ETF Mailbag: Answering Listener Questions

group of questions that I've gotten to Joel. He added some, and Joel is essentially going to pick five or six of the ones that he likes, and we're gonna try to answer them to cover some areas that you're interested in. This time on Trillions, we ran out of ideas. Great question here from Kevin bomb at u s c F. That's a school, No, it's actually an E T F company. Yeah, so he's in the industry. I was going to say University of Southern California, Florida. Okay, there you go. It

sounds like a sixteen seed. So here's Kevin Baum. Have you recently analyzed e t F launch size and the subsequent flows. That's a good question and very specific. There really isn't much connection. There are e t fs that open, they come out with a couple hundred million dollars. We call those big number. That's huge, right, that's bespoke. It's because issuers more and more want to line up like

an anchor tenant in that ETF. So there's a few examples, like the United Nations seeded the low carbon ETF with about a hundred and fifty million dollars, just literally like here, we want this to work. Here's some opening money. Correct, and it has barely more than that four years later. So while it's profitable on that one anchor tenant, it doesn't necessarily mean it's gonna work later. She is another one member the globe. The Diversity e t F Gender

Diversity ETF has three two million. Almost all of that was seed from calisters on the flip side. That's um, yeah, pension money that're looking to do that, and they didn't really you know, beef up more after that. But having that money in there, you'd think might attract other people. In that case, it did not. So organic flows usually

it doesn't matter. Usually what determines whether an ETF gets assets is whether it just starts to crush the index, like it just shoots right up and just it becomes too big to ignore. The out performance, Yeah, the outperformance. The other thing that can attract people is if it comes in dirt cheap um. When something is so cheap, it just excites people. A good example is the Goldman sachs Um Multi Factory t f G s LC. That's

not a great ticker. The the strategy is not that easy to understand, but it charges point oh nine percent. So for for a smart beta type strategy that was like hugely cheap at the time, and that thing has a couple of billion dollars. And what's interesting about both of these though, the from flows perspective is like it's sticky money, right, It's all this money has come in and it's stuck around. When e t f s are cheap,

the money's tends to be more sticky. When the ones that they get money because they're high flyers and they have a good run, like the Robotics CTF, when when that event when they inevitably clucked crash and they will there'll be a time when they really underperformed the indexes. They're probably going to see some outflows, but not all, so that money is less sticky, but not entirely not sticky.

I'd say half is sticky. Some people I think forget they bought it, or they really believe in the idea. Kevin Bomb at usc F, thanks for the question. Okay, nothing matters more to me than my retirement money. But one thing I know about my four ohhen K is that it doesn't hold e t s. Why is that good? I get this question a lot, and the reason e t s aren't four when K plans is because a lot of the advantages that we all know about them don't really matter there. Right, So I'll go over a

couple here. Um, the tax efficiency, that doesn't matter because you're already buying its pre tax. It's pre tax, right. Um. You also don't need to interdate trade your fourwind K plan, so the trading please don't do that. Yeah, the liquidity kind of doesn't matter. And then you also have the

cost issue. Right. E t f s are dirt cheap. However, in a four one K plan like say Bloomberg, we pull all our money together, we can afford the institutional class of mutual fund and the eye class as almost as cheap as an E t F. Correct E t F s ultimately are kind of priced at the institutional class level, where the four one k market where you're going to see the shift is you're going to see index funds take over. And then the other thing is

there's some technical accounting issues with buying fractional shares. I won't get to the weeds, but the idea that if you put money in all the time, when when you go to buy a mutual fund, there is no bid ask spread, whereas E t F you have to buy it that spreads. You could argue that dripping and dripping and dripping money into an e t F could cost you more than on the mutual fund side. But on outside of a four wing k plan, an e t

F will blow away a mutual fund. But that's why the four one k plan is essentially the mutual funds Alamo because they're protected there. Right. E t f s can't really get in there trapped. You know, they're they're fighting for their life there. I love the Alamo metaphor. That was a good one. Have you been It's quite small it's funny. I grew up in Texas, but I never went. Also, that Alamo story didn't work out so well in the end. That's why I use the metaphor. Okay,

came up just a couple of seconds ago. You said something that I want to ask you about bid ask spread. I don't think we've actually really addressed that one. What is bidass spread? Bidass spread is essentially the round trip toll for trading in ETF, the difference between what you can what they'll sell and buy because they're making a market.

