David vs. Goliath: A New ETF Challenges The Private REIT Behemoths, With David Auerbach

Private REITs have amassed huge assets in the past several years, but recent events have put their lack of liquidity in the limelight.

David Auerbach, managing director at Armada ETF Advisors, joins Andy Hagans to discuss a brand new ETF that goes head-to-head with BREIT & the largest private REITs.

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Episode Highlights

  • An exclusive update on Armada ETF Advisors’ newest ETF, PRVT.
  • An overview of PRVT, including the fund’s expense structure and investment thesis.
  • The backstory behind the largest private REITs, and why some of these funds have been in the news lately.
  • Some inherent advantages that ETFs may have compared to more expensive wrappers (like the private REIT “behemoths” that are managed by some of the world’s largest asset managers).
  • Why Andy believes that some individual investors who have invested in huge private REITs, such as BREIT, might be better served by less expensive alternatives, such as Armada’s new ETF.

Today’s Guest: David Auerbach, Armada ETF Advisors

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to the show. I’m Andy Hagans. And today I’m very excited to bring you an exclusive new story. Brand new ETF, just launched, that I believe is challenging some of the biggest players in the private REIT space. Joining me today is David Auerbach, managing director at Armada ETF Advisors. David, welcome to the show.

David: Andy, thanks for having me. It’s great to be here on Fed day, and like how you phrase that. I hope we can shake things up here.

Andy: Oh, I think you’re shaking things up. Or let me say, let’s shake things up, David. Let’s not…you know, let’s tell it bluntly, like it is, you know, the lay of the landscape. I think a lot of our listeners, our viewership, you know, they understand that there’s, you know, it’s a, shall we say, an interesting real estate market right now. But let’s not bury the lede. You launched a brand new ETF this week, very exciting new product, uncharted territory, which I think is, that’s the Armada way, right, is launching something new. Tell us about your new ETF.

David: Sure. So, as you can see behind me on the screen here, we have the new ticker on our screen, PRVT. We launched the Private Real Estate Strategy via Liquid REITs ETF, quite a mouthful there, huh? The ticker is PRVT. Excuse me. What it is is that we took the portfolios and allocations of the largest private REITs that are on the market, and we know who those sponsors are. Blackstone, Starwood, KKR. You take their allocation, based off of portfolio type, geography. And what we did was we took 50 publicly-traded REITs and basically replicated those portfolios based off of geography, portfolio type. And the goal at the end of the day is to bring a lower-cost, more-liquid ETF vehicle to market, that matches, again, these private REIT portfolios assembled by great management teams and great companies. But, again, bringing a more-liquid, cheaper product, as well as a product that’s priced on a daily basis. Because we’re an ETF, there’s a bid-ask spread during market hours, you know what the stock is worth. And so we’re just…what we’re saying is we’re bringing that private REIT allocation at current market valuations.

Andy: Yet it, David, it almost, if I can make a rough analogy, it almost reminds me of, like, some of the hedge replication ETFs, hedge fund strategy replication ETFs. Roughly, in the sense that it’s not the exact same thing, but they’re, you know, using models, or in this case, you know what the holdings are, to recreate something that roughly approximates how that private fund will perform, but at a much lower cost. And then what that introduces is, well, now that private…let’s call it the private alternative, now has a pretty big hurdle, which is they’re gonna need to then outperform the liquid product, the ETF, by a pretty big margin, to justify the increased expenses, right? Am I seeing it correctly? Is that… I mean, that’s my take.

David: I mean, from a high level, we’re charging 59 basis points for our ETF, and the going-in charge for one of those vehicles averages, like, you know, 1.25%, 1.5%, plus additional fees. Over the course of the life of the investment of those private vehicles, the investor is paying on average about 3.6% a year in fees. So, think about how much you’ve paid after, let’s say, year seven, year eight, versus a 59-basis-point ETF. That’s a lot of savings at the end investor’s pocket. Now, I do wanna stress that this is a great complement to that private REIT portfolio. As I said, remember, these guys have assembled great assets, in great markets, with great management teams. They have boots on the ground. They clearly know a lot of things that frankly the average investor doesn’t know. And so if we’re able to glean some wisdom from these guys that helps us shape our portfolio, that’s great.

