The Dark Side of ETFs – The ETF Vortex

Featuring Steve Bregman

In the third and final part of this special interview with Steve Bregman, he explains the misconceptions about diversification in the ETF complex and the importance of having aligned interests. In considering why people struggle with the concept of 1,000% returns, Steve also offers a roadmap, to avoid being trapped in the ETF Vortex. Filmed on June 29, 2017, in New York.

Published on
19 August, 2017
ETF, Liquidity
42 minutes
Asset class


  • HM

    Holland M.

    4 11 2018 19:23

    0       0

    Lost me on BTC.

  • RJ

    Russ J.

    18 9 2017 08:26

    1       0

    Wow, this interview series blew me away. Thanks so much RV. I wonder ifwe could get a follow up with more discussion around how he thinks one should allocate a $1mn portfolio.

  • DJ

    Dan J.

    15 9 2017 10:05

    0       0

    It was not clear to me if he sees the phenomenon of concentration risk in ETFs arising mainly from the natural evolution of a market cap-weighted index (i.e., the ETFs are creating a feedback loop with their own trading activity) or if ETFs themselves are manipulating fund-specific rules (or inventing new reference indices with the same effect).

    As for commenters' observations about a market crash affecting everything: If it is true that the ETFs have created a class of high-quality low-liquidity orphans with mainly long-term investors, the orphans should be somewhat sheltered from the market effects of a rush for the exit in the ETFs.

  • RH

    Rob H.

    13 9 2017 01:24

    0       0

    I thoroughly enjoyed these and can't wait for the follow-up interviews.

  • AS

    Aki S.

    28 8 2017 08:44

    5       1

    Why did it take apparently at least 2 months for this to air here!?!?!? I think 2-3 weeks would be acceptable. It isn't like it takes even that to edit this kind of filming. I would be very pleased if we subscribers got more up to date videos!

  • AB

    Andrew B.

    27 8 2017 09:16

    5       0

    Familiar with Steve Bregman's ETF arguments through reading the Horizon Kinetics quarterlies over a long period. I disagree with him on BTC mainly because the replication factor in the 800 other crypto's erodes his limited supply argument. However, I am in vehement agreement on where to look for "active stock picking" opportunities - I loved the Norwegian shipping analogy (which I found independently) and other common stockholdings like Bollore and Associated Capital which HK own and fit the Bregman description. I thought part 3 was compelling, because it provided answers, not just questions. Well done Grant and Steve

  • F

    Floyd .

    25 8 2017 22:21

    0       3

    somewhat interesting but two criticisms, challenge on the Bitcoin,thought you believe Bitcoin is a bubble and Steve could have discussed his ETF concerns in half the time with better and more specific examples and no discussion of liquidity of ETF's ,leveraged ETF's as concerns. Going to give it a thumbs down, sorry

  • MS

    Matt S.

    25 8 2017 13:13

    0       0

    yeah it was good although I don't think BTC is going up 1000x ever again. Perhaps he also included alt-coins in his analysis.

  • SD

    Stephen D.

    25 8 2017 05:20

    0       0

    This was a remarkable and somewhat terrifing series of interviews, as always brilliant;y stewarded by Grant Williams. I profoundly agree with Steve's comments about avoiding the agency problem by focusing on founder owned businesses. However, very minor quibble, Steve Jobs was not one. In his second stint at Apple, and at his death, he owned more Disney stock than Apple- due to Dinsey's takeover of Pixar.

  • NH

    Nigel H.

    24 8 2017 12:04

    2       0

    A great series but would have appreciated even more depth... what about all the synthetic ETFs that track indices? If you are a UK or EU investor wanting specific EM exposure in your SIPP then only broad index physical ETFs are available... there are no other offerings (unless trading in margin a/c). Anything China or India specific is a "synthetic ETF", e.g. these products from SocGen/ Lyxor: "...the performance of the ETF is generated by a Performance Swap, which is provided by Societe Generale Corporate & Investment Bank (SGCIB)"

  • DG

    Daniel G.

    23 8 2017 17:07

    7       0

    Where are parts 4-6? I need more of his vision

  • SS

    Sam S.

