Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
Speaker 1: James Kirby, the editor at The Australian. Yeah, welcome aboard everybody.
Speaker 1: Just before we start today's show, I want to just
Speaker 1: deal with something. Thank you everybody who contacted us through
Speaker 1: the email of the Money Puzzle at the Australian dot
Speaker 1: com dot au in the last few days about the
Speaker 1: fire movement. I knew there would be a response. It's
Speaker 1: funny it took a week or two rather than a
Speaker 1: day or two, but here they come, and lots of
Speaker 1: correspondents and questions about the fire movement, and fair enough
Speaker 1: a few people saying, well, you know, James Gerard was
Speaker 1: on basically offering a critique of the fire movement and
Speaker 1: the fire movement financial independence, retire early movement. They should
Speaker 1: have the right to come on and give their side
Speaker 1: of the story, which they certainly do, and I will
Speaker 1: do that. Just give me a chance to There's two things.
Speaker 1: First of all, I've got to find some time to
Speaker 1: get them on the show. And I have to choose
Speaker 1: who the spokesman, the most appropriate spokesperson might be for
Speaker 1: the farm movement. So we will sort that out asap.
Speaker 1: All right, okay, speaking about the email box every day
Speaker 1: without failure. There are questions about exchange traded funds ETFs.
Speaker 1: It's easily the top subject. And I'm not surprised because
Speaker 1: exchange traded funds have become a gateway to the market,
Speaker 1: particularly for people who are starting investing early investors. But
Speaker 1: just as easily they are very popular with can I
Speaker 1: call them sophisticated investors, experienced investors who have a kind
Speaker 1: of what they call a core and satellite approach, so
Speaker 1: they have ETFs to cover off certain areas of investing.
Speaker 1: It might be the American share market, or it might
Speaker 1: be bonds, or it might be emerging markets or whatever.
Speaker 1: And they have become so popular, of course, understandably, just
Speaker 1: as I'm starting to understand them, and just as i
Speaker 1: think I've imparted what you need to know about them,
Speaker 1: of course, they're shifting. Goalposts are shifting as to what
Speaker 1: they actually are. So I've had a few people on
Speaker 1: the show before about ETFs, always to good response. So
Speaker 1: we've had Robin Bowerman from Vanguard, We've had David Bassenesi
Speaker 1: from Beta Shares, and today my guest is from the
Speaker 1: Global x Group. Global X You may not know, but
Speaker 1: what's upon a time they were called ETF and that
Speaker 1: was an organization which launched the first the original of
Speaker 1: the species, the first ever ETF in Australia which I
Speaker 1: remember reporting upon at the time. I think it was
Speaker 1: Downtel ninety seven and it was a goal DTF, which
Speaker 1: remains the biggest goal DTF in the market, about three
Speaker 1: and a half billion in the market today. Looking over all,
Speaker 1: that is Mark Jocum, he is at the global X Group,
Speaker 1: is an investment strategist there.
Speaker 2: How are you Mark, Hi, James, thanks so much for
Speaker 2: having me on the show. Really looking forward to it.
Speaker 1: Did I get the history right?
Speaker 2: There?
Speaker 1: Was it ninety seven?
Speaker 2: So we launched the first gold ETF in two thousand
Speaker 2: and three, but we started looking at the first ETF
Speaker 2: came in nineteen ninety one in Canada. But yes, as
Speaker 2: you alluded to, Australia, we were the first country to
Speaker 2: launch a gold exchange traded product. And we've seen a
Speaker 2: range of gold ETFs come after that, but we were
Speaker 2: the first. And yeah, we're now we're recording this twenty
Speaker 2: twenty four, so yeah, twenty one years we've been in
Speaker 2: the market with it.
Speaker 1: And money pouring into that one at the moment, I expect.
Speaker 2: Yeah, I mean, we've seen a lot of interest within
Speaker 2: gold exchange traded funds, in particular around geopolitical risk. There
Speaker 2: was inflation obviously, and also with interest rates coming down
Speaker 2: that usually bodes quite well for the other medal. So
Speaker 2: the last few months have been successive inflows into ETFs,
Speaker 2: which contradicts the last you know, twelve to eighteen months,
Speaker 2: which is actually funny enough been our flows. So it
Speaker 2: just shows that even investors are investing into gold at
Speaker 2: the all time highs at the moment because they wanted
Speaker 2: for that defensive capability, yes.
Speaker 1: Just to use that as a sort of proxy for
Speaker 1: the whole area. So, I mean, et has a very
Speaker 1: useful anyway, folks, because you can buy, as I say,
Speaker 1: you can buy the American share market, or you can
Speaker 1: buy the European share market. You can buy emerging markets
Speaker 1: or bonds, which what it doesn't gives access to people.
Speaker 1: There was most people still never buy bonds, but it
Speaker 1: was a way in. I don't know if it's the
Speaker 1: best way in. We haven't time to talk about that,
Speaker 1: but it's a way in. And similarly with gold, I mean,
Speaker 1: really the people who were gold investors. They had gold
Speaker 1: bars and they had them in vaults, and they paid
Speaker 1: an awful lot to keep those bars insured and all
Speaker 1: that sort of thing, and it was very difficult and
Speaker 1: you really had to be either a bit obsessional or
Speaker 1: very wealthy to have gold up until this CTF was launched.
