Jonathan Forsgren
Welcome to this Asset TV Trends and Themes and ETFs Masterclass. Joining me to unpack some of the key trends and themes product developments and the outlook for the ETF space are Dodd Kittsley national director at Davis Advisors, and Jason Chen, research analyst at the DWS Research Institute. Gentlemen, thank you for joining us.

Jason Chen
Very thanks for having us.

Dodd Kittsley
Yeah, thanks for having us.

Jonathan Forsgren
So, Jason, to kick it off, could you tell us a little bit about DWS and the ETF business at DWS?

Jason Chen
And I would say in general the our ETF offerings in the US, they're not necessarily going to be the very vanilla offerings. It's going to be something a little bit different, maybe a characteristic like currency hedging or a factor that's that's embedded over the index methodology.

Jonathan Forsgren
And before we move on, I understand that DWS launched the largest ETF in history. Is that.

Jason Chen
Correct? Yeah, that's correct. The ticker is USCA for for those who are interested.

Jonathan Forsgren
Cool. Well, congratulations. Thank you. And Dodd could you give us a little bit about Davis Advisors and then your ETF business?

Dodd Kittsley
Yeah. So Davis Advisors is an independent employee owned boutique asset manager. We're a research driven. So the fundamental analysis from the bottom up, we're following an investment discipline that's been around since the 1940s, three generations of Davis. So we have a very long track record, a lot of economic cycles that we've gone through and all of our ETFs, all four of them are high conviction benchmark agnostic.

Dodd Kittsley
They're below average fee. They're based on strategies with track records of upwards of 50 years in a team that's been together for a long time. And one of the really unique things about Davis is we are amongst the largest shareholders in all of our products mutual funds, SMAs, We're very proud of that, especially in an environment where very few managers have skin in the game and eat their own cooking.

Jonathan Forsgren
And sticking with you that you're a veteran in the ETF world. Could you walk us through how ETFs have evolved over the last 25 years and what's really been driving the growth in this space?

Dodd Kittsley
Well, we're going to we're going to need a whole nother master class for that. Thank you for calling me a veteran. Don't know with how to take that one, but I've been really lucky in my career that I stumbled on these in the late nineties and have such a passion for the advantages that they deliver to the marketplace.

Dodd Kittsley
I mean, they've democratized investing in so many different ways, driven down fees, increased transparency. It really made it investors toolbox so much broader by instantly making strategies, markets market segments relevant to a broader investor base. So the efficiencies from a cost transparency perspective is amazing. The breadth of product over 3000 choices today and in many, many different areas in different ways to cuts, like you said, currency hedging.

Dodd Kittsley
What a great innovation that is. It's just an exciting place to be with a lot of innovation, driving down costs and really creating efficiency for the markets.

Jonathan Forsgren
And speaking of evolution, Jason, what have you seen from investors demanding out of ETFs and how is that influencing product development right now?

Jason Chen
Yeah, I think I would say to echo what you just mentioned, it really falls into two buckets in my opinion. One is market access. So providing increased vehicle availability, allowing investors to express their views in more nuanced way. And then the second component of that would be thematics. So offering investment options that tie to a megatrend or provide investors the opportunity to take advantage of an opportunity that I would say it's not a short term opportunity in its nature, but perhaps it looks more interesting today than it might in six months.

Jonathan Forsgren
Come back to Dad. So Jason just touched on themes and you'll get a chance to talk about themes in a second as well. What are some of the themes and trends that are manifesting 
themselves in in your ETFs and in ETFs overall right now?

Dodd Kittsley
Yeah, I mean, our ETFs are unique in that we were among the first to launch actively managed ETFs. So on the equity side, and they're different because they're obviously not benched on a they're not based on a benchmark. We're trying to beat a benchmark. And with that captures is human experience, judgment, discretion, things that can't be captured in a standard old stock screener, just looking at the data and the metrics.

Dodd Kittsley
We all know that investing is the art of the specific. So it allows, you know, that human element to enter, which I know is debatable. And a lot of active managers don't outperform. We've got a great track record of doing so. So we identify themes that often will evolve over time, but really try to get into the megatrend themes, but different than a lot of other ETFs in owning the entire kind of basket of companies that are exposed to that theme.

Dodd Kittsley
We really look for the biggest, best, most dominant companies, most poised to be able to benefit from those trends. So those are kind of what we look at and those themes evolve over time. Right now, higher inflation, a return to normal, you know, driving down costs in health care. On the future of semiconductors are among several of the themes captured in our portfolios.

Jonathan Forsgren
And then bringing it back to you, Jason, how is GWC approaching themes when it comes to ETFs in terms of breadth, time frame and the themes themselves?

Jason Chen
Yeah, So I think themes can take on a lot of different forms. They can be either very broad in terms of their breadth. They can be very specific, either on a subsector level or just a small pool of companies. So it really depends on what the theme is that you're identifying. I think one common one common characteristic of the funds that we look to launch or make available to investors is to have themes that will be either strategic or structural in nature.

