Live Chat: Fallen Angels & Investing For Beginners

December 20, 2018

[Editor's note: Live! with Managing Director Dave Nadig happens weekly at 3:00 p.m. ET.]


Dave Nadig: Good afternoon everyone on this Cold December 20 ...
As always, you can enter your questions below, and I'll get to as many as I can before RSI kicks in.
We'll post a transcript shortly after we're done, at this same link.
And with that, let's get to some questions.


Diego Ruiz: Does the recent ACA ruling impact health care ETFs at all?
Dave Nadig: So, two questions in one.
I don't think the ACA court case stands for more than a second longer it takes to get in front of an appeals judge. Regardless of where you are on the political spectrum, most legal folks agree it's badly argued.
As for what this event means,  it means yet more uncertainty for the entire health care system.
And uncertainty translates directly into "investors will demand higher expected returns," which means lower prices.
So chaos, in general, is bad for stocks. Period. Regardless of the source of that chaos, or which sector it is.


Jill Faraday: How old were you when you started investing? An advisor said she gave a retirement seminar and 1 attendee was in his 20s and she was elated, as most were in their 60s.
Dave Nadig: Interesting question! My first brokerage account I opened in 1985 or so with a small amount of money I got from a relative (I think $5K).
I would have been around 18.
And yep, I learned a LOT about markets before I turned 21! Was a good time to get started!
When I do bigger events, like the Money Show, while the stereotype about individual investors skewing older is true, I do see .. consistently .. folks in their 20s at those events as well, which is awesome.


Sunja: Hi Dave. In your opinion, what ETF/ETN launched this year that has been most interesting, or that filled the greatest need this year?
Dave Nadig: Sorry if this is a bit of a broken-record answer, but I think the defined outcome ETFs from Innovator are both the most interesting and possibly the most useful ETF launches of the year.
I think the Vanguard factor ETFs are notable, as well, and I still like the Cambria Trinity ETF a lot (TRTY). 


Sig: What is going on with SPXS? It’s supposed to triple opposite the S&P 500? And it’s currently double? In other words, the S&P is down 2.1 and SPXS is only up 4.2%???
Dave Nadig: Hi Sig. So, a few things.
First, these things only work when measured exactly on a one-day period. In other words, from yesterday's close to today's close.
I'm not sure what period you were talking about here ... let me look.
So right now, I see SPXS up 4.49
I see SPY down 1.59
So that seems pretty much on the money.
Two possible things: You could be looking at 15-minute delayed quotes on one, and real time on the other.
But more broadly speaking, if you were looking past one day, rebalancing would mess with your returns a lot.
That's not a bug, that's how the products are designed to work: to track over a one-day cycle, then reset to do it again tomorrow.


Anon: So, in sleepy low-volume markets, is it a good, or terrible time to trade?
Dave Nadig: So, in general, low-volume markets are inconsistent, meaning the price signals are weak. To use old-school technical speak, you want a low-volume move to be "confirmed" by a high-volume day at the same level.
Now, SOME traders LOVE low-volume days, like the half days before big holidays, because they believe the market is full of pajama traders who will do silly things.
Others simply avoid them altogether and sit out (hence the lower volume on those days)!
The "pajama trader" argument is similar to playing at terrible touristy poker tables in Las Vegas: -- you assume the people you're playing against are idiots.
I think assuming the market in general is "an idiot" is a recipe for despair, most of the time.
So I tend to side with the "sit it out and wait for confirmation" side of things. Great question though.


Emily Grey: How would you best describe the creation/redemption process in the context of fixed-income active ETFs?
Dave Nadig: Phew OK. Well.
MANY actively managed fixed-income ETFs use cash creations; that is, they ask APs to simply hand them cash, and the fund does their own trading.
That's not difficult with an active fund, because, hey, it's active. They're gonna do their own trading anyway, all the time.
Sometimes, they do cash redeems as well, and sometimes it's a mix (cash in, in-kind out). It does vary quite a bit.
Of course, there's no structural reason this is different for active or passive. A passive junk bond ETF can (and sometimes does) do cash in/out as well, and active funds can do baskets in/out.
As an investor, this doesn't matter all that much. If you are SUPER concerned about the ongoing tracking error of your ETF, then cash makes that a bit harder.
But, the flip side is, funds with cash creation tend to trade tighter to fair value because the AP has so little risk to worry about, and much less to actually do.
They don't need to go buy anything!
Most of the time though, it's really not an issue either way.
If a fund leans very heavily on cash creation/redemption, there's a risk of capital gains distributions, but that's true in fixed income in general, which tends to have higher turnover due to bonds maturing or "aging out" of the strategy.


