Live Chat: Esports & IPO Frenzy

June 20, 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 enter your questions below, and I'll bang out as many answers as I can in the next 30 minutes.
We'll post a transcript right after, along with a quick video.
With that, let's get rolling.


Bob: Soundtrack for the day is ...?
Dave Nadig: Heh. So I've been in a bit of a modern prog-rocky mode, so I've been listening to Glass Animals all day.


H. Tyler: Good morning Dave. What’s the difference between an index fund, and an ETF, since ETFs (mostly?) track indexes
Dave Nadig: Well, in some cases, not much at all.
You can, for instance, find S&P 500 mutual funds that are essentially identical to S&P 500 ETFs, with the sole difference being how you get access to them, and potentially taxes.
Something like iShares' IVV, for instance, is in fact a mutual fund under the hood. It just has exemptions that allow it to trade on an exchange (hence, exchange-traded fund).
So you get the trading (which can be good or bad -- some folks like knowing they're getting NAV at the end of the day, and that's fine; mutual funds still work!)
ETFs generally are more tax efficient than their mutual fund counterpart, because of the creation/redemption process.
But index mutual funds have such low turnover that, honestly, they're pretty tax efficient too.
So if you're sticking with passive indexes, there's nothing "wrong" with mutual funds; you just need to make sure you understand the true costs, and are comfortable only trading at NAV at the end of the day.


Grady: Any tips you’d impart to ETF investors regarding the current IPO frenzy?
Dave Nadig: There are really two funds in this space: IPO and FPX.
IPO is a bit more "pure" in that it ages out its holdings after 2 years. FPX lets them linger longer, and also can end up owning the acquiring companies when a small recent IPO gets acquired
Consequently, you have some very, very large companies in FPX you won't see in IPO.
In both cases, however, recognize that these funds dont get IPO allocations -- they buy in the open market some days after the IPO. So you aren't buying "pop potential";
you're hoping to catch the next Google.


Richard Rankin: I appreciate the informative videos you make here in Live Chat. Can we submit requests for topics here? It’s a great format for more in depth details than a typed Q&A can provide here … Thanks.
Dave Nadig: Of course! I take questions from this very chat window and usually just expand on the answer that I type.
I don't do one every week, if either I run out of time to record, or if its a question i've basically done on video already.
But questions are always welcome!


Janine Dillon: Should where the Fed sets interest rates affect how investors buy/trade bond ETFs?
Dave Nadig: Well, sure, in the sense that Fed policy has a big impact on bond prices and overall returns.
All else being equal, if we're in a declining rate environment (which it looks like we're heading into), you'd expect the prices of bonds to go up.
A lot of the great bull run in bonds was because of that.
But the challenge is always that the market prices in these expectations in seconds.
Again, in the general case, lower interest rates for bonds means lower expected total return from bonds.
Ultimately, it's the coupon on the bond that matters most.
So with low interest rates, stocks look more attractive.
That's why we always read about the market "wanting" a rate cut. The market ALWAYS wants a rate cut, because Treasuries are competition for investor dollars. Making Treasuries less attractive makes stocks more attractive.


Geoff: How are esports doing so far as an ETF asset class? It’s not too “nichey” to succeed, do you think?
Dave Nadig: Hi Geoff -- So I'm a big fan of esports, both literally (I watch them and play them badly) and as an investment.
There's no question it's a niche, and the pure plays are a bit hard to ferret out.
But we've now got some healthy competition between ESPO and NERD, which have slightly different approaches.
Just recognize what you're buying is tech + media, essentially. Esports is part of it, but very, very few of these funds' holdings are 100% tied to esports. Most are more broadly videogame or game community companies.
I suspect at least one of these funds will survive for the long term. Of course, how they perform will have a lot to do with it.
But betting against gaming? That would be a bad bet, I think.


Schuyler: The “interval fund” aspect can’t be used in exchange-traded funds, right?
Dave Nadig: Great nerdy question. So interval funds are a weird hybrid that's in the 1940 Act.
Like a closed-end fund, you don't have daily liquidity. You get generally a quarterly offer from the issuer to buy back your shares.
But unlike a closed-end fund, you can usually give them money anytime, and also unlike a closed-end fund, they don't trade on an exchange, so there's no way to get out at ALL in between intervals.
So why bother? It lets them invest in private companies and less liquid securities.
Fidelity had filed for a weird interval-fund-meets-ETF thing, as a solution to the nontransparent active problem.
It was very clever, but I don't think it's going to go anywhere.
ETFs really don't share much in common with interval funds. They have to be even MORE liquid under the hood than a mutual fund, because you really can't, or at least shouldn't, ever close an ETF for creations or redemptions.
With a mutual fund, you can "close the window" for either new money, or redemptions in an extraordinary environment.
Doing that in an ETF is very rare and will cause it to trade out of whack with fair value.
It really only happens in situations where the underlying market breaks (think Egypt during the Arab Spring).