Jason Chen
Obviously, as I mentioned before, the opportunity set is going to be somewhat time dependent. There are going to be certain regimes or points where certain stocks are cheaper or more expensive at times. Let's say quality is a factor or dividends or income is going to be preferential. But really what you're looking to do is launch thematics that provide access over a long term.

Jason Chen
You're not looking for a flash in the pan. You're looking to provide a toolkit for investors to move in and out of these vehicles, but really think about them as potentially a strategic part of their portfolios.

Jonathan Forsgren
And how are you testing whether a theme has legs to run for some time or if it's, like you said, a flash in the pan?

Jason Chen
Yeah, so David mentioned megatrends, but this is ultimately the foundation of a lot of the trends we are looking for sort of secular shifts across the global economy, across technology. And then really it ends up being an exercise of thinking about what are smaller trends within those broad megatrends are going to play out over time. And obviously, I think to be fair, part of this is art.

Jason Chen
Part of this is science. Obviously, when you are identifying a forward looking trend, the sort of empirical evidence might not be as robust as you would want for, let's say, like a traditional factor strategy, but nonetheless, I think it is really important to have a lot of foundational information on which to develop those or establish those trends for your for your products.

Jonathan Forsgren
And if you've identified a trend that you you have high conviction on, how are you integrating that into a portfolio or trying to capture some of that upside?

Dodd Kittsley
Yeah, you know, for us it's almost inverted a bit because we are bottom up stock selectors and we'll spend often two, three, four years with the company before we'll even invest in that. And from that kind of knowledge and investigative work, trends kind of emerge. We have those eureka moments. You're one of those for our research team was back getting to know Google before they went public and we realized the future of advertising is with Google, which a lot of people didn't think at the time.

Dodd Kittsley
Right? They thought Google's an interesting search engine. Everyone's using it. It's a great technology company, but where do they get their revenue in that light came on for our research team, not just in talking with Google and understanding their business model and where it was going, but also understanding our other companies like insurance companies where their best lead generation prior to online was on cable TV costing about $30 a lead on Google.

Dodd Kittsley
After they were advertising on there, it was $0.50 a week. So a lot of runway, a lot of margin that could be increased over time. And that got us excited about understanding the kind of the future of advertising.

Jonathan Forsgren
And are there ever things that you want to exclude from your portfolios or limit your exposure to as and how do you go about doing that?

Dodd Kittsley
Yeah, you know, themes that are shorter term in nature, themes where it's predicated on things outside of our control. We always know the unknowable is going to happen and often bad things happen and you got to prepare for that. But teams that are just kind of hard to really harness and see long term growth from a long term investment perspective.

Dodd Kittsley
So a couple examples would be, look, we are not commodity experts or gold experts. I understand folks that, you know, want to invest in gold and precious metals. That's not our event. And recently energy has been almost put in that kind of too difficult to call camp for for us. So we really stick to our knitting of really understanding where we're identifying mispriced securities that are durable and have the ability to grow earnings over a long period of time in good times and bad.

Jonathan Forsgren
Just and I'm going to come back to you here. Your ETF business is is goes under extract its trackers tracked and for the most part it's passive ETFs as you mentioned earlier. So what are your thoughts on passes versus active particularly given the growth of active ETFs recently.

Jason Chen
Yeah, and I come from an active background and we have a large active franchise as well over us. So certainly I think I do believe this, but also I think it's I should say this is there is a place for both. I think it really depends on ultimately we are in the business of providing investors the access to the markets or to the themes or to the managers that they are looking for.

Jason Chen
And so in that sense, thematics play a kind of intermediate role between a pure passive approach and an active approach. For instance, pure passive, you know, is probably going to be more competitive on a cost basis. Active. You're going to get idiosyncrasy based on the manager's views. Really, I think it's up to the investor how they want to approach the blend of those.

Jason Chen
But certainly if you look at time frames, alpha generative approaches, these are strategies you are holding for a long period of time, thematics you want to have available. But a lot of the  benefits of having an ETF is the ease of trading, the transparency, making sure that it's functioning in the capital markets as you want. And then the passive one is you know, if you just want something, if you just want market replication.

Jason Chen
And so ultimately I think a healthy blend of them, depending on the time frame, depending on what the market dynamics are, makes a lot of sense for most investors.

Dodd Kittsley
Yeah, I love that. On to 100% agree on that. It really is. It's a blend, right? I mean, it's we're never in a you know either or camp and in most things in life investing in particular in you know both brings so much to the table. But you know, I spend the majority of my time on the indexing side over 20 years, went to the full blown active side and is seen both.

Dodd Kittsley
And the fact of the matter is the world's, you know, most sophisticated portfolios, the top 200 pension funds in the world have a blend and it's roughly 5050. Sometimes it's 6040, sometimes it's it depends on your conviction and access to managers and what have you. But those four years have always had a blend of index and passive inactive.

Dodd Kittsley
I think what the ETF industry has done over the last 25 years is true that up open that tool box, the opportunity set for retail investors, financial advisors to be able to tap into that indexing. Whereas if you look 20, 30 years ago they were just all active. The last thing I'll say about that is I think the pendulum swung so far.

