Clay Finck (04:01):

Like you mentioned, it is really exciting that there is just so much information out there for us to learn from and tools for us as retail investors to utilize, and we are going to dig into all that in today’s episode.

The theme of the episode is the democratization of investment products. To get us kicked off, let’s talk about the retail investor. The past couple of years we have seen a surge in retail investors gaining access to the financial markets. Can you tell our audience what has led to the surge in retail demand?

Seamus Scaring (04:33):

Really, since 2019, we’ve seen this unprecedented interest on the part of, what we like to call, Main Street investors, within options, ETF, and really across all markets. This new age of retail investors, everyone really can agree that it’s a important and integral part of our market ecosystem right now and hopefully going forward. So really what we like to think of this as a result of is multiple factors.

The first is zero commission trading. That was obviously a big step in accessibility in allowing new audiences. The free and accessible trading apps that we all see and hear about are also really important, just in terms of getting it in the hands of users and allowing them to test out these products in these markets. And then I think a big thing was also the events of 2020. So the quarantine mandates, people having a lot of time on their hands to both educate themselves, spend more time following the markets and what was going on and looking for secondary income. So whether that be generating income on the markets or just looking to somehow diversify and build off their current portfolio. I know I was the same way. I was sitting at home and I was trading a lot just because there was tons of news coming out, and you are kind of bored at home and looking to do something. So it was an exciting time.

And I think you look at all of these new entrants and what happened to be an extremely unique realized volatility landscape of 2020, and it just combined to see the growth that we are seeing now. So really our role as both in exchange and as an industry is to make sure that this 2020, 2021 growth isn’t just a quick little flash, it’s actually here to stay for the next 50, 70 years.

Carlos Pelaez (06:20):

I was going to say, just to touch on some of the boom that we’ve seen. I think it also goes to, being the ETF side, seeing the products that are coming to market and kind of different solutions that are available to retail investors and that are targeted at retail investors to help them achieve their outcomes. As Seamus put it, I think you combine zero commissions with the products that are out there that are attractive for an investor along with kind of the usability and easy access of having your phone out and being able to go and trade, whether you’re sitting at your desk, or going for a walk around the city, whatever it is. It’s at your fingertips, and I think that’s a key part of kind of this boom in retail trading, particularly amongst like the millennial and Gen Z type of investor, who are on our phones and are always kind of looking at information constantly. I think that’s a big part of that boom and I think it’s an exciting kind of newer entrance into the market space.

Clay Finck (07:10):

All that makes sense to me with the quarantine mandates and a lot of people working from home. Other items that come to mind is that, with being stuck at home many people also naturally saved a bit more money since they couldn’t go out and do fun things they used to do. And on top of that, many people in the US received a stimulus check, so that added some potential liquidity into the market as well. It seems like retail investors just had more time on their hands and the extra cash to invest as well.

Seamus Scaring (07:42):

You don’t want to say necessarily that this came from the stimulus checks but it’s definitely not a coincidence that there was more cash coming in and more accessible cash at that point, especially young investors like all of ourselves. So there were various reasons and I think it all contributed to the whole.

Clay Finck (08:03):

So what education tools are these retail investors using?

Carlos Pelaez (08:07):

I think overall in the retail space we’ve seen kind of like the traditional outlets of education information, whether it be from their retail brokerage education centers or the financial advisor. But I think particularly with like the younger millennial side of things, we’ve seen a tendency to start using more of the YouTubes, the Twitter, Reddit, and podcasts like this to get that information. I think personally it’s pretty fascinating because it’s kind of a little bit more of like an open source market research approach using this wonderful information age that we are in, all the information and data that we have so accessible through the internet and being able to use that to make decisions for the market. I think we’ve seen that both for the good and bad, and I think there’s a lot of lessons learned during the past 18, 20 months of the pandemic in terms of trading that for the retail investor so there’s a long way to go.

And I think companies like StockTwits and Common Stock are helping bridge that gap of wrapping up that social media or informational outlet information and being able to package it with a retail broker connection or feature set to make sure you’re following or seeing valid information and things that are going to be pertinent to a trading decision that you might want to make. So I think looking at like the newer investor taking kind of a non-traditional source has probably provided some sort of, whether you want to call it alpha or advantage on what you could get previously.

