[Editor's note: Join us for a weekly ETF.com Live Chat! with Managing Director Dave Nadig.]
Dave Nadig: Good afternoon and welcome to a Special Friday edition of ETF.com Live!
(No reason it's special other than it's Friday afternoon.)
As always, you can enter your questions in the box below, and I'll get to as many as I can in the next 30 minutes or so.
Lots of great questions in the queue, so I'll get rolling here.
Tariff Man: Soundtrack?
Dave Nadig: Latest from Vampire Weekend has been on heavy rotation: Spotify: album: 1A3nVEWRJ8yvlPzawHI1pQ ...
... and in the spirit of your name:
Chad: Will the imposed tariffs affect (ETF) investors?
Dave Nadig: So, the biggest issue with the broad new tariffs is that they are just that: broad.
I think the biggest concerns for U.S.-centric investors are supply chain related: technology, consumer staples, autos, hard goods, textiles ... these are all really vulnerable to increased supply chain pricing.
So despite all the flim flam about how "China pays," this is really nothing but a huge tax that will ultimately get paid by all of us. That could put a real damper on consumption, and that in turn drives down overall economic growth.
I think it's a bit foolhardy to try and "play" tariffs, because any move you'd make has to come from a belief that the overall market has it wrong; after all, we all have the same information.
So I wouldn't be an advocate of trying to game this. Just know it's going to be a drag on the economy.
Jill Madrigal: Are ETFs a buy-and-hold vehicle, or are they something owners need to monitor daily?
Dave Nadig: Hi Jill, great question, and like most great questions, the answer is "it depends."
ETFs can cover everything from triple-leveraged oil futures (which you should probably monitor by the minute!) to global stock portfolios that rarely rebalance (which you could for sure just check in on once a quarter or even once a year).
Most of the time, when you're making long-term investment decisions, ignoring things is often a smarter move than watching them like a hawk.
If you're going to monitor daily or something like that, you should do so with a very clear set of rules in place. What would you do if you saw a position was up or down 20%? Buy more? Sell? Replace? Rebalance?
Have the rules in place first; otherwise, you run the risk of letting your emotions decide your investments, which is 99.99% of the time the wrong call.
Jim: Can I buy an ETF directly from an ETF issuer? i know, probably a dumb question.
Dave Nadig: First, there are no dumb questions.
Second, generally speaking, no, you cannot buy direct from an issuer the way you can with a mutual fund. Somewhere in the middle, there needs to be a brokerage account.
Now, you can open a Schwab account and buy Schwab ETFs, or a Vanguard brokerage account and buy Vanguard ETFs, but I don't think that's what you're asking.
The one sort of exception is that if you already own a Vanguard mutual fund, you can sometimes convert from the Admiral share class to the ETF, but you still need to have a brokerage account at Vanguard to "hold" the ETF shares at the end of the process.
Marcia: I want to encourage my kids to invest for their retirement. Is there an ideal age to start? I'm guessing "yesterday." :)
Dave Nadig: I think the right time to talk about it is when your kids are starting to earn some money.
I talked to mine about saving in general when they were young, and gave them passbook bank accounts to learn about how to track money.
But I didn't talk to them about retirement savings until my daughter got a job.
Certainly, once ANYONE, child or no, is in a job that actually offers something like a 401(k), that's prime-time.
Hugh Radditch: Greetings Dave. Do trade wars/tariffs impact gold prices?
Dave Nadig: Really good question. There's no causal link. There's no academic reason tariff=gold flows or gold price moves. However, trade wars should be seen as perturbing the natural market, increasing uncertainty and volatility.
And gold is often the safe haven asset some investors look to in such situations, whether it's because of a trade war, or trouble in the Middle East, or contentious politics, etc.
So in that sense, chaos is good for gold.
I'll knock two of these out at once here:
Dirk: What was the point of creating a finite amount of bitcoin (as opposed to dollars, of which the mint can always print more)?
Archie M.: We getting any closer to a bitcoin ETF being approved?
Dave Nadig: So the point of having a limited supply is that it's immune from inflation. It's the same reason some folks want to be on the gold standard.
If everyone agrees to do all their transactions in bitcoin (or gold), then the gold or bitcoin becomes the yardstick between other goods.
So a barrel of oil is worth X, but a bushel of corn is worth X/100, for instance.
As for the ETF likelihood, the best thing I can say is that i know conversations -- real conversations about details -- are still happening with the relevant regulators.
As long as it's not a "hard no," I think there's still a good chance.
I had a bet with Todd Rosenbluth, if I recall, that we'd see one this year approved. I still think that's possible, but I'd give it 50/50 odds at this point.
Pierre: Good morning Dave. What’s an “underlying” as regards ETFs?
Dave Nadig: So we use the word "underlying" to mean "what does this thing actually own" usually.
So SPY is an S&P 500 ETF, which means the "underlying" securities are the actual 500 stocks in the index.
Which goes to this question ...
Clement: Hey Dave: What does the phrase “… in an ETF wrapper” mean?
