Speaker 1: Exchange traded funds are a trillion dollar story. A trillion
Speaker 1: dollars flowing into them in the year to May in
Speaker 1: the US so far twenty three trillion dollars all together.
Speaker 1: How do you get a handle on numbers that big?
Speaker 1: What's driving them? Tom Bentley from Smart joins me to
Speaker 1: get to grips with the numbers and who is investing
Speaker 1: in ETFs? I'm Garth Bray. This is shared.
Speaker 2: Lunch investing involves the risk you might lose the money
Speaker 2: you start with. We recommend talking to a licensed financial advisor.
Speaker 2: We also recommend reading product disclosure documents before deciding to invest.
Speaker 2: Everything you're about to see and here is current at
Speaker 2: the time of recording.
Speaker 1: Tommy, start with that trillion dollar figure. It's a huge
Speaker 1: amount of money moving into a particular sector of the market.
Speaker 1: What is behind that?
Speaker 3: It's really a continuation of a story that's been going
Speaker 3: on for a number of years now. You know ETF
Speaker 3: funds and management's been growing rapidly for a long time,
Speaker 3: and the numbers just keep getting bigger. I think it
Speaker 3: comes down to a couple of key things. What is
Speaker 3: I think investors increasingly just looking for simple, transparent investments
Speaker 3: ETF certainly fit the bill there, and increasingly we've seen
Speaker 3: investors moving into online platforms where they can essentially pick
Speaker 3: their own investments, and ETFs are really a great way
Speaker 3: of enabling people to do that because you get instant
Speaker 3: diversification in a single trade. You know, you can pick
Speaker 3: across all sorts of different markets, asset classes, thematic opportunities,
Speaker 3: and it's a great, simple, transparent and low cost way
Speaker 3: to create portfolio. So I really think that's a big
Speaker 3: driver of the story.
Speaker 1: It's hard to go past the AI theme in investing
Speaker 1: at the moment. Has that fueled a lot of extra
Speaker 1: flow into the menic ETFC obviously.
Speaker 3: Yeah, I think it has. At the margin again, you know,
Speaker 3: if you break down that trillion dollars this year, I
Speaker 3: think you'll probably find there's still a huge amount of
Speaker 3: that flow going into what we would call core x
Speaker 3: like SP five hundred, then as that one hundred, you know,
Speaker 3: global MSCI type strategies. I think at the margin you're
Speaker 3: seeing more interest and more flow into some of those
Speaker 3: thematic areas like AI. But bear in mind with AI,
Speaker 3: I mean some of the big AI companies aren't even
Speaker 3: listed yet, so you're sort of scrabbling around for things
Speaker 3: like you know, AI adjacent strategies like chip chips and
Speaker 3: memory and data centers and that kind of thing. Most
Speaker 3: of those flows, as I say, are still going into
Speaker 3: the really the core sort of you know, basic sm
Speaker 3: P five hundred type strategies. And in fact, you know,
Speaker 3: you may have seen last month, I think the Vanguard
Speaker 3: US five hundred ETF went through a trillion US dollars
Speaker 3: just on its own. So that's one ETF now that's
Speaker 3: trillion US dollars. So still seeing huge flows into those strategies.
Speaker 1: It feels to me like they're a little bit new,
Speaker 1: but they've been around for a long time. Can you
Speaker 1: tell me a bit about the history and how long
Speaker 1: Smart's been involved. Sure.
Speaker 3: So the original ETF or the very first ETF, I
Speaker 3: think was lunch in the early nineties. That was a
Speaker 3: SMP SPDR it was called, and that was a US
Speaker 3: equity ETF, and that really came out of the market
Speaker 3: crash in nineteen eighty seven where the regulators have identified
Speaker 3: a need for sort of a very large liquid pool
Speaker 3: of money the US equities and Smart was actually surprisingly
Speaker 3: quite hard on the heels of the first TTF. We
Speaker 3: launched our first ETF in New Zealand in nineteen ninety six,
Speaker 3: and depending on which version of your favorite AI you use,
Speaker 3: were either the third or the fourth market in the
Speaker 3: world to launch GTF in New Zealand. So we've been
Speaker 3: at it for just over thirty years now. We celebrated
Speaker 3: our thirtieth anniversary in June this year.
