Speaker 1: Welcome to Trillions. I'm Joel Weber and I'm Eric Beltnis.
Speaker 1: So in this episode, we're gonna spend some time talking
Speaker 1: about what happens when you're ready to put some money
Speaker 1: into an ETF busting out this wallet, tons of big
Speaker 1: bills in it. Okay, I'm ready to put it somewhere. Right,
Speaker 1: what should I be looking at before I make that decision?
Speaker 1: You'd have a checklist for picking any high end item, right,
Speaker 1: and this is no different. There's certain criteria due diligence,
Speaker 1: things you should look for, some of the more important
Speaker 1: than others. But there are many things you can do
Speaker 1: and it's not that hard. But some of the terms
Speaker 1: in E t F DI diligence can be a little frightening,
Speaker 1: a little jargon E. But we have the perfect guy
Speaker 1: here today to help simplify all that. He works for
Speaker 1: the c f r A. His name is Todd Rosenbluth,
Speaker 1: and he's sort of exactly who you are. He's a
Speaker 1: mutual fund and E t F analyst. Yeah, I mean
Speaker 1: he's kind of like me in another world. He works
Speaker 1: at his company. I work at my work competition, but
Speaker 1: we're also Piers. Todd writes really great stuff. I enjoy it.
Speaker 1: I also up push back on it. Sometimes we've had
Speaker 1: some friendly debates. I see Todd all the time on
Speaker 1: the circuit circuit. That's the thing. That's the thing. I
Speaker 1: know that sounds funny, but like there's conferences. You see
Speaker 1: Todd on panels and likewise. So he's the perfect guy
Speaker 1: to help simplify this because that's all he does. And
Speaker 1: I like that he is have a mutual fun background
Speaker 1: because E t F analyists who know the mutual fund
Speaker 1: really well tend to have a richer look at the
Speaker 1: E t F structure. So we're gonna talk about due diligence,
Speaker 1: which let's come up with a better title. How about
Speaker 1: under the hood. It's cliche, but I think in this
Speaker 1: case this is the perfect metaphor. We will go from
Speaker 1: the food store to the car. Right, we got our groceries.
Speaker 1: Now we're in the car. This week's episode. Okay, Todd
Speaker 1: Rosen Blues, thanks for joining us. Good to be here. Thanks, So, Todd,
Speaker 1: who are you? I'm in New York? Go totally? Do
Speaker 1: you want to get So? I head up the E
Speaker 1: t F and mutual fund research for a company called
Speaker 1: c f R A and it's literally called c f
Speaker 1: r A. It is literally called t f A so
Speaker 1: used to the business used to be owned by ms C.
Speaker 1: I uh the name c f A came out with it.
Speaker 1: I'm a former employee of S and P. I ran
Speaker 1: the mutual fund and et F research at c f A.
Speaker 1: I'm a former equity analyst that covered tech and telecom stocks,
Speaker 1: and before that was a mutual fund analyst at the
Speaker 1: company and at Value Line, and for the last seven
Speaker 1: years have been dedicated specifically to E t F s
Speaker 1: and to mutual funds and providing analysis for our n
Speaker 1: clients and and the general public in a range of ETF. So,
Speaker 1: tell me what your day looks like then, So a
Speaker 1: couple of things that are primarily day today. So I'm
Speaker 1: looking at trends that are going on in the marketplace,
Speaker 1: looking at investment ideas, and then trying to explain how
Speaker 1: you can participate in those investment ideas using either an
Speaker 1: E t F and or a mutual fund. Is part
Speaker 1: of what I do. So I typically write about two
Speaker 1: or three articles on a weekly basis that could publish
Speaker 1: for our clients. I'm dealing with reporters, including from Bloomberg
Speaker 1: that are working on their own stories and adding an
Speaker 1: input an independent perspective in that regard. And then we
Speaker 1: have clients so that are subscribing and advisors and retail
Speaker 1: clients that have access to our research and that want
Speaker 1: to hear more or have questions beyond what that is,
Speaker 1: or that possibly want to learn about us before they
Speaker 1: sign up. And then I'm part of those conversations as well.
Speaker 1: You said the word independent. Yes, c f r A
Speaker 1: doesn't offer their own mutual funds or e t F.
Speaker 1: C f R A doesn't have investment banking relationships the
Speaker 1: way that you're Morgan Stanley or Goldman Sachs does. That
Speaker 1: offers research on investment ideas were purely the best ideas
Speaker 1: and from an et F perspective, which is relevant for
Speaker 1: this topic. We have an equal number of e t
Speaker 1: F that we like as a number of e t
Speaker 1: F s that we don't like, So we we cover
Speaker 1: the whole universe. We have about t fs that we
Speaker 1: have an opinion on and roughly in one side of
Speaker 1: the bucket, roughly on the other side, you're not going
Speaker 1: to find that from others that are covering ets often
Speaker 1: want to just tell you what's a good idea. So
Speaker 1: I get Todd's emails, and that's one of the reasons
Speaker 1: I thought he would be a great guest as be
Speaker 1: because Todd is unique from your average et F person
Speaker 1: because a lot of times they get pretty much all
Speaker 1: in on e t F. It's like kool aid city.
Speaker 1: Todd still recommends mutual funds, and he has a reason
Speaker 1: for doing it. He also has a background of mutual
Speaker 1: funds and equities. You can put that together. It makes
Speaker 1: your et F analysis, I think, richer and deeper, and
Speaker 1: I think that's what makes Todd kind of unique. So
Speaker 1: how did you find the e t F? Todd? So
Speaker 1: my company, when I was at S and P, we
Speaker 1: were covering individual stocks. We were seeing the trend that
Speaker 1: investors were looking to invest in e t F s,
Speaker 1: and we wanted to come out in a different perspective.
Speaker 1: So the way that we look at in the way
Speaker 1: we did back now almost ten years ago and we
Speaker 1: continue to do so, is to us and E t
Speaker 1: F is a basket of securities. Whether it's a stock
Speaker 1: ETF it holds Apple and IBM and Facebook and what
Speaker 1: have you. If it holds individual bonds, then you should
Speaker 1: do that as well. So we come at this from
Speaker 1: a perspective that we cover individual stocks. We have by
Speaker 1: hold cell recommendations on individual stocks, and what is going
Speaker 1: to drive an E t F forward is going to
Speaker 1: be what's inside that portfolio. Now, there's other things that
Speaker 1: we use in our research, but so we just really
Speaker 1: took the underlying holdings and formed took the E t
Speaker 1: F rapper and decided to do things that were connected
Speaker 1: to it. Now at the risk of the commercial part
Speaker 1: of it, we use other things that are outside of
Speaker 1: holdings analysis, and I know we'll get into it from
Speaker 1: a due diligence perspective, but there are things that are
Speaker 1: unique to an e t F. It trades on an exchange,
Speaker 1: so there's bid esque spread analysis, you can do it's trades,
Speaker 1: and you can do technical analysis and the rest of
Speaker 1: getting too far in the weeds here, there's things you
Speaker 1: can do that are unique to an e t F
Speaker 1: then you would a mutual fund or an individual stock.