Seamus Scaring (09:31):

I agree. I mean, it’s definitely exciting just the amount of education that we have out there. And it’s something that if you’re not utilizing it, you’re kind of putting yourself at a standstill and you’re inhibiting your potential growth, because it’s so easily accessible and a lot of times it’s overly accessible to a point where it’s in your face. It’s commercials. It’s emails that you’re getting all the time in the morning. Things like that where… You actively have to try to avoid this stuff, so I think that’s probably a good thing.

Clay Finck (10:02):

Yeah. We live in a world where we really have a plethora of information. Like Carlos mentioned, you got YouTube, Twitter, Reddit, podcasts. I mean, there’s no shortage of it that’s for sure. So how is your team playing a role in this shift as far as providing financial products and education tools to these investors?

Seamus Scaring (10:22):

I would say one cool thing about our role in terms of the fact that we work on a product creation side, while also being that end user, it’s interesting to step back and think, “What do I want? I’m trying to build something for essentially myself. What do I want there?” And I think the biggest things for me as an investor are flexibility and accessibility. If we are being honest, I am not at a point where I have the same risk appetite as someone who is 10, 15 years down the road and a lot more experienced in the markets. There are some things that, whether it’d be from a knowledge standpoint or from a capital standpoint are out of my limits. It’s about just offering things that fit each audience.

What we saw is that while there’s a surge in investor interest in the options market, there really wasn’t a strong correlation to the supply of products coming in for this demographic. Things like various expirations, or different contract sizes that range from really light size and mini up to sort of that institutional size, and then just settlements across different time periods.

I definitely started trading options a lot and for me it was about finding the right pieces that fit because a lot of that comes down to timing. If you’re hedging your portfolio you want to sort of plan around certain events, plan around changes that you have upcoming. So different AM and PM settlements throughout the week, expiration days, those are all really helpful. Those are the kind of things that we were able to step back and incorporate into what we are doing at Nasdaq and hopefully just keep building on that pipeline.

Carlos Pelaez (12:03):

And to add onto that, Nasdaq has been building a smart investing platform which is kind of being used as a tool or like an education center for investors. Going back to the points I made, there is so much information on the internet. Not all of us get to, like me, sit next to Seamus and learn about how to trade options. If you can, use those types of platforms that are so accessible. And the idea is to build that easily digestible content so anyone can learn, whether it’s 101, 201, or even more advanced trading techniques. I think that’s something that Nasdaq’s putting a big focus on.

And then from the ETF specific side, we want to make sure people understand what an ETF is and remove the curtain behind any questions people have, whether it’s trading, or the trends it’s following, or things like that. So we work with our issuers constantly to produce content that can be used as those educational sources for a retail trader or really anyone, even institutional. I think that’s the beauty of ETFs is they are used by multiple parts of the market and different participants. That’s definitely been a focus of us and we want to make sure Nasdaq as a whole is providing that type of information and resources.

Clay Finck (13:10):

Carlos, you work in the ETF division for Nasdaq. ETFs, or exchange-traded funds, are an investment vehicle that has gained more popularity recently. Could you give our audience an overview of what an ETF is exactly and why we’ve seen the increased interest?

Carlos Pelaez (13:29):

An ETF is essentially a wrapper or a technology. It’s kind of what I think was one of the original tools of democratizing investing as a whole to the entire investible world. An ETF essentially is a basket of security that you can trade as a share, like a stock on any exchange. Some of the use cases of an ETF are like getting passive broad market exposure to the S&P 500, or building out your 60/40 portfolio using ETFs that cover all those different kind of mechanics of what you need to build, but going portfolio diversification, or even gaining access to maybe a asset class that as a retail investor you might not be able to, like trade in oil futures or something of that sort. So it kind of wraps all of these unbelievable investment strategies into one. And I think that’s kind of the unique aspect of an ETF. It kind of is using the feature set of trading like a stock but providing so much more than that.

And if you look at the history of ETFs, they kind of started in the early ’90s as that passive index investing vehicle, and now you look at some of the recent launches, there’s active strategies and Bitcoin future strategies that are being launched. The industry has come a really long way particularly in the US but also globally. I think a lot of that is to the increasing demand that we are seeing from retail traders, from institutions across the board, trying to take advantage of the benefits that ETFs can provide an investor and an investor portfolio or their long-term or short-term trading strategies.

