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Speaker 1: Welcome to Trillions. I'm Joel Weber and I'm Eric Beltnis.

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Speaker 1: So in this episode, we're gonna spend some time talking

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Speaker 1: about what happens when you're ready to put some money

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Speaker 1: into an ETF busting out this wallet, tons of big

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Speaker 1: bills in it. Okay, I'm ready to put it somewhere. Right,

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Speaker 1: what should I be looking at before I make that decision?

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Speaker 1: You'd have a checklist for picking any high end item, right,

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Speaker 1: and this is no different. There's certain criteria due diligence,

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Speaker 1: things you should look for, some of the more important

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Speaker 1: than others. But there are many things you can do

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Speaker 1: and it's not that hard. But some of the terms

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Speaker 1: in E t F DI diligence can be a little frightening,

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Speaker 1: a little jargon E. But we have the perfect guy

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Speaker 1: here today to help simplify all that. He works for

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Speaker 1: the c f r A. His name is Todd Rosenbluth,

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Speaker 1: and he's sort of exactly who you are. He's a

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Speaker 1: mutual fund and E t F analyst. Yeah, I mean

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Speaker 1: he's kind of like me in another world. He works

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Speaker 1: at his company. I work at my work competition, but

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Speaker 1: we're also Piers. Todd writes really great stuff. I enjoy it.

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Speaker 1: I also up push back on it. Sometimes we've had

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Speaker 1: some friendly debates. I see Todd all the time on

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Speaker 1: the circuit circuit. That's the thing. That's the thing. I

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Speaker 1: know that sounds funny, but like there's conferences. You see

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Speaker 1: Todd on panels and likewise. So he's the perfect guy

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Speaker 1: to help simplify this because that's all he does. And

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Speaker 1: I like that he is have a mutual fun background

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Speaker 1: because E t F analyists who know the mutual fund

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Speaker 1: really well tend to have a richer look at the

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Speaker 1: E t F structure. So we're gonna talk about due diligence,

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Speaker 1: which let's come up with a better title. How about

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Speaker 1: under the hood. It's cliche, but I think in this

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Speaker 1: case this is the perfect metaphor. We will go from

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Speaker 1: the food store to the car. Right, we got our groceries.

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Speaker 1: Now we're in the car. This week's episode. Okay, Todd

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Speaker 1: Rosen Blues, thanks for joining us. Good to be here. Thanks, So, Todd,

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Speaker 1: who are you? I'm in New York? Go totally? Do

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Speaker 1: you want to get So? I head up the E

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Speaker 1: t F and mutual fund research for a company called

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Speaker 1: c f R A and it's literally called c f

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Speaker 1: r A. It is literally called t f A so

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Speaker 1: used to the business used to be owned by ms C.

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Speaker 1: I uh the name c f A came out with it.

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Speaker 1: I'm a former employee of S and P. I ran

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Speaker 1: the mutual fund and et F research at c f A.

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Speaker 1: I'm a former equity analyst that covered tech and telecom stocks,

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Speaker 1: and before that was a mutual fund analyst at the

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Speaker 1: company and at Value Line, and for the last seven

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Speaker 1: years have been dedicated specifically to E t F s

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Speaker 1: and to mutual funds and providing analysis for our n

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Speaker 1: clients and and the general public in a range of ETF. So,

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Speaker 1: tell me what your day looks like then, So a

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Speaker 1: couple of things that are primarily day today. So I'm

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Speaker 1: looking at trends that are going on in the marketplace,

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Speaker 1: looking at investment ideas, and then trying to explain how

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Speaker 1: you can participate in those investment ideas using either an

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Speaker 1: E t F and or a mutual fund. Is part

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Speaker 1: of what I do. So I typically write about two

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Speaker 1: or three articles on a weekly basis that could publish

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Speaker 1: for our clients. I'm dealing with reporters, including from Bloomberg

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Speaker 1: that are working on their own stories and adding an

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Speaker 1: input an independent perspective in that regard. And then we

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Speaker 1: have clients so that are subscribing and advisors and retail

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Speaker 1: clients that have access to our research and that want

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Speaker 1: to hear more or have questions beyond what that is,

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Speaker 1: or that possibly want to learn about us before they

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Speaker 1: sign up. And then I'm part of those conversations as well.

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Speaker 1: You said the word independent. Yes, c f r A

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Speaker 1: doesn't offer their own mutual funds or e t F.

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Speaker 1: C f R A doesn't have investment banking relationships the

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Speaker 1: way that you're Morgan Stanley or Goldman Sachs does. That

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Speaker 1: offers research on investment ideas were purely the best ideas

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Speaker 1: and from an et F perspective, which is relevant for

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Speaker 1: this topic. We have an equal number of e t

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Speaker 1: F that we like as a number of e t

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Speaker 1: F s that we don't like, So we we cover

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Speaker 1: the whole universe. We have about t fs that we

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Speaker 1: have an opinion on and roughly in one side of

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Speaker 1: the bucket, roughly on the other side, you're not going

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Speaker 1: to find that from others that are covering ets often

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Speaker 1: want to just tell you what's a good idea. So

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Speaker 1: I get Todd's emails, and that's one of the reasons

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Speaker 1: I thought he would be a great guest as be

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Speaker 1: because Todd is unique from your average et F person

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Speaker 1: because a lot of times they get pretty much all

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Speaker 1: in on e t F. It's like kool aid city.

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Speaker 1: Todd still recommends mutual funds, and he has a reason

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Speaker 1: for doing it. He also has a background of mutual

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Speaker 1: funds and equities. You can put that together. It makes

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Speaker 1: your et F analysis, I think, richer and deeper, and

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Speaker 1: I think that's what makes Todd kind of unique. So

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Speaker 1: how did you find the e t F? Todd? So

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Speaker 1: my company, when I was at S and P, we

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Speaker 1: were covering individual stocks. We were seeing the trend that

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Speaker 1: investors were looking to invest in e t F s,

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Speaker 1: and we wanted to come out in a different perspective.

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Speaker 1: So the way that we look at in the way

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Speaker 1: we did back now almost ten years ago and we

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Speaker 1: continue to do so, is to us and E t

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Speaker 1: F is a basket of securities. Whether it's a stock

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Speaker 1: ETF it holds Apple and IBM and Facebook and what

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Speaker 1: have you. If it holds individual bonds, then you should

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Speaker 1: do that as well. So we come at this from

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Speaker 1: a perspective that we cover individual stocks. We have by

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Speaker 1: hold cell recommendations on individual stocks, and what is going

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Speaker 1: to drive an E t F forward is going to

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Speaker 1: be what's inside that portfolio. Now, there's other things that

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Speaker 1: we use in our research, but so we just really

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Speaker 1: took the underlying holdings and formed took the E t

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Speaker 1: F rapper and decided to do things that were connected

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Speaker 1: to it. Now at the risk of the commercial part

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Speaker 1: of it, we use other things that are outside of

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Speaker 1: holdings analysis, and I know we'll get into it from

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Speaker 1: a due diligence perspective, but there are things that are

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Speaker 1: unique to an e t F. It trades on an exchange,

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Speaker 1: so there's bid esque spread analysis, you can do it's trades,

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Speaker 1: and you can do technical analysis and the rest of

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Speaker 1: getting too far in the weeds here, there's things you

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Speaker 1: can do that are unique to an e t F

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Speaker 1: then you would a mutual fund or an individual stock.

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Speaker 1: What was your lightbulb moment that you realized, boy, these

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Speaker 1: things are for real. Yeah, well it's you started seeing

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Speaker 1: people buying them because it was the way to get

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Speaker 1: exposure to a certain trend. So I even remember back

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Speaker 1: when I was not an e t F analyst. But

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Speaker 1: I remember people before we had to tech boom the

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Speaker 1: Triple ques. The power shares product which actually just go

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Speaker 1: was by Triple Q. Still, that's how common that name

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Speaker 1: has become, which is a NASDAC one. It's the largest

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Speaker 1: stocks non financial within a n Aztec. Side of what

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Speaker 1: it is, people were buying that, I don't think they

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Speaker 1: understood what it wasn't. In fact, I think people still

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Speaker 1: think of it as only a tech reality thing. And

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Speaker 1: so I just started digging into this, understanding more of

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Speaker 1: what it was. And then when S and P got

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Speaker 1: back around to looking into this, I was very happy

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Speaker 1: to be able to do that because I had that

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Speaker 1: background having been a former mutual fund analyst. So before

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Speaker 1: you were an E t F analyst, you were a

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Speaker 1: mutual fund analyst. So tell me about how you view

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Speaker 1: a mutual fund versus in et F. What's that difference like? Yeah,

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Speaker 1: So we cover both of them. I head up the

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Speaker 1: research for both our E t F business and our

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Speaker 1: mutual fund business. We have separate ratings on e t

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Speaker 1: F s then mutual funds. There's others that are combining

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Speaker 1: that together. We think there's a role for both in

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Speaker 1: et F and or a mutual fund in the portfolio,

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Speaker 1: whether it's actively managed or not so passively managed and

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Speaker 1: index based, but the things that you need to focus

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Speaker 1: on are different. So we don't believe the past performance

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Speaker 1: of an e t F is going to give you

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Speaker 1: much insight as to where is it going to go

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Speaker 1: uh in the future. So there's no there's no disrespect

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Speaker 1: to anybody who's running an e t F portfolio or

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Speaker 1: running an e t F itself that's tracking the SMP

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Speaker 1: five index or the m s c I e F

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Speaker 1: index or what have you. But their job is to

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Speaker 1: track that index, and they're pretty good at probably doing that.

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Speaker 1: But there isn't the same skill set in picking stocks,

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Speaker 1: buying a new when things are falling in value, or

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Speaker 1: spotting new trends in that regard. So whereas we use

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Speaker 1: a performance track record in mutual fund research at c

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Speaker 1: f A, we don't really on that for our e

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Speaker 1: t F research. The SMP five hundred is going to

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Speaker 1: be up roughly this year, it's unlikely to do that

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Speaker 1: in two thousand and eighteen, and and whether or not

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Speaker 1: it did well this year really should have no bearing

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Speaker 1: on how well it did going forward. People aren't buying

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Speaker 1: e t s that way anymore, and we don't do

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Speaker 1: research there. One the thing I do you want to

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Speaker 1: talk about here is sort of what an e T

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Speaker 1: F does, right, because it tracks an index, right, so

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Speaker 1: when you're evaluating them, can you talk about how you

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Speaker 1: look at that index? Right? So what we're doing in

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Speaker 1: part is less looking at the index itself and the

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Speaker 1: name of the index and the rules of the index,

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Speaker 1: although I think that's extremely important for an investor to do.

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Speaker 1: We're looking at what is currently inside the portfolio, what

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Speaker 1: fit that criteria that was there? You're you're correct, It's

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Speaker 1: very transparent. You can understand what's inside that portfolio. And

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Speaker 1: if it's a market cap weighted the largest companies tend

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Speaker 1: to have the highest exposure, which is in you know,

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Speaker 1: I keep using the I shares SMP five hundred of

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Speaker 1: the Vanguard five hundred product or the Spider five hundred products.

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Speaker 1: So I give everybody that's in their full color independent analysts.

