ETF Edge - The Active-Passive Divide

Episode Date: November 1, 2021

CNBC's Bob Pisani spoke with  Ed Rosenberg, Head of ETFs for American Century Investments, Jerome Schneider, Head of Short & Low Duration Portfolio Strategies at PIMCO, and Ben Johnson, Director of Global ETF Research at Morningstar. They discussed the age-old battle between active management and passive strategies - armed with fresh data from Morningstar’s latest report. Overall, passive is still the big winner despite a very topsy-turvy couple of years. In the ‘Markets 102’ portion of the podcast, Bob continues the conversation with Ben Johnson from Morningstar. 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 InvescoQQQ, 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're in the right place. Every week, we're bringing you interviews, analysis, and breaking down what it all means for investors. I'm your host, Bob Pesani. Today on the show, we'll get deep in the trenches and take a look at the age-old battle between active management and passive strategies, armed with friction. data from Morningstar's latest report. Overall, passive is still the big winner, despite a very

topsy-turvy couple of years. Here's my conversation with Ed Rosenberg, the head of ETFs for American Century Investments, Jerome Schneider, head of short and low-duration portfolio strategies at PIMCO and Ben Johnson, director of global ETF research at Morningstar. Ben, I read your report carefully. Only 47% of all active managers outperformed their benchmarks in the year ending in June. The performance is really a lot worse over longer periods. We'll discuss that later. Summarize why active managers can't outperform. Well, it boils down to a few things, Bob. And one of those things really is survivorship. What we see is that over longer periods of time, most active funds simply fail to survive. They don't make it from the beginning of the period

to the end. And why do they fail to survive? In most cases, they fail to deliver the goods. They fail to outperform their benchmarks. And that's in no small part because they have a very high hurdle. And that hurdle is oftentimes their fees. They're oftentimes their own worst enemies to the extent that they overcharge relative to what they're actually able to deliver for investors. Yeah, survivorship is very important. And it's one of the things you guys have always been on top of. And I think it's important. A lot of funds are just terrible and they close and people don't account for that. You do. By the way, love the guitars. It'd be a lot of behind you very rock and roll there Ben. Ed, you oversee several actively managed equity

ETFs for American Century and for in general. And they've outperformed this year. Now, given the odds, how do you do it? How do you stick to your knitting and outperform given the odds that Ben was describing there? I mean, I think it's a few things, Bob. The portfolio managers stick to what they're good at, right? And we have three different types of active. So we have fundamental, which is a bottom-up approach. And then we have another approach, which we'll call it fundamental. It's combining or quantum mental, I should say, combining quantitative with a fundamental approach, meaning a little bit different. And then we have more of a systematic approach. And each one of those managers have defined how they operate to stay within their bands, meaning do what they do well, focus on the stocks that

fit what they're trying to do, and search for outperformance within that area. And the other thing, truthfully, as you guys mentioned it earlier with Ben, is fees are important. And the fees you charge are really important for those products. And if you look at the products we have, the fees are pretty reasonable for the active management that you're getting, especially compared to other products or even mutual funds in the space. Yeah, we'll get back to low fees in a minute. And you're right. That is absolutely key. Now, Ben, equity managers aren't beating indexes, but it was intriguing in your report. bond fund managers seem to be doing a little bit better. So active managers in the intermediate core bond space, sort of the broadest space possible, did well. 84% beat their benchmarks. That was impressive to me, although I see over a 10-year period it slips down to 27%. Why did active bond management do well in the last year, Ben, and then I want to get to Jerome?

