Wall Street is trading in its fax machine for blockchain.

The New York Stock Exchange (NYSE) is teaming up with digital asset company Securitize to develop a tokenized securities trading platform. The partnership follows NYSE parent company Intercontinental Exchange’s January announcement that it was seeking regulatory approval for such a platform, which would enable 24/7 operations, instant settlement and stablecoin-based funding.

Securitize will be the exchange’s first digital transfer agent, creating blockchain-based versions of stocks and exchange-traded funds (ETFs), according to a statement.

T+1 to T+0

While many aspects of tokenized trading would shake up what investors have come to expect from the traditional financial system, instant settlements are particularly noteworthy. The extra time before shares officially move from the seller’s pockets to the buyer’s introduces clearance and settlement risk and slows payment. You may remember the settlement process from 2021, when Robinhood CEO Vlad Tenev placed some of the blame for his platform’s suspension of GameStop trading on the then-two-day settlement period.

In 2024, the securities market transitioned from T+2 (when transactions settled two days after a trade) to T+1 (just one day). NYSE’s new platform could usher in T+0. (While the press release doesn’t explicitly say this, it does say that with Securitize, the exchange is developing a “digital transfer agent program intended to support on-chain settlement of tokenized security transactions.”)

“Instant settlement highlights one of the most important attributes of tokenization,” Rich Lee, head of program trading and execution strategy at Baird, told The Daily Upside. “This aligns with the progression in the equity marketplace to shortened settlement times, from T+2 to T+1, as we progress along the roadmap to a T+0 world for equities.”

NYSE isn’t the only market giant looking to reap the benefits of tokenized trading:

• Last week, the Securities and Exchange Commission approved Nasdaq’s proposal for some stocks to trade and settle in tokenized form.
• Some platforms, including Robinhood and Kraken, offer tokenized stocks, but not to US users.

Waiting on Adoption: Meaningful shifts in the financial system only happen if there’s liquidity, interest from participants on both sides of trades and trust from institutions. While crypto and tokenization have gotten a lot of airtime, “the test will be if investors are ready to embrace these new platforms in enough scale to create a meaningful marketplace,” Lee said.

Just like the contestants on a famous reality television competition’s 50th season, exchange-traded funds are duking it out to become a Survivor.

Nearly 1,000 active ETFs entered the market last year, and Brown Brothers Harriman reported this month that 94% of the investors it recently polled said they believe the active ETF market will hit $10 trillion in assets within 10 years, which is an expected annual growth rate of 20%. But many aren’t hitting the $100 million in assets under management that’s considered an indicator of a fund’s success. In fact, only 11% of active ETFs launched in the previous three years raised more than $100 million in the first year, according to a June report by Broadridge Financial Solutions.

Perhaps it’s time to rethink that asset-based survival rate, which Daniel Sotiroff, a senior manager research analyst for Morningstar, said has decreased over time. It may just mean fewer issuers will end up getting kicked off the island. “The cost of launching an ETF and managing an ETF has come down a lot,” he said. “Technology and innovation have crept into the system now.”

The Tribe Has Spoken

More funds than ever are coming to market to offer investors access to thematic investing, defined outcome strategies, active fixed income and more. And while many factors play into a fund’s likelihood of survival — such as whether it’s from a large asset manager that can let it sit on the market for longer thanks to a lineup of other successful funds — fees and performance are still two of the most important:

• “We’re in a day and age where people understand the benefits of being lower cost,” Sotiroff said. A lot of the newer ETFs are specialized with risk-reward profiles that may not pay off, such as leveraged funds. Because they’re doing something different, they’re charging higher fees but “you’ve really got to be giving people something very different that justifies those higher fees,” Sotiroff added.
• If a fund hasn’t performed well, it’s facing a double-edged sword: It’s not growing and it’s not attracting new investors.

As inflation has increased the minimum asset-based threshold for survival of late, cost savings due to technological advances are a powerful force pushing that threshold down, Sotiroff said. Fund managers can outsource much of the legal and operations work, and passive ETFs can especially benefit. While hesitant to share an exact threshold, Sotiroff said the survival rate is likely closer to $50 million than $100 million.

Outwit, Outplay, Outlast. We’ve likely seen most of the cost savings of those technological innovations baked into the market by now, so if the survival threshold does continue to decrease, it will probably do so incrementally. But large language models and automation pose a question mark due to their potential for making it even easier to run a fund. “It’s hard to say where the bottom is,” Sotiroff said.

The average financial advisor isn’t a health insurance expert, but if there’s one tool they should understand, it’s a health savings account.

HSAs not only boast a rare triple tax benefit, they also offer significant flexibility as a retirement planning tool, especially for the wealthy. In fact, the significant long-term tax savings HSAs can generate for higher-income earners have caught the attention of at least one progressive lawmaker, who last year proposed legislation to curtail their features. The consensus, however, is that HSAs are here to stay, so advisors should learn how to make the most of them, particularly in the context of retirement planning.

“The current healthcare environment is wildly challenging for the typical worker and retiree, primarily due to confusion around the tools and offerings available,” said Erik Wissig, chief operating officer at health care technology provider SureCo. “That said, those who do take the time to understand and engage with their HSAs recognize a ton of power in them.”

HSA contributions and growth go tax-free, as does spending on qualifying medical costs. The cherry on top for retirees over age 65? HSA funds can be used tax-free for Medicare Parts B, D and Advantage premiums, while non-qualified withdrawals are simply taxed as ordinary income. Those features make HSAs an attractive complement to 401(k)s and IRAs.

HSA as Retirement Account

Wissig expects HSAs to grow in popularity, especially if more employers make contributions to employees’ accounts to help them build meaningful balances. Furthermore, the recent IRS rule change allowing Affordable Care Act bronze and catastrophic plans to be HSA-eligible is “a terrific development,” he said, allowing individuals who prefer lower-premium plans to tap HSAs.

One emerging strategy for affluent savers is directing would-be 401(k) or IRA catch-up contributions to an HSA, now that higher-income earners must steer them to Roth accounts. Under current law:

• Savers age 50-plus whose FICA wages exceeded $150,000 in the preceding calendar year must use Roth accounts for catch-up contributions, which allow employees aged 50 and older to contribute extra money to their 401(k) plans.
• If a 401(k) plan doesn’t offer a Roth option, high-earning participants cannot make catch-up contributions.

For late-career workers who know they are going to have substantial medical expenses in retirement, which is almost a certainty for most people, maximizing the HSA is often more mathematically beneficial than paying taxes upfront through a Roth account, or on the back end through traditional contributions.

“That said, it shouldn’t be a total replacement,” Wissig recommended. “HSAs should be used in combination with traditional retirement accounts to create a diversified, tax-efficient drawdown strategy.”

All in the Family. In some cases, clients may elect to direct funds to another person’s HSA, usually an adult child. Current law permits children to remain on their parent’s health insurance plans until they reach age 26. If they start early and have no major health issues, an HSA that earns even modest investment returns can grow into a substantial sum. Plus, the child can claim a tax deduction for the contribution.