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Speaker 1: So that's how that's where it comes about independent analyst

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Speaker 1: where about uh for what that is? Then then the

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Speaker 1: largest companies, the apples, the ibm s are going to

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Speaker 1: dominate that and and our opinion of those stocks is

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Speaker 1: gonna matter more? To use the SMP five hundred as

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Speaker 1: the example. There's an equal weighted product that's out there

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Speaker 1: from Guggenheim. RSP is a ticker same exact companies, but

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Speaker 1: they treat every stock equally. There's more MidCap exposure than

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Speaker 1: you'd find versus the other SPI index products. We're gonna

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Speaker 1: offer take not whether it is equal waiting better than

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Speaker 1: a market cap waiting approach, but is now a better

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Speaker 1: time to be in those companies across the SNP five

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Speaker 1: index as opposed to being dominated by those mega cab companies,

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Speaker 1: the behemoths that are that have earned their their stripes.

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Speaker 1: This brings up a big point, which is who is

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Speaker 1: the user and what is their goal? And and my

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Speaker 1: work I have that is a big difficulty because on

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Speaker 1: the terminal we have mostly institutions, but there's some advisors

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Speaker 1: and I don't know if they're looking to make a

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Speaker 1: quick buck over a week or they want to go

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Speaker 1: in for the long haul. I think, you know, there

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Speaker 1: are different and that's the thing with et s. Everyone

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Speaker 1: uses them so in terms of like if it's a

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Speaker 1: good time or not. I think there's a challenge with

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Speaker 1: what is the investor, how big are they, how concerned

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Speaker 1: are they about certain areas of the e t F,

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Speaker 1: and what's their holding period? How do you determine who

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Speaker 1: the investor is and what their goal is when recommending

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Speaker 1: an e t F. Yes, so we're trying to offer

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Speaker 1: one opinion on an e t F, not multiple opinions

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Speaker 1: that are out there to trying to target to the

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Speaker 1: audience for what it is. And and I understand where

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Speaker 1: you're coming from in that regard. But that institutional investor

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Speaker 1: that then is on their own running, you know, money

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Speaker 1: for their own, you know, doing something for their parents,

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Speaker 1: would want to buy the should buy the same et

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Speaker 1: F for the same reasons, necessarily because it's a good

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Speaker 1: et F that fits their approach. So we have three

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Speaker 1: different ways that we look at costs, and one of

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Speaker 1: them is the expense ratio. One of them is the

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Speaker 1: bid ask spread. I'm gonna leave the third one out

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Speaker 1: for the moment for what it is. If you are

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Speaker 1: more of a buy and hold individual investor or a

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Speaker 1: buy and hold institutional investor, then that expense ratio is

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Speaker 1: gonna matter more. If you're a more frequent trader, whether again,

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Speaker 1: whether you're an institutional investor, or you've a brokerage account

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Speaker 1: where it's unlimited trading or what per trade, and some

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Speaker 1: of these things are commissioned free, then that bid ask

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Speaker 1: spread is going to matter more because the trading costs

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Speaker 1: are gonna add up. We use both of those they're

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Speaker 1: roughly equally weighted from a cost perspective, and the way

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Speaker 1: that we have a ranking of each et F, but

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Speaker 1: we still think that you need to not only know that,

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Speaker 1: and you need to know other things that are important.

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Speaker 1: So the holdings, the how it's trading. From a technical perspective,

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Speaker 1: is there liquidity that's tied to that portfolio as well?

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Speaker 1: And if you can, you can screen so you can

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Speaker 1: use our research the same way you could be able

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Speaker 1: to use on the Bloomberg terminal, and you can say, well,

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Speaker 1: we don't care about the bits spread. Then you can

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Speaker 1: choose to it's still in the rating, but you can

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Speaker 1: be able to filter and store based on certain characteristics

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Speaker 1: that better fit your needs. So actually talk to me

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Speaker 1: about what your work looks like. Yeah, so we there's

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Speaker 1: two different ways that that people have access to or

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Speaker 1: things that they subscribe to, either an individual or an

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Speaker 1: advisor or an institutional investor that has access to our research. One,

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Speaker 1: we have an opinion generated report on plus ETFs that count.

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Speaker 1: I use plus because that number keeps changing. Uh. We

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Speaker 1: typically cover an e t F about three months into

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Speaker 1: its history. So what was there today and what is

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Speaker 1: there in a couple of weeks. That number is going

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Speaker 1: to change, and that opinion is going to say overweight

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Speaker 1: if we like it. It's gonna say underweight if we

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Speaker 1: don't like it, and it's gonna say market weight if

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Speaker 1: we're neutral, And it's gonna show you what are the

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Speaker 1: drivers of that ranking overall and what are the characteristics.

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Speaker 1: The second thing, which Eric was kind enough to offer

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Speaker 1: compliments on on the commentary, is I published content that

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Speaker 1: is more long form in nature, more like an article

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Speaker 1: that has a specific investment topic. Why we think now

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Speaker 1: is a good time to either be favorable or unfavorable

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Speaker 1: on that topic, and then talk about some of the

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Speaker 1: e t f s or mutual funds as relevant that

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Speaker 1: fit in to that trend with really trying to diagnose

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Speaker 1: what are the differences in those products. So, if it's

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Speaker 1: a technology focus, you know, what do we think of

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Speaker 1: large cap technology versus something that offers more smaller companies

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Speaker 1: inside that versus something that is more rigorous from a

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Speaker 1: fundamental perspective, looking at certain characteristics like dividends, for example,

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Speaker 1: and there's there's an e t F for that as well.

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Speaker 1: There's ant for everything. There's an e t F for

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Speaker 1: almost everything. If there wasn't, then we wouldn't see more

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Speaker 1: white space. We wouldn't see you know how many How

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Speaker 1: many ets have we launched this year? Over fifty and

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Speaker 1: there's more in registration to come out in two thousand eighteen,

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Speaker 1: so there's still some white space or equally as important.

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Speaker 1: And again I think we'll probably get there from a

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Speaker 1: due diligence aspect. There's two or three or four of

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Speaker 1: these et fs that are closely aligned for a certain

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Speaker 1: investment theme, which makes the choice harder. It makes it

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Speaker 1: more fun for Eric and myself to offer commentary and security. Yes,

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Speaker 1: the industry continues to grow and then and thankfully they

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Speaker 1: need more. And even though more money is going into

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Speaker 1: some of the cheaper products, people still want to buy

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Speaker 1: some of these products tied to lithium for example, or cybersecurity,

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Speaker 1: and you want to know what else? What do you

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Speaker 1: think of that? And that's that's where hopefully cf A

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Speaker 1: can come in. Yeah, we put a no doubt on

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Speaker 1: buy back and buy back ETFs, which is when companies

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Speaker 1: buy back their shares. And there's a couple of e

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Speaker 1: t fs for that, not just one. And the guy

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Speaker 1: who runs b I was he was shocked there was

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Speaker 1: an e t F for buy back. So I'm like, yeah,

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Speaker 1: it's like five years old. There's two of them, p kW,

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Speaker 1: but then there's another buy back and the differences between

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Speaker 1: the two of them are pretty drastic, the fee, the

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Speaker 1: way they're weighted, everything, and so you have two different

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Speaker 1: experiences even though they're both called the buy back ETF.

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Speaker 1: And that's ultimately what you know. I think Todd and

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Speaker 1: I share is trying to make sure you understand that.

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Speaker 1: But I agree with them. When you look at the

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Speaker 1: holdings and you look at the waitings, that's the engine

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Speaker 1: that is the most important part of the car, or

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Speaker 1: the e t F in this case is so let's

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Speaker 1: actually talk about due diligence and how you approach that.

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Speaker 1: So say I take an e t F off the shelf,

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Speaker 1: what's the first thing I should do? So the first

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Speaker 1: thing I think you should do is look at the

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Speaker 1: holdings to go where Eric said, you should understand what

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Speaker 1: it is that's inside that portfolio. I'm assuming that someone

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Speaker 1: who's you know, you didn't just randomly walk into the

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Speaker 1: store and not know which store you walked into. So

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Speaker 1: if you chose a certain story, you went there for

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Speaker 1: a certain purpose in mind, and so you didn't go

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Speaker 1: into a department store and look for milk necessarily to

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Speaker 1: open the hood and it's like, okay, what's in here?

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Speaker 1: So and to try to understand how that fits into

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Speaker 1: what lver else you own. And if this is the

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Speaker 1: first et F that you're buying, then what you should

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Speaker 1: be buying is something that's extremely diversified, diversified from if

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Speaker 1: it's U, S, E. T F from various sectors, healthcare, technology, financials,

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Speaker 1: what have you. But you should take a look at.

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Speaker 1: So we do research on the entire portfolio, but the

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Speaker 1: top ten holdings, which either are heavy waitings with in

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Speaker 1: the portfolio or they're slightly heavy weightings. If it's something

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Speaker 1: is more equally weighted, and those names should be something

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Speaker 1: that you want to have within your portfolio. You know,

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Speaker 1: we will offer research that will tell you what do

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Speaker 1: we think of what that is. But even if you

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Speaker 1: didn't want to use our research and you just want

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Speaker 1: on went onto a fact sheet, or went onto a website,

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Speaker 1: or you found an E t F ticker on the

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Speaker 1: on the great Bloomberg terminal that's there. If you don't

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Speaker 1: know what these companies are, and these are not companies

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Speaker 1: that make sense to have in your portfolio, then this

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Speaker 1: shouldn't be anything you should be doing any further digging on.

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Speaker 1: I'll take this even further and I'll say I have

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Speaker 1: a golden rule for picking E t F s, and

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Speaker 1: it's thou shalt not pick an E t F based

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Speaker 1: on the name. Yes. So I'll give you two examples

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Speaker 1: real quick. The I shares China E t F. This

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Speaker 1: is a famous one. Todd knows where I'm going with this.

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Speaker 1: F x I. It's the most traded, came out first,

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Speaker 1: but it's half financials and a lot of those are

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Speaker 1: state own banks. You're not getting a lot of that

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Speaker 1: tech in the tech surge that had China has, so

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Speaker 1: f x I can lag the rest of China because

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Speaker 1: it doesn't have that tech. Or another when the social

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Speaker 1: media E t F. Right, that sounds pretty innocent, right, oh,

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Speaker 1: social media Facebook? I like that a third of it

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Speaker 1: is emerging markets. It's much more volatile and filled with

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Speaker 1: companies that you may not even ever heard of. And

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Speaker 1: so those are some examples. And there's Gold Funds that

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Speaker 1: you think holds the goal but holds gold future. So

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Speaker 1: the name sometimes works, but a lot of times it

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Speaker 1: isn't what you think. So I'll offer another example there

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Speaker 1: and then perhaps we're gonna stay in the weeds. Eric

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Speaker 1: and I could probably do this going back and forth

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Speaker 1: and tickers. So I used for full disclosure. Again, I

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Speaker 1: used to work at SNP. I continue to use this

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Speaker 1: E t F as an example. Beforehand, I'll give two

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Speaker 1: of them. The Spider SNP home Builder E t F

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Speaker 1: only has a third of its exposure in home builders.

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Speaker 1: It has home furnishing companies, It has building product companies.

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Speaker 1: These are all related to the housing marketplace. But and

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Speaker 1: not surprisingly, this year, it's lagging behind. It's similarly named

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Speaker 1: but yet different. I shares Home Construction E t F

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Speaker 1: I t B. It's about half performance. So for the

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Speaker 1: Spider product x HB about six for that I shares

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Speaker 1: I t B product. Why is I shares I TV

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Speaker 1: doing better? Well? It holds home builders, it has six

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Speaker 1: waiting in a very strong performing area. The second one

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Speaker 1: I like to do, and again I love the product.

