Relevant Markets Content: KSS, 351, QQQ

Summary

Money Stuff: The Podcast
Episode: Relevant Markets
Release Date: July 25, 2025
Hosts: Matt Levine & Katie Greifeld
Content Focus: Kohl's Corporation (KSS), 351 ETFs, Invesco QQQ Trust (QQQ)

1. Introduction

In this episode of Money Stuff: The Podcast, hosts Matt Levine and Katie Greifeld delve into the resurgence of meme stocks, the intricacies of Section 351 (351) ETFs, and provide an in-depth analysis of Invesco's QQQ Trust (QQQ). The conversation seamlessly blends technical financial insights with witty banter, making complex topics accessible and engaging.

2. The Resurgence of Meme Stocks

Levine and Greifeld kick off the discussion by addressing the comeback of meme stocks. Reflecting on the 2021 frenzy, they compare the current landscape, noting a shift in the dynamics that drive these speculative investments.

Matt Levine [06:07]: "Meme stocks are back."

Katie Greifeld [06:10]: "We're back in 2021. The halcyon days."

The hosts explore why the current wave feels less impactful than its predecessor, attributing it to changes in short interest and the influence of artificial intelligence on stock picking.

Matt Levine [07:21]: "I have to say. Yeah, I'm not feeling it. Are other people feeling it? Am I just old?"

They highlight how hedge funds have altered their short positions, making short squeezes less dramatic but more immediate. The conversation also touches on the role of AI tools like ChatGPT in identifying meme stock opportunities, potentially bypassing traditional coordination platforms like Reddit's WallStreetBets.

Matt Levine [11:55]: "If you want to find the next meme that will go up a lot, your instinct might not be to go to Reddit and ask the people there. Your instinct might be to go to ChatGPT and ask ChatGPT."

3. Understanding Section 351 (351) ETFs

The discussion transitions to Exchange-Traded Funds (ETFs), specifically focusing on Section 351 (351) ETFs. Levine explains the tax-efficient mechanisms that make ETFs attractive compared to mutual funds.

Matt Levine [20:18]: "The real way to understand ETFs is that they are tax dodges."

They delve into how ETFs utilize in-kind creations and redemptions to avoid triggering capital gains taxes, contrasting this with mutual funds that distribute annual capital gains to shareholders. This section provides a clear explanation of the operational advantages of ETFs, emphasizing their role in tax deferral.

Matt Levine [20:31]: "With an ETF you don't pay taxes until you sell the ETF shares."

4. Twin Oak Active Opportunities ETF and Market Implications

A significant portion of the episode is dedicated to analyzing the Twin Oak Active Opportunities ETF. Greifeld outlines the challenges Invesco faces in converting this ETF from a Unit Investment Trust (UIT) to an open-ended ETF, highlighting the complexities of gaining shareholder approval.

Katie Greifeld [27:05]: "The Twin Oak Active Opportunities ETF... has nearly $450 million in assets that could theoretically be all one person."

Levine and Greifeld discuss the potential motivations behind such conversions, including tax deferral strategies for large stockholders with concentrated positions. They explore the logistical hurdles involved in rallying shareholders to approve these changes, noting the immense difficulty in achieving the necessary quorum.

Matt Levine [36:29]: "Wait, let me ask you this question. Can they use their enormous marketing budget to send personal mailings to each shareholder and knock on their door and be like, please vote."

The hosts also speculate on the broader impact on the ETF industry, contemplating whether similar strategies will be adopted for other major ETFs like SPY.

Katie Greifeld [40:35]: "I asked Ana Paglia of State Street Investment Management... if we learn something that we like from this proxy, we will think about it."

5. In-Depth Analysis of Invesco QQQ Trust (QQQ)

Levine provides a technical breakdown of the Invesco QQQ Trust, explaining its structure, fee composition, and the implications for investors. The conversation underscores the profitability mechanisms of ETFs and the delicate balance between marketing expenditures and fee revenues.

Katie Greifeld [34:22]: "Here's something that not a lot of people know or care about."

They scrutinize Invesco's fee strategies and marketing expenditures, questioning the sustainability and transparency of such models. The discussion highlights the complexities investors face in understanding ETF fee structures and the hidden costs associated with heavily marketed funds.

Matt Levine [20:31]: "With an ETF you don't pay taxes until you sell the ETF shares."

6. Conclusion and Final Thoughts

As the episode wraps up, Levine and Greifeld reflect on the evolving nature of ETFs and meme stocks. They emphasize the importance of understanding the underlying mechanics and the potential regulatory scrutiny that may arise from aggressive tax deferral strategies.

Matt Levine [24:48]: "I've advocated that eventually everything will be an ETF."

Katie Greifeld [25:22]: "If you subscribe to the next reveal, you might find a similar loophole being closed."

The hosts leave listeners with a nuanced perspective on the financial instruments that continue to shape the investment landscape, encouraging a deeper dive into ETF structures and market behaviors.

