Masters in Business – At The Money: How Big Can Active ETFs Get?
Host: Barry Ritholtz (Bloomberg)
Guest: Dave Nadig, President & Director of Research at ETF.com
Date: October 22, 2025
Overview
In this episode, Barry Ritholtz sits down with ETF expert Dave Nadig to dissect the extraordinary growth and evolving landscape of actively managed ETFs (Exchange-Traded Funds). They explore the catalysts behind the recent surge in active ETF launches, the challenges and benefits of these vehicles compared to passive funds and traditional mutual funds, the issue of transparency, and delve into specific ETF niches such as leveraged, derivative-based, illiquid alternatives, and crypto. The conversation is filled with insights on risks, regulation, and where the market may be heading.
Key Discussion Points & Insights
1. The Evolution of ETFs: From Passive to Active
- Historic Perception: ETFs were synonymous with low-cost, passive index funds (e.g., SPY, iShares).
- Rise of Superstar Managers: The late 2010s marked a shift, epitomized by Cathie Wood (ARK Invest), Dan Ives (Wedbush), and Tom Lee (Fundstrat), who brought a personal, visible approach to portfolio management, reminiscent of the dot-com era.
"There's a level of authenticity to that that I think is really appreciated." — Dave Nadig [03:54]
- Impact: These personalities attracted significant flows, demonstrating how active strategies could thrive in an ETF wrapper.
2. What Brand-Name Active Managers Mean for ETFs
- Broadening of the ETF Universe: Nadig stresses that blending active strategies into ETF structures is healthy for the industry, moving away from a binary view of passive = ETF, active = mutual fund.
- Investor Challenge: Despite the proliferation, picking the right active manager at the right time remains difficult, with industry stats showing most underperform over long periods.
"The math is not on their sides. As an industry, we have to point out active managers categorically underperform over time." — Dave Nadig [05:50]
"Half of all active managers underperform in any given year. ... Ten years, it's 90%." — Barry Ritholtz [06:52]
3. Transparency in Active ETFs vs. Mutual Funds
- Mutual Funds: Required to disclose quarterly holdings.
- Active ETFs: Innovation led to “semi-transparent” structures—funds reveal some but not all holdings at high frequency.
"It's sort of a kludge, a bit of a hack to be semi-transparent. This solves a problem for some asset managers. It doesn't solve a single problem for an individual investor." — Dave Nadig [07:55]
- Manager Concerns: Less transparency can help avoid tipping off the market about ongoing trades in illiquid positions, but Nadig counters that truly illiquid or niche strategies don't belong in an ETF.
"If you are a special situations manager... you do not belong in the ETF industry. I'll just flat out say it as simple as that." — Dave Nadig [09:32]
4. Complexity in ETF Structures: Leveraged, Derivatives, and Exotic Income
- Many “Active” Funds Are Mechanical: Leveraged, options, futures, and other “exotic” ETFs are technically active but usually rules-based, not relying on active stock-picking.
"I refer to them as INOs, like active in name only, because there's no Tom Lee saying 'I really want Apple options today.'" — Dave Nadig [10:55]
- Cost Implications: These strategies require trading desks and involve higher fees.
5. Illiquid Alternatives in ETFs: Risks and Concerns
- New Frontier: Products like private credit (e.g., State Street’s “PRIV” ETF) are emerging, but market stress scenarios remain untested.
"The private securities in the daily liquid vehicle has not really been through the wringer yet. So I remain very skeptical." — Dave Nadig [13:45]
6. Crypto and Tokenization’s Impending Role
- Mainstreaming of Crypto ETFs: BlackRock’s fast-growing Bitcoin ETF illustrates demand; SEC is making more crypto coins accessible within ETFs.
"All of these assets are going to be more and more available to the average Joe like us." — Dave Nadig [14:35]
- Tokenization: Envisioned future where traditional securities (e.g., Apple stock) are directly moved as tokens between wallets—potentially bypassing exchanges altogether.
"You're going to have an actual token. You'll be able to put it in a wallet and say, 'Oh no, this is worth 100 shares of Apple.'" — Dave Nadig [15:32]
- Caveat: True tokenization of major equities likely a decade away and requires significant legal changes.
"Be skeptical when people say we're tokenizing everything because it's going to be a decade." — Dave Nadig [16:29]
7. Settlement Speed, Risk, and Market Integrity
- Move from T+3 to T+1: Industry shifted from three-day to one-day trade settlement.
- Instant Settlement (T+0): Theoretically enabled by tokenization, but Nadig highlights risks:
"The bigger and more interesting a transaction gets, the less T0 is actually a good idea." — Dave Nadig [17:34] "Did you really want Tzero during the Flash crash in 2010? ... You wanted this ecosystem that protects you from a bad actor." — Dave Nadig [17:46]
- Market Design: Speed bumps and checks add safety, sometimes intentionally slowing things down.
8. Volatility and Liquidity Laundering via ETFs
- Definition: Structuring products that transform volatile returns into seemingly “safe” or high-income payouts—sometimes misleadingly.
"Volatility laundering is simply moving volatility from one bucket to another and charging something for the privilege of doing that." — Dave Nadig [18:38] "You're being the person picking up... quarters in front of the steamroller, not the pennies." — Dave Nadig [19:15]
Notable Quotes & Memorable Moments
-
On the appeal of visible active managers:
"That's why people love superstar managers, because they can look and they can see Tom Lee on screen... there's a level of authenticity." — Dave Nadig [03:54] -
On ETFs containing illiquid assets:
"If you are a special situations manager, ... you do not belong in the ETF industry. ... The mutual fund structure, or even better, a liquidity cap structure like a CEF or an interval fund, is actually a better structure." — Dave Nadig [09:32] -
On the hazards of crypto tokenization hype:
"Be skeptical when people say we're tokenizing everything because it's going to be a decade." — Dave Nadig [16:29] -
On “volatility laundering” products:
"That is volatility laundering. ... You're being the person picking up... quarters in front of the steamroller, not the pennies." — Dave Nadig [18:38, 19:15]
Timestamps for Key Segments
- [01:59] – Setting the context: ETF explosion and the rise of active management
- [03:03] – Historical perspective & superstar ETF managers
- [05:30] – What active managers mean for the ETF ecosystem
- [06:52] – Track record of active managers vs. passive
- [07:37] – Transparency and regulatory environment for active ETFs
- [10:32] – Complex/“ino” active funds: options, leverage, derivatives
- [11:54] – Can illiquid investments fit into an ETF?
- [14:00] – Crypto, ETF wrappers, and tokenization of assets
- [16:51] – Market settlement speed: T+3 to T+1 & vision for T+0
- [18:29] – “Volatility laundering” and synthetic income strategies
- [19:42] – Ritholtz’s bottom line advice for ETF investors
Bottom Line Takeaway
Active ETFs have radically transformed the ETF industry, bringing new strategies and star managers into the spotlight. Yet, investors must remain vigilant—scrutinizing costs, transparency, risks, and the actual mechanics behind these sometimes-complex products. As novel wrappers emerge for everything from private credit to crypto, the fundamental principles of common sense, diligence, and understanding what you own have never been more important.
"Be smart, be thoughtful, do your homework." — Barry Ritholtz [19:53]