ETF Expert Corner CEO Dave Nadig Looks Ahead to ETFs in 2018

December 19th, 2017 by ETF Store Staff CEO Dave Nadig recaps ETFs in 2017 and offers several ETF predictions for 2018.


You can listen to our interview with Dave Nadig by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: Our first guest today is Dave Nadig, CEO of, of course, is one of the world's leading authorities on ETFs and Dave is simply a treasure trove of ETF knowledge. There just aren't many people, if any, who know more about ETFs than Dave does and we're very pleased to have Dave joining us via phone today. Dave, great having you back on the program.

Dave Nadig: It's great to be here. Always happy to join.

Nate Geraci: Dave, let's just start with a quick recap of 2017. Last I checked, about $465 billion has gone into ETFs this year, just obliterating last year's record of around 287 billion. Give us your assessment here. Are you surprised at all? Was this expected?

Dave Nadig: Well, I don't think anybody can expect nearly $500 billion in flows. It's almost like we doubled last year. I think we all expected this to be a strong year, but we've had this combination of strong markets, a real movement into low-cost beta from across almost every asset class, and a lot of new players in the market, which we haven't really talked much about, but they're all showing up with $500 million dollars here and there, and that all adds up.

Nate Geraci: You mentioned the move to low-cost beta. Obviously, the ETF fee war continues raging on. No question that was a big story in 2017. And, look, we all know that on the balance, this is clearly a good thing for investors. But recently released a survey which found expense ratio was the most important factor for ETF investors - and that survey was primarily investment advisors. In response to that, you wrote a really good piece that essentially said it's not just cost that matters, it's what you're getting for that cost. Can you expand on that a bit? Because it does feel like the focus on cost has sort of overshadowed some of the other factors that can have a much greater impact on returns.

Dave Nadig: Yeah, I mean I guess we should be happy that investors have at least gotten the message that cost does matter. But there is such a thing as taking it too far. And I think when you talk to some advisors, the smart ones realize that there's a little bit of truth in you get what you pay for. You have to look a little bit beyond just getting your four or five basis point beta because you need to be careful about your exposure. You need to be careful about your trading experience as well. And running an index fund isn't just pushing a button on a computer. There are funds that track really well, funds that don't track as well. So while it's great that investors have learned this lesson about cost - it is the one thing we can control about our investment experience - I really hope investors look beyond that and start focusing on exposure, which at the end of the day, what you own is really what determines your returns.

Nate Geraci: Alright, now before we move on to talking ETFs in 2018, I've got to ask you, do you have a favorite new ETF launch this year?

Dave Nadig: Well, the irony is if you look at the funds that brought in new money, a lot of them are ones we've never even heard of. Last time I checked, the leader here was actually the DeltaShares S&P International Managed Risk ETF, which I don't think I've ever even said those words before. I mean, DeltaShares is a new player owned by Milliman. They showed up with $250 million of their own assets into that fund. And really, if you go down the list of big launches, they almost all look like that. They all come from places like Principal Financial Group, or FormulaFolios, Goldman Sachs, people bringing their own assets to the party. I would say of that batch, the one that I think is the most interesting is probably the Goldman Sachs Access Investment Grade Corporate Bond ETF, which is a true smart beta corporate fund. It looks at company fundamentals to make the allocations into corporate bonds. That fund pulled in about $200 million out of the gate and only charges 14 basis points. I think that's a really interesting approach.

Nate Geraci: You mentioned the “bring your own assets”. I know Bloomberg's Eric Balchunas likes to talk about this. Is that the model for success for a new ETF launch?

Dave Nadig: Yeah, I mean this is sort of one of my trends for next year. When we look at the winners and the new entrants, it's John Hancock, Legg Mason, Oppenheimer, Transamerica. These are not household ETF names. They're big financial names that come from the traditional mutual fund space or even the insurance space. That's where we see new entrants having success. So you either have to come with that guaranteed money, B-Y-O-A as Eric so nicely called it, or I think you have to have something that's really unique and ingenious, and you have to get the performance hit at the same time. You know we've seen whether it's marijuana funds or bitcoin funds, we've seen all these launches for unique niches in the market. That's part of it, but then you also have to have the performance. Otherwise, I think it's really tough.