Dodd Kittsley
Now in the passive camp, particularly given the last 12 years of a largely momentum based market that I think conventional wisdom is active doesn't work. And we really do believe it's it's the best of both worlds. The best portfolios leverage the strengths of each one.

Jonathan Forsgren
I'm going to bring it back because Davis Advisors was one of the pioneers in the active ETF space, launching some of the first active ETFs about six years ago. So what led Davis advisors to identify that as a space that they wanted to pioneer?

Dodd Kittsley
Yeah, it's a great question because we were a mutual fund shop for 53 years, got in the same business in the nineties and then in 2017 launched actively managed equity ETFs. The real answer to your question is our clients asked for it. They were changing their book of business. They saw the advantages that ETFs offer. So they asked the very honest and simple question of why can't you deliver your portfolios in an ETF wrapper?

Dodd Kittsley
To the firm's credit, they, you know, kick the tires. I became product of that process. I'm thankful because it got me a job that I just love. But essentially was about providing choice. And today when we're talking to advisors interested in our insights and the way we manage money, which is very long term, lower turnover, very intentional, it's a position of strength to say, Look, do you want a mutual fund, Do you want an ETF?

Dodd Kittsley
Do you want a separately managed account? And often it's, you know, the client's either tax situation that dictates which vehicle they're going to use the advisors practice in sometimes the temperament of the client. So it's great to offer all of those. But I've been a believer ETFs have really kind of changed the game and created this very, very efficient way, especially in taxable accounts for people to get access.

Jonathan Forsgren
So as you said, ETFs has changed the game, but the game has also changed in ETFs. I'm I'm sure since you launched the first active ETFs with Davis Advisors, we've had multiple entrants into the market. So that becomes a bit of a problem for advisors and their clients in selecting them. So what what should advisors and clients really be looking for?

Jonathan Forsgren
As you said, how do they kick their tires? How do they kick the tires with ETFs and when they're selecting?

Dodd Kittsley
Yeah, it's a great question. Right over 3000 products. There's a lot to choose from. And you know, over two thirds of that last year were active strategies and generally it's asset managers that in portfolio managers that have had deep experience managing portfolios in either the mutual fund space or private account space. So selectivity is incredibly important. And we talked about this before of the importance of knowing what's in the portfolio, not just the label on the ETF or the category or its objective in which to does it fit fit for your client?

Dodd Kittsley
You know, I think the due diligence questions are a little different when you're looking at passive versus versus an active type of strategy. It's a little more nuanced on the active side, maybe a higher due diligence bar for for passive, it's obviously know what you own the manager behind and if they, you know, been able to deliver index performance or close to that you know what are your overweight and underweight looking at it financial metrics you can look at value indices and there's like three or four multiple differences between a large cap value by one index provider versus another.

Dodd Kittsley
So there's a lot of choice there. And it's really important, you know, for folks to partner with good index providers on the active side. I mean, to us, I think it's very, very simple. It's it's track record, it's philosophy. Are they reasonably priced? Do they look different than the index? Right. Because if you're going to buy a manager that's managing a large cap, U.S. equity portfolio and they look 95% like the S&P 500, buy it for three basis points, why would you spend 40 or 50 or 60?

Dodd Kittsley
Right. So those are really the big things. The last one, I'll add is, again, skin in the game. You know, are you aligned in interests with your shareholders? Are you co-invest? Did you know are you on the same team and benefiting when everyone else benefits?

Jonathan Forsgren
Jason, would you like to add anything to add to that? What should clients and financial advisors be looking for in ETFs to really make sure?

Jason Chen
Yeah.

Jonathan Forsgren
So products that.

Jason Chen
Yeah, I think this is relevant for active and passive but I'm going to take a little more of a passive approach to the question. I think in as Don mentioned, knowing what you own, I think ETFs are a great way to have transparency and liquidity, but obviously that comes with understanding that, you know, there is a there is liquidity and in the sense that you can trade the ETF itself.

Jason Chen
But liquidity of the underlying securities I think is something that people should be aware of as well. And so I think getting comfortable with those sorts of questions is really leveraging a lot of resources and capital markets. Our portfolio managers frequently will jump on calls as well to to walk through in depth the sort of process that they undergo to manage a fund to its index.

Jason Chen
And so I think a lot of due diligence in terms of the operating procedures, the underlying market efficiency, these are all things that I think are worthwhile questions to ask. And I would just I would just say that people should ask those questions. There are resources that exist at us and other places that are there just to, you know, provide as much detail, as much information in those areas as possible and people should leverage those.

Jonathan Forsgren
And you brought up liquidity as being one of one of the top reasons investors are attracted to ETFs. But what we've seen recently in the banking system in the US is is liquidity risk is taking down some very large banks. So do any of those liquidity risks exist in the ETF universe? Could could there be a a run on ETFs?

Jason Chen
Yeah, that's a very good question. It's a complicated question, but I'll do my best to try to answer it. This the theme of asset liability mismatches in general, it's not it's not a deposit institution specific question. It's not a pension or insurance company specific question. It exists in a lot of different forums where people borrow for a certain period of time and they lend for a different period of time.

