Live Chat: What’s In An ETF Name?

June 21, 2018

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


Dave Nadig: Hey folks, welcome to Live!
So before we get started, just wanted to point out that you can always get more thoughts on the ETF Prime podcast.
Latest one is up here:
But let's get to the questions!
(As always, we'll have a transcript up in a few hours, in case you miss something, and you can enter questions in at the bottom of this page. I'll get to as many as I can before my fingers ache too much!)


Dana Thomas: Hi Dave, Is there any precedent showing that ETFs have a better chance of success (or not closing) if a big name is behind it, such as Jim Rogers? I understand he's recently come out with an AI fund ...
Dave Nadig: So, here's the launch in question:
Honestly, the biggest "Name" launches I can think of are the competing funds in the total return bond space: Bill Gross was still at the head when BOND launched from PIMCO.
And Jeff Gundlach is still running competitor TOTL.
There's little question in my mind that having their names associated with that fund helped in their initial success.
Of course, having a following doesn't necessarily mean anything.
We used to have the Dent Tactical ETF (DENT) which was following the ideas of prognosticator Harry Dent.
That fund failed to gain assets, and failed to perform.
Ultimately of course, it doesn't matter at all what's on the label, it matters how, and how well, a fund is run.
In terms of "not closing," the absolute most clear predictor is assets under management.
While I think one fund has closed with over $100 million in assets, I think it's literally one fund, and you can count on one hand how many funds over $50 million have closed.


Anonymous: What's the relationship between an index and an ETF? Can an ETF actually exist without that relationship?
Dave Nadig: Great question! So, in the beginning, all ETFs were, kind of by regulatory design, index trackers.
But that is definitely not the case anymore, and there are several flavors of difference.
First, there are quite a few firms that "self-index."
What that really means is that a firm (WisdomTree is an example here) publishes a traditional Index methdology, under its own brand, and then just tracks that, just like, say, IVV or AGG would.
The advantage for the issuer is flexibility -- they can adjust the methodology over time, as research or expedience dictates.
I'm pretty sure this is what happened with their flagship Japan fund, DXJ -- and obviously that was very successful for them.
You can also have completely active ETFs, that are just traditional stock picking or bond picking active.
ARK & Davis are notable on that side for equities, PIMCO cracked it open on the bond side, etc.
The only caveat there is that active ETFs (so far) have to be fully transparent.
But there's no index at all.


New To ThisMistake By The Lake: With E-Trade now offering Vanguard ETFs commission free, I believe that's the only commission-free platform other than Vanguard's. Is this a reaction to some of the customer service problems Vanguard has experienced with its explosive growth. or something else?
Dave Nadig: Hello longname....
So, I believe you are correct that this is the only place other than Vanguard you can buy Vanguard ETFs commission free.
I have no inside knowledge of the deal. However, I find it unlikely that Vanguard wrote a large check to ETrade for this.
(Commission-free participation on many brokerage platforms involves the issuer paying something to make up for the lost commission revenue).
So if I had to guess (and it's a guess) - I think it's mostly opportunistic from ETrade's side of things. It's obviously a big differentiator.
While Vanguard's brokerage services are broad, they don't come top of mind to a lot of aggressive traders -- where Etrade might.
So this could be a win/win -- it gets ETFs in front of Etrade customers, and it maybe helps ETrade keep/get some additional accounts or assets.
Interesting move though, no matter how wrong I am!


