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Dave Nadig
3:12
Once a day, they go aggregate all the positions their customers want across every single account and stock/etf, and they make the firms overall position match, and they keep track of each persons fractional ownership
that means you can own 4 dollars of Berkshire Hathaway or 22 cents of SPY.
3:13
So it solves one issue with ETFs that a lot of Robos have also solved, which is that you cant own a partial share.  They also don't charge any fees or commissions for managing your "pie" or moving money inand out.
So I'm a big fan, actually.
I also think services like this (and there are competitors), are the thin end of the wedge towards direct indexing.
There's no reason your "pie" couldn't be "all the stocks in the S&P 500."
3:14
At that point, M1 has disintermediated the ETF companies entirely!
There are some technical and some licensing hurdles to overcome, but I don't think it's a stretch to imagine a world where investors and advisors "subscribe" to an index from, say Research Affiliates, and have it just implemented for them by M1 at the security level.
I think it's exciting, and a potential issue for the big issuers!
3:15
Here's a sort of related question:
Anonymous
3:15
Wealthfront offers single-stock tax loss harvesting.  How does that work with ETFs?
Dave Nadig
3:16
Essentially this is what Wealthfront is doing - direct indexing.  I think they even call it that, or used to.  Instead of buying ETFs, you buy full portfolios that track an index.  The twist here is, since you own each security (legally, and from a tax perspective) they can sell your losers to make your taxes easier.
Again, super interesting.  THere are some hiccups in implementing something like this the M1 way - I believe there are some reporting and taxation hurdles to make this as cool as it could be.
3:17
But again, I think it's kind of the future of indexing.  It may just take 15 years to get exactly right.
What you sacrifice of course, is trading. Getting fractional shares and daytrading seem like an impossible hurdle, without someone taking a lot of operational risk.
Bob
3:17
Wes Gray recommends factor etfs with 40-50 stocks in the fund. How do I find etas that match this criterion?
Dave Nadig
3:18
Sadly, in our own finder, you can't specifically search for portfolio size.
But luckily, if you know you want, say, a momentum fund, it's an available data point when you go to each fund's page, like at http://www.etf.com/MTUM
but right now, youd need to look at each fund.
3:19
Wes's point, however, is a solid one.  THere are different schools of thought on factor exposure.
At the broadest level, you just take ACWI and tilt it a bit towards, say, value, or growth, or quality.
But that's a fairly weak factor exposure, by design.
3:20
if you want PURE factor exposure, ideally youd be in the smallest number of securities possible that still maintain blow up risk diversification -- and 40 is a decent guess on where that is.
(actually, ideally, you'd pair that with SHORT exposure to the anti-factor as well, but that's essentially impossible to implement efficiently).
(great questions folk, let's keep rolling here).
Anonymous
3:20
Does the ETF rule proposal get rid of the three baskets used for fixed income ETFs?  Or does it actually allow every ETF firm to use them?
Dave Nadig
3:21
So, I'm guessing by "three basket" you're talking about the actual files thet get sent to the NSCC -- often those are a Creation/Redemption basket, and a "completion" basket.  The idea being that you can take the C/R basket, add in the completion basket, and you have a representation of the full holdings.
3:22
The ETF rule actually goes one step further from this.  Not only would it allow funds to have baskets that are not full slices of the portfolio (which many firms currently HAVE to do), it will allow them to have different baskets for incoming or outgoing money.
3:23
So you can add MSFT to your creation basket, if you need more of it today, but simultaneously put AAPL in your redemption basket.
You might do that to effect a rebalance, for instance.
and you can even go one further, and do a one-off custom basket.  Say a HUGE client wants to create 100,000 shares of your ETF, and has a portfolio thats 90% what you need to own.
3:24
Well, the issuer could say "good enough" and accept that, and then do internal trading over time to get the full ETFs portfolio where it should be.
that makes it easy to take the new money, which means spreads stay tighter (because the authorized participant doesnt need to tweak up the basket).
The potential caveat is the rest of the shareholders might have a non-optimal experience
3:25
for that reason, the SEC is saying funds need to both have extensive documentation on all this, and have written, iron clad policies and procedures for how custom baskets will work.
This is, I should point out, DEEP and of the pool stuff.
Overall, its good for investors.
and not something you need to worry much about.  iShares, State Street and Vanguard already have the ability to do all this.
So this is just levelling the playing field.
3:26
Here's a related one:
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