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Dave Nadig
3:19
If you decide to invest in small caps, you're helping small stocks reprice vs. large stocks.
3:20
Same with sector funds.  Same with stocks vs. bonds.  Same with buying a niche blockchain focussed fund instead of a giant tech fund.
3:21
All those LITTLE decisions all feed into price discovery.  And on top of ALL of that, if in fact index funds create this huge distortion, you would expect the intra-S&P-500 performance to be very similar -- the gap between the top and bottom performers.
In fact, that gap in 2017 was something north of 150% -- near all time highs.  So the math just doesn't actually support the idea it's all going to 1.0 correlations.  Too many options.  Too many investors.
Yin
3:22
This question is a bit technical. For ETFs that track foreign equity indices, how do traders price them during US hours when the underlying are not traded? I assume it's a mixture of statistical guesswork and currency arbitrage?
Dave Nadig
3:22
GREAT question.  THe very short answer is:  they guess.
3:23
But, since it's all math nerds, the guesses are VERY GOOD guesses.  Japan's the best example.  There's zero overlap between the US and Japanese trading days
yet, we have tons of Japanese equity ETFs that trade like water in the U.S.
3:24
If you're the authorized participant, you build a model on how far from last nights Tokyo close you think a given ETF *should* be based on various market dynamics hapening in the U.S.
So for example, your model might suggest "OK, if the S&P is down 5%, Japan will probably open up down 4%" or something.
3:25
and you use a LOT more than just the U.S. market as a proxy.  You look at ADRs.  You look at futures markets.  You look at anything you can, to come up with a proxy for what it SHOULD be worth.
3:26
and then, you make markets based on how confident you are in your model, which is usually inversely proportional to volatility on any given day.  Crazy day in the U.S. markets? You'll probably let the price of Japan ETFs move a bunch more than on a slow day.
NA
3:26
Hi Dave, do we have any “crash-proof” ETFs that offer ways to protect against (or even profit during) a bear market.
Dave Nadig
3:27
Well, there's always MINT (grin).  But seriously, the only way to minimize your risk of participating in a crash is to (surprise) have a strategy that's not in the crashing asset, or hedges against it.
THere are quite a few funds that have triggers that try to manage either a hedge, or a cash position.
3:28
Off the top of my head, the TrendPilot series, from pacer, for example, purports to do exactly this.
But of course, they're all based on models, and models need inputs, so there's no way to guarantee anything.  THat's just insurance.
3:29
As for profiting -- obviously there are all sorts of inverse ETFs, volatility ETFs and so on.  But they all have significant risks, so -- big time do your homework!
pete
3:29
not asking for a buy recommendation, but what is you single favorite ETF?
Dave Nadig
3:30
I am TOTALLY going to cheat on this and pick two funds that are no longer trading.
The first is the Healthshares Dermatology and Woundcare ETF (HRW) -- because it just seemed ... ridiculous.
3:31
Whenever a reporter asks me if we've reached peak ETF, I point out that HRW launched over 10 years ago.
The second would be the Nashville ETF
3:32
NASH, if I recall.  For largely the same reason.
DMV
3:32
What's the difference between factor investing and smart beta? Aren' they the same thing? I see them used interchangeably and sometimes distinct... it's confusing
Dave Nadig
3:32
Yep, it's confusing.  I don't really know anyone who loves the term "Smart Beta"
3:33
but we're a bit stuck with it, like calling facial tissues "kleenex"
Most smart beta funds are in fact playing somewhere in the factor sandbox
3:34
but there's really not much point in getting into definitional arguments.  Factor investing I can least explain -- it's bucketing a pile of securities by a set of non-industry characteristics, believing that those characteristics are a source of risk premium, and thus unique returns
So: value, momentum, quality, volatility, etc...
theres a TON of academic research behind that, notably the fama french model, which looked at value and size in particular
3:35
so when you buy a value fund, you're a factor investor.  And since im a big tent kind of guy, i consider all of those "smart beta" funds.
It gets much more complex when you start combining factors, and bringing models into play which react to signals.  Another area you REALLY have to dig deep into each fund on.
Cryp-To & The Snow Dog
3:36
Why is $100 million in assets and $1 million in average daily trading volume the threshold everybody uses to decide whether an ETF is big enough to invest in? Is it still a fair benchmark, or should investors be thinking smaller/bigger?
Dave Nadig
3:36
Love the name -- I imagine TinTin buying Ethereum.  So rules of thumb ...
3:37
We all have various rules of thumb for things, and the bigger the pool we have to decide from, the more likely we use some initial screen.  Like, my wife simply won't see horror movies, period.  It doesn't matter if I tell her "Get Out" doesn't have any jump scares.
So people use that rule of thumb, or one like it, just to limit their decision pool.
3:38
I would argue, however, that they're pretty dumb when it comes to ETFs.  At least the asset level one.  There are quite a few ETFs that now cross the $100m mark which really don't trade very much, because they're bespoke for a given institutional client.
On the other hand, most less-liquid ETFs can easily be bought and sold by a reasonably careful investor.
3:39
Ultimately, what the exposure is matters SO much more than the asset levels or the trading volume.  Those are just shorthand for "can I get in and out."
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