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Speaker 1: I really think that Wisdom Trees h E d J

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Speaker 1: the Europe Hedge product, is an excellent product. It provides

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Speaker 1: you amazing exposure to the Eurozone. But it doesn't have

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Speaker 1: the word zone in its name. It only has exposure

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Speaker 1: to Germany, France, Italy, Spain. It has no exposure to

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Speaker 1: the United Kingdom, no exposure to Switzerland, two of the

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Speaker 1: largest countries that are in Europe. We've seen the UK

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Speaker 1: look to brexit. Well, it's already brexited. These Wisdom Tree

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Speaker 1: e t F it's not there and it wasn't there,

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Speaker 1: And if you're trying to invest in those countries, this

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Speaker 1: isn't the e t F for you. It's a very

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Speaker 1: good one, it's just not an e t F for

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Speaker 1: you for that exposure. And I think of the home builders,

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Speaker 1: I looked at this one a lot. That's probably the

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Speaker 1: most stark difference. There could be a couple other in

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Speaker 1: the same category, but they their average performance difference every

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Speaker 1: year is about seven percent, so they're nowhere close. But

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Speaker 1: I will say that they You could argue that names

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Speaker 1: are actually okay because home construction is like I'm putting

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Speaker 1: up the walls and the roof, and then I'm out

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Speaker 1: right that's and then home Builders is like, oh, we're

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Speaker 1: gonna build a home. Honey, We're gonna go to home depot.

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Speaker 1: We're gonna get a jacuzzi. You know, we're gonna get

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Speaker 1: a dish washed, right, Yeah, we're going to well it

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Speaker 1: holds whirlpool. Oh no, I understand that, but I didn't

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Speaker 1: know you were getting a jacuzi, and I'm not I

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Speaker 1: wish Okay, this is wishful thinking time. Okay, right, if

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Speaker 1: you had if you had a hundred thousand dollars to invest,

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Speaker 1: instead of putting it into an ETF, you could invest

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Speaker 1: it in your home a lot differently correct and home built.

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Speaker 1: Like I'm just saying, home builders is a liberal take

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Speaker 1: on building a home, whereas home construction is. But the

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Speaker 1: point is one of them is going to be a

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Speaker 1: lot more volatile. The other one is gonna move a

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Speaker 1: lot less volatile because it's going to have more stocks

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Speaker 1: that move more with the market. So bringing it back

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Speaker 1: to where your initial question was on it, and again,

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Speaker 1: Eric and could probably do examples of tickers like this

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Speaker 1: for more than you have time talking about Eric I

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Speaker 1: did not know we stop we we we started you.

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Speaker 1: So you asked about what what do you look for?

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Speaker 1: What I didn't lead with and what I still think

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Speaker 1: people are spending too much attention on is the performance

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Speaker 1: record of that e t F. So which one of

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Speaker 1: those two examples is going to do best or did

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Speaker 1: the best in two thousand and seventeen has no bearing

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Speaker 1: whatsoever on what's going to happen in two thousand eighteen.

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Speaker 1: And if you looked at a three year track record,

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Speaker 1: which is what some people people commonly do with a

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Speaker 1: mutual fund, you're not gonna get much understanding two thousand eighteen.

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Speaker 1: We're going to have likely tax cuts for corporations that

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Speaker 1: are going to be differently, We're likely to have the

432
00:20:45,240 --> 00:20:48,159
Speaker 1: Federal Reserve raised interest rates, which is going to impact

433
00:20:48,240 --> 00:20:50,280
Speaker 1: not only the stock market but the bond market. What

434
00:20:50,440 --> 00:20:53,159
Speaker 1: worked in two thousand and seventeen is not going to

435
00:20:53,240 --> 00:20:55,920
Speaker 1: work again in two thousand eighteen. And we think investors

436
00:20:56,000 --> 00:20:59,639
Speaker 1: need to be buying an et F using the windshield

437
00:20:59,680 --> 00:21:02,080
Speaker 1: in front of them instead of just the review mirror

438
00:21:02,359 --> 00:21:04,280
Speaker 1: that's available in the car, which is the you know,

439
00:21:04,359 --> 00:21:08,200
Speaker 1: the fine print, which it always says past performance, not

440
00:21:08,280 --> 00:21:11,000
Speaker 1: indicative of future results. But people are buying products, or

441
00:21:11,040 --> 00:21:13,320
Speaker 1: they used to be buying products in that regard, I

442
00:21:13,359 --> 00:21:15,679
Speaker 1: think they're buying things now. Is as Eric will probably

443
00:21:15,840 --> 00:21:19,200
Speaker 1: lead into for something other than just the performance the

444
00:21:19,240 --> 00:21:22,040
Speaker 1: performance record, but something else tied to fees. And just

445
00:21:22,160 --> 00:21:24,399
Speaker 1: one quick thing on home builders. I think that this

446
00:21:24,560 --> 00:21:26,399
Speaker 1: is where it comes into what are using ets for?

447
00:21:26,480 --> 00:21:28,520
Speaker 1: If you're trading them and you're looking to play rates

448
00:21:28,600 --> 00:21:32,040
Speaker 1: and and you know economic data around home construction. I

449
00:21:32,080 --> 00:21:34,159
Speaker 1: think these ETFs are great trading tools for that. But

450
00:21:34,640 --> 00:21:37,359
Speaker 1: for most people who just want to take advantage of

451
00:21:37,359 --> 00:21:39,680
Speaker 1: the low costs and the tax efficiency, you're gonna get

452
00:21:39,680 --> 00:21:43,560
Speaker 1: a couple of homebuilders in your bigger, more mammoth mainstream

453
00:21:43,600 --> 00:21:46,480
Speaker 1: ETFs like the SMP five the broad market. So I

454
00:21:46,520 --> 00:21:49,120
Speaker 1: think that's also an important thing here. When you're looking

455
00:21:49,160 --> 00:21:51,200
Speaker 1: at the sort of windshield and what to play and

456
00:21:51,280 --> 00:21:53,520
Speaker 1: what not to play, a lot of these stocks are.

457
00:21:53,600 --> 00:21:55,080
Speaker 1: Are you feel a little bit of them in the

458
00:21:55,119 --> 00:21:58,439
Speaker 1: bigger indices? I want to Actually we've said windshield twice now,

459
00:21:58,760 --> 00:22:01,080
Speaker 1: and I'm imagining you with like in a cockpit with

460
00:22:01,160 --> 00:22:03,600
Speaker 1: a windshield in front of you, like and as long

461
00:22:03,640 --> 00:22:05,720
Speaker 1: as we were talking about holdings holding is obviously going

462
00:22:05,800 --> 00:22:07,080
Speaker 1: to be a big part of that. What else is

463
00:22:07,160 --> 00:22:10,639
Speaker 1: on your windshield? So in addition to the holdings that

464
00:22:10,720 --> 00:22:12,920
Speaker 1: we had that we had that we focus on, we

465
00:22:13,160 --> 00:22:16,480
Speaker 1: we do think that expense ratio is important. So the

466
00:22:16,600 --> 00:22:19,640
Speaker 1: more money that goes into your investment and less into

467
00:22:19,720 --> 00:22:23,800
Speaker 1: the pocket of the asset manager, the better your potential

468
00:22:23,920 --> 00:22:27,000
Speaker 1: returns can be. Now, the the in that example of

469
00:22:27,080 --> 00:22:29,280
Speaker 1: that home construction one, just to beat that one, that

470
00:22:29,440 --> 00:22:31,760
Speaker 1: dead horse a little bit. Boy, let's not dead house.

471
00:22:36,040 --> 00:22:38,680
Speaker 1: So we're beating the dead house, right, We're beating the

472
00:22:38,760 --> 00:22:42,080
Speaker 1: dead house man. The gap is much bigger than the

473
00:22:42,119 --> 00:22:44,600
Speaker 1: expense ratio. But if you bought things that were cheaper,

474
00:22:45,119 --> 00:22:48,159
Speaker 1: all things equal, if they're close enough in alignment, you're

475
00:22:48,200 --> 00:22:50,280
Speaker 1: gonna be better off. So we use the expense ratio

476
00:22:50,800 --> 00:22:54,000
Speaker 1: in our analysis. We also think that liquidity is something

477
00:22:54,080 --> 00:22:56,200
Speaker 1: that matters at the e T F level. So e

478
00:22:56,320 --> 00:22:58,520
Speaker 1: T s that have more assets tend to be traded

479
00:22:58,600 --> 00:23:01,199
Speaker 1: more frequently if they trade, if there's more people who

480
00:23:01,280 --> 00:23:03,040
Speaker 1: want to buy it when you're looking to sell it,

481
00:23:03,440 --> 00:23:05,920
Speaker 1: that trading costs and also known as that bid ask

482
00:23:06,040 --> 00:23:08,600
Speaker 1: spread is going to be much lower, and that's going

483
00:23:08,640 --> 00:23:11,720
Speaker 1: to be another cost that's important for your returns. Just

484
00:23:11,800 --> 00:23:13,879
Speaker 1: two quick metaphors, and the I tend to look at

485
00:23:13,920 --> 00:23:17,320
Speaker 1: expense ratio as a termite, and it's living in your

486
00:23:17,320 --> 00:23:20,159
Speaker 1: total return, and the smaller it is, the less it's

487
00:23:20,200 --> 00:23:23,080
Speaker 1: going to eat out of that total return. And this, ultimately,

488
00:23:23,160 --> 00:23:25,560
Speaker 1: like Todd said earlier, is why active managers have struggled.

489
00:23:25,600 --> 00:23:28,119
Speaker 1: It's not because they're that bad. They kind of have

490
00:23:28,280 --> 00:23:30,840
Speaker 1: to play behind the starting line. They have to overcome

491
00:23:30,840 --> 00:23:33,439
Speaker 1: a one percent expense ratio or something like that. Then

492
00:23:33,520 --> 00:23:35,399
Speaker 1: all the trading costs and the fund which are usually

493
00:23:35,400 --> 00:23:38,000
Speaker 1: another percent. So you could say that the e t

494
00:23:38,200 --> 00:23:40,320
Speaker 1: F for index fund plays with a huge lead there

495
00:23:40,400 --> 00:23:43,159
Speaker 1: right behind the starting line, which would be the expense ratio.

496
00:23:43,680 --> 00:23:45,399
Speaker 1: And so if you're active, you've got to make that

497
00:23:45,520 --> 00:23:48,320
Speaker 1: whole gap up just to be even. Then you got

498
00:23:48,400 --> 00:23:50,960
Speaker 1: to try to outperform beyond that. And that ultimately hits

499
00:23:51,000 --> 00:23:53,760
Speaker 1: to why this whole passive thing is is getting so big,

500
00:23:53,920 --> 00:23:57,560
Speaker 1: is because people are understanding that. And so the I agree,

501
00:23:57,640 --> 00:24:00,040
Speaker 1: and the expense ratio should be a decision part the

502
00:24:00,080 --> 00:24:03,960
Speaker 1: decision making process, especially if it's something that is well diversified.

503
00:24:04,000 --> 00:24:07,000
Speaker 1: So we again have referenced the spire a couple of times.

504
00:24:07,160 --> 00:24:09,200
Speaker 1: There's three e t f s that are out there

505
00:24:09,320 --> 00:24:12,080
Speaker 1: that track that market cap weighted product. Two of them

506
00:24:12,480 --> 00:24:16,119
Speaker 1: are four basis points. The third one is nine basis points.

