Guest: Dave Nadig is CEO of ETF.com. Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, he helped design some of the first ETFs. As co-founder of Cerulli Associates, Nadig conducted some of the earliest research on fee-only financial advisors and the rise of indexing.
Date Recorded: 6/01/17 | Run-Time: 57:27
Summary: In Episode 56, we welcome Meb’s good friend, and CEO of ETF.com, Dave Nadig. Per usual, we start with some background information. Dave tells us about his early days in the investment industry, starting a consulting firm that was working on a then-new idea: fee-only financial advising. His first client was a little shop that went on to become none other than BlackRock. After some professional twists and turns, including running money for a while, Dave ended up at ETF.com.
Meb then dives in by referencing an article Dave wrote toward the end of last year, called “Outlook for ETFs in 2017.” There were several key points in the article which Meb thinks can help provide a general, 30-thousand-foot overview of the ETF space. The first point – ETF flows.
Dave tells us “this is a big year for ETFs.” He then takes us through a quick recap of the evolution of ETFs, going from a purely institutional product back in its early days, to something embraced by investment advisors, to an investment vehicle for retail investors. And here we are now, somewhat full circle, with ETFs even more embraced by institutions (think endowments), only now, they’re no longer held as fringe investments, but as core holdings.
Meb asks at what point ETF assets will surpass mutual fund assets. Meb had predicted within about 10 years back in 2013. Dave tells us there will always be a demand for mutual funds – that said, he believes the cross will happen around 2025, with asset levels around $14 trillion.
Meb asks if the evolution in the ETF space today is primarily a movement from higher fee to lower fee. David believes this is the case. Most of the new flows are going toward low-cost vanilla products. Dave thinks the whole active/passive debate misses the point – it’s really about cost. This dovetails into another business/investment idea Meb has that he’s offering to any listener willing to pursue it.
Next, Meb brings us back to Dave’s 2017 Outlook piece, this time bringing up “ESG.”(This stands for “environmental, social and governance” for anyone unaware.). Dave believes that we’re near/in the greatest intergenerational wealth transfer in history. And the 40-year-olds that are inheriting, say, a $5M portfolio from their 70-80-year-old parents have different desires about what to do with that money. Dave tells us that this younger generation wants their money to do something – and this usually gets labeled ESG. So Dave believes we’ll see more funds targeting this wealth transfer.
After some conversation about industry regulatory issues and Bitcoin, the guys jump into Dave’s recent visit to “The Money Show” – a place Meb describes as the “Wild West” of individual investors. One of the biggest things attendees of the show were asking Dave about was ETF liquidity. Is there reason for concern? How illiquid can you go? Dave gives us the key takeaways: 1) remember good trading hygiene. In essence, don’t be an idiot. Use limit orders, assess fair value if you can, and so on. 2) In responding to “how illiquid is too illiquid” Dave says it’s not that simple, because liquidity is a moving target. He tells us about “the liquidity barbell.” If you’re worried about this topic, you’ll want to be sure to listen to this section.
Meb then asks about a fear the media loves to play up: “Will ETFs bring about stock market Armageddon?” Meb goes on to say how a USA Today article blames ETFs for exacerbating bad investing habits.
Dave says you can’t blame ETFs for bad investor timing. That’s just how we’re wired. But he goes on to say that many of the arguments against ETFs can be traced back to the old guard – people who are trying to defend active management shops that are underperforming, or defend the lack of transparency in their investing process. But their main argument is worth understanding – namely, the indexing problem; the idea is that if everyone owned index funds, then price discovery would be impossible. But Dave says we’re a long way from having this problem.
As usual, there’s plenty more in the episode: exchange traded notes… the regulatory change Dave would like to see… buying ETFs at NAV… Dave’s one piece of advice offered to help listeners the most… and Dave’s answer to a new question: since Dave is a big “game” lover, Meb asks which three games are his top 3 of all time.
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Links from the Episode:
- 3:08 – https://www.factset.com
- 3:10 – http://www.etf.com
- 5:35 – The Outlooks for ETFs in 2017 – Nadig
- 14:57 – “Here’s How Much Money the ETF Industry Makes” – Nadig
- 22:06 – Wes Gray’s active share resource – Visual Active Share – Gray
- 29:24 – https://www.moneyshow.com/
- Dave’s article on The Money Show – Nadig
- Dave’s article on Socially Responsible ETFs (ESG) – Nadig
- 51:46 – Mass Effect (video game)
- 52:14 – Caverna (board game)
- 54:20 – Dave Nadig on Twitter
Transcript of Episode 56:
Welcome Message: Welcome to The Meb Faber show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
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Meb: Hello, podcast listeners. Today, we’re welcoming a good friend as well as the CEO of etf.com, Dave Nadig. Welcome to the show.
Dave: Thanks for having me. I’m a loyal listener so it’s an honor to be here.
Meb: So, normally I’m hanging out with you and you’re wearing a black band t-shirt from some historical band. You’re not today. What’s going on? I feel like…
Dave: I’m luxuriating in my home office on a beautiful summer day so no need to gussy up. Don’t be insulted that I didn’t gussy up for you, Meb.
Meb: It also looks like you have a, like, race car seat that you’re, in your podcast studios. Is that a pretty fancy chair? What’s the story there?
Dave: Yeah. I mean, I have lots of hobbies, but among them are playing video games and playing music. So between the two of those, I have a nice recording setup and a really nice chair to play video games in. So it all worked out.
Meb: I tried one of those, what’d you call it, balance chairs for about a weekand it’s supposed to improve your core, which mine’s pretty terrible. And I quickly gave it to my, one of my co-workers, as well as a standup desk. So I’ve been unable to adapt almost any trends in office furniture. Anyway, all right. So most of our listeners are gonna be familiar with you. Why don’t you give us just a one-minute background? I mean, your history is super interesting. I mean, from, you know, obviously, FactSet and etf.com, but also, you know, lots of other shops. Give us a quick, just tour of the native history and then we’ll jump in.
