Balchunas On Free ETFs & UFO Sighting

May 23, 2018 Regardless of flows, are there any launches or filings in 2018 that’ve really caught your eye?

Balchunas: One that I definitely noticed is the [Procure Space ETF (UFO)]. That reminds me of robotics in a way, where my first reaction was to laugh. But when I think about it, it’s possible that something like that connects.

It’s probably going to take a performance breakout, but the story is very easy to understand. If there’s a new mission that involves space, or Elon Musk does something, you can see that really being an interesting product. I love the ticker. It's just got all the makings of a possible hit-themed product.

The other ones that caught my attention were the quantum computing and the virtual reality ETFs that were recently filed. Those are a little harder to understand, but still interesting.
Some of those futuristic-tech-type ETFs probably have the best shot of thematic ETFs. When you're trying to go out there and serve up a slice of the tech area that isn't really covered by the Technology Select Sector SPDR Fund (XLK), those can probably do pretty well. You’re going to be on a panel at the Inside Smart Beta conference next month where you’ll be discussing tech and how artificial intelligence (AI) can help us better invest and capture factor exposure more easily. Can you get into what you'll be talking about in that panel?

Balchunas: In general, my main message on smart-beta panels is understanding the factor content of an ETF—how much factor you’re getting.
That’s really something that’s not on the label; it's hard to find, and you kind of need to be an analyst to figure it out. We need a label that tells you immediately that an ETF is on the far end of the spectrum in terms of delivering a lot of value or a lot of momentum, this one's in the middle and this one's on the left. There aren't any good or bad ones; it's just a matter of knowing how aggressive your smart-beta ETF is.

The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) is very popular, but it doesn't have much active share. It's a multifactor ETF. It's only got 25% active share to the S&P 500. A lot of advisors want that. They want something they can use for a core exposure. It won't deviate from the market much.
But then you could have somebody else who wants to take more of a gamble. In that case, that product would not be for them. They might go to the iShares Edge MSCI Multifactor U.S.A. ETF (LRGF), which has more like a 75% active share.

Active share, concentration of holdings, and standard deviation are some of the things that can help you understand how aggressive an ETF is.

On the AI front, machine learning is the greatest buzzword since smart beta. It conjures up all these movies you've seen in your head. But it’s probably a little overblown.
We've seen people with all the degrees and all the machines even before they called it machine learning, and they still underperformed the market. I don't know if having a machine on your side is all that great.

If we do a study in a couple years and it turns out all the machine-learning ETFs beat all the active and smart beta, I’ll bow down and give much more credit to machine learning. But as of now, I find it to be more of just a great buzzword capturing the moment. Are there any new updates on the bitcoin ETF saga?

Balchunas: It’s still a long shot. The SEC's 31-question letter was like a big bucket of cold water on the party.
That said, there are a couple of glimmers of hope. A lot of people from the ETF world seem to be defecting to the crypto world. They wouldn't do that if they didn't see some possibility of a bitcoin ETF down the road.
People are not giving up. There's a resiliency to bitcoin. That's why I respect it. The price is resilient and the people are passionate. I see them continuing to fight for it. At some point, they'll probably get a bitcoin ETF. I just don't know when.
If I had to ballpark it, I would say summer 2019. There’s a 50/50 chance we get one by then. Are there any big stories in the ETF world in 2018 that we haven’t discussed that you think people should know about?

Balchunas: Something I'm going to be talking more about is tracking difference. A lot of people ask, “When is the first free ETF going to come out?” But if you look, they're already free in many areas.
There’s some small-caps and emerging market ETFs that have positive tracking, meaning you're getting paid a couple basis points to hold them.

More and more, the securities-lending desks and the acumen of the passive managers will be something retail investors should pay attention to. We should start looking at ETFs in terms of their tracking difference as their true cost.

The reason that's a little harder to accept is because it changes a little bit, whereas the expense ratio is fixed. But I would like to see that conversation evolve, because then you don't have to worry about the free ETF thing; they're already here.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

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