Speaker 1: So it's a good example really of how they did
Speaker 1: change everything. And I'm want to begin with something. I'm
Speaker 1: going to begin by giving you a free kick mark,
Speaker 1: but it's worth introducing to people why ETFs have been successful.
Speaker 1: And we know that they are at their best they're
Speaker 1: simple and low fee, but also there was a habit
Speaker 1: what was upon a time you could only buy an
Speaker 1: Australian investor every day investor could only buy funds in
Speaker 1: the way of managed funds, and there was big fund
Speaker 1: houses Platinum and Perpetual and Magellan, and they were all
Speaker 1: big names and they have all in various ways, faded
Speaker 1: rapidly and shrunk. And one of the reasons you've put
Speaker 1: to me is what they call closet indexing. Explain what
Speaker 1: that is and the critique that your industry, the ETF
Speaker 1: industry has about closet indexing.
Speaker 2: Yeah, it's a really interesting phenomenon, James, where you've got
Speaker 2: this idea of closet indexing, which is just another way
Speaker 2: to describe fund managers who are masquerading themselves as active
Speaker 2: fund managers, but their portfolios closely resemble index funds. And
Speaker 2: I think that's really important now with the polariferation of ETFs,
Speaker 2: that investors actually look under the hood of their active
Speaker 2: manager to see what are the underlying holdings. Are they
Speaker 2: traditionally different from a benchmark or an index ETF, because
Speaker 2: if you look at some of the top fund managers
Speaker 2: out there, a lot of them have very similar holdings
Speaker 2: in terms of you know, when you look at the
Speaker 2: top ten holdings to a low cost index ETF, the
Speaker 2: only difference with them is they charge significantly higher fees,
Speaker 2: and usually just the simple arithmetic of the share market
Speaker 2: is they normally underperform by the amount of their fees.
Speaker 2: So I think not necessarily saying that the likes of
Speaker 2: you know, Magellan and Perpetual were closet indexes per se,
Speaker 2: but I think the key push is that investors really
Speaker 2: push for greater transparency from their fund managers.
Speaker 1: So what you're saying is that once upon a time
Speaker 1: or still I go when I buy a fund, it's
Speaker 1: called the Australian Share Funded, it's from white Box managers
Speaker 1: and it's a managed fund. And when I look inside,
Speaker 1: I find that the top stocks are the four banks,
Speaker 1: the big two miners, calls and worldwords, et cetera. And
Speaker 1: then you're saying to me, why did you just buy
Speaker 1: an ETF on the Australian share markets. It's got much
Speaker 1: lower fees. It's going to outperform active managers invariably. That is,
Speaker 1: it's going to do better anyway nine times out of ten.
Speaker 1: And on top of that, if you look inside the ETF,
Speaker 1: it's going to have the big four banks, the big
Speaker 1: two miners, and the big two supermarkets. So why bother
Speaker 1: go to the active person if they're not being active?
Speaker 1: This is this? The point is that. Okay, that's the
Speaker 1: point you're making. Now here's the thing. That's all fine,
Speaker 1: and I don't disagree with it for one minute. More recently,
Speaker 1: do you act globalix do you offer active ETFs?
Speaker 2: So within Australian business, no, we don't offer active ETFs.
Speaker 2: We have traditionally been index based ETFs and all that
Speaker 2: is it follows just a rules based methodology to classify
Speaker 2: a particular investment. That being said, we have seen a
Speaker 2: range of different active ETFs come to the market as well,
Speaker 2: which I'm happy to dive into as well.
Speaker 1: So just to clear the air for everybody. So for
Speaker 1: a long time, an ETF was always the same thing.
Speaker 1: It was an index. So if you boat the Vanguard
Speaker 1: or Better Shares or Global X, American Wall Street SMP
Speaker 1: index fund, you were buying the S and P. Every
Speaker 1: single stock in it was represented in that fund proportionately
Speaker 1: as they are on the actual market. It's very easy
Speaker 1: to understand, and it acted in a certain way. Now
Speaker 1: more recently, whether I'm sure you're not going to rule
Speaker 1: out doing active ETFs anyway, and a lot of your
Speaker 1: competitors already offer them. James Gerard, who already triggered the
Speaker 1: debate on the fire movement a few weeks ago, also said,
Speaker 1: possibly on that same show, that I found this really
Speaker 1: interesting that the new style active ETFs, where an ATF,
Speaker 1: for instance, will give it a good easy example electric
Speaker 1: car ETF right where they simply say we're going to
Speaker 1: buy a bunch of e let to car stocks, choose
Speaker 1: them for you, and then we're going to let that
Speaker 1: run and you can see how it goes. He said
Speaker 1: that traditionally tfs like you've just been talking about that
Speaker 1: dominate your company and your offerings. That they beat active
Speaker 1: ETFs just like they beat active fund managers. Is that
Speaker 1: the case?