Clay Finck (15:03):

Are there any other benefits that ETFs provide outside of the broad market exposure like you mentioned?

Carlos Pelaez (15:10):

Outside of that like broad market exposure, I think the use case of getting access to an asset class that you may not be able to do it, be able to access as a regular investor. So I think like when you think about commodities, most people from a retail perspective do not have the access to trade futures on commodities or things like that. So in ETF, you can go and buy a gold or oil ETF that’s going to give you that exposure for your portfolio, which could be a really important piece of your personal finance journey, and depending on how you build out your portfolio is I think a huge benefit. You can go to your retail brokerage, buy that ETF, and you have that exposure in the market.

Some of the other benefits that I think are pretty interesting to an investor are the intraday liquidity side of things. Like if you were to invest in a mutual fund, you would be trading once a day. You don’t have the ability to trade out of it during the day as the market’s moving. So ETF you can trade similar, obviously like a stock, and take advantage of market movements that are happening in that day rather than one period of time, like a mutual fund.

And then there’s this whole kind of tax efficiency and lower expense ratios that ETFs provide from a cost perspective to the investor. So they are an extremely tax efficient vehicle, and because of that the issuing firms are able to reduce the management or expense ratio, which is essentially what you are paying to the ETF issuer as a fund fee. So the lower those are, the better experience for an investor, the more of your money that’s going into the market rather than going to fees. And I think that compared to some of the other fund competitors, that’s a huge part of why they have been so successful is… And kind of like any technology, genuinely comes in and disrupts cost and changes that part of the ecosystem. I think those are some of the other benefits that ETF can provide relative to the other products out there.

Clay Finck (17:04):

Yeah, I think the cost piece that you mentioned is really important. Some of these funds have costs that are very close to 0%, and when comparing that to some, say, mutual funds that have, say, a fee of 1% or more, that really compounds and adds up over time. Now I’m curious, what are the various types of ETFs you’ve seen investors have the most interest in? What types of assets are included in these ETFs?

Carlos Pelaez (17:29):

ETFs, as I mentioned, cover multiple asset classes. So it could be your regular US equities, it could be commodities, futures that cover those commodities, tons of fixed income. And there’s been a big boom in fixed income ETFs as well. More recently we had a Bitcoin futures launch on Nasdaq, so that’s kind of a newer asset class that’s come to market from the US equity space and what investors can trade on from an ETF wrapper perspective that I think is pretty unique.

I think the other piece of that is like even outside the asset classes there is this whole idea of trend following and somatics that ETFs are also able to provide exposure to. So if you’re interested in ESG or clean water and energy, those types of things, there’s hundreds of ETFs that are covering these types of investment trends, and I think that’s really important. There’s Biotech, which we saw a huge boom with. A lot of those firms were doing the like key and critical research during the pandemic and around COVID. Stuff like that, as well as ETFs using options, which Seamus works on, along with kind of blockchain crypto, and as I mentioned, Bitcoin future. It’s like you’re interested in following a certain investment trend but don’t want to be a stock picker, there is the beauty of like an ETF can do it for you and that’s why it’s so [inaudible 00:18:44] novel technology or wrapper for the investment world.

Clay Finck (18:48):

For me personally, I think it’s pretty cool if there’s like an emerging industry that I’m interested in and I don’t want to have to try and pick the winners, I can just buy an ETF. I find that very valuable myself.

Carlos Pelaez (19:00):

Yes. I often learn about companies in those segments, like whether autonomous driving or the green energy sector, because the ETF is holding them. And you can kind of from those firms about why they are bullish on that company and why they are bullish on this trend as a whole. So you can definitely follow really successfully kind of overall investment trends that will probably shape the market. You look at different things like FinTech years ago and where that market is now and how it’s really taking up a lot of market share across banks and other technology companies. It’s a great way to get that access. And if you want to kind of skate to the puck, even though I hate using that for analogy or metaphor, ETFs can provide that kind of access to a newer trend, which is great.

