Another Great Convergence: 7bps, APO, HOOD

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Bloomberg Audio Studios.

Podcasts, radio, news.

I'm at 40% right now.

It was really not great doing television today.

This is great.

We've gotten, I've gotten for months now, emails from listeners being like, Bloomberg's engineers need to do something because your voice isn't audible next to Katie's voice.

And what we've done is the Bloomberg engineers have like tuned down Katie's voice by 10%.

So now we are more compatible.

They've performed surgery on me, actually, and now this is how I sound.

It feels like I ate an ashtray.

I just feel disgusting.

I need more milk.

It's going to be great.

It'll be fine.

Big week, Katie.

10th anniversary of Money Stuff.

Happy birthday.

Happy birthday to the newsletter.

Not the podcast.

The podcast is

still an infant.

Getting on one.

When did we get born?

Like April?

Well,

you seem like you're in a good mood.

It was touch and go to get here today, as you know, because we were both late.

Yeah.

And

we're getting through the week.

This is my last thing that I have to do today, because I'm going to call out sick tomorrow.

Yeah, it seems reasonably.

Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

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

What are we talking about today, Katie?

We're going to talk about Vanguard and seven basis points.

We're going to talk about Apollo, and then we're going to talk about the big game.

The big game.

So, Vanguard, I texted you this week to say while I was on Vanguard.

What should I say about Vanguard?

Because you wrote an article about Vanguard cutting its fees.

You never texted me back because you were on television.

Sure was.

So I never never wrote about Vanguard, but you did.

So tell me about Vanguard.

So the story began on Monday when Vanguard announced that they were putting through their biggest ever fee cut across 87 mutual funds and ETFs.

It brings their average fee on their like $10 trillion of assets down to just seven basis points, which is wild.

These are

wild numbers.

The industry average roughly is 44 basis points.

So that tells you just how low Vanguard is.

And then we wrote a follow-up story, myself and Vildana Heyrich, a couple days later, talking about how this really tightens the screws on everyone else, BlackRock, State Street, Invesco, et cetera.

Because Vanguard has this ownership structure where basically the fund investors own the firm and thus everything they do is just geared towards lowering fees.

Other companies don't operate that way.

BlackRock doesn't operate that way.

And BlackRock actually fell, I believe, by the most since 2022 on Monday alone, both because it was a down market with, you know, the will he won't he on tariffs, but also because of this news, which was interesting.

Yeah.

This is sort of the most intuitive way for an index fund to work, right?

Like it's like you get a bunch of investors, they pool their money, they hand their money to someone to perform the sort of administrative tasks of putting it into all the stocks, and they pay that someone a reasonable fee.

But there's no like outside shareholders.

You don't need to like pay the cost of capital of some giant firm to like just pool your money and put it into an index, right?

So it should be in a world of technology

and you know a world of giant scale for these funds it should be you know kind of free to invest in an index fund and it kind of is well vanguard would be quick to tell you including ceo salim ramji who i also interviewed on ptv on thursday would say that okay you think of us as just this passive index fund company but we're more than that malavine we also have active funds and they care very deeply about their active funds but their active funds are also really really cheap their bond funds in particular their active bond funds charge 10 basis points on average and they have this interesting theory that because their fee is so low their managers don't have to take outsized risks in the active portfolios to like outperform or make up the fee and that that leads to their outperformance over a longer-term horizon that makes sense yeah it's like an old time be like how much work is it to like take my money and invest it in bonds like it's active in the sense that like you're choosing particular particular bonds.

They choose that bond over that bond.

Yeah, but it's like the cost of that should come down over time.

And that shouldn't be, you know, like Vanguard is a mutual, right?

It's like the people in the mutual fund pay the managers and there's no outside ownership to collect another fee.

I don't know.

Yeah.

Makes sense.

What I find interesting about Vanguard, especially right now, so CEO Salim Ramji, he came from BlackRock.

He used to run the iShares line at BlackRock, which is their ETF business.