Speaker 2: I think when it comes to this whole active versus
Speaker 2: passive it really depends on one in investors timeframe. Because
Speaker 2: the one thing you see, James, is some active fund
Speaker 2: managers can be passive over the short term, but over
Speaker 2: the long term it's a really different story.
Speaker 1: But do you know, do active ETFs are they beaten
Speaker 1: by passive btfs?
Speaker 2: Is there a need to suggest that, Yeah, majority of
Speaker 2: the time they are.
Speaker 1: Okay, just hold that thought. Why do they offer activetfs
Speaker 1: if the industry knows that passive btfs would beat them.
Speaker 2: It's about distribution at the end of the day, James.
Speaker 2: So a lot of active ETFs have seen, or active
Speaker 2: managers have seen the flight of money that's even unlisted
Speaker 2: managed funds and going into the ETF rapper. So for them,
Speaker 2: it's really about distribution because people want the transparency of
Speaker 2: an ETF, they want the liquidity of the ETF, and
Speaker 2: they want the tax efficiency of an ETF. They've seen
Speaker 2: a lot of success, particularly the Australian active fund managers
Speaker 2: have seen the success of the US and their ETF market,
Speaker 2: where around about a third of the flows in the
Speaker 2: US ETF market are going to active funds. But just
Speaker 2: because you know it looks like an ETF and it
Speaker 2: acts like an ETF doesn't mean that naturally money's going
Speaker 2: to go towards it. And you've actually seen outflows come
Speaker 2: from active ETFs, so you're right, there has been a
Speaker 2: barrage of new ETFs. In fact, last year over half
Speaker 2: of the new ETFs were active ETFs. They around they
Speaker 2: account for around about thirty percent of the market, but
Speaker 2: they're not seeing the same level of flows, which is
Speaker 2: really interesting.
Speaker 1: Okay, so you're saying it was a response basically to
Speaker 1: customer demand, that this was offered by the industry. But
Speaker 1: having said that, it's really worth hearing this, folks, active
Speaker 1: ETF beaten by passivelytfs. I have to say that I
Speaker 1: don't know why I certainly would ever buy an active
Speaker 1: ETF ever if they are beaten by pacive tfs. I
Speaker 1: just don't see why you would tell me I'm wrong.
Speaker 1: Let's hear from you. I can be intellectually seduced by
Speaker 1: arguments you know about various market weighted ETFs, et cetera,
Speaker 1: et cetera. But in the end, aren't you being seduced
Speaker 1: by the old fashioned notion that someone is going to
Speaker 1: be smarter than the market.
Speaker 2: But the harsh reality is of the fund managers who
Speaker 2: can actively outperform, you know, very few can do it,
Speaker 2: and over a long period of time, only one to
Speaker 2: two percent of them can do it for multiple periods.
Speaker 2: So even if you can pick the active fund manager
Speaker 2: in one year, doesn't mean that they are necessarily going
Speaker 2: to perform in the other year. And you know, twenty
Speaker 2: twenty three was a great year where you know, there
Speaker 2: was meant to be market volatility, which seemed favorable for
Speaker 2: active managers, And funnily enough, research actually indicates that the
Speaker 2: optimal conditions for their outperformance is actually low volatility, which
Speaker 2: is contrary to belief, high correlations and this high stocks dispersions.
Speaker 2: But that only occurs around about two percent of the
Speaker 2: time when it comes to markets, So it's a you
Speaker 2: really got to be quite picked that right point in
Speaker 2: time and also pick the right fund manager. And the
Speaker 2: harsh evidence says that index based investing has outperform active,
Speaker 2: but investors do want that active piece, particularly if for
Speaker 2: funds that have high active share, just to add a
Speaker 2: bit of spice to the portfolio. So that's where a
Speaker 2: lot of people are seeing the use of.
Speaker 1: It to turn back their own hunt or back their
Speaker 1: own instincts or whatever. When that comes up. Okay, very interesting.
Speaker 1: We're going to take a break and we'll come back
Speaker 1: and we'll talk. We're going to talk talk to Mark
Speaker 1: about the ETF scene and how it's unfolding, where most
Speaker 1: people put their money and what sort of trends he's
Speaker 1: starting to distinguish in our market here in the Australian
Speaker 1: see Okay, back in the moment. Hello, and welcome back
Speaker 1: to the Australian's Money Puzzle. I'm James Kirby and I'm
Speaker 1: talking to Mark Jolkom of the Global X Index Funds
Speaker 1: and ETF Group, one of the big operators in the
Speaker 1: local market for ETFs. Mark tell me, I look at
Speaker 1: the figures. It seems to me most people once they've
Speaker 1: bought their Australian share market ETF, what happens after that?
Speaker 1: What does the data tell you? What do most people
Speaker 1: do after that?
Speaker 2: Well? Finding enough. This year, James, it has really been
Speaker 2: about global shares, and I think that's the great use
Speaker 2: of exchange traded funds is you know, you can buy
Speaker 2: your Ossie stocks, you can buy your Aussie ETFs, but
Speaker 2: global shares have actually really opened up access for investors
Speaker 2: to gain access to leading global companies using a low
Speaker 2: cost rapper like an ETF. And you've seen gradually over time.
