ETF Prime: Tom Lydon Talks Pros & Cons of Market Cap Weighted Products

On this week’s episode of ETF Prime, host Nate Geraci is joined by ETF Trends’ CEO Tom Lydon, who explains the pros and cons of an ETF industry dominated by market cap weighted products. Additionally, NYSE’s Douglas Yones discusses several topics, including the key growth drivers behind active ETFs, the prospects for ESG ETFs, and the status of the Bitcoin ETF. Finally, ETF Hearsay’s Henry Jim provides a unique window into ETF product development, from filings to launch.

The top five ETFs by assets under management represent 20% of the total $6.7 trillion assets invested in U.S.-listed ETFs. Those funds are all market cap weighted. Geraci explores the potential investment implications with Lydon and discusses whether there should be any concern.

Over 28 years ago, the first U.S.-listed ETF was a market cap-weighted product: the SPDR S&P 500 ETF Trust (SPY). Much has changed over the years. In fact, one of the last remaining ETF holdouts, notable active manager Capital Group, is now entering the ETF market. This is great news, argues Lydon, and reflects how ETFs have gained steam over time; the state of ETFs has gone from simply tracking indexes to seeing notable manager personalities migrate into the field, including Mr. Wonderful himself, Kevin O’Leary; and Cathie Wood from ARK Invest.

See Also: ETF Prime: Tom Lydon on Record Flows and What to Expect Next 

Moving forward, the aforementioned top five ETFs are SPY, IVV, VTI, VOO, and QQQ, which are all market cap-weighted. “They’ve done exactly what they’re supposed to do,” Lydon notes. “By having a greater allocation to the best-performing stocks as they grow, [these funds’ market cap weighting is]almost a self-fulfilling prophecy.”

Lydon also wonders whether all of this growth will or can continue over the next decade. Knowing that small caps tend to outperform large caps over time, it’s important to diversify, he says, and it’s important that investors consider their risk tolerances, especially when valuations are at these levels.

Later in the show, Geraci is joined by Douglas Yones, Head of Exchange Traded Products at the New York Stock Exchange. As one of the true ambassadors of ETFs (he’s a constant presence at ETF bell ringings at the NYSE), he offers plenty of insight regarding the growth of actively managed ETFs, ESG investing, and the elephant in the room: the Bitcoin ETF.

Lastly, Geraci also speaks with Henry Jim, founder of ETF Hearsay. Jim is prolific in his coverage of ETF filings and launches, and he has been involved in developing over 100 ETFs. He’s worked at State Street, iShares, and J.P. Morgan, among others, and knows how ETFs work, inside and out. Jim outlines how the ETF filing process works, as well as how products are conceived and developed.

Listen to the Entire ETF Prime Episode Featuring Tom Lydon:

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