Live Chat: Bitcoin ETF Puzzle & Flash Crash Fixes

August 29, 2018

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

Dave Nadig: Good afternoon! Welcome to Live!
As always, you can enter questions in the box below, and I'll get to as many as I can in the next half hour or so.
We'll post a transcript by the end of the day as well, in case you can't stick around and follow along.
With that, let's get rolling!


Mireille V.: So in your opinion, is it better for publicly traded companies to report semiannually or quarterly?
Dave Nadig: Interesting question! So, in general, I'm a big fan of transparency.
And I actually don't think quarterly reporting is inherently a bad thing -- I get that there's overhead at the public company level, but I don't think it moves the needle on corporate profits, having an extra person in the accounting or IR department.
I think the bigger issue is the culture of guidance around quarterly reports. I would be fine seeing more companies basically just do simple quarterly reports but then semiannual full conference calls with guidance and so on.
But in truth, I think there's essentially no chance (or much appetite) to changing the status quo.
As far as the ETF world goes -- honestly, most ETFs are mechanical, so reporting can essentially be automated and daily -- which it basically is!
There's very little new/interesting information in an ETF quarterly or semiannual report you don't see almost daily anyway.


Zack: Hi Dave, What, if anything, does the S&P topping 2900 bode for ETFs?
Dave Nadig: Hi Zack. So, perhaps this is obvious, but the fetish of round numbers is utterly pointless.
It's a bit like drawing lines on a chart showing support and resistance. The only reason those lines matter is because enough investors (or algos) believe they matter.
They're entirely psychological.
So, every time we cross one of these lines, the only really important question is to ask how it affects market psychology.
Something like 2900 -- does it make people think "ooooh, it's getting pricey" or does it make people think "ooooh, it's headed to the moon!"
And ultimately, that's just a sentiment call, and there are much better measures of sentiment out there (put call ratio, what-have-you).


Daphne Carter: Just a matter of time before Vanguard exceeds BlackRock as ETF flows king, or ...?
Dave Nadig: It all depends when you measure.
Through the end of July, 2018 flows had Vanguard and BlackRock neck and neck. I think BlackRock was around $48B and Vanguard was about $44B.
Of course, on any given week or 4-week or 3-month window, you can find spaces where Vanguard was in the lead
There's no question cost is winning the flows battle -- and everyone who's playing that game is doing reasonably well -- at least in gathering the assets.


Sean Enos: Hello Dave, Do you think we'll see more cannibis ETFs come on the market?
Dave Nadig: Hi Sean -- so, the challenge in a small niche like this is differentiation.
We have MJ out there, which sort of "backed in" to getting a product out by changing from a Latin American real estate fund into a pot fund.
I think it will be difficult for too many other folks to play that same game.
And even if they did, what would the angle be that put them out front, vs MJ?
I can think of a few - cost being the big one.
Supposed geography could be the other.
But there are precious few companies to chase in a liquid format at the moment.
If you imagine a world where it becomes federally legalized, or at least decriminalized from a financial services perspective, then I think it's a bit of a gold rush, and you'll see it like gold miners
where you have "big" and "junior" and some geographic options.


Todd Rosenbluth - CFRA Research: Recently an international equity mutual fund from Harbor announced a large planned capital gains payout for remaining shareholders due in part to a manager change and outflows. Is this a good time to remind investors that it's rare for int'l ETFs like VEA to have cap gains even when index change occurs?
Dave Nadig: Hi Todd! Yes indeed. That's a CRAZY case. As Todd points out, a rare case of a big switch of advisor on an existing fund and one that is sitting on gains.
It's like a worst-case perfect storm for capital gains.
Obviously this kind of thing rarely happens with passive vehicles -- Vanguard is probably the one I can think of that's done a lot of index swaps over the year.
But even then, they've been SUPER careful to have long transition periods so these issues get mitigated.
Structurally, of course, something like this can technically happen in any fund -- ETF or otherwise.
I suppose the board of, I dunno, TOTL or BOND could decide they want new managers with radically different strategies, and you could see something like this. But it's really a unicorn event.
And even more unlikely in an ETF, as you point out.


Samantha Elliott: Given that the SEC recently rejected more bitcoin ETFs, do you think they'll ever get approved?
Dave Nadig: I have a whole bunch of these questions so I'll just generally answer this one -- or perhaps not answer ...
The real issue, as I read the statements from the regulators and everyone involved in the press, is much more about the structure and health of the cryptomarket than anything specific about the ETF proposals themselves.
If that's the case, than it seems to me to be almost inevitable that as cryptocurrencies simply have more time behind them, regulators will get more comfortable.
Imagine if you went to the SEC in 1996 with the idea of a leveraged oil futures ETF. They'd never in a million years have said yes.
So I think this is a matter of time, but I should point out I don't have any inside knowledge here. Just what I read like everyone else.
(I should also point out that Cboe Global Markets, our parent company, is involved in some of these filings and such, but I don't really know much about that side of the house.)


D. Tunston: How likely is it that another serious ETF "flash crash" occurs, and how negatively could that impact the industry's reputation?
Dave Nadig: GREAT question.
So, the 2010 flash crash, while it hit some ETFs, also hit the stocks and derivatives markets. ETFs were just part of an ecosystem that had a bad, bad day.
Pr a bad bad minute, really.
The work the exchanges did since then -- the limit-up/limit-down system, some other plumbing changes -- have probably limited the ability for something similar. After all, you always patch the last hole.
But of course, we don't know the unknowns.
I believe the core infrastructure around ETF trading and arbitrage is, at this point, pretty darn robust and well-tested. And we have had some pretty aggressive days, and ETFs have just not been part of the story.
As for how bad would it be? Of course it's never great when something breaks. But like I said, I feel pretty confident the industry has covered all the potential "obvious" hiccups in the past 25 years.


