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ETF.com Live!
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Dave Nadig
1:00
Hey folks, and welcome back to ETF.com Live, the most carpal tunnel inducing 30 minutes of my week!  Let's jump right into the questions.
Bill Donahue
1:00
Dave, there are many reasons why ETFs have not penetrated the Defined Contribution (DC) market (e.g. backoffice recordkeeping limitations, tax efficiency doesn't matter, there are cheaper mutual fund share classes).  How do you see this playing out the next few years, particularly given the unwinding the DOL Fiduciary Rule and the SEC likely to issue a draft fiduciary rule sometime during the Fall 2018?  Do you foresee some ETF sponsors working with recordkeepers to develop a recordkeeping solution for DC plans?
Dave Nadig
1:00
Awesome question.  I will admit that I've gone back and forth on how important the 401(k) market will be to ETFs for about two decades now.
1:01
The real issue is this:  ETFs have grown largely on the back of a few features:  Transparency, Intraday Liquidity, Cost Efficiency, and Tax Efficiency.
1:02
Two of these are completely irrelevant in the DC market - taxes and intraday trading.
Cost: most big DC plans have some very very low cost index funds already, and the cost issue can actually work AGAINST ETFs.  Many plans are funded by 12b1 fees from their actively managed mutual funds.
So an "all ETF plan" would need to charge separately for recordkeepign.
1:04
and that really leaves transparency.  And while I think that's important, I don't think it's overwhelmed the "who pays for the plan" problem.  A vigorous fiduciary rule -- particularly one that was baked into ERISA --could force an unbundling of fees, and that would be good for ETFs -- but also for index mutual funds.
SO overall, I'm a bit lukewarm on whether we'll see a LOT of growth and activity there.
(all that said, Schwab did some very interesting work in the space a few years ago, I just don't think they've had a ton of traction sellign it).
JRutsey
1:04
Do ETFs even work for fixed income? Wouldn't active security selection of bonds be better than a passive, market-weighted index?
Dave Nadig
1:05
Traditional bond indexes don't really make a lot of intuitive sense.
They give the most money to the companies or countries that issue the most debt -- which generally skews risk.  It's not how most people personally would decide who to loan money to.
1:06
So intuitively, you're right. And given the enormous ineffeciency in the non-treasury bond markets, you'd think that crafty players would have an edge regardless.
1:07
but statistically, the average active bond manager still underperforms even the "dumb" benchmarks.  So it's a bit like the old saying about democracy: its the worst system, except for all the other options.
1:08
I'm genuinely surprised we haven't seen more true "smart beta" fixed income index ETFs take off, honestly.  There has been some good work done there, and a few funds that take advantage of some inefficiencies baked into the system.  Van Eck's Fallen Angels ETF for instance (ANGL) ...
and Deutsche has an emerging markets smart beta bond strategy I think is pretty clever.
1:09
But in general, the average active manager still struggles, even in bonds.
GLW
1:09
What's the one overlooked ETF (or type of ETF) you think should be in everybody's portfolio?
Dave Nadig
1:09
Right now - commodities.
I think a lot of people have approached commodities as just a flier in their portfolios.  They buy oil when they think its going up, etc...
1:10
But I think for most investors a long term, reballanced position in a broad, cheap, non-k1 basket of commodities makes a lot of sense.
Robert Baird
1:11
What did you think of the failed merger between Turner Investments and Elkhorn?
Dave Nadig
1:12
Kind of a breaking news question ... I don't have any inside basebal or gossip here, but in short - it looks like a bunch of the Elkhorn funds will be shutting down, and at least one will be taken over by innovator funds.
But here's the point I'd make.  Here we have what is in some ways the "worst case scenario" for a small ETF startup -- but still, investors are basically going to be just fine.
1:13
Either the fund they're in will be liquidated at NAV -- which is really just worst case a tax event they might not have wanted.
Or it gets taken over, because there's an independant board that reassigns the management.
It's really kind of beautiful -- it all just works like it's supposed to, even when things go really wrong (from Elkhorn's perspective).
Ed
1:14
We have been seeing a slowdown in overall ETF inflows? Was last a fluke for new asstes? What's going on in your opinion?
Dave Nadig
1:14
Hey Ed - so in general, I always expect flows to follow performance.  They SHOULDN'T -- but we all know that as a class, investors chase performance.
1:15
so when you have a bad month, investors sell.  Or put another way -- things go down, BECAUSE people sell.
So I actually would have been shocked to see the markets sell off and there be a ton of inflows.
1:16
I think the real story of the first quarter flows though is International Equity
1:17
If you look there at the asset class table, 40B in flows into international.  That to me says investors are making a bet not against risk, but against the U.S.  I think that's super interesting.
If we have a long term sustained equity market decline, I would suspect flows to be a bit anemic.  We saw that the last time as well.
Again, a bit of a question of which is the tail, and which is the dog, but they're just always going to be related.
1:18
And equity is still 2/3 of ETF assets.
Chris Damon
1:18
Anything from the ETF.com awards surprise you?
Dave Nadig
1:18
I was a little surprised at the winner of ETF of the year, which was the Ark Inovation ETF.
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