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Dave Nadig
3:00
Hey folks, welcome back to ETF.com Live!
As always you can type your questions in the box below, and I'll get to as many as I can in the next half hour or so.
We'll post a transcript up shortly after as well, in case you miss anything.
So with that, lets get rolling
MusicMan
3:01
And Dave's weird music of the day is ...
Dave Nadig
3:01
So, I've been on a Sleater Kinney kick, which led me to this local band from the area I'm enjoying: https://open.spotify.com/artist/0nRfJc54k6c874vvk6TVWq
"Dump Him" is the band.
but onto the ETF stuff!
Aya Jamison
3:01
Good morning Dave,
Is robo advisory sustainable? Only the very few largest have yet made a profit.
Dave Nadig
3:02
So, providing a financial inter-mediation service for around 25 bps seems very sustainable.
The question is "for who."  I think it's a very tough business to start from square one.
ultimately the tech behind a robo isn't rocket science, so its much more about marketing and packaging and distribution (as a business) than it is about managing assets.
3:03
So while I think some of the early players like Betterment or Wealthfront have a shot at long term sustainability (or acquisition!) I don't think I'd be backing a startup today.
3:04
Especially now that the market has figured out this model, and folks like Schwab are offering pretty good services for effectively free (or, if you're a cynic, for the cost of leaving a small cash balance with schwab at below market interest rates).
I think the space evolves a lot, however, and migrates more towards unique offerings like ESG-centric direct indexing.
Naomi
3:04
Greetings. Why do some think that ETFs could exacerbate a credit sell-off?
Dave Nadig
3:05
So, the credit markets (particularly things like bank loans, floaters, and junk) are inherently illiquid.
When you wrap them in an ETF, you get a secondary liquidity layer.  But ultimately just because that wrapper CAN be more liquid and much easier to trade than the underlying securities (because ETFs are exchange traded, not OTC), doesnt mean price discovery is magically different.
3:06
So if everyone wants to SELL, say, Junk Bonds, then a lot of that selling will happen, quickly, in the most liquid vehicle - the ETFs.
The underlying bonds, however, might not even trade in that moment, so the ETF will "seem" to trade lower than the last (stale, wrong) price of the bonds.
So it looks like the ETF is "driving down" the prices.  What it's actually doing is just REFLECTING the market much more quickly and accurately than the underlying holdings.
3:07
The alternative is actually much worse.  If junk bonds could, for example, only be held by private investors and not in any funds, and they all wanted out, well, then its a complete firesale market, where only some incredibly deep pocketed bank could be the buyer of last resort.
the ETF, at least, lets the sellers find buyers.
Gary Latham
3:07
Do you think quantitative easing will start again?
Dave Nadig
3:08
Hi Gary - so I assume you mean in the U.S.
In Europe, it's essentially already starting - there's discussion just today about the ECB buying bonds.
3:09
In general, I would expect US QE to be a bit of a last-resort.  Certainly it would come AFTER interest rate cuts.  So I don't see any reason for it to be imminent without some kind of monster crisis.
Robert
3:09
I read on ETF.com one of the cannabis ETFs is using swaps rather than purchasing shares of the cannabis companies themselves. What's the difference between a swap and stocks?
Dave Nadig
3:10
So, the best way to think about a Swap is that it's a bar bet.  You and I set the terms: if this basket of (in this case, pot stocks) goes up, you owe me the difference between yesterday and today.  If it goes down, I owe you.  And we settle up every night, moving some cash between two accounts.
Now, one of us (the one providing the long exposure, so in this case, you) will hedge the risk of the stocks going up by just buying the stocks!
So its a way for me to get what I want (long exposure to a basket of pot stocks) without having to TECHNICALLY own those stocks.
3:11
Swaps get used anytime the underlyings are problematic or complicated (think managing a daily basket of rolling VIX futures, for example).
In this case, I suspect its also an issue of custodyship.
So the swap counterparties dont HAVE to own anything, but generally the one offering the "long leg" of the swap, goes and hedges by buying the long underlying (or some sort of proxy).
3:12
But technically, you can write a swap contract to cover anything you can measure: temperature, polling numbers, etc.
Willie N.
3:12
Do you foresee the market becoming saturated with pot ETFs?
Dave Nadig
3:12
Well I think we're up to three now?  MJ, YOLO, THCX, and now TOKE.
That seems pretty saturated when you consider there are only a few dozen stocks of note worth chasing in the space.
3:13
So I think it's pretty unlikely we get a LOT more here.
J. Gross
3:13
Hello Dave, Vanguard just introduced a new commodity mutual fund that tracks the Bloomberg Commodity Total Return Index. It is priced at 20 bps - do you think this might spur some price competition in the ETF space. There are a number of ETFs that track this same Bloomberg commodity index (Graniteshares, iShares) - do you think any other indexes may show up in some new funds?
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