scarlet: i'm scarlet fu. this is "bloomberg etf iq." the access, risks, and rewards offered by exchange traded funds. ♪ scarlet: shutting off taxes. how vanguard uses ftse trees in etf to escape in its usual fronts. what this may mean for smaller issuers. the changing face of active. we speak with a representative of oppenheimer funds talking about active and has of debate. the final frontier. we export the missions of ufo, a

new etf that offers investors a ride into space. whether you embrace or reject etfs, there's no getting around their influence. balchunas, how are etf investors is handling the first big rough patch of 2019? eric: this will be interesting. our first down day on tuesday. the market was down. beene been saying this has a lot like 2017, the dystopian setting. even 2016 had a few down days. likehad dozens of days this. if you look at outflows, it's what i expected. there's a variety of asset classes, large-cap, tech, junk bonds, small caps. they have two things in common. they are risk on etfs. they are super liquid used by traders. atally they freak out everything. let's look at how. these are going into etfs long-term. i want to see isa, a court etf

chief. they took in $300 million yesterday. that's a good sign. allocators do what they do. let's also look at the new school fear gauge, dollar volume. it really indicates how big the freak out was. you can see it's about double average. orhere near last october february. it is about half of that. of thoseefinitely one days. it tends to be trade talks create minor freak out's, but the fed and rates create the major ones. scarlet: you hit a lot of the drivers. let's bring in phil bok, along with any nasa. let's start with you. the latest freak out really shattered the market's calm. which of the three pillars of the rally have we seen?

fed pause, china stimulus, or trade truce, they all have potential to change it. >> the trade war is interesting. it has the potential to be resolved quickly. there is no question that the economy is strong right now. has the market run ahead of the economy? everyone wants to sell on the highs. in q4, it does not take a lot to shake a leaf on a short-term basis to shake confidence. scarlet: there's a lot of nervousness. we also knew the cannot last forever. the benefits from this hiccup in pricing's? >> there are two groups that benefit from volatility in general. that's market makers and exchanges. for increase opportunities trade is great for market makers, as well as transactions happening. >> speaking of winners, a lot of people think when the trade talks wrap up, it's good for smaller companies, they get

revenue domestically. you have our brs, reverse half weighted s&p's. talk about how this will interact with the trade situation. >> there is no question that when you talk about a trade war, you're talking about companies that will be most impact and derive the most amount of revenue from overseas and the affected. if you slide down to mid-cap or small cap, if you want to talk about within large-cap, you get away from some of those companies. some of those same companies people are over allocated to have a tremendous amount of expectation. their ability to penetrate the chinese market in particular. we are skeptical about their ability to do so, apple in particular. we are: another thing paying attention to is the ipo's. uber coming into market. you have other consumer facing companies, airbnb, all coming to market later this year. eric: you have this consumer satisfaction etf.

would any of these companies make it into it? how soon can ipo get into this etf? >> there are criteria for stocks .o be included into an etf they have to reach minimum trading and minimum volume thresholds to be eligible to be included. for us to be able to use a stock, it has to trade about 30 days. customer satisfaction is a use that we feel is not priced into the market. when the market price reaches equilibrium, we think we can use it to our advantage. with ipo, it is less effective. there is more volatility and they are settling down on what it is. scarlet: there is still pent-up demand. you cowrote a big story this month about how vanguard uses etf's to limit taxes for its mutual fund investors. they patented their strategy, as well. worked on story i with zach snyder and our database team looking at ,anguard's mutual fund and etf

and how he uses the etf reduce capital gains in its mutual fund. share class of the mutual fund. it is something vanguard patented in the early 2000's. some of the tax advantages etf can realize using heartbeat trades actually apply to the mutual funds, as well because of this connection. it has been a huge win for the investors and man guards -- vanguard's mutual fund to have these advantages in capital gains taxes. this patent will expire in a couple of years. the question is whether other issuers may want to copy that strategy, as well. eric: i have heard 2 sides of this. if someone says you have to pull money out of the click, it will be bad. then the side says i love this, it would be not to do. where do you fall? >> it is brilliant.

not -- it makes the mutual fund investors more tax friendly and the investors more friendly. when it expires, we may see multiple launches of etf share classes so they can take the tax benefit and translate it into their mutual fund. it would be great if we can all be afforded patents on our ideas. scarlet: there's a lot of concern vanguard and big issuers enjoy these unfair advantages. at least the smaller issuers, like exponential behind. what do you think about that? is there an uneven playing field? coming, we have better funds and technology. if you look at the innovation, it is with startups and smaller boutique companies. the industry,over whether it's no transaction fees, wire houses, minimum asset levels being used as a bogey for liquidity when in fact it is not a good measure of liquidity.

