Jun 11, 2018 · 1h 7m · capital-allocators
Tom Lydon – ETF Trends (Capital Allocators, EP.56)
0:00 / 0:00
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews ETF Trends CEO Tom Lydon to discuss the evolution from mutual funds to exchange-traded funds, the mechanics of smart beta and active wrappers, fee compression, and the structural risks of complex products.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 23.8% of the talking time here. How this is scored →
Ted as informed peer 4.6 Guest teaching 4.2 Guest disagreement 0.1 Ted pushing back 1.5
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 35:48 Defending leveraged ETFs as specialized tools
Tom pushes back against the broad dismissal of leveraged ETFs by clarifying that they work properly for disciplined intraday and swing traders despite their danger to retail buy-and-hold investors.
Hardest push from Ted ▶ 37:35 Ted rejects leveraged ETFs as destructive market timing vehiclesTed directly refuses the framing of leveraged ETFs as value-additive products, declaring that anyone not doing short-term market timing should never touch them.
Biggest teaching moment ▶ 41:10 Detailed mechanics of the XIV ETN rebalancing failureTom explains the precise post-4:00 PM settlement dynamics and futures purchasing obligations that caused Credit Suisse's inverse VIX ETN to wipe out 95% of its value in minutes.
Ted holds their own ▶ 38:08 Ted cites his quantitative paper on compounding decayTed displays his own mathematical depth by citing his published paper explaining how day-to-day rebalancing effects erode capital in levered products even when directional bets are correct over multi-month horizons.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Tom Lydon's Early Career in Fund Management | 3 | 3 | 0 | 1 | Ted guides the conversation through Tom's background at Fidelity and early mutual fund market-timing newsletters. Tom shares historical context around technical moving-average trading before 1987 in a fully collaborative tone. | |
| Evolution of Fund Platforms and Fee Models | 4 | 4 | 0 | 1 | Ted probes into historical mutual fund fee layers and custodian dynamics in the 1980s and 1990s. Tom outlines how platform evolution and transaction fee structures shifted power toward RIAs. | |
| Origins, Rules, and Factor Evolution in ETFs | 4 | 5 | 0 | 1 | Tom explains the inception of SPY in 1993 by Jim Ross at State Street and the subsequent development into factor-based indexing. Ted clarifies the distinction between pure passive indexing and systematic factor exposures. | |
| ETF Asset Growth and Bear Market Resilience | 5 | 4 | 0 | 1 | Ted asks why bear markets accelerated the transition to ETFs. Tom explains how advisors shifted from blaming active managers to owning asset allocation via indexes. | |
| Institutional Trends, Fee Compression, and Distribution | 4 | 4 | 0 | 1 | Ted asks about institutional adoption, securities lending revenues, and advisor distribution channels. Tom explains how Google searches and digital media replaced traditional fund wholesaling. | |
| Active Management Adoption and ETF Tax Efficiency | 5 | 5 | 0 | 1 | Ted asks for a breakdown of ETF tax efficiency mechanisms. Tom details how in-kind creation and redemption baskets avoid triggering taxable capital gain distributions. | |
| Sponsor Message: Ridgeline Investment Technology | 5 | 4 | 0 | 1 | Ted asks how allocators should evaluate ETF managers given market concentration in top issuers. Tom highlights tracking error net of fees, self-indexing strategies, and specialized thematic offerings. | |
| Structural Risks and Compounding in Leveraged ETFs | 7 | 3 | 1 | 6 | Ted challenges leveraged ETFs directly, stating he hates them and citing his research paper on daily compounding decay. Tom agrees that buy-and-hold use is destructive while defending their utility for short-term tactical swing trades. | |
| Case Study: The February 2018 Volatility Product Blowup | 5 | 6 | 0 | 2 | Tom recounts the February 2018 XIV inverse volatility blowup, including his own trade. Ted presses for an exact step-by-step walkthrough of how post-market ETN rebalancing triggered the 95 percent intraday collapse. | |
| Liquidity Mismatches and Fixed Income ETF Risks | 6 | 5 | 0 | 2 | Ted questions potential systemic risks, liquidity mismatches in high yield, and pricing distortions in emerging market bond ETFs. Tom contextualizes relative asset sizes, in-kind redemption precedents, and shifts in Barclays Agg duration. | |
| Active Debt Strategies, Thematics, and Model Portfolios | 4 | 4 | 0 | 1 | Ted and Tom discuss active fixed income managers entering the ETF ecosystem, thematic tech fund flows, and the lagged demand cycle for liquid alternatives. | |
| Commercial Business Models and Growth of ETF Trends | 3 | 3 | 0 | 0 | Tom describes how ETF Trends transitioned from an RIA educational blog into a media and webcast enterprise. Ted asks standard closing questions on career lessons and sports memories in a warm closing dialogue. |
Statements from this episode (26)
Lydon: ETF Industry Misses the 'Rock Star' Manager Culture of Mutual Funds
“It wasn't just making money, but you're backing a horse. And that's something I think, you know, with the ETF industry, we're missing today.”