Well, it speaks to the fact that active bond fund managers, unlike their stock-picking peers, have generally over longer periods of time been able to add an increment of value by making out of benchmark bets. And what we saw in that one-year look back that you mentioned, Bob, is that the overwhelming majority of active managers in the intermediate core bond Morning Start category beat their average passive peer, precisely because they took on more credit risk relative to the average index mutual fund or ETF in their category. So they can color outside the lines in a way that index funds, by definition,

can't. They can be more opportunistic, and they can reap rewards from coloring outside the lines and being more opportunistic, as many did in this most recent episode we saw on the markets. So, Jerome, is that what you did? Now, you run the PIMCO Enhanced Short Maturity Active ETF. Mint is the symbol. That's, I believe, it's the second biggest actively managed bond ETF in the world. You outperformed as well. What's the difference between active versus passive bond funds? You know, we talked earlier. You were saying you would there's thousands of stocks you can choose from, but there's millions of bonds to choose from. Does that give you flexibility?

I think the flexibility is important, and you're right to highlight that, you know, ETF isn't spelled PASS-I-V-E any longer. I think that flexibility, especially in bond funds, bond ETFs, allows for not only coloring inside the lines, but also not being forced to color at all. And so I think one of the things that Ben's report highlights is actually really important, that active ETFs actually allow for a degree of flexibility, perhaps taking a additional credit risk, but it's also, as the landscape changes, which we are in an age of transformation right now, we need to be able to adapt and not necessarily picking to color outside

the lines, but also picking to color maybe a little bit less within the lines, within the index. And that's really what is going to be the deciding factor about thinking about performance, not only the beta, but also the alpha, the ability to differentiate between the indexes and, more importantly, the risks that the indexes might pose in the current economic environment. And I think that's one of the critical facets between active equities and active fixed income, which needs to be digested fully by investors. And so as we move to a more expansive universe of fixed income ETS, that active approach will be an incredibly large differentiator as been highlighted in his report.

So I think when... Just, I'm going to get this point across. Did you take more credit risk than your passive peers? Is that why you outperform? I mean, just tell us what exactly happen here because it's not obvious. You can do anything you want, essentially. You can go to cash. No, I mean, that is fair. But what we seek to do is build a diversified portfolio. And having the resources to run the gamut of different types of asset classes, not just corporate credit, but look at structured products, maybe have a little bit more cash, think about where an interest rate curve might be more sensitive and be more advantageous to clients. That's really the facet, which hasn't been fully optimized or optimized at all within the passive universe of ETS for

very long time. And so in the past, while the Fed was in its new normal policy measures being very vigilant, low volatility, and providing a very balanced view of where credit spreads and risk appetite was, that was fine. You could possibly take more credit risk, whether it's in corporate credit or structured products. But now that we are evolving to this age of transformation, it actually is critically important to create differentiation within the product and not necessarily embed or be wedded to a growing aspect of the beta risk in the index that might actually prove very harmful to investors. And so just one thing to point out, you know, back in 2008, the composition within the Barclays aggregate, the fixed income aggregate index was about 8% for triple Bs.

Now it's north of 15%. So simply by owning the index, you're owning a lot more credit risk, which may not necessarily be the right positioning to have in this current environment where we sit here, today with growth moderating and a variety of central bank policies, creating a propensity for a little bit more volatility in the future. Okay. Now, Ben, I want to go back to why active managers underperforming, because this is a teaching moment for those of us who've been watching this. We've known about this for decades. You've been covering this for many, many years. And I'm wondering how you account for the persistence of active management. There's three points the report seems to make here. First is that the market, the concept of market timing doesn't really work.

It's hard to be right going in and going out. High fees and commissions erode alpha. That seems to be the second point here. And third, I hear this from my old buddy Larry Swedro all the time. More professionals are competing against other professionals. It's just harder because there's just fewer individuals in the market and more professionals to compete against. So sort of sum up this for us.

