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Speaker 1: Welcome to ask Fear and Greed, where we take your

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Speaker 1: questions and do our best to answer them. I'm Michael Thompson,

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Speaker 1: and good afternoon, Sean Aylmer.

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Speaker 2: Good afternoon, Michael.

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Speaker 1: Sean. Today's question is a good one. I mean they

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Speaker 1: are all good questions. Actually, I shouldn't single this one

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Speaker 1: out as being any better than any others, but it

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Speaker 1: is a good one. It has come from Brian, and

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Speaker 1: he has shared it with us via the website. You

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Speaker 1: can obviously go to the website Fear and Greed dot com,

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Speaker 1: todau or LinkedIn or Facebook or Instagram or anyway. He

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Speaker 1: said of a carrier pigeon, I don't really mind, just

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Speaker 1: as long as it gets to us, Brian says Sean

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Speaker 1: and Michael, I'm going to insert the end, Michael, even

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Speaker 1: though didn't say.

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Speaker 2: It, and I've said the question, Sean, you have.

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Speaker 1: Gone Sean and Michael. Does the rise in ETF exchange

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Speaker 1: traded fund based investments contribute to greater market sensitivity? If

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Speaker 1: we were to imagine a market entirely owned by ETFs,

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Speaker 1: there would be no direct price setting by individual investors.

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Speaker 1: Is there a risk of moving towards such a scenario?

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Speaker 2: So I don't think there is a risk. I think

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Speaker 2: people always want to take a punt, be an institutional

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Speaker 2: investor or a retail investor. They think Commonwealth Bank will

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Speaker 2: do right. You can't have an ETF on Comwalth bank.

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Speaker 2: You can have an ETF on all the banks, So

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Speaker 2: I think we won't have a situation where that occurs.

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Speaker 2: The question about ETF based investments contributed to greater market sensitivity,

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Speaker 2: Probably not. I wouldn't think. I mean, I can't foresee

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Speaker 2: the circumstances where that may happen. There might be more volatility.

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Speaker 2: When I think about this, I think of some of

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Speaker 2: the risks about ETF. So we often talk about ETFs,

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Speaker 2: and there's certainly huge growth at ETFs, plenty of good

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Speaker 2: stuff about ETFs, but there are also risks. So I

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Speaker 2: thought maybe to answer this question, we should go through

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Speaker 2: some of those risks. And I'm really Vanguard to help

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Speaker 2: on this one. So the single guest risk in ETFs

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Speaker 2: is market risks. You can have the best ETF in

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Speaker 2: the world, and if your market falls by fifty percent,

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Speaker 2: well the value of your ETF is going to fall

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Speaker 2: by fifty percent. So it doesn't matter how cheap it is,

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Speaker 2: how efficient. It is how transparent. If the market falls,

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Speaker 2: your ETF fall, So that's the biggest risk. There's also

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Speaker 2: the judge your book by its cover risk. There are

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Speaker 2: thousands of ETF out there, like in the US there's

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Speaker 2: more than three thousand. There are so many choices, so

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Speaker 2: you might buy a biotech ETF, but the difference between

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Speaker 2: the best performing biotech ETF and the worst performing ETF

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Speaker 2: on Wall Street is often fast. That's because what the

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Speaker 2: definition is by the people creating the ETF can be

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Speaker 2: totally different. So you have to look under the hood,

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Speaker 2: open the front cover and start reading the book to

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Speaker 2: really I'm.

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Speaker 1: Loving I'm loving the mixed metaphors here, So where it's

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Speaker 1: under the hood of the book that we've judged by

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Speaker 1: the cover of the badge on the car, that's it.

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Speaker 1: This is it. But really, really it's just research, right,

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Speaker 1: It is just it is just actually kind of understanding

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Speaker 1: what is within that ETF that it is not just

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Speaker 1: going by the name. You actually have to just just

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Speaker 1: be aware for yourself. Bitter leg work.

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Speaker 2: Yeah, and I've been guilty of buying an ETF because

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Speaker 2: I like the name, rather than looking underneath the cover

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Speaker 2: of the book. There you go okay, there's exotic exposure risks,

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Speaker 2: and there's a vanguard that suggests, remember exotic exposure risks.

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Speaker 2: ETFs have done an amazing job opening up different areas

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Speaker 2: of the market. Right, So we used to stocks. Now

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Speaker 2: you can do all sorts of things, commodities, currencies, options,

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Speaker 2: different strategies, all types of things. But it's having access

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Speaker 2: to these sometimes complex strategies necessarily a good eye. Again,

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Speaker 2: it comes down to doing your homework. You know, if

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Speaker 2: you are moving beyond vanilla stocks and bond ETFs, they

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Speaker 2: get pretty complicated, a bit hard to understand. Sometimes. That's

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Speaker 2: another risk. There's a tax risk.