You know, you mentioned about where the data comes from. And for us, we’re lucky, because the companies do publish quarterly 10-Qs that highlight every asset in the portfolio. So, we can add it up and say, “Okay, residential, including single-family rentals, is 53% of the portfolio. Industrial is 25%. Net lease or gaming is 7%. And then all the other sectors, let’s say, add up to around 3% or so each. But then let’s say next quarter, they file, and that 53% number of Resi goes to, let’s say 40%, and they pick up their exposure either in industrial or some of these other sectors. Well, then it begs to another question. Why? Is it because of a change in thesis at the private REIT vehicle? Is it because they’re selling assets to fund redemptions? There’s just a lot of questions that, you know, are raised, as you see those portfolio dynamics change.

Andy: Yeah, and, you know, it has to be said, BREITs, some of these private REITs, have been in the news a lot recently, you know, the front page of “The Wall Street Journal,” in that they are hitting their quarterly or monthly firewalls, their redemption limits. So, plenty of investors have gotten into these private REITs, and it must be said, plenty of investors want out. Now, I don’t have anything against illiquid investments. You know, I own illiquid investments. I also own ETFs. You know, I like it all. But investors who are invested in these illiquid private REITs, or any type of private alternative investment, need to understand that at the end of the day, they are illiquid. I always say, “You can’t be half pregnant, you can’t be half illiquid,” right? If you sometimes you’re illiquid, then you’re essentially illiquid.

You know, but the other thing, even putting aside the liquidity issues, putting aside the fees, and, you know, active management has costs associated with it, but the other issue, to me, is that publicly-traded REITs are trading at a discount, right? So there’s just this intrinsic, right now… This is, what? June of 2023. Right now, there’s this intrinsic advantage, I would say that you have, or that funds like yours have, that are investing in publicly-traded REITs. Because you get a discount, whereas these private REITs, they’re still generally priced at a premium. Is that right?

David: Yeah, that’s basically, you know, from a very high level, the average REIT is trading at, let’s say, a 20% to 25%, discount to NAV. Currently, the private REITs are trading, you know, anywhere from a 8% to 10% premium. You know, again, it depends on the vehicle. But if you look at our portfolio that we’ve assembled, our portfolio as a whole is trading at around an 8% discount to NAV. We’re assuming, like, let’s say a 5.8%, 5.7% cap rate on our portfolio. And I think that’s a key distinguishing feature that we need to focus on here, because, again, if we use Blackstone as the example, when you look at the amount of money that they raised during COVID, coming out of COVID, and how quickly they were deploying those assets to, you know, deploying that AUM to acquire assets, it was almost very similar to like what Amazon was doing in the world of industrial. Amazon was taking down any and all space anywhere that they possibly could, really kind of not thinking about the price and the long-term implications. We may turn the space back. We don’t know if we need the space. We know we need it now.

Andy: Do we call that the spray-and-pray approach to acquisitions?

David: I like that. Well, Blackstone kind of did the same thing. They deployed a lot of money very quickly. They bought.

Andy: And who, I mean, who, David, who can blame them? You know, when clients are chasing after me, I’m running down the block, they’re chasing after me throwing $100 bills in my direction, and they just can’t give me enough money. I mean, I can’t blame BREIT or Blackstone for…

David: But think about it from the company’s perspective, your American Campus, or one other one of these companies that they acquired. You know that Blackstone’s always gonna have a seat at that table because they have the firepower to do that deal. Well, what happened was, they were going out there and acquiring assets, call it a sub-4% cap rate, in a much different environment, when the 10-year was trading at 1% and change, versus where we’re at today. It was a whole different world back then. And so, the problem, in 2023, where we sit right now, is that nothing is trading at a sub-4% cap rate. And so if they’re valuing their portfolio at a number that is, let’s say, far off from the current environment, you could see a massive reset in their NAV if they use that current market valuation.

