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Dave Nadig
3:12
So, the problem with stops is multifold.  First off, stops can outright kill you if you aren't careful.
If you look at the history of ETF hiccups (flash crashes and whatnot) the only folks who usually get hurt are folks who left sleeping stops on their positions, so they became the sellers at too-low prices.
3:13
So, if you're going that route, make sure your stops aren't just stops, but have a limit on them.  So you can put in a "sell if it trades through 100, but at no price worse than 95" for instance.
the risk of that, of course, is in a very fast moving market, your stop might not trigger
3:14
The options version of this is far more predictable and controllable .
Whether you use a product like the defined outcome ETFs or simply do it yourself, you're lockign in a known pattern of returns
the flip side is -- its not free.  They track a price return index (because thats what options do, they work off prices, not total returns), and they charge, I think, 70 or 75 bps.
3:15
So some of its down to temperment.  If your watching the market every day? By all means, use careful stops.  But if your walking away for a month or more?  You don't want to let those stops sleep.
Kyle
3:15
Hi Dave, since we are in a race to the bottom with respect to fees, especially on core ETF's, how much does a basis point or two really matter (in your opinion) when allocating between providers? Say between various Large Cap Core (ignoring the fact that exposures might be different depending on which index is being tracked). Thanks!
Dave Nadig
3:15
I talked a bit about this on this week's ETF Prime, and its a very good questoin.
3:16
The reality is this:  the difference between Free and 0.03% (what Vanguard's S&P ETF, VOO, charges now) is $30 a year on a 100,000 position.
THat's essentially nothing.
3:17
And if theres ANY difference in exposure, it will dwarf the difference.  Heck just a penny difference in how they trade could dwarf it.
When you start talkign about tens of basis points (tenths of a percent) then I think its worth really considering.
But exposure is always the most important thing.
Take for example the John Hancock large cap fund we were just talking about.
3:18
It charges .35%, vs VOO at .03%.
So thats 32 basis points different.
Thats 320 on a 100,000 position.  Year after year.
THats where you really need to ask yourself what your paying for.
3:19
Not a diss on that fund: it's doing something different.  Its definately lowering your risk a little.  But you could lower your risk other ways too (say, just buy less VOO).
So I guess I just made up a rule of thumb: sub 10-bps differences? Probably irrelevant, especially if there are switching costs.
Confuzzled
3:19
I saw your windmill piece.  Can you explain how these folks who create new shares *actually* do their job?  I got a bit lost ...
Dave Nadig
3:19
Oof, a biggy.
3:20
So, in general, it works like this:  XYZ trades "too high" because everyone wants to buy it.
So it's trading at 101, when the things it own are only worth 100.
So the Authorized Participant swoops in and simultaneously sells a bunch of the ETF at 101, and buys a whole bunch of the stocks for 100.
3:21
at the end of the day, they hand the stocks to the issuer, get the ETF shares in return, and when they go into settlement that night, they have all the shares they need.  THey book the 1 dollar profit.
Where things get slightly weird is that the AP has 5 days to decide whether to go through with the creation.  They don't have to do it today
3:22
they might choose not to for lots of reasons, all of them economic.  Issuers charge a fee to do the creatoin, maybe a lot!
Or, maybe the issuer will only let you make 100,000 shares at a time, and you can only pull off 40,000 shares today.
Regardless, they hedge themselves -- they are short the ETF they sold, and long a bunch of stuff that will perform economically the same as the ETF.
That MIGHT be the whole basket of what the ETF owns, but it could also be a proxy.
3:23
Maybe its a tech ETF, and they put the hedge on super quick by using a similar tech ETF, or even just the QQQs or something.
But they definately don't just sell the ETF without a hedge.
Hope that clears things up.  We have some great articles on this in our education section.
3:24
OK, going to cut this one a bit short today.  Thanks for the great questions as always.  See you all next week!  We'll probably do a mid-day Friday session just to mix it up.
Have a great afternoon!
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