Live Chat: Leveraged ETFs Are Tricky

January 10, 2019

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


Dave Nadig: Good afternoon folks. Welcome back 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 fingers cramp up.
We'll post a transcript (same URL) when we're done, in case you missed anything.
Lots going on, so let's get rolling:
This makes me laugh:


Newbie: ... and today's soundtrack is ...?
Dave Nadig: OK, fair enough. Today is Mitsky:
Now to REAL questions.


Larry: Are ETNs a dying breed? Only banks use this form of ETP, and of the 161 ETNs listed, more than half have less than $100 million in AUM and only 40 have an ER less than 0.75%. Viewing this in terms of ETF trends, it doesn't seem like a recipe for success.
I accidentally hit return on my post, but I want to add that an ETN like CAPE would be very successful in ETF form. Seems like a wasted opportunity!
Dave Nadig: Hi Larry. So there's no question exchange-traded notes aren't much in favor.
For those new to them: ETNs are just pieces of corporate debt that trade on an exchange, like an ETF or a stock.
What makes them interesting is that the promised return from the note can be anything: the mean temperature in Australia, you name it.
So ETNs are great when the pattern of returns is hard to package in a clean wrapper, like an ETF just owning stocks.
That's why we've seen them in certain niche markets, like some leveraged applications or volatility and so on.
The problem is, someone has to issue the note and back it up.
And increasingly, the banks that do that are just not that interested in taking on that kind of balance sheet.
(if they promise, say, the return of VIX futures, they have to go hedge that.)
So I don't see them coming back in a huge way, except these narrow cases.
(FWIW, ETNs are super tax efficient too, because they get treated just like a stock).


Sal: UWT: is that is a good buy-and-hold stock?
Dave Nadig: Ooof!!!
UWT is triple leveraged oil.
It's the successor to the old UWTI, which closed I think two years ago.
It's nearly the definition of something you DON'T buy and hold. It will give you 3X the return of oil over one day. So oil up 5%, you're up 15%.
Of course, oil down 5%, you're down 15%.
Worse, because oil tends to be fairly volatile, you'll experience decay over time (because of how leveraged rebalancing math works).
So, this is a SUPER speculative tool. A very sharp knife in the drawer. If you use a tool like this, you need to REALLy stay on top of it, and know why you own it, and for how long you plan to,
and monitor it daily.


Nemo: How do the notional exposures of NTSX and SWAN compare? Both are using light leverage (explicit or implicit) with some combination of S&P 500 and Treasuries. However, they have different correlations to each of those assets and daily standard deviations. Are those variations based on the allocation of the levered exposure or is the mechanism of leverage making a notable impact?
Dave Nadig: So this is a deeply nerdy question about two deeply nerdy funds.
On the surface, they seem very similar, because they use derivatives to give you a managed pattern of returns from stocks and bonds, but they do it in very different ways.
SWAN to me is the simplest, because it's essentially just a big Treasury position and a bunch of long-term options (LEAPS) on the S&P 500.
The end result is most of the upside of being in equities, but a lot of stability of being in all those Treasuries.
NTSX just takes a 60/40 portfolio and leverages that up to be 90/60.
In terms of what they do. if you compare them during the recent drawdown, SWAN did a much better job of keeping you out of trouble.
But then, NTSX rallied much faster off the December lows.
Just depends on what pattern you're looking for. SWAN will be much more muted.


Conference Man: Are you looking forward to any specific sessions at the Inside ETFs conference next month?
Dave Nadig: Wow, man, so many. It's a crazy good agenda this year. Obviously I'm excited to hear some of the big keynotes: Michael Lewis and such.
But I'm very blessed that I get to be on my favorite panel, which is the ridiculous showdown all the ETF pundits do picking their favorite of the year.
The escalation that's happened there is out of control (and hilarious). We're pretty much ready for T-shirt cannons and full backing bands. But I always learn something.


Gwynn: What kind of an impact on the ETF industry do you think the new RBC iShares will have?
Dave Nadig: So, if you don't live in Canada, none.
But for the Canadian market, I think this is SUPER smart. BlackRock obviously has the product chops in spades, and Canada remains massively dependent on bank distribution, which RBC has.
So basically, it creates a "got it all" powerhouse to compete with BMO.
I don't see it having much spillover, but I suspect we'll continue to see Canada being the test bed for U.S. innovations (like Vanguard's smart-beta funds, which launched in Toronto first).
It's a pattern that the U.S. issuers have used for decades now.


World Bond: Thoughts on Vanguard's BNDW vs, Wisdom Tree's GLBY? Does enhanced yield make more sense even though GLBY has higher fees and spreads?
Dave Nadig: While there are nuances between them, here's the problem with this analysis:
GLBY essentially NEVER trades.
Now, it's new.
I get that.
But it's a month in, and the ADV is something like 100 shares.
I have deep sympathy for everyone who launches new products, but part of the reason we've seen this pattern of new funds coming to market with built-in institutional support is because of products like GLBY.
It may in fact be a better mousetrap. We might look back in a year and say "Holy cats, these guys have it figured out!"
But it's very, very hard in good conscience to suggest someone wade in with their IRA money or whatever when you can't get a bid on it.
I'm not someone who says volume is everything, but there has to be SOME. Even 10,000 shares a day would make me feel fine about this.
But zero?


