In Episode 87, we welcome market veteran and ETF expert, Mike Venuto.
Mike briefly walks us through his background, which includes a fun story about a baffling situation years ago when the gold mining company, Newmont Mining, was falling in price despite gold rising in price. Mike tells us the culprit turned out to be the new ETF “GLD” – Mike realized he needed to learn far more about ETFs.
Next, the guys dive into ETFs. Meb starts broadly, asking where we are in the ETF evolution.
Mike tells us we’re still quite early. The growth rate has been largely the same over the last 10 years (a little over 20%); but that growth rate is compounded over a larger base now, so it feels like the growth is greater. And in terms of where ETFs are going, free beta is getting saturated. The next move in ETFs will be people thoroughly detailing the differences between two ETFs that appear largely the same at first blush (nowadays, people tend to see similarly-themed ETFs as somewhat the same).
Meb pushes deeper on this idea, wanting to know more about this next evolution in ETFs. Mike tells us that myriad factors are a part of any given ETF beyond its expense ratio. For instance, there are the spreads, how well an ETF tracks its index, whether the ETF lends out its shares and what it does with that revenue, then there’s the share price itself. All these factors can make two ETFs that appear similar on the surface actually quite different.
This dovetails into the idea of “active share” – basically, the measure of an active ETF that differs from its index. Mike tells us about a tool at Toroso called Smart Cost that helps embrace ETF transparency. The tool helps answer the question “how much am I paying for the smart portion of an ETF?” Mike goes on to tell us that the overall expense ratio is not the most important cost consideration – instead, it’s how much am I paying for the smart portion? He gives us an example, comparing it to its benchmark, then calculate its “price per unit of difference.” The tool shows the amount of the ETF you’re buying that is different – and this helps determine the true value of any given ETF.
Meb echoes much of this, saying that in order to justify actively managed fees, an investor wants an ETF that looks truly different than its benchmark. Otherwise, you’re just paying top dollar for cheap beta.
The conversation bounces around a bit, including some other tools Mike uses, but eventually Meb asks about something Mike is doing that’s on the forefront of tracking the entire ETF space.
It turns out, Mike has created an index that enables investors to track the growth and exposure of the overall ETF ecosystem. This includes not just the issuers, but the exchanges, the data and index providers, the back-office companies, and so on – the entire overall ecosystem. So, Mike has created an index that tracks the growth of all these companies.
Next, the guys move into the “fringe ETF” space. Mike predicts we’re going to see more “characteristic” based indexes. Rather than capture a factor, they systemize how to target characteristics – e.g. a spin-off, or insiders buying a stock, or great brands. This leads into a conversation about “structural” factors, where you create a different form of behavior. An example would be a put-write fund.
The guys touch on a few topics before moving onto cryptos. They discuss whether crypto has any real legs, and what the potential could be. Mike has some interesting thoughts here.
As the interview begins to wind down, Meb asks for Mike’s favorite ideas going into 2018.
Mike tells over the next 10 years, it could prove difficult to achieve the type of beta returns we’ve enjoyed over the last 10 years, so he suggests seeking out high active, global growth themes. Find a PWC or McKinsey study about “things that are going to change the world” then invest in those industries (think robotics). Mike goes on to mention the Internet of Things and the electrification of cars.
Meb agrees on the potential for a challenging return environment. He walks us through why using the 60/40 portfolio with current bond yields, and what equities would have to return to keep us at “average” returns. Given our lofty valuations today, that seems tough.
There’s way more in this episode: The Permanent Portfolio… whether gold bugs should be concerned about the rise of crypto… how Meb has a new army of enemies in the form of Litecoin crypto investors… and how one of Mike’s friends bought a pizza years ago with Bitcoin – probably the most expensive pizza that friend will ever purchase. And of course, there’s Mike’s most memorable trade.
Hear about it in Episode 87.
Episode 85 is a radio show format. Meb starts with a recap of his latest travels – this time he was off to New York then Europe. Then, it’s onto Q&A. Some of the questions and topics you’ll hear are:
As usual with the radio show formats, there are plenty of rabbit holes including the Big Mac Index, why you shouldn’t go into a sauna in Zurich wearing clothes, Meb’s old econometric models, and why expectations for the traditional 60/40 appear unrealistic all around the globe.