Dave: The short version is, so I started at…I went to BU for Finance MBA. Surprise. At a school that was in the early ’90s. I went and started a consulting firm that became Cerulli Associates. I started that recruits Cerulli in, like ’91, ’92. And we did a lot of work on what was then a new idea, which was the idea fee-only financial advisors. Can you imagine? We did a lot of work in the 401k space, fee-only financial advisors were really starting to move that needle. My biggest client at the time was a little Index shop in San Francisco called Wells Fargo Nikko Investment Advisors, which went on to become Barclays Global Investors and then Blackrock. And I worked for most of the ’90s. I worked at what was Wells Fargo Nikko and then BGI, working on what they called retail. And for them, retail encompassed pretty much anything that was an institutional separately managed account. So, for a while, I ran their 401 K business. I was involved in their early ETF efforts, which were called webs, which eventually became the iShares product line. Then left there, sort of, I don’t know, ’98-ish, I think, sort of height of the dot-com boom and with my partner at the time Tom Ruskin and we went and ran money. So we actually ran some transparent mutual funds at the time.
Now we would just call those basically your ETFs right there. They were transparent mutual funds at the time because the whole idea of an active ETF hadn’t quite shown up anywhere. And I ran active money through the crash, took a couple years off, and then joined etf.com.
Meb: All right. Perfect. And I like to think of Dave as the one person that if, of the 0.1% of people that actually read Prospectus, Nadig is probably the one you wanna go to if you have questions. So providers, if you’re listening and you think you’re gonna sneak in some language, he’s gonna find it and publish it so be forewarned. So today is gonna be pretty wide-ranging, all encompassing, probably go down some deep, deep rabbit holes in the ETF space, but also be pretty educational, I think, for a lot of listeners who may not be as familiar with the structure. But why don’t we get started, top-level, 30,000 feet, provide a little context. One of the best articles I wanna reference was one you did the end-of -last year called “Outlook for ETFs in 2017. And you talked about kind of four main issues. And if you can’t remember what they are, I’ll give you some bullet points. But why don’t we get started? In the beginning, I think, was talking a lot about flows. And why don’t we use that as a jumping-off point?
Dave: Yeah, so, I mean, I definitely, I thought then, and certainly it’s come true so far. And I continue to think that this is a big year for ETFs, and I think it’s a phase shift year for ETFs. And what I mean by that is, if you think about the history of ETFs last 25 years, they started out as purely institutional products. You know, when we launched the first web series back at Wells Fargo, it was like Malaysia and Argentina. It was taught such a random collection of countries looking back on it, but the reason we did it was we had institutional clients that wanted access to a liquid trading vehicle. And it was also a little bit of a settlement arbitrage, right? It wasn’t so much that they couldn’t get access to those markets. It was they would rather own the security themselves than just hand off the SMA to somebody else to run, say, a tiny sleeve of Argentina or something like that. So they used ETFs as a way to get exposure to a market that otherwise was gonna be extremely difficult to get access to. That was really the genesis of it.
And products, like Spy were just purely trading vehicles. They were ways of equitizing cash at 2 o’clock in the afternoon because you didn’t have time to actually get the full trade-in that you would want from say, I don’t know, pilot dividends that you’d, you know, accumulated during the course of the day. So they started as these purely institutional products and really stayed as institutional trading products through the ’90s. And really in the 2000s was when we saw the financial advisor community really latch on to ETS predominantly for two reasons the tax efficiency. I mean, most ETFs don’t ever pay capital gains out because of the cost. And they were under pressure and continued to be under pressure to justify their fees, to justify the fees of managers that they were selecting, and overpriced mutual funds, and so ETFs were a great way for some advisor shops to really cut their costs and do right by their customers. So that was sort of phase two.
And then, I think, for the last five or six years, while of course institutions and advisors are still hugely important, we’ve seen retail really show up. And that’s been helped, to some extent, by things like Robo-advisors, it’s been helped by huge campaigns from retail shops like Schwab and Fidelity, and certainly iShares has done a ton to educate the market. So we got all these cylinders hitting and that’s driving growth by itself. But really, what I think we’ve come around to all the way around the other side is that institutions are now really taking ETF seriously. They’re using ETFs in new ways that frankly of using the ways advisors have, which is they’re using it for core exposure, and they’re using it as part of more complex strategies at the biggest pensions and endowments that are doing a lot of self-directed work. They’re starting to not use ETS for sort of a fringe 5% of their portfolio. They’re starting to use them for core 30%, 40% of the portfolio. And that has just driven huge assets.
Meb: And so if you look at the space, you know, ETFs, let’s talk about getting close to being what, 3 trillion. The mutual funds play is still five times as big as that. And I remember I was on the baron’s ETF outlook in 2013 and I said, you know, I asked the rest of the panelists, I said, “At what point do you guys think ETFs crossed mutual fund assets?” And everyone laughed. And then I said, “No, I’m serious. I actually think it will happen in the next 10 years.” And then everyone laughed even more. But you’re starting to see it. But ETF still, despite all the flows, are a pretty small percentage relative to mutual funds. Do you see this as a kind of generational transfer because you talked a little bit about, you know, people inheriting and pension funds and 401(k)s or, do you see this more, is it like Netflix Blockbuster moment where all of a sudden it just, it falls off a cliff? Like, what’s the future of Flows look like you think?
Dave: Yes, so, look, there’s, you know, I am the CEO of a thing called etf.com, and obviously I’ve been in the ETF industry for 25 years, so I’m obviously fond of the structure. But it’s not the be-all and end-all. It’s just a wrapper. And I think sometimes you have to step back and remember that really, at the core, what we’re talking about is, you know, what are your investor outcomes. And the vehicle that you use should be the one that helps engender the best outcome.
Now ETFs are great for a lot of common issues, but they’re also awful for some other things, right? If you were gonna use an ETF to do dollar cost averaging up $500 a month, I’d tell you you’re an idiot, right? Because the transaction fees of interacting with the stock market would eat you alive. So because of that, there are places where ETFs actually don’t make sense, like most 401(k) plans, like most people’s, you know, if they’re contributing regularly, or 529 plan for your college education. Most investors shouldn’t be putting their money in ETFs and those wrappers with the current structures we have. So mutual funds will continue to get a lot of those assets and those assets are huge. They’re a big part of the mutual fund industry right now, not retail.