Andy: Mm-hmm. And while I was gonna say that kind of thing could cause a stampede for the exits, but there can’t be a stampede for the exits because of the firewalls. So that’s the situation that some of these private REITs are in. And, I mean, you know, I’ve heard it said that they are sort of, these private REITs are sort of passing the test, in the sense that this is a little bit of a period of, I don’t wanna say turmoil, but stress in commercial real estate. And there isn’t panic with these large asset managers, generally. You know, I’m sure some investors are unhappy, but everyone’s sort of surviving. And they’re kind of working as they should, these private REITs, in the sense that, you know, there isn’t a stampede towards the exits. But you’d be, as an investor, you’d be better off, certainly, if you were able to recycle that money into some publicly-traded REITs right now, and get the same, either the same exact assets, or there’s very similar types of assets, at a discount, right?

David: You talk about distress, and a great example of that’s, like, New York office right now. And if you’re an institutional investor and you’re sitting on New York office REITs, what do you do? And there’s two different camps. There’s the, “I’m not touching that with a 10-foot pole. You’re crazy. The New York office is dead. I’m never getting back into it.” But to the other side of, “Wait a second. The Empire State Building is worth a couple of billion dollars, and yet the stock is trading for $6 a share. The sum of the parts is greater than the whole of where the stock price is trading. And this could be a huge potential opportunity.”

Now, I’m not saying that New York office is a buy, sell, or hold, or anything in particular. But if you… I know it’s a drastic example, and I use it in a lot of conversations that I have. But I say, think about the investor that bought American Airlines on September 17, 2001, which is the day that the market reopened after 9/11. If you recall, the airlines, the hotels, the credit card guys, a lot of those stocks just got walloped, because what had happened the prior week. And so, for those investors that turned around and bought American Airlines for, let’s say, sub-$2 a share, think about what they looked like five years later, once that recovery, you know, fully took place and America was back to normal, you know, that $2 could become $20 over a period of time. So, I’m not saying… I’m not trying to equate New York office to what happened in 9/11, but for those that don’t mind a little bit of, let’s say, pain and noise, you know, buying a stock at $5 a share, thinking that there’s only one New York office, eventually, it should bounce back, there could be an opportunity here, and that’s $25 five years from now, again, you’re gonna be happy you took that pain trade for the ride.

Andy: And now let’s turn to your ETF, and, you know, this is a cool story for me. I mean, a trip down memory lane, and I’ll keep it brief. I was covering the ETF beat, you know, 13, 14 years ago, at ETF Database. That’s really where I cut my teeth in financial, you know, covering the financial industry. And we loved ETF launches back then. We ended up selling ETF Database. But now here I am, 13, 14 years later, I still love ETFs. I still have them in my portfolio, even though I cover the private side so much now. There’s just so much intrinsic value in the ETF structure. And whenever that structure and that wrapper is kind of pointed in a new direction or covering a new asset class, or, you know, really, we’re getting to the point where usually it’s covering a niche within a niche, but that’s how it’s supposed to work, right? And so…

David: And I’m just thinking, how many ETFs were there when you were covering that beat? I mean, again, a couple of hundred maybe, back then, versus the 3,500-plus funds that are available on the market today. It was a whole different universe back then. For us in the world of REITs, there’s a handful of thematic, sector-based ETFs inside the REIT industry. There’s a couple of, let’s say, active REIT funds that are out there. There’s also, you know, your 2X levered, 3X levered-type funds, there’s your global funds, your ex-U.S. global funds. But really, it’s become, as you mentioned, a thematic of a thematic. It’s getting so far spread out, and there’s so much for investors to choose from.

Andy: But David, the exciting thing though, to me, is, I feel like it used to be niches competing with niches, or a new twist within the same theme. But now what I’m seeing happen, like, back to the hedge strategy replication ETFs, they are ETFs competing, ultimately, with private products that are non-ETFs. And that’s what I think your ETF here is doing, right? It’s not really competing with other ETFs. I mean, I’m sure it is in a way. But it actually, hopefully, for you, will be getting some of the BREIT money, or some of the money that’s otherwise flowing into some of these private REITs. Could we actually look a little, I guess, under the hood of your new ETF, of PRVT?

David: Sure, sure. Of course.

Andy: So, to begin, this is an actively-managed ETF. Is that right?