Key Takeaways

• Meme Stocks Revival: While meme stocks are making a comeback, the dynamics have shifted due to changes in short interest and the advent of AI-driven stock recommendations.

• 351 ETFs Explained: Section 351 ETFs offer significant tax deferral benefits through in-kind transactions, making them a preferred choice over traditional mutual funds.

• Twin Oak ETF Challenges: Converting specific ETFs from UITs to open-ended structures involves complex shareholder approvals, highlighting potential bottlenecks in ETF evolution.

• Invesco QQQ Trust Insights: The profitability and fee structures of major ETFs like QQQ reveal underlying economic strategies that benefit issuers while posing questions about transparency and fairness for investors.

---

For more detailed analyses and engaging financial discussions, tune into the next episode of Money Stuff: The Podcast.

Transcript

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[Karen Moscow]

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[Karen Moscow]

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[Katie Greifeld]

Radio News I do have a bird update.

[Matt Levine]

I was gonna say you texted me a picture of your bird.

[Katie Greifeld]

Yeah.

[Matt Levine]

And you just like without any sense of irony, you're like foxpo's teen feathers are coming in. So like he's just Fatzpa now, huh?

[Katie Greifeld]

I think so.

[Matt Levine]

I mean, is he Foxpo like for purposes of this podcast? Or do you call him that? Like to your parents and to his.

[Katie Greifeld]

Face in the halls and walls of the Greifeld house, he is just bird. And also we're saying he as if he's a boy, but we don't know that.

[Matt Levine]

But he's a friend of the show, Bill Ackman.

[Katie Greifeld]

Yeah. To the rest of the world, he's Fozpa. Friend of the show, Bill Ackman. But I haven't explained the joke to my parents yet.

[Matt Levine]

Have you explained it to the bird quietly?

[Katie Greifeld]

I think I have said to him, your name is Bill Ackman. But I don't think he's internalized that. And that was the update, though, that his teenage feathers are coming in good for him. Yeah, it's super interesting. Hopefully I'm not the only one who thinks so. When starlings are juveniles, when they first grow their feathers, they're super brown and kind of boring. But in the later stages of being a juvenile, he's still not an adult. He or she. But they get this, like, interesting polka dot pattern on their chest. And so it's growing in patches. The polka dots on his chest. Yeah. He's super cute.

[Matt Levine]

Yeah. So you'll know his gender because they have different plumage when they're adults.

[Katie Greifeld]

Yes. So hopefully in the next couple months, we should know it'll be a gender reveal.

[Matt Levine]

Are you gonna have a gender reveal party?

[Katie Greifeld]

I think it's more he or she is throwing the party for us. And the party is just very slowly, over time, the feathers change.

[Matt Levine]

This is making me realize I have another question, which is what will Fatspah's romantic life be like? Is it none or.

[Katie Greifeld]

I think right now it's none. I would, like.

[Matt Levine]

Have them settle down with a nice ladybird or vice versa.

[Katie Greifeld]

Yeah, exactly. You know, I don't know. I was thinking it would be nice for Fatspah to have a friend. Where my parents live in New Jersey, unfortunately, it's not that uncommon to find stranded baby birds. So maybe that'll happen in the next few years.

[Matt Levine]

Right. I assume, like, there's no prospect of, like, visiting wild starlings.

[Katie Greifeld]

Chadden, with Fatspah, like, setting him up with a wild bird. I don't know.

[Matt Levine]

You're really horrified looking your eyes.

[Katie Greifeld]

I don't know logistically how that would work. I don't think there are, like, any starling stud farms either. But, hey, he's not just gonna, like.

[Matt Levine]

Roam around the backyard.

[Katie Greifeld]

Right.

[Matt Levine]

Like, he's an indoor bird or.

[Katie Greifeld]

I don't know if he would come back. And I worry about him being able to feed himself. He is. Oh, another update I sort of got. This one is interesting too. So I was talking about how he only wants to land on humans, so because he's in this half outdoor, half indoor room, and he had been in the cage, and then we would let him out for free flight. I made the executive decision, let's just have him out all the time. The cage doors are open. He can go in and out as he pleases because there's a hose and a drain in the floor in that room, so we can just clean it down whenever we need to.

[Matt Levine]

I need a room like that.

[Katie Greifeld]

With the introduction of free flight, he is much more confident about perching on things other than humans. Very proud.

[Matt Levine]

Yeah, yeah. He's, like, flying around all day. He needs to. He's a perch Sometimes.

[Katie Greifeld]

There's not always a human in the room with him. So now he's more comfortable with the idea that other objects are suitable perches.

[Matt Levine]

Hello and welcome to the Money's Love Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine, and I write the Money Sluff column for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

Eventually, it's just gonna be all bird updates. It's just gonna be.

[Katie Greifeld]

Yeah, it would be.

[Matt Levine]

He's gonna get a microphone and he just squawks.

[Katie Greifeld]

He does have different squawks for different things. Like, you can tell when he's talking about ETFs, when he's talking about ETFs, you know, or memes, for that matter.

