Live Chat: Guarding Against The Bear

October 04, 2018

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

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.
So with that, let's start stumping the chump.
(That would be me.)


Bart Ramos: Will the current trade wars impact exchange-traded products, either negatively or positively?
Dave Nadig: Well, importantly: ETFs are just a wrapper. You can buy everything from oil futures to inverse equity exposure, China, US, Europe, you name it.
So there's nothing about the ETF structure that's impacted by the current trade wars one way or another.
As far as global economic impacts, well, I'm personally of the belief that tariffs are inherently bad for everyone.
They're a tax on the economy.
So, you would expect, for instance, a prolonged China trade war to be bad for BOTH Chinese and US GDP.
Of course, you get very narrow situational winners and losers in specific sectors/companies.
But in general: none of it's great for global equities.
But you can play both sides of that with ETFs -- you can always go short if you think it's all going down!
Bunch of questions like this, so I'll cue them all up (building on that last one):


Sarah Smythe: Good morning Dave, Do you think the S&P 500 will break 3000?
Daphne Rutgers: If the bear market truly starts soon, what does a smart investor do to protect their portfolio?
Dave Nadig: Lots of market anxiety today I guess!
So, I'm not generally in the "make the call" business, but a few thoughts.
As a quant nerd, I can't help but look at things like CAPE and other valuation metrics once in a while.
And sure, things look a little bit expensive. But then, they looked expensive last year too.
And even Shiller himself will suggest that CAPE is a terrible predictor of 1- or 3-year returns, and at best a guidepost for 10-year forward returns.
As long-term investors, your chances of getting the timing right of making a BIG MOVE are incredibly small.
A lot of the fundamental economic underpinings look fine: spending, earnings, etc. But of course, valuations are high.
So what do I do personally? As little as possible. Boring tends to win over the long term.
I do go to a lot of financial advisor events, and the thing I hear most about is really around the edges: things like defined outcome products (the Innovator series) or using options to earn a little rent of your equity position (buy/write strategies) and so on, which are all ways of just ever so slightly hedging your bets.


Jeannie Altoon: Hello Dave. In your opinion, is there one element more than others that most attracts investors to an ETf: what it gives them exposure to, what its expense ratio is ...?
Dave Nadig: Well, if you look at the data, I would say "cheap" is probably the thing that moves the most assets.
Low-cost vanilla exposure has topped the flows charts for years now.
You get an occasional flash of something else: low-vol funds, MJ, etc.
But longer term, cheap seems to win.
The second thing I most often hear about is simplicity. Most ETFs are pretty straightforward, and just do what they say on the box.
I think for investors coming from active mutual funds, that's an anxiety reducer.


tmuscat27: I came across an ETF that has the sloan ratio as one of their metric and I would like to ask for the ticker symbol if possible. Also which ETF do you suggest for the long term with a decent return?
Dave Nadig: Now that's one I haven't heard of in a bit.
So for those not quite so value nerdy: the sloan ratio is a way of assessing whether a firm is "messin' around" with their accruals when you're evaluating it vs. peers. Off the top of my head, I think it's income minus a few cash flow from operations metrics, over assets.
I don't know an ETF that SPECIFICALLY targets this, but I will point you to two good pieces on value stocks from contributors to our site.
This one from Todd Rosenbluth at CFRA:
And this one from Larry Swedroe I've pointed to a lot over the last two years:
I think they give a pretty good primer on what to look for in the value space.


Sheila C.: Is there any limit, say, per year, that ETF issuers can file for an ETF with the SEC? What's your thought on what percentage of filings get approved that are submitted?
Dave Nadig: Hi Sheila!
So, the VAST majority of ETF filings for run-of-the-mill ETF strategies are approved as a matter of course. It used to be a lot more of a crap shoot. Now it's pretty much rote,
unless you're doing something new (cannabis, bitcon, etc.). Then hanging a new ETF off an existing series, or even launching a whole new series, is pretty much just boilerplate these days.
No, there aren't any limits. If you have infinite money for filing fees and lawyers, you could submit a new ETF every day.
You might get a phone call from the SEC saying "what gives" however (grin).
Here are a few I'll bundle up:


Xander Foley: Hi Dave. What ETF trends are burning brightest on your radar right now, or that you see trending in future?
Ingrid Fulton: First I guess there were stocks, then mutual funds, then ETFs. Granted there were things like CDS, etc., but, what product(s) do you envision could be in investors' futures?
Dave Nadig: So, the quick and obvious answers are some of the new asset class issues: cannabis and bitcoin, for sure. Those always make for interesting stories.
Longer term though, I am fascinated by the idea of a "wrapperless" future -- where you don't even use an ETF or a fund, you just have a firm allocate you fractional shares that add up to the exposure you want. Wealthfront and M1 (whom I've mentioned several times) have approaches here.
I suspect firms like Schwab will eventually extend their robo-advisor platforms in this direction.
The reason it's cool is not (as some suggest) to cut costs, but to mass-customize; say, remove your company stock from the portfolio, or add an ESG layer.
I think it's 10 years out before this is a BIG THING, but I suspect we'll start seeing the entry points pretty soon.