David: Yes, that is correct. And when I say active, again, remember, since they’re publishing quarterly updates with their portfolios, we can then respond accordingly with those portfolio changes. So, from a very high level, we’re, I would say about 75%, 76% involved in Resi, single-family rentals, and industrial. Seven percent of our fund is in gaming or net lease, like VICI Properties is a good example. But then you have other sectors that are including lodging, data centers, healthcare, self-storage, lab space, and those are about 3% or less for each. But from a high level, the top 10 of our constituents represent about 70% of the portfolio. And so, again, our top 10 would be a lot of the well-known Resi names that you might see in-house, including MidAmerica, Camden Property Trust, American Homes 4 Rent, AMH, Invitation Homes, IRT Living. But also we have industrial, like Prologis, EastGroup, which is a big Sun Belt industrial REIT. Rexford Industrial, they dominate Los Angeles industrial. And then also, like I mentioned, VICI. That’s our top 10 names.

And so, you know, what’s different about this than our other fund, besides the fact that there’s, you know, more sectors, because of that, we’re also kind of, this is right now yielding about 3.8%, because, again, it is a 50-name basket, you know, this is bringing a lot of other stuff to the table. And I think one other key to focus on the portfolio, leverage is a very hot topic right now. Balance sheet strength. How are these companies able to weather the storm in a rising interest rate? And right now, on average, our constituents are about 26% of debt to gross asset value. So they’re so, you know, I would say, well-protected, as far as balance sheet and their leveraged.

Andy: David, I’d almost say under-levered. But I don’t wanna say under-levered with interest rates where they are, right? I mean.

David: Especially if we’re gonna be getting this potential what they’re calling “hawkish pause” here in the next several minutes, to be determined. But remember, REITs are, as they say, REITs are interest rate-sensitive, and I’d like to push back on that what I call flawed logic. However, one thing does hold true. When interest rates go up that first time, the REITs got massacred, because, again, of that tie-in to interest rates. But as soon as that first rate cut starts going in place and we start moving the other direction, talk about a sector that you’re gonna wanna be in as a first mover, again, because of the way that the 10-year Treasury will move at that point, how the cap stack will change for these guys. But REITs tend to be that first mover when interest rates rise or go down.

Andy: So, David, you know, it’s an actively-managed fund. But at least my impression is it’s almost like a beta-type strategy, in the sense that you’re looking through these quarterly filings of the private REITs, and you’re essentially trying to recreate or approximate, you know, how they’re very, as you said, the very smart managers are investing, and where their holdings are shifting to. So, how much of the active management is simply implementing what these big private REITs are doing? Versus is there any part of it that this is Armada ETF Advisors using, you know, your own subjective judgment, trying to generate alpha on your end?

David: I would say it’s a little bit of both. We’ve talked about the management team that we’ve assembled at Armada, and the 150-plus years of experience that our team has, including a retired REIT CEO, retired REIT analyst, and some very well portfolio managers, part of the REIT mafia back in the day. But from a different angle, let’s use residential as an example. Remember, HAUS has 25 residential REITs inside that portfolio. We’re looking at the top 10 of PRVT, and we have six of those names in that portfolio. So, to answer your question, yes, there is some Armada sweet sauce that’s involved in this, because if we have 15 apartment REITs to choose from in that portfolio, it’s how do we wanna exactly, you know, allocate that?

And I think a lot of it also plays into, you know, geography. We’re, you know, I would say 60% Sun Belt. Balance coming from the coasts, with some, you know, good exposure in the Midwest and in the Mountain states. But from an interesting side note, we talked about how bad the New York office situation was just a couple of minutes ago. But on the other end of the spectrum, the New York rental market, the New York residential market, is one of the hottest markets in the country right now. And so, it’s interesting that apartments are flying off the books, but yet the office domino hasn’t fallen yet. And so I was chatting with somebody just in New York briefly, who was talking about the story. And they’re like, “Look, I just moved into a new place. The problem is, my bed touches three of the four walls in my apartment. I can’t work in this place. I can’t do a work-from-home situation in this.” And so they’re like, “I’m getting the heck out of dodge and going back to the office building.”

And so, I think, again, this is my opinion. But as the apartments and the properties fill up in New York City, I think that’s the first domino to fall. Then you move them back into the office buildings, whether you put in secluded workspaces from a company like Pillar Booth out of Chicago, which is working with a lot of these office and residential landlords and their tenants, to try to… Again, you know, thinking about that work-from-home, COVID, safety protocols, but trying to offer tenant amenities that will draw your employees back to the office. And then let’s say eventually, that office never picks up. Well, then what happens? Well, now New York street retail is gonna come back. The office building is filled up. We may as well have the amenities and the retail around that, to support all of those employees.