Jason Chen
ETFs in the case of, let's say, credit, for instance, there is this ongoing concern that you have a vehicle. So we have will be it's our flagship high yield ETF. The truth of the matter is that ETF trades a lot more frequently than a lot of the underlying bonds it holds. I remember very early on when I started, we wouldn't touch credit ETFs because we said, Well, how does it work if if the underlying bonds don't trade?

Jason Chen
As I've gotten more familiar with the ETF business, I think it's really elaborate and really, really elegant in the fact that they have mechanisms to deliver baskets in kind to manage the risk of the portfolio without necessarily buying every single queue up. So these are ways that I think PMS can thoughtfully manage around those quote unquote liquidity mismatches.

Jason Chen
And if you look at the track record, you've look at the the net asset values of the ETFs versus their indices, that's a really good historical indicator of if the PM team is doing a really good job of managing those risks. The counter to that, I think, is whether maybe not the counter, but one of the questions that I think arises is when people see particularly in these assets where the underlying holdings are perhaps not traded as frequently as the ETF is, they see this this deviation between the price of the ETF and the net asset value, and they ask the question, well, why is it deviating?

Jason Chen
Does that mean it's not managed properly? I would say two things. The first one being in our view, the price of the ETF is actually a true reflection of liquidity in that market than is the NAV. In many cases the net is either stale or it's using some sort of efficient pricing model that doesn't account for the extent of market volatility in particular circumstances.

Jason Chen
So really the price of the ETF and high yield for instance, is a truer indicator of what the actual prices at that given point in time. The other thing is market makers and authorized participants, they exist to kind of arbitrage this and keep it in tact. I think to be fair, in some situations, the economics of market makers stepping in and making sure those prices align, they can widen a little bit in, let's say, adverse market conditions and that can cause temporary deviations between the ETF and, let's say, its intrinsic value.

Jason Chen
I think in those cases it's really important to engage with capital markets, make sure that the ETF trading is efficient, make sure that the market color is there. But in general, I would say the first thing is a very important point is that the prices are the actual market prices. The prices are not a theoretical price. And so when people see that deviation, it's important to note that.

Jonathan Forsgren
So what is your take on liquidity risk in the ETF universe?

Dodd Kittsley
I first want to just add on because we were talking on something just really, really profound were ETFs of not just changed the way people invest, but they've changed our capital markets. And what you said about, you know, sometimes the ETF is more liquid is reflecting a more true price than what it owns. You know, ETFs have changed the fixed income industry in such a dramatic way.

Dodd Kittsley
You know, you think about fixed income, especially high yield or credit. It's mostly on the run. It's what we call disk continuously liquid. It's hard to tell where or you know, where a bond is trading in any given time. When you think of an over-the-counter market and what ETFs did is poured it on to an equity exchange, in the contrast, there's just so stark right over the counter is negotiated.

Dodd Kittsley
Pick up the phone, be like, Hey buddy, where are you going to price this bond? It's opaque. It's not super competitive. In contrast that the stock exchanges in equity markets, it's transparent, it's competitive in the cost savings that ETFs have been able to really deliver. Pretty, pretty amazing. And, you know, to your point, I think there are a lot of bond traders that are actually using the ETF as an indication of where the bonds should be trading, not the other way around.

Dodd Kittsley
I know it's deep and bright both to kind of go through this over an entire master class, but it's just, I think, another area where ETFs have created just such positive change. And to answer your question on liquidity, you know, I think there are a lot of misnomers kind of around that and myths around liquidity in ETFs. And it's understandable, especially for a lot of retail investors, even some advisors where they'll look at the average daily volume of an ETF, particularly a newer ETF, and be like, it's no way I can execute a trade.

Dodd Kittsley
This thing only trades $1,000,000 a day. I want to do a $20 million ticket. And in that couldn't be more wrong because ETF shares can be created at any point or redeemed or retired at any point. So the kind of theme or saying that we've always used is the liquidity of an ETF is driven by the liquidity of what it owns inside.

Dodd Kittsley
So if you're owning large liquid securities, you have an ETF that is only trading by appointment. That is no excuse, no reason why to pass on that. You definitely need to work with the Capital Markets desk. And essentially what ETFs enable large trades to do is give us all access to program trading. Right? And essentially you want to put 10 million in, they'll create all new shares by everything in the portfolio and instantly that ETF can double triple in size overnight.

Dodd Kittsley
So that's where people make mistakes. And I think the newer ones fixed income in less liquid under a line securities ETF can add tremendous benefit highlighted that.

Jonathan Forsgren
So Jason the last year and a half have been marked by high volatility and in down markets. What are some of the advantages of ETFs in those market conditions? And then what are some of the risks inherent to ETFs in those conditions?

Jason Chen
Yeah, so I would tie this back to the discussion on liquidity we had. So unlike ever before, you have immediate access on a listed on an exchange to trade, basically every component of your portfolio as you see fit. So the major advantage is liquidity. And then transparency I think is always an advantage. But perhaps in more volatile times it's even more sensitive than you're aware of what the fund is.