Speaker 1: What was your lightbulb moment that you realized, boy, these
Speaker 1: things are for real. Yeah, well it's you started seeing
Speaker 1: people buying them because it was the way to get
Speaker 1: exposure to a certain trend. So I even remember back
Speaker 1: when I was not an e t F analyst. But
Speaker 1: I remember people before we had to tech boom the
Speaker 1: Triple ques. The power shares product which actually just go
Speaker 1: was by Triple Q. Still, that's how common that name
Speaker 1: has become, which is a NASDAC one. It's the largest
Speaker 1: stocks non financial within a n Aztec. Side of what
Speaker 1: it is, people were buying that, I don't think they
Speaker 1: understood what it wasn't. In fact, I think people still
Speaker 1: think of it as only a tech reality thing. And
Speaker 1: so I just started digging into this, understanding more of
Speaker 1: what it was. And then when S and P got
Speaker 1: back around to looking into this, I was very happy
Speaker 1: to be able to do that because I had that
Speaker 1: background having been a former mutual fund analyst. So before
Speaker 1: you were an E t F analyst, you were a
Speaker 1: mutual fund analyst. So tell me about how you view
Speaker 1: a mutual fund versus in et F. What's that difference like? Yeah,
Speaker 1: So we cover both of them. I head up the
Speaker 1: research for both our E t F business and our
Speaker 1: mutual fund business. We have separate ratings on e t
Speaker 1: F s then mutual funds. There's others that are combining
Speaker 1: that together. We think there's a role for both in
Speaker 1: et F and or a mutual fund in the portfolio,
Speaker 1: whether it's actively managed or not so passively managed and
Speaker 1: index based, but the things that you need to focus
Speaker 1: on are different. So we don't believe the past performance
Speaker 1: of an e t F is going to give you
Speaker 1: much insight as to where is it going to go
Speaker 1: uh in the future. So there's no there's no disrespect
Speaker 1: to anybody who's running an e t F portfolio or
Speaker 1: running an e t F itself that's tracking the SMP
Speaker 1: five index or the m s c I e F
Speaker 1: index or what have you. But their job is to
Speaker 1: track that index, and they're pretty good at probably doing that.
Speaker 1: But there isn't the same skill set in picking stocks,
Speaker 1: buying a new when things are falling in value, or
Speaker 1: spotting new trends in that regard. So whereas we use
Speaker 1: a performance track record in mutual fund research at c
Speaker 1: f A, we don't really on that for our e
Speaker 1: t F research. The SMP five hundred is going to
Speaker 1: be up roughly this year, it's unlikely to do that
Speaker 1: in two thousand and eighteen, and and whether or not
Speaker 1: it did well this year really should have no bearing
Speaker 1: on how well it did going forward. People aren't buying
Speaker 1: e t s that way anymore, and we don't do
Speaker 1: research there. One the thing I do you want to
Speaker 1: talk about here is sort of what an e T
Speaker 1: F does, right, because it tracks an index, right, so
Speaker 1: when you're evaluating them, can you talk about how you
Speaker 1: look at that index? Right? So what we're doing in
Speaker 1: part is less looking at the index itself and the
Speaker 1: name of the index and the rules of the index,
Speaker 1: although I think that's extremely important for an investor to do.
Speaker 1: We're looking at what is currently inside the portfolio, what
Speaker 1: fit that criteria that was there? You're you're correct, It's
Speaker 1: very transparent. You can understand what's inside that portfolio. And
Speaker 1: if it's a market cap weighted the largest companies tend
Speaker 1: to have the highest exposure, which is in you know,
Speaker 1: I keep using the I shares SMP five hundred of
Speaker 1: the Vanguard five hundred product or the Spider five hundred products.
Speaker 1: So I give everybody that's in their full color independent analysts.
Speaker 1: So that's how that's where it comes about independent analyst
Speaker 1: where about uh for what that is? Then then the
Speaker 1: largest companies, the apples, the ibm s are going to
Speaker 1: dominate that and and our opinion of those stocks is
Speaker 1: gonna matter more? To use the SMP five hundred as
Speaker 1: the example. There's an equal weighted product that's out there
Speaker 1: from Guggenheim. RSP is a ticker same exact companies, but
Speaker 1: they treat every stock equally. There's more MidCap exposure than
Speaker 1: you'd find versus the other SPI index products. We're gonna
Speaker 1: offer take not whether it is equal waiting better than
Speaker 1: a market cap waiting approach, but is now a better
Speaker 1: time to be in those companies across the SNP five
Speaker 1: index as opposed to being dominated by those mega cab companies,
Speaker 1: the behemoths that are that have earned their their stripes.
Speaker 1: This brings up a big point, which is who is
Speaker 1: the user and what is their goal? And and my
Speaker 1: work I have that is a big difficulty because on
Speaker 1: the terminal we have mostly institutions, but there's some advisors
Speaker 1: and I don't know if they're looking to make a
Speaker 1: quick buck over a week or they want to go
Speaker 1: in for the long haul. I think, you know, there
Speaker 1: are different and that's the thing with et s. Everyone
Speaker 1: uses them so in terms of like if it's a
Speaker 1: good time or not. I think there's a challenge with
Speaker 1: what is the investor, how big are they, how concerned
Speaker 1: are they about certain areas of the e t F,
Speaker 1: and what's their holding period? How do you determine who
Speaker 1: the investor is and what their goal is when recommending
Speaker 1: an e t F. Yes, so we're trying to offer
Speaker 1: one opinion on an e t F, not multiple opinions
Speaker 1: that are out there to trying to target to the
Speaker 1: audience for what it is. And and I understand where
Speaker 1: you're coming from in that regard. But that institutional investor
Speaker 1: that then is on their own running, you know, money
Speaker 1: for their own, you know, doing something for their parents,
Speaker 1: would want to buy the should buy the same et
Speaker 1: F for the same reasons, necessarily because it's a good
Speaker 1: et F that fits their approach. So we have three
Speaker 1: different ways that we look at costs, and one of
Speaker 1: them is the expense ratio. One of them is the
Speaker 1: bid ask spread. I'm gonna leave the third one out
Speaker 1: for the moment for what it is. If you are
Speaker 1: more of a buy and hold individual investor or a
Speaker 1: buy and hold institutional investor, then that expense ratio is
Speaker 1: gonna matter more. If you're a more frequent trader, whether again,
Speaker 1: whether you're an institutional investor, or you've a brokerage account
Speaker 1: where it's unlimited trading or what per trade, and some
Speaker 1: of these things are commissioned free, then that bid ask
Speaker 1: spread is going to matter more because the trading costs
Speaker 1: are gonna add up. We use both of those they're
Speaker 1: roughly equally weighted from a cost perspective, and the way
Speaker 1: that we have a ranking of each et F, but
Speaker 1: we still think that you need to not only know that,
Speaker 1: and you need to know other things that are important.
Speaker 1: So the holdings, the how it's trading. From a technical perspective,
Speaker 1: is there liquidity that's tied to that portfolio as well?
Speaker 1: And if you can, you can screen so you can
Speaker 1: use our research the same way you could be able
Speaker 1: to use on the Bloomberg terminal, and you can say, well,
Speaker 1: we don't care about the bits spread. Then you can
Speaker 1: choose to it's still in the rating, but you can
Speaker 1: be able to filter and store based on certain characteristics
Speaker 1: that better fit your needs. So actually talk to me
Speaker 1: about what your work looks like. Yeah, so we there's
Speaker 1: two different ways that that people have access to or
Speaker 1: things that they subscribe to, either an individual or an
Speaker 1: advisor or an institutional investor that has access to our research. One,
Speaker 1: we have an opinion generated report on plus ETFs that count.
Speaker 1: I use plus because that number keeps changing. Uh. We
Speaker 1: typically cover an e t F about three months into
Speaker 1: its history. So what was there today and what is
Speaker 1: there in a couple of weeks. That number is going
Speaker 1: to change, and that opinion is going to say overweight
Speaker 1: if we like it. It's gonna say underweight if we
Speaker 1: don't like it, and it's gonna say market weight if
Speaker 1: we're neutral, And it's gonna show you what are the
Speaker 1: drivers of that ranking overall and what are the characteristics.
