Live Chat: Retail ETFs & ‘Bionic’ Advisors

November 28, 2018

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


Dave Nadig: Howdy folks, welcome to Live! I'll be your host, Dave Nadig.
As always, you can enter in 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 shortly after we're done in case you miss anything. With that, let's roll!


Jackie W.: Are you a CFA? Or play one on TV? :)
Dave Nadig: Hi Jackie, Funny. But no, I am not a CFA. I am a lowly MBA. I considered getting my CFA about 10 years ago when I was hiring a lot of them.
But the truth is, hard to imagine finding the time. the CFA is a HARD standard. I have enormous respect for it, and consider it strongly when hiring folks.
(I did write the CFA's ETF curriculum and book though, if that counts for anything ... grin).


Heidi Watley: Biggest shopping season of the year in full swing. Are there any retail ETFs?
Dave Nadig: Hi Heidi! Yes indeed. Here's the list:
Of those, the one I think is kind of the sweet spot if you're making that (admittedly speculative) play would be IBUY.
The weighting scheme does a nice job of keeping it from just being "the Amazon ETF."
I also like that it's not strictly U.S. (although it's dominated by the U.S.).
It's a little bit pricey, but I think it does the job.


Peter Brady: From a market maker's perspective, how does inventory affect their quote for a low-volume ETF that is easily hedged? I would think an inventory greater than 1/2 of a unit would lead to more attractive bid prices, and vice versa. Or are create/redeem costs, on average, limit profits too much? Am I thinking about this wrong?
Dave Nadig: Nice nerdy question.
You are essentially correct. If a market maker has been accumulating XYZ in 300-share lots all day and is now sitting on 25,000 shares long, she will definitely be on the inside of the market trying to get rid of those shares...
The goal for every market maker and AP is to go out in cash, and if not in cash, fully hedged.
So inventory has the same impact on pricing in an ETF trade as it does on leftover He-Man toys at Walmart. They get "marked down" a little bit to whichever side they need to get flat.


Jerry: Best marijuana ETF? Any recommendation?
Dave Nadig: Well, "best" is relative here.
There really is only one U.S.-listed pure play, MJ.
There is a new one that just filed:
But it's not out yet.
In general, the caution here is that you're investing in small-cap Canadian agriculture in a hugely headline-sensitive sector.
You want to be sure you want ALL of those things: Canada, ag and headlines.
I'm oversimplifying, but I do worry about people just piling in without thinking it through.
I think there are some real long-term winners in the space, but I'm not sure buying all of them right now is the magic way to win.


Todd Rosenbluth - CFRA research: Hi Dave. Lots of great content this week on new ETFs on Anything that has not yet gathered assets you think will gain in popularity as market has become more volatile?
Dave Nadig: Hi Todd!
In looking through the list of launches this year, I have to say I am still intrigued by the defined-outcome ETFs from Innovator (BOCT/UOCT, etc.).
I feel a bit like a broken record on those things, but I think they're very clever and solve a real problem.
They haven't caught on fire yet, but I think in a year we'll look back and see they did just what they promised, and investors will notice.
Downside protection is a serious investor demand, and hard to deliver.


Danny Smythe: What literally is a "roboadvisor"? It conjures up a strange visual. Any measurable benefits over using a human advisor? Do/would you use one?
Dave Nadig: So, I prefer the term "automated investment service," but you can see why that will never catch on.
Essentially, you fill out a survey on a website or app, it measures your risk tolerance, time line and objectives, and recommends a portfolio, generally of ETFs.
It then rebalances and slowly changes the portfolio based on a number of factors, which differ from platform to platform.
So it might "glide path" you toward a goal, getting less risky over time.
Or it might just handle rebalancing for you.
Or it might actually do some fancy tax-loss harvesting using single stocks.
The idea is that the core investment services provided by many advisors can in fact be "automated" and they've had real traction, particularly at Vanguard and Schwab.
But, I believe most people with any significant amount to invest actually benefit from a human being in the picture, who can take into account intangibles, and complex situations.
So i don't think advisors are going to get replaced, they're going to get bionic, using robos to help manage pieces of their business. We're seeing it a lot already.


