scarlet: i'm scarlet fu. this is "bloomberg etf iq," where we focus on the access, risks, and rewards offered by exchange traded funds. ♪ scarlet: shutting off taxes. how vanguard uses heartbeat trades in an etf. what this may mean for smaller issuers. the changing face of active. we speak with a representative of oppenheimer funds talking bout active and has of -- and passive 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. they are an indicate or of market sentiment. eric 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 1.6%. i have been saying this has been a lot like 2017, the dystopian setting. even 2016 had a few down days. 2018 had dozens of days like this. anyway, let's see what happened. if you look at outflows, it's what i expected. there's a variety of asset classes, large-cap, tech, junk bonds, small caps. but they have two things in common. they are risk on etfs. they are super liquid ones used by traders. usually they freak out at everything. let's see what the allocators are doing. these are going into etfs long-term. i want to see isa, a core etf.

cheap. used by advisors. i look at the core series. they took in $300 million yesterday. that's a good sign. allocators do what they do. let's keep putting money in. let's also look at the new school fear gauge, dollar volume. it really indicates how big the freak out was. and here we traded $42 billion yesterday. you can see it's about double average. but nowhere near near last october or february. it is about half of that. so i think, scarlet, look, this is definitely one of those days. it tends to be trade talks create minor freak out's, but the fed and rates which create the major ones. scarlet: you hit a lot of the drivers. let's bring in phil bok, along our guest to covers asset managers from bloomberg news. 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, has the greatest potential to influence price swings. >> the trade war is interesting. it has the potential to be resolved quickly. there is no question that the economy is strong right now. but has the market run ahead of the economy? everyone wants to sell on the highs. when the market is near all-time highs, especially given the head fake 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 market calm could not last forever. who benefits from this hiccup in pricings? >> there are two groups that benefit from volatility in general. that's market makers and exchanges. they increase opportunities for trade is great for market makers, as well as transactions happening, could be good for exchanges as well. >> 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 rvrs, reverse half

weighted s&p's. the smaller large caps get a bigger weighting. talk about how this will interact with the trade situation. >> so 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 countries affected. so as you slide down to mid-cap or small cap, if you want to tilt 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. and we are very skeptical about their ability to do so, apple in particular. scarlet: another thing we are paying attention to this week are 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 uber or any of these companies make it into it? how soon can ipo get into this

etf? >> there are criteria for stocks to be included into an etf. they have to reach minimum trading and minimum volume thresholds to be eligible to be included. so for us to be able to use a stock, it has to trade about 30 days, depending on the trading volume. customer satisfaction is a factor that we use that we feel is not priced into the market. when the market price reaches an equilibrium, we think we can use it to our advantage. with ipo, it is less effective. because there is more volatility and the market is still settling down on what it is. scarlet: there is still pent-up demand. let me bring you into the conversation. you cowrote a big story this month about how vanguard uses etf's to limit taxes for its mutual fund investors. it actually patented this strategy, as well. >> it is a story i worked on with zach snyder and our team looking at vanguard's mutual funds and etf's, and how it uses the etf's to reduce capital gains taxes in its mutual fund.

the way that it works is the etf's are share class of the mutual fund. this is a format that vanguard patented in the early 000's. some of the tax advantages etfs 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 vanguard's mutual fund to have these advantages in capital gains taxes. one interesting thing to note are these patents will expire in a couple of years. so the question is whether other issuers might want to copy that strategy, as well. eric: i have heard two sides of this. if someone says you have to pull money out of vanguard quickly, that will be bad. then the side says i love this, it would be not to do. where do you fall? >> it is brilliant.

it makes the mutual fund investors more tax friendly and the investors more friendly. so when the patent expires, we may see multiple launches of etf share classes so they can take the tax benefit from the etf and translate it into their mutual fund. i think it is brilliant. 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 like vanguard enjoy these unfair advantages. at least the smaller issuers, like exponential, behind. what do you think about that? is there an uneven playing field? >> i see it coming, we have better funds and technology. if you look at the innovation in the space, it is with startups and smaller boutique companies. so we are starting to see gates put up all over the industry, 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? then we have a regulatory framework saying let's get away from cost benefit and look at costs, because 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. so there are a lot of winds blowing one direction. it is a concern. where -- when you look at the innovation and what we have, america has 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: we will see how it shakes out. thank you so much. coming up, we have alessio of oppenheimer funds, the embodiment of the changing face in action. he joins us to compare and contrast active funds.

one etn that caught our attention 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 cross the tape in new york trading on tuesday. a reminder that you can catch that chart and other charts on the bloomberg at gtv . this is "bloomberg etf iq." â

scarlet: i am scarlet fu. this is "etf iq." time now for etf lifecycle, where we wandered through the three main stages of etf. step one, the filing. the sec revealing paperwork for the opportunity fund. ticker acio will be actively 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. when ticker is actively managed.