How do you account for the persistence of active management? Are they selling us something that we want to believe? Is it really true? I mean, riff on this for a minute. Yeah, well, I mean, we've talked about fees already, Bob. So that's really foundational. I think the other point that Larry rightly picked up on is just the dynamic of the market itself. It's not that these managers, these portfolio managers, there's teams of analysts aren't

incredibly bright, skilled, Uber intelligent, well equipped. There is bright, skilled, intelligent as well equipped as they've ever been. So we've moved long past the days of Harlem Globetrotters versus Washington Generals, where professionals could pick on a large contingent of individual retail traders and get out ahead of them and outsmart them. It's now kind of Washington— Harlem Globetrotters versus Harlem Globetrotters' NBA All-Star game, whatever you want to call it, this isn't, you know, LeBron versus me in a pickup game. This is LeBron versus himself. So the level of skill that you see, especially in the U.S. market is as high as it's ever been. It's as hotly competitive as it's ever been. So it's harder

than ever to eke out alpha. And if you want to look at a contrast there, my colleagues in China actually have done a similar analysis of the Chinese funds market where there's a huge active retail investor base. And what you see is that 90 plus percent of actively managed mutual funds in China managed to beat their indexed peers. So I think this is one proof point of one of the most fundamental factors that drives what we see in this analysis. Yeah, Swaydra likes to say the pool of victims is shrinking in the U.S., meaning retail investors who are not as sophisticated. We'll get to that in a minute here.

But, Ed, you're a guy. You oversee several actively managed the ETF. Let me look at some of your holdings here. You run the advantageous U.S. equity ETF, A-V-U-S. Now, explain how you picked stocks. I'm looking at this, and again, this looks mostly like high. high-quality tech and pharma here apple microsoft amazon facebook alphabet johnson and johnson i i see these in a lot of funds these days but what's the criteria you use for picking

funds so think of for a v u s for example think of it more as a modern approach to active management where it's combining the you know the what you get from indexes which is diversification and low fees but instead of relying on the index waiting for a rebalance period which may be monthly quarterly semi-annually even annually the portfolio managers are looking at it every day to account for the things they want to account for. So they're not just looking for the things you would normally look at market cap. They're also looking at balance sheet and profitability and you're combining what goes with

an index along with an active management in a what you could call a best of both worlds for that situation. And so with something like AVUS, you get the full diversification and you get it at a pretty reasonable price at 15 basis points. So that's why you would say that it goes back to the fee discussion that we just talked about. And it also is combining different things that make it attractive to both index and active users. Yeah. And you're putting up here, we're putting up the advantage small cap value. That's done well this year, but small caps have done fairly well. And, you know, we know

historically, not to get into, you know, academic studies like, you know, from a French two-factor, We know that small cap and value two factors do tend to outperform over time, although they have not in many, many years. So you're sort of in that sweet spot this year where some parts of the year, small cap and value have done very, very well. Do you still – I'm asking a generic question, but do you still believe in the concept of small cap and value as factors that will long-term outperform? I mean, I do. And let's add into that what the portfolio managers also account for. They also account for like balance sheet, profitability as well. So it's not just that tilt towards small cap and value, which I think over the long term can outperform. And you'll see periods of underperformance with that. But if you hold it for a long period of time, it will outperform. But when you start adding in other metrics like a profitability or looking at the balance sheet and taking into account what makes a company a good company, it actually gives you. you more of an advantage as well. Over time, you should be able to outperform by even more. And that graphic of AV-UV, I'm sure, in the last year,

shown huge outperformance. The problem is over time, small-cat might outperform big cap. And you might see other little outperformances elsewhere. But it may take a long time. The small-cap people and the value people have been waiting many years for a little bit of out-performance. Jerome, I want to turn to you. Active bond phone.

funds did well in lower volatility as well. You're the bond fund guy. While I've got you here, give us your take on where interest rates are going today? Yeah, absolutely. Interest rates are obviously been in philumbics really over the past week, especially front-end rates at this point in time. The digestion and trying to figure out exactly where the landing point is for inflation is obviously front and center, not just here in the United States, but globally.

Supply chain constraints, labor economics, things like this, the employment cost index from last week. These are all factors which are ultimately going to figure out and really come into construct of how the term premium plays out. So long story short is we are probably in for a period more immediately of a little bit higher inflation, which will effectively moderate as we get into 2022. And it's going to create a little bit of tension, especially for the Federal Reserve, who's going to have to be a little bit more patient as the digestion for inflation actually occurs, and we see some of these supply hindrances come back online and alleviate some of this effect.