So even when you see positive flows in the traditional mutual fund business, it’s almost exclusively in these kinds of defined contribution plan segments. So what the assets, the ETFs are capturing are actually not so much those assets. They’re capturing incremental flow that might have otherwise gone in from a retail investor, you know, an existing IRA that’s already got $400,000 in it or something like that and it’s capturing all this institutional money. So you’ve got…mutual funds aren’t gonna go away now are they gonna cross? Yeah. I mean, I have a model that predicts about 2025 is probably when we see the mutual fund industry come down and the ETF industry hockey-stick up enough that you cross it something like, I don’t know, 14 trillion dollars or something like that, just, I don’t have the numbers in front of me but it’s roughly around there. And we’re totally on track to do that. We look at the growth rates we’re seeing that, I think it’s totally doable.
Meb: Perfect. Well, you and I are gonna have a dinner bet then over because if I had said in Barron 10 years, that would have put it at 2023. So I’m gonna take the under, you get over in 2025, and we’ll do a podcast when they cross or maybe at the etf.com Conference 2023, whenever it is.
Dave: Restaurant of your choice. I’ll take that bet.
Meb: You better. I’m a sushi guy so I’ll pick somewhere expensive. So, yeah. I mean, it’s interesting to think about because you hear that a lot. You hear people say, “Well, ETFs haven’t got into the 401(k) space.” And, you know, we laugh because we say, “Well, there are two main advantages. One of them being tax efficiency doesn’t matter at all in that space.” But, you know, we kind of see it more as a shift from, you know, everyone talks about mutual funds and ETFs, and ETFs have already had like 200, I think, billion inflows this year, gonna have probably a record year, and also this active versus passive debate. But so much of it is really from this high fee world to a lower fee structure. Is that something you’re seeing? Is that, you know, kind of the…
Dave: Oh, yeah. So even if you just look inside the ETF market, right, the weighted average cost of an ETF right now, you take all the assets divide them, you know, by what those assets are paying, it’s about 23 and a half basis points. Even there, that’s coming down. That’s down from 26 a couple years ago. So even though we have new products launching that are either smart beta or full active where they’re sort of naturally a higher cost base for those things, the assets continue to flow into low cost of vanilla. I mean that does seem to be where most of the assets are going. That’s true in the mutual fund space too, right? The only major traditional mutual fund company active manager that actually had positive inflows last year with Vanguard. Like, Vanguard was the number one gaining active manager last year. And that should tell you a lot. It’s cost that’s winning here. I think the active-passive debate which I’m just as guilty of wading into as everybody else I think misses the point a lot. This is really about cost.
Meb: You know, it’s interesting. I wanna make two comments. One is that we got into a recent debate at UCLA where I said it was on active-passive and I was like, “Man, I would rather take a penalty kick to the face and discuss active and passive again.” Because to me, it’s all active. And so it’s a little frustrating because you have out there passive index funds, we saw one the other day, S&P 500 fun buy RIDEX that charges 2.3%, literally an S&P clone. Then you have these activities ETFs now, they’re 20 bits. So the whole world is so murky. But I wanted to touch on an interesting comment you made because if you look at the ETF league tables, which is a chart on etf.com, and it lists the top 40 or 50 ETF providers. In the big three, Blackrock, Vanguard, and State Street, we have, like 80% of the assets. But even number 30 or 40 still manages like a billion so there’s a pretty long tail.
You guys actually did an interesting article, you sorted them on revenue rather than AUM and it actually came to some different conclusions. And in a world where there’s 300 ETF launches a year, you know, maybe talk to us a little bit about if you were an ETF provider, you know, you may not necessarily be targeting the low-cost world and competing with Vanguard, right?
Dave: Yes. So, I mean, that revenue resource, which is, you know, there’s some articles, when you run a website like etf.com, there’s some articles you just get to keep writing over and over again. There’s probably like a dozen of them I could just revisit every year because they’re always entertaining and they’re always different enough to be worth writing and that’s one of them. The natural result is firms that have done a decent job gathering assets in super expensive strategies rocket up that list. So what is the super expensive strategy? Well, leverage and inverse funds, right? And clearly not the average investment. It’s not what everybody thinks of when they think of an ETF. There’s only about 50 billion, 60 billion in leverage and inverse funds.
We talk about them an awful lot but they’re actually a very tiny portion of the ETF market. But they almost all charged north of ninety-five basis points. So they’re credibly lucrative for the issuers that are putting those things out there, maybe less so for the people who are trading them. But, you know, they do what they say on the 10. You know, I think that it is true if you were an issuer coming in. Trying to compete on low-cost beta right now would be, that would be a brutal entry. Like, the only one we’ve seen that had any success in the last decade has been Schwab, and that’s because they came with distribution baked-in, right? They came in with a, you know, we don’t care if we make money strategy because they’re really in the game of capturing assets, not necessarily driving people into specific funds.
Meb: We talk in the office about this idea and I joked with a common friend Venuto about this and I said, you know, “At some point, we’re gonna see…” Because my company has, to my knowledge, the only ETF for the permanent 0% management fee. I said, “At some point, you’re gonna see some of these innovative issuers out there launch an entire suite of funds that are 0% management fee but key part of the short interest rebate, right?”
Dave: Right. Yeah.
Meb: And I said, “You could do that. And I really want someone to do it.” Because we have enough bad ideas here already. So if you’re listening, if you’re into…And there’s like a dozen big banks and index shops that have totally failed in the ETF space. So here’s a good idea for you guys. Go launch a bunch of 0% fee funds, take a huge market share, you’ll still probably make 50 bits in some areas. Anyway, just, you can buy Nadig and I beers for giving you that idea. As I mentioned, we were gonna go off the rails immediately and we have…But going back to your outlook piece, you talked about some other ideas. So looking forward, you know, the trends are gonna continue, of assets coming in to lower cost, but you also talked about some areas that haven’t really, in my mind, been realized yet with there’s been a lot of media but not a lot of dollars. One is the ESG area. Maybe you wanna touch on that a little bit?
Dave: You know, I did. This gets back to, you know, where’s the growth gonna come from. You hinted at this earlier, you know, sort of is this a generational thing. There is no question. It’s just statistically accurate that we’re in the midst of the greatest intergenerational wealth transfer in history. We’ve got 30 trillion dollars over the next 30 years that are gonna roll from an older generation to a younger generation.
Now that often gets misreported or sort of poorly reported as like, you know, Millennials are gonna take over investing and that means everybody’s gonna swipe left to buy or something like that, which, you know, I think that misses the point. We’re not talking about, you know, the kids who are living in basements. We’re talking about the 40-year-old daughter of a wealthy 70-year-old couple who now start showing up in your office, Meb, or in a, you know, in another advisor office. And that 70-year-old is bringing that 40-year-old woman in to talk about what’s gonna happen when they receive this wealth. And they’re talking about trust transfers and they’re talking about all the things that are irrelevant for good estate planning.