Seamus Scaring (19:44):

Just to add to that. From my personal perspective, ETFs are a great tool. Kind of like you said Clay, I am extremely diversified across a lot of different areas, and it allows me to do that into sectors that I don’t necessarily have a totally strong knowledge base on, but I’m allowed to be diversified into that because these ETFs, whereas really if you ask me to talk about it for 10 minutes I probably couldn’t, but we’ll take it.

Clay Finck (20:13):

I love it. Carlos, would you be able to tell us what structures are currently being utilized by newly listed ETFs?

Carlos Pelaez (20:20):

From the structure side, I guess from like the newer trends in the space, what we’ve seen is newly approved structure by the SEC called semi-transparent ETFs. One of the actual benefits I didn’t touch on of ETFs is they provide daily transparency into the portfolio, which is really helpful for investors, but also market makers and trading firms who are providing arbitrage services to the fund to make sure that it’s trading in line with its price.

These semi-transparent ETFs, and why this is like a newer and what I think is an interesting part of the ecosystem, is they allow some sort of shielding or proxy portfolio model on top of the regular transparency that an ETF would have to provide. And this is essentially helping cover the secret portfolio manager might have that they don’t want to bring into the transparent ETF structure. So we are seeing a lot of active managers and active portfolio managers come to market launching these types of ETFs from like a new structure perspective. I think we’ll see more mutual funds converting and things like that, but we can get into some of that later.

Clay Finck (21:25):

Interesting. Shifting gears a little bit. Seamus, we’ve also seen a rise in the demand for options, could you give our audience a brief history of how the options market has evolved and what types of products exist for investors?

Seamus Scaring (21:42):

It’s actually kind of funny that in the eyes of many investors the option market is sort of this new mysterious thing. And I had that same mindset. I mean, I was an investor in high school and college and I consider myself someone who was pretty adequate in terms of market knowledge. I kind of had always stayed away from options and didn’t really know much of it, and so it was funny getting thrown into it for the first time and seeing that it’s really not what the reputation is.

In reality it’s not really that new, it’s been around for a long time, but it’s just gained a ton of traction and public visibility in the last 25 years. I mean, just looking back… I’d written this down but… So 25 years ago the options volume, industry wide, for the year was around 175 million contracts, whereas gradually that number has grown to being over 75 billion contracts just last year. It’s not like it was just one quick jump, it’s really just grown as an industry, whether it be confidence, education, visibility, et cetera. I think really the key to continue that trend is to just debunk a lot of these myths that surround options and just provide more transparency into the benefits and use cases. Really it’s technology and education that go hand in hand there.

In this age of technology, which we’ve kind of talked about, there is just so much information that investors have and so much of an ability to learn at just the click of a button. So whether it be something as in-depth and sophisticated as a deep white paper, or as minor as one quick tweet, there’s just so many ways for you to learn just 1% better in terms of market visibility. We’ve seen this really in the last couple years is, the investor platforms themselves have bought into this education movement because they want their investor base to be more sophisticated. It benefits them, it benefits the market, and most importantly it benefits their clients. I think that’s something that’s really helped. And the goal is just to continually break down these barriers of entry, so definitely something to look forward to.

Clay Finck (23:58):

You mentioned breaking down the myths around the options market. I’m curious, what are some of those myths?

Seamus Scaring (24:05):

The myths really are just the risk around it and the fact that it’s a super complex portfolio management product. And really when it comes down to it, there are ways that options can be used in a super complex and complicated way, but there are also ways that it can be used in a extremely straightforward and simple manner, and both work equally. That’s kind of the biggest thing. And then in terms of risk, there’s also obviously extremely risky strategies as there is with any other investment tool, and then there are less risky, more welcoming, if you want to say, strategies. I think when it comes down to it, it is just like all other investment vehicles and that’s how we want to view it.

Carlos Pelaez (24:49):

To add on to that a little bit. I think something that the options market’s benefited similar to the equities market is it’s kind of never been a better time to be a retail investor. You have that access to your brokerage account on your phone. You have a lot of those types of apps that are teaching you what your option is actually doing or your option strategy. So I think things like that, and then you pair with options being used across the portfolio management universe for years, and being accessible in ETFs or other types of fund structures. Like there’s just more, I think, better that’s benefiting the investor and people are starting to realize the one easy access and then the actual use case of why it’s so important in a portfolio.