Lydon: 1980s and 1990s mutual funds averaged 150 bps management fees
“So it was average to see a 150 basis points, but quite often you'd see hot managers that would be above two percent.”
Lydon: 1990s fund companies used custodians to ban short-term market timers
“If a fund company knew you were coming in and putting twenty million dollars, and then you were selling it six months later, they would actually work with the custodian. The custodian would say, they don't want that type of money, so you no longer can buy that…”
Lydon: 95% of ETF marketplace remains index-based
“Still, to this day, 95% of the ETF marketplace is index-based.”
Lydon: Most ETFs were cap-weighted indexes until 2007-2008
“So up until 2007, 2008, most of it was pure cap weighted indexes and the low costs, the major market indexes that you would know.”
Lydon: U.S. ETF assets grew from $650B in 2009 to $3.7T
“So in U.S., 3.7 trillion, which just at the end of the financial crisis in oh nine was about six hundred and fifty billion.”
Lydon: Top 100 ETFs hold nearly $2T in pure beta strategies
“Almost two trillion dollars is in the top 100 ETFs. So right now they're about 2200 ETFs and we're adding more every day. But the top 100 ETFs, two trillion dollars, still pure beta strategies.”
Advisors Using Pure Index ETFs Must Own Their Bear Market Losses
“So during the next bear market, if you don't have a plan in place, you can't point to the indexes. You're gonna have to take it on the chin yourself.”
Lydon: Self-directed ETF investors will likely panic sell in downturns
“And as far as self-directed investors who have invested in ETFs, maybe through robo-advisors and that type of thing, are they gonna stick with it? They should. We know historically they should over time. Are they going to? Probably not, right?”
Lydon: Smart beta fees are down to nine bps at Goldman
“You can get a smart beta strategy at Goldman for nine basis points. You have pure beta strategies now for four.”
Google is the Number One Research Tool for ETF-Focused Advisors
“We do a study every year entitled how to communicate with ETF-centric advisors, and we ask them not only how they want to be communicated with, but how do they get their research. Their number one research tool is Google.”
Cathie Wood's ARK Invest Quickly Reached $5B AUM by 2018
“In a short period of time, they got five billion under management.”
Lydon: ETFs account for one-third of daily trading volume on high-volume days
“When you look at high volume days on the exchange and people talk about it, ETFs account for one third of the daily asset trading, right?”
Lydon: Very few of the 2,000+ ETFs pay year-end distributions
“Even with over 2000 ETFs that are out there, how very, very few have year-end distributions.”
Lydon: Active managers will prove value by protecting against market declines
“So we're not really yet in a period where active management can really show its worth, but I think we're going to be getting there, and that's really going to get us more back to full circle, where active managers are going to come in. They can show that maybe…”
Lydon: Trading volume in inverse and leveraged ETFs has tripled
“Even though the asset growth in inverse and leverage ETFs haven't really kept up with overall asset growth in ETFs in general, it doesn't matter because when you look at the underlying volume, it's tripled.”
Tom Lydon Bought XIV ETN Right Before the 2018 Volmageddon Blowup
“I actually am one of those knuckleheads that actually went in and bought that thing in the final hour”
Lydon: Fixed Income ETFs Hold $700B Compared to $4T in Mutual Funds
“First of all, there's about seven hundred billion dollars in fixed income related ETFs. There's probably four trillion dollars in fixed income mutual funds.”
Lydon: Fixed Income ETFs Have Improved Bond Market Price Discovery
“Because there's more liquidity in the ETF space, we've seen better price discovery because ETFs have come into the marketplace.”
Rob Arnott Keeps 50% of His Personal Portfolio in Emerging Markets
“Somebody like a Rob Arnott, that I talk to on a regular basis, who personally has, 50% of his individual money in emerging markets, and said, you just don't see valuations like this, with P ratios around 12 right now.”
Barclays Agg Credit Rating Dropped and Duration Doubled Since the GFC
“The Barclays Ag is not the Barclays Ag that it was at the end of the financial crisis, right? So the credit rating, Is a lot less today than it was back then, number one. Duration is doubled since that period of time.”
Jeffrey Gundlach's Active ETF Holds Over 50% in Mortgage-Backed Securities
“I mean, you look at Gunlock, he's got a great portfolio,
But he's got over 50% in mortgage-backed securities, right?”
Lydon: ROBO Global ETF grew from under $100M to $3B in one year
“There's a robo-global that had been around for five years, hung under a hundred million dollars, and then all of a sudden people got it.
And now they're at three billion, you know, in an, in another year.”
Lydon: Long/short equity ETFs will probably show alpha in next 3-5 years
“On the equity side, as well.
Long, short.
We'll probably have a period of time in the next three to five years where it might be able to show some alpha.”
Lydon: Asset managers pay premium valuations to acquire established ETF shops
“We're seeing a lot of M&A going on in the space already. There are a lot of managers who were late to the game, and rather than create it themselves, they'd want to go in and buy somebody. So it's hot right now, and managers are paying premium prices For estab…”