Live Chat: ETF Dividends & Portfolio Positioning

August 23, 2019

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



Dave Nadig: Howdy, folks, and welcome to LIve! As usual, you can enter your questions below, and I'll get to as many as I can in the next 30 minutes or so.
Today's soundtrack is Paul's Boutique in honor of its 30th anniversary:


Lou: If I buy a dividend ETF, does the fund automatically reinvest dividends, or can I get a check from the issuer on every payout for the ETF?
Dave Nadig: So, pretty much all ETFs are designed to distribute any dividends they receive.
So if you see a fund that says it has a distribution yield of 5%, that will in fact be distributed, usually quarterly, sometimes monthly, depending on the fund.
The dividends would be just like getting a dividend from a stock: It'll show up as a transaction in your brokerage account as a dividend paid, just like an IBM dividend would be.
Depending on your brokerage platform, you may be able to flag an ETF position for automatic reinvestment, but that's a function of your brokerage account, not the ETFs themselves.


Raymond S.: Should (ETF) investors position their portfolios any differently because the yield curve inverted?
Dave Nadig: That would require a pretty broad brush to answer: ETF investors come in all shapes and sizes. Some folks manage a portfolio VERY tactically, day trading around news. Others are "fire and forget" investors who look at their portfolio once a year and do some basic rebalancing trades.
Neither one is "right"; they're just radically different approaches.
Most of our readership I know from experience are either long-term investors or financial advisors (whose clients are in turn long-term investors).
For that cohort, reacting to every move in the bond market, or every earnings season, is essentially a version of market timing.
And the math would suggest that while you might get lucky, over any meaningful period, you're more likely to lose trying to time the market and make adjustments on the fly like that.
To the broader question implied however: I'm of the somewhat unpopular opinion (and this is my opinion, not some kind of "house view") that there are many signs of softening in the U.S. economy right now.
The $500K payroll adjustment, the earnings declines, trade concerns, PMI softening, etc. 
Nothing dire, but more negative signs than positive.
But again, unless you're trading, it shouldn't mean you make big changes to your overall allocations.


Owen: Hi Dave, is there a formula you’d recommend to determine how much money you need in retirement? Thanks!
Dave Nadig: Hi Owen, this is a BIG QUESTION!!!!
In short, you need to consider so many factors: your income now, your age, your expenses, whether you've got debt to service and so on.
And then you have to have your own assumptions about things like "will Social Security still be there?" and "What do I think the equity market will do between now and then?"
There's literally a whole industry of folks building models to support financial planning there. But there are some free tools I think are decent to give you some guiderails:
TIAA has a good one:
And I think Vanguard has a lot of good info on this as well:
And while I don't have the link bookmarked, AARP also has a ton on this topic.


C. Griffin: Are ETFs more for buy-and-hold investors or for frequent traders?
Dave Nadig: Good follow-up to the previous questions. The answer is "both."
And really, there are whole corners of the ETF market that are quite clearly for one or the other.
For instance, even if we just considered gold ETFs, well, GLD is the easiest to trade by far, and with a very large handle (in the 100s), you get minimal spreads if you day-traded it.
But it's also the most expensive core gold ETF, so if you were looking for long-term buy-and-hold exposure, you might consider BAR, which is only 0.17% annually (but would be more expensive to day trade).
Similarly, the whole complex of leveraged and inverse ETFs are all designed to be traded vehicles, held for a short time to express an immediate opinion, while, for example, the Schwab and J.P. Morgan lineups are designed to be low-cost beta you hold forever.
On the one hand, that's great! But on the other, it puts some responsibility on you as an investor to do the homework (which, by being here, you clearly are)!


Dwyer: Hello Dave. I saw on your site a headline about potential 100-year bonds. How would that work? You couldn’t redeem them in your lifetime. Does the governmentt assume you’d transfer them to your kids, or …?
Dave Nadig: The buyers for 100-year bonds would likely not be you and me as individuals, but other central banks, pension funds and large instutitions that have effectively perpetual liabilities they need to fund.
As a general principle, folks buy bonds with maturities that match their liability profile (that's a huge oversimplification, but a useful one).
So you wouldn't buy a 10-year bond as your "safe haven" to stash your kids' college money in, if you need to start paying next year.
Because between now and then, you could have rates move, your principle erode, and you'd be left short.
But if you bought a 1-year bond for that slide, well, you know your bond just matures when you need the money.
So 50s or 100s would be targeted at institutions with that kind of time horizon.
Great question!


