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Dave Nadig
3:25
Was an ETF that invested in companies headquartered in Nashville.
Why this is an interesting pattern of returns, I have no idea.
3:26
the only thing I could ever come up with was "well, maybe there are some institutions who are restricted to only investing in the municipal zone?"
but nah.
TangentStyle
3:26
Why has the rotation of assets from MF to ETFs been so slow given the liquidity, transparency, cost and tax advantages?
Dave Nadig
3:26
Well, I think the traditional industry wouldn't think it's that slow (grin).
3:27
But as for why hasn't, essentially, ALL the money moved?  A few things.
First, you DO have to know how to trade an ETF, and I think that scares some people off.
Second, ETFs are terrible for low-value dollar cost averaging, like you might do in a 401k.
It's very hard to make a diverse portfolio with ETFs and $500.
3:28
So because of fractional shares, MFs hang on hard to the defined contribution market, which is a HUGE chunk of MF assets.
Third (related) many mutual funds pay out to salespeople or distribution partners from their embedded 12b1 fees, which most ETFs don't have at all.
3:29
at 10 bps or less, it's hard to have enough money to pay for anything but rudimentary sales efforts.  ETFs are fundamentally "bought" not "sold" -- which is a real cultural shift for a big firm.
I guess last: most active managers don't want full transparency, so they haven't come to play in the ETF sandbox -- and a lot of investors still want to be in active funds, apparently.
3:30
just wading through some duplicates here ...
Rian
3:30
Will passive/strategic beta ETFs always dominate the landscape or do you see active gaining more traction? Currently they are like 1% of the ETF market.
Dave Nadig
3:30
While I think there will always be a place for active, I don't think there's a place for expensive, benchmark hugging active.
3:31
If you look at the MF industry, I'd argue about half the assets -- maybe more -- are in that bucket.
So I think that just goes away in favor of low cost beta/smart beta.
I do think, longer term, most products will at least have an ETF version, and we'll see active be 10-20% of the market long term.
3:32
but i think it will take years more to get there, and there will be a lot of very sad, not very good, active managers looking for new careers along the way.
Rick S.
3:32
Hi Dave, What do you think is ETFs' biggest challenge, or are they just going to be this continuing juggernaut?
Dave Nadig
3:32
I think there are, as I said, some places where ETFs dont make the most sense.
and I think that remains the case
3:33
I think the real threat (which I've mentioned here before) is technology eventually making the idea of a "fund" irrelevant
as we all migrate over time to direct indexing, with our brokers just maintaining fractional share accounts for us.
But that, again, will be years in the offing.  THere's no danger in the next few years, maybe next 5 years, of that having a real asset impact.
3:34
but 10-15 years out? I think its real, and a real issue.
TangentStyle
3:34
What are the data points you are watching regarding self-indexing as a trend? What is most at risk of going that way?
Dave Nadig
3:34
Great question -- the short answer is, there's no great data source on this, other than going one by one through ETFs and figuring out who runs their underlying indexes.
3:35
With the SEC rule coming, and it's basic elimination of the difference between index and active, I think self indexing may actually have a bit of a breather.
Self indexing was a bit of a way to have cake and eat it too in terms of how you could manage the fund, manage your baskets and so on.
3:36
Under the new rule, I could see some folks who are self indexing just saying "to heck with it, we're just calling it active" and then just running the same strategy, without the headache of having to maintain the rulebook, have comittee meetings, publishing the index series and so on.
Wes over at Alpha Architect has basically said he's heading that direction I believe.
3:37
That's going to wrap for this week, sorry if I didnt manage to get to your specific question.
As always, a transcript will be up later.
Also, don't forget to check out our podcast with ETF Prime.
Thanks everyone, see you next time!
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