Live Chat: Value's Struggle & ETF Trading

September 11, 2019

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

Dave Nadig: Howdy folks, and 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 in the next 30 minutes or so.
One housekeeping note: I'm doing a version of this on video, with live demos of how I dig into various ETFs in a week.
That's Wednesday, Sept. 18 at 2 p.m. ET.
You can register here:
With that, let's get rolling.


Anon: Soundtrack?
Dave Nadig: It's a Postal Service kind of day:


Guest: Hi Dave, any investing “super themes” you’re seeing recently?
Dave Nadig: Well, the one everyone is talking about is (I hate this term) "the great rotation."
The theory is that people are nervous, so they're playing defense. We've seen some flows data to back this up. People are putting money into consumer stocks, gold, miners, value stocks, and so on.
I think the thing folks are most interested in is whether we're at the end of the value bear market. There's some recent evidence we might be getting a bit of relief for value lovers.
And certainly, value is itself often seen as a defensive play.
I'd say some version of the "playing D" story is going to linger with us through the election. It will morph and shift of course. But I doubt the headlines go away.


Denise DeSilva: Why has value investing been underperforming for so long? Wasn’t it a rock-solid strategy for quite some time? What’s changed about those fundamentals?
Dave Nadig: See, there ya go.
Value has underperformed because, frankly, so many folks are seeing the performance at the top of the cap table.
Broad market performance has really just been dominated by outside moves in a handful of huge stocks, most of them tech-related.
Now, not all those stocks are avoided in every value fund. You'll even find Apple in some of them.
But traditional Ben Graham style value just hasn't captured investor interest in this near-endless bull market we've been in.
I do suspect, however, we'll see some of that balance back out.
But it's been a long, long road of pain for hardcore value investors, no question about it.


Diandra Platt: Do issuers always make it 100% transparent when they’re changing an ETF name, or what the ETF provides exposure to? How much does the SEC mandate they do this, and how soon?
Dave Nadig: Boy I wish! We spend a decent amount of time and energy staying on top of things like this.
The short answer is: There's very little required of an ETF (or mutual fund) when they change their name or their investment objective. Generally just a refile of the prospectus. Theoretically, a new prospectus should get sent to you by your broker, but in reality, many people opt out of getting it on paper so the notices sit in your brokerage account.
Or you just round-file the big envelope from Schwab or whomever when it comes.
Is it "transparent?" Yes. There's no way to hide the fact you changed your index, you have to file it.
But in reality, I suspect a lot of people don't notice. When LARE changed to MJ, and thus went from Latin American real estate to cannabis, we contacted the largest holder of LARE and they had no idea just days before the switch.
Note this isn't an ETF issue; this is a fund issue writ large.
Luckily it's actually quite rare for anything but the most simple change to happen; name changes due to rebranding or acquisitions and so on.


Anonymous: Can you buy all ETFs commission free, or what variables dictate that?
Dave Nadig: So, whether to charge a commission to trade something is entirely up to your broker.
Many of the big firms (Schwab, Fido, TD, etc.) have commission-free programs, where they make some subset of the ETF universe available to trade for free, but this actually costs them money.
To make up for that, they strike deals with ETF issuers to get reimbursed, based on AUM, trades, simple platform presence, etc.
Those deals are generally not public, so we don't now how much, for instance, BlackRock might be paying Fidelity to have a set of their funds comission free.
As an investor, it doesn't really matter. There's no hidden fee you can't see. Your expense ratio and your commissions are what they are.
If the fund company wants to separately fund a no-commission deal, well, that's just a marketing expense you get to take advantage of.


Shiloh G.: Need investors use limit orders when buying ETFs?
Dave Nadig: That's a great question. The short answer is "yeah, probably."
When you put in a market order, you're saying, "I value speed more than price." When you put in a limit order, you're saying, "I value price more than speed."
There are generally not a lot of reasons for individual investors or advisors to be valuing speed more than price.
The "split the middle" answer is to put in marketable limit orders. So if something is trading 100.10 by 100.20 (meaning you can buy it at 100.20 and sell it for 100.10, it's not insane to put in a limit order to buy at 100.20 or even 100.25.
Most of the time, you'll get filled instantly, but in the off chance the market just leapt while you were putting in the order, you're guaranteed not to end up with a $101 fill by accident.
That's the main reason to put in limits: to avoid unhappy surprises in fast-moving markets.


