Live Chat: ETF Buffer Tools & Growth Vs. Value

August 15, 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 type your questions in the box below, and I'll get to as many as I can in the next 30 minutes or so, or until my hands fall off.
We'll have a transcript up at the end of the day, in case you miss something, and if I'm super motivated, a short video going into more detail on something.
But with that, let's get rolling.


Obligatory Bob: Tunes?
Dave Nadig: This week's soundtrack has been CVRCHES, despite being too hard to type:


RiskyMan: Thoughts on Innovator's filing of the Total Buffer ETF? This sounds pretty good when markets get as volatile as we have had lately. I guess it depends on what the cap is, though?
Dave Nadig: Longtime readers here will know I'm a big fan of funds that use all the tools in the box to deliver unique patterns of returns, and this one's no different.
As you say, the question will be what the cap is, however, I have to say, if it's as clean as it looks in the filings, almost any cap over bond yields should be seen as at least worth investigating.
The challenge, of course, is that these funds (which are just an extension of the existing flex-options-based Innovator buffered funds) have a three-year reset window.
It goes without saying that three years is a long time. It's like a generation in market-time.
But, for certain use cases (say, money you know you've got locked up till college bills are due), I think it's going to be really attractive.
So, like you, I'll wait to see what the final outcome is, but I think it's pretty darn cool.
Now if we could get all these funds at like 0.30% ...


Tony: Are "growth" and "value" opposite sides of the same metaphorical coin? Does owning an S&P 500 Growth ETF and a S&P 500 Value ETF add up to owning a traditional S&P 500 index ETF?
Dave Nadig: A surprisingly tricky question to answer!
Each set of pairs (and pretty much everyone offers G/V as pairs) uses its own unique methodology.
So, for example, the Invesco series (RPG/RPV) is a so-called pure set of funds.
What they mean by that is you get the 1/3 of the S&P 500 that is the most "growthy" in RPG and the 1/3 that's the most "valuey" in RPV.
The "not really either" group in the middle is simply not owned by the two funds.
So my advice is to always stay in-country; that is, stay with the same issuer, if you're trying to implement any kind of rotation strategy.
Whether it's sector rotation, country rotation or in this case, factor rotation, don't cross the streams, because methodology differences can really trip you up.
(Shameless plug: On all the ETF pages, you can now see the MSCI factor box (FaCS), which will give you some hard metrics about things like "valueyness" when you're comparing funds).
Great question.


Asa: Hello Dave. The SEC intimates that in October it will take up (yet again) its decision on bitcoin ETFs. Since they’ve postponed this so often, do you really think it’ll issue a ruling then, or will be it postponed again?
Dave Nadig: Well, a delay isn't a no.
I mean, that's sort of axiomatic, but the SEC could have either sat on it (not said a word, which is a kind of pocket veto) or it could have said, "Nah, go fix these things."
Instead they said, "Let's keep talking."
So I actually see that as a positive.
But I've lost track of which bar bets I've made on approval dates (and honestly, I'm always wrong; I got Precidian's nontransparent approval right, but wrong by four years).
I suspect, however, that the conversations are moving forward, and I still thing someone gets approved. At this point, probably not this year, but maybe Q1? I suspect October is a press.


Jemma: Do you think the introduction of nontransparent ETFs will vastly grow the ETF industry?
Dave Nadig: "Vast" is a big word.
There's no question that it has the potential to be a very big deal.
But I've heard quite strident arguments from both sides. I've talked to folks who swear there are billions and billions of pent-up institutional demand for NTA ETF strategies.
And I hear a lot of "prove it."
The structure is good. It will work. The question is entirely about demand. And that demand is unfortunately not all that knowable.
My hope is that we get a few high-profile wins out of the gate, and that kind of cracks open investor sentiment.
Because if you believe in a particular active strategy, the ETF structure is almost assuredly going to be a better mousetrap for you than whatever existing traditional fund you're in.
Taxes, efficiency, probably outright cost, trading, etc.
It's all tilted in favor of the ETF structure.


Glenn: Any types of (or specific) ETFs for playing the trade war?
Dave Nadig: Well, there are a lot of ways to play that question.
Putting my Econ hat on: Trade wars are bad for everyone. Seriously, they're just a giant tax. So a lot of the concern we're hearing this week is the trade war coming home to roost.
So if you believe that, well, GLD is sitting right there. I say that half in jest, but, the run in to bonds, gold over $1500, those are all reactions to the trade war in their own way.
The more boring answer is, "Yes there's a fund that specifically says it's going to win the trade war" and thats
It's very hard to recommend it though, honestly. It's actually underperformed in the few months it's been launched (vs. the global equity market it fishes from). It hasn't really moved off of its initial $2.5 million it launched with, to say nothing of being 0.81%, which is pretty darned expensive.
So I'd love to be wrong -- I generally route for success -- but I'm not sure it's going to hit the mark.