And when that money hits, right, when that 5-million-dollar portfolio rolls down to that 40-year-old woman, her desires about what to do with money are actually fundamentally different. And we’ve seen this. It’s been pulled dozens and dozens of times. It always comes back the same. Like, people who are now in their 30s and 40s actually care about what gets done with their money. They want their money to not just earn something but also do something. And, you know, that gets labeled as socially responsible investing or environmental social governance, ESG funds, etc. And I think a lot of us that have been in this industry for a while hear that stuff and we roll our eyes. And I think it’s okay that we roll our eyes because for the most part that has been a flop in retail terms, right? Retail investors talk a good game about this, but when push comes to shove, they generally chase performance. They don’t really stick to their knitting on buying a, you know, an ESG fund.
That seems to be different this time, expensive words on Wall Street. So I think what we’re gonna see, and indeed has started to see is more and more funds targeting that wealth transfer pool. Now it’s not gonna be a hockey stick. It’s not like all of a sudden there’s, you know, in three years we’re gonna have, you know, a trillion dollars in ESG, ETFs. But I think you’re gonna see the product launches and you’re gonna see slow steady growth.
Meb: Interesting. I mean, yeah, it is funny that there’s so much media attention and talk about a lot of things and we definitely see that younger investors consume obviously information in a different ways as well as the interface. And if you look at kind of the advent of a lot of these digital offerings and Robo-advisors, the great irony, at least in my mind, is many of the most successful ones are, of course, A, the incumbents, so Vanguard and Schwab, but also the average age is still pretty high. I mean, for our digital offering, the average age is north of 50. And that’s for a very technologically-focused offering. So I definitely think it needs to be incorporated. It’s an area that I’m just kind of a pleasant bystander. I don’t have any strong opinions one way or the other, but ESG, I think, it will be an interesting area that everyone certainly is interested in and talking about, but we’ll see where it goes.
Dave: You know, I think the important thing to do as an investor if you’re thinking about these funds is, like, let’s just, like, talking about smart beta or anything else, you got to separate the hype from the reality here. And because we’ve got a lot of new product launches coming into the space, there’ll be a lot of hype because everybody wants to talk about their product. You know, you still have to put on the same due diligence hat you put on if you were evaluating a small cap manager, right? It’s the same process.
Meb: You know, smart beta is interesting because we think about in a world where there’s so many, what we call, closet indexers, which are funds that basically say they’re doing something different, but because of the size and the stocks they’re investing in, basically looked like an S&P 500 clone. There’s been some new resources that come out. We’ll add them to the show notes from our friends West Gray. And we mentioned some others that look at active share in indices. And you can actually say, “Hey, is this fund actually really different,” because if you’re paying for beta, you will be paying as little as possible. If you’re truly doing something active, in many ways, you want something highly concentrated, that’s gonna look a lot different, but, yeah, I mean, there’s so many of these smart beta funds. There’s something like 300 ETFs that launch per year. You talked a little bit in this outlook about distribution and regulatory issues. Are there sort of any thoughts you have on there, and what kind of the future is gonna look like there before kind of we move on to some other topics?
Dave: Boy. That’s a crystal ball. I mean, the regulatory side is such a, I mean, I wanna say mess, but I’ll say mess right now. Not because I think that our new SEC Commissioner is gonna be bad. I don’t. I actually think it’s gonna be great. But we have a pretty dysfunctional regulatory system in place right now. We’re down so many commissioners at the SEC. We’re down effectively the entire CFTC. And they can’t even have meetings anymore because there’s only two of them kicking around. Because of that, because we just literally don’t have the bodies in the chairs that we need, it makes me nervous because it’s easy to have knee-jerk regulation when you don’t have the staff to actually do the hard work. And it’s hard work. I have a lot of respect for the work that, you know, FINRA and the SEC and CFTC etc. all do. It’s not work I’d wanna do. That’s for sure. Even though I, you know, I am one of the nerdy people that reads all their stuff.
So when we think about the things that we know have been in the pipeline or that people are asking about, it’s tough to see how they clear out the log jams until they restaff. And that’s probably still another year before we see that, right, because obviously, we’re in an administration that’s not getting a lot done. And one of the things they’re not doing is putting up a lot of obvious choices to fill a lot of staff roles. So, you know, the things that are in the hopper that maybe we’ll see, the big ones probably non-transparent active. Presidium has had a filing in play for, god, what is it now, two or three years in front of the SEC on what is frankly a pretty straightforward solution to the idea of running money actively without having to tell you what’s in the portfolio.
Now, even if that gets approved, a whole separate conversation about whether people actually want to buy those funds or not, that’s a separate issue, but that’s a big one that’s been log-jammed forever. It’s hard to see how that one clears. You know, the other ones, you know, Bitcoin ETFs is a big one that’s back under review again.
Meb: All right. Let’s hear it. Wait. Let’s shift. We may as well talk about it. That was a question I had. Someone wanted answered. We may as well. What’s the deal with Bitcoin? What’s going on?
Dave: You know, I think the biggest problem, you know, the…First of all, I should probably point out that I, well, I don’t know a lot of what’s going on at the regulatory level. My understanding about what’s going on with the Bitcoin ETF is it’s not that they’ve been rejected because it’s a terrible idea and they don’t want Bitcoin, it was because of the amount of self-connections in the filings, meaning it’s such a small ecosystem that it’s hard for folks like the Winklevoss Brothers to create an ETF that doesn’t lean on some other part of their business dealings because they’re heavily invested throughout the Bitcoin ecosystem. I think that’s what probably tripped that up. And that’s a that’s a solvable problem. And my guess that that’s part of what’s getting re-reviewed off that filing. I think a Bitcoin ETF of some sort is effectively inevitable because the underlying security has a relatively robust market in it.
I’m not a huge Bitcoin nut. I’m not a crazy believer and I don’t think it’s gonna change the world. But the structure of an ETF is so flexible that somebody will figure out a way to get in. At this point, I think, it may be most likely through the backdoor of a little OTC listed company called GBTC, which you can only buy on the Pink Sheets right now, but the underlying trust structure for it is written. And it’s a live trading security. It’s not particularly liquid, doesn’t have great creation and redemption activity in it so it trades at crazy premiums and discounts, but it’s a live traded security that basically just would need to get promoted out of the Pink Sheets and then get APS to do creation redemption activity and then you have an ETF. And they’d be sort of backdoor it by never having had to go through the direct ETF approval process.