And usually for most TTF there's a penny difference, right, So if you bought like say spy, you buy it at say a hundred dollars and one cent, but when you go to sell it, you have to sell it for a hundred dollars even you're losing a penny and that is what the middlemen make for making the market. So it's very tiny. And if you take that penny and divide by the price of the e t F, you're talking about point oh one in cost. But that's important. But if you do that all the time and you're

trading all the time, it can add up. And if you go to less liquid ETFs you may trade and may maybe four or five basis points'll have a bigger bit ass bread, right, Yes, so just look at the bit asks a spread as the tiny, tiny little cut that the middleman get for making a market in in the stocks and ETFs. Here's a great question, super meta, what's the best performing e t F of all time? So we actually just looked at this. Uh, it's interesting

if there's two categories. There's including leverage thetfs, right, and there's ones without. So we'll start with the whole enchilada rights, what's the best performing e t F of all time? We did, Yeah, and the answer to that question is T E C L what T It's nearly five thousand percent since it came out. It's the triple leveraged Tech. Triple leverage TECH of course. And the thing with leverages, if something goes up in a nice steady pattern, the

daily leverage, when it resets every day, it compounds. So that's why leverage ETFs are path dependent. If it were volatile, you wouldn't see that. But Tech has had a nice nice run since this came out. Was that it came out in two thousand eight, so it came out right at the bottom. Over ten years, it's up five thou percent. Yes,

that blows away everybody. So that's number one. If you take away leverage, which is sort of like you know, steroids, you know, and just going with like clean play, the best performing e t F is m d Y, which is the spider MidCap um. And what's interesting about m d Y it has a big head start. It came out a second e t F launched, But m d Y is midcaps, and you know, we talked about them being the g and Brady of the of the stock market because they're overlooked. M d Y since it launched

is up. Now. If you take the large caps during that same time period, they're up seve If you take small caps there are up seven. In other words, mid caps almost doubled. That is a crazy stat to me. I was shocked by that. Something to consider when you're investing in the stock market. A lot of people like broad market strategies which include mid caps, but if you go just large, you know, kind of missing out on that.

So I kind of what I what I like about this though, too, is that the leverage speaks to like the steroid era of baseball. Yeah, it's Barry Bonds, bonds like Mike Trout. Well, I would go with Roger Marris A right, Roger Marris. There you can have your contemporary, you can have your class there you go. So erk. One thing that people always ask about is um public companies, right, because the needs you have basically you're only investing in

public market. But if you look at the data over the past, you know, fifteen years or whatever, A, there's fewer public companies overall, and b there's fewer and fewer companies actually going public. So is there an option for investors to actually engage it in private markets via E t f s? Not directly, No is the answer, and this is probably why I think, you know, hedge funds and other parts of finance are always going to have

a home because ETFs can only track what's publicly available. However, with that said, I've heard a few arguments recently and I'll throw out some options. Surrogates. Microcap stocks have been argued as a close thing to private equity because these are companies that are smaller, no analysts coverage, they don't their financial strength is lower. How small are we talking with the microcap These are companies with market cap of

fifty million, two about million. And what's interesting about microcaps is there's like, there's a couple of microcap ets. IWC for my Shares is the biggest one. It holds a thousand stocks. And I looked if you take the broad market e t F like v t I, which holds you know, three thousand large, mid, small, the market cap, it barely has any microcaps. So there's a thousand stocks out there that are not even in the broad ones. The thing is, those thousand stocks together only equal one

too of the entire market. That said, nobody is really buying or getting exposure to these thousand stocks. I think that's just interesting alone that there's a thousand companies that almost nobody owns because microcap ETFs have I don't know, around a billion maybe less um. So that's one option for people who might want to just get to companies

that are closer to the private stage. Another option is there's an e t F called b U Y. This is an et F that's uh synthetically trying to get you private equity returns by looking for companies that have those attributes. So it's sort of like the microcap model, except it's going out for mid small and just looking at companies that have similar attributes and trying to basically

replicate the private equity through public equity. Interesting. One caveat that one's pretty expensive, just be careful, doesn't trade a lot, it's very new. Just a caveat on buy. Where's the microcap ETFs have a long track. I think it's all about ten years old um, and they're a little more liquid in terms of trading volume. UM. The third way is there's a private equity et f. The tracks private equity companies that are publicly listed in other words like KKR.