looking at the liquidity of the etf and accessible liquidity of the underlying estimates, we are looking at the liquidity of the fund itself. how much are you spending on distribution? we have a regulatory framework saying let's get away from cost benefit and look at costs only. there is liability in a higher cost fund, even if you think it is better for your investor. the safer move is to buy the cheaper fund. a lot of winds blowing in one direction. it is a concern. where is our mario cavalli? when you look at the innovation and what we have, the best capital market structure in the entire world. i'm worried we are at a precipice where it is being discouraged and corporations are coming in and eating that innovation. scarlet: thank you so much. have alessio of oppenheimer funds with the embodiment of the changing face in action. he joins us to compare and

contrast active funds. one etf that caught our .ttention this week the latest out of turmoil sparking a surge in trading that bets on strings in the s&p 500. more than 70 million shares crossed on tuesday. a reminder that you can catch that chart and other charts on the bloomberg angie tv . this is "bloomberg etf iq." ♪

scarlet: i'm scarlet fu, this is "etf iq." lifecycle,r etf where we wandered through the three main stages of etf. step one, the filing. the fcc revealing paperwork for the opportunity fund. activelycio will be managed and invest in u.s. large caps on the stock. step two, the launch. there is an etf betting that

begins trading this week. it is sold by the etf ticker and is actively managed. --tracks companies the final stage is liquidation. germany equity etfs issued by deutsche bank is calling it quits. launched in 2015 with the low expense ratio, but never caught on with investors. let's get passive aggressive, where we track tensions between active and passive investing. this divide between active and passive can get blurred, with investment managers adding passive elements into their approach. i want to welcome the cohead of the multi-asset team at oppenheimer funds. great to see you. you have one foot in the old-school mutual fund world, and another one in the world of small beta funds. where do you stand? differences -- what are the biggest differences? differences, with

respect to the investment process, are the cost and amount of access rest -- asset risk. they can be dialed down accordingly. equityu look at the universe, there is a strong case. we are asset locators. active managers, especially in mid-cap,liquid spaces, small cap, or emerge and strategies, where the geo syncretic stories really create a valuable turf for active managers to grow. space, wege-cap believe a combination of active managers, as well as dynamic multifactor strategies can really create a lot of value. scarlet: is it as simple as when there is market turmoil? it seems human touch active is a liability. is there a period of time when one approaches better than the other? >> generally speaking, one can morehe more liquid, efficient asset classes are segments of the market and more --tematic approach becomes

is expected to be more efficient and valuable. there are exceptions. even in occasions of market turmoil, i would argue that is more so the case. in the less liquid market, you want to have the human judgment in the more nimble spaces of the market. etf's areultifactor now $100 billion in assets. bi is threatening to surpass growth and value. you see the growth trajectory there. theart etf is all about wiring. you have the russell 1000 multifactor etf. talk about being an active manager designing this smart beta etf. what do you decide to leave in and take out? >> it is a great question. it is a fine balance. we designed it in order to achieve a dynamic multifactor exposure. to provide a one-stop solution

thenvestors where realizing timing factors, especially through single factor etf's, is a challenging proposition. solution, akage multifactor solution to the main five equity factors, size, value, lowball, value, momentum, where you rotate the five factors based on assessment in a ruse-based framework of the stage of the business cycle, can provide asset capture and -- upside capture and downside capture that are superior, compared to a passive exposure. scarlet: you named five factors. how many factors is too many factors? critics will say you can't really do due diligence on this, and it is really just the new -- how would you respond to their criticism? >> when you look at economic>> research, if you want to take the skeptical approach them of have maybe 300 factors.

that is unrealistic. we believe the equity world has five different factors, on the edges of this there is yield. many people can see the yield is a standalone factor. between low volatility and value. ultimately, you need to design a portfolio where the factors are very lowly correlated. whatately, ask yourself the economic exposures are that each factor carries on a standalone basis. when you aggregate them, do you get a portfolio that is a diversified set of economic exposures? scarlet: when something like multifactor etfs achieve success, everyone steps in and you get a sense of a crowded space. for third straight year, they have outnumbered single factor launches. at what point do we reach saturation? >> multifactor etf scarlet:, if you look --

