Live Chat: ETF Tactical Tools & Finding Growth

September 05, 2019

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

Dave Nadig: Howdy! And welcome to Live!
You can enter any questions you have in the box at the bottom of the page, and I'll get to as many as I can in the next 30 minutes or so.
A few housekeeping notes: I'll be at the Wealthstack conference in Arizona starting this Sunday, so please do come up and say hi.
Also, I'm doing a kind of "live on video" version of this as a webinar in two weeks with my colleague Cinthia Murphy. We'll be tackling ETF analysis issues in realtime, showing the tools we use both on and elsewhere, as a kind of "how to."
You can register for it here:
(That's on September 18th, at 2PM Eastern)
And last but never least: today's soundtrack is Amanda Palmer's newest:
So let's get to the questions!!!


John: Hi Dave, thoughts on the latest passive critic saying passive is like CDOs during the Financial Crisis? Aren't ETFs just a wrapper to access securities just like a mutual fund? How can there be a bubble in something that is not an asset class?
Dave Nadig: We received a few questions about this. First, here's the story in question:
I think this mostly got traction because of who's saying it, not what's being said.
It's pretty much the same "index funds are evil" argument we've been hearing for quite literally half a century at this point, maybe a few years shy.
The point Burry is trying to make (and it was from an interview, he didn't write a manifesto) is essentially that index investing is dumb money that has inflated the overall level of the markets because everyone just buys everything.
At the same time, there's no price discovery anymore, so the market's not working correctly. Price discovery is eroded.
The problem with this line of thinking is that the math suggests it's wrong. Single-stock volumes have skyrocketed. The dispersion between the winners and losers in the S&P is as wide as it's ever been, etc.
At the risk of just paraphrasing it, here's a link to a great, lengthy takedown of this from Ben Carlson:
I was literally outlining a rebuttal article and Ben posted it, so I threw mine away. He makes almost all the points I'd make here.
Where I'd quibble with Ben is just in this: If all your assets are in five ETFs, instead of in 500 individual securities, and you decide to sell and go to cash, then it's now slightly easier for you to express that opinion.
Ben makes an odd claim that there's no market impact. I guess I see his point, but of course, if everyone heads for the exits, there's market impact, but that's really not a point in this debate. That's true if everyone sells their contrafund too.
People always try to make this too complicated: If investors all decide to sell, prices go down. The vehicle is irrelevant.


Lydia: Do you think ETFs/indexes make tactical asset moves easier and cheaper?
Dave Nadig: Hi Lydia: Yes!
Back to the point about being "passive": The most active traders I know—the ones who make 20-30 trades a day, and try to go home flat—all lean heavily on ETFs. They probably aren't using SPY; they're using sectors and thematic funds and maybe leverage. But they're using ETFs with the occasional "name play."
So if you're trying to, for instance, "call Brexit" (which I certainly wouldn't recommend, but I know people are doing it), it's a whole lot easier to do that with a GBP ETF, or a U.K. equity ETF, than it is trying to figure out which specific London names you want to trade, waiting for the market to open early in the morning, etc.
Of course, the counterargument is that "easy and cheap is bad." That's the argument Vanguard's Bogle used to make regularly. That ETFs made it too easy for bad investors to make bad decisions.
(Personally, I think choice is good.)


Nemo: Is there any functional difference with First Trust's defined outcome ETFs tracking SPY instead of the S&P 500 price index like Innovator's version?
Dave Nadig: So, while I'd need to read very, very carefully, to my eyes, both strategies use FLEX options to create capped/buffered positions.
So the differences (when the FT products actually launch) will be about the nature of the caps and buffers, expenses, and trading more than anything else.
I am quite sure there are nuances in the way the portfolios are constructed when we see it all live, but fundamentally, these will be two sets of products using the same underlying to create similar results for investors.
(I should disclose: FLEX options are traded on cboe, the parent company of


Wyatt: Re the VanEck/SolidX bitcoin ETF, is this going to get approved by the SEC soon, or what’s the status?
Dave Nadig: So, you probably saw this new ...
... which is that VanEck is making shares of its underlying trust available over the counter to qualified institutions ($100M and up).
There's a ton of deep nerdy plumbing I could get into, but importantly, no, this is not the launch of a bitcoin ETF.
It's very similar to what Grayscale does with GBTC, although it's coming at it from a slightly different angle.
In this case, individual investors are ruled out. This is just for institutions. This lets them get around 99% of the SEC to get the product "alive," with the hope this then opens the door another crack on taking those shares to an exchange to actually trade as an ETF. They have language about converting the share class to the ETF if they get approval.
I'll be honest, the whole thing makes me sigh a little bit. I mean, I get it: If it's a chance for them to get some institutional money in the trust, they gotta do what they gotta do.
But it muddies the waters on this, and I worry bitcoin folks are misreading this as some kind of approval, when in fact it's just an end-around.
That doesn't generate anything particularly new. There are quite a few institutional-only crypto pools out there as hedge funds, and so on.


