Live Chat: Gurus & Illiquid Markets

January 03, 2019

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


Dave Nadig: Good afternoon!
Welcome back to Live! after a holiday break. Hope everyone had a good one.
As always, you can enter your questions in the box below, and I'll get to as many as I can in the next half hour or so.
We'll post a transcript up at the end, in case you miss something.
With that, let's get rolling.


Sam D.: Is Jim Rogers' prediction last May that a huge bear market was coming the only one of significance that’s come true in recent years?
Dave Nadig: OK, well, snark aside. Jim did go on a bit of a "bear tour" starting at the beginning of last year.
I think his predictions started in December 2017 actually. We had an interview with him where he reiterated it.
So, I haven't been big on the bear camp really, but I have to say the kind of notes we're getting today: airlines, autos, Apple ... they give me a bit of pause.
So putting aside whether or not Jim has a track record, I think there's some cause for concern that the "engine of growth," as it were, is pretty anemic right now.
It's reasonable for folks to be thinking defensively, but mostly, my reaction to times like this is to think about value.
Which is part of why we just had the second-biggest year for ETF flows in history: $315 billion

And a LOT of that went into equities.


SM: In a surprising turn of events, Jack Bogle has come out against passive indexing firms in recent days, implying that BlackRock, Vanguard and State Street hold too much power. What is your take on the issue?
Dave Nadig: We do get this pretty frequently. I have obviously huge respect for Mr. Bogle. He's essentially invented a huge chunk of the industry where I've made a career.
But in this case, I always come back to the "prove there's a problem" point.
The argument that big indexers have no incentive to be thoughtful about governance just baffles me.
If I HAVE to hold Apple stock, because it's in the index, won't I make better decisions about those votes than if I could just dump it because I didn't like a quarter?
And if you look at what the big guys are doing, they're being pretty provocative in how they're approaching governance.
State Street voting against board slates, Larry Fink taking out full-page ads to talk about governance ...
i think the industry is leading here; not on its heels. So I just disagree with him on this one.


Guest: I know you don’t own any ETFs, to be neutral; do you own any mutual funds?
Dave Nadig: Fair question. I do own mutual funds, largely Schwab, Vanguard and Fidelity index funds, depending on which account a given bucket is in.
While I'm obviously an "ETF guy" at heart, the reality is that a good, low-cost index mutual fund is an incredible tool as well.


Jake Matthews: Is it too late to vote for our favorite ETFs of 2018?
Dave Nadig: ALMOST, but not. Until 5:00 p.m. ET today, you can still submit things here:
Then, next week, we clean up all the submissions, and they go through a nominating committee to get down to 4-5 entries per category. Then the voting committee makes its selections, and we announce the winners on March 28 at a dinner in New York.
I'm going to have to play interpreter on this one:


Melinda: Method for tracking correlation or lack of same between
Dave Nadig: I THINK what you're looking for is a correlation tool to look at different assets/ETFs.
There are a few online, but the one I've been playing with lately is from Koyfin:
While I'm lucky enough to have both Bloomberg and FactSet at my fingertips, I get that most folks don't, so I'm all about accessible (and free!) tools on the internet.
I hadn't heard of Koyfin till a few weeks ago, but I've been playing around with it and I like it a lot.


Dayna Freitag: Why do some think ETFs are dangerous in illiquid markets? What’s the logic?
Dave Nadig: Well, the argument is that something like (to pick a regular poster child) HYG, the iShares junk bond ETF, trades a ton, but the underlying bonds don't.
So if "everyone wants out," the ETF will sell at a big discount, and "disconnect" from the price of the junk bonds (which might not trade).
This is actually true -- if "everyone wants out," the price will indeed go down quickly -- that's how markets work.
The problem is the naysayers believe that somehow the advertised price of the bonds -- that aren't trading -- is somehow correct, but the ETF price -- which is trading -- is incorrect.
The opposite is true. In situations like this, the ETF becomes the price discovery, and when the bonds trade, they trade where the ETF suggests they should. We've seen this dozens of times, and it always plays out like clockwork.
Even when Egypt closed for a month, the ETF traded, and was price discovery when the market reopenned.
So it's mostly just not understanding the information vectors for pricing.


Travon: Are ETFs an asset class, like commodities or equities? If not, will they become one?
Dave Nadig: ETFs are JUST a wrapper -- like a mutual fund, a separate account, a variable annuity, etc.
In fact, most ETFs are just mutual funds under the hood.
So it's really dangerous to think of the wrapper as the thing itself. You wouldn't consider tupperware a food group.
Tupperware can hold kale, or cookies. So is Tupperware "good for you?"
ETFs are the same way. An ETF can contain the S&P 500 stocks, or it can contain triple inverse wheat futures.
So, long answer short: Nope, they're not an asset class, and they never will be one.


