Real-World ETF Questions

May 17, 2017

While I generally speak at institutional- or advisor-focused conferences on ETF topics, I make a point to do at least one Money Show event a year. If you’re not familiar with the Money Show brand, it’s a series of events specifically targeting active individual investors.

These are huge, cacophonous events full of everything from firms hawking cannabis investment newsletters to sage advice from big-league market pundits.

More than anything, however, the audience of the money show is the real world. Over the years, I’ve met folks from all walks of life, and it’s always surprising. I’ve met grandmothers managing multimillion-dollar options strategies from their kitchens, and college kids trying to day-trade their way through school.

A few years ago, most of the attendees didn’t know much about ETFs—or care to. They were there for stock tips and trading strategies. This year was shockingly different. Every time I turned a corner, I was buttonholed by investors who had substantive questions about ETFs—questions that a lot of institutions and advisors probably should be asking too, but don’t.

Here were the most consistent and smart questions I got this week:

How Do Levered ETFs Work?

This is an active investor universe, so it’s not surprising that many folks here are interested in leveraged and inverse ETFs. They’re a new trading tool for them to use, in a market where getting a short-locate or significant margin can be a challenge.

What was surprising was that the questions about leveraged and inverse funds weren’t the ones I’m used to answering. These folks understand the mechanics—that holding for more than a day can lead to vastly different performance than you might naively expect. What they wanted to know was how the funds actually achieved their returns.

That’s a smart question to ask.

When I told folks how most levered funds use swaps, or a combination of swaps and stocks, they asked really smart follow-up questions: Who are the counterparties? What’s my real risk there? Do I need to monitor them? I’ve heard some say that “nobody cares” about these issues. Clearly, some investors do.

 

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