Jason Chen
Now you own holds. I wouldn't necessarily say this is a direct disadvantage, but more so a byproduct of liquidity is what we've seen over time is evidence that, you know, providing people with access to trade all the time is, in theory a good thing. But in some cases it does magnify volatility, does cause investment behaviors that might be quicker to react or more reactive than we know by the textbook.

Jason Chen
Right. So I do think it's not in a direct downside of market access, but it is sort of in perhaps an unforeseen negative effect on financial markets in general of providing this, you know, broad democratization of financial markets. It's it's kind of a double edged sword where you do want to give people access to the markets they want, but sometimes it ends up being more shaky than it would have otherwise.

Jonathan Forsgren
Kind of continue on that. And there's more out of curiosity than than anything. Did ETFs get caught up in that retail hype to the moon Reddit Wall Street bets did or were ETFs really coming on to the retail radar kind of after all of that?

Jason Chen
Yeah, I think some of them did. I would tie this back to the discussion before in thematics, right? We think about thematics on a much more. I would say fundamentally grounded basis. You know, you looking to tie these themes to trends that are playing out over a longer term period of time. So yes, you you absolutely do see certain ETFs getting caught up in these sorts of meme trades or market, you know, short term market blips.

Jason Chen
But in general, that's something that we try to stay very cautious of is is we don't want to provide people those tools because they're not, in our view, kind of fundamental to the portfolio. We want to provide them with vehicles that make a lot of sense over the long term.

Dodd Kittsley
If it happens, I can't help but think, you know, Jack Bogle is like looking down at us right now and really smiling. And, you know, for the record, I mean, he's obviously the founder of the first mutual fund, S&P 500 Index Mutual fund, a long, long time ago. But he was very outspoken against ETFs to a certain extent based on kind of what we were just talking about.

Dodd Kittsley
And that's with volatility. With uncertainty creates a massive amount of emotion. And we all know emotion is something that can really wreck havoc to a very long term plan, access to all these vehicles, complex or not, and the ability to execute based on emotion can, can, can really, really be challenging. So I think that's that's really a big a big takeaway is during periods of volatility, you know, work with your advisor, make sure that you're making decisions not just because you can access something or hedge something or, you know, trade around into exotic sort of things, but make sure that really is congruent with your long term plan.

Dodd Kittsley
And for active managers, I think it creates and those of us who are patient creates a lot of opportunity. You know, Buffett always said the stock market's just merely a mechanism of transferring wealth from the impatient to the patient. That's never been more true during periods such as this.

Jonathan Forsgren
And you brought up active management and investor advice. How do you try to build a buffer and really try to remove investor bias from your.

Dodd Kittsley
Own creation.

Jonathan Forsgren
When you're creating portfolios? How do you remove that from your active?

Dodd Kittsley
It's such a great question, right? Because emotion isn't just for the investor, it's for those of us in the business. We all get caught up in it. And I think one of the one of the big ones is falling in love with a company you've spent years and years researching, you know, the management teams and it's a company that you've gone to all their annual meetings, you know, it's my baby and you've got to be able to recognize when, you know, your thesis changes in separate, when there's a inflection point in the business versus an inflection point in market sentiment in the price of that security.

Dodd Kittsley
So that's what we do. We spend a lot of time challenging ourselves. We're a learnings based culture. In fact, we have a mistake. Wall of stock certificates on a wall in below it. It has the lesson learned and we just try to remind ourselves that we can get better. There's economic value in mistakes, and I think having professional managers can add a lot of value because they're been in it a long time.

Dodd Kittsley
They've been through market cycles. They understand and it can add a lot of value through perspective and resisting that emotion.

Jason Chen
So thought if I can add to that as well, I think a big part of this is expectation setting. So people understanding what it is they're buying, what are the risks associated with what they're buying? I think as long as that's framed in a very proper and comprehensive way, then you can really objectively determine, you know, is what's happening within the realm of possibility, is what's happening something that I knew could happen.

Jason Chen
And if that's the case, then you ask yourself the fundamental question of does it still make sense? But really where I think perhaps it warrants change is when something happens outside of expectation. And on the one hand that could indicate that something unforeseen has happened. On the other hand, it can mean that expectations were not adequately formed. And I think that's somewhat of of the problem that times is is investor education and people understanding that this is normal or this is within the realm of normalcy.

Jonathan Forsgren
You know, I'm speaking of investor education here, Don. What are some of the common misconceptions around ETFs that you would like to dispel?

Dodd Kittsley
Yeah, I think the majority of them fall under the two ETFs. It's the trading side of things, particularly for folks new to ETF investing, those that have done mutual funds for a good part of their career, where ETFs introduce an extra step, right? You know, just putting an order in for a dollar amount and getting executed at NAV at the end of the day.

Dodd Kittsley
And these are as many shares as you have with an ETF, you actually do have to trade it like you trade a stock. And I think, you know, one common mistake I think is folks don't use limit orders. And to remind when you put a market order in, that's I'm willing to execute it wherever the market's going to going to execute me.