Bill Donahue: Dave,  I see you are attending Inside ETFs Canada this week. I was in Toronto earlier this week.  Canada is one of the fastest-growing ETF markets in the world, with continued significant growth expected in the next 5 to 7 years. However, they have not yet experienced the downward fee pressure that has been experienced by the U.S. and European ETF markets. Most of their mutual funds/ETFs are also sold with embedded commissions. I believe the Canada ETF market is ripe for disruption with respect to downward fee pressures and the removal of embedded commissions. How quickly do you expect this disruption will occur?
Dave Nadig: Hi Bill. Big meaty question, and I just did a whole preso on this, but I'll try to be brief.
You're right on the fee side: There are still folks paying 2% for core equity mutual funds in Canada, but the "low cost beta" movement in Canada is still a real thing.
The "cheapest ETF portfolio" we publish regularly for the US may not be 6-7 basis points yet, but it is around 14-15, which is still crazy cheap.
Part of the issue is that the big banks so dominate both distribution and manufacture, that getting top of mind on "cheap is good" has just taken a little longer.
But it's happening, and I think it accelerates. The prediction I made today was that, by 2025, we see $800 billion Canadian in ETFs, up from $150 billion or so now. That's a crazy hockey stick.
And fees will be a big, big part of that ramp.


Todd Rosenbluth - CFRA research: We saw sizable trades into and out of emerging market bond ETFs EMLC and EMB this week. Does this further prove that there’s ample liquidity in bond ETFs. People got out not just in the door.
Dave Nadig: Hi Todd, yeah, I think EMLC is a bit of a posterchild here.
And it's a great example too because Van Eck is REALLY good about publishing data around trading.
Here's their fund page, for instance:
You can click on the "Excel" icon there and download the Premium/Discount info up to date, and like you said, huge-volume days just don't make much of a difference.
Now, to some extent, there's some lead lag issues there, as the markets for all that local currency debt aren't synced to the U.S. trading hours.
But over time, what you see is pretty clear -- the flows and volumes just don't seem to move the needle on premiums/discounts.
Of course, never say never -- we haven't seen, for instance, a GIANT move in the underlyings -- like some sort of 20% crash up or down.
And on a day like that, who knows?
But course of business -- these things just work.


Ace Weatherby: Hey Dave, Does a changing makeup of an index impact ETFs at all?
Dave Nadig: We see a fair amount of index changes from time to time.
I seem to recall seeing quite a few lately, actually, but the short answer is -- the impact is all down to underlying exposure.
So for instance, when Vanguard made the huge move to the CRSP indexes for all their core U.S. equity exposures, they did it very very slowly.
They had a whole transition period where they slloooowly changed out the positions that would vary.
And when you go from the beginning to the end -- yeah, there were some small portfolio-level differences. Capitalization ranges changed, things like that.
But it wasn't like you woke up one day and owned something different.
That CAN happen, if an issuer makes a sudden and dramatic change to an ETF.
We saw this when LARE (a Latin American real estate fund) just "became" MJ (the only cannabis ETF in the U.S.).
Obviously completely unrelated portfolios, which, if you were in a cave, could have caught you as a surprise, if you held LARE!
But most index changes are actually quite subtle, and managed over decent lengths of time.
Still, if you have an ETF in your portfolio, it pays to follow the news on it just as much as you might for your AAPL shares. Things DO change -- expense ratios can change, indexes, splits, and so on.
So treat them just like you'd treat a stock in that regard.


Anonymous: Per Mistake's question, doesn't Schwab have commission-free ETFs?
Dave Nadig: Good follow-up - yeah, MOST brokers now have a list of commission-free ETFs. I can't tell you who has the most off the top of my head, but I'm pretty sure Schwab was the first.
ETrade's list is pretty small, Schwab's is huge, Fidelity's is very big, etc.
So it pays to at least look!
As far as I know, every issuer that ALSO runs a brokerage (Vanguard, Fidelity, Schwab, etc.) lets you trade their house brand for free, as you'd expect.