Speaker 1: And what has thirty years taught you about how to
Speaker 1: prepare them?
Speaker 3: But we started very small. I guess we had one
Speaker 3: ETF just tracking the top ten stocks in New Zealand.
Speaker 3: And you know, we now offer forty four different funds
Speaker 3: across multiple markets and asset classes. I think what, you know,
Speaker 3: what we've learned along the way is, you know, don't
Speaker 3: try and be all things to all people. You know,
Speaker 3: we haven't launched hundreds of ets. You know, we believe
Speaker 3: that there are some pretty good, low cost core exposures
Speaker 3: that most investors need, and then that you can add
Speaker 3: around that core sort of satellite exposures. But yeah, keep
Speaker 3: it simple, make sure that you're launching products that people
Speaker 3: actually want and are interested in, and yeah, just keep
Speaker 3: going out there and telling the story. You know, it's
Speaker 3: been a pretty slow burn for US's it took probably
Speaker 3: twenty five years odd twenty years to get to a
Speaker 3: billion dollars and five years to go from a billion
Speaker 3: to almost six billions, So it's been a pretty slow burn,
Speaker 3: but you know, we just keep telling the story and
Speaker 3: it's starting to resonate.
Speaker 1: Now, what do you think has amplified things so much
Speaker 1: in those last sort of five or sixty years.
Speaker 3: I think a big part of it, honestly is the
Speaker 3: role of platforms like chairs E's, which have just enabled
Speaker 3: a lot more investors to get into ETFs with much
Speaker 3: smaller amounts of money. I think the big game changer
Speaker 3: was COVID, where people had the time to sit and
Speaker 3: think and research and learn about investing. And I think,
Speaker 3: you know, certainly shares He's had a lot of success
Speaker 3: through that period. So it's really been a story of
Speaker 3: the I guess the democratization of investing just enabling more
Speaker 3: and more people to get involved, to try out different
Speaker 3: things and using ets. You know, it's a lower risk
Speaker 3: way of doing it than trying to pick one or
Speaker 3: two individual companies.
Speaker 1: And yet there are some ETFs that are quite kind
Speaker 1: of highly concentrated. So I'd like to sort of break
Speaker 1: it open a little bit. To what extent are they
Speaker 1: being used still traditionally to get easy diversification. To what
Speaker 1: extent are they almost like incredibly targeted approaches to a
Speaker 1: theme or even just a small number of trades.
Speaker 3: I'd really sort of look at the market in two ways.
Speaker 3: One one is, you know a lot of investors still
Speaker 3: use those very low cost core exposures for most of
Speaker 3: their portfolios. And then you know, where people are interested
Speaker 3: in a particular theme or asset class, you know, or
Speaker 3: they believe that that will have, you know, will go
Speaker 3: well over the next few years. Ets just enable them
Speaker 3: to access those types of opportunities in a sort of
Speaker 3: reasonably well diversified way without having to pick the winners
Speaker 3: and losers in a sector. So if you take US Technology,
Speaker 3: for example, you could try and pick one or two
Speaker 3: stocks in the US Tech or you can just buy
Speaker 3: an ETF that has all of them. So we are
Speaker 3: seeing investors, even in those more concentrated, more targeted opportunities,
Speaker 3: still using ETFs to get diversified exposure to a particular
Speaker 3: sector or theme.
Speaker 1: There's one particular one floating around at the moment that
Speaker 1: the Memory ETF that picked up something like ten billion
Speaker 1: dollars worth of funds I think in fifty days that yeah,
Speaker 1: I mean that almost sounds like a meme coin to
Speaker 1: me at this point, or a meme stock, rather than
Speaker 1: like a sensible bet. Is there a little bit of
Speaker 1: marketing in this as well as some fundamentals about where
Speaker 1: the company's underlying that ETFs.