Nate Geraci: Our guest is Dave Nadig, CEO of Dave, let's talk about some of your 2018 ETF predictions. And just for fun, I went back and looked at's 2017 ETF predictions and, I've got to say, your team did remarkably well. I would say you nailed seven or eight of the ten predictions pretty closely. Now, let me caveat that by saying we just talked in our previous segment about ignoring predictions. We were talking about the financial markets, but nevertheless, let's discuss your ETF predictions for 2018. I know you just posted these today at What are some of the things on your radar for next year?

Dave Nadig: Well, I think this will be a year where we start seeing some of the smart beta funds really come into their own. And really that can go one of two ways, and it will be determined based on market performance. I'm not somebody who is going to make a bold prediction about whether the market is up or down 20% next year. But certainly, any measurement of the broader equity market suggests that at some point here, we're due for some kind of correction. If this is the year we see one, I think you'll see some of the lower beta, the sort of risk averse smart beta products, like maybe the iShares MSCI Quality Factor ETF, QUAL, or the Guggenheim Defensive Equity ETF, which is DEF. Those are funds that are smart beta in the sense they're trying to lower your risk while maintaining pretty standard market exposure. Those are the kinds of funds that could really have their moment in the sun if we have a big pull back because they'll be a little less risky. So that's one way I think we'll see some smart beta stars form. If instead what we have is another big momentum year, another 10, 20% equity year, again, we have a whole raft of fairly new smart beta products out there, including ones like MMTM which tracks momentum itself. I think you'll see some of those really break out if we continue this market. So I think we'll start talking more about those. We'll see that outperformance on either the up or downside, and we'll start seeing some big asset flows into those funds. They really, for all the talk on smart beta, they haven't pulled in huge assets.

Nate Geraci: What about pure active ETFs? It seems like every year, this is one of the predictions from some of the pundits - that this will be the year active ETFs proliferate. What are your thoughts on 2018?

Dave Nadig: Yeah, I think that's one we really need to debunk. There's no question the active managers are showing up in the ETF space in spades. I mean Davis alone pulled in a couple hundred million dollars by themselves with transparent traditional stock picking equity this year. So there's an opportunity to raise assets there, but in terms of finding sort of old school, shoot the lights out outperformance, I think that ship has sailed. S&P tracks these things really carefully. They looked at the 2000 to 2002 bear market, the 2008 bear market, and every time there's always the same prediction which is, "Well, when the bear market comes, that's when you're going to see active managers outperform." In fact, in both of those bear markets, active management did just as poorly, if not worse as it's been doing in bull markets. So I don't see any reason why a new pullback would be different for active management. I do think we'll continue to see active players show up in the ETF space, but I think they're going to have just as tough a road to hoe.

Nate Geraci: Along those same lines, I know one of your bold predictions was that some of these non-transparent active structures may get approved and we'll start to see ETFs come out using that structure. The question that I have is do you think that's something that investors really want? Are they okay not having that transparency?

Dave Nadig: Well, so I've been a fan of the non-transparent active structure, particularly the one put forth by a company called Precidian Investments - mostly because I think it's clever financial engineering that solves a problem for the asset management industry. I think your point is well taken. I'm not sure this solves a problem for investors, but if there are investors out there who really want access to, I don't know, say a Gabelli, a traditional, non-transparent, stock picking, active manager, this may be the structure that lets them get it. Because until there is a non-transparent way to bring those products to market, we won't see a lot of those name brand active equity market participants in the ETF space. So whether or not it's good for investors or whether it's simply an access gate remains to be seen. It is a solution for the investment management industry more than it is for you and me I think.

Nate Geraci: Our guest is Dave Nadig, CEO of Dave, another item you touch on in your bold predictions is ESG. And going back to's 2017 predictions, one was that ESG ETFs would explode. For whatever reason, there seems to be a lot of media attention surrounding ESG, but the assets haven't necessarily followed yet. Do you think that changes significantly in 2018?

Dave Nadig: I think I've moderated my enthusiasm for ESG a little bit. I still think it's where we're going to see a tremendous amount of product growth. We've got 33 sort of pure ESG funds by my count, and we have a lot of funds that don't call themselves ESG that are getting a lot of attention for their say governance screens and things like that. And collectively they pulled in just under a billion dollars this year. I think importantly, none of them had negative flows. So all of them are growing as a class, and I see that as very positive. And I think what we'll see is a continued trickle. We'll see an acceleration of that money coming in, maybe next year we get a couple billion, five, ten billion dollars flowing into ESG product. That'll be long-term, sticky money. That's sort of the premise here. This is not trader's money. This is long-term investors’ allocations. I think we'll continue to see the product line expand. I wouldn't be surprised to see another 30 or 40 ESG funds launch in this year and I think you'll see some of them come in with big assets. We saw that when State Street launched SHE, the women in governance ETF two years ago. That fund launched with big assets coming in from institutions. I think we'll see more of that.

