Crossing the ETF Divide

Published on
January 24th, 2020
57 minutes

Crossing the ETF Divide

The Interview ·
Featuring Steven Bregman and Michael Green

Published on: January 24th, 2020 • Duration: 57 minutes

When he first sat down with Grant Williams in 2017 in a series called "The Dark Side of ETFs," Steven Bregman, president and director of research at Horizon Kinetics, dissected the problematic consequences of passive investing and the potential bubble that has since only grown. In 2020, he has not changed his tune. Ultimately, Bregman and Michael Green debate the risks and fallacies of a market dynamic, which Bregman argues presents incredible opportunity for investors willing to risk crossing the ETF divide. Filmed on January 20, 2020 in New York.



  • SA
    Scott A.
    9 February 2020 @ 15:20
    Mike Green interviews should have a minimum duration of two hours. Only bad part of the interview was the suggestion it should be a year before Steve comes back. I think a possible trigger of the future of ETFs would be a fast negative shock to a major EFT participant company. Where there would be a blatant disconnect between the average persons wanting to own the company versus ETF ownership.
  • AH
    Andrew H.
    8 February 2020 @ 20:44
    Dropping the bitcoin bomb at the end. Did not expect that. Wise open minded guy.
  • AH
    Andrew H.
    8 February 2020 @ 19:25
    "or Germany" lmao
  • DB
    Don B.
    24 January 2020 @ 16:46
    Mike Green is the best interviewer on RV
    • RM
      Robert M.
      24 January 2020 @ 17:09
      Have to agree.
    • PG
      P G.
      24 January 2020 @ 17:58
      After Grant Williams.... sad that we are not hearing from him anymore.
    • TM
      The-First-James M.
      24 January 2020 @ 19:01
      I get the feeling Grant is busy juggling a multitude of responsibilities and time commitments that would turn most of us grey almost overnight. Would be good to have him back in another interview series though. RV, any comment?
    • DS
      David S.
      24 January 2020 @ 21:27
      It is normal in the business world for people to join and leave companies. It would be nice when someone leaves RVTV just to say that they are leaving and wish them well. We are a community and many of us care about the RVTV staff. Even if someone is taking time off, it would be nice to know. I am sure the legal department can come up with some wording. DLS
    • NI
      Nate I.
      27 January 2020 @ 02:31
      It would be epic to get Mike Green and Grant Williams in a conversation with the guest.
    • AL
      Andrew L.
      4 February 2020 @ 03:27
      Grant W is phenomenal at biographical and understand who the guest is, where they come from, how and why they think like they do. Green is very versed in markets and asks amazing questions. He will also challenge guests when they say inaccurate things or things he does not agree with. Both exceptional!
  • JK
    Jay K.
    3 February 2020 @ 04:16
    There is far less risks in passive than in active. It also cheaper and preforms far better.
  • DP
    David P.
    24 January 2020 @ 23:54
    Great interview on a really important topic. I don't know what the active / passive imbalance will look like in the future. I do think, while not a saving element for active managers, that certain stocks could become so cheap that within the next bear market, if it every happens, you could see private equity swoop in and do a really high volume of take privates. As an example without naming it, there is a resource company I follow (not invested in currently) that is 1) too small for most / all ETFs and 2) because of the virtue signaling ESG trend can't be owned by many large pensions, etc. It's cheap now but at some point it becomes so cheap, with through-the-cycle great cash flows, PE or just wealthy individuals will buy it.
    • WS
      William S.
      25 January 2020 @ 15:05
      It is important to remember that Bregman and Stahl primarily serve US families who have the privilege of paying 3 types of taxes (income, capital, and transfer). Consultants and allocators are naturally pre-disposed to avoid Horizon for logical reasons. If you think about it, below the ETF divide is where Edelweiss finds opportunities in a manner not dissimilar to Horizon’s Strivers theme. As for Bitcoin, a little non-leveraged convexity is a nice way to thumb your nose at the Pooh-bahs who have no skin in the game.
    • MB
      Matthias B.
