Buy The Dip: Bond ETFs, NDIVIA bearishness, and TIPSplaining
Read one of my least popular opinions
Hello again. I survived my week of log cabin book-writing isolation without going all Jack Torrance.
But on my return to Alphaville Towers I still chose violence: Here are a thousand-plus words arguing that ETFs are actually a better fund structure for less liquid assets than traditional mutual funds.
This is not a popular argument to make. There are a lot of people that instinctively dislike ETFs, and viscerally detest bond ETFs above all. And while the emotion baffles me I get the vague sentiment, because I was among those that was vaguely sceptical for a long time. Combining an exchange-traded product with sparsely traded underlying securities just seemed like an obvious recipe for something to go wrong.
But for me, March 2020 was one of those moments where you have to hold your hands up and say “um, yeah, I got it wrong”. Fixed income ETFs were FAR more resilient than I expected they would be, and on the fringes probably actually helped ameliorate the crisis. I first cautiously laid out this argument in a column in April 2020, but since then I have become increasingly convinced that it’s true.
However, that is not to say that fixed income ETFs will never cause problems. I’m sure they will. For example, I’m intrigued by some potential negative externalities caused by how they’ve enabled a boom in portfolio trading in credit (something I hope to explore in a future FTAV post). I’m sure there are other technical aspects I don’t appreciate enough. At the very least, ETFs are now so ubiquitous in swaths of the bond market that they’re likely to at least be suspiciously near the scene of any future crime.
And one of my most strongly-held financial opinions is that same-day liquidity is vastly overrated by investors and inherently dangerous for the financial system. If I were granted divine omnipotency for a day, mandating long-term lockups for ALL financial products aside from deposits would probably be one of my first acts (after making Manchester United a lower-league feeder club for Bolton and stripping Sweden of a few of its Eurovision Song Contest titles).
But if we’re determined to let investors pull their money out whenever they feel like it, then ETFs may actually be a far better structure than the traditional open-ended mutual fund.
Anyway, here are some of the other articles that Alphaville published over the past fortnight.
– “An increasing share of NVDA’s revenues from the past two quarters can potentially be attributed to startups NVDA has funded itself.” An unusually punchy sellside report on the AI bubble darling, with this killer line:
– Could change of control covenants put a drag on M&A? Toby Nangle is really getting a hang of this blogging lark.
– The ‘real’ yield curve has now also inverted. But does it really matter?
– The passive attack on bond markets. The passive vs active bond fund flow chart is quite breathtaking.
– Big tech will either be fine or probably mostly fine, says Goldman. This time is different, basically.
– Americans are giving up on the West (of America). For the first time since the Second World War, the share of Americans living in the western census region has fallen.
– What makes ‘whatever-it-takes’? Nebulous but big-sounding central bank pronouncements are more impactful than big but defined stimulus announcements.
– TIPSplaining a lousy inflation hedge. If anyone tells you they’re buying inflation-linked bonds as an inflation hedge then send them this article.
– The “beach effect” and the benchmark. Are summer Hamptons trips reflected in overnight repo rates?
– New SEC rules on Spacs shut the barn door after horses have bolted. :-(
– The video games industry still has a quality-to-price problem. Games are taking MUCH longer to make, are finding it harder to break even, and big franchises and in-game purchases dominate revenues.
– Tesla is five times bigger than all the public companies in Texas. Some fun but pointless data viz inspired by the latest Musk News.