507
00:24:17,119 --> 00:24:19,960
Speaker 1: You know, as Eric has talked about beforehand, I believe

508
00:24:20,080 --> 00:24:22,840
Speaker 1: you know, money is going into the cheaper products because

509
00:24:22,880 --> 00:24:26,159
Speaker 1: it's a similar product. The differences. You know, if you

510
00:24:26,240 --> 00:24:30,520
Speaker 1: invested ten thousand dollars in the eye Shares product versus

511
00:24:30,640 --> 00:24:33,920
Speaker 1: the spider product in the beginning of this year, you

512
00:24:33,960 --> 00:24:37,320
Speaker 1: would have saved four dollars enough to buy yourself a

513
00:24:37,400 --> 00:24:39,440
Speaker 1: cup of coffee someplace, But it really didn't make that

514
00:24:39,640 --> 00:24:41,480
Speaker 1: much of a difference of what's there or a slice

515
00:24:41,480 --> 00:24:44,800
Speaker 1: of pizza and penn station. Yeah, I heard Joel recommends

516
00:24:44,800 --> 00:24:46,399
Speaker 1: not eating because he threw up after he did, but

517
00:24:46,960 --> 00:24:51,720
Speaker 1: not enough to pay for termite damage exactly. But the

518
00:24:52,000 --> 00:24:54,280
Speaker 1: lower the fee, the better, as long as there's enough

519
00:24:54,320 --> 00:24:57,119
Speaker 1: similarity in the strategies that you're comparing with one another.

520
00:24:57,560 --> 00:24:59,920
Speaker 1: This whole concept of going to just the cheapest fund,

521
00:25:00,560 --> 00:25:03,520
Speaker 1: You're right, one basis point, cheaper is now moving billions

522
00:25:03,560 --> 00:25:06,320
Speaker 1: of dollars. One okay, this one's four basis points that

523
00:25:06,320 --> 00:25:08,320
Speaker 1: if I'm gonna put my money into it. I agree

524
00:25:08,359 --> 00:25:10,119
Speaker 1: that it's short sighted, But do you think that there's

525
00:25:10,200 --> 00:25:12,680
Speaker 1: some do you understand why people are doing that. Do

526
00:25:12,720 --> 00:25:15,800
Speaker 1: you think that there's this backlash over the last twenty

527
00:25:15,880 --> 00:25:18,400
Speaker 1: years where they thought, man, I paid all this money

528
00:25:18,400 --> 00:25:19,680
Speaker 1: and I didn't really get a lot out of it.

529
00:25:20,119 --> 00:25:22,639
Speaker 1: The only thing I trust right now is the cost.

530
00:25:22,720 --> 00:25:26,520
Speaker 1: Like it's become like almost like a backlash against trusting

531
00:25:26,600 --> 00:25:29,159
Speaker 1: performance in the past. So I think people should be

532
00:25:29,280 --> 00:25:32,080
Speaker 1: buying among the cheapest products that are out there. But

533
00:25:32,200 --> 00:25:34,200
Speaker 1: I think what they should do is they should pick

534
00:25:34,280 --> 00:25:38,399
Speaker 1: up two or three products that fit that criteria of

535
00:25:38,440 --> 00:25:41,119
Speaker 1: what they're looking for. And you can screen on various

536
00:25:41,160 --> 00:25:43,359
Speaker 1: platform brokerage platforms. You can do it on Bloomberg, you

537
00:25:43,400 --> 00:25:45,600
Speaker 1: can do it from our research tools at cf A.

538
00:25:46,160 --> 00:25:48,720
Speaker 1: Find three et fs that are out there. Let the

539
00:25:48,800 --> 00:25:51,680
Speaker 1: expense ratio be one of the characteristics said you look at.

540
00:25:52,040 --> 00:25:54,399
Speaker 1: But then similarly, even though I don't think people should

541
00:25:54,440 --> 00:25:57,040
Speaker 1: buy based on the cheat on the best performing e

542
00:25:57,160 --> 00:26:00,280
Speaker 1: t F, if you saw a performance differential old that

543
00:26:00,440 --> 00:26:04,199
Speaker 1: was a couple of basis points, then by the cheapest

544
00:26:04,240 --> 00:26:07,240
Speaker 1: one that's out there, it really doesn't matter. From the alternatives.

545
00:26:07,320 --> 00:26:09,560
Speaker 1: But if you look at something and you see something

546
00:26:09,680 --> 00:26:13,040
Speaker 1: is outperforming by four hundred, five hundred, six hundred basis

547
00:26:13,119 --> 00:26:17,359
Speaker 1: points versus something else, and it's more expensive or it's cheaper,

548
00:26:17,520 --> 00:26:20,080
Speaker 1: you might want to investigate why that is. Do a

549
00:26:20,119 --> 00:26:22,760
Speaker 1: little bit further analysis to say, here's what this is,

550
00:26:22,840 --> 00:26:25,879
Speaker 1: here's what's different. There's been product feed cuts have happened,

551
00:26:26,160 --> 00:26:28,280
Speaker 1: and we saw, you know, State Street, for example, lower

552
00:26:28,359 --> 00:26:31,360
Speaker 1: the fees quite sharply in there now commissioned free available

553
00:26:31,400 --> 00:26:35,399
Speaker 1: on on a certain platform as well. There's similarities between

554
00:26:35,560 --> 00:26:37,840
Speaker 1: what's going in and what you know, it's State Street

555
00:26:37,920 --> 00:26:41,360
Speaker 1: replaced on the TV Melitary platform. But then there's some differences.

556
00:26:41,440 --> 00:26:43,399
Speaker 1: If you're looking at things that are dividends or you're

557
00:26:43,440 --> 00:26:46,080
Speaker 1: looking at things that are outside the United States, there's

558
00:26:46,119 --> 00:26:49,320
Speaker 1: a big gap because they're constructed differently. And so I

559
00:26:49,400 --> 00:26:51,560
Speaker 1: understand why people are buying the cheapest. You want to

560
00:26:51,600 --> 00:26:55,400
Speaker 1: pay as little as possible for that, but you you'd

561
00:26:55,440 --> 00:26:58,119
Speaker 1: want to get a second opinion before you ended up.

562
00:26:58,520 --> 00:27:00,840
Speaker 1: You don't go to the cheapest Karmaca antic that's out there.

563
00:27:00,960 --> 00:27:04,520
Speaker 1: There's a reason things are cheap sometimes sometimes, and I

564
00:27:04,600 --> 00:27:06,919
Speaker 1: agree there's definitely something to that and again the holdings

565
00:27:06,960 --> 00:27:08,440
Speaker 1: and the waitings are like the engine back to the

566
00:27:08,480 --> 00:27:11,760
Speaker 1: car metaphor. And you're right. I also think a lot

567
00:27:11,800 --> 00:27:14,760
Speaker 1: of this low lowest of the low cost is driven

568
00:27:14,800 --> 00:27:18,480
Speaker 1: by advisors who are worried about this. There's a fiduciary

569
00:27:18,600 --> 00:27:22,160
Speaker 1: rule coming and they are now connecting fiduciary with cheapness.

570
00:27:22,800 --> 00:27:24,520
Speaker 1: They just think if they don't pick the lowest cost

571
00:27:24,600 --> 00:27:27,760
Speaker 1: product possible, they might get sued for not being fiduciary.

572
00:27:27,800 --> 00:27:29,520
Speaker 1: And that's a whole another sort of angle on this.

573
00:27:29,680 --> 00:27:33,320
Speaker 1: But I think you're right. There is possible people could

574
00:27:33,359 --> 00:27:36,159
Speaker 1: crowd in to something that they didn't really want just

575
00:27:36,280 --> 00:27:38,080
Speaker 1: because it was a little cheaper than the other one.

576
00:27:38,160 --> 00:27:40,639
Speaker 1: But there's things the good I'll do. The good for

577
00:27:40,840 --> 00:27:44,040
Speaker 1: the fact that fees are coming down is things that

578
00:27:44,240 --> 00:27:46,840
Speaker 1: you wouldn't have paid attention to you beforehand because the

579
00:27:46,920 --> 00:27:50,880
Speaker 1: price was too high is now available and on someone's

580
00:27:50,960 --> 00:27:53,680
Speaker 1: radar screen. And now there's more choices, so there's more

581
00:27:53,800 --> 00:27:57,200
Speaker 1: low cost choices to consider. You don't have to just

582
00:27:57,320 --> 00:28:00,560
Speaker 1: buy something because it undercut by by one pain or

583
00:28:00,600 --> 00:28:04,200
Speaker 1: a dollar out of your your ten dollar investment, but

584
00:28:04,320 --> 00:28:06,520
Speaker 1: it's available for you to be able to compare and

585
00:28:06,640 --> 00:28:09,560
Speaker 1: contrast with and I love that there's more choices that's

586
00:28:09,560 --> 00:28:12,800
Speaker 1: out there. One again, you know, career longevity. They need

587
00:28:12,880 --> 00:28:15,680
Speaker 1: someone to help store through this universe that's out there.

588
00:28:16,119 --> 00:28:19,000
Speaker 1: I also love it because you know, you don't want

589
00:28:19,040 --> 00:28:21,840
Speaker 1: to just buy something just because it's at the front

590
00:28:21,840 --> 00:28:24,320
Speaker 1: of the register. You know, they you know, at a

591
00:28:24,480 --> 00:28:26,320
Speaker 1: at a story, they'll try to get you by your

592
00:28:26,359 --> 00:28:28,960
Speaker 1: eyes hatch something for where it is. It doesn't necessarily

593
00:28:29,040 --> 00:28:31,200
Speaker 1: mean it's the right thing for you. There's certain things

594
00:28:31,280 --> 00:28:33,320
Speaker 1: that are at a different level of the shelf that

595
00:28:33,480 --> 00:28:35,800
Speaker 1: make a lot of sense for you overall totally. But

596
00:28:36,320 --> 00:28:38,360
Speaker 1: this is where this gets when I when we point

597
00:28:38,400 --> 00:28:41,560
Speaker 1: out cheap stuff, especially on Twitter, I'll get the same

598
00:28:41,680 --> 00:28:44,360
Speaker 1: comment from different people, and it's it's almost inevitable. An

599
00:28:44,400 --> 00:28:47,640
Speaker 1: active manager will go, well, would you pay you know,

600
00:28:47,680 --> 00:28:51,720
Speaker 1: would you always pick the cheapest clothes or the cheapest car? Yes,

601
00:28:51,880 --> 00:28:54,360
Speaker 1: there is what you're saying is true. But this is

602
00:28:54,480 --> 00:28:58,480
Speaker 1: different because cost does come out of your return. It's

603
00:28:58,520 --> 00:29:01,200
Speaker 1: not the same. It's complicated. It's not just like oh

604
00:29:01,320 --> 00:29:04,000
Speaker 1: if because if a manager charges four percent, that does

605
00:29:04,040 --> 00:29:06,360
Speaker 1: not mean you're they're going to do better. It's not

606
00:29:06,480 --> 00:29:08,840
Speaker 1: the same as buying closer cars where like, okay, a

607
00:29:08,960 --> 00:29:12,960
Speaker 1: Lamborghini is what um call it half a mill half

608
00:29:13,000 --> 00:29:16,280
Speaker 1: a million dollars. That's definitely the best car, right right, Yeah,

609
00:29:16,640 --> 00:29:20,720
Speaker 1: it's better than the Chete Right, it's better than a Chevette. Okay, fine,

610
00:29:21,480 --> 00:29:23,920
Speaker 1: But in in investing, it's possible if you paid a

611
00:29:23,960 --> 00:29:27,920
Speaker 1: hedge fund three the Vanguard whatever at four basis points

612
00:29:27,960 --> 00:29:30,800
Speaker 1: could outperform it and that cost could be a big difference.

613
00:29:30,840 --> 00:29:33,240
Speaker 1: That that's that's where it's there's it's a there's a

614
00:29:33,320 --> 00:29:35,880
Speaker 1: gray area. I think, oh, completely agree, so you should.

615
00:29:36,040 --> 00:29:38,240
Speaker 1: That's why caut shouldn't be the only thing that matters.

