ETF Live Chat: Changing Managers, Growing Liquidity

October 11, 2018

[Editor's note: Live! with Managing Director Dave Nadig happens weekly at 3:00 p.m. ET.]


Dave Nadig: Good afternoon and welcome to Live!
As always, you can enter your questions in the box below. I’ll get to as many as I can in the next 30 minutes or so.
After we’re done, well post a transcript at this same address, in case you missed something.
So, busy week! Let's dig in!


Todd Rosenbluth - CFRA research: Hi Dave. AdvisorShares changed the management behind its ETF this week. What do you think investors should do when the management or the index behind the established ETF changes?
Dave Nadig: Hey Todd, great question
The fund in question is TTFS I think, and this would be its second manager swap in something like two or three years.
It used to be the Trim Tabs Float Shrink ETF, then it became something else, and now it's going to be a DoubleLine Value fund.
Honestly, I look at things like this and shake my head a little bit.
There's something like $90 million in the fund, which charges 90 basis points, so I get not wanting to just shut it down and launch a new one.
And I supposed at least there's SOME throughline between the old strategy and the new strategy (as opposed to what happened when LARE became MJ, shifting from Latin American real estate to marijuana).
But if I were a holder in this fund, I'd be very skeptical.
Should you instantly sell? Well no. But I worry a lot of investors just may not even NOTICE.
Which is really awful.
And if you're an advisor, things like this are a real communications nightmare.
So the answer is: Do the research and decide if you like the new fund, I suppose, but it all seems sad and unfortunate to me, honestly.


Tony L.: Are ETFs necessarily more liquid today than they were, say, 5 years ago?
Dave Nadig: Great question!
A few ways to answer it -- there is definitely more money changing hands every day overall, across the ETF market, then there was 5 years ago.
But more interesting to me is how that's spread out.
If you look at SPY for instance. 
Its average volume hasn't budged much -- around 80 million shares on an average day.
But the further afield you go, the more you see the volume upticks.
So look at something like EFA (iShares developed markets fund).
Now it trades about 20 million on an average day, twice what it did 5 years ago.
And you go through the top 50 ETFs by size, you see that everywhere.
You now have to go pretty far down the list -- hundreds of ETFs -- to find ETFs trading less than 50K shares -- which is great for investors, obviously.


Sergio Ianni: Is there anyone proposing ETF "baskets" that are predesigned and managed based on algorithms and parameters that remain fixed as markets change? For example, someone who anticipated the interest rate increases by the Fed and the slowdown in stocks after 10 years of uninterrupted growth? Thanks.
Dave Nadig: So, lots of folks run algorithmic ETF baskets; that's essentially what all robo advisors do.
And there is a whole separate group of folks we used to call ETF strategists who either with an algo or with a human do the same thing.
There are literally hundreds of them, and they often either take money directly, as advisors, or sell their models to other advisors, who lean on them.
I don't off the top of my head know if any of them have specifically "called a top" a week or two ago. I am sure SOMEONE did, and we'll see them on CNBC being heralded as a genius if we have a sustained bear market.
But the problem, as always, is the odds you found that person BEFORE the market turned is vanishingly small.


T. Frank: Are all ETFs "set-and-forget" like most equities, that you're supposed to just sit on til retirement, or do you have to keep a daily eye on them, to see if trades are warranted?
Dave Nadig: So, there's NOTHING about ETFs that is inherently set-and-forget.
From an exposure perspective, there's no difference (really) between buying SPY, buying the Vanguard S&P 500 index mutual fund, or taking your multimillion-dollar account somewhere and having them manage a separate account.
It's all exposure to the S&P 500. If you think you can set and forget it in one wrapper, you can set it and forget it in the other.
Certainly there are very-low-risk ETFs (say, a near-cash ETF like MINT or something) where you don't need to pay much attention.
But there are also triple leveraged oil ETFs that you probably should be watching intraday as a trader.
So there's no one-size-fits-all answer there -- focus on the exposure, not the wrapper, and then ask yourself what would cause you to make a trade.


Peter Brady: Why do some low-volume ETFs consistently trade at a premium?
Dave Nadig: So, when an ETF has really low volumes -- like 100 or 1,000 shares a day, or even going days without trading -- you need to be very careful about what data you're comparing.
In many cases, what you may be looking at is, say, an NAV struck at 4 p.m. today, but a trade that happened at 2 p.m.
In those intervening 2 hours, the market could have moved a lot, and you can see a "phantom" premium or discount.
Separately, it's also possible that a truly low-volume ETF might just be getting priced badly, because it never trades enough for an authorized participant to step in and do a creation or a redemption.
In that case, if people still want to buy it, the trades will happen over "fair" value. If they want to sell it, it will happen below "fair" value.
You need enough volume to trigger at least the prospect of creations/redemptions for the price to trade near NAV.
So sometimes it can be a bit of a chicken/egg problem with tiny, low-volume ETFs, which is why you need to be careful there.