Anonymous: Hi Dave. How do you envision blockchain/bitcoin will change the way we invest, both in the short and long term. Those are definitely here to stay, right?
Dave Nadig: So, I'm not a HUGE believer in the current state of cryptocurrency-as-currency. I am a big believer in the distributed ledger.
And I think we'll see implementation all over financial services. It's a much better technology than most of the large-scale financial transaction networks we rely on now,
whether it's for credit card processing, stock settlement, or Fed wires.
So I'm bullish on that piece of it, but I think it's still a decade out.


Damon Greenfield: When stocks swoon like they've been doing, is it too simplistic to try to turn our portfolios around by buying shorting/leveraged ETFs?
Dave Nadig: Short answer: yep.
Investors of all stripes are notoriously awful at market-timing calls.
And whatever tool you use -- shorting because you think it's going down more, buying because you think "it can't go lower" -- you're still making a gut call against every other participant in the market.
After all, today's price of AAPL represents the collective sentiment of EVERY Apple investor, smart and stupid, all baked into the price.
It's "worth" precisely what the last trade went off at.
So if you have a genuine belief, I'm not going to tell you NOT to go short. But you're betting against the math.


Garth Trayhorn: Just curious: how does an entity even become an ETF issuer? Is it usually some kind of "spinoff" from a "parent company"?
Dave Nadig: Well, technically most ETFs are "owned" by their shareholders. So IVV, for instance (iShares S&P 500), is just a '40 Act mutual fund, owned by its shareholders, who elect a board to manage it.
The board then assigns various service contracts, the big one of which is the investment advisor.
So IVV "hires" BlackRock to run the fund, and pays them most of the expense ratio (sometimes all of it, and the advisor covers all other expenses).
So defining who the "issuer" even is can be quite tricky.
Most of the time, though, the advisor is just the group inside a large firm that manages money -- usually the same firm that manages mutual funds.
Sometimes you'll see a small firm spin off a separate sub for this, but that's usually because their main business is something else (being a financial advisor, or a bank).


Guest: Unless your ETF involves K-1 distributions, do you have to do anything at tax time if you own an ETF?
Dave Nadig: Well, like a mutual fund, you may have gotten distributions over the course of the year -- dividends, capital gains, etc. Those need to be reported just like any fund.
But there's nothing unique about ETFs. You need to keep track of your cost basis -- just like you do when you buy or sell a mutual fund. And adjust that basis based on distributions -- just like a mutual fund.
But that's pretty much it.


Holly Matthis: Emerging markets were in "disfavor" for some time. But it seems like they're kind of making a comeback right now.
Dave Nadig: They definitely took it on the chin, especially China.
Some of the rallies we've seen are extremely country specific -- Brazil, for instance. So I wouldn't read those turnarounds into a broader picture.
However, I think EM and China are really cheap right now. Almost all of them are under U.S. valuations, with higher internal growth rates.
I'm actually doing a webinar on this next Tuesday. Should be fun and provocative.


Gavin S.: If smart-beta has waned for ETF launches, what are new trends that are trumping that concept?
Dave Nadig: Well, not to be combative, but I deny the premise. I was just looking at the 240 funds launched this year to get ready for the Awards nominations going live next week.
125 -- half -- are some form of smart beta.
53 are actively managed.
I find that a shockingly large contingent.
What's changing a bit is how these funds are marketed.
Many times, you won't see the phrase "smart beta" anywhere near them.
Like, the Invesco Strategic Emerging Markets ETF (ISEM) launched in Setpember.
But I don't think they slap "Smart" all over it. They just describe the strategy.
So I guess the trend is "thematic" and "clarity."