Anonymous: How can you find out who owns an ETF, not what it owns?
Dave Nadig: Great question. The short answer is you really can't.
ETFs, like shares of Apple, or anything else on an exchange, aren't tracked by some big brother in the sky.
The closest you can get is through filings made by certain kinds of asset managers called "13F" filings.
Mutual fund companies, for instance, have to file a blanket 13F that says, "Yes, we, Fidelity, have 100,000 shares of XLF" or whatnot. Those shares are in other funds, and then, of course, you have no idea who owns those funds.
More importantly, however, individual investors and most insititutions don't have any 13F requirements, so you get a very thin picture of a handful of holders, and that's it.
So I'm always very cautious about reading too much into things.
There are some semi-free services ( comes to mind) that can give you some lagged insight.
And there are very expensive services that try and clean up and augment 13Fs with other filings (sometimes from their own trading activities).
But I'd be cautious of using them for much more than for interest's sake.


Alyssa DeChambeau: Hi Dave. What would you say are the pros and cons of investing in growth ETFs?
Dave Nadig: I'd say the biggest problem is that defining what "growth" even means is a very very tricky thing to do.
You'll note that on our fund pages ( or whatnot) you won't see "growth" as one of the major factor breakdowns in the MSCI FaCS methodology.
Every "growth" index will of course have a methodology to define what it means, but often, I think it's really conflating other more interesting factors.
So, for example, if you want companies that grow dividends over time, there are ETFs for that. You want technical momentum growth? There are ETFs for that. You want earnings quality? Etc. 
So I think "growth" is a tough bucket and one I kind of wish would go away.
Most academic literature ignores it in favor of being more specific.


Harvester: Can I tax-loss harvest by selling SPY and buy VOO, or would the IRS have a problem with this?
Dave Nadig: Welcome to the very, very gray world of tax-loss harvesting.
The question is, "What could you defend in a proceeding?" and I think you'd lose swapping SPY for VOO.
Almost every place you look for tax advice, you'll find some sort of disclaimer that sticking to the same index would put you in wash-sale trouble.
The smarter move is to get the same factor exposures through a slightly different approach. So, could you get away with RSP? Probably! Because while it's the same 500 stocks, the pattern of returns will be substantially different.
Could you get away with a Russell 1000? Sure! That's 500 whole different stocks!
So I think you need to be a bit more clever than that. And of course, nobody in their right mind will give you a legal guarantee of what the IRS might or might not do if they audit you.
(Insert my regular boring advice about using an actual CPA for advice on these kinds of questions. I am most definitively not! a CPA!)
I'll bundle up these two: ...


Joe Fallon: Are gold miner ETFs finally re-emerging into the spotlight?
Dana: Hello Dave. Are silver ETFs outshining gold ETFs right now?
Dave Nadig: So I put all of this in the "safety play" category.
All of these -- the miners, gold, silver, defensive stocks, utilities -- have been out of favor for so long that in the rush back in, you're seeing occasional pops and anomalies as investors figure out where they want to be positioned.
The miners, in particular, live in the "not gold, but not just equities" space in a lot of peoples' heads.
And so as we've seen some run back to safety, they've just had an amazing year, because they've gotten some equity tail wind, and some gold tail wind.
As for things like the SLV/GLD ratio (or any other ___/GLD ratio) I'd be cautious of that, because I feel like a lot of investors feel like they should always have some relationship
But really, there's not a ton of overlap. There's no causal reason a rise in gold means silver should be higher, other than there's somewhat similar investment behaviors associated with the two (both being precious metals).
But they also have very unique supply/demand concerns of their own.
So I would be cautious of looking for the easy rule of thumb.


Buffer Swap: Thoughts on tax-loss swapping Innovator Buffer for FT Buffer? Is this the same scenario for SPY/VOO?
Dave Nadig: That sort of seems antithetical to how the products are designed. Also, because the underlyings here are options, you're going to get distributed gains (if I recall).
They're really ideal in tax-deferred accounts, but you do need to dig into the tax issues of them. They're not holding equities.
So you should know that and walk through it going in.

Jill Townsbury: In your thinking, are multifactor ETFs the “new active mutual fund”?
Dave Nadig: So, they're definitely appealing to the same investor: folks who want to at least make an attempt to beat the broad beta in a given arena.
In fact, many multifactor indexes have been designed to replicate the quant-active processes of their parent firms, quite intentionally.
Certainly strategies like "high quality, low volatility" have been darlings in Monday meetings at active managers for decades.
And while we haven't seen trillions in flows into multifactor ETFs, we've seen nothing but outflows in active equity mutual funds for decades (as a group). So it's fair to say some of that money is hunting for more transparent, lower-cost, more predictable versions
What will be interesting is whether the launch of nontransparent active ETFs (likely later this year) moves the needle on investor interest. I remain skeptical.

OK folks, that's a wrap for today. Thanks for coming, and we'll be doing Wednesday next week, after I get back from Wealth/Stack. Have a great rest of the week and weekend!

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