      31 January 2020 @ 17:36
      must be Teck ...
  • JW
    Jason W.
    29 January 2020 @ 07:08
    Brilliant it’s great to see some challenges thrown at him rather than just agreeing. Have you thought of having two interviewees from each side of the debate with an injudicator ??
  • DS
    David S.
    24 January 2020 @ 21:32
    I agree that the massive passive buying will end, and not well. I also agree we should be looking for stocks to buy when it does happen. Since the good, bad and ugly stocks will all go down at once, one should generate a list of stocks to buy and follow. I am not buying them now, as expect better prices when the corrections comes. DLS
    • DB
      Douglas B.
      25 January 2020 @ 22:19
      What’s the best way to determine which stocks have mostly been left out of passive instruments?
    • DS
      David S.
      28 January 2020 @ 22:23
      I would be happy to buy AAPL and MSFT if they get down to reasonable P/Es in the crash. DLS
  • FF
    Farouk F.
    25 January 2020 @ 00:18
    I really hate these same commercials over and over again
    • LJ
      Lucas J.
      28 January 2020 @ 20:53
      Do you think any of these guys who know how the sausage is made like taking this view? I am sure they don't but these problems have been building for years and getting worse. If you don't want to get educated just turn on Cramer and he will probably make money until it bucks. But you need to ask yourself do you want to go by feel and be like Icarus?
  • RS
    Ruben S.
    28 January 2020 @ 12:04
    mixing purchasing power with M2... not sure its very accurate given that M2 growth went more into financial assets rather than pure inflation in consumption prices.
  • EA
    Eric A.
    27 January 2020 @ 05:45
    Mike I’d love to hear a segment where you can have more runway to express your thoughts. Based on the comments I’m not the only one that feels this way.
    • MK
      Michael K.
      27 January 2020 @ 22:56
      Mike has been on a media spree, see alpha exchange podcast.
  • JS
    J S.
    27 January 2020 @ 16:29
    Thank you both. Mike please dont be afraid to rebuff or challenge some of the interviewee points.
  • MF
    Max F.
    25 January 2020 @ 03:01
    Lots of interesting content. Bergman might be wrong about the ROE of tech giants being open to competition and margin compression. Facebook, Google, etc have excellent ROE after stripping out cash, securities, etc because the value of their networks they control and the network effects they benefit from isn't properly capitalized on their balance sheets.
    • MF
      Max F.
      25 January 2020 @ 03:03
      Bregman, excuse me
    • TM
      The-First-James M.
      25 January 2020 @ 13:19
      I do wonder about this aswell. The company I contract for has a big investment in AWS, and a lot of source code written that will only work in AWS. Also, a ton of their data is stored in AWS S3. Sure, if a Cloud Competitor offered significant savings over AWS, they might be tempted to move, but it would require a multi-terrabyte data migration, migration of all their databases, and the rewriting of a ton of code that's been built to run via the AWS CLI, and various AWS-specific API's such as boto3 for Python. It would not be a simple or quick exercise, and it would come with its own hefty price tag. Still, I think that any company that can facilitate quick and relatively painless Cloud provider migrations will be onto a winner.
    • FG
      Flavio G.
      27 January 2020 @ 08:23
      Cloud business is far from commoditised. It's not just a bunch of boxes and cables at scale. It is that + all the services around them. Services (features and reliability) are the main differentiating factor. Some are crap and some just work << talking here of large multi Bn companies in both cases, so it's definitely not just about throwing $ to it.
  • CN
    Charles N.
    25 January 2020 @ 23:10
    Interesting discussion, though covering lots of familiar ground for those who've watched Mike's previous interviews. I'm most curious about Mike's idea that this passive phenomenon might not HAVE to end, at least not any time soon. Would love to hear more on that front!
    • AC
      Andrew C.
      27 January 2020 @ 04:24
      I concur. 2 & 20 really pissed off many people, especially for less than market returns.
  • AC
    Andrew C.
