WEBVTT - The Mystery of Smart-Beta, Explained 0:00:06.559 --> 0:00:11.840 Welcome to trillions. I'm Joel Webber and I'm Eric bel Tunis. Eric. 0:00:11.880 --> 0:00:14.360 We've been doing this for a little bit now, but 0:00:14.400 --> 0:00:18.240 we haven't spent that much time talking about what's basically 0:00:18.280 --> 0:00:21.880 the hottest trend in ETFs, which is smart beta. Yeah, 0:00:21.960 --> 0:00:24.320 it's one of them. I think people forget that smart 0:00:24.360 --> 0:00:27.200 beta is of e t F assets, so it's a 0:00:27.240 --> 0:00:31.400 big chunk um. The other virtually is all what we 0:00:31.480 --> 0:00:34.400 call cheap beta, which is you know, the smp F 0:00:35.000 --> 0:00:37.280 t F and we called the plane vanilla side. But 0:00:37.320 --> 0:00:41.080 this is up from nothing ten years ago, so it 0:00:41.240 --> 0:00:45.400 is a it's growing faster on a percentage basis than 0:00:45.479 --> 0:00:47.240 e t F as a whole, and it's a really 0:00:47.280 --> 0:00:49.600 interesting dynamic area. This is where a lot of the 0:00:49.600 --> 0:00:53.000 innovation and new products are being launched. So how are 0:00:53.000 --> 0:00:57.320 we supposed to think about this thing called smart beta. Well, 0:00:57.360 --> 0:00:59.720 it's very it can be confusing a lot of times. 0:00:59.720 --> 0:01:01.320 People think it sounds like something you get at the 0:01:01.320 --> 0:01:03.279 g n C store. Yeah, I mean right, I know, 0:01:03.360 --> 0:01:08.880 you're like a way container little double chocolate smart beta. 0:01:09.040 --> 0:01:11.560 It's definitely jargon e um and it's got a buzzword 0:01:11.600 --> 0:01:14.600 type feel to it. But um, you know. Essentially, a 0:01:14.640 --> 0:01:16.840 lot of people will give you different definitions of it. 0:01:17.200 --> 0:01:20.039 To me, you know, the metaphor I use is the 0:01:20.080 --> 0:01:23.200 way people describe different religions, right they there's this thing 0:01:23.240 --> 0:01:26.280 that they say, it's like a bunch of people touching 0:01:26.319 --> 0:01:28.760 an elephant in a dark room, in the way different 0:01:28.760 --> 0:01:31.800 religions describing God. It's the same thing, but it's just 0:01:31.840 --> 0:01:34.520 being Uh, they're feeling a different part of it, but 0:01:34.600 --> 0:01:38.160 ultimately it's the same thing to me. Smarting Right now, 0:01:38.440 --> 0:01:41.560 what is that I'm in a dark room? You don't 0:01:41.560 --> 0:01:44.160 want to know. No, let's say you're touching the trunk. 0:01:44.280 --> 0:01:46.600 Somebody else is touching the side. My point is that 0:01:46.840 --> 0:01:49.920 smart beata kind of can mean different things to different people. Uh, 0:01:49.920 --> 0:01:53.200 it's controversial, and I think that a lot of people 0:01:53.760 --> 0:01:57.160 instead of thinking you need to like capture it and 0:01:57.240 --> 0:01:59.520 be done with understanding it in two seconds, I think 0:01:59.560 --> 0:02:02.000 you need to just accept that it's a little bit 0:02:02.000 --> 0:02:04.680 of a mystery to some people. There's a complexity to 0:02:04.720 --> 0:02:07.120 it and there's differing opinions. As long as you embrace 0:02:07.240 --> 0:02:10.400 that and sort of go into this conversation we're about 0:02:10.400 --> 0:02:12.880 to have knowing that you're gonna understand a little more. 0:02:13.360 --> 0:02:14.959 I think that's the way to go. You gotta lower 0:02:15.000 --> 0:02:18.200 the bar on this because you can't really just get 0:02:18.240 --> 0:02:21.200 it done in like two or three sentences. If I 0:02:21.200 --> 0:02:23.840 had to do it in one sentence, what would you 0:02:23.880 --> 0:02:26.519 how would you describe it? I would say smart Beta 0:02:26.960 --> 0:02:29.160 is trying to take Peter Lynch's brain and put it 0:02:29.160 --> 0:02:34.359 into our two D two's think. In other words, you're 0:02:34.360 --> 0:02:36.840 trying to take the best of active management, but putting 0:02:36.880 --> 0:02:39.720 it into a rules based index that an e t 0:02:39.880 --> 0:02:44.600 F track. So it's basically a conversion of active and 0:02:44.639 --> 0:02:47.960 trying to make it better and more efficient and cheaper 0:02:48.440 --> 0:02:52.360 and deliver it in a better structure. This week, Gun Trillion, 0:02:53.720 --> 0:02:59.040 the Mystery of smart Beta. Okay, Eric, we've got some guests. 