Seamus Scaring (25:29):

I totally agree there, Carlos. And I think, unfortunately when it was my time to learn options, the best way to do it was really just to get in the market and actually trade, and so I definitely had a couple losses there. I’ll take them as learning losses, but now there are tons of tools out there where you don’t actually have to risk your money. There’s essentially pretend portfolios or tools that you can practice and learn how these work and then eventually you can implement real life strategies and put your money. But that was really the best way. And not only with options but just with anything that I trade right now. You can learn about it as much as you would like but really firsthand knowledge is… At least for me that was how I became the most comfortable.

Clay Finck (26:12):

Now the most basic way, in my opinion, for an investor to get started in the market is to just simply dollar cost average into a broad based market ETF. Why am I, a retail investor, be interested in utilizing options rather than taking just the basic broad based ETFs approach?

Seamus Scaring (26:33):

I would say all products have their pros and their cons, and from really the purest functionality, options are for yield enhancement, downside protection, et cetera. And so whether they are used for stock positioning, broad based portfolio management, et cetera, they’re just tools that… Really, I think, one of the biggest opportunities is that they are less capital intensive in comparison to the returns they can provide. Sort of, as I mentioned before, this doesn’t apply to all of it, but what I specifically use it for and why I got so into it, especially during the last two years, is because you can see the return without necessarily needing as much upfront capital. And so with that approach there is more risk, but my personal situation at the time was that I was open to increasing my risk appetite in order to increase my return possibility. So for me, it fit perfectly, whereas like I didn’t have large amounts of upfront cash to dump into a certain name and hopefully see that grow. Whereas if you take a riskier strategy using options, for me at least, there was some upside there.

I think that for retail, one of the most attractive parts of it is that it is less capital intensive, especially for sort of new investors that are easing their way into the market. But at the same time you have to understand that when there is less capital and higher upside, there’s always going to be more risk there, so it’s really just how you use it.

Clay Finck (28:04):

The interesting thing I find about options, like you’ve kind of alluded to, is just the flexibility. You can use something like a put option while you own the underlying stock to kind of hedge your downside. And that inherently isn’t a very risky strategy. It’s like buying insurance, where the flip side of it is saying where you can buy a naked call option and give yourself so much more upside than just owning the stock. But like you mentioned, that’s a lot riskier strategy than just owning the stock because there is a possibility that you could lose a 100% of your capital when the option expires. What sort of behaviors are seen from the market regarding how retail investors are approaching options trading?

Seamus Scaring (28:51):

It’s hard to necessarily tie exactly who is trading what strategies, but what we’ve seen in terms of growth is sort of, like you’re saying, those more simplistic strategies, whether they are just a simple call, a simple put, a spread just to mitigate some cost there. And it’s pretty straightforward use cases like you’re saying. If you are looking to hedge, there’s no simpler way than buying a put, or there are simple strategies for income generation. If you want to increase your gain on an expected move, you can use options to continually generate income on that move. I think you touched on it pretty well. We like to think that some of these new strategies coming in are retail. We can’t necessarily tie it down, but definitely, in conversations I’ve had, whether it be with clients or with friends or relatives that are investing, that’s really where everyone starts.

Carlos Pelaez (29:47):

And to add maybe just like an ETF lens on that. One of the interesting points you brought up there, Clay, was like a downside protection or a hedge using an options while owning the underlying stock or index or something of that sort. There’s ETFs that do that for you too, which I think is like taking that idea of like complex portfolio management or what might seem like complex portfolio management or things that we might not do as your kind of everyday retail trader, and providing that in the ETF form, so it’s a little bit easier and you’re handing over a lot of that risk to the issuer and the firm that’s managing that portfolio and the options and stocks or indexes in it. So I think from the retail perspective, there are so many ways to use options now, and whether you want to outsource it into an ETF or do it yourself and trade smaller version of the Nasdaq-100 in terms of products. I think those are all different use cases for retail traders now and options that have been pretty interesting to me.

Seamus Scaring (30:45):

And I think it’s important to remember that while here we are kind of discussing the more interesting and fun ways to use options, when it comes down to it, the largest use case is hedging, by far, far and away. What options are used the most for is to hedge a portfolio. So you have your underlying assets and then you use it as a hedge. There are obviously tons of use cases. Like what I was talking about before, I use it less for that, but everyone kind of has their own thing. And if you have a large equity based or various asset class based portfolio, options are a great tool to hedge that and will always be sort of a great tool for that.