I think one of the key points, though, here. Bob, is really this. When you think about where we've come from, in fact, where we've come from what we used to call the new normal, doesn't really apply anymore. And I think that era of low rates and low volatility is gone by the wayside. Now when we get into this area of a more new neutral policy, that effectively means that the cycles are a little bit shorter. The amplitudes of the cycles are probably a little bit more severe, higher, and lower. And as a result, when we think about the response function, the response function is probably going to be a little bit more passive, patient from the Federal Reserve, especially if they see spikes a little bit beyond their comfort

level for inflation. So ultimately, when they bring that inflation back in closer to that 2% PCE, which is well above higher at this point in time, then they're going to actually find a little bit more runway, not necessarily to be in that rate hiking sequence at all. So our forecast for rate hikes is probably still 2023. Maybe it pushed very into late 2022. But right now, we think that inflation begins to moderate, and that will give the Fed a little bit more leniency in terms how they respond to the current conditions. Over the weekend, everybody was talking about Goldman Sachs call about maybe rates starting hike in July of 2022.

Doesn't that seem a little early to you? I know this is Goldman making the call, but, you know, it seems like an aggressive call to me. Well, it seems aggressive, but frankly, that's where the market's pricing right now. When you look at, you basically have a 44% chance of probability of a hike in June, and you probably have two hikes priced in fully for the 2022. So the market is actually there into that construct. So I wouldn't say it's necessarily off the market. It's probably more consensus if you want to actually look at the market.

I think what is important though is understanding how the digestion actually occurs. So you have to take a view on, or is the inflation that we're seeing actually getting baked into the psychology, into the framework, into the long-term inflationary expectations of the investor. If you don't believe so, and the Fed doesn't at this point in time, but we'll find out more later this week, then you're going to actually see that those rates rise, potentially if that inflation gets carried away. If it doesn't, then you're going to see a Fed being more patient, not necessarily hiking twice in 2022.

That's the tension right now. Sorry to get a little wonky folks, but I got a bond guy here, so I got to hit him up on this. I want to get back to the active versus passive debate. And anybody can jump in here. It seems like passive is winning the inflow game. No matter what you say, we've had, I think, $700 billion in inflows this year into ETS, we've got a record year. Put up the numbers here. Most of it is passive still.

Active is still a very small part of the inflows. Even with mutual fund conversions we keep hearing about. Is there any reason to think that this is going to change? Ed, you and I were talking about this earlier, just massive inflows into passive funds again this year. Yeah, and let's start off with a lot of, there's a lot of ETF models out there to start with that own passive and active, while it's been around since 2008 in the ETF landscape, has been slow to adopt, especially on the equity side. I mean, two years ago at the end of, well, almost two years ago, at the end of 2019, the active space was only $100 billion.

I mean, it sounds like a lot, but when you compare it to the overall ETF space, it was a really small percentage. The end of last year, it grew to $174 billion. And the equity space was the first time it really grew. It was only 15%. at 19, and then it grew significantly to about almost doubled around 30%. But the issue you have, Bob, is a lot of these funds are new in the active space with the advent of different structures, like not being able to show your holdings every day or what we call semi-transparent.

It's really been more ETFs have been coming to market. And this year alone, there have been more active ETF launches than passive. So I think you're beginning to see a lot more active come in. and I think time will tell if they can supplant some of the passive. But because their ETFs, a lot of the ETFs have a lower fee structure than mutual funds, traditional mutual funds, because they're new products. And so having that lower fee structure can attract more to take a chance. So, Ben, is that going to make a difference? I mean, if active doesn't outperform passive in a mutual fund space, is it possible it could do better in an ETF space if the fees are lower? Well, absolutely, incrementally better, Bob, to the extent that the fees are lower, first and foremost,

and to the extent that the ETF wrapper might mean that those strategies are delivered in a way that's more tax-efficient to the end investor who's investing taxable money in that particular strategy in a taxable account. Now, while those two things may reduce the force of gravity on active strategies, I should stress that they are not a pair of anti-gravity boots. and none of these things is a given. So we can know to an extent with certainty that the fees might be lower. What we've seen today is actually kind of a mixed bag with respect to tax efficiency when we look at the same strategy as it's been delivered through an ETF versus an open-ended mutual fund.