Dave Nadig: This is the converse: The ETF, SPY in this case, can be seen as just a container or wrapper for underlying securities.
The same is true of a regular old-fashioned mutual fund: It's just a wrapper for a bunch of underlying securities as well.
Where it can get tricky is with something like an exchange-traded note, like say, VXX.
VXX doesn't "own" anything. It has no "underlying" and it's not a "wrapper" of anything else. It's just a note: a promise to pay a pattern of returns based on some math.
(The math in the VXX case being a notional basket of VIX futures contracts.)
JD: What are nontransparent ETFs? I thought transparency was one of ETFs’ selling points.
Dave Nadig: Yes, transparency IS a key feature of ETFs.
However, there are many active managers (particularly active stock pickers) who believe that if they showed their full hand, they'd get front run, and thus they'd lose their source of excess returns.
For that reason, the mutual fund industry has been looking for a way to put their active strategies into the ETF wrapper, without having to show absolutely everything.
There are four or five versions of how you might do that. The one making headlines has been Precidian, because it got preliminary approval for its approach (which uses a blind trust in between the ETF itself, and the authorized participant who does creations and redemptions).
Whether this is valuable for INVESTORS remains to be seen!
Troy: Which annoys you most: headlines (and Tweets) about tat-for-tat tariffs, or headlines (and Tweets) about bond ETFs and the potential for a liquidity mismatch?
Dave Nadig: For SURE the weird/bad ETF headlines.
Tariffs are real. Whether I agree with them or not, imposing/removing them is as real an economic factor as interest rates.
But most of the scare-mongery ETF headlines are just noise, and thus, annoying.
The E in ESG: Why do so many ESG ETFs, including Ishares; lineup, have such a high percentage of their underlying holdings in fossil-fuel-related companies? The 'E', in a lot of cases, is the most important part of ESG investing.
Dave Nadig: Well, this is mostly a definition problem.
For you, carbon impact and being fossil fuel free may be the important part.
For someone else, board diversity or social welfare may be the most important part.
Perhaps more than any other corner of the ETF market, ESG is extremely personal and wildly divergent.
Even more to the point, both a "left leaning" and a "right leaning" version of a single issue -- say, gun control -- can be seen as ESG. Just in opposite directions.
It's FAR too personal to be uniform, which is one reason I think direct indexing will take off in ESG before anywhere else. No two people can even agree on it. It's more complex and nuanced than even smart beta.
Speaking of which ...
Samantha R.: Is smart beta’s popularity declining?
Dave Nadig: I think some of the hype has fallen off, but Cinthia Murphy did a great piece last month on this:
She points out that while we may be slowing down a bit on the hype, from an assets perspective, smart beta is doing quite well.
Here's the juicy quote:
"While vanilla funds saw total assets under management (AUM) grow 4.3% in the time period, smart beta fund assets grew 10.9%, according to FactSet data."
(The time period was TTM at the end of February.)
Tactical ETF: Pacer released some new ETFs this week, one of which tracks the S&P Developed Ex-US Large Cap Local Currency Total Return Index. What is this index: Simply Developed International or Developed International Large Cap? Not much info is out on the web.
Dave Nadig: I saw that launch. It's a version of their moving average "flipper" strategy that moves between cash and an underlying equity strategy.
in this case, the fund (PTIN) uses the index you mentioned, which isn't anything all that fancy: It's just all the developed world but the U.S. without any extra currency shenanigans. It includes Canada, which makes it slightly unique.
But it's the same index that the State Street fund tracks, SPDW, just with the added "in or out" flipping methodology that goes to cash based on momentum signals.
Core Investor: Is BBUS a good core holding? 2 bps is pretty low! Or is something like VV a better large/mid or VTI/ITOT for all cap?
Dave Nadig: BBUS is definitely a "LMID" strategy, and you can't argue with the price. The only real caveat is to be careful trading. It's doing fine, and the spreads are reasonable, but it's still relatively low volume, so just be careful to use limit orders going in or out.
As for VTI/ITOT, it's wrong to think that they add a LOT of anything to something like BBUS.
While BBUS has basically no small cap, VTI only adds a few percent of small cap, and a few more percent of midcap.
So they're not dramatically different.
OK, last question here:
Donald: Can the Fed specifically do anything about inflation? (Or recession?)
Dave Nadig: Nope. The Fed (and the Treasury, and the IRS and Congress, etc.) can really only wield blunt swords from the sidelines of the battle. The battle always happens in the giant scrum that is the marketplace.
So they can try and pressure things: raising interest rates to slow down the flow of capital, which theoretically can keep prices lower then they might be, and so on.
But I think (and this is just my opinion, which many disagree with) that the press and the markets tend to overestimate the actual causal effect of the Fed. The short-term reactions are far more violent than I think are justified.
With that bit of prognostication, I'm going to wrap. Sorry if I didn't get to you, but we'll be back on our somewhat-normal Thursday time slot next week.
Have a great weekend everyone, and thanks for joining us!