Meb: It seems like, you know, an ETN, which is a debt agreement with an issuer, and you coming from the Barclays world, it seems like that would be a simple solution but…
Dave: Oh, yeah. There’s only one trade. There’s one trading in Europe right now, right, so they to the ETN structure is a logical one. The problem is finding a bank that’s willing to put the hedge on, right? And because bitcoin itself is so volatile, and the volatility of the volumes is, in addition, a lot of volatility in the volume in Bitcoin on any given day, I’m not sure I’d wanna run that hedge book, right? At the end of the day, somebody still has to buy and sell Bitcoin to manage it to the hedge for the ETN. It solves the regulatory problem but it doesn’t necessarily solve the underlying problem, which is somebody’s got to run the book.
Meb: Interesting. And ETNs are always, I mean, it’s such a great structure with exception of the credit risk, you know, in many ways but, you know, it can also be a little…
Dave: And that’s so overblown, honestly. I think the people who get really nervous about ETNs generally are doing one of two things. They’re really, really over inflating the overnight bankruptcy risk of people like Citibank. There’s no Lehman level risk there to be worried about in my opinion from the big issuers of ETNs, or they’re focusing on the ETNs that don’t trade and that’s certainly not an ETN problem, right? We have plenty of traditional ETF that don’t trade either.
Meb: And ETN, for the listeners who aren’t familiar is a structure that is potentially pretty great because, you know, there’s not necessarily any capital gains, right, from the, you know, trading. Most ETF don’t have anyway. But potentially, no income as well if you wanted to design something.
Dave: Well, and you can take…There’s a great tax dodge in it because exchange rating notes are just notes. They’re just debt. The IRS treats them as prepaid forward contracts. And what that means is they basically just get taxed like stocks, right? So you get long-term capital gains treatment on it. So you can take something like a commodities investment, which you would have to pay 60/40 long short mark-to-market at the end of every year, if you did it the traditional way by buying futures, and you could sort of magically turn that into long-term capital gains treatment. So those tax dodges are real.
Meb: And in one of the ways you could mitigate the credit risk is certainly having multiple counterparties. The challenge, of course, is a lot of the counterparties don’t wanna give up the revenue stream and share it with others. But it’s certainly doable. We’ve considered it, may go down that alley at some point. Well, let’s shift back, you know, so despite you going to…I’m gonna nominate you for the SEC after this call. We need a little Mayday Drano in Washington, you know.
Let’s talk on a couple ideas that are probably popular ETF topics. You may be sick of talking about them. But with their questions, we get a lot as well as regular investors, you know, often ask a lot. And in one of the jumping off points was you recently went to the money show, which is kind of like…I gave a talk there once. And I’m trying to think of the right analogy. It’s kind of like the Wild West of individual investors. I mean, you have every possible, everything from, you know, totally legit offering providers to People Hawking, you know, Junior Gold Miner, Marijuana stock, everything in between, but you notice some differences this year. So maybe talk a little bit about your experience recently at the money show and kind of what you think some of the main asked questions were and topics were.
Dave: Sure. So, I mean, I’ve been doing the money shows off and on for 20 years at this point. You know, when it’s sort of convenient and there’s a city I wanna be in anyway, I know the organizers pretty well, so they’ll toss me on some panel somewhere. And certainly, over the years…
Meb: So you just wanna go to Orlando or, where was…
Dave: This one was in Vegas so…
Meb: Oh, much better. I like that.
Dave: And there was a bit of a pundit’s panel so it was me and Matt Hogan from inside ETFs, and Eric Beltunis from Bloomberg. So your usual suspects if you follow ETFs. Over the last few years, it’s definitely been the case. There’s been more focused on ETFs. So, you know, I’ll often do an ETFs 101 panel or a hot topics panel. You know, and the room sizes have gone from, you know, an anemic 50 people to a couple hundred to, this time, we were on the main stage and there were thousands, right, so it’s definitely, it’s definitely grown in interest. But the thing that I found most interesting was, even just a couple years ago, the kind of questions I got were sort of the understandable coffee cocktail party conversations. Like, what’s an ETF? How does it work? Is there any money in the vault for GLD? You know, just, sort of really basic, frankly fairly easy questions to answer, which I’m always happy to do, right? That’s core ETF education. That’s great.
This year, of course there’s self-selection who comes to these panels, the kinds of questions I got were like the kind of questions I get from people who are in the ETF industry who are trying to get deeper into it. You know, people asking about swap counterparties for leverage and inverse funds, right? I mean, like, I know people who trade, you know, millions of dollars of those things a day who don’t understand how they work, they don’t even know that there’s soft counterparties, right? And people are asking, “Well, how can I find out who they are and how can I evaluate how reliable they are? And what’s my risk if the collateral that’s being held against the counterparty risk is not enough? I mean, those are really good questions. Yeah, with complicated answers. You know, almost every person who came up to me had a similar sort of set of questions around it.
Now, it’s always tough for me being in those environments because a lot of the folks that come up to you, you know, are frankly sort of hobby day trading a million-dollar portfolio, and that just makes me a little nervous, but it’s their money. They can do what they want. You know, I used to be an active manager so I’m now, I’m the worst kind of person to put in those situations because it’s like being in, you know, it’s like being a recovering alcoholic in a way.
Meb: Well, you answered all those questions so we just go to etf.com. You can find more information.
Dave: You do what you can.
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Meb: So one of the questions, I mean, I know that people are asking about. So leverage ETFs, covered calls, but a lot of people wanna talk about liquidity. So why don’t you just talk about ETF liquidity in general if there’s any misconceptions or main takeaways you think people should consider how liquid can you go, is it matter about volume, all that good stuff. Then this is kind of a Twitter question too.
Dave: So, look. There are a couple key takeaways I think everybody should always just have when they’re approaching investing, right? One is, no matter what the answer is, like how illiquid, can you trade this, can you not trade that, the first step is always trading hygiene, right, which just means not being an idiot when you’re putting your trades in. It means using limit orders. It means understanding how to assess fair value if you can, and that’s true if you’re trading small cap stocks. It’s true if you’re buying individual bonds. That’s like, good trading hygiene saves lives, period. You know, start from there.