So he went from BlackRock to Vanguard, which is like, we don't get a lot of like exciting moves like that in the ETF industry all the time.

So that was a big deal.

And

again, like BlackRock and everyone else has to operate in this universe that Vanguard has created where Vanguard is just lowering fees, lowering fees, lowering fees, and everyone else has to respond, even though, you know, they actually do have to worry about their margins and their external shareholders.

But in tweeting about this story, I got a few tweets back to the effect of, you know, maybe they should actually stop stop focusing on lower fees and like focus more on putting this money back into the business and making the customer experience better.

That's fair.

Because I'm like, oh, you just put your money in your own.

But like, in fact, it is a corporation that has to do things like

maintain a website.

Yeah, exactly.

Have customer service.

And like, yeah.

One of the responses I got was from a woman theoretically who says that she's a financial planner who I didn't verify her profile or anything, but she said, I wish they would have cut their fees a little less and and instead invested in their customer-facing IT and user experience, which is often disjointed and confusing to consumers relative to the competition, which I find kind of funny.

Okay, your fees are seven basis points, you're paying next to nothing, and you have this like small subset of people saying, no, please stop lowering fees.

Like put this into improving my experience as your client.

Yeah, that seems pretty reasonable, man.

I would frequently pay more for better experiences.

And there are a lot of people in the financial industry who get very sad at the idea that the only criterion is like lowest fees.

And you worry, one, about customer experience being sacrificed, but then people sometimes worry about performance being sacrificed too, although the evidence for the higher fee managers having better performance isn't great.

The other thing I'll say is like, you're talking about BlackRock.

It seems to me that the move in asset management is like there's this kind of barbell strategy of,

you know, there's

index-y public stuff that tends to zero fees, and there's hot new private credit where you can charge all sorts of fees, right?

And so you look at Blackboard getting into private credit in a big way because like the fees on that are just a lot higher.

Blueberg's Laura Benitez had an article this week about Pimco

not really getting into private credit.

And like one thing there is like you have a lot of competition and margin compression on liquid fixed income, which is the vanguard, like I took fixed room where like, Pimco's bread and butter is like

running bond mutual funds.

And that's a tough business because people want low fees and you get low fees in index funds.

And people want the hot new thing, which is private credit, and you can get high fees there.

But just running an active bond fund is tough.

Yeah.

What an interesting way to think about barbelling by fees rather than like risk, which I guess correspond to each other.

But I mean, like, there are a lot of contexts where you can make a barbelly decision, right?

And like, here it's like your product offerings, like

there's a lot of demand for index.

There's a lot of demand for alts and private.

And like the middle is getting kind of hollowed out.

And it's been a tough time for like active mutual fund managers for a long time.

Yeah.

I mean, you're seeing that in the ETF world too, which you can't offer private yet.

I know, but I was going to say, like, the other thing is like your article with Vildana, like you talk about like in the ETF world, like there are people who don't want to compete with

the giants by cutting fees to zero.

And so they're like, ooh, here's a weird product where you can charge charge much higher fees.

And like, we're certainly seeing and talking about a lot of that, like, the weird productized ETFs.

Yeah, exactly.

I mean, you think about all the silly single-stock, super-leveraged ETFs that are out there, all the derivatives-based ETFs.

Really interesting phenomenon occurred actually in 2024 where the average fee on new ETFs coming to the market was ticking higher.

So

the new launches were expensive because the feeling among issuers is like, I'm not going to compete in the core.

So I got to launch the silly stuff and I can charge more for it.

Yeah, and the core is already there.

You can get index funds.

Now you need the silly stuff.

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Shall we sail along?

So

Apollo is launching, thinking about starting a private credit trading desk.

They are having conversations that have been highly constructive at the highest levels about this.

That's how I wrote about this.

I wrote, I don't really know what private credit is.

You and me both, man.

You know, and I get answers.

Like, a bunch of people emailed to say basically something like, if it's a registered public bond, it's public credit.

And if it's not that, then it's private credit, which is not right.

It's not how people use the term, right?

Like, people talk about syndicated bank loans and like loans that are bought by CLOs

not private credit, right?

Like that's something else.

People don't really say public credit, but it's something else.

Private credit is distinct from deals done by banks, right?

Private credit is asset managers doing direct lending.

And in the past, I would have followed that by saying that they hold to maturity on their balance sheet.

But everyone kind of knew that would not last forever, right?

Like eventually, if you have...

potentially trillions of dollars in an asset class, like people are going to trade it.

And Apollo is launching a trading desk or talking about launching a trading desk.

I feel like we've been talking about Apollo's trading desk for a while because we first started having this conversation, especially around when they filed for an ETF with State Street.

Yeah, right.

Let me take that back.

It's not that they're launching a trading desk.

It's that they're having conversations that are constructive about highly constructive

at the highest levels.

About like a venue, about like a marketplace, where it's not just they'll have a trading desk, but

there'll be a bunch of trading desks and they'll trade with each other and there'll be a pricing service and some sort of electronic platform for people to meet and trade private credit.

Because the trading desk that they were doing, that they're planning in connection with the ETF was like, to do a private credit ETF, you need your assets to be liquid.

And the way you get liquidity is by Apollo saying, we'll buy the assets, right?

And so like that trading desk was a sort of like facing a single customer, which is the ETF.

But then obviously, you know, if you have that, you're going to look for other places to trade with.

But here it's like, we want an all-to-all open venue for people people who want to trade private credit because like, obviously that's coming, right?

Like obviously, you know, you have enough private credit funds, they're going to want to start trading.

And so that's what they're putting on.

I'm trying to think about how to think about this.

And you say marketplace for bond trading, and I think of like a market access or a trade web.

Sure.

Are they just trying to build that, but for private credit?

Something like that.

You're so young, you think of market access or trade web.

I mean, it used to be like, you know, a dozen dealers with telephones, right?

Well, that is, that just sounds fake.

Yeah.

Or like a dozen dealers with Bloombergs, right?

And I think, right, when DePaulo talks about, you know, they're like to partner with banks, exchanges, and fintech firms.

Like, exchanges and fintech firms suggest there is like an electronic marketplace.

But yeah, like there's not that for private credit because it doesn't really trade and it doesn't have the electronic identifiers, right?

It's like you sign a contract, right?

So you have to like do some like technological processes to make it tradable easily.

But you know, it's not that hard.

And they're going to do those processes.

The other thing that I was thinking about in terms of how to think about this is like, I've used the word banks to describe the Goldman Sachs' of the world that like originate bond deals and then have bond trading desks.

But it used to be that

that business was done mostly by non-banks, like Goldman Sachs, right?

Which became a bank holding company in 2008.

And it used to be that there was this world of investment banks that used their own capital to trade securities and that also originated originated and like underwrote bond deals, committed their own capital, but basically sold it onto other people.

And like those were non-banks.

They were investment banks and they were big and had a big market niche.

And then over time, like, you know, the rules were relaxed in the U.S.

to allow banks to own them.

And then in 2008, the big independent investment banks kind of got acquired or became bank holding companies.

But like, this used to be a non-bank business.

And you look at these big alternative managers and like to some extent they are like recreating what the big investment banks used to be, right?

Like you look at like Apollo, like Apollo, KKR, Blackstone, like their DNA is like their LBO shops, right?

Yeah.

But like the thing that they're doing now is we're going to originate loans or you originate, you know, debt deals, and we're going to run a trading desk for people to trade.

debt deals, right?

They're kind of like moving into the business that like Goldman Sachs was doing 30 years ago before it became a bank.

And they have some advantages in doing that business now, like largely in terms of just like being less regulated

and also in terms of like being the cool place to go work if you want to work in finance.

And so you can kind of get a lot of talent that banks have a harder time competing for now.

Yeah.

But a lot of this is like the sort of traditional business of the investment bank has become hard to do because the investment banks are all banks now and they're all pretty highly regulated.

And so like the big alternative advantages are kind of stepping in to do kinds of business that banks used to do.

So does that give you any blueprint about where this expands to?

I mean, you have all these lofty projections right now of like private credit being $30, $40 trillion.

If they're sort of like following the blueprint of, you know, what these big investment banks used to be, like, how does this end?

I mean, how much credit is there in the world?

Like, you know, like there is this long-term push against banks doing a lot of credit on their balance sheet, right?

Like this long-term push to like a little bit narrower banking where like the risk of lending is taken by

equity finance investment funds and

the big private credit managers are kind of well set up for that.

And there's a lot of like

you know the sort of like stereotypical private credit deal is like direct lending to finance an LBO, but like all of these big managers are getting into

structured investment grade stuff.

You know, a lot of them are getting into like

consumer loans and like eventually like, why wouldn't these like quote unquote private credit firms be like you know holding most of the mortgages or whatever like I don't know is there a real possibility that like this is like you talk about like BlackRock kind of trying to have

higher fees by you know

diversifying its index funds with like private credit right like you could see the the kind of the reverse happening in private credit where like you start with like very risky expensive direct LBO loans and you end up doing like consumer credit for tighter spreads because you want to become like a financial supermarket, right?

Like that's a possible outcome.

Yeah, I look forward to that future.

And something I was thinking about, I mean, there has been several articles this week that have talked about this grand convergence between private and public, which has been going on for a while now as a narrative.

But I mean, when you think about that convergence, is it just the private debt markets becoming more public?

Are the public debt markets going to take on any characteristics of what happens in the shadows?

Or is this just private becoming more public?

I think it's mostly mostly private becoming more public, but like one way of private becoming more public is ETFs, right?

Like if there's like liquid trading, then there will be private credit ETFs, just as there are like, you know, loan ETFs, which like you know, bank loans used to not trade.

Yeah.

Bank loans used to be not a product that you could buy in your retail account.

And now like there's loan ETFs.

There'll be private credit ETFs if like this gets off the ground and there's a lot of trading, which I'm sure there eventually will be.

This being Apollo's being someone's private credit trading venue, right?

Yeah.

Being like just private credit trading, right?

I spent like three years, maybe more, writing most days the phrase, people are worried about bond market liquidity.

Because people were worried about bond market liquidity.

And the story was something like there are all these like bond mutual funds, but like really bond ETFs people were worried about.

And these ETFs are so liquid, and you can just trade them on the stock exchange anytime you want.

And if like people all want their money back at the same time, these ETFs will have effective redemptions and they'll they'll have to sell, or someone will have to sell all these bonds.

And the bonds are not as liquid as the ETFs.

No.

And so it's a disaster waiting to happen.

And the disaster never really happened.

I made fun of this for a long time.

There are those who would argue that.

This is like real 2020 stuff, you know?

I want to say it was earlier.

I don't know.

Yeah,

2020 is when it came to a head because of like, was when the theory was tested, but people were worrying about it for years before that.

So I'm just really excited for like the first 17 times I can write, people are worried about private credit liquidity because it's just going to happen again, right?

Like there will be some trading and then there will be ETFs and like the trading and private credit markets will not be as liquid as the ETFs and then people are like, oh, what happens if and it'll

talk about illiquidity doom loops.

It'll be great.

It'll be great.

And like the best part of this is that

and I want to say Tracy Halloween was who pointed this out to me, but our Bloomberg colleague, but in like the 60s,

people had this exact worry.

about equity mutual funds, right?

It was like...

How coined?

Yeah.

It was like, oh, these mutual funds, like if they all get redemptions at once, like, they'll have to sell the stocks.

There's not enough liquidity for that.

And then, like, you know, they performed relatively well and like people just forgot about that.

And also, stocks are very liquid, but it's going to keep going, keep moving up the capital structure to private credit.

God, history just repeats itself.

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So are you excited for the pro football championship?

I am looking forward to

the professional football game to be played this weekend between the Philadelphia Squadron and the Kansas City 11.

Wouldn't it be really cool if you could perhaps bet on that on the place where you also trade stocks?

Alas.

Doesn't that seem like a day it looked like it might happen.

One beautiful shining day in the sun.

Yeah, Robinhood Launch.

I love Robinhood.

They just like they shoot their shot.

They do employ lawyers.

Good lawyers.

But like they keep, years ago, they launched the thing called Robinhood Checking and Savings, but but they're like, it's a bank account.

And then like bank examiners are like, it's not a bank account.

You're not a bank.

And they pulled it within like 24 hours.

It was so embarrassing.

And so fun to write about.

But yeah, they launched events contracts.

Yes.

They launched an events contract on the big game.

You can't say super bold because then you get in trouble.

You should pronounce it like Hunter Brook.

They launched contracts on the big game where you could bet on Philadelphia or Kansas City, not the Eagles or the Chiefs.

No.

Philadelphia or Kansas City.

And they said

they called it an emerging asset class, like event contracts, in their announcement, which is now deleted from their website.

But they didn't launch football betting.

They launched the event contracts where you could buy a contract that pays off a dollar if Philadelphia wins the Pro Football Championship, pays off $0 if Kansas City wins, or you could buy the other contract that pays off if Kansas City wins.

And that is a football bet, but they don't call it that because it's like there's this weird gray area where you can launch commodities futures.

And commodities commodities futures used to be like futures on soybeans.

And then people are like, we can have financial commodities futures that are like bets on what the 10-year interest rate will be.

And then people are like, well, if you can do that, what about bets on whether the Eagles will win the Super Bowl?

And the line between like a financial futures contract and an events contract is a little blurry.

And there's a lot of interest in events contracts.

And so the CFTC, the Commodity Futures Trading Commission, which regulates commodity futures, has has like put out rules that are like proposed rules that haven't been finalized and probably won't be saying like certain things are not okay.

And those things include elections.

They've like lost on that one.

Like elections are now fair game.

Assassinations.

Oh, you know.

Timely.

Timely.

Timely.

We had several assassination attempts on President Trump.

Yeah, we also, like, in fact, I think Calci, one of the prediction markets, briefly listed contracts on what would happen to Luigi, like whether Luigi and Mangiani would leave, which is like kind of an assassination contract.

It's not like it's related to assassination.

But anyway, another thing that's excluded is sports betting, because like, obviously, like sports betting is something else.

Gambling is now, you know, largely legalized in the U.S.

You can like bet on sports on your sportsbook app.

But is a sports bet a financial futures that is allowed on your burger job?

Apparently not, because Robin Hood launched it and pulled it 24 hours later because the CFTC CFTC told them to knock it off.

And they were very aggrieved about it, they said.

We were in regular contact with the CFTC prior to launching this product, and we believe we are in full compliance with all applicable regulations.

But nonetheless, they pulled it.

Well, who knows where this will go?

I'm pretty sure it will go to not being able to bet on the big game this weekend.

This big game, this particular weekend.

Yeah, next year.

Yeah.

Well, reading our Bloomberg news coverage, apparently Robin Hood said it will continue to collaborate with the CFTC as it works on unveiling a more comprehensive events contract platform later this year.

So their ambition is unscathed.

Right.

I mean, the whole trend is in the direction of like free, lightly regulated events contract platforms.

And like, it's just weird to have an events contract platform that doesn't feature sports, right?

Because that's like the main event people want to bet on.

Yeah.

Yeah.

The CFTC also wanted to exclude like betting on the Oscars.

Like, what's that?

Why not?

I'm not going to be able to manipulate the Oscars.

Right.

I mean,

I don't really know why.

Like, why they would be against it?

Yeah.

