Another Great Convergence: 7bps, APO, HOOD
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I'm at 40% right now. It was really not great doing television today. This is great. We've gotten, I've gotten for months now, emails from listeners being like, Bloomberg's engineers need to do something because your voice isn't audible next to Katie's voice. And what we've done is the Bloomberg engineers have tuned down Katie's voice by 10%, so now we are more compatible. They've performed surgery on me, actually, and now this is how I sound today.

It feels like I ate an ashtray. I just feel disgusting. I need more milk. It's going to be great. It'll be fine. Big week, Katie. 10th anniversary of Money Stuff. Happy birthday! Happy birthday. To the newsletter, not the podcast. The podcast is still an infant. Getting on one. When did we get born? Like, April? Well, you seem like you're in a good mood. It was touch and go to get here today, as you know, because we were both late. Yeah. Right.

We're getting through the week. This is my last thing that I have to do today because I'm going to call out sick tomorrow. Yeah, that seems reasonable. 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 are we talking about today, Katie? We're going to talk about Vanguard and seven basis points. We're going to talk about Apollo. And then we're going to talk about the big game. The big game. So Vanguard...

I texted you this week to say... While I was on TV. What should I say about Vanguard? Because you wrote an article about Vanguard cutting its fees. And you never texted me back because you were on television. Sure was. So I never wrote about Vanguard. But you did. I did. So tell me about Vanguard. So the story began on Monday when Vanguard announced that they were putting through their biggest ever fee cut. Okay.

across 87 mutual funds and ETFs, it brings their average fee on their like $10 trillion of assets down to just seven basis points.

which is wild. These are wild numbers. The industry average roughly is 44 basis points. So that tells you just how low Vanguard is. And then we wrote a follow-up story, myself and Vildana Hyrek, a couple of days later, talking about how this really tightens the screws on everyone else, BlackRock, State Street, Invesco, et cetera, because Vanguard has this

ownership structure where basically the fund investors own the firm and thus everything they do is just geared towards lowering fees.

Other companies don't operate that way. BlackRock doesn't operate that way. And BlackRock actually fell, I believe, by the most since 2022 on Monday alone, both because it was a down market with, you know, the will-he-won't-he on tariffs, but also because of this news, which was interesting. Yeah. This is sort of the most intuitive way for an index fund to work, right? Like, it's like, you get a bunch of investors, they pool their money, hand their money to someone to perform the sort of administrative tasks of putting it into all of the stocks, and

And they pay that someone a reasonable fee. But there's no outside shareholders. You don't need to pay the cost of capital of some giant firm to just pool your money and put it into an index. So it should be, in a world of technology...

A world of giant scale for these funds. It should be kind of free to invest in an index fund. And it kind of is. Well, Vanguard would be quick to tell you, including CEO Salim Ramji, who I also interviewed on BTV on Thursday, would say that, OK, you think of us as just this passive index fund company, but we're more than that, Matt Levine. We also have active funds and they care very deeply about their active funds. But their active funds are also really cheap.

Their bond funds in particular, their active bond funds charge 10 basis points on average. And they have this interesting theory that because their fee is so low, their managers don't have to take outsized risks in the active portfolios to like outperform or make up the fee. And that that leads to their outperformance over a longer term horizon. That makes sense.

Yeah. It's like an old-timey, like, how much work is it to, like, take my money and invest it in bonds? Like, it's active in the sense that, like, you're choosing particular bonds. They choose that bond over that bond. Yeah, but it's like the cost of that should come down over time, and that shouldn't be...

Vanguard is a mutual, right? It's like the people in the mutual fund pay the managers and there's no outside ownership to collect another fee. I don't know. It makes sense. What I find interesting about Vanguard, especially right now, so CEO Salim Ramji, he came from BlackRock. He used to run

the iShares line at BlackRock, which is their ETF business. So he went from BlackRock to Vanguard, which is like, we don't get a lot of exciting moves like that in the ETF industry all the time. So that was a big deal. And...