616
00:29:38,320 --> 00:29:40,480
Speaker 1: Holding shouldn't be the only thing that matters. Performance should

617
00:29:40,480 --> 00:29:42,400
Speaker 1: be the only thing that matters. The good thing is

618
00:29:42,560 --> 00:29:45,480
Speaker 1: e t s are transparent. They tell you what's happening.

619
00:29:45,520 --> 00:29:47,760
Speaker 1: The e t F providers on their website will show

620
00:29:47,800 --> 00:29:50,760
Speaker 1: you everything that was in the portfolio as of yesterday.

621
00:29:50,800 --> 00:29:54,520
Speaker 1: They'll show you a bunch of metrics as they have to,

622
00:29:54,840 --> 00:29:57,160
Speaker 1: and thankfully they have to so we can do research

623
00:29:57,240 --> 00:29:59,800
Speaker 1: that comparis and contrastings. You have that on the Bloomberg

624
00:29:59,840 --> 00:30:02,440
Speaker 1: turnminal as well. To be able to do that. It's

625
00:30:02,520 --> 00:30:04,880
Speaker 1: there for you to then learn as much as possible

626
00:30:05,040 --> 00:30:08,000
Speaker 1: about your potential investment, the same way you would learn

627
00:30:08,040 --> 00:30:11,680
Speaker 1: as much as possible when deciding again whether to buy

628
00:30:11,760 --> 00:30:14,760
Speaker 1: a car and what it is, or what school you

629
00:30:14,880 --> 00:30:17,280
Speaker 1: might put your kid into, or what neighborhood you might

630
00:30:17,480 --> 00:30:20,200
Speaker 1: look to buy a house. And but you just shouldn't

631
00:30:20,200 --> 00:30:27,960
Speaker 1: buy the cheapest just because it's the cheapest. So we

632
00:30:28,040 --> 00:30:30,959
Speaker 1: talked about holdings and we talked about costs, which are

633
00:30:31,000 --> 00:30:33,640
Speaker 1: probably like the two most important things from a due

634
00:30:33,680 --> 00:30:36,960
Speaker 1: diligence standpoint. But let's kind of change gears and go

635
00:30:37,160 --> 00:30:39,960
Speaker 1: next level and talk about some of the things that

636
00:30:40,200 --> 00:30:44,440
Speaker 1: you guys, being the professionals that you are incorporating into

637
00:30:44,480 --> 00:30:46,080
Speaker 1: due diligence. And there's a word that I want to

638
00:30:46,160 --> 00:30:48,760
Speaker 1: drop that I think we want to start with, which

639
00:30:48,800 --> 00:30:51,600
Speaker 1: is liquidity. How do you guys look at that? Liquidity

640
00:30:51,680 --> 00:30:53,760
Speaker 1: is another way of how much it's traded, how much

641
00:30:53,800 --> 00:30:57,520
Speaker 1: activity is there there. And you know, volume is what

642
00:30:57,640 --> 00:31:00,960
Speaker 1: most people think of because stocks have volume and that's

643
00:31:00,960 --> 00:31:03,560
Speaker 1: all they have. But in e t F this gets

644
00:31:03,680 --> 00:31:06,000
Speaker 1: a little complicated because the way shares are created and redeemed.

645
00:31:06,360 --> 00:31:07,960
Speaker 1: You could use the basket of the E t F

646
00:31:08,040 --> 00:31:11,360
Speaker 1: as another source of liquidity. So it's complicated, but I

647
00:31:11,440 --> 00:31:14,040
Speaker 1: think in general you should start looking at the volume.

648
00:31:14,320 --> 00:31:17,840
Speaker 1: But I'm pretty liberal. I think unless it doesn't trade

649
00:31:17,920 --> 00:31:20,040
Speaker 1: that much, or trade let's say less than um, we'll

650
00:31:20,080 --> 00:31:22,440
Speaker 1: call it maybe like a million dollars a day. Some

651
00:31:22,600 --> 00:31:25,680
Speaker 1: ETFs are really like on the death watches. Ron Roland

652
00:31:25,680 --> 00:31:27,440
Speaker 1: would call them. There's e t f that are like

653
00:31:27,520 --> 00:31:29,960
Speaker 1: on life support. There maybe like four or five of those.

654
00:31:30,760 --> 00:31:32,840
Speaker 1: Then there's a middle pack where you probably have to

655
00:31:32,880 --> 00:31:35,560
Speaker 1: be careful putting in maybe a certain kind of order,

656
00:31:35,600 --> 00:31:37,560
Speaker 1: like a limit order. But then I'd say the top

657
00:31:37,680 --> 00:31:40,800
Speaker 1: five e t f s you're probably just fine doing that.

658
00:31:40,960 --> 00:31:42,040
Speaker 1: And so if you had to have a cut off

659
00:31:42,160 --> 00:31:45,120
Speaker 1: of volume, I would say maybe over ten or twenty

660
00:31:45,160 --> 00:31:48,720
Speaker 1: million dollars worth of volume a day. And you know

661
00:31:48,840 --> 00:31:52,040
Speaker 1: that's they're gonna have pretty tight spreads. That's just there's

662
00:31:52,120 --> 00:31:54,520
Speaker 1: there's nuances to this, but generally that's that's what I

663
00:31:54,600 --> 00:31:57,440
Speaker 1: think of as liquidity. Yeah, and so the connection to spreads,

664
00:31:57,480 --> 00:31:59,600
Speaker 1: which is part of the cost conversation that we that

665
00:31:59,680 --> 00:32:02,680
Speaker 1: we had earlier, I think is relevant specifically with equity

666
00:32:02,720 --> 00:32:06,440
Speaker 1: e t F. So we look at the bid Esque

667
00:32:06,440 --> 00:32:08,640
Speaker 1: spread as a metric that we use within our within

668
00:32:08,720 --> 00:32:11,000
Speaker 1: our research at c f r A, we don't look

669
00:32:11,080 --> 00:32:14,160
Speaker 1: at the trading volume specifically, and when we're looking at it,

670
00:32:14,320 --> 00:32:16,840
Speaker 1: it's more at the shared traded as opposed to the

671
00:32:16,920 --> 00:32:19,000
Speaker 1: dollar mant You can see it's reported in both ways.

672
00:32:19,240 --> 00:32:20,680
Speaker 1: You just have to make sure you're doing the math

673
00:32:21,000 --> 00:32:23,000
Speaker 1: to figure out what that is the number of shares

674
00:32:23,040 --> 00:32:24,800
Speaker 1: you might be putting in. I think I would think

675
00:32:24,840 --> 00:32:26,959
Speaker 1: of it this way, if you are looking to put

676
00:32:27,040 --> 00:32:31,040
Speaker 1: in a trade and how much was your amount of

677
00:32:31,120 --> 00:32:34,000
Speaker 1: money to go in in relation to what that daily

678
00:32:34,120 --> 00:32:38,680
Speaker 1: volume is, and if it's disproportionately high, then I'd be concerned.

679
00:32:38,680 --> 00:32:40,200
Speaker 1: That would be a red flag for me as an

680
00:32:40,200 --> 00:32:43,280
Speaker 1: individual investor, because I may be able to buy the shares.

681
00:32:43,360 --> 00:32:45,560
Speaker 1: That's it's not too hard to find someone who wants

682
00:32:45,920 --> 00:32:48,280
Speaker 1: to have shares created. As Eric talked about, it's the

683
00:32:48,360 --> 00:32:50,120
Speaker 1: getting out part when you want to get out that

684
00:32:50,280 --> 00:32:52,959
Speaker 1: that tends to be the bigger challenge. And often when

685
00:32:53,000 --> 00:32:55,200
Speaker 1: you want to get out, when other people want to

686
00:32:55,200 --> 00:32:57,240
Speaker 1: get out too, and the price you end up paying

687
00:32:57,720 --> 00:33:00,480
Speaker 1: a couple of other things. So one bec because these

688
00:33:00,600 --> 00:33:02,800
Speaker 1: if we're talking about equity e t F S new

689
00:33:02,880 --> 00:33:06,000
Speaker 1: shares can be created relatively easily when there's high demand

690
00:33:06,080 --> 00:33:08,280
Speaker 1: for what that is. And if you're buying a large

691
00:33:08,360 --> 00:33:12,920
Speaker 1: cap oriented ETF that holds Apple and Exxon and Facebook

692
00:33:12,920 --> 00:33:15,400
Speaker 1: and what have you, then there's liquidity and those underlying

693
00:33:15,480 --> 00:33:18,000
Speaker 1: shares that new things can get be created quite easily.

694
00:33:18,280 --> 00:33:20,560
Speaker 1: If you're looking at emerging markets, or you're looking at

695
00:33:20,640 --> 00:33:23,920
Speaker 1: small caps um or you're looking perhaps at you know,

696
00:33:24,040 --> 00:33:27,680
Speaker 1: something that's more narrow and focus thematic for where it is,

697
00:33:27,680 --> 00:33:29,600
Speaker 1: where there's a number of stocks that don't trade as

698
00:33:29,720 --> 00:33:33,320
Speaker 1: frequently individually, then that should be a bigger problem. Within

699
00:33:33,640 --> 00:33:36,720
Speaker 1: bond ETFs are fixed income ETFs, we do think liquidity

700
00:33:36,760 --> 00:33:39,840
Speaker 1: should matter so trading volume in relation to market cap

701
00:33:40,400 --> 00:33:42,160
Speaker 1: in part because and I know you guys have talked

702
00:33:42,200 --> 00:33:46,760
Speaker 1: about this beforehand, not every bond trades on a daily basis,

703
00:33:46,840 --> 00:33:49,160
Speaker 1: even though the e t F that holds those bonds

704
00:33:49,440 --> 00:33:52,000
Speaker 1: trades on a daily basis. So to create new shares

705
00:33:52,040 --> 00:33:54,360
Speaker 1: of a bond is a little bit harder to be

706
00:33:54,440 --> 00:33:58,200
Speaker 1: able to do to get full representation of what's out there.

707
00:33:58,520 --> 00:34:00,880
Speaker 1: And so that's why we've it gets more important to

708
00:34:00,880 --> 00:34:03,920
Speaker 1: pay attention to liquidity in the bond ETF product specifically

709
00:34:03,920 --> 00:34:06,120
Speaker 1: if we're talking about something like on a corporate space

710
00:34:06,800 --> 00:34:09,200
Speaker 1: or an emerging market space, but high yield bonds, you know,

711
00:34:09,560 --> 00:34:13,480
Speaker 1: something like a quarter of the underlying bonds inside are trading,

712
00:34:13,520 --> 00:34:16,399
Speaker 1: possibly on a daily basis. I think it's even less.

713
00:34:16,480 --> 00:34:18,480
Speaker 1: But um, you know, like we said last week that

714
00:34:19,080 --> 00:34:21,440
Speaker 1: that is definitely when I would not call plain vanilla,

715
00:34:21,440 --> 00:34:23,200
Speaker 1: which is high yield. But I just wanted to take

716
00:34:23,200 --> 00:34:25,239
Speaker 1: a quick step back and sort of define bit as spread.

717
00:34:25,280 --> 00:34:26,880
Speaker 1: I think it's a term that sounds kind of jargon.