And it’s gonna take time for all that to happen. But, you know, again, looking at New York and the coastal markets, you know, we are seeing some of it shift back towards some of those markets. Talk about San Francisco and Seattle, and, you know, we see all sorts of stories about what’s happening in San Francisco. But there’s pockets of San Francisco where the rental market is very strong. In the same breath, there’s pockets of San Francisco where the landlords having to offer a couple of weeks of concessions to be able to get people in the doors.

And so, I think it really did, again, it’s just like anything with real estate, location, location, location, I think plays into it. We’re trying to focus on that same thing. We’re looking at these, again, these private REIT guys have assembled great portfolios, in great markets, at the intersection of Main and Main. You know, again, they are paying top dollar for these assets. And if we can do the exact same thing using publicly-traded REITs, and, you know, earn a regular dividend off of this that gets passed through to shareholders, of earned income, well, again, it could be an attractive option, so that, as, let’s say, this private vehicles paid the dividends out, you know, those dividends could be used to potentially buy our public vehicle as a complement.

Andy: Yeah, and David, the interesting thing to me is… Well, first of all, I should say, you know, we cover the alts space here. I cover so much private equity real estate on the show, and we do a WealthChannel. And at our investor shows, a lot of the sponsors who are presenting segments are in very niche, you know, very specific segments. You know, even in private real estate, with very unique strategies that you’re never gonna find at, like, a Blackstone or anything. Whereas PRVT, your new ETF, that really is going head-to-head with the very biggest private REITs. And yet, you know, you’re complimenting them, which I think you’re just being honest and transparent. They have high-quality management teams, they know what they’re doing. They have scale. They have research teams, so you’re very much complimenting them. And in a way, I think, PRVT, it’s riding their coattails. I don’t mean that in a bad way. I mean that as a compliment, right?

David: Andy, you’ve heard that expression, “Imitation is the sincerest form of flattery.” So, again, we are… I wanna emphasize, we don’t own the private REITs in the vehicle. We just own the publicly-traded REITs that own their properties, or, you know, operate or develop their properties. Let’s use VICI as an example. As you know, Blackstone had a big exposure to Las Vegas. They owned a bunch of the casinos, and they wound up selling those assets to VICI Gaming. And VICI owns the ground underneath which those properties sit, right? And so, when you think about the best locations, the best asset types, again, why not try to bring that portfolio to all investors? You talked about the ETF wrapper before. And what’s interesting is if you pull up the largest REIT ETFs that are out there, the VNQs, the IYRs, the SCHHs, you name it, and you put the portfolios next to each other, they’re all pretty much the same.

You’re literally… Because, again, everything is basically passive, market cap-weighted. We’re gonna take the biggest of the biggest, and here’s what it looks like. We’re anything but that. With HAUS, our other fund, remember, we were trying to focus on where the people are going and which of those residential REITs benefited from that. Hopefully, focusing on those target markets, that are generating the most amount of rental income, which would hopefully translate to the highest dividend income.

Private’s a little bit different. We’re assembling a high-class portfolio of S&P mid-cap 400 and S&P 500 names. You know what it takes to get to the S&P indices in itself. These guys trade hundreds of thousands if not millions of shares a day of liquidity, so the underlying constituents are highly liquid. And we’re just putting together, like I said, a wrapper that really matches what these guys have been operating for several years. But again, we’re just bringing it at current market valuations, so that all investors could hopefully play into the recovery of the long-term fundamentals of the REIT industry.

Andy: Well, as you mentioned, better valuations. You know, because the REITs that your ETF is holding are trading at, you know, the assets are trading at a discount, but also a lower expense structure. I mean, you’ve been very polite, and, you know, complimentary towards these private REITs. But, David, I kind of want you to throw the gauntlet down. I mean, how high of a hurdle… I guess, if I’m in your seat, I’m thinking, you know, I don’t even have to perform as well, right? Because the expense structure, the efficiency of this wrapper, is so much lower, it’s almost like the onus would be on them to outperform, to generate such alpha, to generate the higher cost structure, and to generate the premium at which they’re trading. Am I seeing this the right way, or am I all mixed up, David?