Again, like BlackRock and everyone else has to operate in this universe that Vanguard has created where Vanguard is just lowering fees, lowering fees, lowering fees, and everyone else has to respond, even though, you know, they actually do have to worry about their margins and their external shareholders. But in tweeting about this story, I got a few tweets back to the effect of, you know, maybe they should actually stop focusing on lower fees and like focus more on putting this money back into the business and making the customer experience more

better. That's fair. Because I'm like, oh, you just put your money in your own... But like, in fact...

It is a corporation that has to do things like maintain a website. Yeah, exactly. Have customer service and like, yeah. One of the responses I got was from a woman, theoretically, who says that she's a financial planner who I didn't verify her profile or anything, but she said, I wish they would have cut their fees a little less and instead invested in their customer-facing IT and user experience, which is often disjointed and confusing to consumers relative to the competition, which I find interesting.

kind of funny. Okay, your fees are seven basis points. You're paying next to nothing. And you have this like small subset of people saying, no, please stop lowering fees. Like put this into improving my experience as your client.

Yeah, that seems pretty reasonable, man. I would frequently pay more for better experiences. I think there are a lot of people in the financial industry who get very sad at the idea that the only criterion is lowest fees. And you worry, one, about customer experience being sacrificed. But then people sometimes worry about performance being sacrificed too, although the evidence for the higher fee managers having better performance isn't great. The other thing I'll say is, you talk about BlackRock,

It seems to me that the move in asset management is there's this kind of barbell strategy of there's index-y public stuff that tends to zero fees, and there's hot new private credit where you can charge all sorts of fees, right? And so you look at BlackRock getting into private credit in a big way because the fees on that are just a lot higher. Bloomberg's Laura Benitez had an article this week about PIMCO not really getting into private credit. And one thing...

There is like, you have a lot of competition and margin compression on liquid fixed income, which is, you know, like the Vanguard, like I had to fix it. I remember like, you know, PIMCO's bread and butter is like,

running bond mutual funds. And that's a tough business because people want low fees and you get low fees in index funds and people want the hot new thing, which is private credit, and you can get high fees there. But like just running an active bond fund is tough. Yeah. What an interesting way to think about barbelling by fees rather than like risk, which I guess correspond to each other. But I mean, like there are a lot of contexts where you can make a barbelly decision, right? And like here it's like your product offerings, like

There's a lot of demand for index. There's a lot of demand for alts and private. And the middle is getting kind of hollowed out. And it's been a tough time for active mutual fund managers for a long time. Yeah. I mean, you're seeing that in the ETF world too, which you can't offer private yet. I know. I was going to say, the other thing is your article with Vildana, you talk about in the ETF world, there are people who don't want to compete with private.

Yeah. The giants by cutting fees to zero. And so they're like, oh, here's a weird product where you can charge much higher fees. And like we're certainly seeing and talking about a lot of that, like the weird productized ETFs. Yeah, exactly. I mean, you think about all the silly single stock, super leveraged ETFs that are out there, all the derivatives based ETFs. Really interesting phenomenon occurred actually in 2024 where the

The average fee on new ETFs coming to the market was ticking higher. So the new launches were expensive because the feeling among issuers is like, I'm not going to compete in the core. So I got to launch the silly stuff and I can charge more. Yeah, the core is already there. You can get index funds. Now you need the silly stuff.

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So... Apollo is launching, thinking about starting a private credit trading desk. They are having conversations that have been highly constructive at the highest levels about this. So I wrote about this. I wrote, I don't really know what private credit is. You and me both, man. Yeah, and I got answers from...