Speaker 1: The second thing, which Eric was kind enough to offer
Speaker 1: compliments on on the commentary, is I published content that
Speaker 1: is more long form in nature, more like an article
Speaker 1: that has a specific investment topic. Why we think now
Speaker 1: is a good time to either be favorable or unfavorable
Speaker 1: on that topic, and then talk about some of the
Speaker 1: e t f s or mutual funds as relevant that
Speaker 1: fit in to that trend with really trying to diagnose
Speaker 1: what are the differences in those products. So, if it's
Speaker 1: a technology focus, you know, what do we think of
Speaker 1: large cap technology versus something that offers more smaller companies
Speaker 1: inside that versus something that is more rigorous from a
Speaker 1: fundamental perspective, looking at certain characteristics like dividends, for example,
Speaker 1: and there's there's an e t F for that as well.
Speaker 1: There's ant for everything. There's an e t F for
Speaker 1: almost everything. If there wasn't, then we wouldn't see more
Speaker 1: white space. We wouldn't see you know how many How
Speaker 1: many ets have we launched this year? Over fifty and
Speaker 1: there's more in registration to come out in two thousand eighteen,
Speaker 1: so there's still some white space or equally as important.
Speaker 1: And again I think we'll probably get there from a
Speaker 1: due diligence aspect. There's two or three or four of
Speaker 1: these et fs that are closely aligned for a certain
Speaker 1: investment theme, which makes the choice harder. It makes it
Speaker 1: more fun for Eric and myself to offer commentary and security. Yes,
Speaker 1: the industry continues to grow and then and thankfully they
Speaker 1: need more. And even though more money is going into
Speaker 1: some of the cheaper products, people still want to buy
Speaker 1: some of these products tied to lithium for example, or cybersecurity,
Speaker 1: and you want to know what else? What do you
Speaker 1: think of that? And that's that's where hopefully cf A
Speaker 1: can come in. Yeah, we put a no doubt on
Speaker 1: buy back and buy back ETFs, which is when companies
Speaker 1: buy back their shares. And there's a couple of e
Speaker 1: t fs for that, not just one. And the guy
Speaker 1: who runs b I was he was shocked there was
Speaker 1: an e t F for buy back. So I'm like, yeah,
Speaker 1: it's like five years old. There's two of them, p kW,
Speaker 1: but then there's another buy back and the differences between
Speaker 1: the two of them are pretty drastic, the fee, the
Speaker 1: way they're weighted, everything, and so you have two different
Speaker 1: experiences even though they're both called the buy back ETF.
Speaker 1: And that's ultimately what you know. I think Todd and
Speaker 1: I share is trying to make sure you understand that.
Speaker 1: But I agree with them. When you look at the
Speaker 1: holdings and you look at the waitings, that's the engine
Speaker 1: that is the most important part of the car, or
Speaker 1: the e t F in this case is so let's
Speaker 1: actually talk about due diligence and how you approach that.
Speaker 1: So say I take an e t F off the shelf,
Speaker 1: what's the first thing I should do? So the first
Speaker 1: thing I think you should do is look at the
Speaker 1: holdings to go where Eric said, you should understand what
Speaker 1: it is that's inside that portfolio. I'm assuming that someone
Speaker 1: who's you know, you didn't just randomly walk into the
Speaker 1: store and not know which store you walked into. So
Speaker 1: if you chose a certain story, you went there for
Speaker 1: a certain purpose in mind, and so you didn't go
Speaker 1: into a department store and look for milk necessarily to
Speaker 1: open the hood and it's like, okay, what's in here?
Speaker 1: So and to try to understand how that fits into
Speaker 1: what lver else you own. And if this is the
Speaker 1: first et F that you're buying, then what you should
Speaker 1: be buying is something that's extremely diversified, diversified from if
Speaker 1: it's U, S, E. T F from various sectors, healthcare, technology, financials,
Speaker 1: what have you. But you should take a look at.
Speaker 1: So we do research on the entire portfolio, but the
Speaker 1: top ten holdings, which either are heavy waitings with in
Speaker 1: the portfolio or they're slightly heavy weightings. If it's something
Speaker 1: is more equally weighted, and those names should be something
Speaker 1: that you want to have within your portfolio. You know,
Speaker 1: we will offer research that will tell you what do
Speaker 1: we think of what that is. But even if you
Speaker 1: didn't want to use our research and you just want
Speaker 1: on went onto a fact sheet, or went onto a website,
Speaker 1: or you found an E t F ticker on the
Speaker 1: on the great Bloomberg terminal that's there. If you don't
Speaker 1: know what these companies are, and these are not companies
Speaker 1: that make sense to have in your portfolio, then this
Speaker 1: shouldn't be anything you should be doing any further digging on.
Speaker 1: I'll take this even further and I'll say I have
Speaker 1: a golden rule for picking E t F s, and
Speaker 1: it's thou shalt not pick an E t F based
Speaker 1: on the name. Yes. So I'll give you two examples
Speaker 1: real quick. The I shares China E t F. This
Speaker 1: is a famous one. Todd knows where I'm going with this.
Speaker 1: F x I. It's the most traded, came out first,
Speaker 1: but it's half financials and a lot of those are
Speaker 1: state own banks. You're not getting a lot of that
Speaker 1: tech in the tech surge that had China has, so
Speaker 1: f x I can lag the rest of China because
Speaker 1: it doesn't have that tech. Or another when the social
Speaker 1: media E t F. Right, that sounds pretty innocent, right, oh,
Speaker 1: social media Facebook? I like that a third of it
Speaker 1: is emerging markets. It's much more volatile and filled with
Speaker 1: companies that you may not even ever heard of. And
Speaker 1: so those are some examples. And there's Gold Funds that
Speaker 1: you think holds the goal but holds gold future. So
Speaker 1: the name sometimes works, but a lot of times it
Speaker 1: isn't what you think. So I'll offer another example there
Speaker 1: and then perhaps we're gonna stay in the weeds. Eric
Speaker 1: and I could probably do this going back and forth
Speaker 1: and tickers. So I used for full disclosure. Again, I
Speaker 1: used to work at SNP. I continue to use this
Speaker 1: E t F as an example. Beforehand, I'll give two
Speaker 1: of them. The Spider SNP home Builder E t F
Speaker 1: only has a third of its exposure in home builders.
Speaker 1: It has home furnishing companies, It has building product companies.
Speaker 1: These are all related to the housing marketplace. But and
Speaker 1: not surprisingly, this year, it's lagging behind. It's similarly named
Speaker 1: but yet different. I shares Home Construction E t F
Speaker 1: I t B. It's about half performance. So for the
Speaker 1: Spider product x HB about six for that I shares
Speaker 1: I t B product. Why is I shares I TV
Speaker 1: doing better? Well? It holds home builders, it has six
Speaker 1: waiting in a very strong performing area. The second one
Speaker 1: I like to do, and again I love the product.
Speaker 1: I really think that Wisdom Trees h E d J
Speaker 1: the Europe Hedge product, is an excellent product. It provides
Speaker 1: you amazing exposure to the Eurozone. But it doesn't have
Speaker 1: the word zone in its name. It only has exposure
Speaker 1: to Germany, France, Italy, Spain. It has no exposure to
Speaker 1: the United Kingdom, no exposure to Switzerland, two of the
Speaker 1: largest countries that are in Europe. We've seen the UK
Speaker 1: look to brexit. Well, it's already brexited. These Wisdom Tree
Speaker 1: e t F it's not there and it wasn't there,
Speaker 1: And if you're trying to invest in those countries, this
Speaker 1: isn't the e t F for you. It's a very
Speaker 1: good one, it's just not an e t F for
Speaker 1: you for that exposure. And I think of the home builders,
Speaker 1: I looked at this one a lot. That's probably the
Speaker 1: most stark difference. There could be a couple other in
Speaker 1: the same category, but they their average performance difference every
Speaker 1: year is about seven percent, so they're nowhere close. But
Speaker 1: I will say that they You could argue that names
Speaker 1: are actually okay because home construction is like I'm putting
Speaker 1: up the walls and the roof, and then I'm out
Speaker 1: right that's and then home Builders is like, oh, we're
Speaker 1: gonna build a home. Honey, We're gonna go to home depot.