Nate Geraci: Any idea what Vanguard would charge to license ETF share class structure? If cost effective, why would a fund company not consider this versus going the Precidian ActiveShares route? At a minimum, fund companies could license Vanguard structure, launch ETF share class of active MF at same expense ratio and wash through cap gains? Some additional context in this thread:

Dave Nadig: Hi Nate! So, in theory, every big mutual fund company should just license the Vanguard share class patent. However, I think there are a few issues.
First, the patent expires soon, so it would be a bunch of work for a short-term solution.
Second, it's not clear to me you could share-class a nontransparent active fund. I haven't thought through the specific ramifications, but the Vanguard structure has quite specific language (that's unique) around how creation/redemption and accounting are done, and I think the nontransparent active structure would probably blow it up.
And as for how much: I'm not privvy to the specifics, but I think it's telling that in the past 15 years or so, literally nobody has licensed the share-class patent from Vanguard.
The implication has to be one of three things:
1: Vanguard won't.
2: Vanguard has priced it to effectively be 1.
3: Other fund companies really don't want to be beholden to a competitor.


Aidan Heinz: Are any investing themes necessarily specific to certain seasons?
Dave Nadig: Seasonality is one of the things every economics grad student latches onto for thesis ideas. After all, if you take any data series that's date-aligned, it's very easy to run it against the date series and mine for patterns.
Most of the big "rules of thumb" like "sell in May and go away" or "never buy stocks in September" or whatnot tend to fall by the wayside when exposed to hard scrutiny. And if you think about it, even if they once worked, it's so easy to do that any real edge would be arbed-out instantly.
That's not to say there are no seasons in business of course: retail sales are always higher in Nov/Dec thn they are in March, for example. And natural gas has very clear demand cycles.
The challenge as an investor is trying to "play" those cycles, because, as I said, absolutely everyone knows these seasonal patterns exist.
So while you might try and game, say, retail, by buying in September and selling in March, everyone else doing the same thing just means September prices get overvalued, so now you have to move to August, etc. 
So I'm unaware of anyone making millions off raw, obvious seasonal trading strategies in the modern markets.


Erik Pingoud: What is the best ETF class for an impending recession?
Dave Nadig: Well, this is going to sound flippant but: If you were 100% positive we were entering a recession today, and it was going to last 24 months, you'd get out of as much "risk-on" exposure as you could, and buy real assets (maybe discount real estate, gold, farmland on the cheap, etc.) and leave a huge slug of cash available for magically calling the bottom sometime in the future.
The problem is that you can be right in principle, but wrong in timing for a long time.
Anytime we have a major pullback or recession, you can find a litany of people who "called it." Many of them called it for a decade before it happened, so they would have missed an entire bull market waiting to be right, which, again, is why trying to market-time this stuff is generally going to end in tears.
A better approach is to ask, "Do I think my portfolio will do better/worse than the market as a whole in a recession, or in two more years of expansion?"
If you feel comfortable in either case, you're good to go. And that's much more about you and your risk tolerance than any crystal ball accuracy.


Dobbie: I've been watching your ETF education videos. If you had to pick one thing that's most important to focus on when picking an ETF, what is it? Expenses? Trading? Structure?
Dave Nadig: Thanks for watching! I'm posting another one hopefully this weekend.
And that's actually the answer to your question. The No. 1 most important thing in considering any investment is exposure, what's actually in the fund.
The cheapest large cap equity fund, that trades like water, is a terrible substitute for a bond fund, if a bond fund is what you want.
So, first, think about your exposure, and then if you've narrowed it down to a handful of funds that are similar, then consider all the rest.

Here's a follow-up from the previous question on recession-proofing:


Erik Pingoud: I totally understand. However, I’m a retiree with a lot of assets in the bank, and for me, it becomes an issue of not losing money, not an issue of making money
Dave Nadig: Totally fair, and if you're in the position of just wanting a pool of assets to last a long time, then you need to acknowledge your risk tolerance is very low. A low-risk portfolio is nearly, by definition, better in a recession than a high-risk one.
So what does a low-risk portfolio look like? Bonds of shorter duration, most likely. Maybe some liquid, investment-grade corporates. Maybe some gold or other hard asset exposure.
And if you have a small allocation to equities, you'd traditionally look for lower volatility, defensive options.
But I wouldn't approach the question from an "if there's a recession" perspective. I'd approach it from a "my tolerance for a significant loss in the next five years is low" perspective.

OK, that's a wrap for today. We'll have a transcript up shortly.

I think next week we'll have to skip for travel reasons, so everyone have a great holiday weekend after this, and a great weekend.

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