Dodd Kittsley
And that's where bad trades can occur from time to time. They're far more the exception than the rule. But I would say first and foremost, like understand kind of the trading nuances in very simply, I always do limit order. Try not to open, buy at the open, try not to buy at the closed. When you think reason why not at the open.

Dodd Kittsley
There's uncertainty in ETFs. Value is the value of what it holds in there. And you know, you figure out when the S&P opens or the stock market opens at 930 New York time, not all the stocks have traded until 931 932, depending on, you know, the day. And as such, risk is priced in and you're not going to get as execution.

Dodd Kittsley
So there are little nuances that I don't want to say necessarily are a risk or pitfall. You can often sometimes use those to your advantage to get better execution. Being savvy about the about the trading and being conservative. But it is a mistake a lot of people do make.

Jonathan Forsgren
Just what you like to add to that.

Jason Chen
Maybe just one thing. Yeah, and this is a theme I think I've repeated myself a couple of times, but it's understanding what you're buying. I think as as Todd mentioned, it's a very much expanded toolkit and you see a lot of different ETFs coming to market. Some of them are quite simple. I think it doesn't require a lot of time to understand an S&P 500 ETF, for instance, but other ones that are perhaps implementing leverage or using different financial instruments outside of securities, they can be more complicated than they appear.

Jason Chen
And so I think, again, just understanding that at a fundamental level, but also when you don't understand it, leveraging the people who do understand it and if they can explain it in an intuitive way, then great. But if they can't, that's obviously also a question mark. So I would just add that to Todd's does point is very strong.

Jonathan Forsgren
And will stay with you. Jason. So now, now we've kind of covered what things our viewer should look out for when, when it comes to ETFs and we kind of touched on themes that are interesting right now, but I want to dig into that a little bit further. So what are what are some themes or trends that you're seeing that you're most optimistic or have the highest level of conviction for right now?

Jason Chen
Yeah. So I would base our what we view as strong opportunities based on our market view. So we are a little bit more defensive at the moment. There are a lot of question marks in the broader economy. I think to some degree markets are anticipating a much more dovish, Fed or accommodative Fed then perhaps the Fed has even indicated themselves.

Jason Chen
And so with that in mind, I think there are some smart ways to remain allocated the market, but do it in a thoughtful and perhaps less risky approach. So we have offerings quality at a reasonable price. So you are tilting towards quality names and you're not necessarily as susceptible to the sort of discount rate based valuation change that growth stocks are internationally, we think high dividend stocks, HD is quite interesting.

Jason Chen
It's also tends to be a little more defensive in nature. I think one area that we've been talking about this for a while, but it's particularly relevant when the market is volatile is currency hedging. So when people buy international stocks, they basically assume that they have to own the currency risk. And we have really good evidence that that just isn't true historically and it's particularly untrue when markets are rocky and the dollar is the sort of only bastion of safety for investors.

Jason Chen
One of the other areas I would mention as well is yield. So this ties in to the point on market access, right? As investors become more nuanced in the views they want to express, it makes sense to provide them with the vehicles to express their views. And so in the high yield space and I think high yield is a really important strategic allocation for investors, there are ways to, you know, own up in quality high yield.

Jason Chen
We have each way. E.W. It's a fund that allocates to lower spread or lower yield bonds without necessarily extending duration risk. So that provides you access to carry without necessarily owning the the worst parts of the credit complex. We have short duration high yield as well. And and the last one sorry, I mentioned a lot of tickers.

Jonathan Forsgren
No no place.

Jason Chen
Revenue bonds as well. So we have revenue so an often overlooked segment of municipal bonds is revenues. And what you've seen is, you know, as interest rates do kind of stabilize or stop moving higher, a lot of the duration extension risk for these bonds that have issuer call ability that has already happened. And so when you're looking at allocating to longer duration bonds, perhaps because the Fed is pausing, at least there are these segments of the market that still look quite interesting and and are priced accordingly.

Jason Chen
You know, they priced in the fact that rates have moved so much higher. And realistically, that's not going to continue going forward.

Jonathan Forsgren
Don, where are you seeing the greatest opportunity or where do you have your greatest convictions?

Dodd Kittsley
Yeah, I mean, despite, you know, all the uncertainty and volatility in the market we've never had is strong conviction, I believe, as we do today. And I think that's really fueled on this last decade where I think it's fair to say it's been a decade of distortions driven by interest rates being so low for so long. And it's understandable.

Dodd Kittsley
Right? A bail out with the financial crisis trying to save the economies, the world economy with COVID, no blame. It is what it is. But when you take kind of a look back, a really short term rates have only been, you know, as low as they have been recently in 1930. Long term rates have never been as low as they have been in recent periods, dating back to we have a chart going to 3000 B.C..

Dodd Kittsley
I don't know if that's true or not, but, you know, suffice it to say, it's something we've never seen in our lifetime. And what did that do? That era of free money fueled speculation. It made companies promising earnings ten years from now be as valuable is a company with its earnings today. We're going to see a lot of ramifications and change because of a more return to normalcy.