718
00:34:26,920 --> 00:34:29,839
Speaker 1: E really just think about it about there's people who

719
00:34:30,040 --> 00:34:33,120
Speaker 1: are in the middle of all this action, right they

720
00:34:33,480 --> 00:34:35,239
Speaker 1: buy and sell shares so that you can buy and

721
00:34:35,280 --> 00:34:37,440
Speaker 1: sell shares. We call the market makers. They make a

722
00:34:37,520 --> 00:34:40,120
Speaker 1: market in that right, So you can think of Las Vegas,

723
00:34:40,200 --> 00:34:42,120
Speaker 1: or if you've ever had a bookie, not that I have,

724
00:34:42,320 --> 00:34:45,120
Speaker 1: but you know, if you have out there, you know

725
00:34:45,200 --> 00:34:48,120
Speaker 1: they called the vig It's a little tiny piece just

726
00:34:48,280 --> 00:34:50,560
Speaker 1: for them being in the middle and offering two markets

727
00:34:50,600 --> 00:34:52,840
Speaker 1: to people. And that is what the spread is. And

728
00:34:52,880 --> 00:34:54,880
Speaker 1: the more the E t F trades, the bid is

729
00:34:54,960 --> 00:34:57,440
Speaker 1: what they'll sell it to you for. The ask is

730
00:34:57,480 --> 00:34:59,880
Speaker 1: what they're asking to buy it. So you's usually a

731
00:35:00,040 --> 00:35:02,719
Speaker 1: hiny difference and that's just what they keep. So a

732
00:35:02,800 --> 00:35:04,360
Speaker 1: lot of e T s trade with what's called a

733
00:35:04,400 --> 00:35:07,000
Speaker 1: penny spread, so they're only keeping a penny of that transaction.

734
00:35:07,560 --> 00:35:09,840
Speaker 1: Some can creep up to three, four or five cents.

735
00:35:10,480 --> 00:35:12,440
Speaker 1: But if you take that in turn into a percentage,

736
00:35:12,440 --> 00:35:17,200
Speaker 1: you're looking at maybe one to twenty basis points and

737
00:35:17,280 --> 00:35:19,600
Speaker 1: was Todd was looking at early. The longer you're holding period,

738
00:35:20,000 --> 00:35:21,920
Speaker 1: the more that gets diluted over time. So when you

739
00:35:22,000 --> 00:35:24,279
Speaker 1: talk about mutual funds, they have front end loads where

740
00:35:24,280 --> 00:35:26,279
Speaker 1: they they and a lot of mutual funds but charge

741
00:35:26,320 --> 00:35:29,160
Speaker 1: you five percent just to get in. That is what

742
00:35:29,280 --> 00:35:31,000
Speaker 1: I look at the spread as it's sort of a

743
00:35:31,440 --> 00:35:34,480
Speaker 1: an initial fee for getting in. And you could look

744
00:35:34,520 --> 00:35:38,960
Speaker 1: at one two twenty basis points as nickel dime compared

745
00:35:39,040 --> 00:35:40,960
Speaker 1: to a load in a mutual fund. So I think

746
00:35:41,040 --> 00:35:43,120
Speaker 1: sometimes that's a kind of a different way to look

747
00:35:43,160 --> 00:35:46,319
Speaker 1: at what a spread is as a cover charge basically, yeah,

748
00:35:46,360 --> 00:35:48,239
Speaker 1: cover charge, Yeah, that's a good that's a good way

749
00:35:48,239 --> 00:35:50,239
Speaker 1: of thinking of it as well. I do think the

750
00:35:50,280 --> 00:35:51,840
Speaker 1: way the way that you're thinking of it as important.

751
00:35:51,880 --> 00:35:54,360
Speaker 1: So people who are at first embracing E T F

752
00:35:54,440 --> 00:35:56,520
Speaker 1: s and perhaps are learning more about it through through

753
00:35:56,600 --> 00:35:59,279
Speaker 1: these podcasts. Are coming at it from a mutual fund

754
00:35:59,320 --> 00:36:02,040
Speaker 1: world where you're used to putting in an order whenever

755
00:36:02,080 --> 00:36:04,239
Speaker 1: you want to put in an order, and it gets executed,

756
00:36:04,480 --> 00:36:07,080
Speaker 1: and your money gets taken from you and put into

757
00:36:07,120 --> 00:36:11,000
Speaker 1: the underlying investments at four pm when the market is closed,

758
00:36:11,360 --> 00:36:14,000
Speaker 1: or after four pm when the market has closed in

759
00:36:14,120 --> 00:36:17,439
Speaker 1: that regard, and then nothing. It's just all happens behind

760
00:36:17,480 --> 00:36:20,239
Speaker 1: the scenes and they take out whatever that sales load

761
00:36:20,360 --> 00:36:23,359
Speaker 1: is and and your ten tho dollars ends up being

762
00:36:24,320 --> 00:36:26,880
Speaker 1: nine and fifty dollars less or whatever it is for

763
00:36:26,960 --> 00:36:30,719
Speaker 1: the cost. The e t F is transparent. They you

764
00:36:30,840 --> 00:36:33,600
Speaker 1: can see what's happening there. That's an advantage to you

765
00:36:33,719 --> 00:36:36,440
Speaker 1: as an investor, but it shouldn't scare you out of

766
00:36:36,560 --> 00:36:38,000
Speaker 1: doing it. The same way if you're going to buy

767
00:36:38,040 --> 00:36:41,240
Speaker 1: a stock, there is a trading cost to buying a stock.

768
00:36:41,719 --> 00:36:43,560
Speaker 1: There's a trading cost to buying an e t F.

769
00:36:43,680 --> 00:36:46,480
Speaker 1: It's just because things are so competitive, the same way

770
00:36:46,520 --> 00:36:49,200
Speaker 1: it is in the ets space. In this market maker space,

771
00:36:49,520 --> 00:36:51,640
Speaker 1: when there's a lot of volume, the costs come down

772
00:36:51,760 --> 00:36:55,480
Speaker 1: quite low and are quite favorable for a potential investor.

773
00:36:55,600 --> 00:36:58,520
Speaker 1: If you're buying something that nobody else is buying, you're

774
00:36:58,520 --> 00:37:01,400
Speaker 1: gonna have to pay a premium for that execution to

775
00:37:01,520 --> 00:37:03,560
Speaker 1: get that trade taken part of it. And that may

776
00:37:03,640 --> 00:37:05,120
Speaker 1: make sense for you to do. It may be worth

777
00:37:05,200 --> 00:37:07,520
Speaker 1: it because it's the only way to get exposure to

778
00:37:07,560 --> 00:37:09,680
Speaker 1: a certain trend. Yeah, and I would I have a

779
00:37:09,800 --> 00:37:12,960
Speaker 1: term I called exotic nous. Think about what you're buying. Okay,

780
00:37:13,440 --> 00:37:17,160
Speaker 1: if it's you know, junk bonds or the Vietnam etiam,

781
00:37:17,560 --> 00:37:20,840
Speaker 1: if it seems exotic, know that there's probably some some

782
00:37:21,000 --> 00:37:22,920
Speaker 1: frictional costs that are going to be associated with that,

783
00:37:23,000 --> 00:37:25,959
Speaker 1: Whereas if it's plain vanilla, you're probably gonna be charged

784
00:37:26,000 --> 00:37:28,880
Speaker 1: hardly anything in terms of that cover charge. So because

785
00:37:28,920 --> 00:37:31,319
Speaker 1: the cover charge that like in the high yield area,

786
00:37:31,719 --> 00:37:33,359
Speaker 1: that may not show up in the spread. But then

787
00:37:33,400 --> 00:37:36,319
Speaker 1: there's also the pre there's other ways that. In other words,

788
00:37:36,400 --> 00:37:38,600
Speaker 1: there's no free lunch. You know, the people who are

789
00:37:38,680 --> 00:37:40,719
Speaker 1: making these markets and doing all this work, they're gonna

790
00:37:40,800 --> 00:37:44,000
Speaker 1: take a cut for themselves. It's just the much smaller

791
00:37:44,120 --> 00:37:47,040
Speaker 1: cut compared to what a load was for a mutual fund. Yeah,

792
00:37:47,120 --> 00:37:48,520
Speaker 1: So if I could just do the free lunch part,

793
00:37:48,560 --> 00:37:51,680
Speaker 1: of it. Because we're seeing more and more these days,

794
00:37:51,880 --> 00:37:54,160
Speaker 1: and we touched on earlier of of I think ket

795
00:37:54,239 --> 00:37:57,040
Speaker 1: and Merritrade when they made changes to the platform. We're

796
00:37:57,080 --> 00:38:03,360
Speaker 1: seeing commission free products widely available on various brokerage platforms Schwab, Fidelity,

797
00:38:03,560 --> 00:38:06,080
Speaker 1: e Trade, TV, Merriage Trade to all these very merrow

798
00:38:06,160 --> 00:38:09,160
Speaker 1: Edge I think has it as well. And so that's

799
00:38:09,200 --> 00:38:12,960
Speaker 1: a cost that you'd be paying from a commission standpoint

800
00:38:13,040 --> 00:38:14,719
Speaker 1: that continues to come down, but there is still a

801
00:38:14,800 --> 00:38:18,520
Speaker 1: cost there. Something can be commissioned free. It sounds well, okay, great,

802
00:38:18,520 --> 00:38:20,799
Speaker 1: I can be able to buy this and not pay

803
00:38:20,840 --> 00:38:23,920
Speaker 1: any additional charges or cover charges for what that is.

804
00:38:24,239 --> 00:38:27,480
Speaker 1: But if that trading costs a bit, ask spread is

805
00:38:27,600 --> 00:38:30,520
Speaker 1: relatively wide because no one else is doing it. It's

806
00:38:30,520 --> 00:38:34,880
Speaker 1: showing up on this platform perhaps because the asset manager

807
00:38:35,000 --> 00:38:38,399
Speaker 1: wants to make this. They want to get premium shelf

808
00:38:38,520 --> 00:38:40,719
Speaker 1: space for what it is. Some things again that are

809
00:38:40,719 --> 00:38:43,400
Speaker 1: showing up on there makes sense in a portfolio and

810
00:38:43,520 --> 00:38:46,080
Speaker 1: some things don't. And it really is something that investor

811
00:38:46,160 --> 00:38:48,879
Speaker 1: needs to go beyond. Okay, so back to this next

812
00:38:49,000 --> 00:38:52,680
Speaker 1: level windshield. You guys are in this cockpit, look at

813
00:38:52,680 --> 00:38:56,719
Speaker 1: all your various stuff there's another one, volatility. How do

814
00:38:56,760 --> 00:38:59,479
Speaker 1: you take that into account? So we do. The only

815
00:38:59,560 --> 00:39:02,440
Speaker 1: metric from an et F perspective that we rely on

816
00:39:03,160 --> 00:39:06,640
Speaker 1: historical performance, is a standard deviation. If an e t

817
00:39:06,760 --> 00:39:08,719
Speaker 1: F has a three year track record, we use that

818
00:39:08,760 --> 00:39:11,120
Speaker 1: three year stand deviation. If it doesn't yet have a

819
00:39:11,160 --> 00:39:13,160
Speaker 1: three year track record, we still are rating it. We

820
00:39:13,280 --> 00:39:15,880
Speaker 1: cover about fo et F that don't yet have a

821
00:39:15,920 --> 00:39:18,360
Speaker 1: three year track record at c f R A, but

822
00:39:18,480 --> 00:39:22,240
Speaker 1: we do think it's relevant. So above average returns taking

823
00:39:22,360 --> 00:39:26,520
Speaker 1: on above average risk isn't necessarily a good thing for

824
00:39:26,640 --> 00:39:29,320
Speaker 1: every investor. Some people are willing to deal with that

825
00:39:29,440 --> 00:39:32,279
Speaker 1: level of volatility from within. So again, you don't want

826
00:39:32,280 --> 00:39:36,719
Speaker 1: to just pick two thousand seventeen's best performing securities e