Speaker 3: It, I guess one of my great actions in life
Speaker 3: has shown me the incentive and I'll show you the outcome.
Speaker 3: And you know, if people think there's money's we made
Speaker 3: in a particular sector, then you're more or less guarantee
Speaker 3: a ETF we'll be launched in that sector, you know.
Speaker 3: I would I would caution investors that if you want
Speaker 3: to play some of those themes and opportunities, it still
Speaker 3: pays to be diversified, you know, just take a more
Speaker 3: measured approach to some of those thematic opportunities.
Speaker 1: And I suppose if you're looking at some of the
Speaker 1: more rarefied ETFs that are sitting around out there, there's
Speaker 1: been a lot of interest in quite highly leveraged ones
Speaker 1: as well. Can you explain a little bit about what
Speaker 1: might be the attraction there, what might be some of
Speaker 1: the risks that are involved in getting into that kind
Speaker 1: of financial product.
Speaker 3: Yeah, so leverage dutfs essentially enable you to take a
Speaker 3: sort of two to three times exposure to a market
Speaker 3: or a thing or an individual stock. Even so you know,
Speaker 3: if you think about the S and P five hundred,
Speaker 3: you might get a two or three times leveraged ETF
Speaker 3: that essentially, if the market goes up ten, you go
Speaker 3: up thirty percent, give or take. But it does work
Speaker 3: both ways, so you know, if the market goes down ten,
Speaker 3: you go down thirty. So you know, leverage gts basically
Speaker 3: enable investors to take a very high conviction bet directional
Speaker 3: bet on a market or a stock. So not for
Speaker 3: the faint hearted, you know that Again, I'd say they
Speaker 3: have a place in portfolio as if you have a
Speaker 3: more high risk approach or we like a more high
Speaker 3: risk approach. But again I would certainly not put all
Speaker 3: your eggs in one basket in leverage gtfs. And then
Speaker 3: the other type of levi ETF is on the other side,
Speaker 3: so they make money when the market goes down. So
Speaker 3: you know, you can choose directional bets either way on
Speaker 3: the market, but you know there are risks if you
Speaker 3: choose an ETF which goes up when the market goes down.
Speaker 3: Obviously it goes down when the market goes up, so
Speaker 3: it kind of works both ways.
Speaker 1: Are there any kind of I suppose different market interpretations
Speaker 1: around what kind of leverage is allowed to be offered
Speaker 1: for those products? Is there as there are they specifics
Speaker 1: that then investors need to look out for.
Speaker 3: I'm not aware of any particular guidelines or boundaries around it.
Speaker 3: I mean, I think most leathered ETFs tend to be
Speaker 3: in the two to three times range. I think any
Speaker 3: any more than that, you know, it starts to get
Speaker 3: a little bit a little bit scary on the downside.
Speaker 3: You know, if you had a five times levit ETF
Speaker 3: and the markets down fifty, that's basically zero.
Speaker 1: Look if we look into those a little more deeply,
Speaker 1: what what are the mechanics of them that you can explain?
Speaker 3: Yeah, So essentially, what leverage tfs are doing is using
Speaker 3: financial instruments called options, futures and options. So these are
Speaker 3: ways to gain exposure to markets by putting down a
Speaker 3: very small amount to get a very larger exposure. So
Speaker 3: you know, if you think about the mortgage world, you know,
Speaker 3: you put a ten percent deposit down on the house,
Speaker 3: so you borrow a ten percent and then you've got
Speaker 3: one hundred percent exposure to the property. Right, it's the
Speaker 3: same in the future's options world. You know, essentially you're
Speaker 3: putting ten percent down beginning one hundred percent exposure. So
Speaker 3: if the market goes up, you know your your return
Speaker 3: is amplified quite sharply at the same to the same point,
Speaker 3: if the market goes down, your return is umplified as well.
Speaker 1: If we're talking about who's using them, I mean I
Speaker 1: saw some research out of the UK that said that
Speaker 1: anyone over fifty five, you ask three of them about atfs,
Speaker 1: only one of them is going to have heard of those.