A bunch of people emailed to say basically something like, if it's a registered public bond, it's public credit. And if it's not that, then it's private credit, which is not right. It's not how people use the term, right? People talk about syndicated bank loans and loans that are bought by CLOs as not private credit, right? That's something else. People don't really say public credit, but it's something else. Private credit is distinct from deals done by banks, right? Private credit is asset managers doing direct lending to

And in the past, I would have followed that by saying that they hold to maturity on their balance sheet. But everyone kind of knew that would not last forever, right? Like eventually, if you have potentially trillions of dollars in an asset class, people are going to trade it. And Apollo is the luncheon at trading desk or talking about launching a trading desk. I feel like we've been talking about

Apollo's trading desk for a while because we first started having this conversation, especially around when they filed for an ETF with State Street. Yeah, right. Let me take that back. It's not that they're launching a trading desk. It's that they're having conversations that are constructive. Highly constructive. Highly constructive. At the highest levels. About like a venue, about like a marketplace where it's not just they'll have a trading desk, but...

There'll be a bunch of trading desks and they'll trade with each other and there'll be a pricing service and some sort of electronic platform for people to meet and trade private credit. Because the trading desk that they were doing, that they're planning in connection with the ETF was like, to do a private credit ETF, you need your assets to be liquid. And the way you get liquidity is by Apollo saying, we'll buy the assets, right? And so like that trading desk was a sort of like facing a single customer, which is the ETF.

But then obviously, you know, if you have that, you're going to look for other places to trade with. But here it's like we want to all to all open venue for people who want to trade private credit because like obviously that's coming. Right. Like obviously, yeah.

You know, you have enough private credit funds, they're going to want to start trading. And so that's what they're betting on. I'm trying to think about how to think about this. And you say marketplace for bond trading. And I think of like a market access or a trade web. Sure. Are they just trying to build that but for private credit? Something like that.

You're so young, you think of market access. I do. It used to be like, you know, a dozen dealers with telephones, right? Well, that just sounds fake. Yeah, or like a dozen dealers with Bloombergs, right? And I think, right, when Apollo talks about, you know, they're like, to partner with banks, exchanges, and fintech firms, like exchanges and fintech firms suggest there is like an electronic marketplace. But yeah, like there's not that for private credit because it doesn't really trade and it doesn't have the electronic identifiers, right? It's like you sign a contract, right? So you have to like do some like

technological processes to make it tradable easily. But, you know, it's not that hard and they're going to do those processes. The other thing that I was thinking about in terms of how to think about this is like, I've been using the word banks to describe the Goldman Sachs's of the world that like originate bond deals and then have bond trading desks. But it used to be that banks

That business was done mostly by non-banks like Goldman Sachs, right, which became a bank holding company in 2008. And it used to be that there was this world of investment banks that use their own capital to trade securities and that also originated investment.

and underwrote bond deals, committed their own capital, but basically sold it on to other people. And those were non-banks. They were investment banks. And they were big and had a big market niche. And then over time, the rules were relaxed in the US to allow banks to own them. And then in 2008, the big independent investment banks kind of got acquired or became bank holding companies.

But like this used to be a non-bank business. And you look at these big alternative managers and like to some extent they are like recreating what the big investment banks used to be, right? Like you look at like Apollo, like Apollo, KKR, Blackstone, like their DNA is like their LBO shops, right? Yeah. But like the thing that they're doing now is we're going to originate loans.

or you can originate debt deals. And we're going to run a trading desk for people to trade debt deals, right? They're kind of like moving into the business that Goldman Sachs was doing 30 years ago before it became a bank. And they have some advantages in doing that business now, like largely in terms of just like being less regulated and also in terms of like being the cool place to go work if you want to work in finance. And so you can kind of get a lot of talent that

banks have a harder time competing for now. But a lot of this is like the sort of traditional business of the investment bank has become hard to do because the investment banks are all banks now and they're all pretty highly regulated. And so like the big alternative managers are kind of stepping in to do kinds of business that banks used to do. So does that give you any blueprint about

where this expands to. I mean, you have all these lofty projections right now of like private credit being 30, 40 trillion dollars. If they're sort of like following the blueprint of, you know, what these big investment banks used to be, like, how does this end?