>> multifactor etfs, if you look at the static, and assuming the same factor composition, there are 2 different messages. i would expect the industry to go around a volume of approach, versus a top-down approach. those are the categories. when you go into the dynamic multifactor strategies, the field is much more open. academic research shows there is value in rotating among factors based on economic research, understanding where you are in buildingess cycle or based on factor even valuations, or based on factor momentum. how factors have been doing. if you take a different combination of those strategies, you create a pretty ample opportunity set. scarlet: thank you so much. sit down with the man behind the ufo etf bernard

the world's first global airplane space fund. from new york, this is bloomberg. ♪

scarlet: i'm scarlet fu. this is "etf iq." offersry etf that exposure to a theme, others are quick to follow. a's may be the final frontier. a basis for the firm's first product. eric balchunas will give us a

turnaround in the new etf. eric: this is the space etf with the ticker ufo. an instant top five best ticker in my opinion. the space industry and all of the spending. it does it by 80% of the holdings going after pure plays. these companies make over 50% of revenue from space spending. the other 20% or more diversified, bigger companies where space makes a smaller fraction. trying to get. while adding liquidity. it is pretty expensive at 75. 5% since launching. let's look at the space industry relative to other industries like robotics and cybersecurity. a lot more spending here. a little less growth from the other industries. the etfs are much newer than the areas. we will see if the number grows. let's look at ufo versus the other two etfs i think are

competing. deep-sea and spacex portion. ita is there aerospace and defense companies. it's a little bit more expensive. the lack of industrials give it a lot of active share to all of the etfs out. it has more industrials, looks more like ita. it dramatic capture, we give 83% versus spider's 52. we do it because of the active share, concentrated holdings, and they. he. it will need performance and advisors and investors to think it is a legitimate strategy. scarlet: a couple of things on that to do list. andrew chan and is still with us. where is potential for the space industry? this industryly, has been driven by government spending. that was in the early days of the graham. it was something of national pride and secrecy. now, governments are more open to allow commercial companies to allow them progress initiatives.

right now, it's about 75% commercial, versus 25% government. there is an increase in push from the commercial side. government is still supporting. 6% up.: ufo is almost it definitely needs the strong performance to get more flows and buildup assets. how important is performance versus selling someone on this exciting story? >> we will see how the performance turns out. you are able to access these companies and this industry in a way like never before. if someoneefore, wanted exposure, you had to take individual companies. are, we partnered with company led by a former director of the space foundation that understands this industry. he has provided an incredible benchmark to represent the space industry. someone looking for this exposure, it is the first year play way to do that. scarlet: another one that changed the industry is markets

-- morgan stanley mobility analysts. he said people will care more eric:space when they are spaced companies out there. how much is spending on private companies that you can invest versus public? determineifficult to how much revenue comes from private companies, because they do not need to report. we believe a vast majority are going to these publicly traded companies. scarlet: the bulk of ufo's assets are in the u.s.. how do you add more countries like china, europe, which are all prioritizing space missions? not just big countries. israel is very active. >> they can all be included. we are looking at the companies around the world at a certain minimum market cap and above with pure play exposure and daily liquidity. the fund all areas of can expand into as the companies mature more themselves. eric: rachel evans interviewed you. you said something that stuck out to me. you made the case for alien life

form being a bullish case for this etf. can you break down what you were talking about? to play manyway seams and trans, one would be 5g, cloud computing, things that have a lot of investment appetite. further off the malignancy 2 -- we can see 2 types of lifeforms, a negative one or positive one. spending can be huge if it is an adversary. we can get a lot of technology if it is an ally. scarlet: thank you so much. technology is the best-performing sector this year. there are different ways to slice and dice tech. in this weeks there's an etf for that, we target one fund that is the cutting edge of innovation. the ishares exponential technologies etf trades under the slick ticker xp. it is considered one of the pioneer etfs when it comes to investing in companies tied to innovation. xt uses morningstar's definition

of exponential tech. companies with significant exposure to products that displace older technologies, create new markets, and have the potential to generate public -- positive economic benefits. it tracks an index that evaluates stocks around nine tech's income from big data and nanotechnology, to neuroscience, contact. and when it comes to the allegation, they have a fun weighted more heavily in's conductors, telecom, pharma, biotech, and computers. coveringglobal field, japan, germany, and china. more than half of its weight lands in the u.s.. names include marbella technology, qualcomm, features.com. it has gone assets to about $2.5 billion. more than four times its size since launching in march of 2015.

with an expense ratio of 47 basis points, xt gets a green light. a warning for its alternative awaiting. -- alternative weighting. that does it for "etf iq." see you next week. ♪

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