And a lot of that has to do with the fact that we haven't seen a lot of sort of two-way flow into these ETFs and outflows in particular, which are critical for purging low-cost tax slots and getting that uptick in tax efficiency relative to what you might get from a mutual fund. So, again, a gravity reducer, but we're not talking about a pair of anti-gravity boots when we take an active strategy and convert it to an ETF, replicated in an ETF, you name it. The ETF has undeniable benefits for the end investor, but they don't cure everything. Yeah, I think that's a good point. All right, everybody.

I'm going to have to leave it there. Fascinating discussion. Now it's time to round out the conversation. with some analysis and perspective to help you better understand ETFs. This is the Market's 102 portion of the podcast. Today we'll be continuing the conversation with Ben Johnson from Morningstar, my old friend. Ben, thanks for sticking around. You know, you and I have been doing this a long time,

and it's very interesting to see the arguments that active management make even despite overwhelming evidence that they underperform. Remember 15 years ago when there was strong evidence even then, and they were saying, oh, who would want to be? buy mediocrity, you know, buying, betting with the averages is a bet on mediocrity. They've sort of dropped that, and now their argument is, oh, passive is getting too big. If something happens, I mean, you know, this is going to be a problem. Everybody's going to be passive and nobody's going to be trading stocks and the market will be

inefficient. So let me ask you, right now, how big is passive versus active in the equity market? Do we have a rough idea? and what is your thoughts on this? Is there any point where passive investing will get so high that it might affect the efficient functioning of the markets? Yeah, good questions, Bob. So if you look at the share of passively managed stock fund assets, let's call it,

and just look specifically at U.S. mutual funds and ETS, what you see is we sit here today, over half of all of U.S. stock fund assets, are invested in index funds. So that paints a pretty interesting picture, especially if you go back to 1976, when Jack Bogle launched the first ever retail index mutual fund, which at the time was called Vogel's Folly, that share was zero. So here we are now, decades later, more than half of all investors' money that's parked

in U.S. equity funds is parked in index funds. Now, if you zoom out a little bit further and just look at global total market capitalization and all types of index strategies. So that's mutual funds, ETFs, mandates that are being run privately by pension funds, you name it. Roughly a quarter of all of total global equity market cap is indexed today. So it's still in the minority if you zoom out and look at it big, big picture. Now, what looks different is that each incremental dollar that's coming to the market, at least in the U.S., what you see is the majority, certainly in the U.S. fund space, is going into index funds, which I think has got a lot of people concerned, and I would say wrongfully so.

They're worried about just mindless money coming to the market, just buying whatever the index is serving up. Why I'm not concerned about that, at least not at present, is because where prices are set is at the margin. It's when trades are made. It's that buying and selling activity that takes place all day, every day, as long as the markets are open. And a tiny minority of actual trading volume is happening because investors are allocating to index funds, be the ETFs, mutual funds, private mandates, you name it. most estimates are somewhere between 5 and 10% of actual stock trading activity comes back to index funds. So I think we're a very long ways off from any sort of tailwags dog type scenario. And frankly, I think that's a narrative that is taken on different forms over time.

