is for downside protection. So we actually launched the parametric equity premium income ETF. It has almost a 10% yield and it protects on the downside. Or there's clients who want to re-risk their portfolio. They're watching the equity market go up. They want to get out of a 5% CD or 5% money market account and they're doing it through these option-based

strategies through the NASDAQ and through various other exchanges. So that's a lot of. That's definitely a trend we're seeing as well at Morgan Stanley. Rob, what do you think about this? I mean, those you don't know dimensional. Dimensional is it very big. I call you an index plus advisor out there. You have a lot of index-based stuff, but you have sort of an active overlay on top of that.

How should investors think about these active option EPS? What's the white way of sort of looking at them? Well, you know, at Dimensional, we're really focused on factor-based investing, the premiums that you're pursuing. A lot of people think about premiums, size, value, profitability, but let's not forget about the most important premium of all, which is getting that equity market exposure. And so when we think about, you know, strategies that are utilizing derivatives, maybe selling off your upside to give you a little bit of income

protection on the downside, you really have to target a very specific outcome. You have to have a specific outlook on the market. We think, and as you've seen over the last couple of years, that's been supported is the better way to do it is just go with the market overall, with, of course, some good implementation and some of that thought leadership. It made sense. After 2022, the disaster, that everyone saw. Everybody rationally said, how do I still stay in the market and protect myself a little bit? And these products made sense. But when you have this constantly upmarket, you underperform a little bit. It gets harder to sell these, those kinds of protection. But is it because the world's getting older? We're all baby boomers. We actually want some

protection now. And we'll give up some upside if we have to. Is that the way to look at it? Yeah. Well, if you think about it, and Rob's right in his comments, but there's two use cases. But the downside protection is really important. People want to reenter the market. We launched a hedged equity ETF from Parametric, ticker PHEQ. What it enables an investor do is get back in the market with up to 40% less volatility. So they might be capped on the upside, but they're certainly capping their downside protection as well. And this is really getting people off the sidelines back into the broad-based equity market.

I think Rob's point, though, over time, people want to be in the equity market. Yeah. Rob, I want to turn to you, active ETFs, one growing theme. But what about those of us who basically hold long-term index funds like me, old Bogle people here? And we're happy. So do active funds really advance the long-term investment goals for investors in some way? Can you make a case for that? I can. And they certainly can advance that goal that you're seeking there. I think when we talk to a lot of investors about, well, what are you looking for in an index product? You're looking for well-diversified portfolios. You're looking at. for portfolios that are available at a low cost as well. You don't have to go with indexing to achieve those objectives. So what we do at Dimensional is we offer that well-diversified approach, focusing on premiums and implementation, to deliver a superior experience. I think if you're an investor who isn't satisfied with just performing in line with or a little bit worse than an index, then maybe an active managed fund, the way that we do things here at Dimensional, is the right

solution for you. We just had Dave Mata on, Allison, who has Magnes, the Magnificent 7 ETS, he's, you know, jumping up and down because he's getting huge inflows. But another panel here is on concentration, excessive concentration, in Magnificent Seven. It's easy for us to sit and say, oh, how magnificent they are, but I know fund advisors are very worried about concentration risk. You, of course, have the QQQs, NASDAQ100, raking in money, doing great, or somewhat a subset of Magnificent Seven in a certain sense.

But can you, it seems to be very rational for fund advisors, RIAs to be concerned about excessive concentration risk, even as we watch these stocks go up and up. Yeah, absolutely. I mean, I think obviously the beauty and benefit of the ETF is just providing, you know, a lot of times a diversified access to a wide swath of stocks or, you know, securities. QQQQ being a great example, giving you full access to the NASDAQ 100. Of course, as you said, the Magnificent 7 stocks have been a great kind of component of that outperformance recently, you know, Roundtells ETF has certainly, you know, been a, you know, a big contributor to that. But yeah, in general, I think us at the exchange, you know, we like to work with a wide

variety of issuers and just helping bring access to kind of all these different types of portfolios, whether indexed or active, to investors. I want to give the viewers a sense of how concentrated things are right now. And I want to thank Dimensional for providing me with this piece of data. So right now, there's an index, the MSCI All-Ccountry World Index. of all the big stocks in the whole world, everything, including U.S., everything here. Right now, the Magnificent Seven is 17% of the value of that entire index. The U.S. is the largest single value.