Speaker 1: You ask anyone under thirty four, and probably like ninety
Speaker 1: percent or more will be able to tell you what
Speaker 1: an ETF is. Is that a consistent picture that you
Speaker 1: find and your practice and around the world.
Speaker 3: Yeah, I think so. Yeah, Yeah, I think that's pretty
Speaker 3: consistent globally, And honestly, I think it's driven by one
Speaker 3: really key thing in particular, and that is the demographics
Speaker 3: around those different age groups. So you know, it's quite
Speaker 3: likely for anyone over fifty five that they've been pretty
Speaker 3: lucky to be a property owner in a period where
Speaker 3: property has done extremely well for people under thirty five.
Speaker 3: It's very hard to get on the property ladder in
Speaker 3: in most property markets globally because prices has gone up
Speaker 3: so much. Lending has got harder, or borrowing's got harder,
Speaker 3: I should say. And so you know, there is a
Speaker 3: whole cohort of people now coming through in that age group,
Speaker 3: under a thirty five age group, who are really looking
Speaker 3: for other ways to grow their wealth, and ETFs play
Speaker 3: a big role in that.
Speaker 1: The research that I sort of suggested that the kinds
Speaker 1: of people I mean literally see that it's like a
Speaker 1: young guy's game, overwhelming the demographic in the UK, younger
Speaker 1: males eighteen to thirty four are kind of strongly using it.
Speaker 1: They're using it a lot, They're making some quite trades.
Speaker 1: But some other research I saw out a morning Star
Speaker 1: suggested that a lot of the times people investing in
Speaker 1: ETFs are kind of buying late and missing the market.
Speaker 1: They're trading them quite quite quickly. I mean, is there
Speaker 1: a lesson there just about general investment hygiene? I suppose
Speaker 1: no matter what financial product you're using.
Speaker 3: Were certainly we know that people that there are there
Speaker 3: are investors that are using eats more as trading tools
Speaker 3: than investing tools. The key difference being a trading tool
Speaker 3: is basically you just buy and hold it for a
Speaker 3: very short period of time. An investing tool you buy
Speaker 3: and hold for a long period of time. Key difference.
Speaker 3: So we do see a bit of that encouragingly, certainly
Speaker 3: in New Zealand. You know, if we look back to
Speaker 3: for example, COVID and some of the other more volatile
Speaker 3: market periods, we've actually seen investors holding through those periods
Speaker 3: and if anything, actually continuing to buy through those periods.
Speaker 3: So we're starting to see more of a buy the
Speaker 3: dirt mentality here, which I think is fantastic. That's the
Speaker 3: right way to think about it. You know, you invest
Speaker 3: in share you're invest in or you buy most things
Speaker 3: when they're on sale. You know, why not by shares
Speaker 3: when they're on sale as well. So yeah, I think
Speaker 3: it's slightly different here. Definitely at the margin you see
Speaker 3: more trading. But again the more you trade, the more
Speaker 3: it costs you, and the more likelihood there is of
Speaker 3: making a mistake.
Speaker 1: Just looking more broadly and more globally, I suppose have
Speaker 1: we seen any evidence or have you come across any
Speaker 1: suggestion that ETFs are kind of inherently adding to the
Speaker 1: amount of liquidity or volatility in the market.
Speaker 3: They certainly added liquidity. Yeah. You know, if you think about,
Speaker 3: you know, wanting to exit a particular investment, if you
Speaker 3: have a single stock, you know, it might be quite difficult.
Speaker 3: Part could if it's sort of a smaller company or
Speaker 3: that type of thing, Whereas in ETFs, you know, because
Speaker 3: they're broadly diversified. There were sort of get a little
Speaker 3: technical here, but there are kind of three levels of
Speaker 3: liquidity with ETFs. So you know, essentially, if you think
Speaker 3: about going into a grocery a dairy grocery store, you know,
Speaker 3: and there's a fridge of coke on the floor, that's
Speaker 3: that's your sort of on market liquidity. And then you
Speaker 3: know the dairy's probably got a palette of coke sort
Speaker 3: around the back somewhere in the warehouse, so that's your
Speaker 3: market maker inventory. So you know, market makers in ETF
Speaker 3: always holding inventory to meet demand. And then you know,
Speaker 3: if you really need to go big and do a
Speaker 3: very large trade, you've got the individual stocks underlying the UTF,
Speaker 3: which is the factory essentially, so you know, you've got
Speaker 3: these multiple layers of liquidity and ETFs which just don't
Speaker 3: exist in individual shares for example.