It's probably as old as time. You go back to the go-go years of the 60s and people were worried about the quote-unquote mutual fund situation when U.S. retail investors were first buying mutual funds for the first time and all the pros were worried about retail investors flooding for the exits and causing markets to collapse. So I think you hear a lot of this narrative, it prevails, not based on data, but based on people kind of protecting their turf, right? And ETS, despite the fact now that we're near 30 years into this experiment in the United

States are still the new kid on the block in many respects, and you've still got a lot of people trying to throw rocks at them, get them to go away, because ETFs index funds have been drinking active managers milkshakes now for decades. Yeah, I agree with your point. It seems amazing to me because there's such an awfully high level of stock trading that's still going on, and most of this is, in fact, actual trading. And if you look at ETF creations and redemptions, most of the time, You know this, of course, Ben, when you trade a spy or an S&P 500 fund, most of the time, there is no trading of the underlying that's actually going on most of the time. So the important thing is, who's doing all this trading?

Somebody is at this point. I don't get it. And I guess there is an interesting academic question of what would happen if, say, you know, 50% of all the ownership, or 80%, pick a number that's really high, of all the equity ownership was in passive index funds. Would that affect the efficiency of the market? people would say even then, no, because as you pointed out, any kind of trading at the margin is what sets the prices. So even if it's 10%, that's what sets the prices at that point. So I suppose it's an academic question about market efficiencies that might have some value,

but I find it hard to believe that this is an important question. Let me ask about Robin Hood. Yeah, with the trading volume for ETFs in particular, and not only most of the time is the not wagging the dog, but the tail's not even attached to the dog, right? Because most of the turnover you see in spy, for example, on any given day, it's just you and me selling shares of spy back to one another on the New York Stock Exchange. It's not actually creating, in many cases, any trading activity in those underlying stocks. So that that is incredibly important. And, like, where is that theoretical upper bound? It's a question that gets asked all the time. I asked it years ago, this is going back to 2014, I had the opportunity to interview Gene Fama, the father of

the efficient markets hypothesis. I said, how far could this go in theory? And he said, in theory, all it would take is one really smart, call it omniscient active investor to set fair prices in the market and everybody else could index. Now, that is clearly an extreme. The truth is probably somewhere between where we are today and that extreme. And what I would say is that if we ever get to the point where all of a sudden there are $100 bills in front of the market steamroller, because pricing is so inefficient, the market's going to self-heal. Smart people are going to step in, pick up those $100 bills and wrap them up and give them back to their investors. That's the obvious answer. You're right. Let me move on and ask about the Robin Hood traders.

Larry Swaydra, my buddy, who you know at Buckingham, used to say that the pool of victims has been shrinking for years. And this is one of the reasons that it's hard for active managers outperform because they're not competing against retail investors. They're competing against other professional investors. Now, in the last year and a half or so, we've had a whole new pool of retail investors coming in. I don't want to exaggerate it. I mean, the numbers are vary, but it's somewhere, the estimates are about somewhere around 20% of trading might be retail. What about those people? Is the fact that we have a new, a new, pool of younger investors out there? Is that a group that active managers can seek to exploit,

or would they even be successful in exploiting them? Yeah, I think it's going to vary on a case-by-case basis. So I think broadly speaking, we've moved a long way from kind of a pro-verse amateur's game when it comes to stock trading. So historically, the number of amateur retail traders, the percentage of amateur retail traders and their sort of overall share of trading volumes was much, much higher than it is today. What we've got now is no longer a pro-am. It's pro-on-pro. And these are the best pros we've ever seen in anyone's lifetime. So the game is much more competitive because the stakes are so high. And because it's so competitive, because the stakes are so high, it's gotten more difficult to add value to find alpha. So I, I'd

don't think it kind of a big scale what we've seen in terms of the rise of the retail trader, be it Robin Hood traders or traders, frankly, across any number of different online brokerage platforms is really going to disrupt that long-term trend. But we have certainly seen instances, be it with stocks like GameStop, where something that sort of takes shape within that crowd is ultimately exploited by pros, who are watching very carefully, who are waiting for opportunities to step in and take the opposite side of the trade or take the same side of a trade if there's enough money to be made.

And I think that panned out in a very real and very high-profile way with what we saw with GameStop. Yeah. Well, I keep getting asked about GameStop eternally and by people who say, well, Bob doesn't... It's, you know, what people think might make a dollar next year, it's $160, obviously this doesn't make sense. Does this mean fundamental analysis doesn't mean anything anymore?

