The Dark Side of ETFs – Passive Regression – The Trouble with ETFs

Featuring Grant Williams

When Grant Williams sat down for a presentation on ETFs with Steve Bregman of Horizon Kinetics it was mind blowing, as the true realities of investing in these instruments were unraveled. In a pre-cursor to his interview with Steve later this week, Grant charts the rise of the 5,000 plus ETF market and the trouble that could be in store for financial markets from the proliferation of passive investing. Filmed on August 2, 2017, in the Cayman Islands

Published on
18 August, 2017
ETF, Structural flows
30 minutes
Asset class


  • DS

    David S.

    22 10 2017 02:47

    0       0

    After reading the comments, pro and con, I think there is a lot of common ground on high risk, highly leveraged and low turnover ETFs. Many baby-boomers are trying to increase retirement investments before it is too late; thereby flooding the markets with cash. The major market ETFs are a reasonable part of a long-term balanced portfolio. There are, however, enormous pitfalls for markets and individuals within the current ETF landscape. This series is trying to point them out. There is no doubt that we are in uncharted waters. Market corrections normally follows when too many people are doing the same thing or have a common belief like house prices will always go up. DLS

  • JD

    Joe D.

    18 10 2017 21:00

    0       0

    OK - Understand the issues, but active isn't always that great either. You get on the wrong side of the brokers trade, or just get killed by churning, or locked into the broker's firm's products, and so on. Looking forward to the rest of the series.

  • TB

    Tad B.

    15 9 2017 22:02

    1       0

    I'm intrigued..... and a bit worried. I've had it with crusty old 'mangers' working their ticket for fees and, like many others, have built a portfolio around themes "best" (or seemingly so) represented by ETFs.... Selling anything when it all goes south is always going to be a problem; we all know this. Misrepresentation & fraud are different though. I'm gonna watch these vids now.... been putting it off. Grant, your intro was as exquisitely put as usual ! Thankyou.

  • JM

    James M.

    11 9 2017 11:41

    0       0

    Grant ain't the best interviewer as hes too soft on the guests and doesn't ask the most probing questions IMO, which is cool i get it that's his style. But he sure does an excellent job in presentations no matter the subject he covers. I have learnt a lot from this fella even though I often disagree with him. Cheers.

  • ST

    Simon T.

    29 8 2017 03:20

    1       0

    Great intro to a fascinating topic thanks Grant, one point on index investing that concerns me is that most (not all) indicies are market cap. weighted. As such you are buying a bigger % of assets while they are at higher prices. Think Gold GICS2 sector in Australia which got upto circa 6% of the index it's now 1.85%... only criticism bit repetitive.

  • DP

    Daniel P.

    23 8 2017 14:20

    1       1


    Keep up the awesome work Grant.

  • BW

    B. W.

    21 8 2017 05:41

    0       0

    I'm having trouble with the math here. If passive funds have grown to $6T in the past 10 yrs, and active funds have grown to $24T in that same period, how are we going to see parity in the US by 6 months from now? If these are global figures, it still seems like a stretch to suggest that it will be 38%/62% in six months if we are at 20/80 now. Or is it the case that Morningstar's data simply does not agree with the other source that projects the more radical numbers?

  • EF

    Eric F.

    20 8 2017 22:59

    0       0

    The question for me is - how to best play this for profit?

  • DY

    Damian Y.