L. Thompson: Hi Dave, Given how many niches there are in ETFs, how soon til we see a self-driving car ETF? Or is there one already?
Dave Nadig: Short answer: DRIV
It's explicitly an autonomous car ETF.
That said, there are other ways to skin that cat. DRIV falls into a bucket with a whole bunch of other AI- and robotics-focused ETFs:
If you look at the holdings lists though, you run into the classic "super narrow niche" problem.
DRIV is basically all tech names you know: Apple, Cisco, Alphabet, Microsoft, etc.
There's a bit of a "spin" on it.
But you're just buying tech, with an angle.
So as long as you know that, by all means, have at it.


Risk Adverse: Can you tell us a little bit about the new Innovator ETFs that provide predicted outcomes. Seems like a no-lose investment (not including fees). Is it too good to be true?
Dave Nadig: They are definitely not "NO LOSE."
They are "sell some upside, minimize some downside."
So for example, there is a version of their product that basically says "if you buy this fund, you will get the performance of the S&P 500, up until it's up about 10% for the year."
They cap that, but essentially selling the excess performance and collecting a premium.
They then spend that premium to buy downside production. In this case, they say "OK, the first 9-10%, you don't lose." So if the S&P is down 5%, you don't lose anything.
If the S&P is down 20%, however, you lose below the floor -- so you'd be down about 10%.
So it acts as a buffer on your exposure.
The caveats are that you get that promise over a holding period (a year). Which is why all the current products have "JUL" in the ticker -- they're the July versions. I expect there will be "August" versions coming soon.
Last, to know EXACTLY what your cap is and so on, you do need to check in with the website before you buy.
I think they're quite clever. I worry they're a bit complex (as is obvious by the fact it took me three paragraphs to explain).


Alex L.: What's the weirdest ETF you've ever come across (weird as in number or type of holdings, investment objective, methodology, etc.)?
Dave Nadig: NASH.
That was an ETF that invested in companies headquartered in Nashville.
Why this is an interesting pattern of returns, I have no idea.
The only thing I could ever come up with was "well, maybe there are some institutions who are restricted to only investing in the municipal zone?" But nah.


TangentStyle: Why has the rotation of assets from mutual funds to ETFs been so slow given the liquidity, transparency, cost and tax advantages?
Dave Nadig: Well, I think the traditional industry wouldn't think it's that slow (grin).
But as for why it hasn't, essentially, ALL the money moved? A few things.
First, you DO have to know how to trade an ETF, and I think that scares some people off.
Second, ETFs are terrible for low-value dollar cost averaging, like you might do in a 401(k).
It's very hard to make a diverse portfolio with ETFs and $500.
So because of fractional shares, MFs hang on hard to the defined contribution market, which is a HUGE chunk of MF assets.
Third (related) many mutual funds pay out to salespeople or distribution partners from their embedded 12b1 fees, which most ETFs don't have at all.
At 10 bps or less, it's hard to have enough money to pay for anything but rudimentary sales efforts. ETFs are fundamentally "bought," not "sold" -- which is a real cultural shift for a big firm.
I guess last: most active managers don't want full transparency, so they haven't come to play in the ETF sandbox -- and a lot of investors still want to be in active funds, apparently.
duplicates here ...


Rian: Will passive/strategic-beta ETFs always dominate the landscape or do you see active gaining more traction? Currently they are like 1% of the ETF market.
Dave Nadig: While I think there will always be a place for active, I don't think there's a place for expensive, benchmark-hugging active.
If you look at the MF industry, I'd argue about half the assets -- maybe more -- are in that bucket.
So I think that just goes away in favor of low-cost beta/smart beta.
I do think, longer term, most products will at least have an ETF version, and we'll see active be 10-20% of the market.
But i think it will take years more to get there, and there will be a lot of very sad, not very good, active managers looking for new careers along the way.


Rick S.: Hi Dave, What do you think is ETFs' biggest challenge, or are they just going to be this continuing juggernaut?
Dave Nadig: I think there are, as I said, some places where ETFs don't make the most sense.
And I think that remains the case.
I think the real threat (which I've mentioned here before) is technology eventually making the idea of a "fund" irrelevant as we all migrate over time to direct indexing, with our brokers just maintaining fractional share accounts for us.
But that, again, will be years in the offing. There's no danger in the next few years, maybe next 5 years, of that having a real asset impact.
But 10-15 years out? I think it's real, and a real issue.


TangentStyle: What are the data points you are watching regarding self-indexing as a trend? What is most at risk of going that way?
Dave Nadig: Great question -- the short answer is, there's no great data source on this, other than going one by one through ETFs and figuring out who runs their underlying indexes.
With the SEC rule coming, and its basic elimination of the difference between index and active, I think self-indexing may actually have a bit of a breather.
Self-indexing was a bit of a way to have cake and eat it too in terms of how you could manage the fund, manage your baskets and so on.
Under the new rule, I could see some folks who are self-indexing just saying "to heck with it, we're just calling it active" and then just running the same strategy, without the headache of having to maintain the rulebook, have committee meetings, publishing the index series and so on.
Wes over at Alpha Architect has basically said he's heading that direction, I believe.


That's a wrap for this week; sorry if I didn't manage to get to your specific question.
As always, a transcript will be up later.

Also, don't forget to check out our podcast with ETF Prime.
This week: Bitcoin, Bond & Bullion On Tap

Thanks everyone, see you next time!

Find your next ETF

Reset All