It's almost 50% of the market cap waiting, but the second group, Japan, UK, France, Canada, and China are those five countries that are the second through the sixth biggest group. they together are 17%. So this is the idea of how you get your head around how big these companies have become. Seven companies are 17% of the market cap of the whole world and that's as big as the second to the six biggest countries put together at this point. This is incredible too.

When you think about the fact that Microsoft is bigger than the entire market capitalization of the United Kingdom, if you're worried about concentration risk, that should be a big red flag for you. So it's a great time to be able to move away from some of those larger growthier names into other parts of the market that tend to have delivered higher returns over time, like small caps. So how do you do that?

So the way I see the panels, Tony, is they try to nudge people saying, well, look at quality, for example. Here's a great word everybody loves to use. Q-U-A-L is one of the big ones. Or momentum, and these tend to get subsumed in that to a certain extent. Is that a more rational way? I'm trying to figure out how people can address this genuine concern about concentration risk.

I think it's very real. but you don't want people, people don't want to say, okay, how do I stay in without getting two in? Right. They want both things here. Well, you said at the outset, the U.S. ETF market just hit $8 trillion, right? It's accelerated. You've been a big part of this growth over the years. Recognize active ETFs until 2019 was less than 5% of the market.

The regulatory change at the SEC allowing for active managers, like Morgan Stanley and other great firms, to enter the market with active management really enables that. that, you know, you can manage around the concentration risk. So, again, before 2019, 95% of the U.S. market was passive, that's changing. And then I would say one thing. This is about choice. It's not an either-or. Most advisors, Bob, and you know this, they use passive and active.

Most institutional clients that we deal with, they use both. So I think the active element will help manage around some of the concentration risk. And the vast majority of active ETS receive coming to market are fully transparent. Right? So it does come back to knowing what you own, you know, for clients and within their portfolios and having the ability to see on a daily basis what is being held in your active ETF portfolio that's, you know, being managed by these institutional level managers. Yeah. But active management in the traditional way does involve some degree of market timing. I've had many discussions with Dimensional over the years about the risks of market timing. And you can talk, you can see this in the performance of Tesla, which is one of the seven magnificent seven stocks. Tesla returned, what, over 100% in 2023, and it's down 40%? In the last two years, yeah. In the last two years, if you look at it.

So, I mean, that's about as volatile as you're going to get. And what does that tell you about the risk of market timing? People are pulling their hair out about market timing on Tesla. I mean, that's got to be incredibly frustrating for a traditional stock picking active manager, which is one of the reasons why you've seen the growth in more systematic active management where you're targeting premiums through better diversification strategies. I mean, you know, if you've got left out, if you were left behind of the market returns that you saw in last year, that's incredibly painful.

These stocks should be part of your portfolio, but trying to jump in and out over the last couple of years, that's going to be a painful experience. That's one of the reasons we always advocate. You need to work with an advisor, right? An advisor is one of the important people in your life who helps keep you on track and stay above all this intraday noise that you see. You know, it's very frustrating for me. This is my 34th year at CNBC, and one of the things we try to do.

do is financial education and literacy. And one of the things that's very well known is market timing really doesn't work. For most people, it doesn't work. And long-term buy and hold and understand what your strategy is, have a strategy, stick to it, don't change it around, because that's when you make mistakes. Everyone knows this, and yet it's very hard to get this through to the public. How do you do this? The key to that is exactly what was just mentioned. Let the advisor be the financial quarterback for the overall portfolio. And they can decide What percentage is active? What percentage is passive? I think that's really important. It's rare to see an advisor today who's exclusively passive or active. They use both. And I think that's the important part.

At the same time, that we have seen an uptick with retail trading, usage of ETFs. And so, you know, in NASDAQ, as you said, financial education is a big part of it. You know, we put out different pieces of white papers and content. So, you know, retail investors know how to trade ETFs. Know the differences between active and passive ETFs. So I want to get to this debate about active versus passive because it was sort of came up last week here. There was a very, maybe you've heard about this, folks. There was a very well-known hedge fund manager who complained that the markets were broken. And that part of the problem was too much investing in passive funds. So this astonished me.