Clay Finck (31:28):

Now let’s talk about benchmarks. Historically, investors have used one of the major indexes, such as the S&P 500 or the Dow Jones Industrial Average to judge how their portfolio has performed relative to the average. Tell our audience how these benchmarks have evolved over the years. What indexes are investors using to judge the performance of their portfolio?

Seamus Scaring (31:53):

I think there’s been a pretty good and transparent transition between which index dominates the time period. And you look at the Dow Jones as an important benchmark and then the S&P, and really what I look at now, and what I hear a lot about now is the Nasdaq-100 really becoming and leading that charge. It’s emerged as sort of the leading market growth index, and I think obviously that comes from the fact that the most innovative companies, which most portfolios are now heavily tied to, whether that be your fangs, your technology, your healthcare companies, those are the leading, as we like to call, modern day industrial companies that will push the Nasdaq-100.

And for me, that is an index that I benchmark to but it’s not necessarily because of those names. I think something really cool is that if you look at it, actually the bottom 50 of the Nasdaq-100 outperformed the top 50 last year. So it’s weird to think about that you obviously see the outstanding performance of names that are in the Nasdaq-100, those big tech names, but those smaller ones are what really contributes to making it not just this tech-heavy growth index but really a well-rounded benchmark.

But I think from an indexing side, it’s exciting for our generation of investors because there are just a ton of wealth and a ton of indexes out there that have really risen over the last five to 10 years across various asset classes and sectors that allow for… Sort of the key when it comes to investing is customization. What I’m always looking for is, how can I build, whether it be a hedge, if I’m looking for a hedge and I’m trying to calculate what I want to use. A lot of times indexes are where I’ll go for that. It’s just about how can I build something that correlates best to my portfolio.

And so because there are a wealth of these indexes out there, and whether it’d be direct index affiliation, or an ETF, things like that, you can get to a really, really high correlation on your hedge and really don’t have a lot of exterior risk, versus in the past you would have to just benchmark to one and hope that you were correlated well there. It just gives investors more power and accessibility in my point of view.

Clay Finck (34:14):

Are there any other alternative investments you guys have seen emerge recently?

Carlos Pelaez (34:19):

I can touch on that a little bit. I think I had already mentioned that semi-transparent ETF structure, so that’s something we’ve seen from like an alternative structure side, but from an alternative investments, I think options and ETFs have become a really… Whether it’s the number of ETFs we’ve seen come to market and the assets that they are gaining, those are becoming a really important part of the investment community and that world. So that’s something we’ve been keeping kind of tabs on from the trend side with Seamus and his team.

And then I think something that’s probably pretty popular amongst a lot of the retail traders is the crypto and digital assets space. This kind of exposure comes in ETFs in a couple different ways. There is ETFs that track, what they call, digital asset companies who have exposure to mining, or maybe a Coinbase as a digital assets exchange. Providing that kind of soft exposure in the ETF to companies that are in the digital assets space. So there is kind of that which I think is interesting. We saw a lot of those come to market earlier in the year as some of those firms IPOed or some other kind of companies pivoted strategy towards that.

And then there is the actual Bitcoin and digital asset or tokens types of funds. So in the US we only have Bitcoin futures, ETF accessible in terms of that structure of the alternative investment, but there’s a lot of filings out with the SEC, with a lot of issuers to expand that universe. So I think that’s something that we are keeping an eye on in terms of like, how does that, one, not only add a newer asset class or other ways of market access to the crypto world, but what is that going to do for someone’s portfolio? How else does that evolve into trading or investment or portfolio management strategy in the future for investors? I think those are trends that we are seeing, which is really looking at new asset classes and then new investment strategies that are wrapped up in the ETF.

Clay Finck (36:09):

It’s interesting that you mentioned the futures-based Bitcoin ETF that’s been approved. I’ve been following this and seeing how existing funds compare to Bitcoin. One that’s out there is the Grayscale Bitcoin Trust, which is a closed-end fund. So if Bitcoin were to go up, say, 5%, the Grayscale fund might only go up 2% or 3%, or it might go up more than 5%, and the reason for that is that since it’s a closed-end fund it just trades freely on the open market and isn’t necessarily linked to the Bitcoin price. I think that is worth understanding before retail investors get into these types of funds.

