Speaker 1:

Welcome to ETF Central, recorded here at the New York Stock Exchange, the home of ETFs. We're diving deep with the people shaping the space, the technology's driving innovation and the stories behind the tickers. Whether you're an investor, issuer, or industry insider, welcome home.

Bilal Little:

As I read an article from a journal that you actually posted back in April, and I thought it was really good because you were writing about volatility and you said family is needed.

Tom Lydon:

Yeah.

Bilal Little:

Can you expand on sort of why you started journaling?

Tom Lydon:

Yeah. Now that I've had a little bit more time on my hands, it's really important to reflect and the market can be brutal, and if you don't have a lot of experience in it and you have the joy of up markets and you almost count on that money no matter what age you are, and then all of a sudden a major correction comes in. It can be devastating, like it hit you right in the gut. You can feel like a failure. However, the coolest thing that most people who are younger have, and I tell my friends and my kids this all the time, they have something I don't, and that's time. So make time work for you. Don't sweat it. You can go through any bear market if you're in your twenties, thirties, forties, fifties. I have my AARP card. I now qualify for Medicare, but still, I think I'm going to be around for another 10 years so I can actually be a part of the next bear market and bull market. I just don't sweat it as much anymore.

Bilal Little:

Yeah, I love that. Thanks for sharing. Look, let's transition a little bit into your background, right? You've been around for over two decades in the ETF space.

Tom Lydon:

You're rubbing it ina again.

Bilal Little:

I'm just saying you're an early adopter and I like that because I believe in learning vicariously. Right? If I could learn through some of the things and experiences that you've had, I'd love to get your thoughts on sort of what you're seeing take place in the ETF ecosystem. You built a very significant company, obviously, which is Vetify. You've now since transitioned, but in your opinion, just coming into this year, what have you seen that you didn't expect from last year heading into the ETF space?

Tom Lydon:

So obviously the volatility, nobody expects that. The other thing that is really surprising is the continued adoption of crypto. I shouldn't say it's surprising, but the amount of money in that space is just huge. The innovation in the ETF space is crazy. You think about some of the companies out there, the white label firms, the titles, the alpha architects, so if you want to get into the ETF space and you don't want to do all the compliance stuff yourself, you can partner with those guys. They're booming. The way the fixed income space has really diversified to offer up more choices, sectors, treasuries alone, you look at companies like bond blocks and what they've done and put a lot of work into offering up choice in those areas, especially as we're coming off at twenty-year highs of interest rates. The buffered strategies, the simplifies of the world, the innovators of the world. You can see the flows because people like being able to participate in markets, but they don't want the full Monty.

They don't want all that volatility. And then enhanced income too is another way where it's not just a satellite position. For a lot of advisors who have core bond and core equities, they're now finding a slice for enhanced income to help reduce overall volatility, but also enhance the yield that they're getting for their clients too.

Bilal Little:

Do you think that's coming as a result of client demand, or are you seeing folks given your seat, right, given your perspective, are you seeing just the ideation come from folks who are like, look, this might be a good opportunity for us to capture some assets. Where do you see the demand coming?

Tom Lydon:

Definitely demand from investors, but also it's innovation. When you think about people looking at the growth of the ETF space, but look, it was all based on major indexes back in 1993 when SPY was first created, it was a S&P 500, and then everybody was gobbling up any index that they could. It was the passive world. It was low cost, low turnover, tax efficiency. Today that land grab is done. There's no space in the index side. You might be able to get a little bit innovative. It's all active, and if you want to be in this space today, you have to have an active strategy, but the competition is fierce.

Bilal Little:

Yeah. So do you think ETF issuers need to spend more time around distribution strategies to grow their fair share, or what are you seeing?

Tom Lydon:

A, you have to offer up something different than nobody else is offering up. It'd be nice if you had a brand. It'd be nice if you're a big asset manager and you actually had some money as well. It'd be nice if you can actually bring some of your own assets as well. I mean, listen, here we are. How many people are calling you, trying to get a bell ringing. It's exploding. Everybody wants to be up on that podium, ringing the bell, cheering for their ETF.

Bilal Little:

Yeah.

Tom Lydon:

There's not enough bell ringing to go around, right?

Bilal Little:

There aren't. There aren't. And that isn't high demand. Yeah. So look, there are 4,200 products in the market today, $11 trillion. You've been around obviously since the very beginning. What's the one thing you think the industry still needs to adopt for it to continue to reach mass adoption?

