Live Chat: Commodities Made Easy & New Pot ETF

April 17, 2019

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



Dave Nadig: Good afternoon, and welcome to Live!
You can ask questions below, and I'll get to as many as I can in the next 30 minutes. I'll fire up a video for a longer answer on something that catches my eye later on.
We'll post all of it right here with a transcript.
As always, there's a soundtrack, but today it's vinyl: listening to Loretta Lynn's Coal Miner's Daughter.
From the excellent Vinyl Me Please record club:
But let's get to the ETFs:


Roy: Was curious whether it's true that many of these dual-share class IPOs won't be adding major indexes including the S&P 500?
Dave Nadig: Each index provider is dealing with this differently, but in general, index providers are reluctant or flat-out refusing to add nonvoting shares to major indexes.
So in some cases, they're only going to own the voting class, and de-weight (if the index is cap weighted) to only represent the voting share class.
But this is a huge ongoing governance issue, and I actually think we'll see some regulatory action here in the next few years.
The nonvoting shares violate a core tenet of public ownership that the markets are designed around.
This, combined with a lot of focus on "passive" ownership in index funds, is a big deal issue for regulators I know.


J. Gross: Hello Dave, Vanguard recently filed for a new commodity fund in a mutual fund format ( It is launching in June 2019 and comes in with an expense ratio of 0.20%. Do you think this will finally spur ETF issuers to lower expenses on their diversified commodity ETFs? I believe this is one area of the ETF universe that is still very expensive and needs more competition. The largest diversified commodity futures ETF (symbol: DBC) still has a mgmt. fee of 85 bps. Your thoughts would be appreciated.
Dave Nadig: So, first off: Yes - every time Vanguard makes a move it pressures the industry.
However, I'd point out there's a great broad-based ETF right now that's 25 basis points: COMB
It's light on energy, but its a solid, widely tracked index, and it doesn't force you into dealing with K-1 partnership taxes.
It's a little small, and a little harder to trade than the biggest, but it's a completely viable fund.
Don't be scared off that it's listed as "active" - that's more of a structural peculiarity than any real active management. It tracks the Bloomberg Commodities index.


Pink Pony: What's the most unique use of an ETF you've seen?
Dave Nadig: Great name. So, a few years ago, a major institution wanted to get access to a specific set of corporate bonds that were hard to trade.
So they worked with an authorized participant to accumulate a huge chunk of an ETF that held a bunch of what they wanted, had the AP present for redemption, took ownership of the bonds they wanted, and dumped what they didn't.
I think that's a pretty ingenious and unique use of the creation/redemption process to effectively force efficiency into an inefficient market.


Todd Rosenbluth - CFRA Research: Hi Dave. The second cannabis ETF is now available, joining a pair of cybersecurity ETFs, multiple video gaming ETFs and other themes like robotics, online retail, etc. How do you think investors should compare these similarly sounding products?
Dave Nadig: Hi Todd! I think you mean YOLO, but I thought it didn't launch until tomorrow!
Regardless, I think YOLO is interesting ... for a few reasons.
Here's Lara's excellent summary:
But the fact that they worked with BNY to be a "real" normal custodian for this is really fascinating.
I'm really eager to see what's actually in the portfolio -- which will be somewhat driven by what BNY is comfortable holding in custody.
I suspect that whatever restrictions BNY puts in place will make the fund look quite different than its big competitor (MJ).
So as you love to hear me say: its gonna be all about what's under the hood.
All else equal, I like having a more "normal" set of partners like BNY than the rather odd Wedbush/ComputerShare setup MJ currently has.


Alicia K.: Good morning Dave. Could ETFs exist without indexing, the creation/redemption process, or authorized participants?
Dave Nadig: Without indexing, sure.
But the C/R process is really what makes ETFs work at all. Without it (or something new) there's no reason for an ETF to trade at a fair price. They just become closed-end funds.
Almost everything cool about ETFs is a side effect of the C/R process: the efficiency, the tax advantages, the access, transparency. It's almost all from C/R.
And to do C/R in large blocks, you need a market maker to sit in the middle, so that's the AP.
So it's hard for me to see how you get something that works the same that's not built the same way. Or from the same bones.


Emily: Can you please explain the creation/redemption process for Precidian's new nontransparent active ETFs? Do the APs just deposit a bunch a securities in the trust and hope that the "trusted agents" are creating/redeeming efficiently on their behalf? At some point, wouldn't the APs know which securities were being moved in or out of the blind trust? Also, it seems like a lot of market making doesn't involve actual creations/redemptions, but instead hedging with correlated securities. Would this be possible for these funds? Thank you!
Dave Nadig: Whoo boy. Big question. But in short: Instead of the AP getting a list of securities from the fund, a new entity -- the blind trust and its representative -- gets that list. And only they get  it.
And they're the ones who do the buying and selling of those underlying securities.
So you can think of the AP in this case as just making a cash transaction with the blind trust, who then goes out and does the real work.
The AP has to still manage some sort of hedge, which is why there's now this VIIV (verified intraday indicative value) so they can build their own tracking model against it.
And every 90 days, they get the full view, and can tweak their model.
Whether this all actually works as intended? Honestly, we have to wait till something launches.
But I'm optimistic the plumbing holds ...


J. Hayden : What’s the ETF Virtual Summit?
Dave Nadig: Wrong website! LoL. That's Tom Lydon/ETF Trends' set of 4 webinars they ran today. It's a fun event, but it's over till next year!


