Impact of Dimensional’s conversion of mutual funds to ETFs

Dave Nadig, CIO and Director of Research for ETF Trends, joins Yahoo Finance to discuss the outlook on crypto ETfs and Dimensional Fund Advisors’ conversion of mutual funds to ETFs.

Video transcript

- I want to turn now to our ETF report brought to you by Invesco QQQ. We're joined now by Dave Nadig, chief investment officer and director of Research for ETF Trends. Dave, always great to have you here with us. Quite a bit of news going on in the ETF space. But I want to first start just with cryptocurrency since we've been talking about that quite a bit in this hour. What is the latest right now on some of those cryptocurrency ETFs? It feels as if everyone has been chomping at the bit waiting for the ability to get involved, especially since right now we have none here in the United States, only the one in Canada. What is the latest happening there? Is an ETF in that space going to be coming available soon? What are you expecting that interest to be?

DAVE NADIG: Well, we're all just waiting for the SEC to approve one of the nine filings that we've got out there for various cryptocurrency, really mostly Bitcoin ETFs. I think the cryptocurrency market got a little buzzy about the SEC's agenda for the rest of the year, which they finally published. And notably cryptocurrency was not on that agenda. And I think everybody thought that meant, well, we'll never get an ETF. I don't think that's necessarily the case. I think what we're going to see is some guidance from the SEC, probably mid-July.

That's the next deadline that they'd have to say something or continue to delay. And then once we get that guidance, there'll be a bit of a sort of put it together refile. And I still suspect we'll see an approval by the end of the year.

- What if you, again, want that exposure to the space but can't get it in the form of an ETF right now? What are you seeing some clients do?

DAVE NADIG: Well, there are really two options unless you want to go right to the crypto markets, which is what a lot of people are doing. If you want to stay on the exchange traded side of things, you've really only got two options. You've got the sort of called the pink sheet trusts, as I call them, things like GBTC, the Grayscale Bitcoin Trust. Those are subject to big premiums and discounts as people trade them. So in general, I don't recommend those because trading them can be so difficult.

The other approach is more of a picks and shovels approach. And there have been a lot of funds there and a lot of new filings. Probably the notable one would be BLOC, which is the amplified blockchain ETF. With a fund like that, you're getting companies related to the industry and you're getting firms that put Bitcoin on their balance sheet like MicroStrategy, which y'all talk about fairly frequently here. But you're not getting that direct Bitcoin exposure. So you kind of got to go either directly into the crypto markets, the pick and shovel approach, or something like GBTC.

- Now Dave, we were just talking with the former "Bachelor" star, Matt James, who was talking about cryptocurrency as an inflation hedge. I'm not going to necessarily ask if you think Bitcoin is a good inflation hedge. But inflation has been something that we've been talking about quite a bit lately. We've got the numbers from the PPI, the CPI last week accelerated. As you're looking at it, how should investors, as they're looking at some ETFs out there, how should they best create some kind of inflation hedge?

DAVE NADIG: Well, a traditional way of doing this would either be to go into tips directly, inflation protected bonds, or to look into the commodities market. The tips trade hasn't really paid off for most folks. The yields just aren't there in the bond market to make it interesting enough. The commodities play is where we've seen most of the action. We've seen great flows into commodities, ETFs. I'll highlight one there, PDBC from Invesco. That's sort of a yield optimized version of a broad market index on commodities.

And we've seen a lot of interest there. And what you're betting on there is that the price of oil, and the price of agricultural, the price of industrial metals, those are going to be the things that are still in short supply as we're coming into this sort of boomlet coming out of the pandemic.

So those are really the places I'd look. Commodities are always a good one. Not so much gold. Gold really hasn't held its own as an inflation hedge, at least in the short term. But broad based commodities, that's where advisors are looking.

- And I guess congratulations are in order, Dave, because big news in the ETF world. You got four mutual funds converting to ETFs. This is from Dimensional Fund Advisors. Tell us a little bit about that and the thinking behind the conversion.

DAVE NADIG: Yeah, well Dimensional's one of these great big firms, about $700 billion in assets, mostly institutional and advisor money that really has not been in the ETF business. They've figured out how to do a conversion of four of their core actively managed products directly into ETFs. So it takes them from a very low base of a couple funds they started with in November to being the 15th largest ETF provider overnight. And the funds that folks can get access to here, some of them have been trading since 1998. And those track records come over.

So all of the sudden, we have somebody with this incredible 20 plus year track record in ETFs bringing to market a strategy that was historically very hard for retail investors to get access to. Dimensional is a very gated firm. You used to have to find an advisor who was approved to even get access to the mutual funds. Now anybody can buy these products right out of the gate.

- Curious to know what you see as the broader impact and if you see other funds following suit with these conversions.

DAVE NADIG: Yeah. I think we'll see some interest. There are some problems doing this. It's difficult to do this if your mutual fund is in a lot of 401(k) plans. 401(k) plans need to be able to make these sort of small fractional dollar allocations. You put $300 into your 401(k). You're not buying a share of something. You're buying fractional shares. ETFs don't trade that way. So it's been a difficult thing for people to figure out. Notably, the fund that have converted here from dimensional weren't in 401(k) plans because they were tax managed funds. They were tax aware.

The portfolio managers were being very careful not to throw off capital gains already. Now that they're in an ETF wrapper, that'll be even better. But as we look to future people to convert, I think we're going to have some problems with those big name brand funds because they're not going to be able to actually convert the 401(k) parts of those funds. Instead, I think we'll continue to see clone funds launched by firms like American Century, or Gabelli, or Fidelity. And that's what we've seen to date. So I think we'll see some conversions. But I don't think it's going to be a floodgate that has a trillion dollars in it anytime quick.

- And I'm wondering if you could share with us where you're seeing big inflows right now. I know that the infrastructure trade was really big. Now of course, President Biden's infrastructure bill sort of making its way slowly through Congress. We've also got energy, literally a hot commodity right now with that heat wave going on on the West Coast. So where are you seeing the most interest right now?

DAVE NADIG: Well, people are definitely wanting to stick into the equity market. I think where we're not seeing interest is in bonds. Nobody's really looking at that part of the market. Most of the flows are staying inside equity. What we're really seeing is what I'm calling an intra-equity risk off rotation. And it's hard to think about going into things like midcaps or small caps or even value as risk off. But that's really what we're seeing. If you look at things like sector flows, what's performing well in terms of flows? It's things like financials. It's things like basic materials.

It's not the go go growth sectors like technology anymore. And it's not even some of those thematic funds that really were all we were talking about six months ago. So I think that kind of intra-equity rotation is really powerful for investors. It helps them reposition their portfolios effectively. It keeps them invested in what is feeling like a no alternative market. Where else will you put your money if you're looking for growth?