Live Chat: ETF Seed Money

April 05, 2019

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


Dave Nadig: Good afternoon, and welcome to Live!
As always, you can enter your questions in the box below, and I'll get to as many as I can before my hands cramp up.
We'll post a transcript (and a video!) by the end of the day.
And I'll cut off the inevitable question: Today's soundtrack is, Is This It? by the Strokes:
Let's get goin' ...


Ben Dillon: Must all new ETFs launch with seed money, or is that a new “trend”?
Dave Nadig: For an ETF to begin trading, it has to have some amount of money to meet minimum listing requirements at exchanges.
It has to be able to strike that first net asset value. To do that, it has to have some assets.
So historically, all ETFs launched with a de minimis amount; say, $5 million, sometimes even less.
I seem to recall some $2.5 million launches.
Many times, that money was put up by the firm itself (from capital) or it was provided by a market maker, who would essentially "inventory" the initial shares and sell them as real investors find the fund.
More recently, we've seen BIG seeds -- what Eric at Bloomberg coined "BYOA": bring your own assets."
That's a new trend, and it's allowed funds to come to market with $100 million or more.
That makes the rest of the market more comfortable, of course, and can be a real boon to initial asset gathering. Usually, that's money from a big institutional client who was likely in a mutual fund or separate account of the same strategy.


Todd Rosenbluth - CFRA Research: Hi Dave. Great work putting together the nominations for last week's ETF awards that I was proud to be a judge for. Have you thought about a category like a "no longer hidden gem ETF" -- funds that were under the radar initially but came out of their shell? In 2018, there were 11 ETFs that started with under $50M and climbed to more than $200M by year end.
Dave Nadig: While I love this idea (and I truly do), I'm only a bit worried that it might be hard to manage. We'd for sure have to publish a "here are funds eligible" because we don't have something like "must be classified as equity by FactSet" to fall back on.
So it's definitely a cool idea. More generally though, I think for 2019 you can expect us to "shake up" the categories a bit more than we have year-to-year in the past, and maybe make them a bit more ETF-user/investor-focused.
But stay tuned; we'll broadcast any changes long in advance, I promise.


Miller Matthis: I enjoyed your Inside ETFs/ Awards live blogs. Anything else you guys live-blog about?
Dave Nadig: Hi Miller! Glad you enjoyed it! We really did this for the first time in Florida at the big event, and we're looking to do more. It's really hard on the hands (to be honest).
Lara Crigger did the live blog from the Awards, and I think I saw her with icepacks after.
But we'll continue to expand this for live events where we're in attendance. I'm glad you like it. I think it's fun!


Matteo Juergen: What classifies WisdomTree as more of a takeover target than another ETF issuer?
Dave Nadig: Well, I'm not sure they're "more" than any other issuer, but they are unique in a few ways.
First, I should say I think their core research team (led by Jeremy Schwartz) is the bomb.
I read anything they produce; it's always good.
But they have traditionally been a bit of a "hit" shop -- like DXJ. That makes them vulnerable to swings in the market and investor behavior.
And they are publicly traded -- really the only pure play I can think of. That means all of us can dig through their financials and form opinions.
I think those last two pieces are really the core of it. But in general: I'm a fan, and I think I'd be a bit surprised if they got gobbled up super quickly.


Dirk: Hi Dave, when “the world’s first ETF” is referenced, are people talking about SPY or the original ETF from Canada?
Dave Nadig: Hi Dirk, I think it's only deep ETF nerds like me that break up the conversation with a "Well, actually ..." about the Toronto 35 Index Participation Fund
People generally mean SPY ... fair or not.


Luther Anthony: Is there ever an instance where a mutual fund is more advantageous than an EFT?
Dave Nadig: For sure! If you're in a retirement account with access to cheap index funds, there's not much an ETF is doing for you.
The big ETF advantages for most investors are tax efficiency, cost, transparency and tradability.
A lot of that is less relevant in your IRA or 401(k).
Mutual funds are excellent in 401(k)s and other defined contribution plans for another huge reason: They can be bought in fractional shares with no transaction costs.
You can't really buy 1/2 a share of an ETF, and even if you could, if you were paying a commission to do so, it would be a bum deal.
So i don't think mutual funds go away. I think they stay the default vehicle for retirement savers who are dollar cost averaging in over time.
The trick is to put a weather eye on what funds you use -- cost still matters, a lot. So does how the money is managed.