0:02:59.280 --> 0:03:01.360 This is really important because I think every one of 0:03:01.400 --> 0:03:04.320 these guests, including you and me, we'll have a different 0:03:04.320 --> 0:03:06.600 perspective on smart Beta. So we're all sort of touching 0:03:06.600 --> 0:03:09.320 the elephant in your dark room, your creepy dark room 0:03:09.600 --> 0:03:12.240 filled with an elephant and us. Yeah, it's almost akin 0:03:12.320 --> 0:03:14.440 to when you go to a conference. So an ETF conferences, 0:03:14.639 --> 0:03:17.040 there's a panel, you tend to have people from different lenses. 0:03:17.080 --> 0:03:19.120 So we're trying to sort of capture that so that 0:03:19.200 --> 0:03:21.639 you can get all of the viewpoints and then you 0:03:21.680 --> 0:03:23.280 can sort of come up with your own sort of 0:03:23.480 --> 0:03:25.239 view on it. One of them is remote, so he's 0:03:25.240 --> 0:03:27.519 in his own dark room touching a different elephant. Near 0:03:27.600 --> 0:03:31.360 case are a columnst with Bloomberg gad fly high near Hello, 0:03:31.960 --> 0:03:35.200 he's in d C. Joining us in the booth is 0:03:35.240 --> 0:03:39.360 Tom Seraphagus, who is a colleague of yours at Bloomberg Intelligence, 0:03:39.360 --> 0:03:44.040 where he's an et F analyst. Also came from Oppenheimer 0:03:44.600 --> 0:03:47.360 before he was at Bloomberg uh and has some experience 0:03:47.600 --> 0:03:51.080 with smart beata et F. Sah, how are you. I'm 0:03:51.120 --> 0:03:53.920 doing great, Thanks for joining. So Tom, can you help 0:03:54.040 --> 0:03:57.480 start this discussion around what is smart beata. Let's definance 0:03:57.520 --> 0:03:59.880 so that you know, before people get in the deep 0:04:00.040 --> 0:04:01.800 to the pool with us, we have an understanding of 0:04:01.840 --> 0:04:04.400 what we're talking about. Yeah. Sure. And so before I 0:04:04.680 --> 0:04:07.160 joined here, I was at on the other side of 0:04:07.200 --> 0:04:09.200 the table, so on the issue side. And you have 0:04:09.240 --> 0:04:11.680 to remember that a lot of these active shops have 0:04:11.920 --> 0:04:14.840 a tremendous amount of resources, right They've got portfolio managers 0:04:14.880 --> 0:04:18.279 and analysts. So I think in a very brief way, 0:04:18.600 --> 0:04:20.800 what they were trying to do is take the mind 0:04:20.960 --> 0:04:25.760 of the portfolio manager Peter Rearle and sure someone else saying, Hey, 0:04:25.880 --> 0:04:28.000 when you're picking stocks, what are things you're looking at? 0:04:28.080 --> 0:04:30.440 How are you running your screens? What are you looking at? 0:04:30.960 --> 0:04:33.720 Let's take your approach, put it, write it down, put 0:04:33.760 --> 0:04:35.520 it in an index, and launch an e t F 0:04:35.600 --> 0:04:38.720 over it. So, um, you know, the the definition of 0:04:38.800 --> 0:04:41.160 smart data. It's not so clear, right, it's a very 0:04:41.200 --> 0:04:43.040 gray area. But it's really trying to take a lot 0:04:43.120 --> 0:04:46.440 of these approaches, democratize it, put in e TF and 0:04:46.520 --> 0:04:48.680 make it available to the masses as a product, as 0:04:48.680 --> 0:04:51.040 a problem, buy off the shelf, right, how do you 0:04:51.080 --> 0:04:54.160 think about it? I think those are both good. Both 0:04:54.320 --> 0:04:56.960 Eric and Tom's definitions I think are both good. I'll 0:04:57.000 --> 0:04:58.960 just try to simplify it even further because I think 0:04:58.960 --> 0:05:02.480 it's really important to convey to to investors that this 0:05:02.640 --> 0:05:05.840 is actually very simple in concept. All this is is 0:05:05.880 --> 0:05:08.840 traditional active management. All that all the strategies that they've 0:05:08.880 --> 0:05:11.320 always loved and have been used for decades by every 0:05:11.360 --> 0:05:15.440 active manager ever. Value you know, buying cheaper companies, buying 0:05:15.839 --> 0:05:19.040 you know, high growth companies, buying smaller companies, whatever the 0:05:19.080 --> 0:05:22.280 strategy that you like is effectively giving it to a 0:05:22.320 --> 0:05:24.920 computer and letting a computer run it. That's really all 0:05:25.040 --> 0:05:27.680 it is. And the reason that's important to convey is 0:05:28.240 --> 0:05:30.600 the the the act of taking it away from the 0:05:30.960 --> 0:05:33.800 from the human and giving it to the computer gives 0:05:33.839 --> 0:05:37.320 the investor several advantages that are really important. One, it 0:05:37.400 --> 0:05:39.360 makes it a lot cheaper because you can you know, 0:05:39.440 --> 0:05:41.400 the computer doesn't cost as much as the human. That's 0:05:41.400 --> 0:05:43.920 the first thing that's you know, that's a good thing. 