Here is a man very famous who made a lot of money to potentially say, I'm not making enough money anymore. So let me just ask you, are the markets, broken or are hedge fund managers frustrated that, you know, they just don't make as much money as they used to? Are the market's broken or hedge fund managers broken at this point? Well, when you look at last year's returns, it's easy to see which one is broken, right? The market clears. The market's working better than it ever has. You have a tremendous amount of liquidity being pushed through. If you got left behind by market returns last year,

then, of course, you have to say it's something broken. You're not going to look in the mirror, right? For a systematic active manager focusing on those premiums, though, more money going into passive strategies is a great thing for us. That's just more opportunity you have to be able to implement a flexible approach that adds value over time. So that's a tremendous benefit for not only dimensional but also our investors. I think the problem is systematic active investing, which is what you sort of do versus old-fashioned stock picking, you know, which, and let's face it, it's been tough to do that recently. Maybe it's because the market just gets more and more efficient all the time. I don't know what the reason is. I don't have a lot of sympathy for hedge

fund managers who want to complain. They're not making enough money. But you've been doing this a long time? Yeah, look, we actually manage systematic strategies through parametric as well, so we're very familiar. It's active, but it's systematic. The one thing I would say, though, back to the opening, what are the trends, active? Certainly the acquisitional bonds, fixed income ETFs. The third thing is income. People have fallen in love with a 5% yield. We launched a floating rate ETF just last week. This will target a yield between 9% and 10%, Bob. And that's really meeting a need of our customer. We've been doing floating rate management for over 35 years. We manage over 30 billion. We're actually simply adding choice in an ETF wrapper alongside mutual funds and separately managed accounts.

So again, this game to us is about choice. Go where you have a strength. Our strength tends to be an active management. Doesn't mean there's not great passive ETFs out there. There are for portfolio construction. We just want to make sure we're part of that discussion. Yeah. And so just go back to you because you're sort of like the guy always talks about, you know, passive versus active. Yeah. Is there a place in your investment portfolio for active management? If I'm an old-fashioned bogal guy and I like my index funds, is there a place that I should consider for active management of some kind? You seem to, your point seems to be, yes, but systematic active management, which you distinguish from old-fashioned. Let's just pick stocks. Yes. I think it's the best of both worlds, right? You've got the diversification, the low cost of indexing. You've got the ability to outperform like traditional stock picking active management.

It seems like the right solution. And we're also seeing a tremendous amount of assets flow into those types of strategies. We know that investors are interested in that balance between the two. So you don't have to pick between one and the other. You can have both. Allison, what's what's, what's, what's, what do you think is going to, are we going to still have the options overlay business still strong? Is there, you know, something going to come out of nowhere that we didn't think about?

I don't know about come out of nowhere, but I definitely think there are some trends from 2023 that will continue to strengthen. You know, one trend that I know DFA knows about quite well is the conversion of some strategies from mutual funds into ETFs. I don't think it's a solution or, you know, an idea that every mutual fund would convert, but it's definitely an idea for some portfolio managers to take advantage of the ETF benefits. And again, yes, I do think the options-based strategies, you know, we're seeing some managers that will license the NASDAQ 100 index, providing that tech exposure with option strategies on top.

So, you know, I think NASDAQ is well positioned as a listings venue, the index provider and also having a flourishing index options business. The SAC 100 is the gift that keeps on giving. It's been doing quite well. It's amazing. Like what you can do with that thing. This year. Repackages, sell it. This year is the QQQQ.

It's the 25th anniversary of TOOQQ. Boy, that's the, it is the 25th. That's right. We'll have to do something on that. I want to ask you about Morgan Stanley. You have recently sought to get permission to add an ETF share class, right, to your existing mutual funds, as I recall. Yeah, we filed on January 22nd for the share class patent.

It's not a whole lot I can say, Bob, other than we did file. But we did file for three conversions from Morgan Stanley Mutual Funds to ETFs as well. The three conversions will likely come very shortly. And I guess whether it's share class filing, the three conversions or the 12 ETSs we've launched in 12 months, it's just we are committed to this wrapper. Well, it's because Vanguard, of course, famously had this by themselves. They had this, you know, this dual share class structure that seemed to have worked very well. And I'm quite a sort of surprised that a lot more people have it.

Maybe you don't need to do that anymore. Maybe that's just not necessary, but I just noted you did recently. Yeah, we filed January 22nd. Not a whole lot more we can say other than we did file. Okay. Well, appreciate that very much. No problems with that at all. I want to thank you guys for coming here.