    23 8 2017 15:00

    5       0

    This three part series makes me feel like I'm part of something special before the crowds arrive. RV has a way of accomplishing this critical part of getting it right before the crowd blows it up. Like being a fly on the wall with a camera and a microphone. Thank you Mr. Bregman and Mr. Williams!

  • CM

    Carl M.

    23 8 2017 02:50

    2       0

    ....And yet again, another, entirely new perspective...BRILLIANT!!!

  • PO

    Paul O.

    23 8 2017 01:44

    4       1

    First, I very much appreciate the RV crew giving Mr. Bergman the time and space to walk us through these issues as I think that it is one of the most important issues facing investors today. What I would like to see in a follow up piece is an explanation of what happens to the supposed liquidity of an ETF when the machines sell. I am not quite sure I understand the mechanics of how an ETF can lose 35% of its value if the underlying NAV is only down 2.5%, which is what happened to iShares Select Dividend ETF (DVY) in August of 2015. Is it the over-weighting to a few stocks? Is it that the turnover of ETF is exponentially higher than the turnover of the underlying stocks? Again great interview!

  • RA

    Robert A.

    23 8 2017 00:09

    8       0

    I have been with Real Vision almost since inception and it has literally, slowly and over time, changed my approach to investing. These interviews with Steve will move me incrementally back into active managed small cap funds outside of the ETF vortex----and THAT is a big statement for someone who has been a Vanguard devotee for 30 years.

  • BS

    Bill S.

    22 8 2017 17:29

    0       0

    Great interview..a question:

    Take Vanguard as an ETF example, aren,t they based intrinsically off their mutual funds? So do these funds then have the same underlying
    problem - just what are you buying?

  • JD

    Josh D.

    22 8 2017 16:45

    2       0

    What is going to stop the flows into etfs by the swiss bank? Or population at large? This is the central question that needs to be answered

  • Sv

    Sid v.

    21 8 2017 16:29

    0       0

    Bit coin can't ever be stolen, hacked, defrauded, etc. Do you really believe this?

  • GM

    Gerald M.

    21 8 2017 15:29

    4       2

    Excellent interview! There is always more than one viewpoint to a story and that seems to never get discussed (we always get a one-sided view, which is OK). As Steve said, fundamentals don't matter. It's important to recognize the environment you are in and not fight it (you will lose - everytime). The world has changed and the market doesn't care what anyone thinks. There is still a boatload of money in active that can move to passive. The Central Bank can but stocks (they have unlimited resources and haven't even started). The baby boomers have to reach for yield and so they will. Millenials, a larger cohort than the baby Boomers are stepping into the market. Basically, trade what you see and not what you think you know. To the frustration of many, this ETF thing could go on for the investable lifetime of the Babyboomers.

  • TM

    The-First-James M.

    21 8 2017 11:49

    8       0

    I would love it if Realvision could arrange a Bitcoin merits/demerits debate between Steve and Jim Grant (who doesn't get it at the present time). I think it would be a fascinating discussion to be a fly on a wall of...

  • AC

    Andrew C.

    21 8 2017 05:29

    1       3

    You've gotta interview Josh Brown or Barry Ritholtz for a rebuttal (I believe they are pro-indexing enough!)

  • TF

    Terry F.

    21 8 2017 03:01

    4       0

    Excellent interview, Grant. Home run. Especially the third part. At first, I thought this was going to be a discussion about how heavy ETF ownership would dramatically affect the eventual market unravelling. I think this was touched on slightly in part one, but overall I guess it wasn't discussed. You might wan't to put on a short video on how the large scale ownership of index ETFs would impact a bear market. That would be interesting. This interview is a good example of why I subscribe. Thanks.

  • NI

    Nate I.

    21 8 2017 01:02

    2       0

    Steven is right on the money with the owner-operator concept. I have used it very successfully for decades. Insider ownership is my #1 screening criteria in stock selection. It often requires great patience, but the rewards almost always come through. Good interview Grant. Thanks.

  • TH

    Tim H.

    20 8 2017 23:05

    6       5

    I am not really sure I understand the 'big reveal'.