[Matt Levine]

Yeah, starting with meme stocks. Meme stocks are back.

[Katie Greifeld]

We're back in 2021. The halcyon days.

[Matt Levine]

I have to say. Yeah, I'm not feeling it. Are other people feeling it? Am I just old? Like, are the people on the Internet like, oh, yeah, this is just as good as it was in 2021.

[Katie Greifeld]

It kind of reminds me of crypto, how crypto had this resurgence and we're back at all time, highs and then some, and it just feels like way less people care. And it feels kind of that way with the meme frenzy that we're seeing right now.

[Matt Levine]

I hear you. Crypto's weirder because crypto has a lot of different, like, streams. Like, meme Stocks kind of have, you know, one stream, which is people on the Internet doing memes.

[Katie Greifeld]

That's true.

[Matt Levine]

It just feels like less.

[Katie Greifeld]

Yeah.

[Matt Levine]

I don't know.

[Katie Greifeld]

Well, we've seen it before, you know.

[Matt Levine]

Have you seen it before?

[Katie Greifeld]

It was novel the first time.

[Matt Levine]

Right? I mean, you know, the point of Meme Stykes is, like, one, people are on the Internet talking about Them and then two, they go up a lot. Right. And you really need the going up a lot to make it that fun. And I feel like we're not quite there. I mean, the novelty in 2021 was so, you know, like millions of people came to WallStreetBets for the first time. Like it was creating millions of accounts a day.

[Katie Greifeld]

Yeah.

[Matt Levine]

And that doesn't seem to be happening here because like everyone who was gonna get into into it, I may not have fully realized the first time I knew it, but I didn't fully internalize it. How much meme stocks are connected with short squeezes. It's so important to every meme stock. These is like, oh, the evil shorts are getting squeezed. It's such a central part of the story. One thing is that there were learnings from 2021 that hedge funds don't short a ton of crummy consumer focused stocks because you might get carried out. And so if all the shorts are less short, then. Bernd Hoer was writing about this in his newsletter that the shorts are going to have smaller positions and less confidence. What that suggests is one, it's easier to do a short squeeze. You'll get the meme stock pop because as soon as a stock starts memeing, all the short sellers are going to cover their positions. But then two, it's not going to be as long lasting or as big because they'll all just cover their positions immediately and there won't be the Gamestop. There was months where people were like, oh, it's going to be the mother of all short squeezes. The shorts still haven't enforced that and it's instantaneous now.

[Katie Greifeld]

Yeah. It still does though, seem like maybe it's not sophisticated hedge funds who are shorting these stocks. Most of the ones that went crazy this week, or at least Kohl's, which kind of led the meme frenzy. This specific week. I think it's 48% of its float was shorted.

[Matt Levine]

Yeah.

[Katie Greifeld]

I mean, well, I was thinking about that list that you asked ChatGPT for or that ChatGPT produced for you. And one of it was the company needs to be unloved or not appreciated.

[Matt Levine]

Yeah. Right. So I asked ChatGPT, what's the next carvana, what's the next hundred beggar? And it gave me this kind of meme y answer. It was like it needs to have a heavy short interest and be unloved or underappreciated by the market. And that is kind of.

[Katie Greifeld]

That's it.

[Matt Levine]

That's kind of The Meme stock, it.

[Katie Greifeld]

Felt like that was the most important thing, or it's like a sense of resentment.

[Matt Levine]

You need to be mad at people.

[Katie Greifeld]

You need to have a chip on your shoulder. Yeah. But that goes hand in hand with the heavy short interest that this isn't unstable.

[Matt Levine]

Those are identical.

[Katie Greifeld]

You could have put them in the same line.

[Matt Levine]

Yeah. Yeah. Unless there's technical reasons that everyone could hate a stock and it could not be heavily shorted because it's really hard to borrow. But, no, in general, that's. Those are the same thing. Yeah.

[Katie Greifeld]

Something that I appreciated, though, about the fact that we're having this conversation in 2025 was that it dispelled at least two myths that were part of the conversation in 2021. The first being that the activity that we saw back then was all fueled by stimulus checks. The stimulus checks that the government had helicoptered across everyone.

[Matt Levine]

Yeah. I don't know. That totally dispels that myth. Right. I mean, some of the stuff I've read about this Meme stock thing is there's been enough of a stock rally to create kind of a wealth effect, and the stimulus checks are another form of that. But. Yeah, I agree.

[Katie Greifeld]

Yeah. That could have been true in any time.

[Matt Levine]

Yeah, that's right.

[Katie Greifeld]

Except for, I guess, 2022, when everyone. But, yeah, I mean, no, you're right.

[Matt Levine]

It's not the stimulus checks.