I mean, how much credit is there in the world? Like, you know, like there is this long-term push against banks doing a lot of credit on their balance sheet, right? There's long-term push to like a little bit narrower banking where like the risk of lending is taken by, you know, equity finance investment funds. And, you know, the big private credit managers are kind of well set up for that. And there's a lot of like,

You know, the sort of, like, stereotypical private credit deal is, like, direct lending to finance and LBO. But, like, all of these big managers are getting into structured investment grade stuff. You know, a lot of them are getting into, like, consumer loans. And, like, eventually, like, why wouldn't these, like, quote-unquote private credit firms be, like, you know, holding most of the mortgages or whatever? Like, I don't know. There's a real possibility that, like, this is, like... You talk about, like, BlackRock kind of trying to have...

higher fees by, you know, diversifying its index funds with like private credit, right? Like you could see the kind of the reverse happening in private credit where like you start with like very risky, expensive,

direct LBO loans and you end up doing like consumer credit for tighter spreads because you want to become like a financial supermarket, right? Like that's a possible outcome. Yeah, I look forward to that future. And something I was thinking about, I mean, there has been several articles this week that have talked about this grand convergence between private and public, which has been going on for a while now as a narrative. But I mean, it

When you think about that convergence, is it just the private debt markets becoming more public? Are the public debt markets going to take on any characteristics of what happens in the shadows? Or is this just private becoming more public? I think it's mostly private becoming more public. But like one way of private becoming more public is ETFs, right? Like if there's like liquid trading, then there will be

Private credit ETFs, just as there are like, you know, loan ETFs, which like, you know, bank loans used to not trade. Yeah. Bank loans used to be not a product that you could buy in your retail account. And now like there's loan ETFs. There'll be private credit ETFs if like this gets off the ground and there's a lot of trading, which I'm sure there eventually will be. This being Apollo's. Being someone's private credit trading venue, right? Yeah. Being like just private credit trading, right? I spent like three years, maybe more.

writing most days the phrase, people are worried about bond market liquidity. Because people are worried about bond market liquidity. And the story was something like, there are all these bond companies

mutual funds but like really bond etfs people were worried about these etfs are so liquid you can just trade them in the stock exchange anytime you want and if like people want their money back at the same time these etfs will have effectively redemptions and they'll have to sell or someone will have to sell all these bonds and the bonds are not as liquid as the etfs no and so it's a disaster waiting to happen and then disaster never really happened i made fun of this for a long time there are those who would argue this is like real 2020 stuff you know i want to say it was earlier i

I don't know. Yeah, 2020 is when it came to a head because of like, it was when the theory was tested, but people were worrying about it for years before that.

So I'm just really excited for, like, the first 17 times I can write, people are worried about private credit liquidity. Because it's just going to happen again, right? Like, there will be some trading, and then there will be ETFs. And, like, the trading in private credit markets will not be as liquid as the ETFs. And then people are like, oh, what happens if... We'll talk about illiquidity doom loops. It'll be great. It'll be great. And, like, the best part of this is that...

I want to say Tracy Alvarez who pointed this out to me, but our Bloomberg colleague, but in like the 60s, people had this exact worry about equity mutual funds, right? It was like... How quaint. Yeah. It was like, oh, these mutual funds, like if they all get redemptions at once, like they'll have to sell their stocks. There's not enough liquidity for that. And then like, you know, they perform relatively well and like people just forgot about that. And also stocks are very liquid, but it's going to keep going, keep moving up the capital structure to private credit. God, history just repeats itself.

This episode is brought to you by Intuit Enterprise Suite, helping your business grow smarter. All right, let's chat to all the CFOs and business leaders out there. As your company grows, so do the headaches. You're juggling multiple entities, locations, and subsidiaries all across different systems. And that's just the beginning. It's tough to get a clear view of your business when the data's a mess. And understanding intercompany transactions or eliminations can feel like solving a puzzle.

Then you've got forecasting and budgeting to deal with, each department using different tools. Oh boy. And let's be honest, you're probably paying way more for all this without getting the real support you need to grow. That's where the all-new Intuit Enterprise Suite comes in. The Intuit Enterprise Suite is an AI-powered platform that pulls together your financials,

payroll, marketing, and payments processing in one place. With automated multi-entity accounting and reporting, you can simplify everything and make better decisions faster. Learn more at Intuit.com slash enterprise. That's Intuit.com slash enterprise. Money Movement Services by Intuit Payments, Inc., licensed by NYDFS.