Dodd Kittsley
You a sane environment, right? When you think about it, I'm what world what makes sense logically for me to lend you $1,000,000 and ask for just $1,000,000 back ten years from now? It makes no sense because I'm forgoing that opportunity to take advantage of that capital. So it was really this nonsensical that I'm sure a lot of people really grasp that.

Dodd Kittsley
So we're we're focused on has been relatively out of favor for the last decade. So it's hard to say like, you know, trust me now we're going to be right this time. But what's been really shown is durable companies with, you know, growing cash flow that has what that have wide, wide moats that really can compound over a long period of time, maybe not the sexiest areas in the world, but we love financials.

Dodd Kittsley
We've got a3x wait and financials in R, D USA, which is r r US large cap. That's nearly 40% of the portfolio because we see such an enormous opportunity there benefit. They stand to benefit with higher interest rates with their net interest margin. However, you got to be very selective too. We wouldn't buy all banks, right? I mean, looking at that asset liability mismatch, we knew this was coming at some point in terms of the crisis we passed on a lot of companies that were in the headlines because of that.

Dodd Kittsley
So you do get to do a lot of selectivity. So it's it's financials. I think international has been the baby out with the bathwater. It's been so frustrating to be like underperform, underperform, underperform for ten years. But we know these things happen in cycles and to own businesses, growing earnings at 30, 40% that are trading at single digit multiples of that are the best run companies across the globe in the Fortune 500 is such an opportunity for us.

Dodd Kittsley
So we're we're really excited in international financials in the US in maybe some unloved areas around semiconductors and health care companies that are not pharmaceuticals per se, but companies that are trying to drive cost savings and fix the system. That, I would argue is great as it is in the United States. Our health care system has a long way to go to adopt in leverage efficiencies in technology.

Dodd Kittsley
So we have a lot.

Jonathan Forsgren
But no, no, it's it's great and that's what we're here for. But I'm going to deviate a little bit from ETFs for a second and hold you on financials. So could you give us a quick overview of your assessment for the the financial system? And in the kind of regional banks, are we watching the dust settle? What are the are there going to be further ramifications going on here?

Dodd Kittsley
Yeah, I mean, you look at what happened with the, you know, the 2 to 2 banks in the in the headlines. I think there's very, very specific to their scenarios and their deposit bases and clearly there was a mismanagement in terms of, you know, liability matching with their with their with their loans and in investments. And that's what we could see.

Dodd Kittsley
But it's really isn't science, right? It can get really in the weeds in complex. It's not just the duration of your investments because if those are fixed and match up with your terms of your loans, it's not as much of a risk. So we're not seeing some of the bigger best banks. In fact, we think this is an opportunity for some of the the bigger banks that have great market share, a lot of cash, record cash on their balance sheets to actually acquire and be able to come bigger and stronger.

Dodd Kittsley
They've done that with fintech to a certain extent already. But as some of the weaker, you know, more regional banks have have challenges that could create opportunity there. And certainly I think it's going to lead to more regulation, especially on the smaller bank front. The big banks have been up to the biggest acid test anyone would ever give them in terms of the stress test, right?

Dodd Kittsley
I mean, those are draconian assumptions that they have there. And all the banks passed with flying colors. If you're concerned about it's ironic, people are concerned about banks because they're anchoring in the financial crisis that wasn't all that long ago. It's different now. I mean, they've got twice the amount of cash on the balance sheets. You know, you got to be selective in how they're run.

Dodd Kittsley
The credit bar has been very, very high in credit discipline is incredibly important. So I mean, a lot there. But long winded way of saying, yes, it's going to be maybe pervasive and impact things like private equity, you know, any areas where, you know, there was free money before might be under more challenging in companies that were over levered.

Dodd Kittsley
Right. I mean, companies were over levered. Are they're going to have a harder time as they start refinancing, rolling their debt. So those are things to really be on top.

Jason Chen
Yeah, that's that's a great summary. I would just add couple of additional points and I very much agree that I think it's kind of it's somewhat idiosyncratic in nature, but also it was the perfect storm of, you know, it was more sentiment talking back to very strongly. Right. If you if you look at actuality at the NBS losses, it wasn't it wasn't going to put the the SBB under by any stretch.

Jason Chen
And if you look at actually recoveries, if the FDIC was an extended, it wasn't actually as dramatic as I think people think. In addition, since then, there have been facilities to lend for a year at par value for those bonds. And so I think all of those things in combination are, you know, mean that, yes, it wasn't a one off then.

Jason Chen
Those are are in place to make sure that this doesn't happen again.

Dodd Kittsley
Yeah yeah that's was great points.

Jonathan Forsgren
So sticking with investor behavior, I understand that Davis offers resources on an investor behavior. So where could viewers access those materials?

Dodd Kittsley
Yeah, so we've got several for years we've done a series called The Wisdom of Great Investors, which essentially are just quotes, some some pithy, some not. But they really do, you know, tell a lesson like another Warren Buffett quote that we like to highlight a lot, particularly in periods such as now, is that over the short term, the market's a voting machine.