Tom Lydon:

So it has reached mass adoption. I think one of the things that we're all interested in is seeing mutual funds versus ETFs. So two major things that we might see in the coming year. The ETF share class will probably be adopted. That gives, those are applying for that application, the ability to take your mutual fund shares and offer them up in just a different share class as well. So it doesn't mean that everything transitions, but it's, if you own the mutual fund of that company and you like it, but you want it in an ETF share class, you can have that choice. That would be great. The other thing is within defined benefit plans, 401k plans, there's not a lot of work that's being done there to make that transition. A lot of the big holders of 401k assets, like the Fidelity's of the world will claim it's too complicated. We have pricing issues, we have trading issues. Look, if they put a man on the moon in 1968, you think they could figure this out.

Bilal Little:

But someone's got to pay for it.

Tom Lydon:

Well, it's a little bit of innovation as well. It's technology, but it would be a huge cost savings to the shareholders. And why are those companies not motivated? They're making a lot of money on that, right?

Bilal Little:

Yeah. What do you see as some structural impediments behind that? I mean, you obviously have a couple of board seats, so are you seeing the leaderships embrace that conversation? Where are you seeing kind of the friction?

Tom Lydon:

So that's a really good question because there are a lot of companies that are embedded in the mutual fund world. They've got hedge funds, they've got SMAs, and they're saying, I really don't need ETFs. And then some of those that were saying that a few years ago are now saying defensively, I probably should be offering up ETFs too. You're going to have to offer ETFs, and you got to have that realization. But some cultures in the asset management business find it very, very difficult. Some portfolio managers just can't accept that. They don't want to have to lift up the hood every day and share what they own. For some reason they feel that that's going to give away the secret sauce. Guess what? I'll answer the secret question. It won't.

Bilal Little:

People adopt by choice, or by force. Right. I was having this conversation with Nate Gerasiel a while ago about ETF education, and to your point, it's like the wrapper of the mutual fund. Yes. It's still important. I don't necessarily know if it goes away because there are some key benefits to it, but the ETF wrapper is just more efficient across the board when it comes product to product standing up on the vehicle side. What are the new asset classes you think that still have some sort of legroom to run? Obviously you mentioned fixed income earlier. What are your additional thoughts on that?

Tom Lydon:

Yeah, I think you're going to see a bunch of asset managers that are really good at Active. Adventis does a great job. They continue to pile on money. They're moving up the lead tables as well. There others that are bleeding. I mean, I love Cathie Wood, but things just aren't sticking there. They had a great run. And again, I think she will again have a good run. They've got a really smart innovative team, but you're going to have to be able to put up good numbers. It just comes back to the same thing we went through in the mutual fund world. It all comes back to what's the performance, what's the expense, what's the tax efficiency? Because in funds, if you had really a great year and you've got a big year in distribution, that's not that great.

So it just makes sense, as you say, to have that in that type of wrapper on the fixed income side, as far as enhanced income, it's a game changer for a lot of people. And we're just getting going with some of these companies that are in that space. And as you know, I'm really excited about it.

Bilal Little:

So actually, I got a question to kind of pivot the conversation a little bit. So thinking about the portfolio, right? You've always been on the record of saying the 60/40 portfolio needs to adapt. There needs to be some evolution there. What are you thinking should be introduced to the conversation around portfolio construction? Do you think people need to start thinking more about commodities or adding illiquids to the portfolio? Just what are your initial thoughts on that?

Tom Lydon:

So commodities are great. It gives you a little less volatility in the portfolio. And there are periods of time like we've seen recently with gold and especially with crypto, that's going to make up for some of the correction that you might see. So long-term, having diversification commodities absolutely makes sense. As far as your core, and I'll tell you, I went through this myself in the last year, as you mentioned. I had a nice exit coming out of that [inaudible 00:10:38]. I had to do a lot of work, my own portfolio to make sure I'm managing for taxes and then I'm maximizing income, and fortunately I want to invest in ETFs for a long period of time. I'm not a stock jockey. I've never been.

I've tried and I've shot myself in the foot many, many times, and I tell my kids, look, if you like picking stocks or even some hot ETFs, take a small piece of your portfolio and go at it, have fun, and then give yourself an honest assessment at the end. You're going to be happy that you had these core positions over a period of time, and that'll make a heck of a lot of sense.