    20 8 2017 04:19

    2       9

    OK Grant, we know you hate ETF. Being that Real Vision is all about promoting Hedge Fund and there overpriced products, lets have a look at the two. Buffett made a famous bet in 2008 saying that passive investing will out perform Hedge Funds. In 2017 Buffett won buy a long shot. The book, A Random Walk down Wall Street, sums it up also.
    Grant has said many times, that there are more ETF than stocks on the NY Stock Exhange. If you combine the total number of ETF and Stocks on the NYSE then you'll still have more hedge funds than the two combined. Most Hedge Funds last for about 5 years. About 15% of Hedge Funds fail every year.
    The reason why people go into passive is because they perform much better than Hedge Funds and the fees are a fraction of the cost. No wonder Grant and his Hedge Fund buddies hate them so much.
    Yes some ETF will go under. How many listed companies have you seen that are dodgy and have gone under in your life? I would be more worried about companies and Hedge Funds going under than ETF. I've heard Grant say that ETF will go to zero and blow up. If Grant knew how they worked then he would know that if the price gets too low then they split the ETF and reprice them. During the middle part of 2000s, Hedge Funds accounted for 70%-80% of ETF Trading. The Hedge Fund will charge you 20% fee while the ETF will charge you about .5% fee.
    ETF have been actively used since the early 90's. How many blew up in the Tech bubble and the 2007 market melt down. A lot of companies and Hedge Fund went out of business then.
    If you want to learn about ETF then a good book is, A Comprehensive Guide To Exchange Traded Funds, by CFA Institute Research Foundation. Much better information that Grants interview. Type into google, why buffet hates Hedge Funds, and read what one of the greatest investors has to say about them. Buffett compares active managers to monkeys, and they are his words not mine. Grant can you please do a video about the dangers of investing in Hedge Funds and companies? Grant can you also do a video on all these overpriced financial news letter that are full of conflicting advise and how most of these so called expert get it so wrong.
    I do agree with Grant that the market is due for a correction and I personally aren't going long on ETF. There are some good short ETF that look very good.
    ETF are one of the best product for retail investors for investing in Macro.

  • KG

    Kevin G.

    20 8 2017 00:47

    0       0

    Interesting piece. Looking forward to watching Steve's interviews next! The one thing that I would say is that it makes sense to me that a market would be part-active and part-passive. Some investors could be actively involved in the capital allocation in an economy (and attempt to earn alpha in the process), while other investors who had no special insight into capital allocation could simply accept a lower return and invest passively. An economic system that has a mix of active and passive investors seems to me like it would still be able to allocate capital effectively.

  • AE

    Alex E.

    19 8 2017 02:16

    1       1

    3 points to make, Mr. Williams. 1.) Faster than breakneck is "sonic". 2.) I weep for people like Kelly A who are going to get slaughtered in the coming crash. 3.) What is wrong with what Mr. Charlie Munger said: " Buy Great companies at good prices than sit on your ass!"

  • BS

    Bruce S.

    18 8 2017 23:20

    3       0

    Great presentation Grant.
    I am a stock picker. I have disciplines. Even junk is trading at a high price. Am I to change my screens and disciplines to accommodate stupidity? 7 stocks get through my screens and I don't like them! It looks like short duration Treasuries are my only refuge.

  • VS

    Victor S.

    18 8 2017 20:19

    1       0

    Grant great reporting as always. The facts have shown the market via S&P 500 will NOT TOP IT -WILL JUST END -ONE DAY.

  • GT

    Graham T.

    18 8 2017 17:53

    1       2

    Do you think it would rate its own chapter in Mackay's "Extraordinary Popular Delusions..."?

  • GT

    Graham T.

    18 8 2017 15:06

    0       0

    7 ups and 8 downs !! You should have been a market maker Grant.
    Were you at Wedd or Ackroyds in a previous life?

  • GT

    Graham T.

    18 8 2017 12:05

    3       0

    Reason, if ,God Forbid ,reason were needed, here is why RV was created.

  • AK

    Alexander K.

    18 8 2017 10:19

    1       0


  • MC

    M C.

    18 8 2017 01:24

    16       15

    grant, your fear mongering when it comes to ETFs is getting tiresome and this was probably the worst bit of "reporting" ive seen on real vision. I can call out almost every single point but unfortunately am limited in time and space. First let me first exclude from my brief rebuttal any leveraged ETFs and those at the margins which have absolutely no basis being used by any retail account.
    Now let's address Sanford Bernstein's research. Equating passive ETF investing to Marxism is absolute trash Ask your self why? could it be that passive investing is one of the main drivers compressing Wall St commission revenues and keeping more money in the pockets of average people ?!?
    What Jack Bogle and academia have known and index ETFs are addressing is - control the one variable that can be controlled to give investors the best chance for LONG term investment success - COST. Passive investing has exposed an active industry that in some/many cases never even came close to providing the risk adjusted returns commensurate with the fees they were charging.
    Next: passive ETFs are not just passive. Smart active managers are using passive ETFs as an efficient vehicle to obtain exposures in an active portfolio
    With respect to the ETF technology functioning in stressed markets - they have. High yield ETFs during the oil collapse, country ETFs such as Egypt and Greek during periods when the entire country market was closed - the ETF provided price discovery. there are many more examples.
    Not a very well researched or even moderately balanced piece.

