The Next ETF

I had two conversations this week with some Wall Street insiders and a light bulb has been sparked within me.

There is about to be a massive shift in the financial industry that's about to render ETFs completely redundant in the next 10 years. And only a small group of people are talking about it, and it's about to become a mainstream story in financial media in the coming years.

Before I explain the opportunity here, I need to back up and walk you through what's about to happen.

Wall Street completely reinvents how it packages investments about once every 30 years.

Every time this has happened, the people who see it early have made fortunes.

Before the Great Depression, there were investment trusts. People put their money into these vehicles, but this was before the SEC even existed. There were no disclosure rules, audits, or regulations of any kind. You handed your money to a black box and hoped for the best. Unsurprisingly, most of them blew up in 1929 and took the entire country's savings with them.

Out of the wreckage came the Investment Company Act of 1940 and with it, the modern mutual fund. These were regulated, transparent, required to disclose holdings and to be priced once a day. Mutual funds went on to accumulate trillions of dollars and became the backbone of the American retirement system.

Pension funds scaled alongside them. Hedge funds emerged with the pitch that they could generate returns uncorrelated with the broader market. Each innovation layered on top of the last, packaging the same underlying assets in new ways to solve new problems.

Then in 1993, State Street launched SPY, the first exchange-traded fund. It held the same stocks as an S&P 500 mutual fund. But instead of pricing once a day and requiring you to call your broker to place an order, it traded on the stock exchange in real time like a single stock.

It took a while to catch on. But once it did, the ETF market exploded. There are now more ETFs listed in the US than there are stocks in the market. Asset managers have sliced and diced every conceivable theme, sector, strategy, and geography into ETF wrappers.

ETFs are on track to overtake mutual funds in total assets within the next two years.

Why?

• Because they're open.

• They trade on the market.

• They're tax efficient.

• And they're an incredibly effective way to get exposure to a basket of investments for a low cost.

The ETF was simply a better wrapper than the mutual fund for most investors, and better wrappers win.

Now here's where this is going.

I had two conversations this past week that completely changed how I think about the next phase of this evolution.

The first was with an older gentleman who started his career in the 1960s as a runner boy, physically delivering paper records between offices on Wall Street. He's now managing a fixed income fund with $30 billion in assets. He created one of the world's first fixed income ETFs in 1996 way before ETFs were popular. He's seen every single packaging innovation in the last 60 years, from paper to electronic, from trusts to mutual funds to ETFs, first-hand.

And he told me there's a new one coming. It's not a new type of ETF, not a new fund structure, but something fundamentally different.

A token.

My second conversation was with the head of Franklin Templeton's crypto division. Franklin Templeton manages $1.7 trillion. They launched the first tokenized fund on a public blockchain in 2021, years before BlackRock or anyone else. They've been running it for five years now.

He explained it to me in a way that finally made it click.

An ETF is a wrapper. It holds stocks, bonds, or other assets inside a legal structure, and you buy and sell units of that wrapper on an exchange during market hours. The wrapper is a financial product governed by rules, prospectuses, and service providers.

A token is also a wrapper. It holds the same assets. But instead of being a financial product, it's a piece of code.

When he first asked me which I'd prefer to hold, an ETF or a token, I said the ETF. Because at that point I still didn't understand why code was better than a product.

Then he said something that flipped it for me. The token is the ETF, but improved. You trade it 24/7, not just during market hours. It settles instantly, not in one or two days. You can use it as collateral in other transactions without moving it to a different custodian. You can program it to do anything.

That last part is what matters. Because an ETF is a fund. It follows fixed rules written into a prospectus by lawyers. If you want to change how it works, you file paperwork with the SEC and wait.

A token is code. If you want it to automatically rebalance at a specific threshold, you program it. If you want it to distribute dividends the instant they're received rather than on a quarterly schedule, you program it. If you want it to restrict who can hold it based on jurisdiction and compliance requirements, you program it. If you want it to be used as collateral on one platform and simultaneously earn yield on another, you program it.

The ETF was the mutual fund but improved. The token is the ETF but improved. Same underlying assets. Better wrapper. And better wrappers always win.

The DTCC just went live with its tokenization service, and JPMorgan tokenized the QQQ and SPY in the first day.

Every 30 years, the packaging changes. Trusts in the 1920s. Mutual funds in the 1940s. ETFs in the 1990s. Tokens in the 2020s. Each generation was a better wrapper for the same underlying assets. Each generation was dismissed as unnecessary until it wasn't.

I've been covering this shift all year. The companies building the infrastructure for tokenized funds, the settlement layer, the custody, the transfer agents, are where I'm putting my money.

Because whoever builds the infrastructure for the next wrapper is the next State Street, the next BlackRock, the next Vanguard.

If you want to know which companies those are and regular updates to the biggest opportunities in this mega-trend that's only just forming, I cover all of them in the Tokenization Report.

I'm running a big discount for just this weekend. An annual plan is $795, down from $1,995. And for each dollar you spend, you get a matching store credit that you can use on any All Star Charts memberships.

In other words, with the purchase of a $795 annual plan, you'll get $795 of store credits you can put towards any other All Star Charts services.

If you want to follow the story you're not being told about tokenization, this is a perfect place to do it.

Cheers!