Joe: Hi, have you heard anything new regarding the proposed ETF rule?
Dave Nadig: If by "heard anything" you mean "is it coming?" the short answer is nope. I haven't heard a peep from my various moles in the halls of Washington.
I read all the comments. I'm sure the SEC is reading them too. I would expect a NEW proposal, and another comment period, rather than final rulemaking, as the next step.
The first rule had enough loose ends to warrant that.


Jordan: I just read at that the marijuana ETF "MJ" was the best-performing ETF for the first quarter. It has $1.2 billion in assets. Why are there no other ETFs covering the space? Have you ever seen such a successful product not have copy-cats from other issuers?
Dave Nadig: So, MJ kind of "back ended" into being a cannabis fund. It used to be LARE, a Latin American real estate fund.
And the issuer basically just flipped a switch and started buying up mostly Canadian cannabis companies.
This caused no small amount of consternation among folks like custodians and such.
Because they're paranoid the federal government will step in and cause a ruckus.
In the end, they appointed a new custodian, from outside the industry, who is not a bank: Wedbush
Whether that's a risk or not is kind of up to how much you care about things like custody. It's clearly riskier than a big bank, but honestly, it's probably on the order of "speeding 5 mph over the limit is more risky than staying 5 mph below the limit."
In other words, a bit of hair splitting.
But that concern is what's kept competitors at bay. The SEC never "approved" a cannabis ETF. THe issuer forced the issue.
I don't think the SEC would look kindly on someone else doing it again, so we're at a bit of an impass, leaving MJ with a monopoly.


Tangent Style: Dave - Thanks as always for sharing your thoughts. Any POV on the "ETF heartbeat" trade story that got some attention recently?
Felt disingenuous / missing the point (in-kind = basis rollover) to me.
Dave Nadig: So, I wrote a pretty long story on this:
In short, I agree with you. But a quick summary: One of the things ETFs use creation/redemption for is getting rid of securities they don't want, usually because of an index rebalance.
That keeps investors from owing taxes when they didn't actually personally book a gain, which to me is the right outcome.
What's wrong is how mutual funds work, where someone else's trading makes your tax bill go up.
But I go into a lot more detail above.
But ... not a fan of that particular article I gotta say. BB does great work sometimes. Just not this time.


Dane Sadler: Dave, I join your Live Chat each week, and I’m impressed: HOW FAST DO YOU ACTUALLY TYPE?!
Dave Nadig: Hilarious. About 90 wpm last time i checked, which was in college -- so a million years ago. As I get older, I get a bit slower I think.


John-John: Thoughts on BofA’s new ETF individual rating system? How does this differ from other entities' ratings, including's, like with your "A-96" for SPY?
Dave Nadig: So we did an interview with Mary Ann recently on this, one sec:
I actually think it's pretty unique. It basically takes all of the Efficiency work we did (and which FactSet now runs), and bolts on two new things, which are cool.
The first is a technical component -- essentially a momentum screen.
The last is basically a crib of Todd Rosenbluth's CFRA model, which looks at analyst ratings of individual holdings, and rolls it up.
They call that Fundamental.
So they made their own E-T-F out of it, which I take as a bit of an homage to ours, but hey, it's all good. I ain't mad. How can you be mad at Mary Ann Bartels? She's so smart that by the time I'd open my mouth, she'd have me feeling like a toddler, withering under her intellect.
So I'm actually a fan of it. I think it opens up the dialog in a good way!