Now, specific the ETFs, I think the question is almost always, you know, how a liquid is too illiquid to own. And the answer to that question is complicated because it’s not like a linear scale. It’s not like you can say, “Oh, well once this ETF is trading a hundred thousand shares a day, have at it. Do whatever you want. Day trade it like crazy.” Because two things happen. One is liquidity doesn’t stand still.
So we saw in an instance just a while ago of emerging markets momentum fund, so I think it’s EEMO. It had basically never traded more than 10,000 shares. It was effectively a zombie ETF. I’m sure it was getting written up in, you know, people’s death watch list and everything else. And then, boom, one day somebody allocated 250 million dollars to the thing and liquidity picked way up, of course, because now it’s on everybody’s radar. Now all the high previously trading algorithms are watching for it. And now it’s hit a hurdle where people who did have sort of a silly rule of thumb like, has to have a hundred million dollars would now look at it again. So now it’s trading 50,000, 60,000, 80,000 shares a day. So from one day went from a have-nots to a haves.
I would argue it can happen exactly the other way and we’ve seen that a particular country can get hot. We see this even in some of the iShares country funds. You know, Brazil will get hot. And the Brazil ETF will all of a sudden become, trade like water, penny wide all day long. You know you could toss market orders in you’d never get hurt. And then, six months later, it’s trading €5000 a day. And so I think you have to be conscious of the fact that liquidity is a moving target.
And then the second big thing about ETFs that people often miss is that there’s actually sort of a liquidity barbell. In almost every ETF that’s listed in the US that you actually care about with few exceptions, if you wanna get a hundred share trade in, you can get a hundred share trade in. You can put it in the middle of the seemingly, you know, 1% wide spread and you’ll get an execution, right? So at the very small end, there’s enough activity that even ETFs that look like they’d never trade are viable and ownable.
And then all the way at the other end, that same super illiquid ETF that you wanna put 50,000 shares into, you can do that all day, right? Because there’s an AP on the other side of that who will happily negotiate that trade with you. And if you’re trading 50,000 share blocks, you’ve got a guy you can call, and that guy will get you a good price. So the problem is there’s sort of this barbell, which is at the very small and the very large almost every ETF is completely tradable. Most of us don’t live in those worlds, though. Most of us wanna buy more than 100 shares of something and we’re probably not lucky enough to be trading a block of 50. Now we’re talking about, “Well, can I get 1,500 shares of the thing through that never trades?” And that’s where people get hurt.
Meb: There’s some really good takeaways there. So listeners, one, use limit orders. So market orders, do not use in general unless it’s the Spyders. Two, really good points. If you’re trading 50,000 shares or more, you can almost always get in and out pretty darn near net asset value almost regardless of what the ETF is because what Dave mentioned, these APs, these authorized participants can create and redeem big share blocks in what we call these creation units. One note that I also wanted to comment on. For smaller investors, a lot of people don’t think about this. So, obviously, you have expense ratios, which is people’s usually number one. Second is bid-ask spreads, but also a lot of people ignore commission rates.
And so for smaller accounts, so we’re talking $500,000 and less, what you pay in commissions in many times is actually more significant than your expense ratio and bid ask spread. And so people that are traditional brokers are just paying, you know, $20, even $10 commissions at this point. You know, that could be one of your biggest costs, in particular people that are actively trading, that is a huge draw on return. So there’s actually a handful of brokerages now and Robo-advisors that have 0% trading costs, which we think is a pretty awesome innovation.
Dave: The trick with the no transactions or the no cost ETFs is you still have to be careful with GTS. So they’re, you know, if you’re trading with, if you’re a Schwab customer, obviously you can trade the Schwab ETFs without having to worry about a fee, and they happen to be super cheap that you’re not getting robbed or anything like that. If you look at some of the lists of what’s available to trade without a fee at other brokerages, and including at Schwab, it’s a real hodgepodge, right? It’s not like you can trade everything for free. And some of the funds in there are the most expensive funds in their segments, right? The most expensive competitive ones. So there’s really no completely free lunch in the world. There’s a reason why those funds are available to trade for free. It’s because they’re paying the brokerage to be on that list, right?
Dave: And that means that they have to charge you enough to have that money left over to pay for your transactions. Just be cautious of that and don’t just assume that because a fund is on the free list that that also means it’s the best fund for you.
Meb: And there’s some brokerages in general that have free execution. And we know Robinhood is one. I don’t know the sustainability of the business model, but there’s certainly some out there that the fee compression is coming down. I mean, almost, you see it in Barron’s every week. Almost all the big brokerages are down to about $5 a trade. So listeners, if you don’t know what you’re paying for transaction costs, chances are you’re paying too much. So certainly go look it up because we…
Dave: That’s sort of a universal, it’s like if you don’t know what you’re paying for your investment management fee in your fund, you’re probably paying too much too.
Meb: I was looking at advisor ADB the other day who’s a traditional low-cost, well, not even though cost, traditional DFA guy and saw that he paid $20 to $40 per, you know, trade on these mutual funds. I said, “Man, for small accounts, that is a…Forty bucks, come on. You’re stuck in 1982.” Anyway, let’s move on. So a couple more questions. One of the questions is you see a lot in the media. It drives me crazy all the time. And it’s also a Twitter question. And it says, “Why does so many people think ETS will bring about stock market Armageddon? You know, in almost every time that there’s a big market gyration, people are looking to ETFs to blame. And including, there’s been even some comments in USA Today, you know, was talking about this where they said that investors will probably be better off had ETS never existed in the first place. And their comment was kind of because they’re tradable, and people obviously do self-destructive things. But why does the media often kind of get this topic wrong? If they do, maybe they don’t. Maybe you think ETFs do cause Armageddon.
Dave: So the self-destructive behavior argument is inarguable, right? Investors are awful at timing, they’ve always been awful at timing. And if you let people trade, if you engender more trading, people will simply be worse at timing more often. So I don’t think that that’s an ETF problem. I think that’s an investor behavior problem. And that’s part of why you do podcasts like this and I run a website called etf.com because ultimately, the only way you solve that problem is through investor education and through good advice. We’re doing what we can on that front and that really doesn’t have anything to do with the ETF structure. I think the Armageddon arguments come from, well, there are a couple of different arguments and I think they mostly come from the same place, right? They come from people who are trying to defend the old guard.