[Katie Greifeld]

And the wealth effect, I think, has somewhat been eroded by inflation. The fact that, okay, stocks have gone up, but so have the prices on everything else. I was in a grocery store in Hoboken, and there were these bro y looking college kids, and they were complaining about the price of produce. I was like, that's so interesting. It's just so much in just everyday conversations that you stumble across people complaining about how expensive everything is. So I think the wealth effect is out there, but I think it's less so. The other myth that it dispelled was that the Meme mania was just a byproduct of zero interest rates. That is very much not the case right now.

[Matt Levine]

Yeah, that's fair. Right. Another thing that you were just learning, it's not an isolated phenomenon. Right. It's not just like, this happened once, and then people learned from it. I think that what people learn from it is it works. It's like a good game.

[Katie Greifeld]

It is a good game.

[Matt Levine]

Why not make a stock triple in the course of a few days?

[Katie Greifeld]

Also, I know you explicitly said it's not investment advice, but I know that so many people, after reading your column, must have for fun, gone to ChatGPT and asked what the next carvana is.

[Matt Levine]

Yeah, I mean, like, right. I wrote like, a reader emailed me to be like, I asked ChatGPT when the next carvana was and it told me open door. So I bought open door. And look at me.

[Katie Greifeld]

Right.

[Matt Levine]

And I don't get the sense that what has happened in the last, like, week or two is mainly or, like, largely AI driven.

[Katie Greifeld]

Yeah.

[Matt Levine]

But it does feel like in 2021, there was this coordination mechanism where people who wanted to buy meme stocks and have stocks that go up a lot would go to social media, Reddit, mostly Wall street bets, and they'd meet their friends there and their friends would talk about what stocks would go up and they'd all kind of coordinate around the stocks they wanted to go up. And in some ways, it feels like AI which is trained on Reddit has found a way to abstract that. Where. Now, if you want to find the next meme that will go up a lot, your instinct might not be to go to Reddit and ask the people there. Your instinct might be to go to ChatGPT and ask ChatGPT. And ChatGPT might tell you. It might tell you something that's kind of similar to what a Redditor would tell you. I just think that's an interesting new vector for meme stocks to happen. It's like, you don't need anyone else on Reddit pumping the stock because our AI tools have now been trained on that kind of meme stock thinking.

[Katie Greifeld]

Yeah. I hadn't heard the idea that LLMs are just a blurry jpeg of the Internet until.

[Matt Levine]

Yeah, it's a Ted Changs headline on the new album.

[Katie Greifeld]

I love that. I love that. I hadn't read that piece. I will say, reading your musics on that just made me more existentially worried about humanity because I don't think that people should be taking advice from Reddit or a blurry thing that's produced on Reddit.

[Matt Levine]

Right. I mean, Alex Balk used to say, the first rule of the Internet is the things you hate about the Internet are the things you hate about people. When you say people shouldn't be taking advice from Reddit, you're saying people shouldn't be taking advice from people. AI is a distillation of the wisdom and the foibles of people. Right.

[Katie Greifeld]

Of the masses.

[Matt Levine]

Yeah. Of something. Of some subset of people. The people who are on Reddit not only, but also them. Yeah. I used to write this. If you had asked someone 100 years ago, what stocks should I buy? Or how do stocks go up? They would probably have said something like stocks go up because a lot of people want to buy them. It's fairly straightforward. If you ask people 50 years ago what stocks will go up, they would say things like stocks reflect the expected value of future cash flows. So true, stocks that will go up are the ones that have good businesses that are undervalued by the market or something. Right.

[Katie Greifeld]

Makes sense.

[Matt Levine]

I think if you ask today, the answer is the stocks that people want to buy are the ones that go up. There is this pseudo science of investing based on fundamental analysis that kind of ruled for 50 or 75 years and that now has receded a little bit and been replaced by whatever people want to do, they're going to do. Right. And in some ways we've had new technologies to distill and amplify. Whatever people want to do, they're going to do. And those technologies include the Internet and now AI. But in some ways it's frustrating because things don't have reasons. But in other ways that's how it should be. It's just like investing is an empirical science. If the stocks go up, it's because the stocks went up. There's not some axiomatic theory that will tell you why stocks will go up. It's like you have to know what people are thinking.

[Katie Greifeld]

I do kind of love that every time this happens, there's a set of serious people who have to engage with it and try to.

[Matt Levine]

Am I one of them?

[Katie Greifeld]

Not really, no. No. I'm talking more about I lost my.

[Matt Levine]

Mind the last time it happen, but now I have like zen.

[Katie Greifeld]

I'm talking more about like sell side and like, you know, single stock analysts.

[Matt Levine]

If you're a sell side analyst, you really like live in an ecosystem of like stocks reflect the present value of their future cash flow.

[Katie Greifeld]

Yeah, that's your buy.

[Matt Levine]

Yeah.

[Katie Greifeld]

No, your whole job is predicated on that.

[Matt Levine]

Right, right, right. You have like a little fundamental model. It's really right.