Anonymous: Seriously, we are now quoting management fees in hundredths of basis points?
Dave Nadig: OK, this one makes me laugh.
You HAVE to be talking about BAR, which is Graniteshares Gold ETF.
It just cut its prices a few days ago:
The ACTUAL new expense ratio is 17.49 basis points, or 0.1749%  which is obviously ridiculous and silly.
You KNOW the "49" there is because everyone will do what we did, and round it down to 17.
But they "keep" the half a basis point.
I agree. It's ridiculous. A lot of systems aren't even set up to PROCESS the fractional basis points correctly.
Bloomberg will only round to the third decimal.
So it reports it as .175 and so on.
Total silliness.


Jack: Hi Dave. Should I worry if the ETF I choose is not linked to MSCI or FTSE, but to some much smaller index provider? Is there additional risk by going with a smaller index firm (other than index methodology)?
Dave Nadig: Great question. In general, it's not a BIG DEAL when you don't know the index provider off the top of your head. It's generally only a big deal for institutions who may need to track a certain bogey, or perhaps use a certain portfolio analytics tool like MSCI's Barra models.
That said, big index companies invest a TON in things like having great corporate actions teams. Smaller index providers often have to outsource that.
Does that matter if you're tracking, say, 50 tech stocks, or 100 marijuana companies from Canada? Probably not.
Does it matter if you're tracking emerging market local currency debt, or China A-shares? Maybe.
But sometimes the little guy may have an edge. For example, I wouldn't suggest that KraneShares is inherently inferior to MSCI when it comes to understanding the China A-share market.
Krane's building an entire business there; they might actually be MORE tuned in.
So I think it's pretty common sense.


Colleen Ainsley: I've been reading lately that smart-beta investing is dead. Has it been replaced by another "trend"?
Dave Nadig: Well, I don't think smart beta is remotely dead, except hopefully as a term, because I'm not a big fan.
Smart beta is just what we're calling quant/factor investing, which people have been doing since Ben Graham started talking about value stocks.
So the HYPE might have moved on (to thematics like robo/AI/marijuana/bitcoin/whatever)
But the fundamental investment principles live on (and will continue to).


Mitch: How much longer should we go until we start to think about putting the low-ol factor to work/what's your opinion on this factor?
Dave Nadig: So, the reality of low-vol funds is that they really haven't worked very well in years -- compared to the magic moment where they were both outperforming AND doing it at lower risk vs cap weighting.
Funds like USMV and SPLV are doing what they say on the tin -- it's just the low-vol anomally has been on a bit of a hiatus.
Over the last little bit here, we haven't seen one of those funds "break" from the broad trend.
They're getting hit pretty much like everything else in the broad market.
The bigger issue here is: can you really target factors?
Rob Arnott's work would suggest it's a bit of a mug's game, and that valuation ends up being the overriding signal. Buying factors when they are historically cheap can work.
He has a cool tool over at Research Affiliates to check on that:!/strategies
I'm jealous of it. It's very, very well done.
OK, one or two more and I have to hop off.


John Royo: I see a WSJ story today about how ETFs contribute to late-day trading volumes. I thought ETF portfolio managers mostly only buy or sell on index rebalance days. So, if there is late-day selling, wouldn't it come from mutual funds not ETFs?
Dave Nadig: I read that piece too:
It's tricky, because there's a lot of fingerpointing that goes on.
What's inescapable is that a LOT of action in the market now happens in the closing auction.
But there are a lot of reasons why that's the case.
If you're an institutional manager who's getting measured against an index (which is priced at the close), you generally want to minimize any slippage. You want your portfolio trades "at the close" too.
So ETFs - just like TSLA or IBM -- get a LOT of volume either running into the close, or in the auction.
But, there's no structural connection that somehow the presence of ETFs is DRIVING the trading in say, AAPL, to happen at the close. If, for example, an AP is planning on doing a creation, they're doing that based on trades that happened elsewhere.
So if, say, they did a big block trade for 100K shares of ROBO at noon, well, they hedge that by buying all the stocks in ROBO, so they can do the create at the end of the day.
But they DO NOT wait until 4 p.m., and just pray they get good prices.
They do the buying of the stocks simultaneously with the selling of ROBO. That way they have no risk for the rest of the day.
At the end of the day, they present the stocks, they get the 100K shares of ROBO, and they wash their hands of the whole thing.
But the hedge trades happen contemporaneously.

Great conversation here folks! Sorry I didn't get to every question, but we'll be back at this next week.
As always, we'll have a transcript up shortly. Thanks for stopping by!

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