These are companies that, yeah, they manage private equity funds. This is a way to invest in them. However, you're gonna get a lot more exposure to things that are not private equity, like just general macro movements, the FED, those kind of things will push around these big stocks just as much as their revenues. So it's it's almost like playing equity our energy stocks through xl E when

you want oil. I think there's some disconnect there. So it's these are all imperfect ways, but they're just some options out there. I think if people are really on the hunt for something that's private equity esque. So Eric, there's this plan. It's called marijuana. I've heard of it. It's kind of popular in some places. It's even becoming legal. You know. There's medical marijuana, there's recreational marijuana, which more and more stamps are adopting. And then there's an entire

country just to the north called Canada. Canada is in the process of legalizing recreational marijuana. So what's going to happen with e t f s and marijuana? Popular question? In fact, I don't just get this on Twitter, but when I traveled around, people would ask me. People internal here who just have jobs doing whatever have said, hey, here,

potty TF. I think they sense that they want to get in on this early, and they want an e t F because it diversifies, because they don't want to go around trying to pick one of these pot stocks. They're very small, they could blow up. There's a a lot of risk volatil yes, and so a pot e t F basically cuts that risk in half. So the there's a couple of marijuana eat in half. So it takes basically, if you take the volatility of the average stock in say the Canadian Party t F or the

one in the US. The E t F has half the VALL as the of the average stock, which makes sense, right because you're sort of through that diversification. You do cut your single stock VALL in half, and people like that is a way to play that because believe me, it's volatile enough. The potty t F is about five times the volatile of the SMP, so you can imagine one of these stocks could be ten times. So these ETFs already exists. What are the tickers? The one in

Canada that came out first. Canada leads the US a lot in new E t F launches. Their regulators are very liberal. H M m J is the ticker in Canada, m m J. The tickers aren't that great. You think they're better. I think though. I think issuers didn't want to like do a touchdown dance after they got approval and like rub it in or make it more um because I think the regulators are a little like, uh not thrilled with letting E t F s out like this, either in Canada or the US with the U S ticker.

The U S ticker is m J, M and J, which is a little more obvious. I think yeah totally. Um, I think of Michael Jordan and Michael Jackson, you can think that way and the guy who created it differently. But there is one in registration with the ticker TOKE, which is pretty good. That's a verb. Tickers are the best, and that one is a good one. So MJ is the one in the US. Now there's a big difference. The US one holds more US stocks and has a little more filler. The one in Canada, I think, is

more of a pure play and holds Canadian stocks. The Canadian pot companies are the ones that have done way better because it's it's pushing, it's moving along faster there and Ken Shay of Bloomberg Intelligence gave me some really compelling numbers on the marijuana industry. If you look the sales last year in Canada were six million dollars, but they're projected to go in a year and a half to five billions. Does yes, half medicinal, half recu national,

So it's the recreational market that's the big driver. And that's five billion that I mentioned in Canada that other companies predict a little higher, like Dewitch Bank. I believe this is a seven billion. Globally it's twenty billion. And recently I was in Canada at the inside et F S Canada conference and one of the panels they do, which I'm involved with, is six or seven E t F Ana. Let's get up on stage and they all have to argue for what the best new launch was.

It's sort of a rat battle for E t F analysts and the one that you were involved in a rat battle, I was, except that's et F analysis that I'm throwing down, you know, and then the audience votes no, there's no beat. But I have power points lives. So what I showed was I showed what do you think of when I say, Mara want. I showed pictures of you know, um Grateful Day Concert, Pineapple Express, Cheech and Chong, and I said, this is what most people think of.

But then I showed the bar chart of the growth. This could be what you should think of when you think of this industry. The question is how much more can it go? Up? Right? H MMJ is a hundred and six in the past twelve months. The argument back after I laid down my case for it, The argument back, because you've got to rebuttal they came back was, well, a lot of people this isn't new. People know this is growing. The price to earnings ratio are extremely high.

It's like sort of the same argument for like internet stocks in the late nineties. One it could all go up and smoke. That's pretty good, obvious but good. So I didn't win. I came in I think second, but third based on the audience um sort of applause meter. I feel I feel like this is a consistent thing, Like you end up in these show downs and you don't take calm the gold. Yeah, but last the one I did before, I was sixth, so I'm moving up.

