On the grand scene of financial innovations, the exchange-traded fund was fairly innocuous at first. It took a good 15 years of slow realization for people to figure out how disruptive they would ultimately be. “Exchange-traded fund” isn’t even a very good name, since closed-end funds were also exchange-traded.

And the ETF wrapper still isn’t the ideal investment vehicle, at least for the purposes of traditional active management. For active strategies, the open-end fund structure is still superior.

I’d argue that the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

After spending a career in indexes in some capacity, I am no longer much of a stock-picker. All my ideas are top-down. I like oil. I like France. Instead of finding an oil stock or a French stock I buy all oil stocks or all French stocks. Seems easier—what if I bought the wrong oil stock or the wrong French stock? I’m happy to take the average.

Finance is funny. There are a lot of things in the capital markets that make sense when a few people do it, but not when everybody does it. The thing about buying all oil companies is that you are buying the bad ones as well as the good ones—and driving all of their valuations higher.

Back in 2004 at Lehman, we observed that correlations among stocks in the same sector were increasing, at least on an intraday basis. Think about it: if oil goes up, companies like Chevron, ExxonMobil, and ConocoPhillips should all go up—on a micro, minute-by-minute basis. So, you could still make money in the long term by picking the best-integrated oil major, but day trading them against each other became useless.

Fast forward to 2017, and the stock market is a sea of baskets trading against baskets. A lot of people have learned their lesson—the only thing that works is buy and hold. Which I think is a good thing!