I admit I laughed.
At what?
JPM reported results (along with WFC, JNJ and others) yesterday in the 6a ET hour (when there are no volatility girders, public companies) and the stock dropped and everybody talked about the “surprising miss” for the world’s best-run bank.
And then the stock recovered and rose.
And closed down.
So which is it? A miss or not? Or does it matter? That’s what had me chuckling.
Which brings us to ETFs. For ETFs, stocks are collateral. Not investments in the rational sense. Everybody is furiously studying JPM results to divine answers to its erratic behavior. That’s looking in the wrong place.
Suppose we heap tokens onto this story.
I’ll explain. Stay with me.
The Investment Company Institute publishes monthly data on trends that we’ve tracked for a decade. From Aug 2025 to Aug 2026, ETF assets in the US market alone rose by more than $4 trillion. Of that, $2.5T flowed to domestic equities.
Do the math. It’s over $200 billion monthly. No wonder the stock market also rises like the sun.
Now, that’s not all new money. Most of it in fact is conversion from conventional mutual funds into ETFs and monies leaving stock-picking managers.
What do ETFs have to do with JPM’s stock performance? It’s in more than 620 ETFs and arbitragers consume spreads until it’s down less than its volatility. Same thing happens to the whole market – the reason why the Dow can be way up, Nasdaq way down, and by day’s end all the gamma has been scalped, the delta hedged.
Yes, it will break. But not for the reasons one supposes. It’ll break because ETFs will become like home equity lines of credit in a devaluing real estate market.
Tokens, now spreading across markets, are like ETFs. Stocks are collateral. Give me a basket of shares, I take a little fee (in crypto), and give you tokens.
ETFs and tokens are genius intermediary models for taking tolls. Money managers charge you a toll. Toll roads charge you a toll. Stock markets charge tolls. Jane Street takes tolls. You follow?
Anybody sitting in the middle collects a fee from the parties to transactions. Often, the middlemen become richer than the creators and consumers of goods.
ETF issuers make money on creations. ETF creations/redemptions are averaging $1.3 trillion per month. That is, money shifts to or buys ETFs, which requires creating ETF shares.
That undertaking totaled more than $700 billion in August alone. Money also leaves in the form of Required Minimum Distributions, boomers gifting to youngsters, and so on. That number in August was about $540 billion, for a net spread of $170 billion.
Now how would you know where that money is going? Demand and Supply. We measure it everywhere.
It’s rather astonishing to see how much of the market has missed out on those flows. There’s been a lot of talk about it. Some 90% of stocks are down 10% or more from 52-week highs. Over half the Russell 3000, which is 99.9% of market cap, is down 20% or more, says Morgan Stanley. Nearly half the SPX is too.
Which proves a point. ETFs don’t index. They accept as collateral only PREDICTABLE stocks. Mainly large caps. Cozy up to that herd and behave how good collateral does (ask and we’ll explain!).
It shows the DIFFERENCE between ETFs and “investing.” Listen to Stephanie Link from Hightower on CNBC sometime. Nobody knows business fundamentals better. ETFs are the opposite of Stephanie Link. They want large, liquid, low-volatility equities with predictable value, so they can issue ETF shares against that collateral, and collect tolls.
Why should you care? Because it’s how the stock market works!
And tokens will compound collateralization of equities. I was in New York last week at an excellent Computershare conference that focused on tokenization and ISTs – Issuer Sponsored Tokens. Prudent companies will get ahead of this wave.
The good news for issuers is that a market where stocks are collateral is frankly easier to manage. But ALL your practices must change and evolve, public companies. How you report news. When you do it (we’ll be trading all the time, everywhere, soon). What you say. How to shepherd shareholder value as fiduciaries.
What is the money doing? Answer that question first. It’s not buying Stories. Trying to “get our story right” isn’t going to make your stock more attractive to ETFs as collateral. It might make it less so.
The best way to understand the value of collateral is to measure Demand and Supply for the product. That is the heart of our quantitative analytics at ModernIR. We built the first algorithm to assess sentiment more than 15 years ago. We’ve come all the way to Scorecards now.
If there’s a challenge for us all ahead, ETFs are like currencies. It’s easy to issue currencies. It’s hard to reduce the supply smoothly.
The best step you can take to protect yourselves is to implement a STRATEGY. Don’t wait around, doing what we’ve done for thirty years. That’s not a plan. That’s hope.
Let us help you take the stress out of the future. Every day, we help companies implement strategies for today’s stock market.