Speaker 2: You know, if I go back to when the ETF
Speaker 2: market first started, it was really dominated by ozzie shares
Speaker 2: and commodities, gold being one of them that we spoke
Speaker 2: about earlier. But now the majority of the actual ETF
Speaker 2: market is global shares, and that's because ETFs are used
Speaker 2: as that vehicle for accessing these international opportunities. So far
Speaker 2: this year, it's been very much a risk on sentiment, James,
Speaker 2: where we've seen a lot of money coming out of
Speaker 2: areas like cash and going into areas like global shares
Speaker 2: because we've seen the rise of the dominance of some
Speaker 2: of these developed markets like the US. Last year was
Speaker 2: a little bit different, where we saw a lot more
Speaker 2: flows going into bond ETFs, particularly within things like floating
Speaker 2: rate notes. And I think that's your point James. The
Speaker 2: beautiful thing about an ETF is your listeners and investors
Speaker 2: can access all these different asset classes that were once
Speaker 2: cumbersome or hard to get exposure to via a low
Speaker 2: cost ETF to provide that access point.
Speaker 1: Cumbersome the perfect world. I should have thought of that earlier,
Speaker 1: that's right. We're talking about the gold like that was cumbersome,
Speaker 1: that's for sure. Or as for buying bonds, I mean, really,
Speaker 1: where would you start and how money would you have?
Speaker 1: And you try to have a ladder of maturities and
Speaker 1: you know, we always had to do a short course
Speaker 1: about how to even start. Okay, talking then about this
Speaker 1: area of offshore. So you're telling me that the big
Speaker 1: trend among Australian investors in their use of index funds
Speaker 1: in ETFs is to buy global markets. Okay, what did
Speaker 1: they buy? I'm guessing Wall Street, Nasdaq and then maybe
Speaker 1: a global fund. But the global funds are going to
Speaker 1: be seventy percent Wall Street anyway, aren't they Exactly?
Speaker 2: And that's why a lot of you're seeing a lot
Speaker 2: more this year is just going towards your general broad
Speaker 2: market low cost ETFs. So you think about your entire
Speaker 2: world access products but also some countries are becoming a
Speaker 2: bit more popular. US is one area that a lot
Speaker 2: of people want exposure to due to the Magnificent seven stocks,
Speaker 2: but there's other regional pockets, like we're seeing a bit
Speaker 2: of interest in Europe, We're seeing a lot more in India.
Speaker 2: India is a very interesting one because it's almost going to,
Speaker 2: you know, take over the lead of China and their
Speaker 2: Merging Markets Index. Most of the flows are still going
Speaker 2: towards your broad based, diversified ETFs, covering very broad market exposure,
Speaker 2: and I think that's a very sensible way for a
Speaker 2: majority of people to invest. But then they can take
Speaker 2: a bit more tactical views, you know, if you want
Speaker 2: to go into a particular country, a particular style, a
Speaker 2: particular thematic. You know, a lot of people have been
Speaker 2: talking about investing in things like copper uranium. You can
Speaker 2: get very esoteric investment at exposure via an ETF, which
Speaker 2: is such a great way for investors instead of having
Speaker 2: to worry about pick all these stocks, especially if you're
Speaker 2: trading international stocks. You don't want to have to open
Speaker 2: up a brokerage account, change your Aussie dollars into US dollars,
Speaker 2: handle all the paperwork and ETF.
Speaker 1: Really, jenk Cluck, give us an example of what in
Speaker 1: terms of those thematic ETFs or specialized ETFs. Is there
Speaker 1: one in particular that's getting inflows at the moment.
Speaker 2: Yeah, we're seeing a lot of interest within our copper
Speaker 2: miners ETF. The TIC code for that is wire wire.
Speaker 2: The reason for that, James, is everyone knows copper is
Speaker 2: an incredibly important part of the global economy. It used
Speaker 2: to be a bit of a proxy for what's going
Speaker 2: on with economic activity. But it's slowly.
Speaker 1: Transitioning doctor copper.
Speaker 2: Yeah, doctor copper they called it. But it's slowly transitioning
Speaker 2: into this secular commodity that's going to be driven by electrification, urbanization,
Speaker 2: the rise of artificial intelligence. Because copper is used in
Speaker 2: a lot of things. When you talk about renewable energy,
Speaker 2: it's used in building things like wind turbines, solar panels.
Speaker 2: If you look at data centers which are powering this
Speaker 2: AI revolution, they require per gigawat of data, they require
Speaker 2: sixty five thousand tons of copper. So if you're talking
Speaker 2: about the use of AI and the electric cars, of
Speaker 2: course exactly. So electric cars is a good example where
Speaker 2: compared to an internal combustion engine, it requires four times
Speaker 2: the amount of copper to use. So people are starting
Speaker 2: to understand this broad case for copper, and it's predicted
Speaker 2: to be in deficit for over the medium term as well,
Speaker 2: which bodes quite well for the price. And a lot
Speaker 2: of ossies wanting to get exposure to copper tend to
Speaker 2: invest just in the Australian miners, and we've seen the
Speaker 2: likes of BHP. They had a bit when it came
Speaker 2: to some of the global companies. They've just sent up
Speaker 2: a jo venture with London, which is a company that's
Speaker 2: ly ETF, but there's a global range of companies that
Speaker 2: investors maybe missing out on.