Carlos Pelaez (36:49):

I think that kind of hits on a couple interesting points. One is, if there will be spot Bitcoin funds in the future, and that’s really up to the regulatory framework that’s applied at the end of the day. For an ETF business, we want to support firms that want to attempt to do that and we continue to do so. And then I think it goes back to the educational side of knowing what kind of structure you are investing into, what is actually held in the ETF or the closed-end fund, or maybe what options you are trading. Things like that. It goes back to educating yourself and making sure you’re doing that diligent work on understanding what you’re trading and what you have. I think that’s like pertinent to the investor these days. There are a lot of products out there. Just because it says it on the wrapper, maybe peak underneath and just make sure that everything is what you are expecting from the whole beans of what’s in a fund or in some sort of investment product.

Clay Finck (37:43):

Rotating back to the retail investors in the surge and retail demand we’ve had, have you seen that growth slow down with things going somewhat back to normal in some parts of the US?

Seamus Scaring (37:54):

We have not seen it slow down, and I don’t really see any signs that it will. Obviously we hope it doesn’t. But I think you have to look back on the multiple public events over the last two years that really shined on the markets. Some of them obviously you can’t go without talking about, sort of the main events and some of the other market based events that happened in 2020 and 2019. But really I think that even though maybe the event as a whole was negative, and not to get into specifics on any of these, but just as a whole, if we want to find one positive, it’s that there was transparency, there was eyes and ears on all of our capital markets, and it just brought more attention to trading, to education, to accessibilities for the new younger investor. Things like that that we are happy came out of this.

Just as an example, I mean, you look at the options market and volume as a whole over the last two years is over a 100%. What were some benefit to this? And what we’ve seen is that at first it was sort of erratic behavior but now it’s sort of grown into a natural and organic part of our ecosystem, and we hope to just continue as an industry to make sure that, like I said before, this isn’t a trend that was just a quick surge.

Carlos Pelaez (39:21):

We definitely saw a peak of activity and it was definitely around some of the more tumultuous events in the market, or kind of news we were reading during the pandemic that people were reacting to and then we saw a lot of retail traders come in on the ETF side, which I think is kind of funny. So we’ve had all these retail traders come in and trading a single stock or something and just getting used to it. And then as they are kind of a part of the market, we’ve obviously seen some of the activity come down to, maybe not normal levels as prior to the past two years but kind of finding that middle ground or medium.

We’ve talked to people where they are telling us that they moved their single stock exposure into an ETF because it’s less to manage and less to worry about from a day-to-day perspective, whether it’s volatility, or what’s going on in the market, or a specific stock. I think it’s actually been a benefit for the ETF space to have these retail traders come in because of the broader market exposure that can provide maybe when there isn’t a lot of single stock volatility or major market news.

Clay Finck (40:20):

All right. So it’s going to continue to be exciting times in the markets it sounds like. Are there any other noteworthy topics of discussion that you’re seeing in the markets today?

Carlos Pelaez (40:32):

I think something that’s interesting in our space is the Bitcoin ETFs that we talked about or crypto ETFs obviously. I think the world is watching that space, and whether that is a technology or in the ETF world or investment world, where that fits in the profile of an investor’s risk management appetite and all of that.

We are also seeing legacy asset managers or larger mutual fund only companies come to the ETF market, which I think goes back to like what we talked about the benefits early in the podcast, which is really, are you serving your customer best, and a lot of that has to do with cost. And because ETFs are going to be generally cheaper than a mutual fund, we are seeing these large, large asset managers looking at converting those mutual funds to ETFs, which is I think a very big moment and has happened already with a few of them. Or even just launching new ETFs that either replicate or look to do something similar to a successful strategy they have, or maybe launch something new that they don’t have in their offering that an ETF can provide to their customer base.

I think those are kind of interesting spaces. That’s only going to add to the success of the ETF industry over the next 5, 10, 15 years from the assets that are going in, but also I think the amount of investors that are going to be aware of how to use ETFs, the benefits and all of that.