[Katie Greifeld]

It's precious. There was a note from Barclays talking about how to engage with it. They said that one way you can hedge is like through a dispersion trade of sorts. In this case using options to bet on a basket of meme stocks that will continue to be far more volatile than the S&P 500. Those wanting to take a more directional bet on the frothiest companies they can buy puts that would benefit if these shares reverse course, which I don't know, I just feel like the safest thing that anyone could do is just not short things, right?

[Matt Levine]

I mean like I think the idea of buying puts as like you've capture, yes, you could lose that much money, but no more.

[Katie Greifeld]

Your losses aren't infinite.

[Matt Levine]

It's the safest way to short Meme stocks. But no, I agree with you. I would not personally wake up and see a meme stock mania and be like, oh, I got to bet against these. That sounds like a good use of my time. But I'm not a professional investor and I'm not a research analyst.

[Katie Greifeld]

Or even before you get to that point, if you don't want to get your face ripped off on a company that you were shorting, maybe just don't short it, right? Yeah, right. Not investment advice.

[Matt Levine]

No, I wouldn't. But some people, their job is to make correct market calls and other people their job and I sympathize with the research analysts because other people, their job is to create relevant markets. Related Content and when there's a Meme stock wave, you're like well what Meme stock content am I going to produce? And I know that difficulty well and I sympathize with anyone else who has to create Meme stock Related content.

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[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with context.

[Karen Moscow]

And that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify, or anywhere you listen.

[Katie Greifeld]

I want everyone to know that this was your idea.

[Matt Levine]

I know. I keep pushing ETFs.

[Katie Greifeld]

I know.

[Matt Levine]

And I keep saying so sick of ETFs.

[Katie Greifeld]

I don't know if anyone wants to listen to it. This was Matt's idea.

[Matt Levine]

I love these ETFs.

[Katie Greifeld]

Yeah, 35, 35, 351. I was going to say 35, one ETFs. No, 351s.

[Matt Levine]

Yeah. So one way to understand exchange traded funds is that they're exchange traded funds and they have nice liquidity properties. But the real way to understand ETFs is that they are tax dodges.

[Katie Greifeld]

Yes.

[Matt Levine]

And in particular I learned that if you buy a mutual fund, you annually pay capital gains taxes on the fund's trading activities, whereas if you buy an ETF, you do not. Because ETFs have found a way to make all of their trading both to meet redemptions and to change their positions. They found a way to make all of their trading not a tax realization event. And this involves in kind creations and redemptions. It involves doing big heartbeat trades with authorized participants. It's a whole ecosystem. But the way it works is the result of it is that you don't pay taxes.

[Katie Greifeld]

Well, you get to decide when you want to take the tax hit.

[Matt Levine]

Yeah. If you buy an ETF this is not 100% true, but this is largely true direction. Sure enough, if you buy an etf, you do not pay any taxes until you sell the etf, which Is not true of mutual funds. So in mutual funds you pay taxes every year and you hold it forever. But with an ETF you don't pay taxes until you sell the ETF shares and then gets wrapped up in the ecosystem of you buy an asset, you defer taxes forever, you borrow against the asset if you need to, eventually you die, your heirs get stepped on basis and no one ever pays the tax. But at least you defer the tax even if you might have to if you sell the thing, eventually you pay taxes. And so it's really good. And it's like if you own AN S&P 500 ETF, it's a little bit more tax efficient than if you own an S&P 500 mutual fund because of trading redemptions or whatever. But whatever, it's not a huge impact on your life to pay those capital gains taxes. Where it's really interesting is if you can use that to wrap other stuff. And so I think, and so we're talking about Bloomberg's Justina Lee wrote a big article about these 351 ETFs. But directionally the idea is you worked at a tech company, you got a lot of stock early on, and so your stock has a basis of roughly zero and it's now worth roughly $100 million. Does seem like some of these trades are for $100 million. And so you have a lot of this stock and if you sell it, you'll have tens of millions of dollars of capital gains taxes. And, and what you do is someone comes to you and like, I will build an ETF for you. And you plop your stock into this ETF that is custom built for you. And then the ETF does trades to get rid of that stock and replace it with like, you know, the S&P 500. And then you are left with S&P 500. And you don't pay any taxes. You defer taxes. You have zero bases in the S&P 500. But you've deferred taxes. You've sold out of your giant concentrated position in your employer stock and replaced it with a nice diversified index fund without paying taxes. Which is a really neat trick. Yes, I'm oversimplifying. There's actually rules about the original contribution has to be kind of diversified. So you can't just literally plop all of your employer stock and nothing else into it, but you can do it.

[Katie Greifeld]

We've talked about swap funds on the swap.

[Matt Levine]

This is a swap fund.

[Katie Greifeld]

This is a swap fund.

[Matt Levine]

No, this is a better Swap fund. You don't need other people. You can just do it with your stuff. Historically a swap fund was like 10 people get together and they plop their stock in and then, I don't know, 10 people diversified pool of each other's stocks. This is. We just boop boop. You're into The S&P 500.

[Katie Greifeld]

So much cleaner.

