Live Chat: The ETF Labeling Problem

June 14, 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 any questions you have in the box below and I'll get to as many as I can in the next half hour. Apologies in advance if we run short of time. I give preference to questions actually about ETFs!
At the end of this, we'll post a transcript, in case you have to duck out, at the same URL.
With that, let's get rolling!


MusicMan: Today's soundtrack is ...
Dave Nadig: Little indy band from New England, Palehound, just dropped an awesome new album called Black Friday.


Todd Rosenbluth- CFRA Research: Hi Dave. Great piece highlighting the communication skills challenge with smart beta. Do you think multifactor ETFs would be better off including quality, value, momentum in their names to show what ingredients are part of their recipes?
Dave Nadig: There's no question that ETFs have a labeling problem, but I'm not sure adding more words to the titles of the funds is going to help a lot.
I mean "iShares Quality Value Momentum U.S. Equity Multifactor" doesn't exactly roll off the tongue.
My hope is that someone doesn't just jump into a more complex strategy like a multifactor ETF without at least reading a fund description.
In general, I think we (both us, and the broader ETF community) do a pretty good job once we get to reports and editorial coverage and fund descriptions.
But it's a bit of a losing battle. Products are only going to get more complex, not less. I think what's needed is different media.
I don't see a lot of good "explainer videos" for new products, or presos with voiceovers, or other things.
I see a lot of long fact sheets, white papers, occasionally with math.
I love math. But math doesn't sell.
So I think its way beyond titles Todd. Way beyond.


T Lynch: Sir: Simply put, I wish to invest in a pool of ETFs that would be chosen, rebalanced, actively overseen by a paid manager. However, I find the the standard 1% fee defeats one of the greatest appeals of ETFs: their low cost.
Dave Nadig: So this is an interesting question. And we get this a lot: How do i find/what should I look for in a financial advisor?
I agree: paying 1% to someone just to manage a simple ETF model is a bit much. For 1%, you should be receiving a lot more service than just asset allocation. I'd say 1% is at the "boutique" level of service.
There are many advisors out there that charge half that (or less) for large accounts.
But if you're not looking for an actual advisor, this is really what the robo advice market is all about.
Whether it's the free offerings from folks like Schwab, or the unaffiliated folks at Wealthfront or Betterment, you can get this kind of thing for 25 basis points or less.
It's not that there's nothing worth 1%. It's just that, for that, you should expect a lot in return -- not portfolio returns. Service returns.

Marty: Dave, has the low-vol sector become overbought?
Dave Nadig: Hi Marty, this is a chance for me to highlight one of my FAVORITE tools on the web, and we don't even run it! The Research Affiliates Smart Beta page:
Here's a link that hopefully gets you to the right chart:!/strategies?exp...
What that shows you is the current valuation of all the major factors, vs historical norms.
It would suggest that LowVol is trading at historical peak valuations -- its very expensive right now.
Value looks cheap, pretty much everything else is median or above.
There's a lot of really interesting research about whether aggregate valuation is a kind of "overriding" factor on factor investing (much of it by research affiliates).
But that tool at RA, I cannot recommend more highly. It's super cool, and very very well put together.


Don: Not an ETF question, so you may not answer, I understand, but what is the difference between a financial advisor and and certified financial planner?
Dave Nadig: So, this is really about minor definitions. Anyone, essentially, can call themselves an "advisor."
It's sort of like calling yourself a "personal trainer" -- it's aspirational.
A CFP means the person did a bunch of actual studying in order to get a certification.
The CFP is a SERIOUS cert, much like a CFA.
It requires, if I recall, several thousand hours (read, years) of practice, on top of educational requirements. It's a real thing.
But you can also just take out an ad in the paper and call yourself one.
Of course, you could end up breaking all sorts of laws, but you COULD do it.
So a CFP is worth looking for in your advisor.
It's worth noting that not every employee of a big advisory shop will be a CFP. Often times there are folks who don't do the actual planning work with customers who may have different or no credentials. You don't expect the receptionist, or the accountants, or the lawyers to, necessarily.


Cole H.: Hi Dave, in your opinion, is there one key thing ETF investors should be mindful of in volatile markets?
Dave Nadig: Yes. In the immortal words of the Hitchhikers Guide to the Galaxy: don't panic.
It's very, very rare that you can look back on someone's portfolio and say, "Golly, if only this person had made more panic trades in the midst of it all, they'd be so much better off."
Overtrading is the issue, not undertrading.
Does that mean you should never ever react or sell a position? Of course not. But a one- or few-days' drawdown because of big, macro factors (which is the kind of Vol we've been seeing) should really be irrelevant if you're a long-term investor.
If anything, it just creates buying opportunities if you're dollar cost averaging in.
I guess the second piece would be: If you are going to be trading in volatile markets, use good trading hygiene. Use limit orders. Have a sense of fair value. Never leave a stop overnight.