    We are in a bubble - yep, pretty sure the vast majority of sane individuals know this. Real Vision have been telling us since ithey launched, over three years ago now.

    ETFs do not represent what the buyer thinks they do - I am not sure on this, their holdings are easily downloadable. This is not hidden information - they are not lying, so why the big conspiracy? As far as I am aware - and correct me if I am wrong - QQQ is weighted the same as the Nasdaq 100 index. SPY is weighted as the S&P500 is. XLF is weighted the same as the S&P 500 Financials Index etc. etc. How is this news?

    With regard to ETFs creating additional risk in the system - did we not learn this in August 2015? Once again, not sure why this is being presented as news....

  • RS

    Rick S.

    20 8 2017 20:11

    2       0

    Great series. I appreciated the way you saw a topic of true interest, and allowed a knowledgeable speaker the opportunity to present the case. Thank you.

  • ii

    ida i.

    20 8 2017 12:47

    9       2

    I like this interview, but his gold / bitcoin comment is contradictory. He states that when gold demand goes up so does supply, while Bitcoin supply is limited. However he doesn't consider that blockchain technology is not limited, that if there is strong demand for bitcoin, other cryptocurrenices will be created , as is already happening, so why should one prefer Bitcoin to gold if not other for illegal tranactions?

  • js

    jacob s.

    20 8 2017 09:52

    7       0

    holy shit. blown away. was not expecting him to touch on bitcoin.

  • JH

    Jesse H.

    20 8 2017 07:55

    23       0

    Excellent series, Grant. One of the top five I've watched so far, the others that stand out being the first interview with Daniel Want of Prerequisite Capital Management and Raoul's interview with Mike Green, which totally blew my mind.

    The only part I found disappointing was that the depth of his analysis and his thoughtfulness in discussing ETFs were belied by the brief and relatively glib conclusion that he doesn't see a market crash / correction coming. He seemed to provide very limited explanation of this key conclusion, and I think this discussion could have been fleshed out more.

    This conclusion struck me as rather ironic, as there are reams of evidence from the first two parts of the interview that the ETF market is a proverbial house of cards. This doesn't mean a crash is inevitable, but in a very real sense it means that instability is being artificially increased in the markets via these product offerings and the effective "automatic bid" underpinning them. And, crashes are not just about things being overvalued or fraudulent products being offered, both of which he shows are now happening with ETFs. Crashes in my view are about the probability of systemic risks weighing on an already unstable and fragile system. This is the nature of a physical system collapse or divergence, which is always non-linear by the way; and this is mirrored in financial systems and even in human behaviour (e.g. when your spouse blows up at you over something tiny...but it was the 3 things that happened before that and your mild comment was the final straw! : ) Any factor or product which has an automated buy/sell, absorbs significant liquidity, and which significantly increases instability because it is so poorly diversified, is likely to result in greater market sensitivity to triggers, and therefore a greater probability of a systemic correction (or collapse) at any time.

    To quote Mike Green, whose grasp of this stuff is just mind-boggling, an automatic bid can very easily become an "automatic sell" with the backdrop of factors we see now in the markets and indeed, the world.

  • SP

    Steve P.

    20 8 2017 02:54

    14       1

    Superb interview Grant. I'm sure a great learning curve for most of us.
    Talking bitcoin was an outlier though. My big question with bitcoin is this - with now no way out of over indebtedness for the western world except through the historically accepted method of fiat currency debasement via the printing press, will governments allow bitcoin to upsurp their respective fiats knowing that the door closes for future devaluation opportunities. I don't believe governments/central banks could live with a bitcoin standard longer term. Historically, various governments have rescinded their gold standards to circumvent the money printing cap and if one thing in history can be taken for granted it is this; that governments will always overspend to woo voting constituents thus building up debt obligations. This eventually leads to attempts to print their way out of the dilemma that over indebtedness creates. It's never different this time and for this reason alone I don't think bitcoin will ever be a widely accepted median of exchange.

  • PS

    Peter S.

    20 8 2017 02:30

    3       0

    Brilliant. I couldn't help but binge watch the whole series. Going to be a fantastic buying opportunity once all of this sorts itself out. Unfortunately I'm still not sure the best way to cross that rubicon.

