Live Chat: Options & Physical Gold ETFs

March 06, 2019

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


Dave Nadig: Good afternoon, and welcome to Live!
As always, you can ask questions in the box below, and I'll cram as much as I can into the next 30 minutes.
Don't be bashful!
We'll post a transcript later today in case you miss any of the answers.
And with that, let's get rolling.

Anonymous: Today's soundtrack is ...
Dave Nadig: Been on an Amanda Palmer kick. She has a new album coming out Friday:

ETF Guy: Can you explain how to find ESG ETFs on your site?
Dave Nadig: So, very legit question that highlights the fact that no two people can agree on what ESG even is.
We've taken a few approaches here at
First, we integrated all of the MSCI ESG data. They have a really robust methodology that assigns various ESG scores to essentially all ETFs based on what they own.
You can see that data on the "ESG" tab on the main screener ( will get you there).
If you want to limit your search to only funds with a certain score, you can use the sidebar on the left to do that (under "Analysis").
What you'll find, however, is that there are a lot of funds that score well in ESG that aren't claiming to be ESG funds. For example, many EU equity funds score well, because many EU companies have adopted very ESG-friendly stances on a number of issues.
Separately, we have a list of funds that make socially responsible claims.
You can find that on its own channel page here:
Again, some of those funds may not actually rate that highly for ESG.
But between the data and the list of folks making claims, hopefully you can find what you're looking for.

Ray: Do you have any concerns, or what are the risks of owning a physcially backed gold ETF? Seems like a cheaper way to own gold, but you can't hold the gold.
Dave Nadig: I'm not a huge gold bug, but here's my general thinking.
First off: I'm not worried that there's "no gold in the vault." That heads into the realm of actual conspiracy theory. All of the physical gold ETFs have strict security and audit processes, and they're all pretty transparent about it.
To believe it's all rigged is pretty much up there with worrying that aliens secretly run the government ...
The bigger question is, why are you investing in gold?
If you're investing in it for its historical countercorrelation to risk assets, and its correlation to inflation, then really there's no reason not to just buy an ETF.
If, however, you're buying gold as some sort of a hedge against the collapse of the global economy, and you think having gold will help in some sort of apocalypse, well, it won't do you any good in a London vault.
If you're the latter kind of gold buyer, there's really only one thing you can do: Bolt a safe to your basement floor, buy physical gold and worry a lot about security.
But the ETFs? They do exactly what they say on the tin.

James: How come much wasn't made about John Hancock lowering fees on 9 smart-beta ETFs? It was difficult to find news about this anywhere. Am I missing something?
Dave Nadig: So a few answers. I think this happened in mid-February, which was both right around the big ETF conference, and in the middle of a ton of ETF launches, closures and fee changes.
I'm pretty sure we covered it, but it probably rolled off the home page almost instantly with all the news right then.
The cuts were I think about 10 bps, bringing them from the 50s to the 40s in general, which is great. I think the "right" price for most funds like those is in the 30s, but they're close now, which is great.
The funds themselves are bit of a mishmash. Their core funds like the JHML (the large-cap U.S. one, which tracks a dimmensional index) hasn't managed to beat the market over any meaningful period since launch.
But it HAS worked as a risk reducer, a touch. Its beta comes in under 1.
So I would describe the product line as "subtle tweaks" on traditional cap weighting for the most part.
It's clearly worked for an audience, as the complex now has I think close to $4 billion in it.
But fee-cut news barely makes headlines anymore, it happens so often!

Options or Stops: Hey Dave, if used appropriately, do you think a better way to protect versus the downside is: 1) options like Innovator Funds use, or 2) to have stop-loss orders placed within an account on, say, something like SPY?
Dave Nadig: Fantastic question.
So, the problem with stops is multifold. First off, stops can outright kill you if you aren't careful.
If you look at the history of ETF hiccups (flash crashes and whatnot), the only folks who usually get hurt are folks who left sleeping stops on their positions, so they became the sellers at too-low prices.
So, if you're going that route, make sure your stops aren't just stops, but have a limit on them. So you can put in a "sell if it trades through 100, but at no price worse than 95" for instance.
The risk of that is, of course, in a very fast-moving market, your stop might not trigger.
The options version of this is far more predictable and controllable.
Whether you use a product like the defined-outcome ETFs or simply do it yourself, you're locking in a known pattern of returns.
The flip side is it's not free. They track a price return index (because that's what options do: They work off prices, not total returns), and they charge, I think, 70 or 75 bps.
So some of it's down to temperment. If you're watching the market every day, by all means, use careful stops. But if you're walking away for a month or more, you don't want to let those stops sleep.

Kyle: Hi Dave, since we're in a race to the bottom with respect to fees, especially on core ETFs, how much does a basis point or two really matter (in your opinion) when allocating between providers? Say, between various large-cap core (ignoring the fact that exposures might be different depending on which index is being tracked)? Thanks!
Dave Nadig: I talked a bit about this on this week's ETF Primeand it's a very good question. 

The reality is this: the difference between free and 0.03% (what Vanguard's S&P ETF, VOO, charges now) is $30 a year on a $100,000 position.
That's essentially nothing.
And if theres ANY difference in exposure, it will dwarf the difference. Heck, just a penny difference in how they trade could dwarf it.
When you start talking about tens of basis points (tenths of a percent), then I think it's worth really considering.
But exposure is always the most important thing.
Take, for example, the John Hancock large-cap fund we were just talking about.
It charges .35%, vs. VOO's .03%.
So that's 32 basis points different.
That's $320 on a $100,000 position. Year after year.
That's where you really need to ask yourself what you're paying for.
Not a diss on that fund: It's doing something different. It's definitely lowering your risk a little. But you could lower your risk other ways too (say, just buy less VOO).
So I guess I just made up a rule of thumb: sub 10 bps differences? Probably irrelevant, especially if there are switching costs.

Confuzzled: I saw your windmill piece. Can you explain how these folks who create new shares actually do their job? I got a bit lost ...
Dave Nadig: Oof, a biggy.
So, in general, it works like this: XYZ trades "too high" because everyone wants to buy it.
So it's trading at $101, when the things it owns are only worth $100.
So the authorized participant swoops in and simultaneously sells a bunch of the ETF at $101, and buys a whole bunch of the stocks for $100.
At the end of the day, they hand the stocks to the issuer, get the ETF shares in return, and when they go into settlement that night, they have all the shares they need. They book the $1 profit.
Where things get slightly weird is that the AP has five days to decide whether to go through with the creation. They don't have to do it today.
they might choose not to for lots of reasons, all of them economic. Issuers charge a fee to do the creatoin, maybe a lot!
Or, maybe the issuer will only let you make 100,000 shares at a time, and you can only pull off 40,000 shares today.
Regardless, they hedge themselves -- they're short the ETF they sold, and long a bunch of stuff that will perform economically the same as the ETF.
That MIGHT be the whole basket of what the ETF owns, but it could also be a proxy.
Maybe it's a tech ETF, and they put the hedge on super quick by using a similar tech ETF, or even just the QQQs or something.
But they definitely don't just sell the ETF without a hedge.
Hope that clears things up. We have some great articles on this in our education section.

OK, going to cut this one a bit short today. Thanks for the great questions, as always. See you all next week! We'll probably do a midday Friday session then just to mix it up.
Have a great afternoon!

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