Speaker 1: We're gonna get a jacuzzi. You know, we're gonna get
Speaker 1: a dish washed, right, Yeah, we're going to well it
Speaker 1: holds whirlpool. Oh no, I understand that, but I didn't
Speaker 1: know you were getting a jacuzi, and I'm not I
Speaker 1: wish Okay, this is wishful thinking time. Okay, right, if
Speaker 1: you had if you had a hundred thousand dollars to invest,
Speaker 1: instead of putting it into an ETF, you could invest
Speaker 1: it in your home a lot differently correct and home built.
Speaker 1: Like I'm just saying, home builders is a liberal take
Speaker 1: on building a home, whereas home construction is. But the
Speaker 1: point is one of them is going to be a
Speaker 1: lot more volatile. The other one is gonna move a
Speaker 1: lot less volatile because it's going to have more stocks
Speaker 1: that move more with the market. So bringing it back
Speaker 1: to where your initial question was on it, and again,
Speaker 1: Eric and could probably do examples of tickers like this
Speaker 1: for more than you have time talking about Eric I
Speaker 1: did not know we stop we we we started you.
Speaker 1: So you asked about what what do you look for?
Speaker 1: What I didn't lead with and what I still think
Speaker 1: people are spending too much attention on is the performance
Speaker 1: record of that e t F. So which one of
Speaker 1: those two examples is going to do best or did
Speaker 1: the best in two thousand and seventeen has no bearing
Speaker 1: whatsoever on what's going to happen in two thousand eighteen.
Speaker 1: And if you looked at a three year track record,
Speaker 1: which is what some people people commonly do with a
Speaker 1: mutual fund, you're not gonna get much understanding two thousand eighteen.
Speaker 1: We're going to have likely tax cuts for corporations that
Speaker 1: are going to be differently, We're likely to have the
Speaker 1: Federal Reserve raised interest rates, which is going to impact
Speaker 1: not only the stock market but the bond market. What
Speaker 1: worked in two thousand and seventeen is not going to
Speaker 1: work again in two thousand eighteen. And we think investors
Speaker 1: need to be buying an et F using the windshield
Speaker 1: in front of them instead of just the review mirror
Speaker 1: that's available in the car, which is the you know,
Speaker 1: the fine print, which it always says past performance, not
Speaker 1: indicative of future results. But people are buying products, or
Speaker 1: they used to be buying products in that regard, I
Speaker 1: think they're buying things now. Is as Eric will probably
Speaker 1: lead into for something other than just the performance the
Speaker 1: performance record, but something else tied to fees. And just
Speaker 1: one quick thing on home builders. I think that this
Speaker 1: is where it comes into what are using ets for?
Speaker 1: If you're trading them and you're looking to play rates
Speaker 1: and and you know economic data around home construction. I
Speaker 1: think these ETFs are great trading tools for that. But
Speaker 1: for most people who just want to take advantage of
Speaker 1: the low costs and the tax efficiency, you're gonna get
Speaker 1: a couple of homebuilders in your bigger, more mammoth mainstream
Speaker 1: ETFs like the SMP five the broad market. So I
Speaker 1: think that's also an important thing here. When you're looking
Speaker 1: at the sort of windshield and what to play and
Speaker 1: what not to play, a lot of these stocks are.
Speaker 1: Are you feel a little bit of them in the
Speaker 1: bigger indices? I want to Actually we've said windshield twice now,
Speaker 1: and I'm imagining you with like in a cockpit with
Speaker 1: a windshield in front of you, like and as long
Speaker 1: as we were talking about holdings holding is obviously going
Speaker 1: to be a big part of that. What else is
Speaker 1: on your windshield? So in addition to the holdings that
Speaker 1: we had that we had that we focus on, we
Speaker 1: we do think that expense ratio is important. So the
Speaker 1: more money that goes into your investment and less into
Speaker 1: the pocket of the asset manager, the better your potential
Speaker 1: returns can be. Now, the the in that example of
Speaker 1: that home construction one, just to beat that one, that
Speaker 1: dead horse a little bit. Boy, let's not dead house.
Speaker 1: So we're beating the dead house, right, We're beating the
Speaker 1: dead house man. The gap is much bigger than the
Speaker 1: expense ratio. But if you bought things that were cheaper,
Speaker 1: all things equal, if they're close enough in alignment, you're
Speaker 1: gonna be better off. So we use the expense ratio
Speaker 1: in our analysis. We also think that liquidity is something
Speaker 1: that matters at the e T F level. So e
Speaker 1: T s that have more assets tend to be traded
Speaker 1: more frequently if they trade, if there's more people who
Speaker 1: want to buy it when you're looking to sell it,
Speaker 1: that trading costs and also known as that bid ask
Speaker 1: spread is going to be much lower, and that's going
Speaker 1: to be another cost that's important for your returns. Just
Speaker 1: two quick metaphors, and the I tend to look at
Speaker 1: expense ratio as a termite, and it's living in your
Speaker 1: total return, and the smaller it is, the less it's
Speaker 1: going to eat out of that total return. And this, ultimately,
Speaker 1: like Todd said earlier, is why active managers have struggled.
Speaker 1: It's not because they're that bad. They kind of have
Speaker 1: to play behind the starting line. They have to overcome
Speaker 1: a one percent expense ratio or something like that. Then
Speaker 1: all the trading costs and the fund which are usually
Speaker 1: another percent. So you could say that the e t
Speaker 1: F for index fund plays with a huge lead there
Speaker 1: right behind the starting line, which would be the expense ratio.
Speaker 1: And so if you're active, you've got to make that
Speaker 1: whole gap up just to be even. Then you got
Speaker 1: to try to outperform beyond that. And that ultimately hits
Speaker 1: to why this whole passive thing is is getting so big,
Speaker 1: is because people are understanding that. And so the I agree,
Speaker 1: and the expense ratio should be a decision part the
Speaker 1: decision making process, especially if it's something that is well diversified.
Speaker 1: So we again have referenced the spire a couple of times.
Speaker 1: There's three e t f s that are out there
Speaker 1: that track that market cap weighted product. Two of them
Speaker 1: are four basis points. The third one is nine basis points.
Speaker 1: You know, as Eric has talked about beforehand, I believe
Speaker 1: you know, money is going into the cheaper products because
Speaker 1: it's a similar product. The differences. You know, if you
Speaker 1: invested ten thousand dollars in the eye Shares product versus
Speaker 1: the spider product in the beginning of this year, you
Speaker 1: would have saved four dollars enough to buy yourself a
Speaker 1: cup of coffee someplace, But it really didn't make that
Speaker 1: much of a difference of what's there or a slice
Speaker 1: of pizza and penn station. Yeah, I heard Joel recommends
Speaker 1: not eating because he threw up after he did, but
Speaker 1: not enough to pay for termite damage exactly. But the
Speaker 1: lower the fee, the better, as long as there's enough
Speaker 1: similarity in the strategies that you're comparing with one another.