Speaker 1: The BHP in there results clearly shifting towards copper, as
Speaker 1: you say, the commodity of the future. Okay, Can I
Speaker 1: just ask you though about the ETF whether they're specialized
Speaker 1: or whether they're broadbrushed, so whether you're talking about a
Speaker 1: copper ETF or an electric car RETF or a Wall
Speaker 1: Street ETF. One of the things that's a criticism of ETFs,
Speaker 1: and I'm not talking about some of the more sort
Speaker 1: of arcade things that come up, but a very simple
Speaker 1: one is that in buying everything, you buy all the rubbish,
Speaker 1: and you buy all the bad stuff, and you buy
Speaker 1: all the nasties, You buy all the ethically questionable, if
Speaker 1: not downright dreadful companies. Because if I go and buy
Speaker 1: a copper ETF, and it has a eighty seven or
Speaker 1: eight hundred and seventy copper mining companies in there, and
Speaker 1: it must buy everything that's on the market. By definition,
Speaker 1: its promises to buy everything, so it must buy everything,
Speaker 1: and that means it was also buy some pretty bad
Speaker 1: companies that you would never buy ever, but you must
Speaker 1: because it's an ETF. Is that a faiting of ETFs?
Speaker 2: I think so, but I don't know if it's more
Speaker 2: a bug or a feature, James, because the good thing
Speaker 2: about an ETF is you're kind of expressing the view
Speaker 2: of that intellectual humility that you don't really know who
Speaker 2: are going to be the winners and losers. And naturally,
Speaker 2: particularly the ETFs that weight the stocks by size or
Speaker 2: by market cap, the market does a pretty good job
Speaker 2: at kind of distilling all the information out in the
Speaker 2: market to accurately price these particular securities. And I think
Speaker 2: it's actually quite good to get exposure even though You're right,
Speaker 2: there are a bunch of junk stocks that can come
Speaker 2: into an index, but naturally the bigger players are going
Speaker 2: to have a larger weight in your portfolio. So if
Speaker 2: you didn't have exposure to some of the magnificent seven stocks,
Speaker 2: you probably would have underperformed the market. And the harsh
Speaker 2: reality is sixty seven percent of stocks underperform a basic
Speaker 2: market index.
Speaker 1: Yeah, it disputed to me, And that's an argument, a
Speaker 1: very strong open on the business of price. But is
Speaker 1: there any ethical dimension here, like, for instance, you think
Speaker 1: ETFs should have more of a rule and voting, etc.
Speaker 2: Yeah, I mean that gets into the political nature around ETFs,
Speaker 2: and they are becoming a greater part of the global
Speaker 2: share market. You're seeing that companies in the US ETF
Speaker 2: issuers are starting to think about, well, how can they
Speaker 2: actually outsource the proxy voting to all their individual investors,
Speaker 2: Which is a very interesting topic because when you invest
Speaker 2: in an ETF, you're really outsourcing that to the ETF
Speaker 2: managers who uses an investment steward to vote on shareholders.
Speaker 2: Behalf that being said, I don't know how many people
Speaker 2: actually do want to vote when they go to the
Speaker 2: meeting of a particular company, and especially if you're owning
Speaker 2: a broad market ETF that holds hundreds of companies, going
Speaker 2: to all the individual meetings and voting on them. Some
Speaker 2: people will, especially some that have strong for instant sustainability
Speaker 2: views ESG views, but for the vast majority they just
Speaker 2: want low cost exposure. But I do see that as
Speaker 2: a way of innovating in terms of ETFs, providing more access,
Speaker 2: more choice and proxy voting is particularly an area that
Speaker 2: could see some development in the ETF market.
Speaker 1: All right, believe that that we will be back in
Speaker 1: the moment, folks, I've got I have pre selected curative
Speaker 1: a couple of questions strictly from our audience, strictly on ETFs.
Speaker 1: So perhaps we will get through some of the questions
Speaker 1: that have been boiling up at the money person in
Speaker 1: recent times. Okay, back in a moment, Hello and welcome
Speaker 1: back to the Australians Money Puzzle podcast. I'm James Kirby
Speaker 1: with Mark Jocum of the Global X groupies the investment
Speaker 1: strategists there now, Mark, these questions are several of them
Speaker 1: willfully break our golden rule of keeping questions short. I
Speaker 1: don't know how I can shorten some of them. But
Speaker 1: if you bear with me, I'll just try and go
Speaker 1: through them, and I'll try and paraphrase to the extent
Speaker 1: I can without losing the nature of the question. I'll
Speaker 1: just take an easy one for us from Adam. Dear James,
Speaker 1: can you outline what is meant by an open ended ETF,
Speaker 1: How do such open ended ETFs adjust their prices to
Speaker 1: reflect underlying assets? And is there such a thing as
Speaker 1: a closed ENDTF? Okay, Mark Jocom investment strategist. What's an
Speaker 1: open ended DTF and is there a closed ended one? Yeah?