[Matt Levine]

It is like a swap fund. It's a similar idea.

[Katie Greifeld]

So this kind of blows my mind.

[Matt Levine]

People do swap funds in ETF form because you get the ability to diversify by doing heartbeats. In the article, someone calls it a black hole for capital gains.

[Katie Greifeld]

It's a perfect description.

[Matt Levine]

It's just like a solution. You don't have to pay any Stockholm anymore.

[Katie Greifeld]

It's legal. Sure, it's legal. And I think it was a lawyer that Justina interviewed for the piece who said that he's worked on hundreds of these or something of that magnitude.

[Matt Levine]

Right. And it's hundreds, it's not millions. Because you need a certain amount of money to make this work. This is not free. You need some advisor to do it. You need an ETF issuer to do a white label ETF for you. So it's expensive. If you have $100 million of zero basis stock in your employer, it's worth it because you're saving $20 million of capital gains taxes. If you have you bought some Tesla a few years ago and now you have a million dollar Tesla position with a basis of $500,000, you're probably not going to do this. But one thing that I have talked about on this podcast is I think.

[Katie Greifeld]

Have I also talked about it?

[Matt Levine]

I mean, we've talked about it, right? For sure. I have advocated that eventually everything will be an etf, every product will be etfized. And one thing that means is there will be automation and costs will come down. So that if you're just like, I want to do an ETF of this thing, you'll push a button and it'll charge you like $95 and you'll get the ETF. And like when that happens, no one will ever have to pay capital gains taxes on their stock because everyone will be able to do this.

[Katie Greifeld]

And then we'll find out some way that this is illegal. Like it'll become illegal.

[Matt Levine]

Yeah. Eventually someone will be like, well, we should stop that. It's not like obvious that this should work. Right? I mean, yeah. So the trade that they do is called a heartbeat. Right. The idea is that you're an etf, you own some concentrated stock you don't pay taxes on in kind creations and redemptions. So if someone brings you a basket of your stock, if they bring you a basket of the underlying shares and you give them ETF shares, that's not a taxable transaction, or vice versa. And so what they do is they have special baskets where basically a Jane street or a bank or somebody will go to an etf, they'll bring in the stuff the ETF wants, they'll give them the s and P500, they'll get back ETF shares, they'll wait like a day, and then the next day they'll hand back the ETF shares and take out whatever the ETF doesn't want. So it's like, these are not taxable transactions, but they're weird transactions. They're not in the full underlying basket of the etf. They're in the specific stuff the ETF does or doesn't want. And they're not done because the counterparty wants to be an investor in the etf. They're done because the ETF is adjusting its trading. I first learned about this in 2019 when Bloomberg had a big article about heartbeats.

[Katie Greifeld]

A seminal piece.

[Matt Levine]

A seminal piece. And they were sort of like, should this really be legal? And my view was like, sure, it should be legal. ETFs don't pay taxes. But now it's like people have learned from this mechanism that they can just get rid of all taxes. And then it's like, yeah, someone might look at this and say, hey, we should close that loophole.

[Katie Greifeld]

That's the thing. The notion of a heartbeat is pretty well socialized at this point. But these individualized heartbeat ETFs, the fact that these ETFs only exist to do this because you see heartbeat trades once a quarter in some of the biggest ETFs out there, right?

[Matt Levine]

Because their index funds, the index changes. And so they have to get rid of some stocks and get new stocks, and you heartbeat that away so you don't pay taxes. It's not obvious that ETF holders shouldn't have to pay taxes on their index rebalancing, but everyone's fine with it.

[Katie Greifeld]

It's fine. This is the only purpose of this etf.

[Matt Levine]

I mean, who can say what the only. But it's.

[Katie Greifeld]

Who can say. So this leading anecdote that Justina opened with was talking about the Twin oak Active Opportunities ETF. And the thing about ETFs. So this one has nearly $450 million in assets that could theoretically be all one person it could.

[Matt Levine]

My impression was that it was a bunch of S and P and stuff, but then it was like three sort of nearly $100 million positions in three tech stocks. Which suggests. Snowflake Datadog suggests it was roughly three people who. This is pure speculation, but it could have been three people who were early employees at those companies or were venture capital investors in those companies and who have very low basis stock in those companies.

[Katie Greifeld]

Well, theoretically, if they are still holding onto this ETF and invested in this ETF in some way and they're big enough, we should be able in like 45 days or something to see who they are, which is interesting to me. So you lose. Yes.

[Matt Levine]

Listener will be the judge of that. It's like some guys you don't know of, right?

[Katie Greifeld]

I don't know.

[Matt Levine]

I worked at a company.

[Katie Greifeld]

You lose to the anonymity that you would get in a traditional swap fund.

[Matt Levine]

Yeah. The other thing that was interesting in the article is like you lose, you're in a more regulated, more public vehicle. One thing about it is it's an ETF trades on the exchange so anyone can buy it.

[Katie Greifeld]

That's the other thing.