827
00:39:36,800 --> 00:39:38,920
Speaker 1: t F. They're often the best performing ones in two

828
00:39:38,960 --> 00:39:43,360
Speaker 1: thousand and seventeen because they significantly underperformed in two thousand sixteen,

829
00:39:44,120 --> 00:39:46,240
Speaker 1: and then there's a good chance that they're gonna revert

830
00:39:46,280 --> 00:39:48,120
Speaker 1: back to the mean in two thousand eighteen if there's

831
00:39:48,120 --> 00:39:50,360
Speaker 1: a lot of vlatility. So we that's one of the

832
00:39:50,440 --> 00:39:52,120
Speaker 1: things that we focus on at c f R A

833
00:39:52,440 --> 00:39:56,640
Speaker 1: standard deviation. Standard deviation sounds like something from stats class

834
00:39:56,680 --> 00:39:59,600
Speaker 1: in college. So but I'm telling you this is I'm

835
00:39:59,600 --> 00:40:03,320
Speaker 1: gonna format it for you. You were gone skiing, I

836
00:40:03,440 --> 00:40:06,840
Speaker 1: know you have, right, yeah, snowboarding, Yeah, of course. Anyway,

837
00:40:07,280 --> 00:40:09,560
Speaker 1: Well I like to ski, Joel likes the snowboard. Anyway,

838
00:40:09,600 --> 00:40:11,560
Speaker 1: we get to top of the hill. There's a sign

839
00:40:11,680 --> 00:40:14,760
Speaker 1: for how steep the slope is? Right, double black, diamond,

840
00:40:14,880 --> 00:40:17,719
Speaker 1: blue green for that's where Yeah, that's right, am I

841
00:40:17,880 --> 00:40:19,799
Speaker 1: he where's the bunny slope called? Because that's what I'm

842
00:40:19,880 --> 00:40:22,839
Speaker 1: using on. So you got you got a Philly's jacket, right,

843
00:40:22,880 --> 00:40:25,040
Speaker 1: and it's like unzipped and flapping in the breeze. I

844
00:40:25,080 --> 00:40:27,759
Speaker 1: can totally see you on the green. I know your type.

845
00:40:28,080 --> 00:40:29,799
Speaker 1: I'll let you live with that image because it's better

846
00:40:29,840 --> 00:40:32,520
Speaker 1: than the reality. But that's okay. So the ski slope

847
00:40:32,560 --> 00:40:35,399
Speaker 1: metaphor works. And when we when Todd talked earlier about

848
00:40:35,480 --> 00:40:38,120
Speaker 1: whether you're buying equal weighted or how it's weighted, and

849
00:40:38,640 --> 00:40:41,840
Speaker 1: you could buy it, you could be unpleasantly surprised. Standard

850
00:40:41,920 --> 00:40:45,640
Speaker 1: deviation will tell you how much up and down you're

851
00:40:45,640 --> 00:40:49,360
Speaker 1: gonna experience. All standard deviation says say the standard deviation

852
00:40:49,520 --> 00:40:52,919
Speaker 1: is that just means there's a two third percent chance

853
00:40:52,960 --> 00:40:55,280
Speaker 1: that it's going to go up or down. That's the range.

854
00:40:56,320 --> 00:40:57,560
Speaker 1: So what you want to do is look at where

855
00:40:57,560 --> 00:41:00,120
Speaker 1: the sp I think right now, the standard viation is

856
00:41:00,120 --> 00:41:02,279
Speaker 1: about six percent, maybe seven percent. That's a little low

857
00:41:02,320 --> 00:41:05,000
Speaker 1: because volatility has been low. So where is this et

858
00:41:05,120 --> 00:41:08,000
Speaker 1: F I'm gonna buy? Take something like XOP the spider

859
00:41:08,920 --> 00:41:13,239
Speaker 1: oil drillers exploration. Sounds like a pretty general sector play,

860
00:41:13,320 --> 00:41:16,399
Speaker 1: but that probably has a standard deviation of of cent.

861
00:41:16,480 --> 00:41:19,520
Speaker 1: So you gotta go, okay, this is three times is

862
00:41:19,600 --> 00:41:22,160
Speaker 1: likely to lose me or win me money than the

863
00:41:22,320 --> 00:41:24,200
Speaker 1: S and P five hunter. But then a bond ETF

864
00:41:24,360 --> 00:41:26,800
Speaker 1: might have a standard deviation of two percent or three percent.

865
00:41:27,280 --> 00:41:29,239
Speaker 1: That is why that is so key because if you

866
00:41:29,320 --> 00:41:31,880
Speaker 1: miss something on the holdings or the waitings, the standard

867
00:41:31,920 --> 00:41:35,040
Speaker 1: deviation will alert you to what might be inside. Because

868
00:41:35,040 --> 00:41:37,759
Speaker 1: you could have an equal uh market cap weighted portfolio,

869
00:41:38,160 --> 00:41:40,360
Speaker 1: but you might not notice they're all small caps, and

870
00:41:40,400 --> 00:41:42,239
Speaker 1: the standardviation will clue you out that hey, this is

871
00:41:42,280 --> 00:41:44,440
Speaker 1: gonna be a wild ride. So you did the Philly thing.

872
00:41:44,480 --> 00:41:46,400
Speaker 1: I'm I'm a met fan, not a you know, not

873
00:41:46,480 --> 00:41:49,520
Speaker 1: a good year. This past year for in here with

874
00:41:50,960 --> 00:41:53,560
Speaker 1: it's been is going to be a better one. Pitchers

875
00:41:53,640 --> 00:41:58,200
Speaker 1: won't get hurt. But you know, to use a baseball analogy,

876
00:41:58,360 --> 00:42:00,560
Speaker 1: you know, singles and doubles is a good way of

877
00:42:00,640 --> 00:42:03,040
Speaker 1: going if you're if you're a home run hitter and

878
00:42:03,160 --> 00:42:05,239
Speaker 1: you're aiming for the home runs and swinging for the

879
00:42:05,280 --> 00:42:07,279
Speaker 1: fences for what it is, you're gonna strike out quite

880
00:42:07,320 --> 00:42:10,680
Speaker 1: a bit. So something that has relatively low volatility, a

881
00:42:10,760 --> 00:42:14,000
Speaker 1: relatively consistent performance is going to be a You could

882
00:42:14,000 --> 00:42:16,279
Speaker 1: be a three hitter getting singles and doubles all the

883
00:42:16,360 --> 00:42:18,960
Speaker 1: time and be able to do that as opposed to again,

884
00:42:19,000 --> 00:42:21,160
Speaker 1: met fan, not a Yankee fan, Aron Judge, you hit

885
00:42:21,239 --> 00:42:24,600
Speaker 1: some runs and strikes out quite a bit. Good ballplayer,

886
00:42:24,840 --> 00:42:28,600
Speaker 1: different different kind of expectations that you have. Okay, so Todd,

887
00:42:28,800 --> 00:42:31,480
Speaker 1: here we are marching along through your checklist. What do

888
00:42:31,560 --> 00:42:34,040
Speaker 1: we come to next? So we covered a number of things.

889
00:42:34,080 --> 00:42:36,800
Speaker 1: We covered holdings, we covered costs, we covered liquidity. The

890
00:42:36,880 --> 00:42:38,840
Speaker 1: one thing that we don't use that I know others

891
00:42:38,960 --> 00:42:42,879
Speaker 1: do is tracking ERA, which is what so how well

892
00:42:43,040 --> 00:42:46,200
Speaker 1: that e t F tracks the underlying index that it

893
00:42:46,400 --> 00:42:49,920
Speaker 1: chose to track. And so the reason we don't do

894
00:42:50,080 --> 00:42:52,200
Speaker 1: that is, as I guess a couple of things, but

895
00:42:52,280 --> 00:42:55,640
Speaker 1: most importantly most e t F s are tracking a

896
00:42:55,760 --> 00:42:59,560
Speaker 1: different index then something else you might be considering, and

897
00:42:59,680 --> 00:43:02,160
Speaker 1: so yes, it makes sense if you're dealing with those

898
00:43:02,239 --> 00:43:05,080
Speaker 1: three SMP five hundred index based products that we talked

899
00:43:05,120 --> 00:43:08,880
Speaker 1: about this year, we're seeing about a five basis point

900
00:43:09,080 --> 00:43:13,400
Speaker 1: differential between SPY and I, v V and v O,

901
00:43:13,800 --> 00:43:17,359
Speaker 1: the three SMP five d index based products. Coincidentally, that's

902
00:43:17,400 --> 00:43:19,839
Speaker 1: the difference in the fee that's there, and so that's

903
00:43:19,960 --> 00:43:22,799
Speaker 1: one of the reasons that they'll be different. But if

904
00:43:22,840 --> 00:43:25,000
Speaker 1: you're looking at one, you know, we use home builders

905
00:43:25,040 --> 00:43:26,759
Speaker 1: as an example, But if you're looking at a low

906
00:43:26,840 --> 00:43:29,440
Speaker 1: volatility e t F from power Shares s p l

907
00:43:29,480 --> 00:43:32,560
Speaker 1: V and a minium minimum alatility e t F from

908
00:43:32,760 --> 00:43:35,960
Speaker 1: I Shares U s m V as the example, the

909
00:43:36,080 --> 00:43:39,400
Speaker 1: indexes are quite different. The rules are different, the holdings

910
00:43:39,440 --> 00:43:42,320
Speaker 1: are different, the sector exposure is different. The fact that

911
00:43:42,440 --> 00:43:45,399
Speaker 1: one tracks its index better than the other one really

912
00:43:45,480 --> 00:43:48,359
Speaker 1: doesn't tell you how well it's doing, because it's it's

913
00:43:48,400 --> 00:43:51,719
Speaker 1: trying to track something completely different. How well it I

914
00:43:51,880 --> 00:43:56,080
Speaker 1: am at following one recipe and how well Eric is

915
00:43:56,280 --> 00:43:59,919
Speaker 1: at following a completely different recipe doesn't make any sense

916
00:44:00,000 --> 00:44:02,480
Speaker 1: if I'm making you know, peanut butter and jelly sandwich,

917
00:44:02,520 --> 00:44:04,799
Speaker 1: and he's making meat ball palm. That's all that Eric

918
00:44:04,840 --> 00:44:07,200
Speaker 1: knows how to make, as you mentioned food, because he

919
00:44:07,280 --> 00:44:11,200
Speaker 1: goes crazy. He's now he cannot focus on the show anymore.

920
00:44:12,040 --> 00:44:15,120
Speaker 1: But how do you feel about tracking air? So I

921
00:44:15,200 --> 00:44:17,520
Speaker 1: agree with Todd, You're right, they're all tracking different things.

922
00:44:17,680 --> 00:44:20,400
Speaker 1: I guess I would look at it because the I

923
00:44:20,400 --> 00:44:22,000
Speaker 1: would take a step back though. What's an E T

924
00:44:22,200 --> 00:44:25,040
Speaker 1: S purpose in this life? It is to track an index.