Dennis Martinez: Why are ETFs so allegedly tax efficient?
Dave Nadig: So, two main reasons.
1) Most ETFs are index-based, and most indexes have very low turnover. Not selling often means minimal chances for a taxable gain that would need to be distributed.
2) Most ETFs use "in-kind redemption." That just means when someone wants their money out in size (a market maker), the ETF doesn't sell stocks to raise cash; they simply hand the market maker a bunch of securities.
Since they can pick which tax lots they want to hand out, they tend to hand out those witih the lowest possible basis -- those securities that would generate a gain if sold.
Over time, this means the basis for the positions in the ETF goes up and up, minimizing any gains when the manager has to sell for some reason, like an index reconstitution.
End result: the VAST majority of equity ETFs have never made a cap gain distribution.
Bond ETFs sometimes do, because many bond ETFs have maturity requirements (like, it only holds 5- to 10-year bonds) -- that creates some forced selling now and then.
But even then, the record is pretty great -- bond ETFs are generally still more tax efficient than their mutual fund counterparts.


Anonymous: What asset classes saw the most outflows/inflows this year? What do you project for 2019 in that regard?
Dave Nadig: We actually just posted our big flows rundown here:
But to summarize: U.S. equities pulled in $135 billion for the year -- and $15 billion in December!
So for all the turmoil, it turns out people still want in -- at least ETF investors.
Second place was U.S. fixed income, but interestingly, a lot of shorter-term stuff -- that's your safety play there.
Funds like SHV/SHY from iShares - short-Term Treasuries -- had big flows in December.
As for losers -- basically no asset class -- but some specific funds. "Old guard" ETFs like SPY, EFA, LQD and JNK all had negative years.
In many cases, offset by flows IN to competitors like IVV, IEFA and so on.


Jane Franks: Hi Dave, In your opinion, when financial gurus make predictions that have turned out to be wholly false, do they seem less likely to go on the record making more predictions?
Dave Nadig: Interesting question!
My anecdotal experience is that pundits who make big calls tend to get flushed pretty quick when they're wrong.
I think big, bold predictions are kind of just a media game. I mean nobody KNOWS the future, right? The economists and financial writers I most respect wrestle directly with that uncertainty
instead of pretending. But big, bold predictions (see Rogers above!) make for better headlines. And it's understandable. I know; I read them too!
And sometimes there's meat under the headline. Rogers' point, for instance, is less about the end of the world and a bit more about how it's often small, unnoticed things (like Iceland) that are the canaries in the coal mines.


Todd Rosenbluth - CFRA Research: Happy new year Dave! My 2019 prediction was for the first zero-fee ETFs to launch Anything you want to share with us to kick off the year?
Dave Nadig: Hi Todd! I saw that. I actually disagree, honestly; at least any meaningful launch. I just don't think it works the way it does in mutual funds.
But as for my OWN big predictions? Mine aren't too controversial.
I DO think we see nontransparent active (assuming the SEC gets to go back to work) in 2019.
I think we remain highly volatile, and probably flat for the year. That's my "big" market prediction, but as I pointed out, I'll probably be wrong.
I do think we'll see more of the traditional active community really wade in finally. The bear market gives them cover.
Whether that's a Gabelli or a Growth Fund of America, who knows. But they'll crack.


Bill Donahue: Happy New Year, Dave. Two quick questions... 1. Which ETF provider do you expect to make the biggest leap in 2019 in terms of flows and AUM? 2. ETFs continue to disrupt mutual funds in terms of flows, growth, downward fee pressure, etc. What are two or three areas that could slow ETF growth and/or turn the tide in favor of mutual funds? 
Dave Nadig: A two parter!
I think Schwab crosses Invesco to be No. 4 this year. I'll make that bold prediction.
State Street has had a bad year (down in assets in a big up year), but they have a LONG way to lose the third-place slot.
I think we'll continue to see BIG moves from J.P. Morgan and First Trust. They were 4th and 5th in terms of total growth this year, and I bet that continues. Distribution is hard to beat, and they've got a plan for that!


Dave: What are the best ETFs to follow a rise in gold?
Dave Nadig: So this is pretty simple: There are several ETFs directly just buying gold bullion, and they've been in a bit of a price war lately.
The cheapest two are SGOL and BAR, which are around 17 bps, I think. They keep trading for top slot there.
They all do pretty much exactly what they say they do on the tin.


Lois Gregson: In your opinion, what was the biggest takeaway in the ETF space for investors and asset managers from 2018? ETF liquidity verified, closures are good?
Dave Nadig: Hi Lois!
Two things.
1) A lot of folks were saying, "Just wait until we have some monster volatility, and the ETF structure will break!"
The opposite of course has happened -- the ETF structure has proven it can handle about as much crazy as you can drum up.
2) A lot of (probably the same) folks were saying, "Just wait until we have a bear market; we'll see all these passive products wilt, and active will have its day!"
And of course, not happening either. Now, to be clear, once we set a bottom, there will be SOME active managers who will be on TV a LOT, who will have called the top and bottom.
Put 1,000 folks in a room, and 10 of them will get it right, and we'll have to put up with months of annointing this "next generation of active rock stars" on CNBC and so on.
But the math is the math, and I suspect we'll see what we continue to see: Market turmoil shakes out the bad active managers, and that money shows up in ETFs.


Scott: Where do I sign up for your Macro Themed ETFs webinar?
Dave Nadig: Thanks for asking: All our webinars are always listed here:
That link doesn't change, and it's on the menu from the front page as well. I hope you'll join us.

That's probably as good a place to end as any. Thanks everyone for joining us today. We'll have a transcript up shortly, and should be on for same time next week.
Have a great afternoon!

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