Dawn Petre: I assume SPY is the main ETF through which investors can get exposure to the S&P 500. What are some others?
Dave Nadig: Hi Dawn. So we have three horses in that race. SPY is the "traders' fave" because it's literally the most liquid security in the world.
It has two big competitors: IVV and VOO, from iShares and Vanguard, respectively.
The latter are both cheaper (IVV is 4bps, VOO is 3bps) vs. 9 for SPY.
And SPY has a tiny amount of cash drag, which costs it another bp or two in up markets (because of its structure).
I suppose I should mention that if you truly wanted the cheapest exposure to large cap U.S., the Salt Low Beta fund, (LSLT), is under waiver, which makes it technically free.
But that's a twist, not pure exposure.


Karl: I'm new to ETFs. When is the annual expense ratio collected? Day of purchase and then every year on that date? Does it show up on a brokerage account statement?
Dave Nadig: GREAT question!
So, every night, the ETF (and every mutual fund) calculates a net asset value (NAV).
In that calculation, any accounting accruals for expenses (or income!) are included. So 1 day's fee is accrued against the books of the fund.
When the check is actually cut from the fund to the advisor is actually irrelevant, because the liability is booked and it comes out of the NAV calculation every day.
That NAV acts as the "peg" around which any trading in the open market will happen, so it's a known drag, which the market makers and APs know about in advance, so they put it into their hedging calculations as well.
So as an individual investor in any fund or any ETF, any expenses are taken out before the value of your position is even reported; you don't need to worry about it at all.


John: I saw Innovator ETFs filed for a patent on their defined outcome ETFs. Do you see this becoming more of a trend in the ETF market for smaller independent firms to protect intellectual capital against some of the larger players?
Dave Nadig: I'm generally not a big fan of financial/process patents, because they rarely seem to cross that "aha!" threshold of "nonobviousness" that patent law is based around.
But I live in my own bubble, for sure, and by all means, people and firms should use the system to their maximum advantage.
Historically, things like index methodologies have been treated more as copyright issues, not patent issues. Usually it's structural processes that get patented.
I haven't waded through the entirety of theirs, but I'm curious if it will hold up.


Lois Gregson: Thank you for sharing thoughts from Camp Kotok; it's always an interesting piece. Based on your experiences there, what has changed the most about the "event"? Can you speak to the demographics? Thanks.
Dave Nadig: Hi Lois!
So, the Kotok invitations are run by David Kotok, as you can imagine.
And he curates a pretty diverse group.
It changes a little bit each year as people drop off and he reaches into the (enormous) wait list. It's capped based on the number of camp-mattresses on site, which is about 50.
But it's roughly 40% women, if I had to guess, and has a smattering of other diversity metrics in it. It's a bit less "old white Americans" than an average finance conference, which is nice.
It's very diverse philosophically, and I am 100% certain that's by intention; not just economic philosophy, but politically as well.
As for what's changed, mostly just the outside world. It was very different in August 2016 than it was this year. I made some comments about that in my piece here:


Lonnie: Hey Dave, I see you answer some “fun” questions here sometimes, not strictly “technical” ones. So what’s your 2 cents: Is time “money”? :)
Dave Nadig: I think that's actually a very useful construct.
I think the measurement of true wealth has much more to do with time than money.
So for example, I have some friends who run a successful local community-supported farm. While they suffer the tyranny of nature's clock, they have absolute freedom with what happens in the moment.
I consider that wealth.
Similarly, I know some folks who've tagged out of their high-profile careers because they figured out how to only work 10-20 hours a week, and live very modestly. I consider that wealth as well.
So I think it's a fair comparison. I might say money=freedom more than time, perhaps.


Robert TB: In your Camp Kotok article and ETF Prime Podcast, you mention your parlor trick. Do you have 1 question you know you can always fall back on in these situations?
Dave Nadig: My default is always something nonpolitical and noncontroversial if I don't know the group at all. So something like "favorite book you've read in the last 2 years" or "favorite movie" or "go-to music." I think those tell you a lot about someone and also serve as classic ice breakers.
If I feel even a little comfortable, I try to get things that will expose an area I don't know about. So for instance, I've also asked, "What was your favorite conference presentation you've ever seen?"
I've had folks tell me about neuroscience and videogames and physics and EST-like self-help gurus.


Robert TB: During this week's ETF Prime Podcast, Nate Geraci asks whether you caught any fish. And we are still in the dark as to whether you drew a blank.
Dave Nadig: I caught many fish. Frankly everyone did. It was good fishing. I even won $100 off Barry Ritholtz for "most fish" in our boat (although he got "first fish," which was a $5 bet, so net $95).


X Factor: Hi Dave: Since Vanguard (inadvertently?) has gun stocks in its ESG ETFs, how soon will they be able to take those out?
Dave Nadig: Instantaneously. If you read every prospectus, it says something like:
"Our investment objective is to be at least 80% in securities which substantially represent the XYZ index" or other such hedgy language.
So not only can they sell them at their discretion, they could have not bought them, regardless of what file came in from the index provider.
That kind of discretion is rarely used in index funds, unless there is real optimization that needs to be done (liquidity being the main reason). But "noping" out of a trade is always an available option for the desk at the micro level.
This isn't the last we're going to hear about this little hiccup.

OK, that's going to be a wrap. Sorry if I didnt get to your question today, so many good ones still in the hopper.

Next week we'll be doing this on Friday afternoon, and I hope to see you then. Until then, thanks for coming!

Find your next ETF

Reset All