  • TR

    Thomas R.

    18 8 2017 00:24

    6       0

    I can fully appreciate the implication that in the event of a market crash - the long ETF's crash - with no bid under the underlying stocks and accelerating selling as prices fall. The examples provided appear to only address long ETF's. What about the short ETF's? or buying puts on the long ETF's? Is there an implication then of possible or probably counter-party risk with firms like Direxion on their short ETF's?

  • JH

    Jesse H.

    17 8 2017 22:08

    4       0

    Great stuff, Grant - some fascinating info to absorb -- this also syncs up well with the 26 charts sent out earlier from RV publications. This matches my core observation / thesis that by and large, most of today's money in the markets is speculative rather than investment-related. It makes me long for a time when our world was simpler, and growth of AUM was about careful, multi-year decisions with occasional rebalancing. Not this ultra fast tech BS that has significantly exacerbated the predominant "get rich quick" culture. Benjamin Grant must be rolling in his grave.

  • T~

    Tshort63 ~.

    17 8 2017 22:01

    1       0

    Binge baby Binge. Can hardly wait!

    Looks to be a very valuable discussion.

  • T~

    Tshort63 ~.

    17 8 2017 22:01

    0       0

    Binge baby Binge. Can hardly wait!

    Looks to be a very valuable discussion.

  • DC

    Darrell C.

    17 8 2017 21:26

    1       0

    Just a devils advocate, did the active managers save us from the 2007-09 great recession....?

  • MB

    Mike B.

    17 8 2017 20:44

    4       0

    Can someone please tell me when this wonderful equity orgy comes to an end. Preferably a week or two before it rolls over. If it gets ugly, will the Fed not consider going to Congress to get approval to expand its wonderful tool box to include the purchase of equities. Seems to work for the BOJ and SNB. If the ETF carze actaully wipes out active managers, some entity is going to have to step in and be the equity buyer of last resort? Think about it, if the Fed convinces the bozo's in Congress to allow it to expand its toolbox to include the purchase of equities, they would not only save the equity/ETF market from collapse, they could also gift the appreciated value of the securities to the unfunded Social Security Trust. Just being silly but am expecting the unexpected ...

  • BF

    Bruce F.

    17 8 2017 20:07

    3       0

    brilliant. 100% agree. would be interesting to see David Kotok defend ETFs since that is his investment style.

  • IJ

    Ian J.

    17 8 2017 18:53

    3       1

    Hey Grant, did Hugh Hendry inspire the attire? The Dark Knight Rises.

  • CY

    C Y.

    17 8 2017 18:36

    2       0

    The one thing that Grant never differentiates in is the difference between systematic ETFs (smart beta) to use an annoying term and market cap ETFs. While I share his concern on the overall ETF market I do think there is a huge difference in between true passive market cap weighting and other ETFs.

  • Sv

    Sid v.

    17 8 2017 17:57

    2       1

    why do i feel like Grant is a friend of mine? I am sure getting to know him as i hear or see him so much. Interesting.

    I hear what you are saying, but i can not see the problem with investing in ETFs that are a liquid as individual shares of companies?

  • WG

    Wade G.

    17 8 2017 16:54

    2       0

    Simply outstanding. Thank you Mr. Williams for a cogent introduction to what I believe will be a fascinating series of videos. I'll mention I hope your work addresses the fundamental "pluming" of ETF share creation and retirement, as what little I know about it, suggests a set of potential problems in and of themselves. Thank you again for your outstanding and easily understood work.

  • DW

    David W.

    17 8 2017 16:44

    3       0

    Horizon is one of the best value shops out there..... Cannot wait for more Grant!

  • DR

    David R.

    17 8 2017 15:19

    1       0

    I too am concerned about the lack of true price discovery. But I do like that the proliferation of ETFs allow retail investors to invest more like hedge funds. We now have easy, affordable access to countries and sectors w/o taking on company specific risk.

  • KA

    Kelly A.