It was just terrific talking to you and get all the most recent trends that are going on. I want to switch a little bit here. I want to talk about something else. So thematic tech investing, cybersecurity, robotics, cloud computing, electric vehicles, social media, et cetera, has waxed and waned in the last decade, you know. But there is no doubt that artificial intelligence ETFs, and I'm talking about things like IRBT or bots or Robo, that's ROBO. and you see several of them that are up here, they have recaptured some interest in the investing public. The problem is defining exactly what an AI investment looks like

and trying to figure out what companies are exposed to AI. Here's what's really interesting about what's happening at this conference. The impact is already being felt by the financial advisory community. Jason Pereira is a senior partner and financial planner at Woodgate Financial, and he's been speaking on how financial advisors are using artificial intelligence, not what stocks depict, how they're using artificial intelligence. There are amazing AI tools that financial advisors can now use. So Pereira described to me how it's now possible, for example, and we'll talk about this to generate financial podcasts with just snippets of your own voice. You just plug in a text and it can generate a whole podcast without ever saying the actual words. How do you generate the text?

Well, in theory, you can go to chat GPT and say, for example, write me a thousand words about current issues in 401ks and rewrite it slightly for a specific audience. You get the idea. So I want to discuss this. Jason Pereira is here. He's the senior partner, financial planner at Woodgate Financial. Brian Portnoy is the founder of shaping wealth. He's leading a different panel on how advisors can stop. talking about numbers and returns and started offering human-centric advice. Thank you both for joining us.

It's quite amazing this AI story. Tell me a little bit about the concept here because we used to do panels on AI and how it was going and what was going on. And it was mostly about, oh, this is how you can invest, AI ETFs, AI stocks. But now the advice is about what the financial advisors themselves can be doing. Absolutely. Well, generative AI has changed the game because now it's taken it from a concept or technology is being coded on to something practical and applicable that people can use and is now being leveraged in everyday planning software. So we've gone from the idea, from the point of this is the potential to the early stage of the potential actually happening. And what we're seeing happen is is getting deployed upon every level or every possible tool set that the advisor uses,

meaning that the time that we take for administrative back office research generation tasks is being truncated dramatically in the next little while. So things that took 10 hours might be down to 20 minutes, freeing up an incredible amount of time for deeper client relationships and additional tasks. You know, what's amazing to me is just listening to you. We had a half an hour conversation about, what, two, three weeks ago just to talk about this. And I said, can you show me some examples? You gave me some amazing examples where new AI programs can take a few snippets of my voice, generate an entire half-hour podcast, based on 20 or 30 seconds of me talking into it.

and can generate text using chat GPT and create. Basically, you can create me in a podcast for 30 minutes with me doing no work at all, practically. Absolutely. And you can do a video podcast, right? So there are audio ones. So you can put your recording into a company called Discrypt and then basically put in the text, type it up, copy, paste it,

and it will produce your voice in any language. You can do the same podcast in 40 languages if you wanted to. Yeah. Right? I mean, grammar is going to be different. Or you can take that same text and do something similar, something called, Hagen, which will produce an AI avatar and have you there reading the text.

So you can actually create a video of yourself doing this. Brian, this is wonderful and appalling at the same time. It's wonderful in that you look at this and you say, holy cow, this guy looks like me. I mean, they're essentially using my images just to generate additional images of me. But at the same time, it's pretty appalling. Like, first of all, it's Bob out of work. Bob's toast, number one. But number two, isn't there a concern about what is real and what is not and what is value

and what is not value at this point? I mean... A hundred percent. And we've been asking for centuries or millennia, how does this technology disrupt me? How does it maybe make me irrelevant? And now we're living in this moment where we're asking these questions. I focus on something called human first advice. My friend Jason focuses on AI.

actually the two sides of the exact same coin. The challenge for advisors nowadays is how do I more deeply connect with my clients? Because the machines can do so much of the routinized work, building the portfolios, optimizing for taxes. AI can handle a lot of that nowadays and we're early days. So the question becomes, or one of the questions that me and my firm are trying to answer is, well, how do we become more human? How do we more deeply connect because that's going to be the edge.

The irony, Bob, is that the deeper human connection is going to be the edge in the time of generative AI. You know, this is what's the interest in this conference is it used to be all about advising RIAs on, okay, here's the ETFs you need to own. And that's still there, but more important now, I hear how do you deal with your clients? How do you educate your clients? And some of these RIAs I thought through, they're really frustrated because they have clients saying, okay, why am I not in the Magnificent Seven? Or why am I in the Magnificent

Seven? Why should I be in something else? It's sort of like an ADHD client base. Right. So how do you educate them to be using behavioral economics, understanding their own behavior, their own biases, to make them better investors in general and make them the word easier to deal with is not quite what I'm getting at. But you do have a problem managing a base of investors who may or may not understand how the investing business actually works. That's right. So the advisor then pivots from being a mechanical or technical expert who just knows better to be an actual guide. Hey, we're on this journey together to get wherever you want to go and I'm going to walk alongside you. And part of that is that deeper connection.

And the funny thing is the cutting edge toolkit nowadays for the advisor is emotional intelligence. How do I more deeply connect? The flip side is that AI is changing and disrupting what I'm doing, and we're building AI technologies into our adaptive learning systems that can help the advisor learn on the spot in real time. These are the conversations that you should be having with your client. So it all sounds a little bit touchy-feely, but competition for clients are really intense these days, right?

And having someone who can understand this or explain this to client might give you a competitive advantage. So, you know, my friend Jason here is the advisor. I just coach and train advisors. But I'll tell you, if your value proposition in 2024 is I'm going to pick better stocks and build you a better portfolio, you have some bad news coming. That's not really going to be an edge. Like I said, the irony is that deeper connection is going to be your edge in the age of AI.

And that was never the real value proposition people were looking for anyway. It was what they believed they needed, right? At the end of the day, people weren't coming to us with money saying, I need to beat the S&P by 0.5% minimum to justify your fees or whatever else it was. It was, am I going to be okay? Is the life that I want to live going to be possible? Am I going to put my kids through school? All these questions that we've been evolving to,

from moving away from a product-centric industry to a human-centric industry, that's really what they were coming to us for. And what Brian's doing is basically getting us to lean further hard into that. Right at the time that the technology is going to take away all the heavy work that it was to just do the basic stuff of opening accounts and picking the right things that put them in. So it's really kind of all happening at the same time in a perfect harmony. So does this have a name? Is it a movement?

I mean, I started you use the word human-centric advice. Yeah, yeah. So we call the movement human-first advice, or you could say human-centric advice. And it's a pivot from client-centric to human-centric. Client-centric's great. It's personalized, but it's a client saying, hey, I want to retire at age 65 with so-and-so amount of dollars, and then you fill that order. You are sort of an order-taker.

Human advice is, no, we're on a journey. I'm going to help you get there. And we know that the value of the financial plan is that it needs to be changed over time because it's outdated within a year of it being written. And that adaptive mindset is part of being human. It seems like it's a move away from numbers. Like we're, okay, we beat the S&P 500 in the four of the last five years, and here's what we can do.

And it's sort of like an outperformance game. That's right. And moving away from those numbers and more towards what, how do you get to your goal? We're sort of, we're people who help you manage your dreams. That's right. We're in the dreams business. We are in the number business. I would say we're in the story business.

So, you know, I always say that we weren't born as calculators. We were born as storytellers. And what the modern financial planner does and is, believe it or not, is help someone keep writing their life story. Because the numbers don't have the emotional impact we think that they might. More isn't usually the solution. Enough is, but enough's always a story. But to Claude Christensen, people weren't looking, aren't buying three-quarter-inch drill bits. They were three-quarter-inch holes.

At the end of the day, the numbers were the drill bits, the tools were the drill bits. It was all this stuff that we were providing that helped them accomplish that dream that they wanted. The dream was the three-quarter-inch hole. That was the purpose. And what's happening is, again, by, again, digitizing and using AI to leverage all this, it's, like I said, shrunking the advisor's time and everything else and letting us spend more time with the human to form those deeper connections and better understand what it is the striving of them.

Are people becoming more financially literate? I have to say, I don't think so. 34 years at CNBC, and we had this great dream, we were going to educate the world, and it doesn't seem that way. Is there a lack of critical thinking skills, which is really the high-level thing? And below that, you have behavioral biases

and other kinds of things, emotional intelligence. These are all sort of subsets of each other, but there seems to be something missing these days. And it seems to be, if I think it was the highest level, be critical thinking skills to a certain extent. Well, people like us have been, you know, engaged in financial literacy, youth financial literacy movements for years and it's a really tough slog. The brain between our ears is more than 100,000 years old.

Money was invented less than 3,000 years ago. These things don't play very well together. So it's an uphill battle. So the end around is on the emotional side. Financial literacy is one thing, emotional literacy is another. You know, in a world, and maybe this is for you, Jason, but step in, Brian, in a world where a million people could generate a podcast on financial device literally in 10 minutes. How do you maintain any value at all? It seems like a lot of the lower-skilled stuff like data analysis is going to get pushed out very quickly.

Everyone will be able to generate data analysis really quickly. But how can you differentiate between volume and quality? Well, this is the thing. It's basically an extension of what's been happening in media for years, right? It thing is becoming snippets and shorter and everything else. And this is just going to accelerate that. And what's the value is something that's ubiquitous and shallow? Pretty much nothing, right?

What's going to capture people's attention and what does capture people's attention is things that are different, things that actually go beyond that. I have many friends who basically go beyond just small snippets and write like long 3,000 word essays on a very specific niche topic. Because when the person's looking for that kind of service, and they see a bunch of ubiquity that's very shallow, but then they find the 3,000 word treaty on basically like, this is how you do this. Oh, my God, that's the person I want to hire. They understand my true problem. Whether that be a technical problem or a human problem.

What happens when AI can write the 3,000 word piece? Well, this is the thing is that it's getting better and better. But at the same time, is it really going to truly understand the people that we are across from, that we've chosen to work with and their true individual struggles? I don't know that it will. Yeah, it's funny because I'm in this journalism, And for several years, AP Dow Jones, they've had services that enable you to scrape the economic data. So housing sales, home sales come out once a month, direct plug-in to the Bureau of Labor Statistics, whoever does the website.

You pull the data right off, scrapes it, and generates a single paragraph on what happened in home sales. And I read this very carefully. And I'm a financial reporter for 30 years. I look at it, I say, you know, if I only had one paragraph, it does a pretty good job. It does. And what it doesn't do is generate more deep. So far, I'm not completely, you know, out the door. But I smell it's getting better.

I can smell they're getting into the level where they can get much deeper analysis going. The kind of stuff that I now do, I can now say, oh, all right, so they can spit out a paragraph. An AI. It's actually an AI, just literally. No, the human doesn't write it. But they can't do a long, you know, 2,000-word essay on housing starts. Well, how often is it accurate? I mean, the number of times people have tried to.

use chat GPT even submitted legal briefings to court only to find out that the chat GPT made up a court case that wasn't real see that seems to be a technical problem it'll get better and better that's not like oh that'll never happen ever that also that also presumes the human being knows how to prompt it properly to not make those mistakes right communication is not great there yeah this has been a fascinating discussion and we're we're not going to end it here obviously but you are both two two different flips of the coin yeah essentially it's been a great conversation Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS with our markets 102 portion of the podcast. Continuing now, Jason Pereira, senior partner and financial planner at Woodgate Financial.

And we're talking about artificial intelligence investing. And what's amazing to me is how the themes have changed a bit this year. It used to be three or four years ago, how do we pick AI stocks? How do we pick AI ETFs? And it's a slightly different theme here this year. about how you use AI to sort of manage your businesses. And it seems to me that from what you're saying, he's giving a whole keynote on this,

AI is going to change the whole value proposition for how RIAs, registered investment advisors, manage their business. How is that going to happen? Absolutely. Well, I mean, there's no part of a RIA's experience right now that can't be improved through artificial intelligence. There are tools at every function and piece of the value stack

that it can compress the amount of time it takes to do things. So that's going to reduce the amount of time that an advisor and their staff spend actually doing administrative work, heavy lifting, back office preparation, and allow them to spend more and more time with their clients. So they have a choice. They can either try to capture more clients and service them the same way, or they can try to go deeper into relationships and basically just continue to build off those efficiencies.