    27 January 2020 @ 04:11
    My thoughts are that low liquidity low float stocks somehow eventually become included in index EFTs when the attractive ROE or dividend yield or FCF drives their stock price above whatever ETF-inclusion threshold. This initial price rise would be primarily driven by active managers. But it also means indices have a long way to the upside still.
  • JH
    Jesse H.
    26 January 2020 @ 23:27
    MG did an excellent job but this interview was pretty underwhelming on the whole. Nothing new really from Bregman since his superb interview with Grant a few years back.
  • pd
    peer d.
    26 January 2020 @ 17:22
    MG has to be the most incredible interviewer on the RV bench. I love this guy, as he lets the guests develop their thesis then comes in at the pause with incisive, killer questions and comments.
  • TJ
    Terry J.
    26 January 2020 @ 16:13
    Mike's extraordinary discussion with Raoul and his revelations about the passive elephant potentially destroying the free market remains the benchmark video on this subject for me. This video was interesting, but disappointing by comparison possibly because as others have suggested, Mike wasn't allowed to properly challenge some of the views being proffered.
  • TR
    Thomas R.
    26 January 2020 @ 16:04
    Can't somebody build an ETF made of other ETFs, so we can all just buy ONE thing and watch it grow? :-)
  • NR
    Nicholas R.
    25 January 2020 @ 14:04
    Bregman conveniently uses the last 20 years as a time horizon which included two very severe bear markets. For any 30 year time horizon (rolling or non rolling) over the last approximate 100 years S&P returns average about 10%. Stocks are a very long duration asset.
    • EF
      Eric F.
      25 January 2020 @ 19:18
      Realistically who can commit to a 30 year time horizon? I agree with longer term investing / thinking but this is unrealistic.
    • JL
      Jinny L.
      26 January 2020 @ 12:03
      excellent point. i was wondering that myself as i was under the impression that stocks gave about a 10% over a very long term horizon. i like the fact he is skeptical but he also should have provided that nugget of information
    • FG
      Flavio G.
      26 January 2020 @ 14:44
      The last 20 years are more relevant due to secular diminished returns, consequence of demographics, QE, etc. That historical 10% average is gone.
  • PD
    Peter D.
    26 January 2020 @ 13:18
    Great stuff. But the debate goes deep. So you need to watch it twice...and you have to go right to the end. Bregman slips his best trade idea in the last two minutes: a small position in a non-debasable crypto currency....
  • LC
    Liliana C.
    26 January 2020 @ 06:30
    I really wanted MG to finish his responses fully, but no such luck!
  • RM
    Ryan M.
    26 January 2020 @ 03:18
    Mike brings up a great point. If millennials are 90% invested in passive, what are boomers? So when next downturn happens and boomers sell x amount of their stock, what % of that is active vs passive money? As boomer's proceed to die off over next x amount of years and leave wealth to millennial children, what happens? Every active manager thinks that the money will come pouring back in after the next recession, but what if it doesn't?
  • DS
    David S.
    25 January 2020 @ 16:31
    Nontrasparent ETFs story on CNBC. Active manager's way of trying to get into the ETF market without showing actual portfolio everyday. There is always a new idea. DLS
    • MG
      Michael G. | Contributor
      25 January 2020 @ 20:11
      Waste of time. Fundamental misunderstanding of problem facing active management. Exacerbates unstable capital issue by providing instant liquidity. Just take them out and shoot them already...
    • DS
      David S.
      25 January 2020 @ 21:00
      Mike G. - I completely agree. It just shows how desperate people get when reality is distorted. DLS
  • DB
    Douglas B.
    25 January 2020 @ 17:38
    I have learned more from Mike “Perversely” Greene than any other investor in my 47 yrs of existence.
    • MG
      Michael G. | Contributor
      25 January 2020 @ 20:12
      Too kind
  • TS
    Taranvir S.
    25 January 2020 @ 13:27
    "Wall Street is the only place that can produce infinite supply of a product, given demand is present"...big statement
    • PM
      Philip M.
