Live Chat! Different Ways To Invest In Gold ETFs

January 24, 2019

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


Dave Nadig: Good afternoon! And welcome to Live Chat!
As always, you can drop questions in the box at the bottom of the page.
I'll type till my fingers go numb (about half an hour) and get to as many of your questions -- hopefully ETF-related -- as I can.
With that, let's get started.


Anon: Now it's like a thing: what's today's soundtrack?
Dave Nadig: Hilarious.
So, at the moment, Greta Van Fleet, three kids from the midwest:
But on to the real questions. Let's start with Todd:


Todd Rosenbluth - CFRA Research: Hi Dave. On the latest ETF Prime Podcast, you mentioned a lot can be done with technology to support ETF investors and proxy voting to ensure corporate governance is not a big problem, as the Big 3 own more of Microsoft, Apple, etc., stock. I'm intrigued. Can you kindly share examples?
Dave Nadig: So the core issue is this: If I own SPY, how does State Street take into account my preferences when it comes time to vote the proxies for the 500 companies?
Right now the answer is, "They don't, at all."
Instead, they have their own set of principles based on which they vote in each company's proxy. So in the SPY example, SSGA has been clear they want more board diversity, so they skew that way.
But they don't, for instance, ask me if I want this person or that person.
(And to be clear, the vast majority of the time, I won't have an opinion).
So what's needed is a way for them to essentially "poll" me about the things I care about. There are only so many hot-button issues: risk management, finance/M&A, governance, social/environmental factors and so on.
Right now there are firms like trying to solve part of this problem -- connecting companies one at a time with actual shareholders.
But I imagine a world in which SSGA sends me a survey once a year, asks my opinions, and then either fractionates their vote (57% of our shareholders vote for X), or majority-rules.
And that would solve a lot of the concerns about "too much power" in the hands of the big index managers.


Margot Iver: Is there a key difference between investing in gold ETFs and investing in gold miners ETFs?
Dave Nadig: Hi Margot, great question! HUGE difference.
For years, it was actually pretty tricky to buy gold itself. If you wanted more than a few ounces, you needed a vaulting system, or a certificate system where you buy "shares" of gold in a specific vault.
Back in those days, investors would often use miners as a proxy for gold prices. And gold companies actually managed their own hedge books to make their performance even more tied to the price of gold than it might otherwise be.
But in today's world, most miners don't do that anymore, and are also MUCH more diversified. So they're mining copper and rare earths, etc.
And, of course, buying GLD or BAR or something just as easy.
So I'd think about them completely independently. You get single-stock risks with miners, but you also get actual businesses that can do things like pay dividends or invest in new ideas. The yellow metal can't do either.
(There are also tax differences. Gold ETFs are taxed as collectibles at a flat 24% when you sell on gains, over any time period.)


Dina: How soon do you think the amount of money in passive funds will surpass that of actively managed funds?
Dave Nadig: Funny you should ask, as this is a slide in my stump speech for Inside ETFs every year. Short answer: 2025-ish.
That's the date Matt Hougan and I put on the board 10 years ago, and so far, we seem to be on track.
That's ETFs vs. mutual funds, in the U.S., which is of course only one way to count. If we go active in ALL its forms vs passive in ALL its forms, I wouldn't be surprised if we're much closer. There's a LOT of undercounted institutional money tied to indexes in separate accounts.
And of course, the definition of "passive" is shifting by the day.
But that's my short prediction: 2025.
Two questions on the defined-outcome ETFs:


Nemo: As the defined-outcome ETFs are indexed to the price-only return of the S&P 500, is it fair to mentally add the estimated dividend yield to the fund expenses for comparison purposes? With limited price upside and such a significant expense drag (2.60-3.0%), wouldn't there be major concerns about longevity risk if trying to substitute them for part of an equity portfolio?
Dave Nadig: So you're not wrong. The funds (like BOCT) use SPX options, which are tied to the price index.
That doesn't make them "wrong." It's how the options market generally works.
So in that sense, if your comparison is purely SPY vs. BOCT (for instance), then yes, you should consider the TOTAL return of both. In the case of SPY, that includes reinvesting the dividends as you get them.
But calling it an "expense" seems wrong. It's not like Innovator is pocketing that. They're just investing in something different than stocks.
But yes, you should consider it.


Matthew Vazquez: Did you see First Trust filed to launch two buffered ETFs in April? Will this impact Innovator’s chances for success with their Defined Outcome series?
Dave Nadig: I did see that thanks to our intrepid filing monitor, Heather Bell! And boy, it really does just look like a straight copy.
History would suggest second movers in a narrow niche like this have a hard time getting much share. Who knows when the First Trust funds will launch, but it's not inconceivable that the Innovator series could have a full cycle -- a year -- behind them to talk about before they get out the door, in which case, I can't see a huge upside -- unless it's really targeted at internal distribution.
First Trust is a monster when it comes to distribution management, so I wouldn't count them out. In fact, it's probably likely they're filing because of demand, not just to play me-too.
But yeah, I think first mover here wins, overall.
That's the story on the new filings:


ETF Bro: What percentage of active fixed-income ETFs actually create and redeem in-kind vs cash baskets?
Dave Nadig: Nerdy question. Love it. I would say the majority of active bond ETFs do cash create/redeems -- which is easy to say, because it's the default for PIMCO, which is the biggest player in active bond funds.
I also expect this could change when the ETF rule finally goes into effect, because the ideal situation (from the fund's perspective) is cash creates/in kind redemptions.
That lets them manage tax lots, but still trust their own desk for buying bonds, which is mostly what they want.
It's one of the two reasons bond funds tend to be slightly less tax efficient than equity ETFs -- this, plus "forced selling" in index funds as bonds get too short-duration.
A few industry questions I'll bolt together:


A. Twellman: How will/are managers dealing with race to zero?
Jesse: Hi Dave, following up on the question above. ETFs only made $7 billion in revenue for assets that are in trillions. This can't be good news for small/new entrants in the industry. Will the giants just gobble up the small fish? Will consolidation happen a lot sooner than normal?
Dave Nadig: The reality of the ETF business is that a lot of it is pretty low margin. So how do big firms deal with that? Well, we've seen some layoffs in a few firms ... although from what I see, that's mostly not from the indexed parts of their businesses.
But the flip side is: Index ETFs are enormously scalable. It doesn't take much more labor to run a $50 billion fund than it does to run a $5 billion fund.
Small players have to have some sort of an edge.
It can be a product edge (like, say, Innovator we were just talking about). It can be a distribution edge (which is usually because they are a big firm, with a small ETF business).
Or it can be even something like a content marketing edge.
That's how I see firms like Cambria, for instance.


Quentin: How does a DIY investor rebalance, or is that even necessary on a modest account? Mr. Bogle always said to forget about it and dont touch it, right?
Dave Nadig: Hi Quentin; great question.
Of course, the answer is, "It depends." For example, say you have a dirt-simple two-fund portfolio, e.g., ITOT - iShares total market, for all the equity, and, I dunno, WBND, Vanguard's world bond fund.
And you have them set at 60/40. The question is, What you do when we have a BIG move?
So say this time next year, bonds have tanked, and stocks globally took off.
Now you're sitting on a 70/30 portfolio. Are you still comfortable with that?
That's the question. How extreme does it have to be to where the portfolio no longer represents your investment objectives?
A lot of folks I know have either a % trigger -- when this fund gets over X% of my portfolio, sell some. Or just a regular look-see. Like a post-New-Year look.
But if it's taxable money, you have to consider gains, which might make you wait even further.
So I think at least annual is pretty reasonable. That's about when I look. But even I just forget sometimes if things seem to be working OK.


Jana: Last year you had Serena Williams at Inside ETFs, and this year I see you're having Joe Montana. How do you decide what cool keynote speakers you'll have?
Dave Nadig: Well, I wish I could take credit for it all, but doesn't actually run the Inside ETFs event in Florida. We're a proud sponsor and partner of the event, but it's owned by a big events company: Informa.
Some years ago, we sold the event itself.
But I will say, it's always a long and interesting conversation for nonfinancial speakers. Ultimately the question is ALWAYS just a trade-off between "how much does this person charge" and "how interested do we think the audience will be?"
But this year, I had no say or input (grin). Just like you, I'll be excited to hear everyone!


jamesbond: Hi, I just tried to buy ARK on gene modification; however, due to EU legislation, I cannot buy it (I can't buy Canadian or US ETFs). Can you recommend to me something similar? I don't think it can be on the U.K. stock exchange either (due to tax reasons).
Dave Nadig: Hi Mr. Bond.
Yeah, smaller issuers often don't go to the expense of cross-listing or relaunching their strategies in non-U.S. markets.
Vanguard, iShares and so on -- you can usually buy either a cross-listed or locally managed equivalent of a popular U.S. fund. But small folks like ARK, that would be really tough for them to manage.
What I do know is that larger investors simply fund U.S.-domiciled accounts, but that can get you into all sorts of sketchy tax/legal issues that are far outside of my area of expertise.


Terry Wilhelm: The Winklevoss brothers say they have a plan for bitcoin ETF SEC approval, but how can that even happen with the government shutdown?
Dave Nadig: Hi Terry. No inside knowledge here.
But essentially NOTHING interesting is happening at the SEC right now because of the shutdown.
If a fund company has an existing trust, a plain-vanilla ETF in the same series can come to market generally.
We had a great story on all the impacts here:
Safe to say, with 94% of staff gone, the building is empty, and nobody's reviewing anything new or interesting until they come back.


Bernard Leverton: Best guess on how/when US/China trade war ends, especially in way that will produce salutary effects on our economy?
Dave Nadig: I'm actually quite pessimistic on this.
I don't see it just "resolving."  I think it could be another year or so. But I'm not sure that's the end of the world for investors. At least, I think it gives China a chance to focus internally a bit, build other trading partners, and so on.
I actually think it's much worse for the U.S. long term than it is for China.
But I don't see China giving in on the demands Wilbur Ross reiterated just today: total overhauls of foreign investment rules, rewrite of all their IP laws, and so on.
Those things don't happen quickly, even if China just caves.
OK, that's a wrap for the day. Great questions, everyone.
We should be here same time, same place next week.

Plug of the day: If you haven't seen ETF Edge over at CNBC, it's their new weekly (Mondays, 12:30 on-air and streaming show. I'll be on again Monday with Bob Pisani.
Link here ...
... to see the past shows.

Thanks everyone. We'll have a transcript up shortly. Have a great rest of the day, and a great weekend.

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