Bilal Little:

Do you think that there are enough tools out there on ETF's right now where people can find the resources that they need? Or do you think there needs to be continued evolution and development around portfolio construction pieces?

Tom Lydon:

I think there are too many tools. You think about when I was an advisor back in the early nineties, I started going, it was just Morningstar. And guess what? It still works. Not to say that competition isn't good, but everybody's in the space. I mean, think of all the models that are out there alone. So if you're an advisor where you're having to spend time running your business, managing clients, managing growth, managing people, managing technology, and then all of a sudden every 15 minutes, someone's giving you a call or trying to sell you something, knocking at the door, it's difficult to get through that. So what do advisors do? They listen to other advisors, right?

Bilal Little:

Yeah, for sure.

Tom Lyon:

And advisors are, they're not that many shy advisors out there. They're not that many advisors that don't have decent egos. They all have opinions and they'll tell you what the market's going to do and that type of thing, or at least what their positioning is going to be. So that's really good and healthy. But most importantly, advisors want to know what other advisors are doing too. For sure. And fortunately in this area of financial services, we're very lucky because everybody shares. So when you talk about things like podcasts or you talk about things like webcasts or conferences where you have interaction, it's tremendous because there's certain innovation that you'll see in the area like buffered ETFs, huge. That area is bigger than the crypto space in the ETF world. But there's so many players that do it so many ways, and some are really good and some are kind of stinky. And if you understand who's good and who might be positioned well for the long term versus those that have flaws, that's going to help you be a better advisor.

Bilal Little:

Look, you took a position of a very interesting company. I got to ask about NEOS. They're doing some really cool things. Why don't you share a little bit about what's going on over at NEOS, given your points just now?

Tom Lydon:

Yeah. So fortunately, coming out of Vetify, I tried to retire and as my wife said, they won't let you. You failed. I failed miserably. So as you said, I'm doing a couple boards, but I love being in the space. I love this stuff where we're people who are very dedicated to it. I'm working closely with the private equity firm that did the NEOS deal, and I'm sorry, that did the Vetify deal and we're looking around for other opportunities within the ETF space. One opportunity was with NEOS. These founders were fantastic 10 years ago. Were behind QYLD at GlobalX. They know the options overlay space very, very well. There are a lot of players in this space who do an okay job. I think they do a great job because not all strategies are created equal.

Not all options that you buy are created equal. The tax efficiency is different in different strategies as well. So it's important to know that when you talk about lifting up the hood, that's really important. And when you look at the league tables, NEOS has been very fortunate to be able to move up the pace. And it used to be you'd look and they'd be on page three, and now they're creeping up on page one.

Bilal Little:

That's good.

Tom Lydon:

So I'm very happy for them. I think they are leaders in enhanced income, tax-efficient income as more and more of us are getting older. And what do we want? We want income and get that monthly income, and as some people call it on social media, when the income comes in, that's payday. That's a payday.

Bilal Little:

That's right. That's payday's mailbox money.

Tom Lydon:

That's right.

Bilal Little:

That's mailbox money. Look, you have a unique seat, right? As a pioneer in the space, but also as a thought leader. When you speak to other leaders around the ETF ecosystem, what's one challenge that seems to be uniform to many of the issuers today?

Tom Lydon:

Well, I was going to say the regulatory world, but we as an industry as far as the ETF industry has really been very, very responsible. And I think we all should be proud of that. We've embraced innovation. I mean, it used to be things like inverse and leverage got a bad rap 10 years ago, and the directions and the pro-shares of the world were fighting that today they're-

Bilal Little:

Post-COVID.

Tom Lydon:

Yeah. Today, when you look at all the single stocks and the three times leverage and that type of thing, the direction and the pro-shares is kind of like milk toast. It's not that exciting. So is that good or bad for investors? Well, investors have to decide.

Bilal Little:

Absolutely.

Tom Lydon:

I mean, we can't control what investors will do if investors shoot themselves in the foot. Hopefully they'll learn from that at a young age. At the same time, there are a lot of advisors and institutions that are using inverse and leverage the right way, single stock investing the right way. I mean, if you want to have a Nvidia be a portion of your portfolio, but you're almost fully invested and you can be three times Nvidia, but you invest it the right way, that's great. And we're seeing that with popularity. I mean, the big thing is more and more individual investors are embracing ETFs, and that's a good thing. Not everyone's going to win. Some people are going to look at it like gambling. But I would say just in talking to people, most are doing a really, really good job setting themselves up for success down the road.