Speaker 1: This whole concept of going to just the cheapest fund,
Speaker 1: You're right, one basis point, cheaper is now moving billions
Speaker 1: of dollars. One okay, this one's four basis points that
Speaker 1: if I'm gonna put my money into it. I agree
Speaker 1: that it's short sighted, But do you think that there's
Speaker 1: some do you understand why people are doing that. Do
Speaker 1: you think that there's this backlash over the last twenty
Speaker 1: years where they thought, man, I paid all this money
Speaker 1: and I didn't really get a lot out of it.
Speaker 1: The only thing I trust right now is the cost.
Speaker 1: Like it's become like almost like a backlash against trusting
Speaker 1: performance in the past. So I think people should be
Speaker 1: buying among the cheapest products that are out there. But
Speaker 1: I think what they should do is they should pick
Speaker 1: up two or three products that fit that criteria of
Speaker 1: what they're looking for. And you can screen on various
Speaker 1: platform brokerage platforms. You can do it on Bloomberg, you
Speaker 1: can do it from our research tools at cf A.
Speaker 1: Find three et fs that are out there. Let the
Speaker 1: expense ratio be one of the characteristics said you look at.
Speaker 1: But then similarly, even though I don't think people should
Speaker 1: buy based on the cheat on the best performing e
Speaker 1: t F, if you saw a performance differential old that
Speaker 1: was a couple of basis points, then by the cheapest
Speaker 1: one that's out there, it really doesn't matter. From the alternatives.
Speaker 1: But if you look at something and you see something
Speaker 1: is outperforming by four hundred, five hundred, six hundred basis
Speaker 1: points versus something else, and it's more expensive or it's cheaper,
Speaker 1: you might want to investigate why that is. Do a
Speaker 1: little bit further analysis to say, here's what this is,
Speaker 1: here's what's different. There's been product feed cuts have happened,
Speaker 1: and we saw, you know, State Street, for example, lower
Speaker 1: the fees quite sharply in there now commissioned free available
Speaker 1: on on a certain platform as well. There's similarities between
Speaker 1: what's going in and what you know, it's State Street
Speaker 1: replaced on the TV Melitary platform. But then there's some differences.
Speaker 1: If you're looking at things that are dividends or you're
Speaker 1: looking at things that are outside the United States, there's
Speaker 1: a big gap because they're constructed differently. And so I
Speaker 1: understand why people are buying the cheapest. You want to
Speaker 1: pay as little as possible for that, but you you'd
Speaker 1: want to get a second opinion before you ended up.
Speaker 1: You don't go to the cheapest Karmaca antic that's out there.
Speaker 1: There's a reason things are cheap sometimes sometimes, and I
Speaker 1: agree there's definitely something to that and again the holdings
Speaker 1: and the waitings are like the engine back to the
Speaker 1: car metaphor. And you're right. I also think a lot
Speaker 1: of this low lowest of the low cost is driven
Speaker 1: by advisors who are worried about this. There's a fiduciary
Speaker 1: rule coming and they are now connecting fiduciary with cheapness.
Speaker 1: They just think if they don't pick the lowest cost
Speaker 1: product possible, they might get sued for not being fiduciary.
Speaker 1: And that's a whole another sort of angle on this.
Speaker 1: But I think you're right. There is possible people could
Speaker 1: crowd in to something that they didn't really want just
Speaker 1: because it was a little cheaper than the other one.
Speaker 1: But there's things the good I'll do. The good for
Speaker 1: the fact that fees are coming down is things that
Speaker 1: you wouldn't have paid attention to you beforehand because the
Speaker 1: price was too high is now available and on someone's
Speaker 1: radar screen. And now there's more choices, so there's more
Speaker 1: low cost choices to consider. You don't have to just
Speaker 1: buy something because it undercut by by one pain or
Speaker 1: a dollar out of your your ten dollar investment, but
Speaker 1: it's available for you to be able to compare and
Speaker 1: contrast with and I love that there's more choices that's
Speaker 1: out there. One again, you know, career longevity. They need
Speaker 1: someone to help store through this universe that's out there.
Speaker 1: I also love it because you know, you don't want
Speaker 1: to just buy something just because it's at the front
Speaker 1: of the register. You know, they you know, at a
Speaker 1: at a story, they'll try to get you by your
Speaker 1: eyes hatch something for where it is. It doesn't necessarily
Speaker 1: mean it's the right thing for you. There's certain things
Speaker 1: that are at a different level of the shelf that
Speaker 1: make a lot of sense for you overall totally. But
Speaker 1: this is where this gets when I when we point
Speaker 1: out cheap stuff, especially on Twitter, I'll get the same
Speaker 1: comment from different people, and it's it's almost inevitable. An
Speaker 1: active manager will go, well, would you pay you know,
Speaker 1: would you always pick the cheapest clothes or the cheapest car? Yes,
Speaker 1: there is what you're saying is true. But this is
Speaker 1: different because cost does come out of your return. It's
Speaker 1: not the same. It's complicated. It's not just like oh
Speaker 1: if because if a manager charges four percent, that does
Speaker 1: not mean you're they're going to do better. It's not
Speaker 1: the same as buying closer cars where like, okay, a
Speaker 1: Lamborghini is what um call it half a mill half
Speaker 1: a million dollars. That's definitely the best car, right right, Yeah,
Speaker 1: it's better than the Chete Right, it's better than a Chevette. Okay, fine,
Speaker 1: But in in investing, it's possible if you paid a
Speaker 1: hedge fund three the Vanguard whatever at four basis points
Speaker 1: could outperform it and that cost could be a big difference.
Speaker 1: That that's that's where it's there's it's a there's a
Speaker 1: gray area. I think, oh, completely agree, so you should.
Speaker 1: That's why caut shouldn't be the only thing that matters.
Speaker 1: Holding shouldn't be the only thing that matters. Performance should
Speaker 1: be the only thing that matters. The good thing is
Speaker 1: e t s are transparent. They tell you what's happening.
Speaker 1: The e t F providers on their website will show
Speaker 1: you everything that was in the portfolio as of yesterday.
Speaker 1: They'll show you a bunch of metrics as they have to,
Speaker 1: and thankfully they have to so we can do research
Speaker 1: that comparis and contrastings. You have that on the Bloomberg
Speaker 1: turnminal as well. To be able to do that. It's
Speaker 1: there for you to then learn as much as possible
Speaker 1: about your potential investment, the same way you would learn
Speaker 1: as much as possible when deciding again whether to buy
Speaker 1: a car and what it is, or what school you
Speaker 1: might put your kid into, or what neighborhood you might
Speaker 1: look to buy a house. And but you just shouldn't
Speaker 1: buy the cheapest just because it's the cheapest. So we
Speaker 1: talked about holdings and we talked about costs, which are
Speaker 1: probably like the two most important things from a due
Speaker 1: diligence standpoint. But let's kind of change gears and go
Speaker 1: next level and talk about some of the things that
Speaker 1: you guys, being the professionals that you are incorporating into
Speaker 1: due diligence. And there's a word that I want to
Speaker 1: drop that I think we want to start with, which
Speaker 1: is liquidity. How do you guys look at that? Liquidity
Speaker 1: is another way of how much it's traded, how much
Speaker 1: activity is there there. And you know, volume is what
Speaker 1: most people think of because stocks have volume and that's
Speaker 1: all they have. But in e t F this gets
Speaker 1: a little complicated because the way shares are created and redeemed.
Speaker 1: You could use the basket of the E t F
Speaker 1: as another source of liquidity. So it's complicated, but I
Speaker 1: think in general you should start looking at the volume.