I think I'm gonna take it next time around. Yes, because I realized it's not really the ticker or the validity of the e t F. It's the show. Whoever just puts on the best show. And so I've raised my performance this time and got higher on the ladder. But anyway, I will so you can invest in pottytfs MJ's won the U s h MMJ is the one of what's the US one whole It's it's a mixture of Canada and US stocks. It's got mid and small caps. Again,

I asked ken Sha to look at the holdings. He said, well about it is sort of directly linked to cannabis sales, but like one company in there. I think Scott's Miracle Grow is in the e t F. That clearly pot is not a huge but it you know they are working in the industry. The question is as the industry gets a little more, get bigger, they will give more

weight to the pure play companies. But when a new industry or THEMTF starts, they kind of have to fill it out with some bigger, liquid names to make the basket actually liquid. For a little shake in your dubie. Everybody hates paying taxes, and we know that ETFs have some tax benefits. Joe Panino at Panin ll C, ask, can you do it? An analysty the tax efficiency of e t F s versus mutual funds versus hedge funds. Right, The data is is tough to crunch on this, but

morning Star actually did an analysis. I'll give them credit for this. If you look at the e t F capital gains distributions over time, it's almost the perfect record. It almost looks like a picture. No hits, no runs, no, you just look almost a perfect game. There's occasions where they will distribute to capital gains, but it's so rare um and that's what people like about e t s. It's a big I put A top five attribute is the fact that you don't get tax for doing for

just sitting there and a mutual fund. You can if a big investor were to leave the mutual fund, the manager has to cash them out. How do they do that? They sell some of the stocks. That's a taxable event, and you sit there in the fund. You get a distribution, and e t F do not have that. You still get tax when you sell it, but you don't get taxed just for doing, like a by standard kind of tax. Huge deal. E t f s almost no capital gains

distributions across their life. Mutual funds big problem. And he also asked about hedge funds, So how to hedge fund stack up? Same deal with the mutual funds. The thing is a lot of people who are in hedge funds are endowments, pensions who are going pre tax. All of what I just said only involves in after tax money, which brings us back to this idea that if you put an e t F, a mutual fund, a hedge fund in a level playing field after tax e t

F almost always going to win that battle. Oh, I like this one from at stand the m F man. It's a great hand no no comment. Yes, I don't think it's mutual fund man. No comment. Uh, here's what he asked. What are your thoughts on index provider selection like M s C I versus foot c F t S. This is a great question and it's huge. You really should look at the index. The index is the thing. Most people just look at the issue or now and the costs and the exposure. You know, A MSCI versus

Footsie is a great example. People usually bring up the emerging markets. M s C I has South Korean there at about a fift weight foot see doesn't they consider South Korea developed market? So if you were going and using m s C I, which is the I Shares version for your international you should use them as a set at least because the developed and emerging will be in line. If you used one or the other, you

might have extra or no South Korea. So you really should think about that, and that's why some people do like to use indexes sort of together for their broad exposure. I do think that looking at the index though, ultimately comes leads back to looking at the holdings the waitings, which we always talk about how is it weighted, So it's not that indifferent than looking at the exposure. But

it is important. But this is you know, it's really important because uh, it's about what you're gonna buy, right, And like say, China is an interesting one. There's been a lot of conversation about when China is in an index,

when it isn't an in an index. For instance, there's UM E t F E M M right which noticed it was created by a guy who basically was like, I want China exposure and I'm not getting it anywhere else because of the way the indexes are structured, right, which brings us to the fact that there's a lot of new formed independent indexes and what's called self indexing because when you have an E t F, you have to pay ms C I and foot see if you want to license, and it goes into your basis points.

So what you're going to find more and more is self indexing. Even the big guys, I think are going to start to wean off of the big brand names and just do it themselves. I think there's a couple exceptions, S and P five hundred ms c I emerging markets. These are rock stars. They're almost bigger than the e t F. But outside of a couple of rock star indexes, a lot of the indexes are not that big of adeal. I've seen an index get switched by an issuer and

the flows don't change. Because there's surveys that show advisors and retail in particular really are looking. They think the brand name of the issuer is more important in the brand name of the index, and they trust the you know those names more, which is that's a really phenomenal shift, totally right, because those the indexes have been forever the hemos. Institutional money typically is more focused on the index they are benchmark to the ms I, and they they're way

more into that. That's why it's important on institutional for institutional clients to have that m c I or foot see. But for retail, I think more and more they just don't care. They'll just look to the issuer. Oh it's Black Rocket, Stage Trade, it's Vanguard. I you know, I trust the name. I don't really, they don't even look. What's an example of somebody who's been self indexing lately. Wisdom Tree started it. They only they make their own

indexes and then track them. But black Rock for the first time ever self index two bond E t F s, and I would look, that's major to me because they've never done that before and they're major um. And then you have other companies that have started to come out with a Goldman sex the e T E t F we mentioned earlier, GSLC. Goldman made that index and I was tracking it, and that's ultimately what you'll find more

and more with big active mutual fund companies. They're going to take their active secret sauce, turn it into an index that's their own index, and then have an E t F tracking it. Okay, So here's probably the most basic question that a listener could ask, and I love it, which is what's the best E t F for the long term? Oh, that is a tough question. And I do get asked this here and there, and I can't give investment advice like that's that's against the rules for me.