All this and more in Episode 85.
Episode 86 is a solo-Meb show.
It’s been 10 years since Meb wrote “A Quantitative Approach to Tactical Asset Allocation” which is the top-downloaded paper of all time on SSRN. In the coming weeks, we’re going to publish a retrospective on that paper in the Journal of Portfolio Management. So Meb thought this episode would be a good opportunity to revisit the original paper and perform his 10-year post mortem.
Here’s the abstract of the new paper, and the backbone for what you’ll hear in this episode:
“In this article, the author revisits his seminal paper on tactical asset allocation published over 10 years ago. How well did the market strategy presented in the original paper – a simple quantitative method that improves the risk-adjusted returns across various asset classes – hold up since publication? Overall, the author finds that the model has performed well in real-time, achieving equity-like returns with bond-like volatility and drawdowns. The author also examines the effects of departures from the original system, including adding more asset classes, introducing various portfolio allocations, and implementing alternative cash management strategies.”
If you’re not familiar with Meb’s original “A Quantitative Approach to Tactical Asset Allocation” don’t miss Episode 86. In many ways, this paper is foundational to the various market approaches Meb has adopted since.
In Episode 84, we welcome investor and entrepreneur, Howard Lindzon.
Howard starts by giving us his background. He was a broker who felt the pain of the ’87 crash. In the aftermath, he got the angel investing and entrepreneurial bugs. He’s currently an investor in Robinhood, and he started StockTwits – which you might think of as Twitter-for-finance. He also runs a fund, Social Leverage.
Given that Howard has spent plenty of time in the public markets, Meb starts by asking about his public market framework, and how he approaches markets today.
Howard tells us that he likes to see which investments are doing well, then try to join in – in his words “classic trend following.” He uses the analogy of the great white shark and the pilot fish. Howard is a pilot fish, following the great white. He likes this approach as “there’s so many ways the markets are rigged that I think it’s best to just follow along the trends.” Howard believes this approach of following the great whites also works in the private markets.
Meb asks about something Howard wrote in regards to learning to invest – it was something along the lines of “open an account, lose money, get a mentor.” Howard expounds on that, focusing on how everyone needs a mentor. Howard wants to help other investors through his own writing and advice. He references Millennials, and how he wants to use tools to help them.
Meb asks Howard’s advice for people who want to learn to be better investors, and how to find a mentor. This leads to a conversation about Howard’s site, StockTwits. Whereas Wall Street felt that people wouldn’t share quality investment information (just keep it to yourself so only you can benefit), Howard felt that many people would want to share their good ideas. Many of these people do exactly that on StockTwits. So, Howard suggests finding someone there that matches your own investing style and temperament, who has a consistent, good track record, and just follow along.
Meb asks which gurus Howard suggests following these days in order to get great information. Be sure to listen to this part to get the specific names.
Next, Meb transitions the guys toward private investing. He asks for an overview on the blurring of the lines between private and public markets, and the development of the seed stage being open to individuals.
Howard tells us things changed in 2007/2008 – it was “the cloud” that was the catalyst, bringing down the costs of starting a company. He says now we’re in a transition stage where many private companies are actually staying private for too long. He references Uber, saying how it feels a bit late for it to go public, but it’s too big to be private.
Meb asks about the realities of private market investing for listeners, noting how some of our pasts guests have had different opinions. Howard has some helpful thoughts you’ll want to hear, but he notes that to be a great angel investor, you need to invest over multiple generations – 20 years or so. You need this time to see an overall crop of investments work out.
This leads into a discussion of Howard’s fund, Social Leverage. Howard gives us the details as to what they’re looking for, as well as the fund goals.
As always, there’s plenty more, including a discussion of when Bitcoin was less than $1, Howard’s publication, The Peloton, and, of course, his most memorable trade. Not investing in Twitter and Zynga when he had the chance comes to mind.
Hear all the details in Episode 84.