Jenna Wong: Is the sky the limit for what’s in the bucket of securities that ETFs hold, as issuers mull their next filings? I see there are “ETFs of ETFs” or they can hold sectors, or countries; what HASN’T been done yet in constructing new ETPs, that we might see next?
Dave Nadig: So, in the normal structure -- an ETF based on a mutual fund skeleton -- pretty much anything a mutual fund can hold is fair game. So that means some limits on derivatives, generally, but any kind of stock or bond portfolio is fair game.
If the strategy needs futures, then it becomes a commodity pool like USO, but you can put any futures in an ETF wrapper (but for bitcoin, right now).
And worst case, you can make an exchange-traded note on almost anything you can imagine. Because it's just a promise from a bank to pay a pattern of returns based on some math.
That math could be weather patterns or baseball scores.
The limiting factor is much more what the market will actually want than anything else. Again, there are some exceptions. The SEC isn't approving huge leveraged ETFs (10X the S&P!) or bitcoin ETFs right now.
Nobody's filed for a U.S. bitcoin ETN, but I imagine they'd stomp on that right now as well.


Ryan: HI Dave: Twofold question for you. Given gold’s at a 5-year high right now, does it stand to reason ETF investors should buy funds like GLD and IAU? And how does one decide if they should buy gold funds, or, buy gold miner funds?
Dave Nadig: Hi Ryan, so a few things.
As a tactical matter, waiting for an asset to be at a 5-year high as your buy signal strikes me as a bit of a bad idea. I'm not a big fan of market timing in the best case, but here there'd be a real argument for getting the timing pretty wrong.
As a more general matter, if you're looking to own gold through an ETF for the long term, they all get the job done.
The cheapest is BAR, and it's pretty much the same ETF as GLD or IAU.
Miners aren't gold -- they're natural resource companies. Obviously they're somewhat tied to how gold is doing, which is why, for decades, investors used miners as a gold proxy,
but with the advent of the ETF, you don't NEED that proxy. So ask yourself why you're interested in miners Do you think their businesses are undervalued? Or are you just trying to get gold exposure through the back door?


Theo: What would incentivize an investor to choose a nontransparent ETF? Seems counterintuitive. What perks do they have that might make investors select them over transparent ETFs?
Dave Nadig: So, nontransparent active solves an issuer problem, not an investor problem.
For example, there's nothing inherently better about an NTA fund vs a transparent doppleganger. They're the same assets. The big difference is that you don't get to see what's in it.
That's not an investor issue.
The reason many active mutual fund managers aren't in the ETF space, however, is that issue: They don't want daily transparency because they think it hurts their strategies' performance.
So in that sense, if you WANT a given strategy, and you want it in an ETF, well, this could help get that for you.
It remains to be seen what products actually launch and whether ETF investors are clamoring for them. Really only time will tell.


Todd Rosenbluth- CFRA Research: Hi from Italy. Do you think investors can build a country rotation strategy or is it better to just stay diversified in Europe?
Dave Nadig: Greetings Todd! So, I know quite a few advisors focus heavily on picking their country bets. It's a core part of Dave Garff's Accuvest business, for instance.
And he's done, and I know other folks have done, quite well, picking the winners, looking for value, buying PIIGS stocks when they get slammed, etc.
Personally, it seems very, very hard to be smarter than the global market, so when I see people succeed, I never really know if they just got lucky, or if they're wicked smart.
For most investors (or idiots like me), it seems like a mug's game, and broad developed markets diversification will win out over trying to get the calls exactly right.


Craig: How would you explain the wide discounts and premiums historically in HYD?
Dave Nadig: So, there are a few issues here.
The first is just how bond ETF NAV is determined, which is usually off the bid, meaning that the price that gets marked as the "NAV" at the end of the day is the "what can i dump this whole portfolio price?"
The trading price at the close is the "what do all the market participants think it's worth at 4 p.m. price?"
Usually, that means most bond funds show a small persistent premium, which is fictional.
Second, Junk munis are illiquid. Anytime you have underlying holdings that don't trade that often, the "price" used in the NAV isn't even based on live prices, it's based off a pricing service.
That pricing service uses an algo to make a fictional price based on how like-things are trading.
But a given bond in HYD might not have traded for days. So what's it worth right now? It's a guess.
The very best "guesser" in the market is -- you guessed it -- the ETF that trades all day between muni-bond junkies.
So HYD is actually the price discovery tool. In fact, I can guarantee you the price of HYD is one of the inputs to the model of what the bonds it holds should be priced at; like a snake eating its tail.
So the +1/=1% swing you see on the premium/discount is really just fiction -- it's the pricing services and the market in general lagging behind the "smart" money in the ETF itself. We see this in HYG, JNK and other less liquid bond portfolios.
This is a narrow case -- if you saw a tech ETF trading at a 1% premium, well, then you'd need to do some digging.
But junk bonds? Not something I'd lose much sleep over.

OK, that's the 30-minute mark. I appreciate all the questions and thanks everyone. Sorry if I didn't get to your question this week.

We'll be back, same time, same place, next week.
Have a great afternoon!

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