So if you actually trace a lot of these stories back and you look who gets quoted in them, it tends to be people who are trying to defend active management shops that have not been performing well, or they’re trying to defend the lack of transparency in their investment process. And those, ultimately, I think, are pretty losing arguments. You know, I think that the most famous one recently was the paper by Inigo Fraser Jenkins that compared indexing to Marxism. You know, big big giant clickbait headlines. That’s part of it, is that’s where it’s coming from. But the actual arguments people are making are worth at least understanding.
So there are really two different schools of thought. One is the indexing problem, right, and indexing problem is that if you reduce the argument to absurdity and you say that 100% of every market participant’s dollars was in an index fund, then there would be no price discovery. And that is, you know, that is objectively true at that kind of ridiculous extreme. Yes, in fact, you would destroy price discovery. We’re a long way from being in that problem and there’s our natural pressures i.e. Active managers and activists who push very hard against that ever becoming a real problem. So I’m fundamentally unworried about that argument. And in fact, I think that the pressure of that active-passive debate like you were saying, Meb, really is just driving costs down. And fundamentally, that’s probably a good thing for investors period, right? Well, there are good active managers out there and they don’t all have to charge 2%.
Meb: Well said. I have so much to talk about on that topic but I think you just did a good job talking about it, otherwise, I’ll start getting a headache. A couple more quick questions. We’re running out of time. One, so if you look at kind of your wish list or maybe if you said kinda what’s missing from the industry going out next five years. We did a fun ETF contest a few years ago on ETF ideas. Then it’s fun to look back and see the ones that have launched, the ones that haven’t launched, you know, some of the really terrible ideas, and many laughable, and some that are terrible and laughable but have launched, it is well structured. What do you think is missing? What would you like to see, not just for products, but also maybe for either regulation or ideas. Anything that out there that you think would be on kind of your wish list?
Dave: Oh, sure. That’s easy. So from a nerdy regulatory perspective, I would be a huge advocate and personally put a lot of my own time into the passage of an ETF rule. Right now, ETFs live by loophole, right? There is no piece of legislation somewhere that create, there’s no act that created the ETF structure. ETFs are created, still to this day, through a whole series of exemptions and loopholes and “Can I please not do this? Can I please do that?” And that leads to all sorts of bizarre haves and have-nots in the industry. The most recent example probably is, you know, when PIMCO first launched BOND, I mean that their Total Return bond ETF, their initial relief that let them watch it, the initial loophole said they couldn’t own any derivatives any kind. Nothing. You can’t you can’t hone an overnight futures contract. You can’t buy a credit default swap against the bond that you’re worried about. Nothing.
Now that’s not, it wasn’t true for most of the rest of the industry, but their particular relief completely hamstrung their strategy and created real deviations between what they could do in the mutual fund, which it used derivatives for all those things and what they could do in the ETF. Now, eventually, they went back and got it fixed and they were able to run the strategies more similarly. But those kind of small subtle differences between issuer’s ability to do things is rampant across the industry and it affects, honestly, every little corner of the business. Now there are standards now. If you watch the new ETF today, your lawyer who’s filing for you is going use a kind of boilerplate that is easy to get approved. But you’re exempt of relief will still be different than iShares, which was, you know, one of the first in the game.
So I would love to have an ETF rule that rationalized that and level the playing field and cleaned up a lot of the mess in the corner. So that would probably be my number one wish for the industry. The net result of it would be better competition, slightly lower cost for everybody, and this whole business of, you know, sending your paperwork to Washington and praying they let you run a fund would go away. That’d be my number one.
Meb: Well, preach to the choir on that one. I mean, a classic example is there such an unleveled playing field where not only is it, like, unlevel between say people got active versus a passive exemption, but it’s also when they got them. So get those people that have the exact same rules, you know, had you got approved prior to 2009 or 2010 and people after and it’s just totally bananas and it’s such a mess. One that I often think about is do you think that the industry will ever solve or figure out a way to trade ETFs or even a brokerage house that’s kind of like the way the mutual funds trade? Because one of the big adoption issues I think is going back to liquidity in the trading because the people can’t just throw in a $10 million order and get the end-of-day price. Do you have it? Is there a solvable solution there? Do you think that’ll ever happen or is that just kind of impossible from the structure you think?
Dave: Yeah, so it is a solvable problem. You have effectively a version of this in the way Canada deals with that. In the existing structures, the way funds are approved right now, no. Right? It’s not something that can be solved by an exchange magically waving their hand and making it all better. I don’t believe. Now if somebody’s willing to take the other side of a NAV trade, then yeah, you can get these things done. But right now, there’s no economic reason for a third party, you know, Susquehanna or KCG, somebody’s out there on the other side of most of these big trades, there’s no economic incentive for them to offer an institution or an advisor a NAV price, right? Because they’re on the hook to deliver a basket at the end of the day. The best they could possibly do is to create that basket at NAV, which means they’ve made zero money on their trade, right? So there’s an incentive problem there.
Now, if people wanna start pushing the incentives around, you know, if issuers wanna start moving money into the hands of the traders, you know, directly or indirectly through exchanges etc. In order to incent that new order type, you know, an end-of-day NAV trade as opposed to, you know, just a market on close, you know, order something like that, they could do that. I’m not aware of anybody really lobbying too hard to make that happen. And for the most part, a solution like that would mostly benefit very large institutions, not mom-and-pop investors. And mom-and-pop investors were the ones who were probably most put off by the fact they can’t get that NAV trade.
Meb: If there’s anything that Wall Street is good at, it’s figuring out solutions when there’s incentives involved. So I remain hopeful. I don’t have any good ideas. Actually, not even close to having good ideas, lots of terrible ones there. Let’s wind down a couple more quick questions. So, you know, kind of pulling back, one thing we try to do on the show is help listeners walk away from each episode with a little bit tangible or actionable advice to help them make them better investors. What piece of one advice would you give per offer, ETF folks or not, that you think would help listeners the most?