[Matt Levine]

No one would. They don't market it. And it's not even clear that anyone could because you might own all of it and just not sell it. But in theory. But they can buy from authorized participants. In theory, someone could buy the etf.

[Katie Greifeld]

Well.

[Matt Levine]

And so you have these weird obligations where you have fiduciary duties to run the ETF in the right way.

[Katie Greifeld]

Well, going back to the name, the Twin Oak Active Opportunities etf, which bills itself as seeking long term capital appreciation, I could be poking around at my brokerage account somehow come across that and.

[Matt Levine]

Be like, yeah, you could click buy.

[Katie Greifeld]

I want to see capital appreciate that sounds good. So that's cool too, right?

[Matt Levine]

It's a weird family office trade that in theory anyone could free ride on, but the whole juice in the trade is in the first three days. So you're not getting the super exciting product if you just buy it on the exchange. Because the whole point of it was to save these people taxes.

[Katie Greifeld]

Sometimes I wonder worry about what's going to happen to the ETF industry. As a reporter, I don't have any feelings, but it feels like every etf. I track ETF filings very closely, but every ETF filing nowadays is like triple leveraged quantum computing stock with an income strategy overlay. It's just crazy. It's like all of this spaghetti sauce that's being thrown at the wall and then maybe These will become more popular. And then what does the industry turn into? I don't know. It's just like it turns into everything.

[Matt Levine]

So I've written about tokenization and I think of tokenization of securities as being largely people trying to find sneaky ways around securities laws and pretend that it's about technology. But someone asked me, what do you think is the good case? What are useful things that can be done with tokenization? And I look at this stuff and I'm like, this is going to be tokenized. This is a whole product set that will be turned into APIs that will be turned into. If you want an ETF, there will be a series of buttons you can push and the ETF will come out and it'll be exactly the ETF you want and, and it will just exist as an etf and you won't have to like sit at a meeting with a wealth manager or like go to a white label ETF firm. You'll just like the computer will give you the ETF that you want and it'll heartbeat away whatever you don't want.

[Katie Greifeld]

I feel like that is the exchange traded everything.

[Matt Levine]

Yeah. Not just funds, any portfolio, any trade, any combination of trades, any whim, etf.

[Katie Greifeld]

If I. Yeah. Any desire that I might feel about to hold. Yeah, yeah, right.

[Matt Levine]

For sure. But yeah, any desire.

[Katie Greifeld]

Wow.

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[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with.

[Karen Moscow]

Context, and that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.

[Katie Greifeld]

We have to talk about Invesco.

[Matt Levine]

Do we? Yes, that's your idea. Okay, go ahead.

[Katie Greifeld]

Okay. Also in ETF land, this one actually was my idea, but really interesting filing last week.

[Matt Levine]

I'll be the judge of that.

[Katie Greifeld]

I should stop saying interesting. Let me just state a fact. There was a filing last week from Invesco.

[Matt Levine]

Always a promising start.

[Katie Greifeld]

Here's something that not a lot of people know or care about.

[Matt Levine]

I'm going to step out of the room. You have fun.

[Katie Greifeld]

The QS.

[Matt Levine]

The QS.

[Katie Greifeld]

The Qs. It's an ETF that tracks the NASDAQ 100. So it's pretty big. Pretty huge. 350, $360 billion depending on the day. Started in the 90s, really from the dawn of the ETF. One of the oldest still existing ETFs. It's actually a unit investment trust. And that's interesting. My mind is blown because Invesco doesn't make any money off of the qs. The way that the fee breakdown as it stands right now, they charge 20 basis points. A bunch goes to NASDAQ from which they license the index. A bunch goes to BNY because they're the trustee. That does leave some for Invesco. But it is written into the QS prospectus that Invesco has to spend that on marketing, which is why the QS are like the official ETF of the ncaa. And why every big marketing measure? Exactly. But it's an enormous marketing budget. But I wrote about this in August 2023 because it's one of my favorite quirks in just the investing landscape that the QS are the most profitable ETF because you're charging 20 basis points on $350 billion of assets. That spins off over $700 million of fee revenue a year. And Invesco, it's just this piggy bank that they can't break. But they're now trying to convert the CEWS into an open ended ETF from a unit investment trust. But to do that, they need shareholders to approve it. They need holders of the CEWS to approve it, which is a gargantuan task because they need 50% quorum on this vote. And there's tens of thousands of queues holders at this point. So it's like the ultimate exercise in herding cats. And I'm really fascinated to see how this goes.

[Matt Levine]

Wait, let me ask you this question. Can they use their enormous marketing budget to send personal mailings to each shareholder and knock on their door and be like, please vote.

[Katie Greifeld]

I don't think so.

[Matt Levine]

Why not? It's marketing.

[Katie Greifeld]

I mean, in a sense, it's not just like marketing the product to buy the product though. It's like trying to rally shareholders for this specific purpose.

[Matt Levine]

Please buy QS to vote to change it into an etf.

