Live Chat: Asset Allocation ETFs & Market Timing

February 21, 2019

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


Dave Nadig: Good afternoon! Welcome to Live!
You can ask questions in the box below, and I'll get to as many as I can in the next half hour.
We'll post an archive when we're all done, in case you have to hop.
And I'll head off the question that seems to come every time: Here's today's playlist for my speedtyping:

Let's start with Todd:


Todd Rosenbluth- CFRA Research: Hi Dave. Given the recent NY editorial from an SEC commission on index funds, can you remind us all when the “ETF rule” is supposed to be finalized. Thanks.
Dave Nadig: First things first: The note Todd's talking about was very nicely rebutted by Todd on our pages and for his clients here:
And it was a pretty woolly-headed piece of reasoning about why index funds are somehow nontransparent (not Todd's piece, the NYT piece).
I do think this is a topic that's not going to die, although I don't think the transparency-of-methodology issue is one with any legs.
I think corporate governance (how big managers vote their holdings) will be the touchpoint. And I don't think the index providers will get regulated—it will be investment managers. After all, anyone can publish an index. The question is "then what?"
As for the SEC rule: Well, it came out of comment period around the end of the year. From there, it's always a mystery what the SEC will do next. Theoretically they could have voted on the proposed text that day and poof, it would happen. I suspect we'll see a revised rule from the SEC in the second quarter, and that will kick another comment period. But I still think its reasonable we have something actually done in calendar 2019.


Rerun: Is there an ETF that can give you a 60/40 mix of stocks and bonds, kind of a one-stop ETF that is simple for someone w/o an advisor?
Dave Nadig: So, that's a surprisingly good question. There are a few "one-stop shop" type products out there, but none maybe as simple as you're looking for.
Probably the cleanest answer are the "target risk" type strategies, of which there are a few. Check out something like the iShares products, though. Here's the "moderate" one:
If you go through our screener, you can find a pretty decent list. Also this covers a lot of the bases as well:
You will notice a lot of those asset allocation ETFs are quite specifically targeting income—usually through a combination of dividend stocks and bonds.
Another place I'd look is to the Cambria family. They offer both a global asset allocation fund (GAA) and the Trinity ETF (TRTY), which I think are good runs at this problem.
You could also look towards a robo-advisor like Betterment, Wealthfront, or Schwab/Vanguard's offerings. They are another way to approach the "advisorless" problem.


SM: Hi Dave—Any chance you can send us a link of the State of the ETF Union presentation from the Inside ETFs conference? Everyone wants to know more about direct indexing.
Dave Nadig: Thanks for asking! But sadly I haven't put up a "storified" version of it yet, and I don't think Inside ETFs releases the videos. But have no fear, I will be writing a bunch more about it. And there was a lot of coverage coming out of the event, as well.


Anon: Do market-timing ETFs actually work?
Dave Nadig: So, by market-timing ETFs, I assume you mean those that switch between market exposure and bonds or a cash position
To me the poster child for these strategies is the Pacer Trendpilot U.S. Large Cap ETF (PTLC). It basically just implements a fairly textbook 200-day moving average strategy
(that is, buy when momentum is going up, sell when it turns the other way and trades below the average). People have been running that strategy for decades, and some people swear by it. IF the market performs in nice predictable waves, it can be very effective. But boy, that's a giant, gargantuan IF.
So for example, PTLC,sold out of the market in something like November. If you were looking at one-year returns on 12/31/18, it looked brilliant. The problem is it has stayed there. If you hadn't noticed, large cap stocks are up over 11% on the year so far in 2019—and PTLC has missed ALL of it, because its happened fairly violently. That's the real challenge with any market timing strategy—being wrong is really wrong.
Thanks for the seque I guess: I wrote a bit about market timing here this week:
And we're doing a webinar on managing vol in other ways next Wednesday if you want to hear more.


Tangent Style: Seems like a POV that emerged from Inside ETFs is that the fee war in vanilla beta may be at its end
Where do you think the brunt of pricing pressure falls next? I was interested in Ben Johnson of Morningstar's observation: "Foregone yield on cash is the first place investors should look to gauge the cost of 'free'."

Dave Nadig: Yeah, there are lots of ways to make up a "free" price tag.
Ben's of course right (no surprise) that looking at things like cash is an important point. Schwab, for example, (and most brokerages) have historically made a healthy profit on the spread between overnight paper and what they pay on cash balances.
Inside a fund, this isn't usually an issue—the issuer doesn't somehow get to keep intra-fund cash and invest it on its own for profit. But it can be an issue inside roboadvisors and brokerage accounts.
So where else do we look for hidden costs? Well, brokerages like Robin Hood offer free trading by essentially selling their flow. Theoretically, this could hurt investors through poorer trade execution. I say "theoretically" because these are monitored/reported things that the regulators look at with some frequency. So it's hard to see a systemic long term issue there.
Then there's acquired fees. A lot of funds hold other funds. You always need to look all the way through. On our site, we capture this pretty cleanly, but it can be tricky sometimes if you're just poking through fund literature.


Alex Laipple: @Dave—Love the content you've been putting out as of late. What's the biggest hurdle to direct indexing/SMA investment adoption?
Dave Nadig: Hi Alex: There are still some BIG software/operational hurdles. For instance, fractionalizing a bond so that it can go into a portfolio is tough. It probably requires a "house account" that holds the whole bond, which investors then have a claim on. This is not in any way an insurmountable issue, but it requires some clever organization and software. Similarly, things like "How do you manage dividends, and reinvestment, without triggering wash sales from tax lost harvested positions?" Not an insoluble problem, but work needs to be done.
That's part of why I put the timeline on real mass-affluent adoption out 5-10 years, not tomorrow. I think the great unwrapping is coming, and is inevitable, but I don't think it's a panic. Still, it's worth thinking about where you fit in a wrapperless world.

Ok, a few more questions before we wrap:


TaxManCometh: So do ETF investors not have to pay taxes? I read they were tax-advantaged.
Dave Nadig: So, this is DEFINITELY not the case—they are not somehow structurally "tax free." What is the case is that for the most part, ETFs don't distribute capital gains themselves (because they use the creation redemption process to wash those gains out). But, as an investor, if you buy XYZ for 100 and sell it for 150, you still have a 50 dollar gain, and you'll still owe taxes on that. The big difference is you control that process. So it's best to say they are tax-efficient, and tax-fair. But they sure aren't magically tax free!

Tangent Style: Who do you think is in the lead on re-wrappering active into ETFs? Feels to me like there is a new appreciation for the tax inefficiency of MF vs ETF in the down year we just had (aside from the often-confounded active/passive variable)

Dave Nadig: Well we have some clear winners here already: ARK and Davis, for instance, have launched super-traditional, high-conviction active equity ETFs that have done quite well at attracting attention and money (and in some cases, performance!). The big "other shoe" though is when we see a giant step in with both feet—A Fidelity Contrafund, a Growth Fund of America, etc...
I don't feel like any of that is imminent, because we havent seen anything but non-transparent active filings. Clearly ETMFS—Eaton Vance's attempt at bringing exchange trading to traditional mutual funds—wasn't a success, and that effort has now been rolled into the non-transparent active camp. Whether we see that dam break this year? I really have no idea. I'd like to think so, just so we can let the market decide if they care. But importantly: The smaller shops aren't waiting, and I say good for them!

OK, that's a wrap for this week. Thanks for the questions. Same time, same station next week.
And hope to see you on our upcoming webinar. Obligatory plug link:
Have a great afternoon!


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