Jason11: I note Cliff Asness was dropping f-bombs on Twitter. Didn't really occur to me folks who write white papers would do such. Is this common, or a rarity?
Dave Nadig: Well, depends. Back in the day (early '90s) on trading floors, the language (and behavior, frankly) was embarrassingly crass. I was never a big fan.
Most public pundits are pretty constrained in language, as you suggest, but I think it slips out sometimes from folks who've just been through it a lot.
Cliff doesn't surprise me. Josh Brown from Ritholtz doesn't surprise me.
But if I start seeing Rob Arnott or Bob Pisani letting loose, I'll probably just hang up my hat and retire!
Personally, I think the world is plenty messy without me dirtying it up more.


Anonymous: Hello Dave. I'm assuming the main reason ETFs close is they failed to gather a certain amount of AUM by whatever time frame the issuer may have had in mind. What are other reasons for fund closures?
Dave Nadig: So, as you suggest, the BIG reason is not enough assets.
That makes it actually a money loser if it's open long enough, so we see issuers pretty willing to pull the plug on ideas that don't catch.
MOSTLY that's it. Sometimes we see "cleanup" closures from M&A activity -- iShares shut down some larger funds after the BlackRock acquisition, and so on.
But really, it's a popularity contest. Sad, but true. I appreciate it when firms are pretty thoughtful about what they launch, and then give those funds a good few years to prove themselves. Getting assets is HARD.


Dag Stinson: HI Dave, So what, if any, implications does the retirement bill the House just passed have on ETFs? Or is it too soon to know?
Dave Nadig: Hi Dag, I read the summary but not the whole thing.
My take is: a) this will never pass, as it's far too broad and covers far to many areas. I don't think a 300-page bill on tax minutiae is going to plow through the lame-duck inertia;
 b) even if it did, the only real investment implication is around the safe-harbor provisions. Employers could add lifetime annuity options to their 401(k) plans, so retirees could just opt in to that instead of taking distributions.
I think that's on paper a cool thing -- decumulation is a huge issue.
But it's a bit of a giant Xmas present to the insurance industry. It needs FAR more guide rails around costs and transparency.


Bill: Are mutual funds going to eventually be rendered extinct at the hands of the ETF?
Dave Nadig: Doubtful, because defined contribution plans are here for good. And they just don't match well with ETFs (fractional shares are impossible with an ETF without convoluted structures).
But I think most retail/inst money ends up in ETFs.


J. Gross: Hi Dave. I was under the assumption that all of the "low hanging fruit" regarding ETFs has already been covered. I was looking for a diversified commodity ETF that is low cost and deals with roll yield (contango) and yet couldn't find one (they are all in the 75-85 bp range). I'm astonished no ETF issuer has happened upon this. I was hoping GraniteShares was on the case, but doesn't seem to have happened. Any thoughts (including which diversified commodity ETF you would choose for a diversified porfolio of assets)?
Dave Nadig: So, part of the issue is that commodities have been far out of favor for years now. So, not a lot of competition. Hence not a lot of fee pressure.
The contango killers are out there (DBC and so on).
But the only real fee pressure has come from GraniteShares.
They have two cheap ETFs covering broad futures: COMB and COMG.
I don't THINK they specifically work against contango (I'd need to check).
But they're cheap: 25-35 bps.


Lennart: Hi Dave. Lennart here from the Netherlands. Do you think this is a good time for ETFs that have a low volatility focus? Like Vanguard Global minimum volatility.
Dave Nadig: So, in general MinVol did just what it was supposed to do in October/November, which is that it went down a bit less than the overall market.
I think it's not 100% proven that MinVol works in all markets. The explanations for the MinVol anomaly often lead to speculation about what institutional owners are doing, which breaks down a bit when you head into, say, emerging markets.
So it's an intriguing idea, and I don't think you'll get your fingers burned (as by definition, these tend to be slightly lower-risk strategies than pure beta). The question will just be how much upside you give up, and what your costs are.
And one of those is an unknown!

OK, that's going to wrap it up for this week. Next week we should be on for Thursday at 3 p.m. ET.
We'll have a transcript up shortly.

And plug of the week: Join me on Wednesday, Dec. 12, for more discussion on China: 
Thanks everyone; have a great afternoon.

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