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Dave Nadig
2:59
Howdy folks, welcome to our weekly ETF.com Live! session.
You can enter questions in the box at the bottom of the page, and I'll do the best I can to answer them.
3:00
A transcript of this chat will go live by the end of the day in case you have to hop sometime in the next half hour before I get to your question.
And with that, let's get rolling!
PKD
3:00
what's the point of a total global/US bond ETF or for that matter global/U.S. stock ETF... seems like a dilution of sort
Dave Nadig
3:00
I'm guessing this comes a bit on the heels of Vanguard announcing they're launching a global bond fund.  One sec for a link:
3:01
can't find it... but to the question at hand.
Most investors have ridiculous home bias.  They invest far too much in their own country.
3:02
even worse, many investors are overloaded not just in the U.S., but in the industry or even the company in which they work.
The reasons here go back to Peter Lynch - we were all raised to invest in what we know, and hey, what do I know about, say, Brazil.
the problem is, what we want is big diversified portfolios that push us out on the efficient frontier.
3:03
to do that we need to have access to different patterns of returns.
and if we limit ourselves to the U.S. - well, we're leaving opportunity on the table.
So, just like you shouldn't invest only in tech, or only in U.S. stocks, you really shouldn't invest only in U.S. bonds as part of your fixed income exposure.
3:04
Partly it's dollar diversification, but it's also just taking advantage of opportunities.
Can you go too far? I dunno, I don't actually think so, if you're investing for the long term.  Of course if you're trying to trade tactically, you want sharp tools, and a 5000 bond portfolio isn't going to be super volatile.
which youd WANT as a trader.
3:05
but long term, diversification is pretty much always your friend.
(here;s the link)
B. Keller
3:05
I believe I read that ETFs have overtaken mutual funds in "inflows." Do you think eventually, likewise, ETFs will eclipse investments in stocks themselves?
Dave Nadig
3:05
Ah, interesting theoretical framework here.
So, structurally, really, ETFs can't own "everything"
which is what this implies.
3:06
ETFs are currently about 6% of market cap, which is a long long way from owning "everything"
Global market cap - just in equities - is something like 100, 110 Trillion dollars.
ETFs are, last i checked, globally, about 5Trillion.
3:07
and a lot of that 5 Trillion is not in equities, its in bonds, or even gold or commodities.
So there's a long, long way to go.
On a "flows" basis though, it's tough to measure.  All money comes from somewhere.
3:08
the flows into ETFs have come from mutual funds, sure, but they've also come from new-cash (earnings that's invested) or even other less liquid assets (someone sells a house, and invests the proceeds).
Some, for sure, has come from people selling stock, but if you sell $1000 of AAPL and buy $1000 of SPY, you haven't pulled any money out of the stock market.
3:09
So, in short, I am quite sure I will be long, long in the grave before we reach some theoretical tipping point of ETFs owning "too much" of global markets.
Anonymous
3:09
Can you please explain the creation-redemption and arbitrage process for ETNs?
Dave Nadig
3:09
So, background: ETNs are exchange traded notes -- they're not pools of assets, they're really bonds issued by a bank that promise a pattern of returns tied to an index.
3:10
But, the cool thing is, they have pretty much the same creation/redemption mechanism as an ETF, they just do everything in cash.
So if an Authorized Participant wants to make new shares of an ETN, they just have to hand cash to the issuer, and they get shares back.
Same in reverse, they present shares, and get cash. It's actually even easier than it is to be an AP for a traditional fund, because they don't have to create a basket or securities (or get handed one, at the end of the day).
3:11
They only hiccup can be if the bank for some reason doesn't want to accept creation orders for some reason -- this HAS happened a few times.
most notably, credit suisse stopped making new shares of TVIX, an vol-tracking ETN, some years ago, and it traded to a large premium until it finally came back down to fair value.
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