David: Here’s how I’ll phrase it, because I think I briefly touched on it earlier. Right now, if we use BREIT as the example, I think they’re trading at around a four to gross asset value, currently. Their yield on cost of their assets that they acquired was around a sub-4% cap. If you use our cap rate that we’ve assigned to our portfolio, of around 5.7%, BREIT’s NAV would go from, call it $14.59, $14.60-ish to around $8 or less. And the reason I mention this is that we talked about the gating issues before, right?

Andy: Yeah.

David: Well, if they’re having problems, you know, filling the liquidity requests, and the investor suddenly gets their statement next month and they see that their NAV has hypothetically declined from $14.60 to $8 a share, they’re probably gonna be calling their advisor and wanting to press the Sell button. And that would mean then that the queue would grow even longer than what’s already in place.

Andy: But you know what, David? You’re right, but isn’t the way that it’s currently set up, and I’m bad at math, so, you know, bear with me. If they keep this NAV where it is, the investors who do sell, or do get to sell now, they’re sort of selling…they get to sell at the premium, isn’t it leaving everyone who’s left worse off? Because not only, they’re still in the fund, but now they’re forced to, you know, allow the other investors to sell at what I would argue might be an artificially high price?

David: Let me ask your question with another question back to you. You probably saw the deal that was worked between BREIT and the University of California Regents a few months ago, where UC put in several billion dollars into the vehicle, and got an 11%, I think it was an 11.25% guaranteed return, billion-dollar blackstop by BREIT… Backstop, excuse me, by BREIT. You know, there was…it was almost, like, the Warren Buffett sweetheart deal that was worked out.

So, let me ask you a question. If your high-net-worth investor in Palm Beach, Florida, that has a few million dollars in BREIT, and you read that Blackstone worked out this deal with the University of California, aren’t you saying to yourself, “Boy, I’d like to get those terms of deals to myself as well. I would love to have them backstop my money. I would love to get a guaranteed hurdle-type. And so, the average investor got shut out of the deal that California was able to work for themselves, right? So, I think that, you know, one thing that’s important, and we talked about, is, you gotta do your homework. You gotta know what’s under the hood of the car. And with these vehicles, one thing that’s, you know, of note, they all, they will say, “We’ve disclosed this. It’s in our prospectus. We disclose our redemption policies and how things work.” I don’t know how good your eyes are. You see me wearing glasses. If you have time to read, you know, a book of a prospectus, in a four-point font, with a magnifying glass, really trying to read all those footnotes and what that redemption window is…

Andy: David, can I go back to my half-pregnant analogy?

David: Yeah, sure.

Andy: “I told you I was half pregnant. It was on page 93, in a six-point font. So if you didn’t read that, that’s your problem.” Well, we don’t need to…I guess I should say, I don’t need to beat up on BREIT all episode.

David: No. And again, that’s why we kept saying, like, these are, you know, again, the companies have built great portfolios and everything. The problem is that, at current market valuations, there could be better options for investors to take advantage of.

Andy: Well, David, totally. I’m gonna interrupt you there, and I know being, you know, part of the ownership of Armada ETF Advisors, there’s…you’re limited in what you can say. But, I mean, I can say it. The case for BREIT right now as an investor is very, very weak. Why would you invest in something at a premium, when you can get essentially very similar assets at a steep discount? It doesn’t make any sense. And I don’t wanna pick on anybody, any asset manager in this space, but I think the Blackstones of the world, these big giants, they can take it, right? They’re gonna be okay, right? They’re not gonna go bankrupt because I, you know, put my two cents in. It’s not a great deal for investors.

And so, whether you’re looking at smaller, more boutique, alternative investment funds, you know, private placements, or now, I think there are ETFs available, they’re just better value. And like you said, you have to do your research, you have to see what’s under the hood. And, you know, all investment vehicles, all offerings, they’re gonna have that prospectus. There’s probably gonna be, you know, eight-point font, 73 pages, or whatever. The cool thing with your ETF, or correct me if I’m wrong, everybody gets the same deal, right? There’s no…you know, no one gets to call in and get a different expense ratio or whatever. It’s basically, you invest in an ETF. You know, this is how it works.