Tim Fugatt: i sometimes see comparisons of ETFs to mutual funds, but what are the differences/similarities between ETFs and stocks, other than the former could give you exposure to segments, and the latter to individual companies?
Dave Nadig: A trickier question that it would first seem.
The biggest similarity to stocks is that they trade just like stocks. And I mean JUST like stocks.
You put in orders the same way (using limits I hope!), you can short them, you'll pay the same commissions (barring the above discussion on commission-free platforms).
From a portfolio perspective - how "stocklike" an ETF is, is a function of how narrow its exposure is.
So if you're invested in something like MJ, from above, well, you're in something like 30 companies, all pretty much pure-play agriculture/cannabis companies, most of them Canadian, all of them small- or micro-cap.
From a risk/volatility perspective, you should expect that to seem pretty "stocklike" -- diversified compared to owning just ONE Canadian small-cap grower, but hardly as diversified as a total- market fund.
Conversely, VT, Vanguard's total market fund, is in every way a giant diversified mutual fund. You just happen to trade it like a stock to get in or out.


L. DiCaprio: Does it matter how much inventory the market maker has when quoting a low-volume ETF?
Dave Nadig: I suspect this is not your real name (grin) --
The answer is "it can." So imagine you're trying to trade XYZ, and it trades a few thousand shares a day, on average.
And you can only trade with, say, Cantor.
So if Cantor has NO position at all (long OR short), then they are going to set a spread that makes them feel comfortable they'll be able to make a profit between the time they take an order and the time they'll see the opposite side of that order.
In other words, probably pretty wide.
If, however, they're sitting on 10,000 shares that they bought off someone earlier in the day, well, you can expect them to be offering you those shares at a better price.
And in fact, they might offer you a better price to buy from them, but an even worse price if you wanted to sell them MORE.
So they might only be competitive on the side of the market they had a position (works short, too).
So yeah, inventory can matter.
In general, in the modern market, nobody really wants to sit on "inventory," however.
Nobody wants to go home net long or net short anything if they can help it, so they will set their prices to try and go home "flat" if they can.
(The nuance here, of course, is that for LARGE orders, regardless of on-screen volume, they can access the underlying markets and do a creation or redemption, and all of a sudden, prices can come back in!)
That's why we sometimes talk about the "smile" of ETF liquidity. ETFs can be very liquid for very small lots (100 shares) and very large lots (100,000 shares), but sometimes trickier in the toothy part of the smile (20,000 shares).


Teresa Medvic: Hello Dave. Is there a standard amount of time it takes for your filed ETF to be approved, or does it depend, say, on the "complexity" of the filing?
Dave Nadig: Hi Teresa, I'm going to combine this with this next question for my last one:


Anonymous: So: The SEC is apparently considering new ETF rules next week? Should we be concerned?
Dave Nadig: So, the huge answer is, of course "it depends," and yes, on the complexity.
It can be fairly quick and cheap (a few months, under $100K) if it's super simple, or if you're leveraging existing filings/umbrellas.
It can be literally forever, and infinitely expensive, if you're trying to do something nobody's ever done before (the case right now, with, say, nontransparent active).
BUT, on the 28th, the SEC is taking up the idea of an "ETF Rule" again, for the first time since 2008.
We don't know EXACTLY what's on the table in that meeting (I'll be tuned in with popcorn; they livestream them).
But we know what they floated in 2008.
And really, it's about making the process for plain-vanilla, fully transparent ETFs as simple as possible.
This could radically cut the time-to-launch (and either a little or a lot of money, depending on how it all works out).
It may also address a few issues like "custom baskets."
(Prior to 2012, folks who filed generally had broad latitude to muck around with what securities are in a creation unit, or a redemption. After 2012, anyone who's filed generally has to go with a pro rata slice of the actual portfolio).
There are some other nits and lice to be cleaned up as well.
Given that we've been down this road more than a few times, I'm not super confident that this time it happens.
That said, it will be great if it does -- if nothing else, it will free up the SEC to focus its actual staff time on more interesting/complex issues, like bitcoin, or nontransparent active, or how to think about leverage/derivatives.

OK, folks; that's going to wrap it today. Thanks for all the great questions, and we'll do this again next Thursday, same URL, same time!

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