ETF Bro: Does volatility actually increase the liquidity of an ETF? Do ETFs gain liquidity as the underlying securities trade more?
Dave Nadig: History would suggest these are pretty unrelated.
We have huge, liquid ETFs covering very illiquid underlyings (BKLN for instance, or SRLN), and we have countless ETFs covering large-cap equities that hardly ever trade.
If you have decent volume in BOTH the ETF AND the underlying, then you do see transmission; easy-to-trade underlyings equal better spreads on the ETF.
But I don't think it's causal that "all liquid ETFs are liquid because of their underlyings."
Ultimately, investor interest is what drives on-screen liquidity.
Put it this way: We have three solid S&P 500 ETFs. How much volume do youthink a fourth, or a 10th would get? Same underlyings...


Todd Rosenbluth - CFRA Research: Hi Dave. Happy new year! Do you think the owners of VXX realize that the ETN is maturing this month? Still a lot of money and volume in this product.
Dave Nadig: Hi Todd.
So, the traders I've talked to are all acutely aware.
That said, I am 100% sure we'll read some article about some dentist in Iowa who was holding right till the end and was surprised when he got cashed out.
My prediction is that within a few days or a weeks, we'll see essentially all that volume in the successor ETN -- or I suppose, the competitive vol ETP from Janus.


Neil: What do you think about ETFs of ETFs?
Dave Nadig: Mostly I don't, in that, I think rolling ETFs up in strategies makes a lot of sense. It just comes down to transparency and cost.
One of my favorite boring ETFs - Cambria Trinity ( is an ETF of ETFs.
A lot of the currency-hedged ETFs are just holding a nonhedged ETF and a currency position).
As long as you're not layering up fees and know what you own, there's really no concern.


dave: Can i do a 60% (equity)/40% (fixed income) ETF all-in-one thing?
Dave Nadig: So there are quite a few "all in one" ETFs at this point, although I'm not sure theres one that's THAT simple.
The WisdomTree ETF we mentioned earlier, NTSX, is essentially this, but with 50% leverage.
The challenge is always managing rebalances, and if you're really just after your whole portfolio in two funds: one equity, one bond, well, managing that rebalance yourself isn't hard.
And it would give you control over your own tax timing. Like, why would you rebalance in December and lock in a gain, if you could wait a week, and so on.


Powell Put: When I look at ETF returns, are they usually posted as after cap gains (if there were) or not? How can I evaluate ETFs against each other including cap gains' impact?
Dave Nadig: So, performance for ETFs is usually standardized to be total returns (meaning, as if all distributions are reinvested, whether those are dividends or cap gains or return of capital).
And without any assumption of what you might pay on the gains.
The industry does that because there are so many variables, obviously.
I mean, even in your own account, you don't care about the gains in your IRA, but you would in your after-tax account.
The good news is that the VAST majority of ETFs -- certainly equity ETFs -- have never made a capital gains distribution.
So any gains you get are yours to track and deal with, when you sell.
But if you're very tax sensitive, it makes sense to check on the issuer websites to see if there's a pattern of distributions, for sure.
(And, having waded deep into the data swamp there, I would really ONLY trust direct-from-the-issuer data on distribution tax categorization; it's rife with errors).


Tom: I saw you on the new ETF Edge thing on CNBC talking about equal weighting a lot. Is it always better than market-cap weighting?
Dave Nadig: So, in that segment Monday, the question was, "Can you do better than XLK, given its Apple weight" -- XLK, being a tech ETF that's cap-weighted, has 17% in Apple.
(You can see that at
My point there (and in another segment) was that this is an easy fix -- there are equal-weighted versions of most popular strategies).
The pro: You don't get single-stock blowup risk like you do with the big top-heavy funds. You potentially get better performance over LONG cycles.
The con: rebalance friction in the funds, generally higher expense ratio, and of course, you'll miss the 20% rally in whatever stocks at the top when it happens.
Nobody complained about XLK when Apple could do no wrong!
It's only on the downside.
So -- no, equal weighting isn't always "better," but it does always solve one problem: overexposure in top-heavy funds.


Bill Perlman: How can one get historical ETF creation/redemption values for a set of ETFs?
Dave Nadig: Hi Bill -- I'm sort of not sure what you mean here. Historical prices? Historical portfolios? Historical costs to create? Short answer is that other than the net asset values, I don't know an easy way to find, for instance, what the basket for HYG was four years ago on a given date.
I THINK FactSet and Markit have that data, but I'm 100% sure they'd charge you a lot for it (grin).


Sean F.: So there's about, what, 2200 (US) ETFs currently? New ones get launched regularly, but because there are also frequent closures, do you think this number will remain about steady, or constantly grow year over year?
Dave Nadig: We're still at about a 2:1 launch ratio I believe, so I don't think we're stable yet.
Toroso actually tracks this explicitly as part of the material around their ETF-ETF - TETF. 
And it looks like about 1.2 opens per closure right now on a trailing basis.
So you're more right than wrong: It's stabilizing.
I suspect the land rush phase is probably, if not over, at least slowing. This is a good thing. Launches are getting more thoughtful.
I'll close with this one:


DanMan: You have some themes like “world’s cheapest ETF portfolio” and “cheapest ESG ETF portfolio.” Do you plan to do this for other asset classes as regular themes as well?
Dave Nadig: I think doing these kinds of models, as long as they're educational, is probably a great idea. As part of what CNBC is doing on ETF Edge, I know they want to highlight a portfolio-for-a-purpose at least once a month, so I imagine I'll be kicking a few new ideas to them there, and we'll of course write them up for

I think that's a wrap for today. A few quick housekeeping notes:

We're doing a broad, global macro and trading webinar on Wednesday next week, where I'd love to field questions. You can register for that here:

Also, don't forget our weekly podcast with ETF Prime. That's really been fun lately. Some great guests and interviews:

Thanks folks, and we'll see you next week!

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