Live Chat: What's The Best Multifactor ETF?

May 31, 2018

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


Dave Nadig: Good afternoon!
Welcome to Live Chat!. As always, you can enter your questions in the block below.
I'll try and cram as much as I can into about half an hour. There will be a transcript later today if you have to hop.
Also just a heads-up: We'll be taking next week off, as I'll be at the Inside Smart Beta and Active conference in New York. 
With that, let's get rolling.


LL&P: What impact do you think the rollback of the Volcker Rule might have on bond ETFs?
Dave Nadig: First, nobody's really rolling back the whole thing.
The news today was pretty limited -- that they're considering changing the time window for which banks get to justify their trading as legitimate market making (good) vs. prop trading (bad).
There's a lot we don't know about how this would impact ACTUAL trading, but theoretically, it could make it easier for banks' bond-desks to hold inventory to enable trading for their customers (that's the stated reason to roll some of this back).
And a little more liquidity in the bond market isn't, in a vacuum, a bad thing.
I think there are some counterpoints though -- this pokes at one piece of the regulatory infrastructure, while not really addressing anything else.
Stephen Gandel had a great piece on this this morning over at Bloomberg (hold for link): 
As for ETF impacts? Really none. This is about the underlying markets.


Bennie Jones: What is the best all around Multi-Factor ETF?
Dave Nadig: Well, you KNOW I'm going to half-answer/half-dodge that question, because it's just super broad.
There are dozens of multifactor ETFs that all have very different purposes, and will be different for different kinds of investors.
I do think it's worth pointing out PRF though -- it's been around forever, and was in some ways "the first" smart-beta ETF.
It's the Research Affiliates-driven large-cap U.S. ETF -- so it's a bit like buying into Rob Arnott's brain.
But I do think you need to always ask "what am I replacing?"
The answer with something like PRF is pretty clear -- you're replacing large-cap equity.


Liz Hankel: Hi Dave, How arduous is it to launch your own ETF, and what's an "average" amount of time that would take?
Dave Nadig: Hi Liz! So, I would say it's in general gotten easier.
If you truly wanted to start from scratch -- let's say you're just an average RIA with an idea you think is the next great thing, and you wanted to do it ALL yourself, I'd say you're looking at a minimum of 6 months, and probably longer.
There's a big part of that that's just finding your partners -- lawyers, custodians, fund accountants, etc. -- who will be part of all your legal filings and so on.
More often these days, however, smaller folks come to market using an umbrella firm like Exchange Traded Concepts, where you just sort of "rent" that existing infrastructure. Or you could simply shop your subadvisory skills to someone like AdvisorShares.
It's a bit of a "what are you really after?" If you've got one core portfolio idea, it likely makes sense to partner up. If you think you've got an angle on an ETF complex -- a dozen funds, with your own distribution and marketing ideas -- then you might go it alone, and take the time (and money) that entails.


New To This: Can I buy shares of an ETF directly from the issuer rather than go through a brokerage?
Dave Nadig: I love simple questions - short answer, nope: you cannot buy ETF shares directly from the issuer. With mutual funds, you can do this.
You can open up a Janus account, and just have a direct relationship with them.
Now, it's SLIGHTLY complicated, because a lot of the big issuers (Vanguard, Fidelity, Schwab) also run big brokerage platforms, so you can buy, for instance, Schwab ETFs in your Schwab accounts.
But in general, nope. You buy ETFs like you buy AAPL stock.


Bill Donahue: Dave, how much impact do you expect that an ETF rule (e.g. codifying most of the current areas requiring exemptive relief) will have on the ETF industry? Are there any particular areas (e.g. custom baskets) which could have more impact than others in an ETF rule?
Dave Nadig: So, for those less in the weeds: ETFs exist through exceptions. To do what they do, they need approval to bend or break a whole pile of securities rules around issuance, fund accounting, listings, and so on. That's part of what makes the process a bit daunting.
The idea of an ETF Rule that cleans all that up and creates a simple, standard way of both launching and regulating ETFs has been kicking around for 15 years, and the idea is back on the SEC agenda.
I'm a BIG fan of cleaning it all up, and it would have some profound implications.
1) It would open the market even more to new entrants, lowering both cost and time to entry. That could of course lead to a flood of products, which on the one hand is good for investors, but also makes ETF due diligence even more challenging.
2: It would remove the haves/have-nots situation the industry currently has. Issuers in the gate early (State Street, iShares, for example) often have much "fuzzier" and broad exemptive relief than what you could get today.
This means they can do things, like customize the creation/redemption process for big investors, that new shops can't do, which is plainly unfair.
Does it REALLY make a lot of difference? Probably not -- but it would be a good competitive levelling.
I think we could also use some guidance on things like leverage/derivatives/liquidity/non-'40 Act products/commodities/currencies/ETNs. But most of that is subject to other rulemaking, and I don't expect much to get cleaned up as part of a first-draft ETF rule.