[email protected]: Can I know what is wrong with this (CLM, AMZA, OXLC)? Many advisors say it is not a safe invesment. Is it BAD or GOOD?
Dave Nadig: So, two of these aren't ETFs (CLM and OXLC) -- I'm gonna guess they're closed-end funds. So I have no opinion at all.
MLPs are a WEIRD asset class, no way around it.
AMZA in particular uses the "C-corp" structure, which means, unlike almost every other ETF, it has to actually pay its own internal taxes before passing any profits/distributions on to you, the investor.
BUT, the core investments - MLPs that are midstream gatekeepers in the movement of oil and gas, pipeline providers and such -- are just monster income generators.
They're tollkeepers. So people get attracted to the massive yields -- 20% in the case of AMZA..
The challenge, of course, is that the value of the underlying, fairly illiquid MLPs themselves can go up and down a lot too.
So consider it a very very narrow energy infrastructure play, with all the associated risks.
Here's the easiest question ever:


Darcy Jacobs: Exactly how do hedge funds provide a smoother ride for investors than ETFs?
Dave Nadig: They don't.
"Hedge funds" is just a phrase we use to cover private investment pools. Those pools can do everything from just holding cash (pretty smooth!) to making monstrously leveraged bets on small-cap companies on the verge of death (bumpy!!!).
There are literally thousands of "hedge funds" and they have enormously different strategies.
The same of course is true of ETFs. You can get cashlike exposure, or you can make insanely leveraged speculative bets on almost any asset class.
As always: Look under the hood and know what you're buying and why! That's more important than the structure, almost always.


Larry: Thanks for providing some great articles on ETF investing. I recently ran into an article that I did not completely understand. I was wondering if you can clarify. See article "bond-etfs-vs-bonds-which-are-better?" Bond ETF drawback - You aren't guaranteed to get your money back. Although that statement is true, isn't this a bit misleading, because I can always sell the bond ETF and get my money back based on the bonds that are in the ETF minus trading costs? So in theory I should get back my money from the value of the bonds based on the current interest rate - which is basically no different if I held a bond and sold it before maturity.
Dave Nadig: Long question here. Let me parse.
So, I think that's fair, but the article in question ...
... basically points that out too.
So maybe a poor word choice with "guarantee" -- but the core point here is this:
When you buy a fund that's holding, say, 20-year Treasuries, it's constantly buying and selling to maintain that 20-year exposure.
Between now and 20 years from now, it will incur expense doing that, and if rates skyrocket, it will plummet. Because that's how bonds work.
If instead you just bought one 20-year Treasury bond, well, next year it's a 19-year bond, and eventually, you just get the par value back, without having to do anything.
That's why some folks like buying individual bonds.
You know what you'll get back.
With any bond fund, you can't say that.
But fair point on the subhead there.
OK, one or two more.


Lyssa Neilssen: How will this Brexit debacle affect European ETFs?
Dave Nadig: Badly, mostly. I don't think there are any winners from Brexit, personally. And the EU has its own issues.
Germany in particular is almost entirely an export economy. It has the largest trade surplus in the world by % of GDP last time I checked.
So it's a bit of a canary in the coal mine for global recession ... and it's not looking all that pretty.
Brexit - hard or soft -- only makes this worse, in my opinion.
Last question (sorry if I didn't get to yours! Come back!)


Trine: What’s “bid/ask” in ETFs? Does that apply to other financial instruments too?
Dave Nadig: So, when you buy pretty much anything, there's the price you pay, and that's almost always higher than the price you'd get if you turned around and sold it immediately.
So when you buy a stock or an ETF, you might be asked to cough up $101 to buy it, but at the exact same moment, you could only get $100 for selling it.
The difference between the two is the "spread," and you "pay" it in the sense that you should expect your experience to include selling for a bit less than you bought, all else equal.
That spread is how market makers eat.
Or house flippers, or used car salesmen.
Pretty much all financial instruments that trade openly have a spread.
There are some narrow exceptions. When you buy or sell a mutual fund, you pay/receive net asset value.
But, the underlying fund has to go buy and sell securities to either put your money to work, or to raise money to pay you back.
THAT activity incurs a bid/ask spread. It's just borne by all of the existing shareholders of the fund (which I would argue isn't all that fair).
With an ETF, those trading costs are externalized, into the spread you pay on the ETF.


OK folks, that's it for today. Thanks for the great questions. Next week we're on Friday. Have a great weekend!

And hey, if you haven't checked out our podcast lately, I think you'd like it. is a good bookmark for it.

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