  • MR

    Marten R.

    20 8 2017 01:02

    3       1

    Big thumbs up. Great series. Well done RV and Steve Bregman / Horizon Kinetics team.
    Very deep dive and great job at 1. identifying all the 'dots' in this mystifying market puzzle and then 2. connecting them.
    But... on a personal level... i see the puzzle... but I can't solve it.
    It's a bit like one of those 3d pictures you have to stare at to see the picture, within the picture (to this day, I have never been able to see a single on of those...).
    So, great - indexation has been corrupted.
    ETF's are rigged.
    The automatic bid levitates 'the market' within which there are the liquid favoured few and the illiquid disregards.
    Let's say I go ahead and buy some quality companies at 50c on the dollar.
    When the liquidity tide goes out (when, not if)... ALL stocks will get hammered, including the ones in my portfolio.
    Relativity is important I guess.
    Cash is a real asset class and a high allocation to cash would be wise at this juncture.
    Great optionality.
    It's important to be liquid when the market is not.
    I'm not sure what (or when) will disrupt the liquidity tide to such a degree that there is a tipping point... but I know it's coming..
    The more time that passes without such an event... the closer it is.
    When the biggest bubble in history bursts... the biggest opportunities in history... will present themselves.
    But for now, we wait for a pin.

  • HK

    H K.

    19 8 2017 22:43

    3       0

    mixed feelings on my side: Positive: By far the best criticism of the 'phenomenon' I heard so far including deep dive into index construction. Negative: I am not really convinced by his solution or rather way around. As he points out, indices/ETFs need two things in stocks to be able to scale big time, 1/ decent Float MCAP and 2/ decent liquidity. Everything above a certain threshold you would (bit simplified) put in broad market index. So Steves advice to go outside the ETF world essentially means use stocks below those thresholds as per his mentioning of the micro/very small cap guy (forgot the name). But when a crash occurs (and I am not good at market timing), I would rather own a cheap broad market ETF. I assume (using his examples) I would rather see a bid on FAANG, McDonalds, etc. compared to Micro Caps or other pockets that don't make it into the indices.
    Interesting that he (his firm) is also in the index business (at least if I understood correctly in the end). But again - for sure tons to think about and great insight. Thanks RV and Steve.

  • WM

    Will M.

    19 8 2017 19:39

    8       0

    I have been familiar with some of the negative comment about ETFs from others for about a year now. This was an excellent conversation about their drawbacks. I think the Exxon and FAANG stories from an earlier part really should bring the issue home to all RV viewers. Of course like anything else its all a question of when does a bubble get finally burst. Having witnessed the dot com fiasco and then the mortgage debacle, i read several good articles of individuals shouting that this was all a disaster waiting to happen countered by even more folks claiming it was a new era or the statistics didn't support the wild overvaluation claims. We all know what happened next. The market could easily soar to 30,000....but eventually it will crash down wiping out baby boomers and probably Gen X at the same time. There will be no time to recover. This series just provided yet another reason to be very very careful indeed. When this dam bursts, it will worse than dot com and mortgage bust put together. This next time sovereign debt will collapse and the only thing left may be initially cash notes and gold which which to get back into the game at the bottom. Great stuff Grant. Love RVT.

  • GS

    Gordon S.

    19 8 2017 18:07

    2       1

    Good interview. There were some interesting points discussed and although I agree with most of them, I found some points to be exaggerated a little too much for my taste. I guess most retail investors don’t look at the components of their ETF, but I hope that any more “advanced” manager figures out the holding components? We were not presented with complicated models and deeply hidden things here…

    Selling BTC as a 1000x story may be a little too optimistic? I agree with investing a small part of your wealth into it, but BTC at a market cap of $700 trillion? Hum… A 1000x for smaller ICOs? Maybe, but then you are back at being a venture capitalist.

    In conclusion, when does Steven Bregman bring out his anti-ETF-ETF? :)

    P.S.: By the way, I was surprised not to hear Russel Clark talk more about his ETF strategy in his RV interview, as described here:

    (or later from Goldman Sachs: