ETFs vs. hedge funds: How derivatives could change market dynamics

Dave Nadig, chief investment officer and director of research at ETF Trends, and Paul Kim, CEO and co-founder of Simplify ETFs, break down how more derivative inclusion impacts the ETF industry. With CNBC’s Bob Pisani. For access to live and exclusive video from CNBC subscribe to CNBC PRO:

There was a change in the regulatory environment last year to 40 act funds that i don’t want to get too far in the weeds in this but essentially it allowed etfs to do a lot more in the derivative space and i i take it you’re one of the firms that are were taking advantage of that idea which i think is a good one is there uh any evidence that this is significantly

Becoming a a big business using derivatives to i’m intrigued by the ability to extract because i think you characterize this very well this is a play on people trying to get a little more uh money for their for their interest uh and not so much a play necessarily on volatility so i think it’s not what it necessarily looks like so i think it’s less about what

Flows have consequently come from that change but i think it’s more what is in the realm of possibility now that you’ve opened up sort of the last sort of hurdles that differentiated an etf vehicle from other vehicles right sort of the hedge fund vehicle itself took advantage of greater flexibility to use leverage and use derivatives and be more flexible and

Nimble now the etf continues to democratize first from vanilla equities to fixed income to commodities now we suggest the hedge fund world is going to be democratized by the etf and this is your spyc is 25 basis points it’s 25 plus the three percent uh three bips from ivv so 28 total yeah your thoughts on this overall yeah i think this is actually some of the most

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Interesting things that going on in the etf industry right now i think most of the interesting product innovation is using multiple asset classes to generate new patterns of return we don’t need more vanilla equity funds we don’t need more vanilla bond funds we do need better solutions for people trying to solve real problems like generating income yeah i don’t

Know how i mean i think this is a very interesting way to look at the whole issue because the number one question i get is how do i get more income in a safer way i i have a friend who just sold his restaurant business the physical building he collected 1.2 million dollars literally he had a check he showed it to me for 1.2 million and he said now i want you

To tell me what do i do can you give me some stocks to invest in what that has i hope i hope you ran screaming yes i don’t do investments yes yes not advisor friend but he really wanted to know he said i want to i’m interested in you know dividend aristocrats you know give me something that’s two percent that’s growing i don’t want to have exxon at six percent

That it may be dividend may be in trouble just give me something two percent and growing i said well you know you look it up you know go go to the dividend aristocrats right s p you’re only johnson and johnson and stuff like that right but even there people are worried about valuations because this does feel like i mean honestly you and i were there this feels a


Lot like 1999 2000 to me right these valuations seem very high we have a lot of noise in the system people are worried about that so just buying dividends may not cut it yeah except the this time it’s it’s not i don’t see a lot of pet stocks well that’s the nfl there is stuff that that still is not making money that’s still on the horizon but it doesn’t

Feel exactly yeah and this time you can’t run to the bond market because the interest rate starting right place is very different yeah you’re not going to go there where were we in in 1999 what was the four and a half yeah that sounds right yeah so it’s a very different it’s a very different calculus there you

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ETFs vs. hedge funds: How derivatives could change market dynamics By CNBC Television