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Dave Nadig
3:13
Flex options are based on the price movements of the underlying index (in this case, the S&P 500) largely as a matter of convenience.
But this ultimately is just reflected in what people are willing to pay for the options themselves.
3:14
If the expected return of the thing your trackign was higher (say, a total return index) then that gets baked into the premium
If dividends are included, then you end up with various pricing/expiration issues.
3:15
(this is deep, deep end of the pool stuff, but at the end of the day, the price your paying as an investor washes out, in the sense that the options prices ... which the fund pays ... are baking in that its the price movement, not the total return).
I totally get that as an investor, that seems weird.  The important thing is just to know what you're buying -- the S&P yield is about 2%, so your return expectations for the product should be adjusted.  If you don't think that's worth it? Well, thats your call.
L. Tremayne
3:15
Are the FAANGs getting into banking? What would be the pros/cons for investors?
Dave Nadig
3:16
One of my favorite topics.  TO me there's little question that Google/Amazon (in particular) will get into financial services of SOME sort fairly soon.
banking/cash management is an obvious place to start, which is what Alibaba did with their ANT financial division (currently the largest money market fund int he world, at something like $170 billion).
3:17
I actually think they may go more the robo/direct indexing route first.
But thats just me speculating.  The bigger question is whether they move in with half steps (say, partnering with a big bank, like a JPMChase or Wells) or if they go it on their own.
3:18
Id be a little disappointed in the former honestly -- much less interesting.
But I'll go out on a limb and say SOMEONE in the tech/online retail space announces something cool this year.
I'll bolt a few of these together:
Winston Riggs
3:18
Good morning Dave, Can you explain the significance of the yield curve in a nutshell?
M. Dashiell
3:18
With the recent bond yield inversion, are certain ETFs giving investors better yields?
Dave Nadig
3:19
So, in a nutshell, if the yield curve is inverted, banks lose a core source of return.  One thing banks do is arbitrage maturity.  They take in short term money (deposits) and the loan out long term money (mortgages, and so on).
Another way to think of that is they are constantly taking in the "tbill" money and going long the longbond (notionally).
3:20
if there's no (or negative) money in that trade, it's bad for banks.  THis is especially true the smaller your bank is
after all, Citibank has a LOT of ways to make money, and this ends up being a small part of the overall picture for them.  Some savings and loan? It's basically their whole business.
As for what to DO about it, it depends much more on what you think will happen going forward.
3:21
if you believe we're in global slowdown mode, and the yield curve inverts further because of that, then you can actually gain by buying the long bond (say, TLT, the 20 year treasury iShares ETF).
Because by definition, the 20 will come down in yield, which means the price of the bonds goes up.  So you make money from the appreciation.
3:22
(in other words, it's just a targeted falling rates play)
But that's a pretty big call, honestly.  I don't think theres a free-lunch, obvious play on it.  If there was, everyone would immediately pounce and it would get priced out.
3:23
Im going to take half of this long question:
Larry (again)
3:23
(Note to posters - Do not hit return!)  Basically, I am wondering how the index provider landscape is changing with things like the fee wars, with companies like iShares developing their own indexes, and with (probably) lower barriers to entry for more index providers to enter the business.  Any thoughts about the state of index providers? Thanks!
Dave Nadig
3:23
The core of the question is: everyones getting squeezed, what does it mean for index providers.
Short answer: they're getting squeezed too.
3:24
The fees on vanilla indexing are around 1-4 bps, specialty providers can maybe get away with a few bps more ...
so theres not a LOT of room.
And of course, lots of folks are doing self indexing now.
3:25
Vanguard's move to CRSP indexes was a big part of this as well.  They saw a way to shave a fraction of a percent and they took it.
We'll just see more of it, honestly. More self indexing.  More fee wars across the space.
BondCurious
3:25
Hi Dave. Is it better to invest in bonds or bond funds?
Dave Nadig
3:25
A time honored question!
3:26
The advantage of buying an individual bond is you basically can hold it forever, and you know EXACTLY how much your going to get every single coupon payment.
If you buy it for 1000 and its paying 2 percent, well, you know you're getting 20 bucks a year, and your going to get 1000 at maturity
and you can literally ignore what happens with bond prices.
THe downside is its hard and often inefficient to buy individual bonds, and you aren't diversifying at all.
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