Jana Marcus: Don’t think this is a specific asset class, but how have solar ETFs been doing lately?
Dave Nadig: Gosh, I haven't looked in ages, but did just now, with TAN:
Sort of looking like the market, honestly, but with a longer bad run in 2018.
Same Christmas Eve bottom as everything else.
Tough to love solar in this political environment though. The combo of tarrifs and general hostility the admin seems to have toward alternative energy is a hard pill to swallow as an investor.


Ben Frankken: Would inflation increasing decrease volatility?
Dave Nadig: Now that's an Econ 101 question that no professor will touch. Grin.
In all seriousness, the conventional wisdom is that inflation and equity vol are somewhat correlated. In fact, the "vol spikes" we've seen in the last few years often get reported as a reaction to "inflation fears" -- not that any actual inflation has shown up much.
So if we did have sustained inflation (which I don't see), I suspect we'd have normal vol a bit higher than here, but honestly, for a lot of these macro factors, I feel like we're in some pretty untested territory.
The global QE/QT cycle really throws a lot of textbooks out the window.


Denise Rich: I understand that LIBOR’s going away in 2 years. Was that the plan since its inception, and, what’s going to replace it?
Dave Nadig: Definitely not the plan from inception. This is a specific reaction to the LIBOR scandal from a few years ago.
It's being replaced by the "Secure Overnight Financing Rate," or SOFR, which is a much less interesting acronym.
The idea is to create something more transparent and replicable to base all these financial instruments on, which makes sense.
Off the top of my head, I believe (but could TOTALLY be wrong) that the NY Fed is going to calculate SOFR, or at least, they built the math for it.


Sy Berghe: Since the SEC is cracking down on ETF names that could “mislead investors,” why wouldn’t that have been something they did some time ago? Is this something new that issuers have started doing?
Dave Nadig: The SEC has always looked at naming conventions, but they've rarely acted. As for why they're acting now: my suspicion is this:
ETFs are "bought" not "sold" really. Certainly individual investors aren't getting visits from wholesalers.
Thus, the ticker and fund name matter substantially more than they do for something like, Growth Fund of America.
Because ETFs are at least at the face of the coal mine, transnational, where mutual funds are much less so.
So I think that's put some more focus on naming accuracy.
Mostly, I think they are wary of blockchain, period, and that was the thin end of the wedge.


Tarek: BRICS were all the news for some time, but we haven’t heard much about them lately. What’s changed?
Dave Nadig: BRICS were the early entry point for emerging market exposure.
When the less developed EM countries were harder to access, BRICS was almost a kind of "liquidity cheat" to get the economic exposure without the operational risk.
The operational risk is largely not an issue anymore, so now BRIC funds look like underdiversified exposure to EM.
If you think about it, is there really an economic thesis around why you should own Russia and Brazil, but then skip a dozen other countries?
I also think that investors over time get more sophisticated. And I imagine a lot of folks realize that what's happening in Brazil is utterly unrelated to what's happining in China right now: unique political risks, unique economic positions, etc.
So as BRICs have become less a thing, that exposure has just gone into EM ETFs.


Nah-dig or Nay-dig?: Between all of the divisions in the SEC, FINRA, the ICI, the exchanges, all of the attorneys and all of the compliance officers and compliance rules, is ANYONE addressing the fact that this industry is turning into a monopoly in front of our eyes?
Dave Nadig: Love the name: and either is correct (not helpful I know, but families are weird).
There's not a lot of doubt that Vanguard/SSGA/BlackRock suck up a lot of the flows.
But I do think it's also worth noting  there are over 80 issuers now -- a decade ago, there were half that many.
And the fastest-growing firm last year wasn't one of them; it was JPM.
So there's a surprising amount of activity going on.
As far as "addressing" it, I'm not sure exactly what that would even mean. Do you honestly think someone's going to get the FTC to actually step in and break up Vanguard? Or BlackRock?
I'm not sure I see much in their practices that's hugely "monopolistic."
I supposed you could create a case that the fee wars are a kind of "dumping" to flush out competitors, but the biggest pushers of the fee wars haven't been the big guys.
It's been Schwab, Fidelity, GraniteShares, etc.
So while you might not like how big some of these firms are, I don't see them as being unfair in their competition.

So many questions! Sorry, I'm not going to get to them all, but I'll grab one more here.


Sadie H.: Dave: If investors were to “interview” financial advisors before hiring them, what’s the main question you’d recommend asking?
Dave Nadig: This is a fantastic question, and I'm actually not sure I have the perfect answer.
I think the most important thing is what questions THEY ask.
Perhaps the most telling thing you could ask is how often, and about what, they communicate with their clients.
You'd get a lot of different answers. Some advisors see themselves as portfolio managers, and their client communications are all about the markets, and what they're doing with investments.
Some would say that a quarterly call is their most important thing, because they're really financial planners who want to understand what's going in their clients' lives, not just what's going on in the markets.
But honestly, a good financial advisor asks GOOD QUESTIONS, much more than having a good elevator pitch.

OK, sorry, I've run out of time here. SO many great questions still in the queue, I hope you'll come back next week and toss them in.

Be sure to check out the ETFPrime podcast each week as well, where we also hit on a lot of these topics.

Have a great afternoon, everyone!

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