Hamish: Greetings Dave. Does it seem to you like Schwab calling crypto “speculative” is kind of like folks who deny climate change? I mean, isn’t crypto simply going to be part of our world, solely because no one can stop technology from progressing?
Dave Nadig: I think it's entirely accurate to call crypto "speculative." Speculation is a hard thing to define precisely, but here's my shot:
A speculator is someone purchasing something with the intent to sell it reasonably quickly to someone else at a higher price.
An investor is someone purchasing an asset for its inherent long-term growth and income contributions to a broader portfolio.
Given that bitcoin really doesn't have a definable growth projection or an income model, I think it's reasonable to say that most bitcoin owners are owning on the hope of selling higher to someone else later, ot because they expect to own it until they die.
So, perhaps splitting hairs, but I think of buying a 5% slug of crypto as being pretty similar to buying LEAPS or commodities futures.
I think there's a chance for that to change, for it to be a true "store of wealth," but I'd argue most gold investors are really speculating as well.
Although at least there there's enough history that we can say meaningful things about gold in different market environments.


Peter: We use Mstar Direct to track our portfolios. The problem is, we are forced to use NAV returns to track performance because some of our models also have MF. If we used price return we would not get performance of our MFs. I can't seem to find a real good explanation of any differences between using NAV or price return of ETFs. That's really my question.
Dave Nadig: So, if the markets are liquid and healthy for an ETF, there won't generally be a big difference between NAV and price returns over long periods (more than a month).
Where things get tricky is day-to-day.
Bond ETFs, for instance, strike their NAV generally based on fire-sale prices: "What could we dump all these bonds at right now?" The market, however, is two-sided, so the closing price of most bond ETFs tends to be a little bit higher than NAV on a day-to-day basis.
But that very disconnect means it's a bit more volatile. It's not unusual for something like HYG to be at a 50 bp premium one day and a 50 bp discount the next. That's a 1% difference versu NAV.
Similarly, in a less liquid ETF, NAV may be struck based on prices from the underlyings that are very current at the 4 p.m. close. But the ETF might not have traded in the last few minutes. DIfferent exchanges have different rules about how to interpolate a "closing price" if there are no trades at the close.
So again, you can get a day-to-day disconnect.
In general, using NAV is the best practice, because it will be consistent over the life of the investment.
And in fact, I think both GAAP and GIPS would require you to use NAV unless you had some other information.
Hope that helps.

OK, one or two more here and then my wrists are going to cramp up.


Todd Rosenbluth - CFRA Research: Hi Dave. Great to see you at Wealth/Stack and share the stage. You made a good point (one of many) that how "valuey" an ETF is, is not easy to tell by the name/ticker. Would be great for you to expand on it here.
Dave Nadig: Yeah, the point I was making was simply that smart beta products add an entire level of complexity that makes life difficult for investors.
We've tried to mitigate that some with the work we did with MSCI to get their Factor Classification System on all the equity fund home pages. So you can go to a fund like this:
and at least get some info on how much it's really overexposed to value (and in the case of VTV, see that it's really being driven by dividend yield!).
But the tools have got to get a lot better and a lot more widely available. There are great tools out there (Style Analytics comes to mind, but it's not free by any means!).
But the problem is that most folks aren't making these kinds of analyses daily. They don't need a monthly tool to do the occasional check-in.
It's getting better, but there's a lot more to do.


DidntGo: Any big takeaways from WealthStack? Was it just a FinTwit FanBoy Convention?
Dave Nadig: Hah!
Well, there's no question the audience was heavy on financial Twitter, but honestly, i think that's part of why I liked it so much. It was very, very different than any investment conference I've been to in a while.
The audience was in general younger, smaller in AUM, and more tech savvy. For example, in the panel on crypto, I'd guess half the audience said they were either currently in crypto or actively looking for an option for their clients.
That same audience at Inside ETFs Florida might have been 5%, if i had to guess.
So: different, fun and engaging.
Key takeaway: The business of being an advisor is changing extremely quickly, and the core investing piece of it is completely commoditized.
Most of the interesting discussion was around things like moving toward non-AUM fee models, life planning services, better risk analysis, client communication tools, and so on.
We'll try and take some of those ideas and get them on the page.This week's ETF Prime podcast, however, will have a good long discussion with Nate Geraci and Lara Crigger and myself (with some extra bits from attendees), that should give you a flavor. Should be out tomorrow I think.

OK folks, that's going to do it for this week. Next week we should be back to Thursday. Have a great rest of the week.

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