David: No, I bought a little bit of stock after we opened yesterday, and I paid the same expense ratio as anybody else. So I did not get free stock yesterday or anything like that. You know, and I wanna emphasize that ETFs are not going away. As we know, ETFs continued to grow, just, dramatically year over year over year. And one thing that all investors need to realize is that mutual funds are by and large gonna be going away. If you own mutual funds, and I still own mutual funds, those mutual funds are going to convert to ETFs, and if.

Andy: Even the big index funds?

David: Oh, yeah. Vanguard? The Vanguard mutual funds are absolutely, in my opinion, they’re absolutely going to convert over to ETFs eventually. There’s no question about it. You know, especially for some of these guys, it’s the same portfolio. Why am I running a mutual fund. An ETF is just basically a publicly-traded mutual fund. That’s what I call it. And so, you know, I do think that the mutual fund wrapper is eventually going to go off into the sunset, which means we’re gonna see a lot more ETFs come to market. You know, there’s a joke that there’s an ETF for everything. If you have an idea, chances are there’s already an ETF out there that covers it. It’s a huge, huge universe. But the cool thing is that, again, there’s no layered fees, they’re highly liquid, with the way that the ETF process works, and it’s called the creation redemption process, if you’re an investor, you wanna put a million dollars, $10 million, $100 million into an ETF, through back-office channels in your brokerage firm, an issuer can create new shares of stock without moving the tape. You know about all of this, Andy, how it all works.

Andy: Mostly, mostly. Yeah. It gets a little complicated for me, so…

David: Yeah, because it’s, again, it all happens through back office channels. You give them money, they give you units, and here’s how it works. Or, you can work with your broker who works with the market maker, to try to, you know, arrange the trade on the tape. “It’s $10 by $10.05. I’ll pay $10.02 for 100,000 shares.” You could fill it at $10.04, boom, the trade gets done. So, I mean, it’s just like negotiating a trade. But that’s the cool thing. And again, if you like what they’re doing, you can deploy more and more and more. And if you don’t like what they’re doing, and you wanna go off and try Global X’s Data Center ETF versus Pacers Data Center ETF, you hit the Sell button, you got your proceeds, you press the Buy button, you buy it in, boom, it’s done. It happens all…you know, snap, snap, snap. It’s very quick. That’s the cool thing about stocks in the market.

Andy: Yeah, now, I will say, David, if you’re gonna be trading in and out of stuff, you know, sometimes things can happen. Sometimes you are at a disadvantage if you’re an individual little guy, but we’re talking big picture. We’re talking investors, you can buy ETFs, put in a limit order, you can do just fine.

David: I was just gonna say, Andy, I was gonna give everybody listening to this the smartest piece of advice you could ever give them. Never trade ETFs with a market order. Never ever, ever, ever, ever use a market order to buy ETFs. Even if you’re buying SPY, and it trades 25 million shares a day, never put a market order in. And here’s the reason why. The Fed just announced interest rate decision, right? Because I’ve been talking to you, I have to say I haven’t seen what the announcement is. I’m guessing it was a, you know, again, a hawkish pause, as they were talking about. Yeah, pauses rate hike, but signals more tightening to come. The hawkish pause. There you go.

But let’s say the market reacted at 2:00:2, right after that announcement comes up. You put that market order in for SPY, and that SPY order goes like this, as it spikes on the news. Well, you just gave all that money to the market maker basically, or you gave that to the market, versus you digging, what I call digging your heels in. Stand your ground. “I’m a buyer at X. I’m a seller at Y. And I’m not breaking ground.” So, I always recommend, always, always, even if it’s for…even if you’re a very, very small retail investor, and you’re only buying 10 shares of something, always use a limit order. Always try to get the best price that you can in your pocket.