Speaker 1: That's a great analogy. It's a great way to think
Speaker 1: about it and how people can understand that you can
Speaker 1: sort of trade in and trade out. I guess with that,
Speaker 1: I wonder because you're talking about an exchange traded fund
Speaker 1: rather than a mutual fund, which is almost kind of
Speaker 1: what it would have replaced. To some extent, those funds
Speaker 1: would have been like, you know, call the broker, arranged things,
Speaker 1: get them in, get them out. It's like a process
Speaker 1: that happens maybe once a day, once a week or whatever.
Speaker 1: It's not something you can sort of flick in and
Speaker 1: out of quite rapidly. Has that changed the game? Has
Speaker 1: that changed the global markets and how they move a
Speaker 1: little bit?
Speaker 3: Yeah? Yeah, But you know, I think I think it's
Speaker 3: important to note that for the most part, you know,
Speaker 3: if you're if you if you want to sell your
Speaker 3: et F units, you're essentially selling the units to another investor.
Speaker 3: So you're selling your bottle of coke oud of the
Speaker 3: fridge on the dairy floor, to use my previous analogy,
Speaker 3: You're not you're not selling the underlying share, so there's
Speaker 3: no impact on the underlying market at all. In most cases,
Speaker 3: when ets trade, you're just selling units from one investor
Speaker 3: to another, not the underlying shares themselves, So you know,
Speaker 3: that's important to note. But I do think where where
Speaker 3: ETS would change the game in liquidity terms is yeah,
Speaker 3: it just enables investors to switch very quickly from one
Speaker 3: approach to another. So for example, if you want to
Speaker 3: switch from equities into fixed income, in the ETF world,
Speaker 3: you sell your equity ETF and buy your fixed income UTF.
Speaker 3: Your economic exposure changes instantly, and then you just settle
Speaker 3: the trade two days later. In the unlisted managed fund world,
Speaker 3: you know, you put in your cell request, it gets
Speaker 3: processed the next day. You might get the money a
Speaker 3: dayly day after that, so you're talking, you know, three
Speaker 3: days later, and then you've got to apply for the
Speaker 3: new fund and then get that invested. So it can
Speaker 3: be you can be up to a week out of
Speaker 3: the market, and you know, as as we know, markets
Speaker 3: move pretty quickly these days. If it takes a week
Speaker 3: to get out of equities and into bonds, if that's
Speaker 3: what you want to do, things can change a hell
Speaker 3: of a lot in that period of time.
Speaker 1: Have et IF's because you can get in and out
Speaker 1: of them more quickly, enabled a more kind of rapid
Speaker 1: fire decision making. Does that change your approach to investing
Speaker 1: in a way.
Speaker 3: I'm not sure that it does. I think I think,
Speaker 3: you know, if you've made a decision to switch out
Speaker 3: of one thing and into another, you know, if you're
Speaker 3: in the unlisted world, you can't. You don't get a
Speaker 3: cooling off period as such. It just takes longer. So
Speaker 3: you put your cell order in, it still gets process.
Speaker 3: You don't get the opportunity to then go back and say, oh,
Speaker 3: I've changed my mind. Maybe only a couple of hours
Speaker 3: where you might be able to do that. So I
Speaker 3: think it's just enabled, you know, where people do want
Speaker 3: to be more tactical about their investing. It's just enabled
Speaker 3: that to happen in a lot more seamless way than
Speaker 3: used to be the case pre ETFs.