Speaker 2: So great question, Adam. Very simply, open ended just means
Speaker 2: that units can be created or destroyed based on the
Speaker 2: underlying demand. So when there's demand for a particular product,
Speaker 2: to the fact that it's open ended means that these
Speaker 2: market makers or authorized participants can come in and either
Speaker 2: create new units or end up redeeming units. And the
Speaker 2: reason why open ended is important is because and your
Speaker 2: other question was around how it's reflected based on the NAV,
Speaker 2: is that the price of the ETF will track very
Speaker 2: closely to the net asset value the NAV or the
Speaker 2: NAV due to the actions of these big banks and
Speaker 2: these market makers and authorized participants. Because if there's a
Speaker 2: difference between the price of an ETF and the NAVE
Speaker 2: of an ETF the net asset value, that's an arbitrage
Speaker 2: opportunity for these very smart institutions to actually make some
Speaker 2: money in terms of either buying or selling the underlying
Speaker 2: ETF versus the security. So if an ETF price trades
Speaker 2: at a discount to it's a net asse of value.
Speaker 2: The market maker will go in buy the ETF and
Speaker 2: then sell the underlying to profit the difference, And that
Speaker 2: way attracts close to NAV And then your other question
Speaker 2: was around are they close ended ETFs. The answer is
Speaker 2: yes they are, but they're not called ETFs. They called
Speaker 2: list in investment companies or licks. So these are different.
Speaker 2: Where these are similar in terms of the fact that
Speaker 2: they do expose to a broad out their clalth.
Speaker 1: I don't want to go down this kind of rabbit hole.
Speaker 1: But l I see isn't identical to an DF. I
Speaker 1: mean they select the now shares their wish. Isn't that right?
Speaker 1: Why the ETF doesn't select them? It literally takes what's
Speaker 1: on the board.
Speaker 2: Yeah, And I think the main one is around the
Speaker 2: structure of them. There's only a fixed pool of capital,
Speaker 2: so there's only a fixed amount of shares out there.
Speaker 2: The reason that some of them trade at a large
Speaker 2: discount to their NTAA, or sometimes they trade at a premium,
Speaker 2: is because there is no market maker. There is no
Speaker 2: authorized participants that are creating and redeeming these shares. And
Speaker 2: I think that managers don't really have an incentive to
Speaker 2: close that discount because at the end of the day,
Speaker 2: it's a closed pool of capital. They collect the fees,
Speaker 2: so why would they want to close the discount.
Speaker 1: Okay, we're very popular and remain popular, but there was
Speaker 1: a period for the lic was the nearest thing in
Speaker 1: some ways to They were more than a managed fund,
Speaker 1: and they were very They were invented but way back
Speaker 1: and some very big ones stood in the market. AFIC
Speaker 1: and I'll go out of Adelaide, which was once connected
Speaker 1: with Sardan Brandtman and he was on the board of
Speaker 1: our that they tell us about that every time we
Speaker 1: talked to them, and they remain popular. Some people see
Speaker 1: them as a use for the Wilson Group has some
Speaker 1: They remain an interesting variation on the managed fund where
Speaker 1: you are using the brain power of some leading managers
Speaker 1: to pickstocks, but then the vehicle is a bit more
Speaker 1: useful than than some straight managed funds. Okay, we'll leave
Speaker 1: that to one side for the moment. I think that
Speaker 1: answers your question, Adam. That's open ended ets. That's basically
Speaker 1: how they work. That was the part of the magic
Speaker 1: of these products that were all created once upon a time.
Speaker 1: Go back to a man called Jack Bogel bog l
Speaker 1: E who was the sort of godfather of all this
Speaker 1: and created Devant Guard group, and you can read all
Speaker 1: about it. I'm sure somewhere all right, question from yogesh
Speaker 1: yog E s H. While looking in ETFs, I came
Speaker 1: across a GEAR DTF. I'm unable to understand how they work?
Speaker 1: Are you able to give the common understanding? Yes, of course,
Speaker 1: I'm sure Mark Jocom would do that for you. Gear
Speaker 1: Just to make it easy, folks, is course is an
Speaker 1: index fund just like we're talking about. But they borrow
Speaker 1: that's all. You don't get the negative gearing. That's the thing.
Speaker 1: Of course, if you borrowed and bought the ET if
Speaker 1: you'd get negative gearing. So you don't get it. So
Speaker 1: maybe Mark would tell us all about that. Okay, would
Speaker 1: you illuminate us their Mark.
Speaker 2: Yeah, you're exactly right, James, and thanks to our guests
Speaker 2: for the question. Geared ETFs pretty much use internal borrowing.
Speaker 2: Saves you from having to go out to get a
Speaker 2: margin loan to borrow to invest money. Sometimes the ETF
Speaker 2: wrapper will do for you and the fund manager is
Speaker 2: able to go out and get an institutional rate from
Speaker 2: some of the large banks, they can get a loan
Speaker 2: and they handle all the gearing process for you. There
Speaker 2: is a difference with leverage gtfs, even though they may
Speaker 2: see seen one and the same, where leverage gtfs use
Speaker 2: a bit more financial magic by using derivatives like futures
Speaker 2: contract to get magnified exposure, and that's what people who
Speaker 2: invest in geared or leverage ETFs want. You want to
Speaker 2: exposure that provides more to the market or less to
Speaker 2: the market as well. So currently there's ETFs out there
Speaker 2: that provide as little as about one point four times
Speaker 2: the daily price of the actual index, but there's some
Speaker 2: that are a little bit up the risk curve that
Speaker 2: provide up to two point seven times the exposure to
Speaker 2: the particular market. Good alternative for people who want exposure
Speaker 2: to the market but in a magnified way and not
Speaker 2: having to realize going to go get a margin loan
Speaker 2: and they can access lower boring by going through a
Speaker 2: gear or leverage GTF.