    17 8 2017 14:21

    7       12

    I'm not buying the Marxist argument. Sounds more like whining from active managers who failed investors. Their cozy game has been hurt, but they are still taking advantage of people. And in any case, who cares about Marx. ETFs are the free market at work. AND: There are plenty of ETFs that are about investing, not speculation. Sure, could there be a multiplier effect from ETFs in a down market? I hope so, because i plan to be using 3x ETFs for shorting it. I think Grant is ALWAYS worth listening to, and I don't disagree with his market predictions. But the Marxist stuff is a distraction of the nasal gazing type. And, BTW, let us have our 4x ETFs. Make sure they are well funded and managed, but otherwise, why not allow them? The market IS about speculation, even if you are an "investor."

  • BG

    Brad G.

    17 8 2017 14:05

    2       0

    Great point about State tax receipts as an indicator

  • HJ

    Harry J.

    17 8 2017 14:04

    0       0

    What about muni bond ETFS?

  • RM

    Richard M.

    17 8 2017 14:02

    2       3

    Wow, nice mug shot Grant (out drinking too late in the Caymans)!!! :-)

  • CR

    Charlie R.

    17 8 2017 13:37

    3       0

    Excellent and source-rich setup! You're right Grant - EAGER to hear your convo with Steve! Binge on!

  • EL

    Elizabeth L.

    17 8 2017 13:29

    1       0

    Thanks Grant for this illuminating foundation piece.

  • EG

    Eduardo G.

    17 8 2017 13:25

    1       0

    Standing ovation here! The number of 'robo-advisors' that are offering ETFs as the holy grail is growing at a really fast pace. None of these strategies have been put to test in a bear market, and in many cases is worrying that retail investors think that they can find better ETFs than their advisors, taking extra risks blindly. Very interesting the comparison between a Marxist economy and passively managed capital markets.

  • SH

    Stu H.

    17 8 2017 13:22

    3       1

    Great stuff as always, Grant. I wouldn't touch a Gold ETF with a barge pole. It defeats the very purpose of holding gold, a no counter-party risk store of value. With some very reputable allocated gold storage companies out there it's just as quick and easy to hold physical as it is the index tracking ETF. Better still find a good local dealer and hold it in your hand.

  • HK

    H K.

    17 8 2017 13:13

    3       4

    ETFs are just a different vehicle to access e.g. the entire US large cap universe vs an active stock picker choosing a selection of stocks (and re-weighting within that universe based on value estimate). I agree the latter is necessary for price discovery. But the valuable job for society 'unfortunately' ex ante has on average lower expected returns for investors relative to the market. Hence, from the end investors angle I can totally understand the great rotation and the billions moving from Wall Street to investors.
    Question then is who will pay for that 'service for society' the active mutual funds deliver, if investors don't want to do it anymore apparently.

    Other remark: I think the presentation in the end mixes market timing with choice of vehicle. If I believe in market timing, of course I can make the argument S&P500 is overvalued and will break down whatsoever. But if stocks tank, then that will happen to all vehicles investing into that market (active or passive) as they own the same stuff. Even if ETF accelerate the downside to stocks (which I can even agree to as they represent part of the market that cannot step in as they are 100% invested per construction) that does not help the active to outperform if they hold stocks from the same universe. It would only help if they could identify the outperforming stocks ex ante, which they cant in aggregate after costs -- the reason we have that discussion in the first place.

  • DM

    Daniel M.

    17 8 2017 13:09

    0       7

    A masterclass in spinning a yarn

  • SS

    Sam S.

    17 8 2017 13:02

    1       0

    Slow down on the conversation as hard to digest the subject when moving so fast. I do love Grant best.
    Can't wait to watch and the "real vision" of the ETF market will be all telling for the future. So true that the emotions from the GFC are still strong and powerful.

  • GM

    Greg M.

    17 8 2017 13:00

    1       0

    Can't wait. Excellent video Grant.

  • PJ

    Peter J.

    17 8 2017 12:13

    8       0

    A taster for next week for those interested is Steve Bregman's presentation on James Grant site:'s%20Conference_Oct%204%202016_Steven%20Bregman_Final[2].pdf

  • RO

    Rodica O.

    17 8 2017 12:02

    3       0

    Grant is always bringing some great and practical info . Thanks !

  • RI

    R I.

    17 8 2017 11:52

    12       2

    Ironically, this series makes me want to go buy ETFs; however, only two in particular: GLD and GDX.

  • IH

    Iain H.

    17 8 2017 11:09

    3       0

    Can't wait!