      25 January 2020 @ 13:45
      I just realized this guy is at the firm that tried to argue that harmonic means "incorrectly" measure the mean of ratios, that Dell could come out with a rival phone to the iPhone, that internet businesses were only predicated on the growth of internet users vs. usage, or that Slack (used for intercommunication at companies) makes email obsolete.
  • TM
    The-First-James M.
    24 January 2020 @ 19:30
    Bitcoin mentioned in all but name at the end of the interview. I know Steve is a fan, and would have got even more out of this if Mike had been able to dig in further on this front. I doubt it would have provided enough discussion material to have made an interview in its own right though.
    • TM
      The-First-James M.
      25 January 2020 @ 13:26
      Just to follow up my last post, what I would really like to see the next time Realvision have a Crypto Week is for Jim Grant - a Bitcoin Sceptic - to interview Steve Bregman on the subject. I know Steve has knowledge of and respects Bitcoin, and I know Jim has a lot of respect for Steve and his broader market views, so it could make for an interesting discussion. Please vote this up if you'd also like to see this (cue for Bitcoin Haters to vote this down, now). ;)
  • HY
    H Y.
    25 January 2020 @ 03:32
    Good interview. My only concern with the doom and gloom bunch is that they maybe right at some point but isn't being too early also just being wrong, specially in today's market environment.
    • PM
      Philip M.
      25 January 2020 @ 06:20
      I think the search for yield along with safety is a much stronger driver than passive versus active (if market cap-weighted). The counter-argument against passive flows driving the market is that strong dislocations have occurred in index (Kraft Heinz, Biotech, energy, asset management firms, Limited Brands, Gap, etc).
  • VS
    Vasil S.
    25 January 2020 @ 05:22
    I've been looking forward to the return of Steven Bregman to RV and was even more excited to see him interviewed by Mike Green but alas, I was left disappointed. I thought Steven's hypothesis was essentially a regurgitation of the (innovative) discussion he had with Grant back in 2017 and I didn't warm to his presentation style second time around. Furthermore, he didn't allow any opportunity for Mike 'GOAT' Green to convey his thoughts on what is a very interesting topic.
  • RC
    Rob C.
    25 January 2020 @ 04:13
    Backtesting, what's the point anymore? History doesn't repeat and I'm not even sure it's going to rhyme in a period great secular change which we seem to be on the doorstep of and knocking.
  • MF
    Michael F.
    25 January 2020 @ 00:09
    Excellent Interview!
  • NC
    N C.
    25 January 2020 @ 00:05
    Another problem with passive management is the massive growth in these robo-advisors all pushing 60/40 which has caused the stock bond positive correlation dynamic (Jim Bianco talks about this). They say that the bond market leads the stock market. When inflation finally hits or there is eventually a lack of bond buyers (Jeff Gundlach talks about this), this correlation will have a crisis of an ending... Thank you Steven and Michael for this interview.
  • CR
    Chris R.
    25 January 2020 @ 00:02
    Here is another paper by the academic mentioned showing the results of global stocks. The paper, "Do Global Stocks Outperform US Treasury Bills?" Can be found here: The original article has a link listed in a comment below...
  • WW
    William W.
    24 January 2020 @ 23:32
    Great interview. I believe the passive management trend will end, but it's not going to be obvious that it is a passive-to-active handoff. To me, it seems obvious that central banks are losing control of the current set of economic circumstances while staring into the abyss of massive future entitlements, unfunded pension liabilities, and other issues. The only way out is inflation, which will be MMT dressed up to be politically palatable, such as a large infrastructure spending project. The show has already started with global forces trying to sell the public on massive spending for climate change projects. Nonetheless, when MMT is unleashed, inflation will jump and both bonds and stocks will get crushed. It will be the turning point of the stock/commodity cycle with the most underrepresented passive asset allocation (commodities) taking the lead for a decade or more. Stocks might even have positive returns, but not in terms of purchasing power. Passive management will simply be forgotten.
  • AE
    Anders E.
    24 January 2020 @ 21:28
    Good interview. The relentless concentrated bid due to active management and continual (systemic) flows have totally distorted markets. It will end. Some day. Not sure about the interest part of the conversation. Maybe rates are low due to the demand for pristine collateral and not because of CBs...
    • AE
      Anders E.
      24 January 2020 @ 21:28
      I meant passive, not active...
  • SC
    Sam C.
    24 January 2020 @ 21:22
    LoL for the crypto plug in the end.
  • HK
    H K.
    24 January 2020 @ 21:22
    Interesting, especially last minutes where it became a dialogue vs monologue. Some thoughts: 1) Vast majority of ETF assets are in (Float) Mcap weighted indices, hence there is no selection as to specific industries. The only set of criteria are related to Min Float, Min daily volume, Min USD value traded, security type (no ADR, BCD, MLP e.g.). That in order to have a product that offers capacity for the provider to earn money. Steven points that out but I am surprised to then hear him suggesting to invest in stocks that don't make it into the relevant indexes (below the ETF divide). So his ideal stock seems to be a low float stock that barely trades and is structured as a BDC or so (exaggerating but you get my point). I for myself would prefer the highly liquid portfolio a MSCI ACWI represents. 2) He comes back to that 4,5% 20 year return for S&P 500 and maps it against treasuries and as some reasoning why passive doesnt work?! Believe me, no one in the ETF industry offers an S&P 500 ETF with a return promise. The promise is to deliver S&P 500 performance at low tracking error. That points to my 3rd comment... 3) As an investor, if I want to have exposure to US Large Caps e.g. the relevant question is: Can I identify an active manager ex ante that will do better (after fees) than an index representing that segment? If yes, he is my pick, if not I choose an ETF. So far, all proof I have seen is that someone outperformed with statistical significance in the past. No signalling on future. To be clear: ETFs alone are nowhere near a solution, you still need a proper asset allocation according to your risk profile and have to adapt if life situation changes. But they are for sure a great tool for implementation. I share the concerns of Mike that there could be a series of nonlinear events caused by passive flows. But hiding in low liquidity, low float stocks wouldnt be my strategy of choice for my retirement savings. Still waiting for a better and more rational way to invest than a broad ETF portfolio covering various asset classes tailored to my risk/return profile.
  • NH
    Neil H.
    24 January 2020 @ 19:38
    Always interested in hearing Steves insights. great interview
  • JY
    Junyi Y.
    24 January 2020 @ 16:51
    When asset bubble becomes the new norm, get adapted and change your strategy!
    • TM
      The-First-James M.
      24 January 2020 @ 18:59
      The New Normal... Really...? I'm old enough as a Gen-Xer to have seen a few "new normals". They always end in tears for those sucked into the new paradigm its apex.
  • PJ
    Peter J.
    24 January 2020 @ 17:33
    Great discussion, will need a second listen
  • RM
    Robert M.
    24 January 2020 @ 17:16
    Making an obvious comment but the only thing that stops the momentum of ETFs is a large and sustained market crash. As millennials favor technology like robo-advisors and aren't knowledgeable about the market, they will rely on ETFs until forced to a different strategy. So while this interview points out good risks of ETFs, I don't see this tide turning outside of the sustained market collapse. Personally have only used ETFs for bonds as I am more comfortable owning individual stocks. Yet most of my friends are clueless on the market and will stick with ETFs or overpay a broker to manage their money into high cost mutual funds without really understanding the fees they are paying or the possible risks to the ETFs they are buying.
  • RA
    Ryan A.
    24 January 2020 @ 15:04
    what is new here?
  • GN
    Griffin N.
    24 January 2020 @ 11:23
    Fantastic interview . 1h flew by
    • GN
      Griffin N.
      24 January 2020 @ 11:52
      Link to Bessembinder's paper
    • MW
      Max W. | Real Vision
      24 January 2020 @ 15:01
      Thanks Griffin, I had trouble making an account at that link but was able to find it here also:
  • KS
    KEVIN S.
    24 January 2020 @ 14:30
    Outstanding interview!
  • RC
    Robert C.
    24 January 2020 @ 05:25
    I saw professor plum, I went and got my professor plum notebook ready to be schooled.