0:05:43.960 --> 0:05:46.719 The second thing is they're more transparent because you've turned 0:05:46.800 --> 0:05:49.360 it over to a computer. You've had to write rules 0:05:49.440 --> 0:05:52.320 about how this thing will look. And investors can read 0:05:52.400 --> 0:05:54.920 these rules and they can see exactly what they're buying, 0:05:55.080 --> 0:05:57.480 So that's useful to And the other thing is that 0:05:57.600 --> 0:06:00.400 it allows them. It allows us to to um to 0:06:00.520 --> 0:06:03.560 fine tune how we think about these various styles. So 0:06:03.680 --> 0:06:06.720 for example, me and you, we might both like value, right, 0:06:06.760 --> 0:06:08.840 but you might like it more than me, So I 0:06:08.880 --> 0:06:10.720 can write a computer program for you that gives you 0:06:10.800 --> 0:06:12.600 more value and less value for me, and so on. 0:06:12.880 --> 0:06:14.760 And these are things that are more difficult to do 0:06:14.839 --> 0:06:17.560 with human beings. So that's all it is. That sounds simple. 0:06:18.200 --> 0:06:20.720 Let me add in here to dovetail to my original 0:06:20.760 --> 0:06:23.800 definition and just go and how the term came about, 0:06:23.920 --> 0:06:27.200 because this probably will help. A consulting firm named Towers 0:06:27.240 --> 0:06:30.400 Watson is who coined the phrase smart beta, and this 0:06:30.600 --> 0:06:32.800 is exactly how they defined it in their literature in 0:06:32.880 --> 0:06:35.880 your two thousand. Smart beta is simply about trying to 0:06:35.960 --> 0:06:39.040 identify good investment ideas that can be structured better. So 0:06:39.200 --> 0:06:41.120 think about it. What do people not like about an 0:06:41.160 --> 0:06:45.400 active mutual fund? Their high cost uh they have the 0:06:45.720 --> 0:06:48.480 manager could be emotional and make decisions based on the 0:06:48.560 --> 0:06:52.680 current trends, and they have distribute capital gains regardless of 0:06:52.720 --> 0:06:54.880 whether you if even if you stayed invested, you've got 0:06:54.960 --> 0:06:58.720 tax bill. Now, if you take that active mutual fund 0:06:59.000 --> 0:07:01.919 strategy and you put it into a rules based index, 0:07:02.320 --> 0:07:05.960 you essentially eliminate the emotion, right because it's gonna rebalance 0:07:06.000 --> 0:07:09.000 at least us said it's a robot. You're gonna lower 0:07:09.040 --> 0:07:10.960 the feet because there's less overhead. And the ETF structure 0:07:10.960 --> 0:07:13.120 so usually like a third as cheap as or a 0:07:13.160 --> 0:07:15.840 third as expensive as an active mutual fund, and they're 0:07:16.040 --> 0:07:17.960 et f s are very tax efficients. You can have 0:07:18.120 --> 0:07:21.120 some decent turnover inside the fund, and yet no capital 0:07:21.160 --> 0:07:24.640 gains get distributed, so you eliminate three of the baggage 0:07:25.120 --> 0:07:27.040 of the active mutual fund when you cross it over. So, 0:07:27.360 --> 0:07:30.800 in a way, Towers Watson definition is true. It's just 0:07:30.920 --> 0:07:33.840 been mutated over the years and piss people off because 0:07:33.880 --> 0:07:36.560 they think that it means smart means better, and it's 0:07:36.600 --> 0:07:39.559 not necessarily better. It's better, a better way to deliver something, 0:07:40.040 --> 0:07:43.360 not you're gonna definitely outperform unless we're clear. There's also 0:07:43.760 --> 0:07:46.720 different names for smart beta. It's not like smart beta 0:07:47.040 --> 0:07:48.760 is the only one, right Tom, Like, what other what 0:07:48.880 --> 0:07:52.040 other terms can mean smart beta? Yeah, I mean there's 0:07:52.040 --> 0:07:54.120 a lot of terminology that's been thrown out. People call 0:07:54.120 --> 0:07:58.880 it strategic beta, tarnative beta, active beta, um, you know. 0:07:58.880 --> 0:08:00.720 And a lot of people will get caught on, get 0:08:00.800 --> 0:08:02.720 caught up in the semantics because they think that, oh, 0:08:02.800 --> 0:08:05.560 if it's not smart beta, it's dumb beta. Right. It's not. 0:08:05.720 --> 0:08:07.920 It's not so binary that it's just one or the other. 