Speaker 1: I guess we've also seen it open up a whole
Speaker 1: different range of markets as well as themes, like we've
Speaker 1: talked about AI, but also I'm thinking about emerging markets
Speaker 1: places like you know, you know, South Korea or China
Speaker 1: where maybe it's not as easy to get broker access
Speaker 1: and so on. You don't have the the the equities
Speaker 1: listed on the NAREST deck, necessarily we can get at them.
Speaker 1: So these ETFs are providing a reach into those markets too,
Speaker 1: are they? How many people are reaching in there.
Speaker 3: We've seen quite a significant uptick in investing into our
Speaker 3: Asia Pacific and Emerging markets CTFs recently, and I think
Speaker 3: that it speaks to exactly that process, you know, with
Speaker 3: the ets enabled people to get into those markets without
Speaker 3: having to think about researching a whole bunch of individual
Speaker 3: companies and decide which ones to invest in. You know,
Speaker 3: you can buy the whole region with an ETF and
Speaker 3: get the exposure that way. And so yeah, we've definitely
Speaker 3: seen Asia Pacific, Emerging Markets, Japan, Europe, they've all become
Speaker 3: much more popular recently. And I think part of that,
Speaker 3: honestly is the you know, the acknowledgment that the US
Speaker 3: equity market's quite concentrated now in very small range of
Speaker 3: companies they're so called Magnificent seven, and people are looking for,
Speaker 3: you know, where else could we invest outside of that
Speaker 3: very narrow range of businesses, And there's plenty of opportunities
Speaker 3: out there in the UTF world to diversify that exposure
Speaker 3: a bit more.
Speaker 1: The funds have just really accelerated massively in ETF since
Speaker 1: twenty twenty. Are you we thinking that that pattern is
Speaker 1: likely to be repeated in the back half of this decade.
Speaker 1: Is there way more money to flow into them? Or
Speaker 1: is that just too hard to pick?
Speaker 3: I don't see any is why wouldn't continue honestly, I mean,
Speaker 3: you know, certainly, as far as we're concerned in New Zealand,
Speaker 3: we've seen growth pick up very sharply in the last
Speaker 3: couple of years. In particular, so coming out of COVID,
Speaker 3: you know, we saw strong growth, but the last couple
Speaker 3: of years we've been growing at sort of over forty
Speaker 3: percent a year in terms of funds under management, and
Speaker 3: we see that continuing because you know, we've been relatively
Speaker 3: slow adopters in the ETF world here, but thanks to
Speaker 3: businesses like Charese's, you know, we're now catching up very quickly,
Speaker 3: and in fact, we're growing a little bit faster here
Speaker 3: than we are than ETFs are globally now. But yeah,
Speaker 3: I mean, I still think we're we've got a long
Speaker 3: way to go on that journey with ETFs, and you know,
Speaker 3: I think it's important to note that when we talk
Speaker 3: about ETFs, and ETF is a structure. It's an investment
Speaker 3: wrapper around an investment strategy. You know, ETFs. Not all
Speaker 3: ETFs are index tracking and not all index trackers are ETFs.
Speaker 3: It's important to note that. So a big part of
Speaker 3: the growth in ets in the last couple of years
Speaker 3: has been active fund managers launching utfs. So you know,
Speaker 3: you just are not just for index tracking. You know,
Speaker 3: you can use them for any type of asset pretty much.
Speaker 1: That's just their way of I guess trying to get
Speaker 1: back some of that drift to pessive maybe.
Speaker 3: Yeah, yeah, but also acknowledging that you know, there are
Speaker 3: some benefits to ETFs, which we've discussed previously, things like
Speaker 3: liquidity and transparency that you just don't get in the
Speaker 3: unlisted manage from the world.
Speaker 1: Tom Bentley, I feel like we've covered an awful lot
Speaker 1: of ground here in just a short amount of time.
Speaker 1: We have, thanks very much. I really hope that people
Speaker 1: watching there are feeling a little bit more comfortable about
Speaker 1: understanding what goes into an ETU and knowing what they
Speaker 1: need to take a closer look at to better understand
Speaker 1: whatever it is that they are right coom to you.
Speaker 1: That's us for this week.