Dodd Kittsley
Over the long term, it's a weighing. And that's exactly what we've seen is this divergence between in a lot of companies business results and in stock prices is creates great opportunity. We also have a brand new exciting series that we just launched, which is a series of short form videos called Mastering the Mental Game of Investing. You can find that on our website or you just Google that and it will take you to a micro site.

Dodd Kittsley
It's a collaboration between bestselling author Morgan Housel with the Collaborative Fund Work Psychology of Money. Over three and a half million copies sold. Such an insightful guy. We should have him on one of these master classes, but more of an academic perspective, journalistic perspective. And he sits down with Chris Davis is a practitioner over 34 years of experience managing portfolios and his own money.

Dodd Kittsley
And it's really, really an interesting way to kind of consume and think about things that might be straightforward and make common sense. But we all forget about, you know, So it's our hope that those will be really, really helpful for folks. You know, we we practice what we preach, and I've personally found them very valuable. So it's it's something just added that we like to do.

Dodd Kittsley
And again, we're in this the we're in this road, this journey with advisors in the clients together. And we want to make sure and try to ensure that people make the best decisions they possibly can. And how you behave is as important is what you're invested in, sometimes even more important. And people forget that from time to time.

Dodd Kittsley
We're also focused on the the next big thing or getting the winners or getting the the outperformers. That's important, too. But people all too often will, you know, shift themselves in the foot on an otherwise well-constructed plan.

Jonathan Forsgren
And Jason, where can our viewers find out more about DWC and X trackers?

Jason Chen
Yeah, so I would say that the probably the most comprehensive place to go is our website WS dot com a trackers is under that umbrella as well. There is a litany of resources you know we I personally publish a lot on strategic investing so thinking about things over a 5 to 10 year timeframe, which I think is very much foundational and in a very reactive world.

Jason Chen
But I would also say that for listeners or viewers browsing that website, also reach out. You know, we have some fantastic resources that can speak to or provide more in depth analysis than simply reading a paper. I would personally advocate for reading those papers and I write those papers, but I think it often, oftentimes connecting with the experts directly is probably the way to get the the more specific answers to the questions that might arise.

Dodd Kittsley
You wrote a great paper on currency hedging. And you know, I know you mentioned that you always have a lot of resources product to back that up. I would encourage people to reach out to you because that's great. People don't get, you know, and it's something, you know, that Yeah, it's really, really important. You guys do great work.

Jason Chen
Thanks. Appreciate it.

Jonathan Forsgren
So we're we're tying up here. So, Jason, do you have any concluding thoughts that you want to leave viewers with?

Jason Chen
Yeah, I guess the discussion in general, there are a couple of main themes that we established. You know, I think ETFs are a fantastic way to provide market access and transparency and liquidity. But the the other side of that is just for people to be even more aware of what it is they're buying, even more diligent in terms of the questions or asking, the conversations they're asking with the people who, you know, provide access to those vehicles, for instance.

Jason Chen
And so on the one hand, it's this is true of a lot of different things, right? You're providing people a way to make their lives easier in terms of investing, but that comes with a lot of complexity. And so I think balancing those two things, that's just if I could say one thing, I would say think about balancing the benefits with some of the additional risks and managing those risks accordingly.

Jonathan Forsgren
And Don, what are some of the thoughts that you'd like to leave our viewers with?

Dodd Kittsley
You know, I'll build in his comments that, you know, ETFs have been a lightning rod for innovation. And with that comes the good, with that comes the bad. I certainly think there are a lot of great diamonds in the rough that people miss. Maybe because they continue to think of ETFs as just a way to index or find rules based strategies.

Dodd Kittsley
Active is growing dramatically. The entrance has been out of this world, yet it only represents 6% of the $7 billion industry. So I'd say, you know, do take a deep look at your options and then take a deep look under the hood, reach out to to resources. And just because it's an ETF doesn't mean it's good. There are a lot of nonsensical, you know, no investment kind of basis products that are launched.

You know, again, ask the right questions, make sure it's congruent with your long term plan and recognize that, look, you know, ETFs are used by such a diverse investor base. I know most of the people tune in today are long term investors. That's that's kind of our way of viewing the world. But a lot of the news ETFs aren't, you know, immune to this.

Dodd Kittsley
Lot of the news is intended for the short term traders and nothing wrong with short term trading. If that's your game and that's what you're doing for different purposes, that's great. But we as long term investors need to kind of recognize that those signals often panicked signals or euphoric signals we need to tune out because that has no relevance to what we're trying to accomplish long term.

Jonathan Forsgren
Well, Jason Dodd, I very much enjoy this. I thank you for your very thoughtful responses to the questions and thank you for being part of this panel.

Jason Chen
All right. Thank you.

Dodd Kittsley
Thank you very much. It's a lot of fun.

Jonathan Forsgren
And to our viewers, thanks for watching for us at TV. I'm Jonathan Foresman. We'll see you next time.