ETF Mailbag: Answering Listener Questions

Episode Summary

Executive Summary: This Mailbag episode of Trillions answers listener questions about ETFs: how launch size relates to flows, why ETFs are rare in 401(k)s, what bid-ask spreads are, how tax efficiency compares to mutual funds and hedge funds, how index-provider choice affects exposure, which ETFs have performed best, and whether ETFs can give access to private markets or marijuana stocks. The hosts emphasize ETFs’ low costs, tax advantages, and ease of ownership, while noting their limits and the importance of looking beyond the issuer to the underlying index and holdings.

Main Topics: ETF launch size and asset gathering (Priority: 5/5): The hosts explain that a large launch does not guarantee future success; ETF asset growth is driven more by strong performance, very low fees, or a powerful theme than by initial seed capital. Why ETFs are uncommon in 401(k) plans (Priority: 5/5): They argue that many ETF advantages—tax efficiency, intraday liquidity, and ultra-low cost—matter less in retirement plans, where mutual funds and index funds can offer similar economics and operational simplicity. Bid-ask spreads and ETF trading costs (Priority: 4/5): The episode defines bid-ask spread as the small round-trip cost of trading an ETF and explains why it is usually tiny for liquid funds but can widen for less liquid products. Best-performing ETFs and leverage (Priority: 5/5): The hosts identify the best-performing leveraged ETF and the best non-leveraged ETF, using these examples to show the impact of leverage and the long-term strength of mid-cap stocks. Accessing private-market-like exposure through ETFs (Priority: 4/5): They discuss imperfect ETF proxies for private equity, including microcap ETFs, factor-based products, and publicly traded private-equity managers. Marijuana ETFs and thematic investing (Priority: 4/5): The conversation covers cannabis ETFs in Canada and the U.S., their composition, volatility, and how themed ETFs often blend pure-play names with larger liquid holdings. Tax efficiency and index-provider choice (Priority: 5/5): The hosts compare ETFs with mutual funds and hedge funds on taxes, then stress that investors should pay attention to index methodology and provider differences such as MSCI vs FTSE.

Key Arguments: ETF launch size alone is a weak predictor of long-term asset growth; performance and ultra-low fees matter more. Money in low-cost ETFs is often sticky, while theme or high-flyer ETF money can leave after underperformance. ETFs are less compelling inside 401(k)s because tax efficiency and intraday trading are largely irrelevant there, and mutual funds can be nearly as cheap at institutional pricing. The bid-ask spread is the hidden trading toll on ETFs, usually tiny for liquid products but meaningful if traded repeatedly. Leveraged ETFs can become the best performers when the underlying market trends steadily, because daily leverage compounds path-dependently. Mid-cap stocks have historically outperformed large- and small-cap stocks over the period discussed, making mid-cap ETFs notable long-term performers. ETFs cannot directly hold private companies, but microcaps, factor screens, and public private-equity managers can serve as rough proxies. Thematic cannabis ETFs exist because investors want diversified exposure to a volatile new industry, though they often include larger, non-pure-play names to maintain liquidity. ETF tax efficiency is a major advantage because ETFs rarely distribute capital gains, unlike many mutual funds. Index selection matters because different providers classify markets differently, which can materially change exposure. Retail investors may care more about the ETF issuer brand than the index brand, while institutional investors remain more benchmark-focused.

Data Points: Time format for The Big Take: 15 minutes - Promo described the Bloomberg podcast as a daily 15-minute show. ETF assets from seed capital example: About $150 million - United Nations seeding a low-carbon ETF. Gender diversity ETF assets: $322 million - Example of an ETF largely seeded by pension money (CalSTRS). GSLC expense ratio: 0.09% - Goldman Sachs multi-factor ETF cited as unusually cheap for a smart-beta strategy. Best leveraged ETF performance: Nearly 5,000% - TECL, the triple-leveraged tech ETF, since launch. TECL launch year: 2008 - The leveraged tech ETF launched at the market bottom. Best non-leveraged ETF performance: 1,255% - MDY, the SPDR MidCap ETF, since launch. Large-cap return over same period: 700% - Comparison used to show mid-caps outperformed large caps. Small-cap return over same period: 745% - Comparison used to show mid-caps outperformed small caps. Microcap market cap range: $50 million to $300 million - Definition given for microcap stocks as a private-equity-like proxy. Microcap share of market cap: 1% to 2% - Rough share of total market capitalization represented by microcaps. Microcap holdings in broad market ETF: Barely any - VTI was said to hold 99% of market cap but little microcap exposure. Cannabis ETF volatility: About 5x the S&P - General statement about how volatile pot ETFs are versus the broad market. HMMJ 12-month return: 160% - Canadian cannabis ETF performance cited during the discussion. Canada cannabis sales last year: $600 million - Current size of the Canadian cannabis market at the time discussed. Projected Canada cannabis sales: $5 billion - Projection for Canadian cannabis sales in about a year and a half. Alternative Canada cannabis sales forecast: $7 billion - A Deutsche Bank estimate mentioned for the Canadian market. Global cannabis market size: $20 billion - Referenced as a worldwide estimate for cannabis sales. HMMJ Canadian stock weight: About 80% - Host described the Canadian cannabis ETF as more of a pure play. MJ direct cannabis exposure: About 70% to 75% - Estimated share of holdings directly linked to cannabis sales. ETF capital gains distributions: Almost none historically - Morningstar analysis cited to show ETF tax efficiency. Buffett Special equity allocation: 90% - Buffett’s suggested allocation to an S&P 500 index fund. Buffett Special cash allocation: 10% - Buffett’s suggested allocation to short-term Treasury bills. Buffett Special total cost: About 5 to 6 basis points - Estimated blended expense ratio using low-cost ETFs. Vanguard S&P 500 ETF expense ratio: 5 basis points - One example used for the 90% equity sleeve. iShares S&P 500 ETF expense ratio: 4 basis points - Cited as even cheaper than Vanguard’s S&P 500 ETF.

Pivotal Quotes: "The reason ETFs aren't in 401k plans is because a lot of the advantages that we all know about them don't really matter there." — Eric Balchunas: Explaining why ETFs are rare inside retirement plans. "Bid-ask spread is essentially the round-trip toll for trading an ETF." — Eric Balchunas: Defining the hidden trading cost of buying and selling ETFs. "Money goes where it's treated best." — Eric Balchunas: Summarizing why low fees and tax efficiency help ETFs attract assets.

Implications: Listeners should focus less on headline fund launches and more on fees, index methodology, liquidity, and tax treatment. For the industry, ETF growth will keep favoring low-cost, transparent, and well-constructed products, while themed and leveraged funds remain powerful but risky tools.