Speaker 1: And what could go wrong with the lead forridged ETF
Speaker 1: compared to a standard ETF.
Speaker 2: Yes, so they are very risky just pointing out there
Speaker 2: because they are really designed to achieve this multiple on
Speaker 2: a daily basis, which means over the long term, even
Speaker 2: though share markets go up because of this idea of
Speaker 2: daily movements and daily rebalancing, it actually could if the
Speaker 2: gearing ratio does fall outside that particular range can be
Speaker 2: quite detrimental to investors. And I think that this idea
Speaker 2: of this compounding effect of daily rebalancing can sometimes cause
Speaker 2: people's you know, representation of what the ETF might do
Speaker 2: over the long term. As an example, if you're invested
Speaker 2: in a two times let's use a simple example, two
Speaker 2: times leverage ETF, just.
Speaker 1: Just to explain, mark two times. That means for every
Speaker 1: dollar you put in, they borrow a.
Speaker 2: Dollar exactly, So that's like exactly, so that's double the exposure.
Speaker 2: So if the index is down five percent, your ETF
Speaker 2: will probably be down ten percent on that day.
Speaker 1: So it's everything's magnifies exactly, You're one hundred dollars is
Speaker 1: now ninety dollars.
Speaker 2: And let's say the market's up the next day, because
Speaker 2: that's generally what happens. You know, large four days are
Speaker 2: accompanied by large updates. So if the index it goes
Speaker 2: up five percent, that means again the ETF will go
Speaker 2: up ten percent that day. But if you think about it,
Speaker 2: that ninety dollars going up ten percent is now ninety
Speaker 2: nine dollars, so you're still down a dollar overall. And
Speaker 2: this is this whole arithmetic is that over time in
Speaker 2: the volatile market, these small differences can lead to larger deviations,
Speaker 2: particularly magnified when you have leverage gtfs. So our view
Speaker 2: is they should be short term trading tools and also
Speaker 2: keep an eye on the borrowing. Ask your find manager
Speaker 2: what the borrowing cost is versus the return on the shares.
Speaker 1: Of the view, they should be short term tactical products,
Speaker 1: I suppose as opposed to a long term I'm just
Speaker 1: I'm geared thirty percent into the market forever. Yeah, okay,
Speaker 1: very interesting. Well just leave it at that, thank you,
Speaker 1: and I'm sure that was very useful to you your ges. Okay,
Speaker 1: Declan says on a number of occasions recently, you have
Speaker 1: suggested there is an inherent contradiction in investing in private
Speaker 1: credit and private equity via the ASX are listed markets.
Speaker 1: There isn't. Okay, just to context there, I continually say,
Speaker 1: and I'm sorry, Declan, I'm going to say it continually
Speaker 1: that accessing on listed assets through a listed vehicle, which
Speaker 1: can crash with the share market crash, I find contradictory.
Speaker 1: But I'm happy to hear new views. So Declan says, additionally,
Speaker 1: ETFs themselves can invest in nonlisted assets, including real estate,
Speaker 1: private equity, gold, and so on. There you are, he says,
Speaker 1: there's no contradiction there. Now that's good. That test. I'm
Speaker 1: interested in what he says there. It is testing. It
Speaker 1: is testing my bias, if you like. Because the gold
Speaker 1: ETF from anybody, including the original one which was created
Speaker 1: by it just so happens global X and Marx from them.
Speaker 1: It allows you to buy a physical asset in pay
Speaker 1: per form. So let's just test this. But let's say
Speaker 1: there was a crash and almighty nineteen twenty nine like
Speaker 1: share market crash, and everything crashed with it, including gold dtfs,
Speaker 1: and then everybody wanted to get their money out at
Speaker 1: the same time from the gold DTF. Could I'm not
Speaker 1: talking about you, Mark, I'm just talking about the ETF industry.
Speaker 1: Could it produce the Could it get the gold and
Speaker 1: sell the gold dollar for dollar that's represented by every
Speaker 1: piece of paper out there on listed ETFs.
Speaker 2: Yes, So, I mean it's a great question as that.
Speaker 1: That yes they can or yes, it's a good question.
Speaker 2: No, it is a good question because at the end
Speaker 2: of the day, ETFs only account for a small part
Speaker 2: of the overall market. If there is going to it
Speaker 2: is growing. So if there's going to be a crash,
Speaker 2: it's not just going to be the ETFs that are selling.
Speaker 2: It's going to be active fund managers selling institutions Selling gold.
