Harold Bradley, a long-time investment manager and chief investment officer, joins Julia La Roche on episode 77 to discuss why Exchange Traded Funds (ETFs) have distorted the role of equities markets in capital formation while posing systemic risks.
Bradley has broad and deep experience in mutual funds, foundations and endowments, exchanges, and private equity partnerships, including venture capital and hedge funds. His experience also encompasses investments in farmland, metals and mining, futures and options, and a track record of successful engagement with venture-backed technology and FinTech companies, including W.R. Hambrecht's OpenIPO, Euronet Worldwide, StarMine Corp (sold to Reuters) and Archipelago, LLC (IPO).
In 1982, Bradley introduced first of a kind cash-settled stock index futures contract in the Value Line Composite Index while at the Kansas City Board Trade before purchasing a membership and trading for five years on the floor. In 1988, he was hired at Twentieth Century, now American Century, as the first equity trader, and built a globally recognized trading operation over the next ten years. He was the lead portfolio manager of small-cap growth funds from 2003 to 2007. He was later appointed Chief Investment Officer of aggressive growth strategies before being named President of American Century Ventures in 1999, which invested $63 million in businesses likely to disrupt the mutual fund industry. From 2003 to 2007, he managed American Century Tomorrow and a team of software engineers and developers who used artificial intelligence, fuzzy logic, inference engines, and pattern recognition to develop manager compliance systems and quantitative investment strategies for American Century growth mutual funds managing $10B. The American Century trading desk received global recognition as an innovator of electronic trading techniques and protocols, including the Financial Information Exchange (FIX) Protocol steering committee that created open source standards for order, trade and settlement instructions between investment firms, brokers and exchanges in global equities and foreign exchange trading.
Throughout his career, Bradley delivered Congressional testimony on stock market regulation, electronic trading, soft dollars, decimalization of stock prices, and ETFs. As Chief Investment Officer of the Kauffman Foundation from 2007 to 2012, he co-authored a vital research paper with Robert Litan highlighting risks to market stability from lax regulation of ETFs. He also co-authored widely-cited papers on subpar venture capital fund returns, with recommended best practices. He's been interviewed by CNBC, Wall Street Journal, New York Times, and others.
Read Harold Bradley's October 2011 testimony on ETFs here: https://www.etf.com/docs/Bradley_Testimony_10-19-11_SII.pdf
0:00 Open
1:21 Harold Bradley
2:15 Accidental investor
3:00 Agricultural commodities reporter
5:43 A major structural shift
6:45 Pace of change
7:50 Wheat pit to stocks
10:29 1987 crash
13:04 Black Monday blamed on portfolio insurance. ETFs 'a form of portfolio insurance'
13:45 20 Building trading operation
16:30 Electronic trading
21:15 Fees
22:40 Flawed system was a bug, not a feature
23:01 Soft dollars
28:59 Testified before Congress six times
30:10 Risk in ETFs
32:00 Drawback to mutual funds
35:12 Why did ETFs start
38:22 Decimalization
40:30 How D.C. works
43:00 ETFs are presented as a passive investment, but they're not
48:30 KRE
53:29 ETFs have instant liquidity, but the component securities within an ETF aren't immediately liquid
57:00 Gold/silver ETFs
1:00:45 Margin lending
1:03:18 How are ETFs distorting markets and the systemic risk they pose
1:06:00 Undermining price discovery
1:10:38 Bubbles
1:11:50 AI next ETF craze
1:13:00 Punishing good management
1:17:00 Investing today
1:20:00 Investing challenges
1:22:54 Why market won't go down?
1:27:00 Fragile markets
1:28:00 ETF risk likely won't go away
1:34:00 Markets today
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#196 Brent Johnson, Creator of The Dollar Milkshake Theory, Explains How The Global Economy Is 'One Big Carry Trade'
#195 Chris Whalen On Why The Fed Is Afraid To Really Fight Inflation
#194 Dr. Art Laffer: If Trump Wins And Follows The Economic Policies Of His First Term We Could See A Renaissance In America
#193 'The Bulls Are No Longer In Charge' — Tom McClellan On What The Market Is Signaling Right Now
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#191 Ted Oakley On Deep Market Selloffs: 'If You Don't Have Any Liquidity, It's Not An Opportunity For You'
#190 Brian Wesbury: 'The Morphine Is Wearing Off' And We're Headed For Recession And A Market Correction
#189 Rick Rule On Paying Attention To The Warning Signs In The Economy And Insuring Against Collective Stupidity
#188 Chris Whalen On The Difficult Economic Environment Ahead
#187 Michael Pento: A Triumvirate Of Bubbles Is Creating A Dangerous Situation For Markets And The Economy
#186 David Woo, Economist Who Nailed 2016 And 2020 Election Outcomes, Explains Why The Market Has The Trump Trades Wrong
#185 Jim Rickards: We're Probably Already In A Civil War
#184 Professor Steve Hanke, Who Nailed The 9% Inflation Call, Sees It Falling To 2.5%-3% By Year-End And A Recession On The Way
#183 Neil Howe On The Fourth Turning, Tribalization of America, And The Attempted Assassination of Former President Trump
#182 Tyler Cowen On Why We Might Get Lucky And AI Can Solve Out Debt Situation
#181 Chris Whalen On Why The Fed Is Worried About A Recession Next Year
#180 Andrew Wilkinson On Going From A Barista To A Billionaire, Building Tiny 'The Berkshire Hathaway' Of Tech, And Life Lessons From Warren Buffett, Charlie Munger, And Bill Ackman
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