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Lois Gregson - FactSet Research
1:19
We know the ETF structure exists via a number of exemptions.  In your opinion, what is the biggest exemption or aspect of ETFs that need to be revised?
Dave Nadig
1:19
A follow up (Hi Lois!).
1:20
So, the BIGGEST issue is custom baskets I would say.  Older ER's let issuers take in, for instance, a different bunch of bonds from one AP than they do from another.
This allows for a lot of flexibility in tough to manage portfolios (like, say, junk bonds).  If an ETF Rule fixes one thing, it should be that.  The question is, can they do it retroactively?
1:21
(I don't actually know the answer to that).
art
1:21
is this Cayman Island thing a tax dodge? seems shady
Dave Nadig
1:21
A reasonable question -- it's a "tax dodge" only in the sense that it's using a completely legal structure to change the tax status of an investment.
THat's precisely what ETFs themselves do, of course.
1:22
The REAL impact is: instead of getting a K-1 partnership form at the end of the year (which is a huge pain), and having to pay 60/40 Long/Short capital gains on a mark to market basis, you get to treat it just like any other equity-like security.
1:23
I'd argue that since most ETP buyers aren't actual securities dealers, taxing them like they are isn't really fair, so the Caymen Structure makes a lot of sense.
And it's not like this stuff hasn't been reviewed -- it's pretty clean, and fully transparent.
Erik Hagar
1:23
One of the benefits of Mutual Funds is the ability to receive NAV at the close of the day, no matter the size of the order. Do you envision CBOE, NASDAQ, NYSE or other sources being able to offer NAV at the close for trades less than 50,000 shares?
Dave Nadig
1:24
NAV based trading is a bit of a holy grail, for sure,
but if you go through the motions of it, NAV based trading for less than creation unit size requires someone to wear some level of risk -- and generally folks will only do that when compensated.
1:25
To get NAV at the end of the day, some sort of hedge has to happen, whether its making a creation basket to get new shares from the issuer at NAV, or just a counterparty "promising" the NAV price, but working the other side of the trade in some non-NAV way.
That latter scenario has risk, so it will always have cost (my opinion).
1:26
So in short, I don't see it anytime in the near future, unless it's through some sort of matching system, where traders match at NAV instead of in a market on close auction -- but even there, someone will want to get paid for providing that match.
Michael T. Kennedy
1:26
Good morning and thank you for your time. With technology becoming more and more efficient and becoming able to replicate most of the portfolio management/administrative/operational aspects of running an ETF business, do you anticipate more technology firms acquiring or taking stakes in ETF providers? It seems there may be some strong synergies between the two. Your thoughts?
Dave Nadig
1:27
Since I've been poking the ETF bear for about 25 years, I'm constantly trying to figure out where it all goes next, and technology is definitely the driving factor going forward, I think.
I do think you'll see a major tech firm wade into financial services, but more because of their audience than  because of their technological chops.
1:28
So think more Google/Amazon/Facebook rather than, say Microsoft or Apple.  Increasingly the plumbing of ETFs isn't hard, it's the distribution that's a challenge.
1:29
Also, side note - a lot of the existing big financial services tech providers -- custodians, banks, recordkeeping firms and the like -- have BIG, established infrastructures.  Those are a real pain to update and move into modern standards.
There are still people out there making fat salaries on their COBOL skills for just that reason.
pete
1:29
Has the closure threat of the marijuana ETF (MJ) subsided since some of the first coverage reported when launched. It does have $400 Million in AUM.
Dave Nadig
1:30
Well, the chat has for sure died down.
Whether that means the threat is gone?  It seems unlikely the SEC just shows up and says "hey wait a minute." on a big existing fund like this.
1:31
But, there could be some side discussion we all never hear about. It's possible that someone in the value chain gets cold feat and pulls out.
But the rumor mill is a bit silent at the moment.
Barry Z
1:31
My ishares wholesaler told me that it is risky to buy an etf from an issuer that doesn't have several billion in overall assets under management or to buy an etf that is small unless it is from blackrock or vanguard. This seems suspicious to me - is he right?
Dave Nadig
1:32
Well, I always ask the "what if" question on things like this.
What if your ETF issuer only has $700mm under management.  What's the worst case scenario.
1:33
I suppose in this case, you could imagine said small issuer just isn't making enough money to keep the lights on, and the fund board isn't paying attention, and so one day you wake up and the issuer is just overnight bankrupt.
That seems super far fetched, but what would happen?  Well, the assets in the funds are unaffected.  They just exist, on behalf of the shareholders.
The board (which is paid by the fund, not the issuer) immediately meets and appoints a new advisor.
1:34
Theoretically, in a completely botched situation, you could imagine a day or two of index drift while things get sorted out.
That's really about the worst thing I can imagine.  And it would be truly unprecedented.
ok one or two more questions and I'll wrap it up...
Tom Sawyer, CFP
1:35
What's the difference between an ETF market maker and an authorized participant?
Dave Nadig
1:35
So market makers are in the business of buying and selling securities -- making markets.
they make money by buying something low, and selling something high.  That can be simply buying and selling AAPL stock
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