Bill Donahue: Self-indexing is getting a lot of play these days, primarily related to cost reduction. Any issues or concerns that you have with self-indexing?
Dave Nadig: Hi Bill! Well, I think the line between self-indexing and active is super thin.
You could take the successful active strategies of someone like Cathy Wood from ARK and make those into an index with a monthly committee reconstitution, and it would look pretty similar.
I don't have any real concerns in terms of any sort of "self dealing" or anything. As long as the index methodology is transparent, I don't think most investors care ALL that much. Not at the retail level.
At the institutional level, it matters a lot, because if you're a big endowment, you want your ETFs to be mappable into your existing analytics framework.
Hence why big MSCI / S&P funds exist in competition with each other.
It can also matter having related products (derivatives) tied to those same indexes. That can really help with arbitrage and thus, liquidity.


RC: I notice that low-volume ETFs that, for example, track the S&P 500, sometimes do not do a good job of tracking the underlying positions. If the S&P500 is up 1%, the low-volume ETF might only be up .75%, on a given day. Or if the S&P500 is up 1%, the ETF might be up 1.25%, on a given day. Why is this? Possibly due to the market makers and spreads? Or, something else?
Dave Nadig: Hi RC.
What you're seeing is MOST likely a difference between market price and NAV.
I'd be surprised if you found many plain-vanilla US equity strategies that don't track their indexes pretty tightly from an NAV perspective.
However, depending on what you're using as your data service, if the ETF didn't trade in the last 50 minutes of the day, you could be looking at a pretty stale "closing price."
It of course CAN be legit -- if a fund really really doesn't trade and has very wide spreads (again, pretty rare for a US equity fund!), it could have a 1% wide spread and even then, the midpoint could be off if the AP just doesn't think he or she will ever roll up enough to do a creation unit.
So it CAN happen, but it's pretty rare.
Most likely what you're seeing is just the "last trade is old" problem.
If you dig hard enough, you can find some trades that are MONTHS old.
THose are true "buyer beware" funds.


Todd Rosenbluth - CFRA research: Vanguard’s comment letter includes a recommendation for ETFs to be able to halt creations in rare cases like local market closure. What do think of that, and might the SEC be OK with it? ETN halts have been dramatic.
Dave Nadig: Welcome back Todd!
So, they can in fact do this now. It's really just a formal guidance that they're looking for.
When Egypt's market closed, eventually VanEck shut EGPT for creations. So there's a process.
I wouldn't be super happy if it happened more than in those extreme cases.
Like, right now, mutual funds close for new money basically because they feel like it -- they think their strategy is saturated.
That would be horrible in an ETF wrapper, and essentially have the ETF bounce in and out of being a closed-end fund.
Wouldn't be a fan.


Adam Okhai: Very useful site. Are you considering coverage of Canadian-listed ETFs? Cdn economy is and population is about equivalent to California. You would definitely not ignore California. PLEASE do include Canada ETFs.
Dave Nadig: I love Canada! I go to most of the bigger events there. It's very much the canary in the coal mine for the US market.
The issue for us (to be really blunt) is whether there's ENOUGH traffic from Canadian investors to justify putting up all those fund pages, and then hiring 1 or 2 crack reporters to cover all the various moves in what is a pretty dynamic market.
Every time we've looked at it (which we really have!), it's just been a hard case for me to make to invest the resources there.
Maybe that will change! I actually hope it does, because like I said, I think it's an important market that in dozens of ways is the precursor market to what happens in the U.S. - just look at HMMJ launching before MJ!


Finola H.: Is it conceivable that passive investing/ETFs could contribute to, or cause, the next big market crashes?
Dave Nadig: Boy I get this one a lot.
So, when you look at some of the market "hiccups" we've had that involved ETFs in the past decade, I'd describe them as "plumbing related." The biggest issue -- can an ETF trade WILDLY off fair value -- has been adressed by the Limit Up/Limit Down circuit breakers.
So I don't see a plumbing problem.
Of course, ETFs are just targets for supply and demand, like anything else.
If EVERYONE wants to sell, I dunno, tech stocks, then tech ETFs will get hammered. And so will tech stocks. And so will tech mutual funds.
Since there's a lot of trading volume in ETFs, you can see scenarios where the ETFs actually respond FIRST to outside stimulus, and then the stocks "catch up."
We've seen this in illiquid corners of the bond market when we've had big high-volatility days.
But in equities, for the most part, even when we have big vol spikes like we saw in February, the ETF just trades along merrily -- up or down, based on investor sentiment.
OK, last question before I wrap up:


Thom Margate: Clearly ETFs cover super specific niches. Is there an ETF that targets entertainment vehicles like Netflix/Hulu?
Dave Nadig: Great change to plug a tool on!
If you go to ...
... you can swap whatever ticker you want in there for Netflix.
You'll see the funds with the biggest exposures.
Some of these don't look like your angle, but look down a few on the list and you'll see:
Invesco Dynamic Media ETF, which is basically what you're looking for.
I think that stock finder tool is a great way of ferreting out a niche ETF in a sector you think you might be interested in.
OK, that’s going to do it for today. We’ll have a transcript up shortly.
Next week we should be same time/same place, I believe.
You can bookmark this link, which will open for questions on Thursday morning.
Thanks everyone; see you next time!

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