Live Chat: 2019's ETF Surprises

June 27, 2019

[Editor's note: Join us for a weekly Live Chat! with Managing Director Dave Nadig.] 



Dave Nadig: Good afternoon everyone, and welcome to Live!
You can ask your questions in the box below, and I'll answer as many as I can get to before 30 minutes is up, give or take.
We'll have a transcript up at the end of the day, in case you miss something.
With that, let's get going. Tons of questions backed up here:


Music Mike: And today's ETF wisdom is brought to you by musical guest ...?
Dave Nadig: Heh. It's a meme now! So I've been on a phantogram kick, so that's what's on right now:


Dan: Dave, did you see SEC Commissioner Hester Peirce's remarks on ESG ratings, likening them to the Scarlet Letter of Nathaniel Hawthorne's classic novel? What's your reaction?
Dave Nadig: This is a good one. So Commissioner Peirce made some comments to the effect of:
If investors care about board diversity, that puts boards in the position of having to disclose things that we wouldn't expect in broader society. So for example: self-identifying your gender, sexual preference, ethnicity and so on.
Her argument, as I read it, wasn't "diversity is bad" but more "the devil is in the details."
Who "polices" whether someone is actually the specific ethnicity (or gender for that matter) claimed on a disclosure form? Does the SEC get in the business of that?
She has a point. I'm not sure it overrides the broader desire to have diversity on boards, but it does come down to definitions. There's a lot of evidence that diversity of *background* makes for better decision making, different experiences, etc.
And most of the things we measure to support that goal are problematic, in one way or another, from a privacy and enforcement standpoint.
So I think there are some good points in this, but I don't think it somehow "kills ESG" or anything dramatic. It's a conversation worth having.


Ken Fortuna: Hey Dave, bitcoin just had a huge jump for the first time in a while. That can’t solely be due to the Libra ETF filing, can it?
Dave Nadig: Not to put too fine a point on it but: who knows? No, I don't think the rather thin white paper around Libra is directly responsible.
But one of the issues with bitcoin (and other crypto) is that one of its key selling points (decentralized trading/anonymity) means we really have no way of knowing.
To be fair, when MSFT goes up 10%, we don't really ever know why, causally, either.
Usually we can point to a piece of news, but ultimately, things go up because more people want to buy at the current price than sell, and the price goes up until there's equilibrium.
But the WHO and the WHY of the buyer we rarely know, except for things like 13F filings from institutions, which give a very incomplete picture.
I do think there's some safe-haven buying going on. We're seeing it in gold too.


Todd Rosenbluth - CFRA Research: Hi Dave. What's been the biggest surprise to you in ETF land in first half of the year?
Dave Nadig: Hi Todd!
So, I guess I keep seeing examples where the flows aren't following performance the way we always think they do.
You can troll through segment after segment, and we just don't see flows following outperformance the way we've seen in the past.
I mean, take GDX.
Up 25% in a month.
Has -$400M in outflows.
Instead we see low-cost beta continuing to blossom in flows land.
So I'm not sure what any of that means, but it's for sure got me scratching my head.
Half the time I see things like that and I literally think the data is wrong, until I dig deeper, and time after time, funds that are crushing it aren't getting flows at all, often the opposite.


Terese Finau: In considering dividend ETFs, anything specific that investors should look at besides current yield?
Dave Nadig: Great question. So there's a lot of debate about whether dividends are a "factor" or whether in fact they're just yield generators.
If you're JUST looking for yield, the big question is "why is this portfolio paying such a high yield?"
Many times it's mostly just investor preference; as in, utilities traditionally pay decent dividends, so utility company CEOs keep that up.
But sometimes a stock is super high yielding because it recently got plastered in the market (after all, the denominator of yield is price).
So look at the companies for sure.
Then secondarily: There's a big chunk of dividend ETFs that focus on so-called aristocrats -- companies that increase their dividends year after year, often for decades.
Some stats suggest this is in fact a kind of "factor," but mostly, it makes people feel comfortable that they're buying old-school blue chips.
So really, ask what you're trying to get -- regular checks? outperformance? a smoother ride? And base your decision on that, not just the % yield number.


M. Darcy: Bill Gates said losing the mobile race to Android was his greatest mistake. Is there an investing mistake, or a “guru call” you’ve made that you’d say is your greatest? Conversely, what do you think was your “best” financial decision?
Dave Nadig: Oh man. I guess careerwise: I left BGI to become an active mutual fund manager right at the top of the tech boom.
While that was a very entertaining time to be alive, it was a disastrous decision both to jump the fence to stock picking, and to have the hubris that went along with it.
I definitely got my fingers burned. But hey, those things make us who we are. It was valuable. I learned a ton.
As for best decision? Forgetting my portfolio. I commented on this in my Jack Bogle eulogy.
"Sometimes boring and forgetful is the best thing you can be."
(His words.)