Speaker 1: But I'm pretty liberal. I think unless it doesn't trade
Speaker 1: that much, or trade let's say less than um, we'll
Speaker 1: call it maybe like a million dollars a day. Some
Speaker 1: ETFs are really like on the death watches. Ron Roland
Speaker 1: would call them. There's e t f that are like
Speaker 1: on life support. There maybe like four or five of those.
Speaker 1: Then there's a middle pack where you probably have to
Speaker 1: be careful putting in maybe a certain kind of order,
Speaker 1: like a limit order. But then I'd say the top
Speaker 1: five e t f s you're probably just fine doing that.
Speaker 1: And so if you had to have a cut off
Speaker 1: of volume, I would say maybe over ten or twenty
Speaker 1: million dollars worth of volume a day. And you know
Speaker 1: that's they're gonna have pretty tight spreads. That's just there's
Speaker 1: there's nuances to this, but generally that's that's what I
Speaker 1: think of as liquidity. Yeah, and so the connection to spreads,
Speaker 1: which is part of the cost conversation that we that
Speaker 1: we had earlier, I think is relevant specifically with equity
Speaker 1: e t F. So we look at the bid Esque
Speaker 1: spread as a metric that we use within our within
Speaker 1: our research at c f r A, we don't look
Speaker 1: at the trading volume specifically, and when we're looking at it,
Speaker 1: it's more at the shared traded as opposed to the
Speaker 1: dollar mant You can see it's reported in both ways.
Speaker 1: You just have to make sure you're doing the math
Speaker 1: to figure out what that is the number of shares
Speaker 1: you might be putting in. I think I would think
Speaker 1: of it this way, if you are looking to put
Speaker 1: in a trade and how much was your amount of
Speaker 1: money to go in in relation to what that daily
Speaker 1: volume is, and if it's disproportionately high, then I'd be concerned.
Speaker 1: That would be a red flag for me as an
Speaker 1: individual investor, because I may be able to buy the shares.
Speaker 1: That's it's not too hard to find someone who wants
Speaker 1: to have shares created. As Eric talked about, it's the
Speaker 1: getting out part when you want to get out that
Speaker 1: that tends to be the bigger challenge. And often when
Speaker 1: you want to get out, when other people want to
Speaker 1: get out too, and the price you end up paying
Speaker 1: a couple of other things. So one bec because these
Speaker 1: if we're talking about equity e t F S new
Speaker 1: shares can be created relatively easily when there's high demand
Speaker 1: for what that is. And if you're buying a large
Speaker 1: cap oriented ETF that holds Apple and Exxon and Facebook
Speaker 1: and what have you, then there's liquidity and those underlying
Speaker 1: shares that new things can get be created quite easily.
Speaker 1: If you're looking at emerging markets, or you're looking at
Speaker 1: small caps um or you're looking perhaps at you know,
Speaker 1: something that's more narrow and focus thematic for where it is,
Speaker 1: where there's a number of stocks that don't trade as
Speaker 1: frequently individually, then that should be a bigger problem. Within
Speaker 1: bond ETFs are fixed income ETFs, we do think liquidity
Speaker 1: should matter so trading volume in relation to market cap
Speaker 1: in part because and I know you guys have talked
Speaker 1: about this beforehand, not every bond trades on a daily basis,
Speaker 1: even though the e t F that holds those bonds
Speaker 1: trades on a daily basis. So to create new shares
Speaker 1: of a bond is a little bit harder to be
Speaker 1: able to do to get full representation of what's out there.
Speaker 1: And so that's why we've it gets more important to
Speaker 1: pay attention to liquidity in the bond ETF product specifically
Speaker 1: if we're talking about something like on a corporate space
Speaker 1: or an emerging market space, but high yield bonds, you know,
Speaker 1: something like a quarter of the underlying bonds inside are trading,
Speaker 1: possibly on a daily basis. I think it's even less.
Speaker 1: But um, you know, like we said last week that
Speaker 1: that is definitely when I would not call plain vanilla,
Speaker 1: which is high yield. But I just wanted to take
Speaker 1: a quick step back and sort of define bit as spread.
Speaker 1: I think it's a term that sounds kind of jargon.
Speaker 1: E really just think about it about there's people who
Speaker 1: are in the middle of all this action, right they
Speaker 1: buy and sell shares so that you can buy and
Speaker 1: sell shares. We call the market makers. They make a
Speaker 1: market in that right, So you can think of Las Vegas,
Speaker 1: or if you've ever had a bookie, not that I have,
Speaker 1: but you know, if you have out there, you know
Speaker 1: they called the vig It's a little tiny piece just
Speaker 1: for them being in the middle and offering two markets
Speaker 1: to people. And that is what the spread is. And
Speaker 1: the more the E t F trades, the bid is
Speaker 1: what they'll sell it to you for. The ask is
Speaker 1: what they're asking to buy it. So you's usually a
Speaker 1: hiny difference and that's just what they keep. So a
Speaker 1: lot of e T s trade with what's called a
Speaker 1: penny spread, so they're only keeping a penny of that transaction.
Speaker 1: Some can creep up to three, four or five cents.
Speaker 1: But if you take that in turn into a percentage,
Speaker 1: you're looking at maybe one to twenty basis points and
Speaker 1: was Todd was looking at early. The longer you're holding period,
Speaker 1: the more that gets diluted over time. So when you
Speaker 1: talk about mutual funds, they have front end loads where
Speaker 1: they they and a lot of mutual funds but charge
Speaker 1: you five percent just to get in. That is what
Speaker 1: I look at the spread as it's sort of a
Speaker 1: an initial fee for getting in. And you could look
Speaker 1: at one two twenty basis points as nickel dime compared
Speaker 1: to a load in a mutual fund. So I think
Speaker 1: sometimes that's a kind of a different way to look
Speaker 1: at what a spread is as a cover charge basically, yeah,
Speaker 1: cover charge, Yeah, that's a good that's a good way
Speaker 1: of thinking of it as well. I do think the
Speaker 1: way the way that you're thinking of it as important.
Speaker 1: So people who are at first embracing E T F
Speaker 1: s and perhaps are learning more about it through through
Speaker 1: these podcasts. Are coming at it from a mutual fund
Speaker 1: world where you're used to putting in an order whenever
Speaker 1: you want to put in an order, and it gets executed,
Speaker 1: and your money gets taken from you and put into
Speaker 1: the underlying investments at four pm when the market is closed,
Speaker 1: or after four pm when the market has closed in
Speaker 1: that regard, and then nothing. It's just all happens behind
Speaker 1: the scenes and they take out whatever that sales load
Speaker 1: is and and your ten tho dollars ends up being
Speaker 1: nine and fifty dollars less or whatever it is for
Speaker 1: the cost. The e t F is transparent. They you
Speaker 1: can see what's happening there. That's an advantage to you
Speaker 1: as an investor, but it shouldn't scare you out of
Speaker 1: doing it. The same way if you're going to buy
Speaker 1: a stock, there is a trading cost to buying a stock.
Speaker 1: There's a trading cost to buying an e t F.
Speaker 1: It's just because things are so competitive, the same way
Speaker 1: it is in the ets space. In this market maker space,
Speaker 1: when there's a lot of volume, the costs come down
Speaker 1: quite low and are quite favorable for a potential investor.