Success. It's discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. It's the best in each of us made better by the best in all of us. Whatever success looks like to you, Stiefel is invested in yours. That's why Stiefel is one of the fastest growing global wealth management firms in the country. So when you're ready to chase success, our financial advisors are ready for you. At

At Stiefel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank.

And it's why Stiefel has won the J.D. Power Award for Employee Advisor Satisfaction two years in a row. If you're an advisor or an investor, choose Stiefel, where success meets success. Stiefel Nicholas & Company, Inc., member SIPC and NYSE. For J.D. Power 2024 award information, visit jdpower.com slash awards. Compensation provided for using, not obtaining the award.

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the professional football game to be played this weekend between the Philadelphia Squadron and the Kansas City 11. Wouldn't it be really cool if you could perhaps bet on that, on the place where you also trade stocks? Alas. Doesn't that seem like a... For a day, it looked like it might happen. One beautiful shining day in the sun. Yeah, Robin Hood, I love Robin Hood. They just, they shoot their shot. Yeah.

They do employ lawyers. Good lawyers. But they keep... Years ago, they launched a thing called Robin Hood Checking and Savings. But they're like, it's a bank account. And then bank examiners were like, it's not a bank account. You're not a bank. And they pulled it within 24 hours. It was so embarrassing. And so fun to write about. But yeah, they launched events contracts. Yes. They launched an events contract on the big game. You can't say...

Super Bowl because then you get in trouble. You should pronounce it like Hunter Brook. Yeah, Super Brook. They launched contracts on the big game where you could bet on Philadelphia or Kansas City, not the Eagles or the Chiefs, but Philadelphia or Kansas City. And they said, they called it an emerging asset class, like event contracts in their announcement, which is now deleted from their website. But

They didn't launch football betting. They launched the event contracts where you could buy a contract that pays off a dollar if Philadelphia wins the pro football championship, pays off zero dollars if Kansas City wins, or you could buy the other contract that pays off if Kansas City wins. And that is a football bet. But they don't call it that because it's like there's this weird gray area where you can launch commodities futures. And commodities futures used to be like futures on soybeans. And then

People were like, we can have financial commodities futures that are like bets on what the 10-year interest rate will be. And then people are like, well, if you can do that, what about bets on whether the Eagles will win the Super Bowl? And the line between a financial futures contract and an events contract is a little blurry. And there's a lot of interest in events contracts. And so...

The CFTC, the Commodity Futures Trading Commission, which regulates commodity futures, has put out proposed rules that haven't been finalized and probably won't be, saying certain things are not okay. Those things include elections. They've lost on that one. Elections are now fair game. Assassinations. Timely. Timely. Timely.

We had several assassination attempts on President Trump. Yeah. We also like, in fact, I think Calci, one of the prediction markets, briefly listed contracts on what would happen to Luigi, like whether Luigi Mangione would plead, which is like kind of an assassination contract. It's not like it's related to assassination. But anyway, another thing that's excluded is sports betting because like, obviously, like sports betting is something else.

Gambling is now largely legalized in the US. You can bet on sports on your sportsbook app, but is a sports bet a financial futures that is allowed on your brokerage app? Apparently not, because Robinhood launched it and pulled it 24 hours later because the CFTC told them to knock it off. And they were very agreed about it. They said,

We were in regular contact with the CFTC prior to launching this product, and we believe we are in full compliance with all applicable regulations. But nonetheless, they pulled it.