Dana: Greetings Dave. Any secrets to a particular ETF issuer being more successful ($) than another? Or is it just hit and miss with each fund?
Dave Nadig: Hi Dana, so the short answer here is distribution.
In the old days, the conventional wisdom was that everything was about relative performance. If you were the best-performing fund in XYZ sector, you could count on flows, Field of Dreams style.
It's just no longer the case. There are dozens of funds with really solid track records that haven't pulled in assets (Natixis' MVIN comes to mind) despite that.
So having a great story, a decent marketing budget and a good sales force. That's actually probably more important for the success of a fund than its raw construction.
Of course, as an investor, you should care exactly nothing for any of that. You should look for funds that give you the exposure you want, at a price you think is reasonable, that trades reasonably well.


Avery: Hi Dave, thanks for your time. You've published a few articles recently on factor-based strategies (quality, min vol, etc.). How important is sector neutrality when considering these types of strategies? Sector constraints appear to maintain diversification within a factor, but curious to hear your take. Thanks again.
Dave Nadig: So, the reality is that even the purest factor ETFs only get a small fraction of their active risk from the factor alone.
I just did a slide for a presentation where I looked at the most "valuey" value fund out there (I believe FTA was the winner when I ran it, from First Trust?)
And when you run that through a risk model like Bloomberg/Axioma/Barra, it turns out only 8% of its risk vs. benchmark comes from value. Most of it comes from sector differences, or single-stock exposure risks.
So by that measure, if what you're really trying to do is get "the market with a factor tilt," then sector neutral is very, very important.
However, that constraint can lead you to some pretty thin portfolios, or some pretty diluted value exposure by itself.
Put another way: If all the "value" stocks happen to be utilities, you're really limiting how much value you're going to get being sector neutral. So it's a trade-off.
I think it's important to think of factors as "tweaks," not asset classes in themselves, unless you're doing them completely market neutral by going 100% short and 100% long, which no U.S. ETFs do in the factor space (if I'm wrong, someone will remind me, but I'm pretty sure I'm right).


Jim Garces: Too soon for the Oman tanker attacks to be having an effect on oil ETFs?
Dave Nadig: I'm actually surprised how muted the reactions have been, honestly.
WTI did what, a pop from 51 to 53?
But yes, that pop was instantly reflected in the price of the ETFs like USO. It has to be, as that's what it owns: WTI futures.
But I would caution against trying to "trade" big news like this.
Big news gets priced in within seconds these days. There are algos out there watching Twitter and the AP newsfeed and everything else.
I suspect that there was a HUGE spike in trading within seconds of the first headline crossing the wire, entirely untouched by human hands.
So these things get priced in far, far faster than any of we normal humans could imagine.
So the question is, "What do you think you know that the market doesn't?"
And if the answer is just that you have a hunch, well, that's fine, but recognize that that's no longer investing. It's just speculation.


Grover Miller: Are there any ETFs that cover the LNG market? Like the LNG shippers?
Dave Nadig: So the two ways I know of in ETFs to play this are either just buying natural gas itself, through a futures product like UNG, or through master limited partnership ETFs that own pipelines (AMLP, MLPX, etc.).
Those are really the cleanest plays.
There is one specific ETF focusing on natural-gas-related equities, however:
Not just shippers at all though -- mostly exploration.
As a side note, sometimes the easiest way to find something like this is with a bellwether stock.
So for instance, in the NG space, you could say, "Golly, who has the most Noble Energy?"
Then you can just do this:
and it will show you who the big folks are there, and you'd find FCG at the top of that list.

OK, running a bit long and we have literally dozens of questions still in the hopper. I have time for one more here. Let me take a gander.


Looking to Learn: I have a long drive this weekend. What are the best podcasts or audiobooks to learn about ETFs?
Dave Nadig: That's a fun one, so I'll drop a few titles here. I don't have the links handy, but it should be pretty easy to find:
Obviously, ours (grin), which you can find here or at
Trillions and the ETF Story at Bloomberg are both awesome.
Phil Bak runs "The ETF Experience," which is fun, and pretty loose.
The Meb Faber Show is great (I think that's even what it's called).
And ETF Trends does its own podcast as well, although somewhat infrequently, I think.
Those would be my go-tos. And Masters in Business is amazing, even though it's rarely ETF specific.

OK, with that, I need to wrap up. Thanks everyone, for the excellent questions. We'll be back next week at our normal Thursday 3 p.m. time. Until then, have a great weekend!

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