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Dave Nadig
3:15
It's as good a definition as any, I suppose, but ultimately, all smart beta is at some level based on factor analytics (that I've seen) - it just depends which factors and what you do with them.
So I wouldn't get hung up on the label, and just focus on what you own and why you own it.
if it happens to be a factor, so be it.  If it happens to be active-management in smart-beta-clothes?  So be it.
Anonymous
3:16
Do the currency hedged ETFs have significant counterparty risk? Are the currency hedges swaps? The Deutsche Bank headlines made me think to ask.
Dave Nadig
3:16
Super interesting question with some nuance to it.
3:17
THe short answer is really "no", but the long answer is slightly more complicated.
Let's just take the Euro for instance.
The big fund there is FXE, from Invesco.
3:18
So, it is essentially just a bank account
it just owns Euros
physically
3:19
The problem is -- at the size firms like this have accounts, a lot of the cash is actually NOT insured.
its not like the FDIC runs up to $300mm in deposits.
So in this case, if in fact JP Morgan Chase went completely bankrupt, FXE shareholders are in the same boat as any other depositor.
3:20
So the question you have to ask is, how likely do you think a "surprise" bankruptcy is.
Just like, say, an Exchange Traded Note .
3:21
This is actually a systemic problem with institutional investing.  It turns out owning lots of cash is very hard.
which is why we have things like money market funds, and also part of the reason you can end up with paradoxical things like negative interest rates on german bonds.
Institutions often simply HAVE to own securities, because they can't sit on the cash.
So the short answer is "no" because I think the risk of surprise defaults is very low.
3:22
but it's "maybe" because, it's certainly not ZERO.
L. DiCaprio
3:22
I know that volume reduces spreads but why?  Is there any data that points to this or is it just a concept we all agree to?
Dave Nadig
3:22
Loving the nerdy questions.
3:23
So, there is no systemic link between volume and spreads, which is what you are getting to.  When you see that XYZ traded a million shares yesterday, that doesn't mean spreads HAVE to have been tight yesterday.
And in fact, if that million shares was a single negotiated trade, spreads might have been wide.
but historically, high volume securities of any asset class tend to BE high volume not because of whales, but because of lots and lots of minnows.  Many many small trades.
3:24
When you have many many small trades, they will naturally compete with each other for execution, and that drives the inside spreads down
even in giant securities like SPY, the "inside" is quite often very small -- 100 shares on the bid or ask.
3:25
with the big available limit orders just outside that inside edge -- which will be constantly moving as orders get executited.
Volume is a useful proxy, because it's easy and available
but what you as investor should really care about is your actual arrival cost to buy or sell, which includes your expected spread and your trading costs, and any market impact you might make (we should all be so lucky).
Holly Thurman
3:26
Can mutual funds hold ETFs? And is the reverse true?
Dave Nadig
3:26
Its actually a bit tricky here.
So yes, they can (in both directions) and in fact they do (in both directions) but there are diversification issues.
There are some very large ETFs that basically just own other ETFs
3:27
QAI, for instance, the IQ Hedge fund tracker, only owns other ETFs under the hood
that is essentially a mutual fund owning ETFs.
3:28
But they can't just own, for example, ONE etf, because the IRS rules on diversification mean they have to spread it around.
But it's actually quite common to see the cross holdings.
Terrance Davenport
3:28
Several outfits publish annual surveys on ETF use. I assume they ask fairly similar questions. Are you noticing any significant differences in their results?
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