Andy: Totally. And that, I would agree, if there’s one golden rule of ETFs, certainly you would know it. And I agree. That is the number one rule. And then I have to say, you know, once you’re in an ETF, once you’re out of it, while holding it, you know, just because they are liquid intraday, you can still use ETFs with a buy-and-hold strategy. Trust me. Ask me how I know that, because I do that myself, with my own portfolio. So, they’re just a very cost-efficient vehicle, and…

David: But there’s also products that are out there that are not geared towards the buy-and-hold strategy. I mean, I do wanna caution that, you know, single-stock ETFs, 2X, 3X-levered products…

Andy: Yeah, Direxion. Yeah, all that.

David: Those are not geared towards buy-and-hold type plays. So, you know, I always, again, I don’t wanna knock any advisor, I don’t wanna knock any investor. But if somebody is telling you, “You gotta buy this fund because of…” do your own homework.

Andy: A hundred percent.

David: Why do I need to be buying a 3X levered inverse ETF if the market’s going up?

Andy: Yep. Absolutely. I mean, and it doesn’t matter what the vehicle is, what the wrapper is, you always have to do your due diligence. And, I mean, I think our audience on this show understands that. I just, as a guy who normally covers the illiquid alts beat, I also have to give credit where credit is due, and it’s, I still love the ETF structure, I always will. Your point, you know, it seems like the whole world is going ETF. I don’t think that’s true, but even mutual funds, you know, gradually converting to ETFs, and so on, so…

David: But again, it also goes back to BREIT, again, with that portfolio that they’ve assembled. Same thing. You know, if you’re buying an ETF that’s assembled of tech movers, and you’re trusting that management team to put the best tech movers out there as the high part of that basket, you know, you wanna know what’s under the hood of the car. And it’s the same thing about buying BREIT. You know, advisors knew, like us, we know the… Again, I keep complimenting them because, as I mentioned, imitation’s the sincerest form of flattery. They have built great portfolios. They did, you know, have great management. They have great management teams. They know this stuff. They know a lot more, like I said, than the average investor does, that if they choose to bump up their weighting in industrial, clearly they know something that the average guy doesn’t, especially, like, if their LA exposure, let’s say, jumps up dramatically, well then that means that, hypothetically, the Port of LA standoff has worked its way through, there is no more trade gap issues anymore, the ships are no longer sitting at the port, they can finally come in and offload. Okay, we need to up our ante on Rexford now, because.

Andy: So, it’s almost, you just, we can just sort of trust that they’re in the know, things that maybe you and I aren’t, or especially, I’m not in the know. We can kind of trust that, because they have very good management. But I have to say, the most beautiful asset in the world, you know, Class A, whatever, still comes down to price, because the best asset in the world, if I pay too much, it’s a bad investment. A mediocre asset, if I buy it at a huge discount, can be a fantastic investment. So, costs matter. I think that’s part of the whole underlying thesis of ETFs, David. That’s why I love you, your company, Armada ETF Advisors. This ETF, I think, PRVT is dynamite. I think our audience, definitely give it a look if you’re investing in private REITs. I think at a minimum, it’s worth a look, so I’m gonna make sure to link to the press release, of course, Armada’s website. I also wanna link to the Yahoo Finance page. You know, the ticker page has a lot of data. Sometimes it might take a couple days or a little while for all those fields to percolate, to fill in. David, in the meantime, where can our audience of high-net-worth investors and family offices go to learn more about this brand-new ETF?

David: First of all, Andy, thank you so much for this. This is great. I love talking to you, and I could do this for hours on end. This is just fantastic. Our website is armadaetfs.com. Armada ETFs. On there, you can learn about HAUS, the residential REIT ETF, as well as our new fund, the Private Real Estate Strategy via Liquid REITs ETF. There’s a whole story to that as well, why it’s named that. But there, you could find our investment case, facts sheet, information about our thesis, but also contact me directly, David Auerbach, [email protected]. We’re here to talk about this. We’re here to educate. If you have questions about our thesis, what we’re thinking, we’re happy to share that, all of our thoughts with you.

Andy: Yeah, and I gotta plug our audience. Don’t hesitate to get in touch with David. He’s a super nice guy. And David, I gotta thank you for coming on the show today and giving us the exclusive. Thank you so much. Makes me feel very important to have an exclusive on a new product launch. So, thanks again for coming on the show today.

David: Thanks, Andy. I appreciate it, buddy.

Andy Hagans
Andy Hagans

Andy is co-founder and co-CEO at WealthChannel.