Bilal Little:

So it seems to be that you're in the camp that ETFs will continue to evolve, right? There's innovation happening. Can you talk a little bit about the career opportunities that you're seeing develop? Because what I want to make sure that we cover is that there's still opportunity within the wealth management space to create opportunities for young people who say, I like the innovation that's taken place within wealth management. I want to make sure that there's a space for me as the ETF or the mutual fund business may be slowing a little bit. The ETF business is taking off.

Tom Lydon:

So I know you're a big fan of this, and I know the New York Stock Exchange is a big fan of this, and the ETF industry is a big fan of this. Most big and even midsize ETF companies have internship programs. So find out, I know people like Jan Van Eck from Van Eck. He brings in 20 interns I think every summer. He also teaches them courses and things like that. Personally, he spends the time doing that. People in our industry care about the next generation. Education, schools. Schools are talking about ETFs in your investment courses. So set up model portfolios or see if you might be able to help. I went to Babson College. They have an investment committee of kids that actually are part of managing the endowment of the school. A lot of schools are doing that, which is also great. From an education standpoint, you folks have a great program for advisors, but there's no reason why a individual or a kid out of college might be able to sign up for the ETF designation, right?

Bilal Little:

Yeah, absolutely. Look, I think we continue to see adoption as far as the way people want to learn. It seems to be self-motivated in many cases. So we continue to put the CETF designation out there as an offering, but at the same time, we're doing some things that it's unique to the exchange. I think next month we will have four different internship days where we will bring in several partner interns from across the industry to help them learn about obviously some of the transpiring activity that's taken place here at the exchange, so.

Tom Lydon:

It means so much. And I'll tell you, there's a tough story really quick. Jonathan Clemens, who writes for the Wall Street Journal is dying of cancer. His good friend Jason Zweig, who also writes for the Wall Street Journal, has helped put together a foundation, and it's tied into John Bogle's Foundation where they're raising money to help educate inner city kids. And if they stick through the program at the end of the program, they get a thousand dollars to put into a Roth IRA. Now they're not just cutting them loose and letting them go. They're creating an infrastructure. So these kids can actually continue to keep in touch, and they're going to monitor the success because they feel that if they got that education early and they actually remained invested and didn't take the money out and spent it, that they can have a better chance of being successful investors down the road.

And when I heard that, I am getting a little wet just thinking about it because there's nothing better that you can do. Look, you can lead them to water. You can't make them drink. But if you can hang around the pond for a little while and see how they do, just check in with them from time to time. That's fantastic. So that's something that's on my radar. You might want to get in touch with those guys too.

Bilal Little:

Yeah, I might have to have to. Right? That's fantastic. As far as what you see from an opportunity perspective within the space, what's one thing you would like to see the business do to continue to pull itself forward? Is it lobbying in Washington? Is it getting together, being more collaborative with the way that we tell the ETF story? Is it more education? What is it?

Tom Lydon:

I think all that's important, but the ETF business is really a micro, it's a microcosm of America. When you think about easy to access, well, not too easy to access. You got to do your work. But if anybody had an idea and they really were committed to it, they could try to find a way to bring that investment strategy to market. And if you work hard and it's a good idea and you're successful, you end up getting paid for it. And those people that come in with just mediocre ideas and they just have a checkbook, you're going to write a lot of checks and still not raise a lot of assets. So it really, really works well. It's true. It's balanced.

If you find people or companies in this industry that are not following the rules, people find out pretty quickly. I mean, I'm very, very proud to be a small part of this. And when I started using ETFs in the early two thousands, I never went back to mutual funds. And I just luckily strapped in and just rode the wave because it is been fantastic. So to a great degree. I apologize to my wife for not retiring, but I can't give this up.

Bilal Little:

Yeah, I love it. Well, thanks so much for being here at ETF Central.

Tom Lydon:

Yeah, [inaudible 00:22:47]. Thank you. I appreciate it.

Speaker 1:

That's a wrap for today's conversation, but the ETF discussion doesn't stop here. For more insights, deep dives and voices shaping the market, stay connected on ETFCentral.com. From the New York Stock Exchange, we'll see you next time. Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties expressed or implied as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.