Live Chat: Defining Growth, Value & Heartbeats

April 12, 2019

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



Dave Nadig: Good afternoon! Welcome to Live!
As always, you can enter questions in the box below. I'll get to as many as I can here in the next half hour, and we'll repost with a video by the end of the day, in case you miss something.
With that, let's get rolling!


Bob: What's our trading soundtrack for the day?
Dave Nadig: Nothing like having a regular gag. Today I'm listening to Minus the Bear:
Can't get Spotify to link, but paste it in Google; you won't be sorry.


Duncan S.: What are “growth” and “value” ETFs?
Dave Nadig:  This is a shockingly good question. I love how we absorb these words and never define them. Because no two people will ever agree on the answer.
Conventionally, value stocks are those that trade at a low price to something, usually a low price-to-book value.
Growth stocks are sort of an antithesis to value, but it's not just high price to book. It can be anything from momentum factors to increasing earnings yield to free cash flow growth over time.
Historically, people have looked at value as a kind of long-term way to generate alpha, because cheap tends to mean "beaten down" or "overlooked."
I'm not actually convinced anything is overlooked in the modern markets anymore, however.
The most important thing when looking at this in ETF wrappers however, is style consistency.
One person's growth methodology might get Apple a top spot, but another company's value methodology might put Apple in too!
And some methodologies split a universe like the S&P and just say, "We'll put the 250 value-y looking stocks in one fund, and everything else in the growth fund," and so on.
It's a deep, deep pool of research.


Mason J.: So what’s a "heartbeat" trade?
Dave Nadig: So, quick link:
Elisabeth Kashner (former head of research here) and Lara Crigger (one of my writers) have been chasing these weird-looking flows numbers for years.
Essentially, when a fund wants to sell some of ABC to buy some XYZ as part of a rebalance, they have two choices.
They make the trade (potenitally booking a capital gain).
Or they can "push" the ABC shares out, and then get some XYZ shares in, through the creation/redemption process.
When they do the latter, they find a friendly counterpart to do the big create, then the big redeem.
This keeps average investors from getting a gain just from rebalance activity.
It helps ETF investors defer their tax bill until they actually book a gain.
(It's been making headlines because BB published a woolly-headed take on it, based on our research here and at FactSet.)


Evan: In the whole of the finance arena, how’d you decide you wanted to get into ETFs in the first place (as a career)?
Dave Nadig: Completely by accident. I started at Cerulli Associates, which I founded with Kurt Cerulli back in ... 1991? Something like that.
and we talked to a LOT of advisors making the move to fee only. As part of that I got interested in the 401k market and indexing. Wells Fargo Nikko (then a huge index company) hired me to help with "retailizing" their index expertise.
Several years later, the firm became BGI (which became Blackrock) and they started looking at ETFs in 1995ish. I happened to be in the room
I'd love to say I was all over it -- I wasn't I thought they were doomed. I couldn't figure out how to solve the chicken/egg problem of getting the initial assets and trading going.
Glad I was wrong though!!! And I've learned a lot along the way.


Phil: What ETFs do you think will hold the most shares of Uber and Lyft by year end?
Dave Nadig: Well, the easy answer is IPO or FPX -- two IPO focussed ETFs.
They're the most logical. But from there I'd look to Kathy Wood at Ark.
Shes super smart about emerging tech companies, so if she thinks they're worth the price of admission, I'd expect her to load up. She makes high conviction bets.
So I'd watch what she does, or at least subscribe to Ark's regular updates. They broadcast their trades


Nate Geraci: Do you think all ETNs should be *required* to have an early redemption or call provision that is essentially automatically triggered upon an ETN delisting in order to prevent zombies such as DB's ETNs?
Dave Nadig: Yes, I actually do. The very worst thing that can happen to an investor in the ETP space is you buy an ETN and it delists. You have basically no recourse but to wait decades for them to mature (and get an NAV payout) or to sell at whatever price you can find on the pink sheets.
I like to hope that most investors are smart enough to notice their ETN is getting delisted.,
but I'm sure some folks don't get the memo, and there are millions of $ tied up in some of these delisted ETNs.
Pretty much all new ETNs feature a call provision, but some of these old ones just don't actually give the issuer discretion to pull them back in.


SunnyWindy: To me, the SEC approval of a nontransparent ETF structure is a BIG deal. Do mutual fund and/or ETF companies think this is a BIG deal? (I was slightly surprised that the media didn't make a BIG deal about the news.)
Dave Nadig: So, it's a big deal for ETF nerds like us, but there's no actual product you can buy yet.
Until there is, I don't expect much mainstream coverage.
There are some mutual fund companies in the wings that think this is a very big deal, and have been waiting for this before entering. So I suspect by year end we'll see some actual products, and then we'll be writing articles about what it means for investors, and the mainstream financial press will catch on.
Whether any money flows in remains to be seen.