for some, the final stage is liquidation. the german equity etf issued by deutsche bank is calling it quits. grmy launched in 2015 with the low expense ratio, but never caught on with investors. let's get passive aggressive, where we track the tensions between active and passive investing. now this divide between active and passive can get blurred, with investment managers adding passive elements into their active 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 you have another foot in the world of small beta funds. designing world factor etf's. from where do you stand, what are the differences between these approaches? >> the biggest differences are with respect to the investment

processes, the costs, and the amount of asset risk. those can be dialed up or down accordingly. when you look at the equity universe, there is a strong ase. we are asset locators. active managers, especially in the less efficient, less liquid spaces, mid-cap, small cap, or emerging-market strategies, where the idiosyncratic stories really create a valuable turf for active managers to grow. in the large-cap space, we believe a thoughtful combination of active managers and dynamic multifactor strategies can really create nd add 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 approach is better than the other? >> generally speaking, one can say the more liquid, more efficient asset classes are segments of the market and more systematic approach becomes,

generally speaking, 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. but in the less liquid market, you want to have the human judgment in the more nimble spaces of the market. scarlet: and of course this is a growing field because multifactor etf's are now $100 billion in assets. there is a call for them to top all smart categories and surpass growth and value. you see the growth trajectory there. a smart etf is all about the 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, take out? how do you make that decision? >> 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 to investors where realizing that timing factors, especially

through single factor etf's, is an extremely challenging proposition. having a package solution, a multifactor solution to the main five equity factors, size, value, low vol, value, momentum, where you rotate the five factors based on assessment in a rules-based framework of the stage of the business cycle, can provide upside capture and downside capture that are superior, compared to a passive exposure. scarlet: that sounds great, but you named five factors. how many factors is too many factors? a lot of critics will say you can't really do due diligence on this stuff, that this is really just the new active mutual fund. how would you respond to that criticism? >> when you look at economic research, if you want to take the skeptical approach, people have uncovered maybe 300 factors. that is unrealistic.

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

factor composition, there are two different messages. i would expect the industry to go around a volume of approach, versus a top-down approach. those are the two categories. when you go into the dynamic multifactor strategies, the field is much more open. and academic research shows there is value in rotating among factors based on economic, in order of importance, understanding where you are in the business cycle, or building based on factor even valuations, or based on factor momentum. how factors have been doing recently. if you take a different combination of those strategies, you create a pretty ample opportunity set. scarlet: thank you so much. coming up, we sit down with the man behind the ufo etf, the world's first global pure space fund.

from new york, this is bloomberg. ♪

scarlet: i'm scarlet fu. this is "etf iq." for every etf that offers exposure to a theme, others are quick to follow. space may be the final frontier. but for one person, it is the basis for the firm's first product. eric balchunas will give us a drill down in the new etf.

eric: this is the space etf with the ticker ufo. an instant top five best ticker in my book. that definitely helps. this is an etf that goes after the space industry and all of the spending. it does it by 80% of the holdings go after pure plays. these are companies that make over 50% of revenue from space spending. the other 20% or more diversified, bigger companies where space makes a smaller fraction. so it is trying to get a purity while adding some liquidity. it is pretty expensive at 75. it is up 5% since launching. that is a good start. let's look at the space industry relative to other industries that theme etf's track like robotics and cybersecurity. you can see a lot more spending here. a little less growth in those 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 ones. deep-sea and spacex portion.

ita is there aerospace and defense companies. you can see this is a little bit more expensive. but the lack of industrials give it a lot of active share to all of the etfs out there. it has more industrials, looks more like ita. here is the big one. our dramatic capture, we give it 83% versus spider's 52. we do it because of the active share, concentrated holdings, and the purity of that strategy. it will need performance and advisors and investors to think this is a legitimate strategy. scarlet: a couple of things on that to do list. great stuff. andrew is still with us. where is potential for the space industry? is it commercial or government spending? >> traditionally, this industry has been driven by government spending. that was in the early days of the space program where it really was something of national pride and secrecy. but now we have realized that governments are more open to allow commercial companies to help them rest their initiatives. right now, it's about 75% commercial, versus 25% government.

so it seems like there is a significant increase and push from the commercial side, which government is still supporting. scarlet: ufo is almost 6% up. it definitely needs the strong performance to continue to get more flows and buildup assets. how important is performance versus selling someone on this very exciting story? >> i think we will see how the performance turns out. with this fund, you are able to access these companies and this industry in a way like never before. so, at a time period before, if someone wanted exposure, you had to take individual companies. but here we have partnered with a 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. so someone looking for this exposure, in our mind, this is the first pure play way to do that. scarlet: another one that change the industry -- morgan stanley mobility analysts.

he says people will care more about space when there are more publicly traded companies out there. eric: how much is spending on private companies that you can invest versus public? >> it is difficult to determine 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. hese are all areas of the fund 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 exactly what

you were talking about? >> so this is a way to play many different themes and trends. one would be 5g, cloud computing, things that have a lot of investment appetite. further off, we can see two types of lifeforms approaching us, a negative one or positive one. spending can be huge if it is an adversary. we can get a lot of technology f it is an ally. scarlet: thank you so much. >> thank you for having me. scarlet: 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 highlight one fund that is the cutting edge of innovation. the ishares exponential technologies etf trades under the slick ticker xt. 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. that is, companies with significant exposure to products that displace older

technologies, create new markets, and have the potential to generate significantly positive economic benefits. the fund tracks an index that evaluates stocks around nine tech themes, from big data and nanotechnology, to neuroscience, robotics and fintech. when it comes to the allocations, they have a fun weighted more heavily in's conductors, telecom, pharma, biotech, and computers. xt has a global field, covering japan, germany, and china. more than half of its weight lands in the u.s.. names include marbella technology, qualcomm, eatures.com. xt has grown its assets to about $2.5 billion, more than four times its size since launching in march of 2015. it has out from the market since then. with an expense ratio of 47 asis points, xt gets a green light from the bloomberg

traffic system with a warning for its alternative weighting. scarlet: that does it for "etf iq." see you next week. ♪

jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, the president unleashing higher tariffs on china and there could be more to come. a rush of supply into global credit markets. issuers getting ahead of potential further escalation. soft inflation adding to trade tensions, adding fuel to rate cut bets. we begin with the big issue, a wall of uncertainty met with resilient optimism. >> i don't think we should be moving from an exuberance to a panic mode.