Speaker 2: Is quite interesting because gold isn't just you know, speculators
Speaker 2: or investors using gold. A lot of people use gold
Speaker 2: for industrial use, central banks use them for their reserves.
Speaker 2: So there could be buyers on the other side. But
Speaker 2: the great thing about an ETF is if people do
Speaker 2: want to sell, well, you've got that liquidity over there.
Speaker 2: Even though it is considered to be an unlisted asset,
Speaker 2: it's a highly liquid market. So there's always buyers and
Speaker 2: sellers and in fact, the gold market is actually a
Speaker 2: lot more liquid than some share markets out there because
Speaker 2: it's so heavily traded globally.
Speaker 1: Just Win, I think it probably does test the theory.
Speaker 1: It does test the bias that on listed assets are
Speaker 1: sort of uncomfortably placed sometimes in this listed markets.
Speaker 2: And I think James your point around the unlisted assets
Speaker 2: particularly you know, definitely mentioned around private assets or private
Speaker 2: creative private equity. We haven't seen a lot of you know,
Speaker 2: private creator going through a default cycle because a lot
Speaker 2: of them came during we're pretty much post the two
Speaker 2: thousand and eight, two thousand and nine GFC because banks
Speaker 2: refused or pretty much shut the doors to a lot
Speaker 2: of lending to risky borrowers. So it'll be very interesting
Speaker 2: to see how these private creditors managers go during a
Speaker 2: financial crisis. What happened if investors run for the extent, Yeah,
Speaker 2: I'm very interested to watch that.
Speaker 1: Do I recall in the GSC that there was some
Speaker 1: strain on gold ETFs and their ability to actually achieve liquidity.
Speaker 2: Not entirely. If anything, you saw a lot more buying
Speaker 2: within gold ETFs during times of market turmoil, and that's
Speaker 2: because gold has a bit more of a defensive capability
Speaker 2: to it. Same with COVID as well. There was no
Speaker 2: issues around buying into gold products. So yeah, it's got
Speaker 2: that defensive characteristics to cushion share market volatility.
Speaker 1: Okay, Okay, thank you for that. Detton. Do appreciate the
Speaker 1: correspondence and the points you make. It's certainly an area
Speaker 1: where two sides. Okay, final question from David. I have
Speaker 1: a question I was hoping you could answer on the
Speaker 1: podcast in relation to a couple borrowing to invest in ETFs.
Speaker 1: If a couple are both borrowing separately in their own
Speaker 1: names to invest in a diversified, poorly of portfolio of
Speaker 1: past btfs, what are the considerations for deciding who should
Speaker 1: invest in Australian ets for the frank and who should
Speaker 1: invest in global ets because they don't have franking. That's
Speaker 1: the sort of question you're going to say, speak to
Speaker 1: a financial advisor. I wouldn't blame you if you give
Speaker 1: that answer straight away, Mark, But I imagine it happens. Does
Speaker 1: it when people come in by TF they can't help,
Speaker 1: but they start asking questions.
Speaker 2: Like this, they do. I would not say to speak
Speaker 2: to a financial advisor. I'd say to speak to a
Speaker 2: tax accountant because they are the professional when it comes
Speaker 2: to tax. That being said, i would say that a
Speaker 2: lot of people use ETFs for its tax efficiency, right
Speaker 2: when it comes to high income versus medium income earners. Again,
Speaker 2: I'm not giving tax advice, but you're right who answer
Speaker 2: the question around Australian versus Global shares. If you invest
Speaker 2: in Australian shares, they do have a lot more distributions
Speaker 2: that are treated as dividends, which means that you know
Speaker 2: they can use the franking credits to offset their tax liability.
Speaker 2: But tax should never be a reason to invest. It's
Speaker 2: more byproduct. And keep in mind that if you're investing
Speaker 2: in global shares, they have more capital growth potential versus
Speaker 2: the Australian mark which has dividends. But the thing about
Speaker 2: an ETF is that the ETF packages those capital gains
Speaker 2: when it rebalances and distributes it as an income right
Speaker 2: as almost similar to a dividend, but it forms part
Speaker 2: of a distribution, so that will still be treated as
Speaker 2: income for that investor. So it's always hard whether you're
Speaker 2: high income versus medium income owner to be deciding what
Speaker 2: to do. But yes, if you are a high income
Speaker 2: owner and you want those franking credits to offset that
Speaker 2: tax liability, then it can make sense to be more
Speaker 2: heavily weighted to Australian shares. Just keep in mind to
Speaker 2: be diversified, and there are capital gains implications from the
Speaker 2: global share component two.
Speaker 1: Okay, terrific, really good answer. Thank you, and remember none
Speaker 1: of this is ever advice. This is information only, as
Speaker 1: you all know by now, but I must say every week. Okay,
Speaker 1: very good. Hey Mark Yo, come from global X the
Speaker 1: ETF House. Thank you very much for coming on the show.
Speaker 2: Thanks for having me. James really appreciate it.
Speaker 1: Great to have you on the show. We'll have you again.
Speaker 1: Thank you very much for coming on. Okay, everybody, now,
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Speaker 1: the Australian dot com dot Au. Today's show was produced
Speaker 1: by Leah Samangaloo. Talk to you soon,