Steffen: Hi Dave. How are the global index-tracking products rebalanced? The indexes just divide the closing value of the index times weight by the closing share price, but this cannot be done in real life if the different time zones are involved. Thank you!
Archie M.: Super great question. The short answer is: The index companies know this, and they tend to roll the index changes to the close. What I mean is, if the rebalance calls for getting rid of Apple and adding Toyota, they don't dictate the how; they dictate the end state.
So for example, when the value is struck (say, at 4 p.m. ET, which is pretty standard) tomorrow, the index will have no Apple and will have Toyota. This move gets broadcast. So the funds KNOW that's the end state.
so they know, yesterday, that they need to buy a lot of Toyota. So they buy what they need as close to YESTERDAY'S closing price as they can.
They will also sell the Apple at yesterday's U.S. close, if they can.
Not sure if I can really communicate it without a white board. But in short, they focus on the known end state: Today I have to have no Apple and a lot of Toyota when I strike my NAV.


Owen McPherson: Lately I’ve seen headlines that “value investing” is dead. Also, that it might be making a comeback. Which is it?
Dave Nadig: Hah! Well, if you can get it precisely right, you should run a hedge fund!
The biggest argument for "value is dead" is one I don't often hear. We live in a radically different information environment than we did when Ben Graham was born.
He was literally born in the 1800s.
One of (not all) the ideas behind value investing is an information mismatch. The value investor finds prices that are "wrong" because they do work to understand true intrinsic value that public documents obscure.
I don't believe those kind of information edges are really productive anymore. Information is too available, and moves FAR too fast to generate a persistent edge by simply looking harder than the guy next to you.
That said, there are different kinds of value well beyond classic Ben Graham. Research Affiliates would suggest that buying "cheap" factors, for instance, puts mean reversion in your pocket.
That's a very different kind of value, of course.
But in general, I think traditional, work-the-balance-sheet value isn't that useful a methodology anymore. I think you need something beyond that, whether that's incorporating momentum, screaning for quality signals, etc. -- something.


Beau: How is it possible Vanguard doesn’t have even one ETF in the top-performing ones so far in 2019?
Dave Nadig: Simple: The highest-performing ETF on ANY day, week or month will be something that has enormous leverage.
The recent BB article you're referencing ...
... shouldn't be seen as an indictment of Vanguard. If anything, it's a celebration of how boring Vanguard's product development process is. It only launches products it thinks investors actually need in the tool box. Investors. Not day traders.
It's really that simple.
Also: Since Vanguard is mostly (not totally) passive in its products, you wouldn't expect it to somehow be better than everyone over any period of time. You might expect them to be better than other PASSIVE products in a given segment, because it runs them well and they're cheap.
But I'd actually be shocked to see them on some short-term performance leaderboard.


Chandra: Exactly how does “trend following” work regarding ETFs?
Dave Nadig: So trend following is a term that gets kicked around a lot, and means different things to different people.
Most often, it refers to a specific kind of managed futures strategy, which there is at least one ETF for.
However, the phrase also gets used for just raw momentum investing: Buy what's working, sell or short what's not.
There are a lot of variations on that, from "flipper" products that go in and out of Treasuries and stocks based on signals, to just raw momentum ETFs that buy stocks with consistent recent historical price moves.
(Mostly, honestly, it's just a buzzword you should dig WAY beyond.)


Samantha S.: Do you think more ETF issuers will piggyback off Precidian and start offering nontransparent ETFs?
Dave Nadig: I don't think "piggyback" is the right word. I think we'll see a lot of ETF issuers *licensing* the Precidian IP and using it to launch NTA funds. We already have a half dozen or so we know about.
The bigger question is whether the SEC will approve one of the competitive structures before Precidian launches and then starts gobbling up market share with theirs.
It won't necessarily be obvious in a few years who's using Precidian or not, any more than you know right now off the top of your head whether you have an Intel or AMD chipset in your laptop -- there might be a sticker, but most people will just peel it off and ignore it if the product just works.

OK, sorry, I have about 15 questions queued up and I won't get to them all here. So let me just cherry-pick one. (incidentally, for some of you who've asked about how to make suggestions or have site-specific questions, you can reach us at [email protected]).


Brian: if you had one choice, would you invest in a total equity market ETF (domestic only), or a total world equity market ETF (globally)? 
Dave Nadig: This is an easy one, because while I didn't make this choice in an ETF, I did make it a 401(k), which has a LOT of index funds to choose from.
Global equity ETF, every day of the week.
U.S. investors are swamped with home bias everywhere we turn. Our *jobs* have home bias. Our currency has home bias. Our investments will default to huge home bias.
So, given the opportunity to get diversified outside the U.S., every investor should take advantage of it.
But great focusing question, Brian.

That's it for me. Thanks everyone, as always. Next Thursday is a holiday, and I'm off for a week after that, so stay tuned here or on Twitter (@DaveNadig) to catch the next one later in July.

Have a great afternoon! And a great holiday next week!

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