And then I think lastly, just the educational aspect of things. As we mentioned from Nasdaq, that’s a huge focus of our company and both Seamus’s teams here. So I think that’s always going to be something of a topic to make sure that that is a focus and a priority for the financial participants to be educated in the market on how things work, whether it’s products, or the technology around things, or just the markets in general. Kind of expecting those to be the continuing noteworthy trends and topics that people are discussing over the next three, six to 12 months.

Clay Finck (42:24):

You mentioned the movement of clients funds from mutual funds to ETF, and that reminds me of how we’ve seen this race to the bottom in terms of fees. Robinhood released free trading and all of the other brokers followed suit. And I was listening to a podcast this week where an investor mentioned that early on in his career there were fees of something like $50 per trade, which is pretty crazy to think about. And when I got started with E-Trade, they had fees of $10 per trade and it was so painful to see those fees on each trade. So it’s nice that we’ve seen fees for both the brokerages and the ETFs just go so low and sometimes be completely free.

Seamus Scaring (43:07):

I think a lot of that can be contributed to just our growth and technology and the fact that a lot of what those fees contributed to are cut out of that process. As well as there is such strong competition that… Like you said, there was that race. It’s really exciting for the new investor because… Like you said, a lot of people don’t even know that periods like that existed, where it was expensive to make a trade, and now you just have access to all these free and easy to use trading platforms that you don’t even really realize how great this is. And so it’s just honestly a commodity for everyone to use going forward.

Carlos Pelaez (43:49):

To the point of low cost, I think there was actually an ETF at one point which had a 0% expense ratio and may have actually had a negative expense ratio, meaning they were paying you back for holding their funds. I need to double-check those facts, but I think it’s just the fact that we are that low in cost, whether it’s retail brokerage trading fees, expense ratios on funds, I think shows how far that technology has gotten, but just how efficient the markets are and why it’s such a great time to be an investor in these markets. It’s never been easier to educate yourself to trade, to hold a fund, and things like that. I think we also need to make sure we appreciate those facts and continue to improve the other places maybe where costs are high.

Clay Finck (44:32):

And I wouldn’t be surprised that one of the biggest barriers for people to get into options is the fees. If you’re buying an option that costs you, say, 200 bucks and your fee is $10, that right there is 5% of your capital and it might not make it worth the trade.

Seamus Scaring (44:49):

100%. I think that’s part of why options were kind of the last domino to fall when it came to free trading just because it was sort of that late push.

Clay Finck (45:00):

All right. Seamus and Carlos, thanks so much for coming onto the show. I’ve really enjoyed this conversation and really appreciate you joining us and spending time on here for our audience. Where can the audience go to connect with Nasdaq and you guys and learn more about the work you are doing?

Seamus Scaring (45:17):

We’ve been pushing to increase education, and part of that is building our internal websites. So we built a tool… Similar to what I had mentioned before, it’s a back testing tool that allows investors to go in and test out certain strategies, certain products during, whether it’d be market movement periods or just any period that you choose. Definitely go check that out. It’s at nasdaq.com/XND. And if I could give any advice it would be, just sign up for all information you can receive, whether that’d be newsletters, social media accounts, et cetera. Carlos and I are constantly talking about things that we see within media, and it helps us to become more educated, so just continue to do that.

Carlos Pelaez (46:01):

From my end obviously our business serves more from the institutional purpose and the asset managers, but I think I’d recommend to the audience to go on those websites, whether it’s a Vanguard, or a BlackRock, or State Street, or even the smaller issuers, and read about their funds, read about some of the educational content they are putting out there about investing and the benefits of ETFs in your portfolio. I think that’s massive. And it’s an exciting time as I mentioned to be an investor. Clay, we really appreciate you having us on. This has been really fun and hopefully we can do it again.

Seamus Scaring (46:30):

Agreed. Thank you, Clay.

Clay Finck (46:33):

Fantastic. We’ll be sure to link some of those in the show notes. Thanks a lot, guys.

Seamus Scaring (46:33):

Thank you.

Carlos Pelaez (46:38):

Thank you.

Clay Finck (46:40):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you will find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. And with that, we’ll see you again next time.

Outro (47:03):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestors.podcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.