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Anonymous
3:16
Does wholesaling still work for ETFs?  All info is widely available now, on ETF.com, for example, and other outlets.  Seems advisors know where to go for info and ideas.  Especially ETF users seem more early adopters and can competently find out about new and existing products.  What do you as trends in the way ETFs are distributed now to end users?
Dave Nadig
3:16
I think it absolutely, 100% works.
We got a great question last week about First Trust, and the combo-platter of “so many funds something is always hot” and “great wholesalers” is their secret sauce in my opinion.
3:17
Advisors *can* dig in and do all the work.  They can read ETF.com, and read prospectuses, and so on.
But advisors really have three main jobs:  getting new clients, investing their money, and then keeping existing clients happy. That's a wicked oversimplification, and of course GOOD advisors do a lot more than that, but bear with me here:
3:18
A good wholesaler doesn’t just say “hey, here’s this product, please buy it” - attacking the middle problem (investing).  They give advisors narratives that solve the other two problems.
Those narratives are what help get and retain clients.  Maybe that sounds a bit cynical.  The products still have to be fit for purpose, but assuming you’ve got three flavors of vanilla on the desk, it’s the wholesaler – and the story – that wins.
3:19
As for new trends in distribution?  Obviously the robo space is for real, and more advisors will lean on tech for asset allocation, whether its in a TAMP or some other structure.
I think most of how distribution is changing comes from that.  But if you don't already, go poke at Michael Kitces stuff.  He's just the best on these kinds of discussions.
3:20
Follow up on the non-transparent active question:
Chooch
3:20
So in your opinion - which non-transparent model is the best?  I have concerns around the added operational complexities of some of the filings.
and how does that even work?  Doesn't precidian have IP?  so if they all get steered to the same model, then is there any IP?
Dave Nadig
3:21
Here's the thing - I think most of these structures are *clever* and I like clever.  Like, the Precidian model, I find an ingenious set of solutions.  To me the much bigger question is -- does it actually solve an investor problem.  I'm not sure it does.  I think it solves an issuer problem.
3:22
If I had to make a bet, I would bet on Precidian, because I have gotten to know the actors involved, and I simply wouldn't bet *against* them on anything. But that said, their approach is a bit complex (as you mention) and thus might not get the out of the gate nod, or as you point out, might get put into a "not original IP anymore" box if it all gets watered down by the SEC.
3:23
I honestly think at this point, we're just not going to know until we see it, without much warning.
Michael. T. Kennedy
3:23
How long does it typically take for a firm to be granted exemptive relief to launch ETFs after filing an application with the SEC?
Dave Nadig
3:24
Boy there are so many nuances to that question. I have heard that a super, plain vanilla filing can get through in as little as 90 days at this point, but that doesn't mean you're done.  That's just the actual relief filing (40-APP I believe is the form).
Actually getting to market? That can be a longer process, which involves half a dozen partners (exchanges, custodians, and so on).
3:25
The complexities are the reason we have firms like ETF and ETFMG, who sort of rent the infrastructure baked in.
Nate Geraci
3:25
There’s a significant dislocation in the junk bond market. Give us the play-by-play. What happens to junk bond ETFs? What happens to junk bond mutual funds?
Dave Nadig
3:25
BIIIG question
3:26
The important thing to remember is that no matter what happens in the markets, nobody suspends the law of supply and demand: if everyone wants to sell, things go down.
The ETF angle is just about “how.”
So imagine we have a route on junk bonds because of event X – some sort of default or policy surprise.  You can assume everyone will want to sell everything related – so you’ll see selling pressure on individual bonds, junk bond ETFs, and redemption orders into junk mutual funds.
3:27
Now, something like JNK or HYG is orders of magnitude more liquid than any individual corporate bond, so you’d expect them to react quickly and dramatically to event X.
You as an investor, can choose to participate or ignore -- you can buy low!  You can panic and dump it all at the bottom.  your call.
Say they trade down 20%, boom, in seconds.  So what happens in the underlying?
3:28
Well, the intraday NAV of the ETFs is based on a pricing service, which looks at all sorts of inputs – not just the last traded price of individual junk bonds.
So while the eTF is down 20%, the signals for “fair value” are just slowly starting to trickle into that INAV calculation.
3:29
A smart authorized participant with a good bond desk might see that 20% down and see, simultaneously, bids on the basket of bonds of “only” down 15%.
They can step in, be a buyer of the ETF at down-20, a seller of the bonds at down-15, and book the 5% arbitrage.
This will serve to BOTH bring the price of the ETF up from down-20 and push the price of the bonds further down.  That’s exactly what’s supposed to happen.
3:30
But in a crisis, these gaps can get large, and persist for some time as the market starts processing the information.
But the reality is – price discovery is happening in the ETF first, and the bond market second.  We’ve seen it happen over and over again since the early 2000s.
Now what about, say, a traditional fund that owns the same bonds.
3:31
Well, obviously at like 2PM, nothing happens -- all the fund can do is take orders. They're not participating in pricing.
If I put in a big redemption at 2PM, I have NO IDEA what price I will be getting out at.
at 4PM, the fund accountant will calculate an NAV, based on the trading prices of the bonds, based on pricing services for the bonds that didnt trade, and so on.
3:32
if ENOUGH people put in their orders, the fund may not have enough cash on hand to make redemptions.
They'll have to borrow overnight (they have lines of credit) to meet redemptions (which all shareholders will pay for).
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