Speaker 1: If you're buying something that nobody else is buying, you're
Speaker 1: gonna have to pay a premium for that execution to
Speaker 1: get that trade taken part of it. And that may
Speaker 1: make sense for you to do. It may be worth
Speaker 1: it because it's the only way to get exposure to
Speaker 1: a certain trend. Yeah, and I would I have a
Speaker 1: term I called exotic nous. Think about what you're buying. Okay,
Speaker 1: if it's you know, junk bonds or the Vietnam etiam,
Speaker 1: if it seems exotic, know that there's probably some some
Speaker 1: frictional costs that are going to be associated with that,
Speaker 1: Whereas if it's plain vanilla, you're probably gonna be charged
Speaker 1: hardly anything in terms of that cover charge. So because
Speaker 1: the cover charge that like in the high yield area,
Speaker 1: that may not show up in the spread. But then
Speaker 1: there's also the pre there's other ways that. In other words,
Speaker 1: there's no free lunch. You know, the people who are
Speaker 1: making these markets and doing all this work, they're gonna
Speaker 1: take a cut for themselves. It's just the much smaller
Speaker 1: cut compared to what a load was for a mutual fund. Yeah,
Speaker 1: So if I could just do the free lunch part,
Speaker 1: of it. Because we're seeing more and more these days,
Speaker 1: and we touched on earlier of of I think ket
Speaker 1: and Merritrade when they made changes to the platform. We're
Speaker 1: seeing commission free products widely available on various brokerage platforms Schwab, Fidelity,
Speaker 1: e Trade, TV, Merriage Trade to all these very merrow
Speaker 1: Edge I think has it as well. And so that's
Speaker 1: a cost that you'd be paying from a commission standpoint
Speaker 1: that continues to come down, but there is still a
Speaker 1: cost there. Something can be commissioned free. It sounds well, okay, great,
Speaker 1: I can be able to buy this and not pay
Speaker 1: any additional charges or cover charges for what that is.
Speaker 1: But if that trading costs a bit, ask spread is
Speaker 1: relatively wide because no one else is doing it. It's
Speaker 1: showing up on this platform perhaps because the asset manager
Speaker 1: wants to make this. They want to get premium shelf
Speaker 1: space for what it is. Some things again that are
Speaker 1: showing up on there makes sense in a portfolio and
Speaker 1: some things don't. And it really is something that investor
Speaker 1: needs to go beyond. Okay, so back to this next
Speaker 1: level windshield. You guys are in this cockpit, look at
Speaker 1: all your various stuff there's another one, volatility. How do
Speaker 1: you take that into account? So we do. The only
Speaker 1: metric from an et F perspective that we rely on
Speaker 1: historical performance, is a standard deviation. If an e t
Speaker 1: F has a three year track record, we use that
Speaker 1: three year stand deviation. If it doesn't yet have a
Speaker 1: three year track record, we still are rating it. We
Speaker 1: cover about fo et F that don't yet have a
Speaker 1: three year track record at c f R A, but
Speaker 1: we do think it's relevant. So above average returns taking
Speaker 1: on above average risk isn't necessarily a good thing for
Speaker 1: every investor. Some people are willing to deal with that
Speaker 1: level of volatility from within. So again, you don't want
Speaker 1: to just pick two thousand seventeen's best performing securities e
Speaker 1: t F. They're often the best performing ones in two
Speaker 1: thousand and seventeen because they significantly underperformed in two thousand sixteen,
Speaker 1: and then there's a good chance that they're gonna revert
Speaker 1: back to the mean in two thousand eighteen if there's
Speaker 1: a lot of vlatility. So we that's one of the
Speaker 1: things that we focus on at c f R A
Speaker 1: standard deviation. Standard deviation sounds like something from stats class
Speaker 1: in college. So but I'm telling you this is I'm
Speaker 1: gonna format it for you. You were gone skiing, I
Speaker 1: know you have, right, yeah, snowboarding, Yeah, of course. Anyway,
Speaker 1: Well I like to ski, Joel likes the snowboard. Anyway,
Speaker 1: we get to top of the hill. There's a sign
Speaker 1: for how steep the slope is? Right, double black, diamond,
Speaker 1: blue green for that's where Yeah, that's right, am I
Speaker 1: he where's the bunny slope called? Because that's what I'm
Speaker 1: using on. So you got you got a Philly's jacket, right,
Speaker 1: and it's like unzipped and flapping in the breeze. I
Speaker 1: can totally see you on the green. I know your type.
Speaker 1: I'll let you live with that image because it's better
Speaker 1: than the reality. But that's okay. So the ski slope
Speaker 1: metaphor works. And when we when Todd talked earlier about
Speaker 1: whether you're buying equal weighted or how it's weighted, and
Speaker 1: you could buy it, you could be unpleasantly surprised. Standard
Speaker 1: deviation will tell you how much up and down you're
Speaker 1: gonna experience. All standard deviation says say the standard deviation
Speaker 1: is that just means there's a two third percent chance
Speaker 1: that it's going to go up or down. That's the range.
Speaker 1: So what you want to do is look at where
Speaker 1: the sp I think right now, the standard viation is
Speaker 1: about six percent, maybe seven percent. That's a little low
Speaker 1: because volatility has been low. So where is this et
Speaker 1: F I'm gonna buy? Take something like XOP the spider
Speaker 1: oil drillers exploration. Sounds like a pretty general sector play,
Speaker 1: but that probably has a standard deviation of of cent.
Speaker 1: So you gotta go, okay, this is three times is
Speaker 1: likely to lose me or win me money than the
Speaker 1: S and P five hunter. But then a bond ETF
Speaker 1: might have a standard deviation of two percent or three percent.
Speaker 1: That is why that is so key because if you
Speaker 1: miss something on the holdings or the waitings, the standard
Speaker 1: deviation will alert you to what might be inside. Because
Speaker 1: you could have an equal uh market cap weighted portfolio,
Speaker 1: but you might not notice they're all small caps, and
Speaker 1: the standardviation will clue you out that hey, this is
Speaker 1: gonna be a wild ride. So you did the Philly thing.
Speaker 1: I'm I'm a met fan, not a you know, not
Speaker 1: a good year. This past year for in here with
Speaker 1: it's been is going to be a better one. Pitchers
Speaker 1: won't get hurt. But you know, to use a baseball analogy,
Speaker 1: you know, singles and doubles is a good way of
Speaker 1: going if you're if you're a home run hitter and
Speaker 1: you're aiming for the home runs and swinging for the
Speaker 1: fences for what it is, you're gonna strike out quite
Speaker 1: a bit. So something that has relatively low volatility, a
Speaker 1: relatively consistent performance is going to be a You could
Speaker 1: be a three hitter getting singles and doubles all the
Speaker 1: time and be able to do that as opposed to again,
Speaker 1: met fan, not a Yankee fan, Aron Judge, you hit
Speaker 1: some runs and strikes out quite a bit. Good ballplayer,
Speaker 1: different different kind of expectations that you have. Okay, so Todd,
Speaker 1: here we are marching along through your checklist. What do
Speaker 1: we come to next? So we covered a number of things.
Speaker 1: We covered holdings, we covered costs, we covered liquidity. The
Speaker 1: one thing that we don't use that I know others
Speaker 1: do is tracking ERA, which is what so how well
Speaker 1: that e t F tracks the underlying index that it
Speaker 1: chose to track. And so the reason we don't do
Speaker 1: that is, as I guess a couple of things, but
Speaker 1: most importantly most e t F s are tracking a
Speaker 1: different index then something else you might be considering, and
Speaker 1: so yes, it makes sense if you're dealing with those
Speaker 1: three SMP five hundred index based products that we talked
Speaker 1: about this year, we're seeing about a five basis point
Speaker 1: differential between SPY and I, v V and v O,
Speaker 1: the three SMP five d index based products. Coincidentally, that's
Speaker 1: the difference in the fee that's there, and so that's
Speaker 1: one of the reasons that they'll be different. But if
Speaker 1: you're looking at one, you know, we use home builders
Speaker 1: as an example, But if you're looking at a low
Speaker 1: volatility e t F from power Shares s p l
Speaker 1: V and a minium minimum alatility e t F from
Speaker 1: I Shares U s m V as the example, the
Speaker 1: indexes are quite different. The rules are different, the holdings
Speaker 1: are different, the sector exposure is different. The fact that
Speaker 1: one tracks its index better than the other one really
Speaker 1: doesn't tell you how well it's doing, because it's it's
Speaker 1: trying to track something completely different. How well it I
Speaker 1: am at following one recipe and how well Eric is
Speaker 1: at following a completely different recipe doesn't make any sense
Speaker 1: if I'm making you know, peanut butter and jelly sandwich,
Speaker 1: and he's making meat ball palm. That's all that Eric
Speaker 1: knows how to make, as you mentioned food, because he
Speaker 1: goes crazy. He's now he cannot focus on the show anymore.