Dan Windham: With the current upheaval in, say, Turkey, Italy, North Korea and the China etc. tarriffs, is there a way to play that with ETFs? Or because global volatility is basically always an issue somewhere, should investors just address this in some other, comprehensive way?
Dave Nadig: So, for the most part I think the answer to most "how to play X with an ETF" questions is" "don't."  There are exceptions of course, but usually the question is about something like "how to play Cisco earnings."
In this case, however, my personal opinion is that the kind of global trade wars and euro-centric uncertainties are just an unmitigated drag on global growth.
Very, very smart people might be able to tease out the value plays faster than the market prices them in (buy this country, short that one, etc), but in general, I think it's almost all just negative for global equities.
So if there was a play (and it's just my opinion, not like, some absolute truth), it would just be to consider your equity allocations pretty carefully.
Of course, that's a very tactical position -- a more long-term approach would be to assume that "this too shall pass" and buy the dipping markets as the tweetstorms upset the applecarts country by country.


Nassim M: Are there any particular blogs/other sources of financial investment info you read regularly that you deem required reading for good insight?
Dave Nadig: Love this question! There are a TON of great resources -- it's a golden age -- so any list I pull off the top of my head will mean making apologies to people, but that said, off the top of my head (and without links for the moment):
I read Matt Levine's daily email from Bloomberg religiously.
Even if I can't get to all the stuff I have bookmarked, I make sure I at least SCAN his email every single day. I've found him to be a great curator of other people's stuff, and a great writer and thinker in a pretty low-BS tolerance way.
I also try and stay on top of everything coming out of Ritholtz Wealth Management (which is like, 8 blogs, 3 podcasts, videos and probably a restaurant chain by this point).
They have a lot of very smart folks there now, and pretty low BS tolerance themselves. I don't agree with every word of it, but it's always on point at least.
ETF-specific: Obviously I read the stuff our own writers produce! But I also make sure to stay on top of ETF Trends, Todd Rosenbluth's CFRA emails, Eric Balchunas' Bloomberg Insider coverage, and a few other folks I'll get crap for forgetting.
OK, coming up on the half hour, time for 1-2 more:


Galadriel: There's a filing for a Space ETF. Is this pushing the boundaries of thematic investing?
Dave Nadig: I don't think thematic investing HAS any boundaries. If people will buy it, someone in the industry will package it up and try to find a way to sell it to you.
I think investors are pretty smart though -- they should always look at something that seems like a "headline play" and ask more questions. I haven't seen what the Space ETF is going to hold, but hey, who am I to say whether it will be good or not. The challenge is always the same: Is the pattern of returns unique, and at a reasonable cost, and in a tradable vehicle?
I don't know the space industry super well, so maybe it does in fact have a lot of solid pure-play companies across industries that exhibit a real correlation to the rising private space flight market
So I wouldn't count it out, just because it seems like a gimmick!


Gordon Gekko: Who is the best Lead Market Maker for ETFs?
Dave Nadig: I will thoroughly dodge this question by saying "which ETFs?"
The reality is that different LMMs are particularly adept at different kind of products. What I know of the space I know mostly from talking to clients of course -- I'm not personally trading with the LMMs -- but it seems that folks like Jane Street have been able to come to the party and carve out nice sections of the business.
(in their case, I believe with a lot of focus on Europe, and fixed income).
But SiG and Cantor and so on all get props when we do our awards each year from their customers, often for different reasons -- working complex trades, getting good prices, and so on.
Luckily for us little guys -- all that matters really is that it's a competitive space (it is) and that the plumbing works well (it does) and then we get to benefit from the liquidity and pricing (we do).

That's going to wrap it for today. Again, we'll skip next week while I'm at the Smart Beta conference in NY.

And a transcript of this will go up a bit later in the day.

Thanks for joining, and we'll see you in two weeks!

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