But what I can do is I can point you to an article I wrote in something I captured in my book, and it's not one E t F but it's two E t F and I call it the Buffet Special. Warren Buffett, in one of his letters to investors, his famous letters, said one of the investors asked him

what should I invest in? So he basically pointed to his will and what he's going to do with his fortune after he passed his way, and he said to his wife, take my fortune, put it into an sp index fund, preferably from Vanguard, and then take the other ten percent and put it into short term treasury bills. So you could do that with two E t F s very easily and very cheaply. You can do it with say VOO that's the Vanguard s and P five hundred that's five basis points cost, or I VV the

I shares even cheaper at four. Then you can do there. And then you could do ten percent into SHY or s h V, which is just short term treasury builds, and I think the expense ratio and that might be ten or eleven basis points. So if you all in, you're talking about five or six basis points for your Buffet Special portfolio. And he claims that portfolio will outperform all of the professionals, all of the institutions. I back tested it, and it does. You look at the average

endowment versus that the buffet special does win. It'll obviously have times when it might not be as well, but over the long term, you know, it's hard to go against warm buffet. So well, I can't recommend an e T F. I can point you to what he said and then fill in the two E T s to sort of play out his recommendation. I think I'm gonna walk over and figure out where I do this. But put in a little holder for a buffet speci rolled ticker. That sounds like a good idea. Yeah, using his name,

I think I'm not sure that one. I'm guessing. One thing I'm really proud about with this podcast is we have a great review and iTunes. Have you seen that, Like it's like four and a half stars amazing. Yeah. No, we're getting a lot of good, good star ratings and mostly good comments. A couple other comments that we want to talk about. Yeah, so the ones that are, hey, you're doing a great job. Love the insight, you know

you love to hear that. Um, normally I don't even re read reviews, but somebody you're like that, huh, yeah, I don't because if you buy into the good ones, you kind of have to buy into the bad ones. And so I I did read them though, and I want to address too, because I think other people may feel this way. One guy says that I feel like I'm getting sponsored content spoon fed to me. Um. I'm a fan of ETFs. However, it's not all roses. There are downside that need to be addressed. Right, So here's

the thing. Yes, it's it's sponsored, but you know everything sponsored in the media. You first of all, we are we are vetting et s properly here, and we did a whole episode on the traffic light, I mean went over ten things that could be nasty surprises and et f s. We try to do the warts and all. But here's the thing. E t s are really good. They probably deserve more credit than critique, and that's why the flows are so strong. Money goes where it's treated best.

If we were really gonna be spoon fetting or like working for the man, we'd probably be trying to get people to stay in active mutual funds because it makes a ton more revenue. So I don't really agree with that, but I understand kind of why he's saying it. But you know we're not sponsored content, Like there's an advertisement at the front of the show. That's that, right, What you got one more that has been sticking with you

a little bit? We want to talk about it. Yeah, this guy who, by the way I looked up he hasn't written a positive view about anything on iTunes. Okay, so he's kind of a nasty guy. But I hear what he's saying, goes, Um, do you also do you like pop culture references? We too love pop culture and give you two minutes of filler for every actual minute of E T F information. So I get that there's been a couple episodes and guessing he does not like

the Squeaky Wheel yeah, or my police Academy reference. Afterwards. Here's the thing, Um, I do a lot of premium content on the terminal, and the TV show I do is much more for it, you know, advisors and professionals. This is purposely for people living outside of the financial bubble. There are plenty of PhD type podcasts where they talk to each other for each other. This isn't that we're

trying to We're trying to make it relaxing, fun, normal. Yeah, and also give you the information in a way that isn't like we're teaching a class, so it's by design. I'm okay getting that, but alright, look, on occasion, maybe we go a little too far down the eighties rabbit hole. The best critique I got on that front was um a listener who said, if I wanted Radiohead, I would have had a Radiohead podcast. There really should be a Radiohead podcast. I would. You know, we should know. We're

gonnavolunteer yourself. We can pitch it. I can hear the response already. Yeah, the radio Head one was probably the most far out we've gone. But look we're trying to We're hanging out with you for twenty five minutes. It's oddly intimate. It is. I enjoy being intimate with you. Eric. Thanks for listening to Trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, and wherever else you listen to podcasts. Trillions is produced

by Magnus Hendrickson. Francesco Levy is the head of Bloomberg podcast Bye