Live Chat: ETF Flows & Market Action

October 25, 2018

[Editor's note: Live Chat! with Managing Director Dave Nadig happens Thursdays at 3:00 p.m. ET, with the question window available in the morning.]


Dave Nadig: Good afternoon, and welcome to Live!
As always, you can enter your questions in the box below.
I’ll get to as many as I can in the next 30 minutes or so.
After we’re done, we'll post a transcript at this same address, in case you missed something.
And with that, let's start ... with Todd!


Todd Rosenbluth - CFRA Research: Hi Dave. There's been solid ETF inflows this week to SPY and IVV, yet the S&P 500 has fallen. Seems like a good example that ETFs are riding in the back seat, not driving the market, no?
Dave Nadig: Yeah, I've had to field this question a lot during this little - ahem - market hiccup.
I think you have to remember that flows don't mean "everyone's buying."
Flows mean "there's a disconnect between the price of the ETF and the price of the underlying."
Specifically, positive flows mean the price of the ETF is "too high" relative to the price of the stocks (in this case).
When it's too high, the authorized participant sells ETF shares they don't own, and buys stocks to offset that, delivering the stocks at the end of the day, to get new ETF shares to deliver.
When you have volatility, ANY disconnect is an opportunity.
In this case, the positive flows mean "for some part of a given day, the stocks got 'oversold' vs the ETF, so the AP jumped in."
This isn't surprising, actually, because we've seen such huge volatility in individual large-cap names (FAANG stocks, etc.).
So here's a classic case where conventional wisdom (chasing flows) is a bad idea, because the structure is about BOTH sides of fair value: the ETF, and what it owns.
But to your point, Todd, for sure it means the ETF trading isn't "driving" the market in any way.


Darcy: Is there one major factor that's driving the stock market fall, or a combo?
Dave Nadig: Well, not specifically an ETF question, so these are just my opinions.
But, by measures I look at as an individual investor, like the CAPE ratio, the market was looking fully valued, at least.
So almost everyone was suggesting we needed some sort of correction.
We're also seeing the impact of trade policies showing up in actual earnings and guidance.
So I think there's a calibration going on between the broad economic measurements (like GDP and employment, which are fine) and the actual corporate environment (which has its own issues).
I definitely do NOT think it's just about rates. Rates need to normalize, based on what's going on in the broader economy.
And the Fed's job isn't to jack up asset prices.
Here's a fun question:


Dana Falmuth: Hi Dave, If you were the one who won the recent Mega Millions pot, where would you invest, now that you have All The Moneys?
Dave Nadig: I will admit, I *did* buy a ticket for the big jackpot, even though I am enough of a quant to know it's just a tax on people who are bad at math.
But it was a few bucks well spent, because my wife and I spent a weekend talking about the what-ifs, and investment certainly came up.
At THAT scale, it's beyond what a human can remotely spend in a lifetime, so your time frame shifts to that of an institution.
And I would invest it just like an institution (or rather, I'd hire someone to invest it like an institution) with an infinite time horizon.
What does that mean? It means short-term risk becomes almost irrelevant. Which is why you see huge endowments invest so strongly in emerging markets, small-caps and private equity.
Which is what I would do with infinite wealth. I'd like to say I'd give tons of it away, and I would intend to. But imagine the psychological impact? Who knows what any of us would ACTUALLY do.
Other than hire private security.


Jameson Dunnell: Greetings Dave: What effects are the midterm elections going to have on the markets?
Dave Nadig: I saw Nate Silver from 538 present at a BlackRock event yesterday, and he put up an interesting matrix.
Which had something like an 80% chance of the Dems getting the house, but a pretty tiny chance of them controlling both chambers.
From a markets perspective, I think that's what's priced in. A Dem house would probably return us to the market's favorite baseline position: gridlock.
I do not think the recent sell-off is somehow an "oh no, not Democrats!" thing. After all, we're at the TAIL end of a great market, which has featured both D and R administrations.
Should the pendulum swing either way a LOT - both houses either D or R - I think that will cause more vol.


Trace Kinsman: Do ETFs in your portfolio need to be monitored, kinda unlike stocks, or are they good vehicles for retirement?
Dave Nadig: Hi Trace: so the short answer is "it depends on the kind of ETF."
If you're holding, say, SPY, which is the S&P 500, the question to ask yourself is, "how often do I need to check on the market, in general?"
Personally, I try to ignore my portfolio as much as possible. But for some folks, they might feel the need to stay on top of their overall market exposure all the time.
Of course, if you're talking about, say, investing in leveraged oil futures, or a narrow thematic ETF, like say MJ, the cannabis ETF, you're probably going to be paying a LOT of attention.
So focus on the underlying, not the fact that it's an ETF. The ETF is just a wrapper, like a mutual fund.


Megan Janus: Supposedly October is always volatile for markets. 1) Why? 2) What ETFs really jumped/tanked so far this month due to this?
Dave Nadig: Hi Megan! I love this question.
I'm going to focus on the first part. We post the "winners/losers" on the website all the time.
But the October thing turns out to be mostly a myth. Barry Ritholtz wrote about this just a bit ago:
It turns out if you could invest ONLY in Octobers, you're better off than other months you could do that with.
The reason we fear October is because of 1929 and 1987.
So, don't fear the October! Or any other month, for that matter!


