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Dave Nadig
3:14
IF the market performs in nice predictable waves, it can be very effective.  But boy, that's a giant, gargantuan IF.
So for example, PTLC,sold out of the market in something like November.  So sure, if you were looking at 1 year returns on 12/31/18, it looked brilliant.
The problem is it has stayed there.
3:15
If you hadn't noticed, large cap stocks are up over 11% on the year so far in 2019 -- and PTLC has missed ALL of it.
because its happened fairly violently.
That's the real challenge with any market timing strategy -- being wrong is really wrong.
3:16
Thanks for the seque I guess: I wrote a bit about market timing here this week:
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and we're doing a webinar on managing vol in other ways next wednesday if you want to hear more.
Tangent Style
3:17
Dave Nadig
3:17
Yeah, there are lots of ways to make up a "free" price tag.
3:18
Ben's of course right (no surprise) that looking at things like cash is an important point.  Schwab, for example, (and most brokerages) have historically made a healthy profit on the spread between overnight paper and what they pay on cash balances.
Inside a fund, this isn't usually an issue -- the issuer doesn't somehow get to keep intra-fund cash and invest it on its own for profit.  But it can be an issue inside roboadvisors and brokerage accounts.
3:19
So where else do we look for hidden costs?  Well, brokerages like RObin Hood offer free trading by essentially selling their flow.  THeoretically, this could hurt investors through poorer trade execution.
I say theoretically because these are monitored/reported things that the regulators look at with some frequency.
So hard to see a systemic long term issue there.
3:20
Then there's acquired fees.  A lot of funds hold other funds.  You always need to look all the way through.  On our site, we capture this pretty cleanly, but it can be tricky sometimes if you're just poking through fund literature.
Alex Laipple
3:20
@Dave- Love the content you've been putting out as of late. What's the biggest hurdle to direct indexing/sma investment adoption?
Dave Nadig
3:21
Hi Alex:  There are still some BIG software/operational hurdles.
For instance: fractionalizing a bond so that it can go into a portfolio is tough.
It probably requires a "house account" that holds the whole bonds, which investors then have a claim on.
3:22
This is not in any way an insurmountable issue, but it requires some clever organization and software.
Similarly, things like "how do you manage dividends, and reinvestment, without triggering wash sales from tax lost harvested positions."
Not an insoluble problem, but work needs to be done.
3:23
That's part of why I put the timeline on real mass-affluent adoption out 5-10 years, not tomorrow.  I think the great unwrapping is coming, and is inevitable, but I don't think it's a panic.
Still, worth thinking about where you fit in a wrapperless world.
ok, a few more questions before we wrap:
TaxManCometh
3:23
So do ETFs investors not have to pay taxes? I read they were tax-advantaged?
Dave Nadig
3:24
So, this is DEFINATELY not the case - in that, they are not somehow structurally "tax free."
What is the case is that for the most part, ETFs don't distribute capital gains themselves (because they use the creation redemption process to wash those gains out).
3:25
But, as an investor, if you buy XYZ for 100 and sell it for 150, you still have a 50 dollar gain, and you'll still owe taxes on that.
the big difference is you control that process.  So it's best to say they are tax-efficient, and tax-fair.
but they sure aren't magically tax free!
Tangent Style
3:25
Who do you think is in the lead on re-wrappering active into ETF?

Feels to me like there is a new appreciation for the tax inefficiency of MF vs ETF in the down year we just had (aside from the often confounded active / passive variable)
Dave Nadig
3:26
Well we have some clear winners here already: ARK and Davis, for instance, have launched super-traditional, high-conviction active equity ETFs that have done quite well at attracting attention and money (and in some cases, performance!).
The big "other shoe" though is when we see a giant step in with both feet.  A Fidelity Contrafund.  A Growth Fund of America, etc...
3:27
I don't feel like any of that is imminent, because we havent seen anything but non-transparent active filings.
Clearly ETMFS -- Eaton Vances attempt ant bringing exchange trading to traditional mutual funds -- wasn't a success, and that effort has now been rolled into the non-transparent active camp.
3:28
Whether we see that dam break this year? I really have no idea.  I'd like to think so, just so we can let the market decide if they care.
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