Speaker 1: But how do you feel about tracking air? So I
Speaker 1: agree with Todd, You're right, they're all tracking different things.
Speaker 1: I guess I would look at it because the I
Speaker 1: would take a step back though. What's an E T
Speaker 1: S purpose in this life? It is to track an index.
Speaker 1: I mean that's ultimately what it's designed to do. And
Speaker 1: people think it's like a robot, right, Like there's how
Speaker 1: right from Space Odyssey sitting there tracking the index. But
Speaker 1: there are human beings who tracking an index and a
Speaker 1: lot of things happen, rebalances, corporate actions. They've got to
Speaker 1: make sure they track that index well. And that's passive
Speaker 1: portfolio management. I think it's an underrated job. It's because
Speaker 1: if you tie you in and nobody cares, like, you know,
Speaker 1: there's if you're not noticed, that's a good thing. But
Speaker 1: so that's why I bring up if you notice a
Speaker 1: high tracking difference, that could be a red flag. So
Speaker 1: you look at the index return and you look at
Speaker 1: the e t F return. If they're really far off you,
Speaker 1: they want to just think, Okay, why you know what's
Speaker 1: going on? Like the Vietnam ETF. Back to that one
Speaker 1: that does have a high tracking error. But in that
Speaker 1: one you can go, well, that's because I'm getting local
Speaker 1: Vietnamese stocks. It's a lot of it's highly exotic. I'll
Speaker 1: live with it. But if you see how high tracking
Speaker 1: on like a MidCap growth fund or something like that,
Speaker 1: it might mean somebody is to sleep at the wheel. Correct.
Speaker 1: I want to ask you one more question that gets
Speaker 1: right to the heart of who you are and what
Speaker 1: you do, because you're both an analyst for mutual funds
Speaker 1: and for e t f s. And obviously we've talked
Speaker 1: a lot about the growth of the e t F,
Speaker 1: but to some extent, that's at the expense of the
Speaker 1: mutual fund. So what do you think the future of
Speaker 1: the mutual fund is? So I think that we're going
Speaker 1: to continue to see money bleeding out of actively managed funds,
Speaker 1: and it's certainly inexpensive actively managed funds. It's been happening
Speaker 1: within the equity space. Investors are still quite comfortable paying
Speaker 1: somebody to drive the car. In the fixed income space
Speaker 1: and and wanting an uber driver, so to speak. The
Speaker 1: difference between active and equity and active and fixed income.
Speaker 1: Don't you think that because the SMPS market cap weighted
Speaker 1: and that's the big benchmark, and like the stocks do better,
Speaker 1: they get a bigger waiting So it's harder to beat
Speaker 1: something that's got this momentum in it, whereas on the
Speaker 1: fixed income side, the aggregate bond index that is ours
Speaker 1: is weighted by the debt the company has outstanding, and
Speaker 1: thus it doesn't have that momentum feel and it's just
Speaker 1: way easier to beat. You Do you think that plays
Speaker 1: into what you just Yes, I think it completely plays
Speaker 1: in it. And I think in part there's a people
Speaker 1: are comparing it perhaps to the wrong thing. So Bloomberg
Speaker 1: Barkley's also has something that's a different fixed income UH index.
Speaker 1: I I know the ticker that's part of it that
Speaker 1: I Shares has. It's a core fixed income product that's
Speaker 1: there that that has some high yield exposure to it.
Speaker 1: It has a little bit more corporate instead of just
Speaker 1: being tied to the treasuries that's there. It is a
Speaker 1: little bit harder, but people don't feel comfortable following what's
Speaker 1: going on in the Federal Reserve and following corporate issuance
Speaker 1: the same way they do tracking what's going on in
Speaker 1: the stock market. So people are willing to pay for
Speaker 1: often average performance within the fixed income space. I do
Speaker 1: think that's gonna shift. I think in two thousand and
Speaker 1: eighteen we're gonna see harder returns to come by for
Speaker 1: actively managed funds as the Fed continues to raise interest rates.
Speaker 1: If we hit a year now that we have E
Speaker 1: t F choices where the average actively managed bond fund
Speaker 1: declines and value, that's gonna be a red flag in
Speaker 1: two thousand and nineteen for people to go, wait, I'm
Speaker 1: paying how much for you to lose money? I might
Speaker 1: as well pay seven eight basis points for a G
Speaker 1: G or B and D from Vanguard or or some
Speaker 1: of the dozens of other products that are low costs
Speaker 1: in nature. So I do think they have a role
Speaker 1: active and passive and mutual funds and ETFs can play
Speaker 1: a role in both portfolios. But I do think the
Speaker 1: tide is continuing to shift towards gtfs. But as long
Speaker 1: as people want to know something about mutual funds, then
Speaker 1: we'd see if or A want to help them with
Speaker 1: tools to be able to do that. So closing question, Yeah,
Speaker 1: favorite et F ticker, My favorite E t F ticker.
Speaker 1: She I didn't come prepared for that one. That's why
Speaker 1: we put on the skin your brain. I know they're
Speaker 1: all in there, all floating around. It looks like it's
Speaker 1: like a ticker soup in there. I don't have a
Speaker 1: favorite ticker the ones. So I find things being just
Speaker 1: that when I paint a good picture of what it is.
Speaker 1: So like you wood and cut with your paper related
Speaker 1: and forest products, the image works out quite well. There's
Speaker 1: a wood, there's a wood w o O D which
Speaker 1: owns timber companies, and then there's a cut E t
Speaker 1: F C. Actually both doing really well. I mean they're
Speaker 1: good performs. So those are two that come to mind
Speaker 1: because you can picture the image for where it is. Uh.
Speaker 1: Because because it's a verb, I'm a fan of the
Speaker 1: verb tickers. But my favorite is move to me. That
Speaker 1: is the Mona Lisa of E t F tickers because
Speaker 1: not only is it a verb, but it's something everyone loves.
Speaker 1: A cow saying move. It's like kind of takes you
Speaker 1: back to your childhood. That's the global Agribusiness ETF know what.
Speaker 1: Probably Number one is that we didn't really ask him
Speaker 1: for his favorite, but he felt you said both of you.
Speaker 1: If there's a ticker that's out there that someone thinks
Speaker 1: would be interesting, there's likely to be an et F
Speaker 1: to follow suit. Todd Rosen Blooth, thank you so much
Speaker 1: for joining us in a pleasure. Guys, thanks for listening
Speaker 1: to Trillions. Until next time, we can find us in
Speaker 1: the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, and a
Speaker 1: bunch of other places that probably haven't heard about yet.
Speaker 1: We'd love to hear from you. We're on Twitter, I'm
Speaker 1: at Joel Webber Show, Key's at Eric Faltunas. Trillions is
Speaker 1: produced by Jordan Bell with help from Magnus Henrickson. Francesca
Speaker 1: Levie is the head of Bloomberg Podcast. Bye.