Joe: You mentioned earlier you started investing with $5K. How would you do that today if you are just starting out, how would you spend that? I'm at that place.
Dave Nadig: So, this is tricky. I genuinely believe that if you want to LEARN investing, the best thing to do is to learn how to analyze and trade individual stocks.
Do that till you're very comfortable with it.
Then, slowly, learn how options work, because they're an underutilized tool for most small investors.
However, you're nearly guaranteed to lose money vs. doing something much simpler.
And that simpler thing would be to simply buy a cheap index fund or ETF that matches your risk tolerance and desire for involvement.
If you just want to stick it away and occasionally add to it, then you should get that money in a tax-deferred account like an IRA ASAP, and pick a target-date mutual fund, and slowly add to it -- even $25 a week.
But that's REALLY BORING, and you won't learn a thing.


Nemo: Can you speak to some methodology differences between the two major fallen angel bond ETFs? You've expressed interest in them several times generally referencing the original: ANGL. When I've looked at FALN in the past I've seen lower duration and lower average credit quality. What constraints between the two funds account for these exposure differences?
Dave Nadig: So, I've been a fan of ANGL since it launched, but the reality of the two funds you're mentioning here is that they are VERY, VERY close in terms of the portfolios you end up with.
If you just do a quick side by side at and you'll see nearly identical duration, yield, number of holdings, credit quality and so on.
Honestly, the biggest difference between them right now is in favor of BlackRock's FALN, which is 10 bps cheaper I think (let me look).
Yeah, 25 vs 35 bps.
I don't think you go wrong with either. I think ANGL trades better, and certainly has the longer track record.
But you won't get really meaningful portfolio differences from the two.


Bill Donahue: Dave, Happy Holidays to you and your family. Which do you think will be approved first by the SEC: 1) Non-transparent active ETFs; or 2) bitcoin ETFs?
Dave Nadig: Hi Bill! So, I would bet on nontransparent active first: far fewer unknowns.
I've been wrong for years on this though, so take it with a grain of salt.
But I think bitcoin has a longer row to hoe with the SEC. The NTA stuff is pretty much "done"; it's just waiting for a positive nod. I don't think there's much more work to be done, or an exogenous market condition that needs to resolve.


Todd Rosenbluth - CFRA Research: Hi Dave. Love these chats. While down from last year, do you think (as I do) the $300B cash haul of ETFs is a great sign of industry health given that US/intl equity markets and bond markets are down? Happy new year!
Dave Nadig: I hate to crow, but ETF pundits (you and me included!) have been saying for a decade that market pullbacks are good for the ETF industry.
What we've always said is "when markets go down, asset levels come down a bit, and things SLOW a bit, but you see big redemptions from underperforming active mutual funds, and that money inevitably ends up in ETFs."
And that's EXACTLY what we've seen so far in the end of 2018.
If 2019 continues to be ugly, I expect flows to continue to be one way (into ETFs) and reasonably strong.


Sammy: Predictions for 2019 either in the financial world in general, or in ETFs in specific?
Dave Nadig: I suspect we're in for continued volatility, marketwise. I just don't see much of a catalyst for stability. The market is VERY sensitive right now to geopolitics and macroeconomics, and both seem pretty shaky (just my opinion).
So what does that mean? I'm guessing we see more focus on traditional financial planning, a lot of talk about portfolios, instead of single funds or stocks, which is healthy and good.
I suspect we see a bunch of bond funds launched to manage higher rates, and we see the equity side continue to fill out with thematics.
And, as I said above, probably nontransparent active.


Guest: What’s the relationship between the Fed hiking yesterday and equities decreasing so much?
Dave Nadig: I'll close with this one, which is a great "101" type question that I think a lot of folks overcomplicate.
At its simplest, investing is just about trade-offs. Finding the best target for your cash for a given risk tolerance, to generate the highest return.
Given a choice between investments, markets are smart. They will throw money at the best risk/reward trade-off.
If government bonds -- basically the most riskless asset -- are at 1%, and expected returns on stocks at todays prices are 5%, well, you just do some analysis.
Is the stock worth the additional risk over the riskless asset?
When the Fed jacks rates, it raises rates across any products associated with borrowing.
So if they jack the "riskless" asset by 1% to 2%, well, now all of a sudden you might reconsider those stocks.
You're getting TWICE the return you did a year ago on something with NO more risk!
That's the conventional logic.
(Of course, there's always the question of how much an expected rate change is "priced in" or not)
Hope that helps, and that's going to do it for me today.

We'll have the transcript up shortly, and everyone, have a safe and happy holiday! We'll be skipping next week, so we'll see you in two!

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