[Katie Greifeld]

Well, they are offering a carrot of sorts. They will lower the fee to 18 basis points.

[Matt Levine]

18 basis points for an index ETF seems still high. Extraordinarily high.

[Katie Greifeld]

It is very high. You're right about that. But I mean, a lot of these holders are locked in. They've been holding this forever and they don't want to take the capital gains hit selling. But if they are able to convert it, they'll theoretically be able to change the revenue breakdown. So even by lowering the fee, they're still making so much more money than they were before, they won't have to.

[Matt Levine]

Pay Nasdaq and pony as much.

[Katie Greifeld]

Because that's a natural question posed by my editors. Who loses out here? And it seems like who loses out are the advertisers.

[Matt Levine]

You mean the recipients of the advertising?

[Katie Greifeld]

Yes, exactly. So the thinking seems to be that Nasdaq will still get their 8 basis points. Their 8 basis points of Flush Boney.

[Matt Levine]

8 basis points for an index? Yeah, because like you get S and P index funds for.

[Katie Greifeld]

I believe it's exclusive though. Like I don't think anyone that's cool. Yeah, I know.

[Matt Levine]

Okay, that makes sense.

[Katie Greifeld]

So NASDAQ will still get paid a licensing fee, which is pretty hefty. Boney will have some sort of role, not trustee. I believe that Invesco is asking shareholders to improve Invesco to be the trustee as well. Bloomberg Intelligence estimates that right Now Invesco spends 8 basis points on marketing, which is so much money. Invesco estimates that will be reduced to two to three basis points to start, which translates into something like $150 million in annual revenue that Invesco would unlock with pretty much no incremental spend to get it. So you've seen Invesco shares go absolutely bananas. I mean, it still needs to be approved. The vote is on October 24th, and it's just going to be so hard to get all those people.

[Matt Levine]

I know. I love the difficulty of getting retail investors to it or anything. It comes up occasionally in corporate land, although not that much because corporates usually have mostly institutional shareholders, except unless when they're meme stocks. But yeah, in UTF land, it seems hard.

[Katie Greifeld]

It does seem hard. I think that's interesting. I hope that listeners agree. And please tell me if you don't, the other part of the story that I'll tell you about. The only other unit investment trust of really meaningful size out there is Spy, which is also from the 90s. Born in 1993, such as myself.

[Matt Levine]

Sure. And also famously has. There's like, some other children born around that time who are named in the prospectus.

[Katie Greifeld]

Yeah, exactly. Like all of These really old ETFs have these funky prospectuses.

[Matt Levine]

Yeah. They rule against perpetuity problems where, like, they're trusts and so they can't last past, you know, 75 years, past the life of some living person. And so they name a bunch of babies as, like, the reference lives for their ruling and perpetuities.

[Katie Greifeld]

If you're ever really bored, it's worth poking around in the prospectus of ETFs that were born in the 90s, I hope.

[Matt Levine]

You know, I was going to say I've never been that bored. I'm pretty sure I've looked at the SPY perspective, so I have been that bored.

[Katie Greifeld]

I asked Ana Paglia of State Street Investment Management on Monday whether or not State street was going to try something similar with spy. And she said that filing to us is interesting. We are going to learn from it and never say never. You know, if we learn something that we like from this proxy, we will think about it. Which I heard as if invesco is able to pull this off, maybe we'll do it with spy.

[Matt Levine]

Does SPY have the same economic structure?

[Katie Greifeld]

Yes.

[Matt Levine]

Do they not make money from spy?

[Katie Greifeld]

So some money stays in the door because State street is currently the trustee on spy, but they also have to spend a boatload of money on marketing, as mandated by the prospectus.

[Matt Levine]

Okay, how much do they charge for spy?

[Katie Greifeld]

I think SPY is nine basis points. It's pretty high, I know. Well, they can't lower it that much because they have to give money to their index. They have to give money to the trustee, which is them, and then they have to spend money on marketing.

[Matt Levine]

But the index. I'm aware of S and P funds that charge.

[Katie Greifeld]

That's true.

[Matt Levine]

Two or fewer basis points.

[Katie Greifeld]

Yeah.

[Matt Levine]

The index can't be that expensive.

[Katie Greifeld]

Definitely less so when it comes to the s and P500. Sorry for all the ETF talk, but half of it was Matt's idea. The other half, that was all me.

[Matt Levine]

Please write in and let us know. Please don't.

[Katie Greifeld]

No, I always want to hear. I read every comment, so keep them coming. Please don't hurt my feelings.

[Matt Levine]

Go ahead and hurt my feelings. And that was the Money Stuff Podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.

[Katie Greifeld]

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodloomburg.net Ask us a question and we might answer it on air.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Anda.

[Katie Greifeld]

Our theme music was composed by Blake Maples and Sage Bauman is Bloomberg's head of Podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff podcast. We'll be back next week with more stuff.

[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest story with.

[Karen Moscow]

Context, and that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify, or anywhere you listen.