925
00:44:25,080 --> 00:44:26,840
Speaker 1: I mean that's ultimately what it's designed to do. And

926
00:44:26,880 --> 00:44:29,359
Speaker 1: people think it's like a robot, right, Like there's how

927
00:44:29,600 --> 00:44:32,120
Speaker 1: right from Space Odyssey sitting there tracking the index. But

928
00:44:32,360 --> 00:44:35,160
Speaker 1: there are human beings who tracking an index and a

929
00:44:35,239 --> 00:44:38,160
Speaker 1: lot of things happen, rebalances, corporate actions. They've got to

930
00:44:38,200 --> 00:44:41,720
Speaker 1: make sure they track that index well. And that's passive

931
00:44:41,800 --> 00:44:45,320
Speaker 1: portfolio management. I think it's an underrated job. It's because

932
00:44:45,320 --> 00:44:48,000
Speaker 1: if you tie you in and nobody cares, like, you know,

933
00:44:48,040 --> 00:44:49,640
Speaker 1: there's if you're not noticed, that's a good thing. But

934
00:44:49,719 --> 00:44:51,880
Speaker 1: so that's why I bring up if you notice a

935
00:44:51,960 --> 00:44:54,560
Speaker 1: high tracking difference, that could be a red flag. So

936
00:44:54,640 --> 00:44:56,600
Speaker 1: you look at the index return and you look at

937
00:44:56,640 --> 00:44:59,840
Speaker 1: the e t F return. If they're really far off you,

938
00:45:00,040 --> 00:45:02,040
Speaker 1: they want to just think, Okay, why you know what's

939
00:45:02,040 --> 00:45:04,080
Speaker 1: going on? Like the Vietnam ETF. Back to that one

940
00:45:04,440 --> 00:45:05,960
Speaker 1: that does have a high tracking error. But in that

941
00:45:06,040 --> 00:45:08,399
Speaker 1: one you can go, well, that's because I'm getting local

942
00:45:08,480 --> 00:45:11,480
Speaker 1: Vietnamese stocks. It's a lot of it's highly exotic. I'll

943
00:45:11,520 --> 00:45:13,160
Speaker 1: live with it. But if you see how high tracking

944
00:45:13,320 --> 00:45:15,640
Speaker 1: on like a MidCap growth fund or something like that,

945
00:45:15,960 --> 00:45:18,080
Speaker 1: it might mean somebody is to sleep at the wheel. Correct.

946
00:45:18,560 --> 00:45:20,520
Speaker 1: I want to ask you one more question that gets

947
00:45:20,880 --> 00:45:22,520
Speaker 1: right to the heart of who you are and what

948
00:45:22,640 --> 00:45:25,520
Speaker 1: you do, because you're both an analyst for mutual funds

949
00:45:25,840 --> 00:45:28,040
Speaker 1: and for e t f s. And obviously we've talked

950
00:45:28,040 --> 00:45:29,640
Speaker 1: a lot about the growth of the e t F,

951
00:45:30,360 --> 00:45:32,759
Speaker 1: but to some extent, that's at the expense of the

952
00:45:32,880 --> 00:45:35,000
Speaker 1: mutual fund. So what do you think the future of

953
00:45:35,239 --> 00:45:37,480
Speaker 1: the mutual fund is? So I think that we're going

954
00:45:37,560 --> 00:45:42,040
Speaker 1: to continue to see money bleeding out of actively managed funds,

955
00:45:42,280 --> 00:45:45,600
Speaker 1: and it's certainly inexpensive actively managed funds. It's been happening

956
00:45:45,920 --> 00:45:49,480
Speaker 1: within the equity space. Investors are still quite comfortable paying

957
00:45:49,600 --> 00:45:53,120
Speaker 1: somebody to drive the car. In the fixed income space

958
00:45:53,440 --> 00:45:55,560
Speaker 1: and and wanting an uber driver, so to speak. The

959
00:45:55,640 --> 00:45:58,480
Speaker 1: difference between active and equity and active and fixed income.

960
00:45:58,520 --> 00:46:01,440
Speaker 1: Don't you think that because the SMPS market cap weighted

961
00:46:01,440 --> 00:46:04,160
Speaker 1: and that's the big benchmark, and like the stocks do better,

962
00:46:04,200 --> 00:46:06,359
Speaker 1: they get a bigger waiting So it's harder to beat

963
00:46:06,840 --> 00:46:09,080
Speaker 1: something that's got this momentum in it, whereas on the

964
00:46:09,160 --> 00:46:12,760
Speaker 1: fixed income side, the aggregate bond index that is ours

965
00:46:13,600 --> 00:46:16,880
Speaker 1: is weighted by the debt the company has outstanding, and

966
00:46:17,040 --> 00:46:19,400
Speaker 1: thus it doesn't have that momentum feel and it's just

967
00:46:19,719 --> 00:46:22,520
Speaker 1: way easier to beat. You Do you think that plays

968
00:46:22,520 --> 00:46:24,560
Speaker 1: into what you just Yes, I think it completely plays

969
00:46:24,600 --> 00:46:27,359
Speaker 1: in it. And I think in part there's a people

970
00:46:27,400 --> 00:46:30,280
Speaker 1: are comparing it perhaps to the wrong thing. So Bloomberg

971
00:46:30,320 --> 00:46:35,640
Speaker 1: Barkley's also has something that's a different fixed income UH index.

972
00:46:35,719 --> 00:46:37,560
Speaker 1: I I know the ticker that's part of it that

973
00:46:37,680 --> 00:46:41,239
Speaker 1: I Shares has. It's a core fixed income product that's

974
00:46:41,280 --> 00:46:43,800
Speaker 1: there that that has some high yield exposure to it.

975
00:46:43,880 --> 00:46:46,239
Speaker 1: It has a little bit more corporate instead of just

976
00:46:46,400 --> 00:46:49,160
Speaker 1: being tied to the treasuries that's there. It is a

977
00:46:49,200 --> 00:46:52,480
Speaker 1: little bit harder, but people don't feel comfortable following what's

978
00:46:52,480 --> 00:46:55,520
Speaker 1: going on in the Federal Reserve and following corporate issuance

979
00:46:55,800 --> 00:46:58,160
Speaker 1: the same way they do tracking what's going on in

980
00:46:58,200 --> 00:47:00,600
Speaker 1: the stock market. So people are willing to pay for

981
00:47:01,600 --> 00:47:05,000
Speaker 1: often average performance within the fixed income space. I do

982
00:47:05,120 --> 00:47:07,320
Speaker 1: think that's gonna shift. I think in two thousand and

983
00:47:07,360 --> 00:47:10,440
Speaker 1: eighteen we're gonna see harder returns to come by for

984
00:47:10,680 --> 00:47:14,279
Speaker 1: actively managed funds as the Fed continues to raise interest rates.

985
00:47:15,120 --> 00:47:16,840
Speaker 1: If we hit a year now that we have E

986
00:47:16,920 --> 00:47:20,640
Speaker 1: t F choices where the average actively managed bond fund

987
00:47:20,880 --> 00:47:24,000
Speaker 1: declines and value, that's gonna be a red flag in

988
00:47:24,080 --> 00:47:27,120
Speaker 1: two thousand and nineteen for people to go, wait, I'm

989
00:47:27,160 --> 00:47:30,200
Speaker 1: paying how much for you to lose money? I might

990
00:47:30,280 --> 00:47:33,480
Speaker 1: as well pay seven eight basis points for a G

991
00:47:33,640 --> 00:47:37,360
Speaker 1: G or B and D from Vanguard or or some

992
00:47:37,480 --> 00:47:39,319
Speaker 1: of the dozens of other products that are low costs

993
00:47:39,320 --> 00:47:41,440
Speaker 1: in nature. So I do think they have a role

994
00:47:41,520 --> 00:47:44,040
Speaker 1: active and passive and mutual funds and ETFs can play

995
00:47:44,080 --> 00:47:46,440
Speaker 1: a role in both portfolios. But I do think the

996
00:47:46,520 --> 00:47:49,440
Speaker 1: tide is continuing to shift towards gtfs. But as long

997
00:47:49,520 --> 00:47:51,880
Speaker 1: as people want to know something about mutual funds, then

998
00:47:52,040 --> 00:47:54,040
Speaker 1: we'd see if or A want to help them with

999
00:47:54,200 --> 00:47:57,719
Speaker 1: tools to be able to do that. So closing question, Yeah,

1000
00:47:58,640 --> 00:48:02,040
Speaker 1: favorite et F ticker, My favorite E t F ticker.

1001
00:48:03,160 --> 00:48:05,880
Speaker 1: She I didn't come prepared for that one. That's why

1002
00:48:05,920 --> 00:48:07,799
Speaker 1: we put on the skin your brain. I know they're

1003
00:48:07,800 --> 00:48:10,080
Speaker 1: all in there, all floating around. It looks like it's

1004
00:48:10,120 --> 00:48:13,400
Speaker 1: like a ticker soup in there. I don't have a

1005
00:48:13,480 --> 00:48:17,360
Speaker 1: favorite ticker the ones. So I find things being just

1006
00:48:17,560 --> 00:48:19,960
Speaker 1: that when I paint a good picture of what it is.

1007
00:48:20,120 --> 00:48:24,160
Speaker 1: So like you wood and cut with your paper related

1008
00:48:24,239 --> 00:48:26,839
Speaker 1: and forest products, the image works out quite well. There's

1009
00:48:26,840 --> 00:48:30,640
Speaker 1: a wood, there's a wood w o O D which

1010
00:48:30,719 --> 00:48:33,759
Speaker 1: owns timber companies, and then there's a cut E t

1011
00:48:33,920 --> 00:48:36,120
Speaker 1: F C. Actually both doing really well. I mean they're

1012
00:48:36,120 --> 00:48:38,120
Speaker 1: good performs. So those are two that come to mind

1013
00:48:38,160 --> 00:48:41,200
Speaker 1: because you can picture the image for where it is. Uh.

1014
00:48:41,840 --> 00:48:43,880
Speaker 1: Because because it's a verb, I'm a fan of the

1015
00:48:43,960 --> 00:48:47,160
Speaker 1: verb tickers. But my favorite is move to me. That

1016
00:48:47,320 --> 00:48:49,840
Speaker 1: is the Mona Lisa of E t F tickers because

1017
00:48:50,120 --> 00:48:54,040
Speaker 1: not only is it a verb, but it's something everyone loves.

1018
00:48:54,400 --> 00:48:56,600
Speaker 1: A cow saying move. It's like kind of takes you

1019
00:48:56,680 --> 00:49:00,200
Speaker 1: back to your childhood. That's the global Agribusiness ETF know what.

1020
00:49:01,000 --> 00:49:03,560
Speaker 1: Probably Number one is that we didn't really ask him

1021
00:49:03,600 --> 00:49:07,040
Speaker 1: for his favorite, but he felt you said both of you.

1022
00:49:09,280 --> 00:49:11,279
Speaker 1: If there's a ticker that's out there that someone thinks

1023
00:49:11,320 --> 00:49:13,800
Speaker 1: would be interesting, there's likely to be an et F

1024
00:49:13,920 --> 00:49:18,520
Speaker 1: to follow suit. Todd Rosen Blooth, thank you so much

1025
00:49:18,560 --> 00:49:27,799
Speaker 1: for joining us in a pleasure. Guys, thanks for listening

1026
00:49:27,840 --> 00:49:30,120
Speaker 1: to Trillions. Until next time, we can find us in

1027
00:49:30,120 --> 00:49:34,239
Speaker 1: the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, and a

1028
00:49:34,280 --> 00:49:36,399
Speaker 1: bunch of other places that probably haven't heard about yet.

1029
00:49:36,960 --> 00:49:39,359
Speaker 1: We'd love to hear from you. We're on Twitter, I'm

1030
00:49:39,520 --> 00:49:44,200
Speaker 1: at Joel Webber Show, Key's at Eric Faltunas. Trillions is

1031
00:49:44,239 --> 00:49:48,200
Speaker 1: produced by Jordan Bell with help from Magnus Henrickson. Francesca

1032
00:49:48,280 --> 00:49:50,640
Speaker 1: Levie is the head of Bloomberg Podcast. Bye.