Dave: We’ve talked a lot about stuff already on this podcast that I think is very much in the weeds and in the corners of things. Cost, commission’s, you know. We talked about securities lending briefly, etc. And all the things making the right choice, like the ETF A versus ETF B, or put this trade in well but don’t put this trade in well. Those matter, but if you’re looking at ETFs as beta vehicles primarily, which I think most people are, right? They’re looking for their large cap equity exposure. Those little things are dwarfed by the differences in what’s in under the hood, right? The actual things that are being held by these ETFs. And almost every investor that I talked to at any level makes the same mistake of assuming that there’s really no difference between the 200 different large Cap ETFs because they’re all ETF. They’re all based on an index. Who cares?
The dispersion of returns in every little corner of the ETF market between the winner and the loser in any given year is enormous, right? To something like financial sector ETFs, right? How many ways can there be to skin that cat? Well, the answer is, last year, it was about 30% difference in returns, right? So big giant numbers because of these differences and approach to portfolio construction. Just because you’re an ETF investor doesn’t mean you can turn off your brain. If anything, it means you have to become an expert in understanding what’s under the hood and understanding how different index methodologies and different active management styles are gonna produce very different patterns returns. So, and maybe it’s a little pedantic, but the end of the day, what’s under the hood matters way more than all the little nerdy stuff I spend most of my time worrying about.
Meb: Well, I was gonna say investors don’t need to become experts. They just need to read. Let you be an expert. And then they can just read what you write. I think you should rename your column, Jeff. I also think we should name the podcast, “Good Trading Hygiene.” “Good Investing Hygiene.” I think that’s a good name.
Dave, we got one more question for you, and it’s…I’m gonna move it a little differently. Normally, we finish up in 2017 asking the podcast guest, we say, “What is your most memorable investment?” I’m gonna skip that with you. I have a more interesting question, which is, I know, like me, you are very interested in games. So I wanna hear your top three games you like, either, you can take it one of two questions, currently or all-time. Either way…
Dave: Oh, wow.
Meb: Give me three favorite games. And I want one of them to be something most people, kind of an unknown game.
Dave: Okay. So that’s such a broad spectrum.
Meb: I guess…
Dave: I’m gonna do of all time that you can still play?
Dave: And number one is, like, the nerdiest thing ever, but freaking Dungeons and Dragons, man.
Meb: Oh, wow.
Dave: Dungeons and Dragons probably literally saved my life as a teenager. And I still play today and I’m not ashamed of it. And a surprising number of people in the ETF industry also secretly play role-playing games, which I think is hilarious. But I won’t out anybody here on this podcast. But I think, you know, I’m a big fan of escapism. When I’m not working, I want to be not working. I work a lot. So however you get that escapism, for me, I love playing D&D with a bunch of friends. You know, it got a lot more interesting when we could all drink. That’s for sure. But that would be number one.
Number two, probably a video game called Mass Effect. The series of video games.
Meb: I don’t know that. What platform is that?
Dave: Almost anything. Xbox, PS4, PC. They’ve been out on everything at this point. It’s a long series of game. There have been four of them now. And I’ve had endless amounts of enjoyment from them. And then, for my one that people have probably never heard of, I will go with a fairly obscure board game called Caverna by a designer named Uwe Rosenberg, which is, not making this up, about being the world’s most average dwarven cave farmer.
Meb: It’s funny. There’s a great resource and I was, you know, I played all the traditional games growing up and I’ve just always loved games. And there’s an article by FiveThirtyEight a few years ago that the thesis of the articles, there’s a website called, I think, BoardGameGeek. And it said, basically, they did a quantitative analysis of games. And they said a lot of the traditional games aren’t that highly rated. But if you were to look per kind of age, here’s that the best games. And so I’ve spent the last few years, every Christmas, my nieces and nephews get whatever the random highest-rated game is so there was Hive and Blokus and Train to Ride, all these games I never even heard of on the board game side. So I’m happy to add two more to the list. I’ve never heard of Caverna or Mass Effect. We’ll add those to the list.
I actually, I was laughing with some friends the other day because in LA, they have, I’m a terrible bowler, but they have a special, they’re like fancy bowling lanes in LA that for all you can Bowl, three games a day, including shoes through September is $40. And I don’t know how that’s possible. So I’m a little nervous because, like you said, it’s a lot more fun once you can have some beers too. So there’s a good chance by the end of the summer, I’ve gained 30 pounds and…
Dave: And are bowling on every …
Meb: [inaudible 00:55:08], you know, but the good news is my average score is up to 230, and so I’m gonna totally Lebowski it out by the end of the summer.
Dave: Oh, yeah.
Meb: Dave, it’s been an awesome. A lot of fun. Thank you so much. Where can people find you if they really wanna follow your writing going forward?
Dave: Well, so you can definitely find anything I’m doing at etf.com, pretty easy to remember. But if you just wanna pay attention to things that I’m writing or if I’m speaking somewhere, Twitters probably, Twitter is the only one I really use, and it’s just at @davenadig, easy enough.
Meb: Are we gonna find you at the West Coast IMN Conference? Are you coming to that?
Dave: I am. I don’t know. I’m moderating some panel. Josh and Barry asked me, Josh Brown, Barry Ritholtz from Ritholtz Wealth Management asked me to come out and talk ETFs on some panel or other, but I haven’t seen what I’m supposed to do yet, but I’ll be there.
Meb: Listeners, that’s, I think, Mid-June. So coming up soon. I’m gonna be there. It’s down in Dana Point. Great lineup. It’ll be a lot of fun. Dave will buy you a beer if you come and tell him how…
Dave: Sure, why not?
Meb: How you’re doing it.
Dave: I’ll send you the bill.
Meb: Caverna. Dave, it’s been a blast. Thanks so much for taking the time today.
Dave: Thanks for having me. A real pleasure.
Meb: Listeners, thanks for taking the time out to listen. We always welcome feedbacks. You just questions for the mailbag at firstname.lastname@example.org. As a reminder, you can always find the show notes. We’ll link to all of Dave’s various papers, tweets, games, and everything else at mebfaber.com/podcast. Subscribe to show on iTunes, elsewhere. And if you’re enjoying the podcast, please leave a review. Thanks for listening friends, and good investing.
Sponsor: Today’s podcast is sponsored by the ride-sharing app Lyft. While I only live about two miles from work, my favorite means of getting around traffic-clogged Los Angeles is to use the various ride-sharing apps, and Lyft is my favorite. Today if you go to lyft.com/invite/meb, you get a free $50 credit to your first rides. Again, that’s lyft.com/invite/meb.