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Speaker 1: Now.

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Speaker 2: This is basically you need to know the ins and

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Speaker 2: out of the tax rules on different asset classes. So

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Speaker 2: for example, if you buy an ETF in the US

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Speaker 2: based on gold, that will have different tax implications to

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Speaker 2: buying a Wall Street equity ETF currencies are treated differently. Again,

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Speaker 2: it gets very complicated. Another risk there. There's also a

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Speaker 2: shutdown risk. Plenty of ets out there, plenty of popular,

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Speaker 2: but there are lots that are unloved. In fact, over

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Speaker 2: the last five years, on average, one hundred and ten

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Speaker 2: ets clothes per year. There's an issue there. I mean

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Speaker 2: you should get your money back, However you may not.

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Speaker 2: You know, there could be tax issues with that. It

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Speaker 2: may actually be quite the process to get your money back,

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Speaker 2: So that's another risk. There's also trading risks with ETF.

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Speaker 2: You can't always buy an ETF with zero transaction costs

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Speaker 2: like any stock, and ETF has a spread that can vary,

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Speaker 2: particularly for trading exotic things that might be quite costly.

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Speaker 2: There's the hot new risk, no, the hot new thing risk. Yes,

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Speaker 2: where something comes to market and it sounds fantastic anything

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Speaker 2: I must get some of that. But if you actually

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Speaker 2: did your homework with the marketing materials, you might realize

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Speaker 2: that maybe the strategy is not real good or the

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Speaker 2: hot new thing ain't so hot. So there's that type

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Speaker 2: of thing. There's also the crowded trade risk, which is

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Speaker 2: kind of like the hot new You know, if every

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Speaker 2: hot new thing risk, if everyone jumps into it, maybe

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Speaker 2: it's no longer cheap enough. So there's a risk there

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Speaker 2: as well. So there are lots of risks with ETFs

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Speaker 2: that you have to think about, and you know, if

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Speaker 2: you're going to boil it all down, it's about doing

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Speaker 2: your homework. I don't think they're ever going to be

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Speaker 2: that much that the market is, you know, sort of

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Speaker 2: prices set in the market by ETFs. I think that

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Speaker 2: would be unlikely, But some of those risks that I

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Speaker 2: mentioned could lead to greater market sensitivity. As to Brian's

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Speaker 2: question on how things are priced.

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Speaker 1: It's quite a list of risk, isn't it. But I mean,

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Speaker 1: in many cases, as you say, that risk can be

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Speaker 1: mitigated by a couple of the basic principles of investing,

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Speaker 1: in terms of making sure you're doing your homework, that

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Speaker 1: you're getting advice from professionals who know what they're talking about.

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Speaker 1: But also, when you mentioned it was an exotic exposure risk,

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Speaker 1: the fact that ETFs have kind of opened up a

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Speaker 1: new world for a lot of people and exposure to

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Speaker 1: things that they may not have invested in various commodities

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Speaker 1: or different kind of option strategies and things. Goes back

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Speaker 1: to what Warren Buffett.

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Speaker 2: Said, wasn't it nice work?

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Speaker 1: Michael that what you said, never invest in a business

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Speaker 1: that you can't understand, or that you don't understand, or

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Speaker 1: something like that. It's just that the principle is still

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Speaker 1: the same. Sure, you might have access to it now

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Speaker 1: because the ETF has made it available to you, but

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Speaker 1: if you don't understand it, then it's on you to

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Speaker 1: make sure you do understand it.

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Speaker 2: Yeah, yeah, yeah yeah and with as ets right, if

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Speaker 2: the ETF provider can't explain it to you, don't go

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Speaker 2: near it. Yeah.

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Speaker 1: Anyway, look is it? It feels as though we have

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Speaker 1: not just covered Brian's immediate question, We've probably covered about

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Speaker 1: eight other questions that Brian didn't ask. And it also

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Speaker 1: feels like I've injected myself enough into this that I

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Speaker 1: earned being in it. But he didn't address me. He

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Speaker 1: didn't address it to me at all. But you know

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Speaker 1: what doesn't matter.

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Speaker 2: Well done, Well done.

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Speaker 1: Thanks Brian for the question, and thank you Sean for

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Speaker 1: answering it.

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Speaker 2: Thank you Michael, Thank you Brian.

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Speaker 1: Remember if you have got something that you would like

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Speaker 1: to know, then please send it on through via the

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Speaker 1: website Fearinggreed dot com dot are you send it through LinkedIn, Instagram, Facebook,

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Speaker 1: and just remember it's both Sean and Michael. There's two

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Speaker 1: of us here. It's not just Sean. I'm Michael Thompson

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Speaker 1: and this is asked Fear and Greed