Yeah. So it kind of reminds you what happened to software as a service, like 15 years ago. All of a sudden you had these companies like Service Now that came through, and they manage your back office operations, They manage your HR, they'll manage your payroll, for example. And things got a lot more efficient. This is sort of out on steroids, you seem to be in mind? It absolutely is, because it stops being from, I need to learn how to use the software to,

I need to just tell it what I need to do in a lot of cases, right? So there's a level of always a learning curve to software and becoming a level of mastery before you can actually adopt it. Now, with artificial intelligence, the AI bot or the AI thing you're talking to is actually the assistant who's learned that mastery, can execute. So that just, again, reduces the amount of time and heavy lifting that people need to spend on these things. Now, what about me as an individual investor? We're talking about advisors, investment advisors. How do I, if I'm a guy and I'm reasonably, I have individual funds,

maybe a lot of index funds, but I'm thinking of doing more trading myself. Can AI help me at all? No. I mean, the reality is, is that, look, artificial intelligence has been on Wall Street for a long time. And as we know, Wall Street's like the most highly evolved gladitorial arena of all time. If there's a tool that can be used, it will be used. But now that AI is becoming ubiquitous, now that everybody's got access to chat sheet, PT and everything else known demand, you know, you're not going to cut out an edge because you're going to an open protocol that everybody else has access to. We just created a new point of efficiency. Yeah. But what about AI and stock picking? I mean, a couple of years ago, there were panels on using AI. There was ETFs that were being developed that use what they call

some AI protocols to pick stocks. Does any of this matter? Is the market too efficient? I mean, I think that early on, like, you know, perfect example, the best example, the best example of this was Renaissance technologies and Jim Simon's incredible track record because they were using artificial intelligence and machine learning long before a lot of people were. And now, again, the ubiquity of it, now he may still have a secret sauce there, but the ubiquity of it that everybody else has access to, does it matter? Well, if it does get you an edge now, it's a matter of time before everybody else copies that edge with the same technology.

Well, with Renaissance, it was very clear. They did have a competitive answer because they cleaned up databases going back decades and made them more efficient, discovered relationships that didn't exist. So there actually really was a competitive advantage that they had. But it also required their AI on top of that to actually make any kind of sense out of all that data. But then everybody always asks me this, if I can get an AI and maybe I can make a lot of money for me. And I said, well, your AI is going to be just as good as the other guy's AI. So the market efficiency rises immediately.

That's it. Yeah. So we don't go any further from there, right? It's not a sustainable advantage. Everybody can get it. Yeah. So what else do you see? You're going to be giving the keynote address on this.

What are you going to be telling everybody here? Well, first and foremost, I'm going to be talking about people about how they should be. approaching this, right? Like, AI has a lot of dystopia wrapped around it from wherever, you know, from media and whatnot. But in actuality, all technology is a tool, a tool that we can harness. So the really, what I'm trying to inspire people to do is to say, listen, you've got to be aware of what these things are capable of. And then also look at how you can leverage it in your practice. So really, it's about changing their mindset towards AI to be, to be curious, to understand, to learn more about what's going on. There's a lot of it out there. But really,

when you look at what's affecting this space on a day-to-day advisor's life, it's not a lot. There's enough that they can get their head around it, and they can figure out what's the most value to them and improve their situation. Because if we can improve their practices, we can improve the lives of every client that they serve us. And how do you, I mean, I take it you're an AI, not an AI bull, but you're an AI optimist, right? I'm an AI realist. AI is going to improve the efficiency of the world. It's going to help us solve problems. It'll help us uncover bottlenecks. It will make things reduce friction, financial frictions and things like that.

Look, all technology creates problems and solves problems, right? There will be creative destruction as part of this. There's going to be people and jobs that disappear because of artificial intelligence. Make no mistake about that. But there will be new jobs and new things that come out of it that we can't even foresee yet. So the reality is that it's going to be a period of transition, of turbulence for some people, of great opportunity for others. And we don't know what comes on the other side of it.

But what does come out on the other side of it is more human interaction, less physical interaction. I like to point out, I was in college. I was a telephone operator we had to take into our apartment building, come in, pull the plug out of the wall, put it into the wall. And that was disintermediated decades ago. And what happened to all the people in the 30s, 40s, and 50s that were telephone operators, they went away. They got new jobs. They got new training. And software developer as a job didn't even exist 25 years ago.

And now it's ubiquitous job functioning. So I'm with you. I'm an optimist. I'm not in the Terminator camp. I'm going to take over. Technological progress is a good thing. It's proven to be a good thing for all society since as far back as we can tell. Jason, thanks very much.

Appreciate you being here with us. That does it for this week's ETF Edge, the podcast. Thanks for listening. Join us again next week or head to BTFedge.cc.com. InvescoQQQQQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQQQQ. Investco Distributors, Inc.