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Dave Nadig
2:59
Good afternoon folks, and happy East Coast heatwave.
3:00
As always you can enter questions in the box below, and we'll post a transcript of this session at the end of the day.
Also two things of note: don't forget to check out our weekly podcast at ETFPrime, and we have a new feature on the site today which we'll talk about in a few minutes ... ETF Stock Finder.
With that, lets get rolling.
Khaleesi B.
3:00
Do you think indexes that rely on artificial intelligence for their selection better capture their targeted sectors/themes?
Dave Nadig
3:01
So, this is really related to a series of iShares products that recently launched, that use natural language processes to try and put the right stocks in the right buckets.
3:02
This basic issue is actually surprisingly difficult in the modern era.  Most companies have more than one source of revenue, so figuring out whether, for instance, Amazon is a "retailer" or a tech company is less obvious than it seems.
There are a lot of competing methodologies (GICS, IBC, RBICS, Bloomberg, etc..)
and most of them share in common that a group of analysts digs into financials and tries to assess where most of the revenue comes from
3:03
The AI approach basically just reads -- it reads news articles and twitter and analyst reports -- and then tries to guess.
It's intriguing, but I'm super skeptical about it.  At the end of the day, the key thing in sectors is getting high correlations within a sector, and low correlations to other sectors.
3:04
Last time I did the math, the Reuters methodology marginally did that best, but I havent seen the full data on some of the AI approaches, so I would say "jury still out."
Anonymous
3:04
When will the new SEC ETF rules currently under comment period come into effect?  And what is the custom baskets part of that about?
Dave Nadig
3:04
So, technically we're in a 60 day comment window from whenever the proposed rule hit the Federal Register (which I'd guess would have been last Friday).
During this window, everyone with an opinion sends notes to the SEC.
3:05
The SEC then takes those comments and can either:
1: Do nothing, letting it die (this strikes me as unlikely this time around).
2: Ignore the comments, and republish the rule as a "final rulemaking."
3: Take the comments into account, and either issue a new proposal, or a new final.
3:06
how long they take is up to them - but 2 months is a reasonable guess.  So if they close comments on Sept. 1, we could see proposed final by November 1.
3:07
It's really at their discretion from there how long it takes to implement, or if there is a second round of commentary.  In general, these kinds of things phase in over time.  So I would be a bit surprised if this went into effect on January 1, full stop.  More likely there's a phased approach, where Issuers have to report which funds they think are effected by a certain date
and then at a future date, the old exemptive orders sunset, and so on.
3:08
As for custom baskets:  It's fairly simple.  Anyone with relatively recent exemptive relief has to put a full, pro-rata slice in their basket, either to make new shares or to get rid of old ones.
older firms can tweak that - putting in a security they want to sell in the redemption basket, for instance, and one they want to buy in the creation basket.
this gives them a lot of flexibility to manage both internal trading costs, and taxes.
so this levels the playing field.
3:09
(sorry, long answer, ill try and type faster!)
Galadriel Nunchucks
3:09
How do you tell when a niche or theme is to narrow to be a fund? Any funds from recent years that come to mind?
Dave Nadig
3:09
Well, we used to have a "Wound Care" ETF, and an ETF that only invested in companies based in Nashville.
SO I actually think we've come back from the brink!!!
3:10
Practically speaking, it can be hard to get too narrow for diversification reasons.  Back when we used to have a structure called "Holders" (HLDRS), they could avoid the IRS diversification rules.  At the very end, I think the B2B holder from the 90s had like 2 companies in it.
So that's DEFINITELY too narrow.
3:11
Once you get down to lists of 10-15 stocks in your niche, I think it's legitimate to ask "why bother" putting it into an ETF.
J. Gross
3:11
With Vanguard's announcement that they will offer 1,800 ETFs commission free on their trading platform, do you believe that this is a signal that the lowering of expense ratios has reached its limit?
Dave Nadig
3:11
I think this is a pretty big deal.
3:12
Essentially Vanguard is subverting the paradigm of brokerage firms charging for shelf space.  Right now, if your a small ETF issuer and you want to get on the No Transaction Fee (NTF) program at, say, Schwab, you have to pony up.  Call it somewhere around 25 basis points (its all private, and negotiated).
3:13
Vanguard is basically saying "we'll decide, and don't worry about paying us"
So why would they do this?  To gain a ton of assets in a hurry, on the belief that a lot of those assets coming in from other brokerages will find their way into either vanguard products, or to a vanguard advisor (where they charge).
3:14
I think its another price war entirely
And one that is ultimately great for investors.
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