DFA: What are your thoughts on Betterment's announcement of its partnership with DFA? Does it make sense for Betterment to start using mutual funds now in 2019 or should they have considered building out models using John Hancock's subadvised DFA ETFs?
Dave Nadig: I thought this was a bit of a weird announcement.
Here's a version:
Essentially, all they're doing is allowing Betterment-linked advisors to get their DFA funds through the platform.
DFA funds are broadly available through most RIA custody platforms (like Schwab, for instance).
Although not always without a transaction cost.
So I guess there's a small edge here. but the barrier to entry for DFA is that they require RIAs to go through their training before they can even put the order in.
It's almost cultlike -- you have to join the club to invest. Luckily, DFA is a solid shop, and worthy of the love many RIAs give them.
So, good PR move for Betterment, but I don't think it actually matters all that much.


Todd Rosenbluth-CFRA: Hi Dave. Great piece on this week on most shorted ETFs. We got inquiries that I handled about if the impact of the stocks inside XRT and others is limited. But would love you to offer your take. Thanks.
Dave Nadig: I'm not sure I can type fast enough for the real answer here.
XRT is one of the ETFs that got grandfathered when Reg SHO happened. So any "naked" short positions held by market makers that didn't have a locate got to just "hang" in the system.
So if you look, XRT has been hugely short literally forever.
What you need to watch is the delta on shares actually short.
That would give you some small bit of info. If a ton of new shares go short, then that potentially puts a bottom in, like any other large short position -- 'cause all shorts become buys eventually.
(The other interpretation is one of sentiment, in the other direction, of course.)
So for the half dozen or so "perpetually short" ETFs, this really doesn't mean anything.
It's a ghost in the machine.


Muller: A zero-fee ETF, I get. But how can ETFs cost less than that; does the issuer pay you somehow?
Dave Nadig: Well, that's what Salt Financial is trying to do. They're kicking $50,000 into the fund.
While I give them props for finding something clever to get headlines, there's no way to interpret but as a gimmick to raise assets.
Nothing wrong with that -- raising assets is a noble goal.
But yeah, they'd have to basically just pay you. And they do it for the same reason dot-com companies don't charge for things for years -- to build a base they can charge or sell things too later.
Its dot-com-meets-fintech.


Mike: is there a micro-cap ETF?
Dave Nadig: A nice easy question. There are three:
Although only one has any significant assets: IWC.
It's a super-volatile space, so do your research. Micro-caps sometimes become Google. They often become zero-caps.


Anon: It has been proved that the Precidian ETF can be reverse engineered, so why do you think it was still put forward for approval by the SEC?
Dave Nadig: Nobody has "proven" anything because we don't have live product, with live holdings and live traders.
I see all the nontransparent active things as a trade-off between "how easy is it to arb" vs. "how much does the PM really need secrecy?"
But ultimately, that's for the PM to decide. If they think the Precidian structure is "too transparent," nobody's forcing them to use it. They can keep running mutual funds.
The "reverse engineering" here is simply: I give you a state (a static portfolio), weeks old. So I tell you I held all this stuff in, say, February.
I now tell you second by second how that portfolio -- and every single trade I make for 90 days you don't see -- results in fair value.
You build an algo to try and "guess" what trades I have made from that steady state to generate this new pattern.
You're never going to get it perfectly, but sure, you might be able to suss out that they went from 10% tech to 80% tech.
I don't believe this will matter. To anyone.
But that's just me, and like i said, let the market decide!


Priya: Hi Dave, Best ETFs to use to play oil’s rally?
Dave Nadig: Sumit Roy wrote a solid piece on this just recently here:
So two answers really. If you think oil -- the actual crude -- is going to continue rising like this, then short-term oil futures is the cleanest way to express that: something like USO.
But, if what you think is "now we have higher-priced oil, and this is the new normal, who benefits," then you'd look at the equities.
So XLE/XOP are the two big ETFs there.
The premise is that they'll do well with high prices.
I think that's a little simplistic, since many of the holdings are hugely vertically integrated -- yes they profit from selling higher-priced oil, but they also PAY more for inputs into refineries, and so on.


onlavu: Hi, in Europe, we cannot buy US ETFs due to EU legislation which came into effect quite recently. Is this going to change? Are there any initiatives to make it any better? Thanks
Dave Nadig: So, I don't see anything that will make cross-border trading magically easier for EU citizens I'm afraid.
Hence I know many (very rich) folks have accounts in multiple domiciles, to avoid this.
But if you're just a normal person, living in, say, France, you're going to have to live in that regime. If it makes you feel any better, I don't think I can buy UCITS funds in my Schwab account either.


Appreciate the great questions and appolgize for the ones I didn't get to.

We're shooting for 1:00 p.m. ET Wednesday afternoon next week, so join us again then!

Thanks everyone, we'll see you next time.

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