Well, who knows where this will go? I'm pretty sure it will go to not being able to bet on the big game this weekend on Robinhood. This big game. This particular big game. Yeah, next year. Yeah. Well, reading our Bloomberg News coverage, apparently Robinhood said it will continue to collaborate with the CFTC as it works on unveiling a more comprehensive events contract platform later this year. So their ambition is unscathed. Right. I mean, the whole trend is in the direction of free events.

lightly regulated events contract platforms. And like, it's just weird to have an events contract platform that doesn't feature sports, right? Yeah. Because that's like the main event people want to bet on. Yeah. Yeah, the CFTC also wanted to exclude like betting on the Oscars. Like, what's the point? Why not? I'm not going to be able to manipulate the Oscars. Right. I mean, I don't really know why. Like why they would be against it? Yeah. Like part of it is like,

When you think about soybean futures, they're for farmers to hedge their risk and for soy sauce producers to hedge their risk. You have natural counterparties on either side who are doing real economic activity and are hedging that or raising money to do it. There's some underlying economic activity for all the financial betting. And so you can be like, oh, this commodities exchange is just evil speculators betting. And they can be like, no, no, no. It's supporting real economic activity.

And then betting is just betting, right? Like no one really thinks, maybe I'm wrong, but I've never heard anyone being like, oh yeah, sports betting is like building wealth, right? People sometimes say it, but it's like a very cynical thing to say. Well, it is an emerging asset class. It's an emerging asset class. It's a very cynical thing to say. Yeah, come on. It's not an asset class. The stock market goes up over time, not because of magic. It goes up over time because it's like an investment in economic activity and like the economy grows with like technological process and demographic growth.

like the size of the sports betting market does go up over time but like the outcome of the eagles game doesn't go up over time right it's like you bet and like some people win and some people lose and like that's it and most people lose right and it's like negative some game for the betters and if i were a financial markets regulator i would be like look i'll approve a lot of stuff that is pretty tangentially related to real economic activity i understand that like

because liquidity, that like a lot of complicated products are useful in hedging. You want to trade zero day options on meme stocks, like fine. Like that's really loosely related to real financial activity, but like it's all in a continuum. But then it's like sports betting is like, there's nothing. This is embarrassing to a financial regulator. Now, I think we're probably entering an era of like unembarrassable financial regulators. And so...

So, like, yeah, like, whatever. You can definitely buy futures contracts on the Super Bowl. But, like, I just think that, like, turning over the financial markets purely to gambling is kind of a scary step, right? Yeah. But it's, like...

You can understand why, right? Because you look at like the work of a sports book and the work of like a high frequency equity trading shop is like very similar, right? It's like similar techniques. It's similar skills. It's like similar risks. Like you're really doing the same kind of work. And there is a lot of movement between people who are market makers for stocks and people who are bookmakers for sports.

And then on like the retail side, like you look at like, there's so much stuff in like retail stock markets. There's a Bloomberg article this week about people betting on sports and, and like people who bet like thousands of dollars a weekend on football. And like a lot of what they say is like, it's a social thing. It's like, I'm texting with my friends and like getting our bets in and like, it's my way to keep up with my college buddies or whatever. Yeah.

And you see that in the meme stock phenomenon too, where it's a very social phenomenon. And it gives people a sense of fun and a sense of identity. It's not just like, we expect these stocks to go up. There's some more social process to it. It's very community-based. Yeah. And it's just that one of them is financial markets and one of them is gambling. But there's an obvious convergence socially. And so...

You know, it is a little weird for the regulators to say, no, Robinhood, you can offer some kinds of like fun gambling, but not other kinds of fun gambling. And like eventually I think that will erode. Yeah. Another great convergence. Indeed. In those shining 24 hours where you could do this on Robinhood, apparently it had been rolled out to 1% of their customers. So Robinhood said it will give those investors the option to close their positions or take them to resolution.

It would be fun to talk to some of those folks who are caught in this limbo. Oh, they get to take it to resolution? Yeah. I guess because they... Pretty cool. Yeah. Okay. All right. Everything hurts.

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 on open interest between 9 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 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 Masarakis and Moses Andam. Our theme music was composed by Blake Maples. Brendan Francis-Nunem 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. Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with a Business Unlimited smartphone plan. That's unlimited data. And with it,

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