And I say, well, listen, fundamental analysis is a system based on valuing a future stream of earnings or dividends that goes back to the very origin of the stock market and why stocks were invented in the first place. That's what it was for. And yet, if you get a certain number of people trading on other metrics, on astrology, remember, Arch Crawford, if you get a sufficiently low, large group on a different belief system or technical analysis, you know, there's no reason to think why a stock would trade exclusively on fundamental analysis. I mean, how do you look at that?

For example, you mentioned the GameStop situation. Yeah, I think it's kind of like a high-stakes game of musical chairs, right? And you're just kind of making a bet that, you know, you're going to be the one to have, you know, your rear end on a seat by the time that the music stops. and that only, you know, applies to one person by the time that game's over. So how long can that game go on? I mean, certainly it's gone on much longer than I personally would have expected it to. But, you know, ultimately, you know, I'm of the opinion that fundamentals are going to rule the day at some point. And either, you know, the firm and the franchise grow to, you deserve the multiple that they get today.

and that's not unique to GameStop. There are other firms out there where we see this apply. Like Tesla has been in this seat for quite some time, or the price comes back down to be sort of more appropriately calibrated against the cash flow generating ability of that company. Yeah. Let me just ask you about the fees and the commissions. You know, one of the things we've always known,

and Vogel talked about this 25 years ago, is high fees, commissions, are alpha killers. And one of the main reasons that many good fund managers actually underperform is because of the fees and commissions. I'm wondering if the fact that fees are coming down a bit, some are not just the ETF space, but some fees are coming down.

And in many cases, we're going to zero commissions. Do you have any sense that that might improve the picture long term for active managers at all? Or is it still too incrementally small to make a difference? Yeah, I think every little increment helps, right? So every penny that an investor is not paying in fees is a penny that they keep for themselves and they're not handing over to an asset manager

or if you see an active manager now offering actively managed ETFs, right? There's the prospect for some big tax savings there. So that's another penny or dollar that you're not handing to Uncle Sam that you keep in your pocket compounds to your benefit. It's inarguable that that's a good thing for investors. Does it leave them any better off than they would be if they invested in a low-cost index fund? That's the question.

I think what you see in terms of, you know, ETF repackaging, right? Mutual funds converting to ETF's strategies that we've known for a long time, like Fidelity Contra Fund, now available in an ETF wrapper, that reduces somewhat the force of gravity on these managers, but it's not a pair of anti-gravity points. One of the biggest things that played them over long periods of time is just being able to live and most funds don't live because they fail to perform. And it's been a really challenging

environment, especially the past 10 years for active stock pickers in particular because the market's just been trending up into the right. And it's really been a small handful of names that have done a lot of the lifting. So any stock. that's been underway to name like an Amazon, an Apple, or a Microsoft has been trying to keep up and having a really tough time doing it by virtue of being either underweight or just not even owning some of the market's best performing names. Now, what I would say is that looking forward, like the setup may not be great for index investors. And it's a moment that I think many lived through in the dot-com era, which, you know, showed what are.

some of the faults of indexing, right? The market can go too far. It can get too excited about certain names, certain sectors. Eventually, if that turns, indexing is going to feel like a much less good idea than it's felt like for the past 10 years. But look back to that period, right? Ultimately, since that period, indexing has proven its worth again. So you're going to have to live through tough times, no different than you would for an active strategy if you're an index. Yeah, all right, Ben, we're going to have to leave it there. I very much appreciate your time. Ben Johnson, of course, my old friend at Morningstar,

and author of the Passive Active Morningstar Report, which comes out twice a year, by the way. Ben, we'll have you back when the next one comes out. Thanks very much. And everybody, thank you for listening. Thanks, Bob. InvestcoQQQQ believes new innovations create new opportunities. Here's the greater possibilities together.

Learn more at investco.com slash QQQQ. Vesco Distributors, Inc.