Ralph Loader: Dave, Thinking about costs of ETFs I have encountered (this in the case of a Vanguard Global Equity product in the UK market) "Product Costs", (22 bps) "Service Costs" (15 bps) and "Transaction Costs" (est. 10 bps). If I want to draw fair cost comparisons between equivalent products, should I ask providers to define these three costs in every case? Are there other costs that I should consider?
Dave Nadig: Hi Ralph. So I'll back up a second for our non-UK readers.
I'm pretty sure what you're talking about is three somewhat related things.
The first one is the actual expense ratio of the funds. That's super easy to find (on issuer websites, or here at for the U.S. or at for UCITS funds, etc).
And it's pretty universally complete -- meaning whatever market you're in, you can usually find that data point and it's accurate.
The second thing: "Service Costs" is a bit unique to the UK. That's actually a fee being charged by your BROKERAGE for the privilege of having an account with them.
That's essentially unheard of in the US -- the closest equivalent would be the fee paid to something like a robo advisor here.
I'm pretty certain not all firms charge a flat fee, but I do believe Vanguard's brokerage arm does. But you could buy that Vanguard fund through a different brokerage.
The last, the transaction costs, is really entirely dependent on your personal trading.
Part of it is headline commissions -- which could be anything from nothing to $50 or more.
The other part is the spread you pay getting in and out.
Both are time dependent. If you buy once and sell 20 years from now, it's irrelevant.
If you day-trade, it will dwarf the expense ratio of the fund.
Importantly, the actual ETF issuer ONLY controls the first fee -- the actual expense ratio.
The rest is about where you choose to hold your money - the brokerage environment.


Rich Martin: What ETF most surprised you that it closed?
Dave Nadig: ANother super fun question. I have an easy answer.
ALT was an iShares product that at one point had over 100m in assets.
one sec for a link:
It closed with over $50m in assets, and was very unique for ishares, in that it was actively managed, and total return focussed.
I get WHY they closed it - it was a black sheep. A weird little product that didn't fit the broad product suite after the BlackRock acquisition of BGI.
But it was truly a successful product, doing what it said it was going to do, without much competition.
And it was iShares, which at the time, basically NEVER closed funds.

Barry: How can I track the AUM for an individual ETF like SMH? I would like to be able to download the daily data and then use my own algorithms on it.
Dave Nadig: Hi Barry - so, unfortunately this isn't data you can just cleanly download from, but I'll give you a caveat.
You DONT want to track AUM, because AUM bakes in two completely unrelated things: The flows in and out of the ETF, and the performance of the ETF.
What many people want to track is flows -- which we have a tool for here:
But that data is sourced from FactSet, and we can't redistribute the raw data. That's the issue you may find in many places.
FactSet, Bloomberg, Markit, Reuters -- the big data providers -- all have it, but they won't just give it away in a convenient format.
You can get it from individual issuers, often, but you'd need to make your own system for getting it every day.
Your broker may also be able to feed you some of that data. I know specialized brokers sometimes have direct data feeds for just this kind of purpose.
OK, one or two more (great questions today, folks).
Here's a sort of silly one:


Bob: Do you listen to music while you do Live Chat? Always been curious.
Dave Nadig: Yes! Music is always on in my office. Today I've been listening to the latest album by Grizzly Bear. I usually just have Sirius radio on, tuned to SiriusXMU.


Bill Donahue: I hope things are well. Lots of activities with respect to ESG ETFs lately. ESG mutual funds have around quite awhile and have amassed significant AUM. How do you foresee ESG ETFs evolving, particularly where most of the ESG mutual funds are active?
Dave Nadig: Boy the ESG space is interesting, and confounding, isn't it?
We haven't seen HUGE flows into ESG at all. We've seen a slow, steady trickle.
I think a few things MIGHT happen.
If this market downturn is sustained, some folks will sell whatever they have -- capitulate -- and then be sitting on cash.
Or, they may have positions go under water, and thus no longer have a taxable gain associated with them, and they may sell, locking in losses/avoiding gains.
In either scenario, you now have money on the sidelines.
When that money comes back in, I believe SOME of it will look to ESG alternatives where they might not have when those original positions got put on, if only because there are so many more options now.
But it all comes back to the "slow steady trickle" future I think we'll see.
I also think we'll see more active funds launch in the space.
Last thing: many ESG funds claim their methodologies act as risk reducers. A sustained downturn will help prove -- or defy -- that claim.


Curious: Any specific dividend ETFs you'd recommend?
Dave Nadig: So, that's a pretty big space. In our screener, you can search for that pretty easily:
And honestly, if your goal is "Yield Above All," then the choice is pretty clear: SuperDiv, or SDIV.
The distributing yield on that thing is over 8% -- which is just ... well ... super.
The ENORMOUS caveat here is you are throwing a LOT out the window in pursuit of that yield.
Your international. Your loaded with financials.
Your pretty small-cap tilted (average of $5B).
So, as long as you're realizing this is NOT a replacement for your boring US large-cap exposure, it's the clear winner in terms of raw yield-seeking through equities.
(I should also point out that at 0.58%, it's hardly cheap.)

OK, that's going to wrap it up today. If I didn't manage to catch a follow-up question, you can reach me at [email protected], and I'll try and help as I can.

One side note for folks: we have a great lineup of CE-credit-eligible webinars coming up through the spring.
The first two are on doing factor analysis, and investing in rising rate environments. You can find more here:

We'll have a transcript up here shortly too.

Thanks everyone, and we'll see you next week!

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