Nate Geraci: Dave, I'm curious, I don't want to get too far into the weeds here, but can you tell us anything about the so-called ETF rule, where the SEC may try to make it easier for fund companies to launch ETFs? I guess the question is will this have any impact on the ETF landscape next year?

Dave Nadig: Yeah, I mean we definitely are in a different regulatory environment. Our new SEC commissioner, Jay Clayton, is very ETF friendly. He recently appointed Dalia Blass to run the investment management division there, which is really where ETFs go to either be born or die. She comes from an ETF background as a lawyer. So we're certainly in an environment where at least the SEC understands ETFs. There has been a lot of talk about an ETF rule that would simplify the process for bringing standard ETFs to market. Not Bitcoin ETFs, not things that push the limits, but just standard, plain vanilla, unlevered, long ETFs. They still take a huge amount of effort for the SEC to approve. An ETF rule would make that process simpler. It could potentially lower costs for new entrants. That gives us more options as investors. In general, that's a good thing. Whether you can do this without actually doing any legislation I think remains an issue. ETFs live because of loopholes to existing laws that were passed, the 1940 Act. An ETF rule sort of has to get around that or it has to be an actual piece of legislation. So I'm a little skeptical with the current environment in Washington that there's a lot of movement that could happen in Congress. But I do think you could see some clean up on the way ETFs are implemented in the current SEC.

Nate Geraci: Well, sort of on that subject, we're going to visit here in just a moment with AdvisorShares’ Dan Ahrens to spotlight their new Vice ETF. This holds companies involved with alcohol, cannabis, and tobacco. So it's more broad-based. But there are a handful of standalone marijuana ETFs in registration with the SEC. As a matter of fact, I think LARE’s hoping to transition next week if I recall correctly. But the question I have is are there enough investible companies in the cannabis space? Could there be some capacity issues with these ETFs?

Dave Nadig: Yeah, I think that's a very serious concern. And it's one of the reasons we haven't seen the SEC approve a straight up marijuana ETF yet. The two real concerns are if you're going to invest in US companies, are they at some sort of additional regulatory risk and does that make them inappropriate as a target? And the way most funds seem to be getting around this is they're going after the public companies that are available, which are either related companies, i.e. a fertilizer company, something like that, or perhaps a real estate investment trust that's owning land that's being used. Or they're investing in Canadian companies where there are a few dozen very small companies that are in fact publicly traded that are directly involved in the space. So that brings with it all sorts of additional risks, right? I mean you're now investing internationally in a set of small and/or microcap companies. Regardless of what industry, that's a set of risks that you're taking as an investor. Now, you're adding the layer of sort of the uncertainty around marijuana regulation. I think these are very speculative investments for most people. So while I think we'll see some of these products come to market, the capacity constraints are real, as are the risks.

Nate Geraci: Dave, you mentioned that these may be speculative investments. There's no question about that. We have about two minutes left here. As you look at ETF proliferation overall, I'm curious, where do you fall on this? When you look at all the different thematic ETFs that are out there, obviously there's a lot a talk about bitcoin ETFs coming to market, marijuana ETFs, do you ultimately think these are a good thing or a bad thing for investors?

Dave Nadig: We've seen this story before. We saw it in the mutual fund space where we now have some ten thousand mutual funds available. People have been saying there are too many mutual funds since the 80s, and yet we still see continued product proliferation. I think that there's a lot of room in the marketplace. You look at the successful launches this year, whether it's the Main Sector Rotation fund, or Principal’s Multi-Factor Megacap fund, not every one of these is a tiny little niche fund. They're funds that serve a purpose. They're either part of a larger asset allocation play, they're part of a distribution strategy, they're a tweak on an existing exposure, or they're a genuine new way of approaching a market like that Goldman Smart Beta Fixed Income ETF I was saying. So I think these choices are great to have out there for investors. There's no question that you've got more and more funds to look at - puts more burden back on the investor to do your homework and really understand your exposure.

Nate Geraci: Well, Dave, on that note, we'll have to leave it there. Always a pleasure having you on the program. Happy Holidays to you and your family, and we certainly look forward to seeing you down at the Inside ETFs conference in January.

Dave Nadig: Absolutely. Thanks for having me.

Nate Geraci: Thank you. That was Dave Nadig, CEO of