READ: The Future of Finance

In a special Q&A-style video between VettaFi’s CMO Jon Fee and VettaFi’s Financial Futurist Dave Nadig, the pair dive into answering the question of what the future of finance could resemble. Nadig and Fee cover subjects like market capitalism, the future of ETFs, alternative income, and more.

The Future of Finance

Jon Fee: Dave Nadig, financial futurist for VettaFi. I’ve got questions for you, and here’s why. The future of finance is all the buzz right now. I’m looking down at my notes. It’s the evolution of traditional banks unfolding right before our eyes, the rise of digital payments, the rise of digital currencies, Basil. The future of finance is on the move. I couldn’t wait to catch up with you today. What are you seeing from your vantage point?

Dave Nadig: First, almost everything that you’re talking about, Jon, is really not the future that’s now. That’s the stuff that we know is changing, that we know is going to be different. I tend to think of this as a funnel starting at the top. I think at the top, what I really think the story of the next five years is, is an increasing disconnect between what we see in terms of policy and government, and all these big institutions that we think drive the world and markets where we actually put our investments in.

We talk about things like watching the Fed or worrying about who’s going to get elected. Of course, those things are important, but I think they’re becoming less and less important to our actual investments, and we’re moving towards a world where the market is going to be the institution that is standing, that people have a decent amount of trust in, not individual companies, but the whole process.

Market Capitalism

Market capitalism is going to be what we lean on while we look around the rest of the world. Honestly, a lot of our other big institutions seem pretty shaky. So that’s the funnel we have to start with, and if you’re a financial advisor, that means you have to start having really interesting conversations about your clients, about everything from asset location and whether are you going to buy a house in a different country.

How are you thinking about taxation in which state you’re going to live in? Those are going to become more and more important conversations. I think one way you can think about that is more communities and fewer silos. That’s the upside version of this. The way you solve these institutional problems that we have is actually by focusing on the ones that really work. Really good institutions are when two people have a conversation. That’s an institution of two people, and you build from there.

Jon Fee: I like that. I’m actually just updating my notes. I wrote The Future Is Now based off of your feedback. Dave, hearing you talk about what you’re seeing or what you believe to be seeing, without a crystal ball, five years out from now, it’s almost like this trend of now less globalization, more regionalization, but you’re taking a step further to say it’s almost like within the country, more communities are coming together, those that are aligned by a common cause. It could be a value exchange of solutions or products. On the topic of products, what’s the future of finance for ETFs?

The Future of ETFs

Dave Nadig: In a narrower sense, if you think about where investors are going to be allocating money, I think one of the institutions that’s been really challenged is academic finance. Most of us live in a world where we understand the style boxes, large-cap versus small-cap, and growth versus value.

We have some ideas about how, for instance, bonds should work versus stocks, and we know that those have been really upended in the last year or two. We’re going to start really making hamburgers out of a lot of sacred cows, to borrow an old statement from the ’60s, and things like value, we’re going to really start questioning.

I think things like alternative income are becoming the new value, and we’re going to start seeing academic underpinnings that really lean into the derivatives market and how that’s changed risk.

We are in very different markets than we were even 10 years ago, certainly, than we were 30 years ago, when most academic finance got baked. So I think the kind of product growth we’re seeing right now gets extended and deepened and actually brings academic finance along behind it. So I think that’s the key to it in terms of what’s going to be successful in the market, because there are an awful lot of ETFs out there. You may have noticed there are quite a few thousand of them now.

Jon Fee: Yes.

Rise in Single-Ticker Products

Dave Nadig: I think the greenfield space is what I would call packaged trades and package portfolios. Packaged trades you can think of, like, “You want triple leverage Tesla?” Normally you would just go take out a bunch of margin and buy a lot of Tesla. Now you’ve packaged that trade into a single ticker. We’re going to see more and more of that, whether that’s inverse Jim Cramer or options overlays on a collection of bank stocks. Those are all effective trades you would’ve made that the industry now makes easier.

On the other hand, you can see things like what’s going on in Canada with a huge rise in single-ticker products, the idea that you’re basically buying a one-shot portfolio that’s going to fill whatever need that is. Think of it as target-date funds on steroids outside of your 401(k). Those have been very slow to catch on in the United States. I think that’s going to shift, and retail’s really going to move towards those kinds of products.

Jon Fee: I could certainly see these package trade products taking off for a particular segment. It just smells like convenience to me. Regardless of finance or any other industry, convenience and cost are usually the two aspects that drive success. Dave, thank you for taking the time. I love hearing your thoughts on the future of finance. We’re going to do it again in a couple of weeks. I’ll see you then.

Dave Nadig: See you in the future.

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