Like, part of it is like, when you think about like soybean futures, they're for like farmers to hedge their risk and for like soy sauce producers to hedge their risk, right?

Like you have natural counterparties on either side who are like doing real economic activity and are hedging that or like raising money to do it.

Like there's some like underlying economic activity for all the like financial betting, right?

And so you can be like, oh, this commodities exchange is just like evil speculators betting.

And they can be like, no, no, no, it's like supporting real economic activity.

And then betting is just betting, right?

Like no one really thinks, maybe I'm wrong, but I've never heard anyone being like, oh yeah, sports betting is like building wealth, right?

People sometimes say it, but it's like

an emerging asset class.

It's a very cynical thing to say.

Yeah, come on.

It's not an asset class.

The stock market goes up over time, not because of magic.

It goes up over time because it's like an investment in economic activity.

And like the economy grows with technological process and demographic growth.

The size of the sports betting market does go up over time, but the outcome of the Eagles game doesn't go up over time, right?

It's like you bet and some people win and some people lose.

And

that's it.

And most people lose, right?

And it's like negative sum game for the betters.

And if I were a financial markets regulator,

I would be like, look, I'll approve a lot of stuff that is pretty tangentially related to real economic activity.

I understand that like the speculation begets liquidity, that like a lot of complicated products are useful in hedging.

You want to trade zero-day options on meme stocks.

Like fine, like that's really loosely related to real financial activity, but like it's all in a continuum.

But then it's like sports betting is like there's nothing.

This is embarrassing to a financial regulator.

Now, I think we're probably entering an era of like unembarrassable financial regulators.

And so, yeah, like whatever.

You can definitely buy futures contracts on the Super Bowl.

But like, I just think that turning over the financial markets purely purely to gambling is kind of a scary step, right?

Yeah.

But it's like you can understand why, right?

Because you look at like the work of a sports book and the work of like a high-frequency equity trading shop is like very similar, right?

It's like similar techniques, it's similar skills, it's like similar risks.

Like you're really doing the same kind of work and there is a lot of movement between people who are market makers for stocks and people who are bookmakers for sports.

And then on like the retail side, like you look at like there's so much stuff in like retail stock markets.

There's a Bloomberg article this week about people betting on sports and people who bet thousands of dollars a weekend on football.

And a lot of what they say is it's a social thing.

It's like I'm texting with my friends and getting our bets in and like it's my way to keep up with my college buddies or whatever.

And you see that in like, you know, the meme stock phenomenon too, where it's like a very social phenomenon.

And it's like gives people like a sense of fun and a sense of identity.

It's not just like we expect these stocks to go up.

There's like some more social media.

It's like very community-based.

Yeah.

And it's just that like one of them is financial markets and one of them is gambling.

But there's an obvious convergence socially.

And so

it is a little weird for the regulators to say, no, Robinhood, you can offer some kinds of fun gambling, but not other kinds of fun gambling.

And eventually, I think that will erode.

Yeah, another great convergence.

Indeed.

In those shining 24 hours where you could do this on Robinhood, apparently it had been rolled out to 1% of their customers.

So Robinhood said it will give those investors the option to close their positions or take them to resolution.

It would be fun to talk to some of those folks who are caught in this limbo.

Are they good to take it to resolution?

Yeah.

I guess because they're pretty cool.

Yeah.

Okay.

All right.

Everything hurts.

And that was the Money Stuff Podcast.

I'm Matt Levy.

And I'm Katie Greifel.

You can find my work by subscribing to the Money Stuff newsletter on bloomberg.com.

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

Eastern.

We'd love to hear from you.

You can send an email to moneypot at bloomberg.net.

Ask us a question and we might answer it on air.

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.

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

Our theme music was composed by Blake Maples.

Brendan Francis Newnham is our executive producer.

And Sage Bauman is Bloomberg's head of podcasts.

Thanks for listening to the Money Stuff Podcast.

We'll be back next week with more stuff.

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