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Dave Nadig
2:59
Good afternoon folks, busy day in ETF land.
You can enter questions in the window below, and as always, we will have a transcript up soon after my fingers fall off from typing too much ...
3:00
So let's get started with the big issue of the day:
Darius Ellman
3:00
Hi Dave. What was the upshot of the SEC's decision today? Would it be positive or negative if new ETF issuers no longer need that exemptive relief?
Dave Nadig
3:00
So, for those of you NOT glued to the SEC website, they proposed a new ETF rule today (still not published, no matter how much I hit refresh).
3:01
In short, it would get rid of exemptive relief for most ETFs (both new applications and existing funds).
We'll have a full story up on ETF.com shortly, so I wont just rehash each detail, and get to the "what does it mean" bit.
Once comments are done (60 days) and a final rule enacted (maybe by year end?) it will remove a whole set of processes for new issuers.
3:02
On the surface, this makes time to launch and cost to launch go down for new funds.
That said, this was a pretty well established process already, so we're not talking ENORMOUS amounts of time and money saved, but a dollar and a day is a dollar and a day.
the bigger news is the levelling of the playing field around custom baskets.  Which gets me to question two on my list here:
Todd Rosenbluth - CFRA Research
3:02
Dave - Can you give an example of how a custom ETF basket works and why the proposed SEC rules would make it easier for recently launched funds to work with institutional investors? Few better to explain to this audience than you.
Dave Nadig
3:03
So there's a lot of confusion around what a "custom basket" is --
but basically, it's any creation or redemption basket that isn't just a prorata slice of the whole portfolio.
So why would an issuer want custom baskets?  Several reasons.
3:04
1: Let's say you have an index rebalance, and you want to get rid of microsoft, but get more apple.  You could put "too much" microsoft in the redemption basket for the day, and "too much" apple in the creation basket, thus letting the C/R process do some of your trading for you.
3:05
2: Let's say you want to take a HUGE creation unit from a big institution (through an AP).  And that institution has, say, way more Apple stock than you really need.  Custom baskets would allow you to take that "one off" creation unit and true it up internally.
3:06
Commissioner Stein represented the last part as problematic
She was concerned that APs could "cherry pick" and "dump" into the ETF in a way that would be bad for investors, hence the requirement that there be a formal set of rules and procedures developed by each fund,
and furthermore, that all of this be recorded and tracked so SEC examiners can come audit.
3:07
in general though, its a good thing for both funds and investors, and cleaning it up makes a ton of sense.
Feel free to toss any additional ETF rule questions in, I'll move on to a few unrelated issues that are fun:
Yellow Card
3:07
If you own a mutual fund share class, such as Vanguard, and want to convert to the exact same Vanguard ETF share class, can that be done without capital gains, or is simple selling a security for another?
Dave Nadig
3:08
This is a super fun question.  So first off, right now this is ONLY a Vanguard problem, because they have a patent on the share class structure for ETFs.
(and, further, they won't be affected by the new Rules, as they were explicitly called out from it).
The tricky thing is the answer is "yes, but one way" - You can take your, say "Admiral" shares at vanguard, and convert them to ETFs.
You can do this tax free, it's just an inkind transaction
3:09
however, once you're in the ETF shareclass, your locked in.
Its also worth noting that this process is pretty easy if you are a Vanguard brokerage customer, but significantly more confusing if you hold either your Vanguard mutual fund shares, or your stocks, in a different brokerage firm
3:10
As for "why" you can't go from ETF shares back into mutual fund shares without making a round trip through cash -- I've never gotten a super clear answer on that.  I suspect it has to do with the fact that by design, ETF's can never be redeemed in small lots, only in redemption units.
Lucy Carbone
3:11
With the momentous news yesterday about Justice Kennedy stepping down, and thinking about how many niche ETFs there seem to be, I was wondering if there are any government ETFs currently. I think there used to be a DEMS and maybe a GOP from RealityShares, but didn't they close?
Dave Nadig
3:11
Hi Lucy -- so you're right.
DEMS and GOP closed in April.
3:12
They were sponsored by "eventshares" and we were all a little stunned they closed so quickly honestly.
they sort of combined all three of their ideas (the latter being TAXR, a tax relief based fund) into PLCY
3:13
Which is designed to pick stocks based on the (admittedly capricious) US economic policy agenda.
Its an interesting idea -- especially because it picks losers to short, not just winners.
3:14
but I'm pretty skeptical in general of "headline" funds.
Investors seem to be as well -- i don't think PLCY has managed to crack 20 million in assets yet.
Worth noting there's a competitor - MAGA.
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