0:08:08.040 --> 0:08:10.360 So a lot of people send they get caught up 0:08:10.360 --> 0:08:12.360 in the semantics and kind of forget, like, what is 0:08:12.440 --> 0:08:14.760 the bigger theme here? What are these products giving you? 0:08:14.840 --> 0:08:16.680 What are they offering you? Can you help me embrace 0:08:16.760 --> 0:08:18.640 the complicated a little bit here, because one of the 0:08:19.320 --> 0:08:22.080 main differences with smart beta is with a with a 0:08:22.160 --> 0:08:24.880 normal ETF the most popular ones to play vanilla ones, 0:08:25.080 --> 0:08:29.080 those are all market cap weighted, right, So help me 0:08:29.160 --> 0:08:33.040 better understand what sometimes the differences with smart beta. Right 0:08:33.080 --> 0:08:35.120 when the Towers Watson definition, they would call all that 0:08:35.240 --> 0:08:37.800 bulk beta. So there's just two bulk beta, which is 0:08:37.840 --> 0:08:40.240 market cap weighted. This I think a lot of people 0:08:40.400 --> 0:08:42.959 just called beta. So just tell me what market cap 0:08:43.080 --> 0:08:45.000 is right like that? Right, So the SMP five hundred, 0:08:45.520 --> 0:08:48.240 the bigger the stocks market cap, the bigger the waiting, right, 0:08:48.320 --> 0:08:50.800 so as stocks get bigger, that sort the top waitings 0:08:50.840 --> 0:08:54.400 in the Sapier, Apple, Microsoft, Amazon, Right, you got it. Now, 0:08:55.120 --> 0:08:56.800 that is another way to view smart beta and how 0:08:56.880 --> 0:08:59.760 some people do it. If you're in the index fund 0:08:59.800 --> 0:09:01.959 were world or the vanguard world and you're used to 0:09:02.040 --> 0:09:06.439 market cap weighted products which are very popular, smart beta 0:09:06.520 --> 0:09:09.520 to you seems like a mutation or a twist on 0:09:09.640 --> 0:09:12.199 the market cap waiting structure. So you could actually view 0:09:12.240 --> 0:09:14.640 smart beta from that lens and either look at it 0:09:14.720 --> 0:09:17.320 as you know, a way to try to do better 0:09:17.400 --> 0:09:19.640 than the market cap waited next, because you're gonna change 0:09:19.679 --> 0:09:21.520 the way the index works. You're gonna maybe wait by 0:09:21.559 --> 0:09:24.040 dividends instead of market cap. You're gonna wait by size. 0:09:24.480 --> 0:09:27.760 You could wait by a collection of fundamentals. That is 0:09:27.800 --> 0:09:29.360 another way to view it. So you can see you 0:09:29.440 --> 0:09:32.040 can see smart beta from the active side or from 0:09:32.080 --> 0:09:34.959 the passive side and describe it different ways. But it 0:09:35.720 --> 0:09:38.840 sounds kind of controversial, right, Well, it is. The word 0:09:38.960 --> 0:09:42.280 smart is the controversial part. But I equated to Obamacare, 0:09:42.400 --> 0:09:44.160 right remember that what was the real name of the bill? 0:09:44.160 --> 0:09:46.760 I don't even remember the patient and affordable care branding 0:09:46.840 --> 0:09:49.640 right there, right, so even Obama started calling it Obamacare. 0:09:49.920 --> 0:09:53.040 Smart beta is just a buzzword that you cannot beat down. 0:09:53.480 --> 0:09:55.880 People have come along, like Tom said morning Star Targic 0:09:55.880 --> 0:10:00.640 called a strategic beta, scientific beta, alternative beta, quantiment indexes. 0:10:00.640 --> 0:10:03.600 How about that one anti benchmark is the France calls 0:10:03.640 --> 0:10:05.679 it that active betas You just keep coming back to 0:10:05.760 --> 0:10:08.400 smart beta. Smart beta sticks. It's sticks. But the words 0:10:08.440 --> 0:10:11.520 smart is what has made it controversial because at the 0:10:11.600 --> 0:10:13.960 end of the day, you may or may not outperform. 0:10:14.440 --> 0:10:16.880 You're just going to have a different return stream than 0:10:17.200 --> 0:10:25.520 a market cap weighted index. Okay, Eric, can we actually 0:10:25.880 --> 0:10:29.120 break this thing down and talk about smart beta in 0:10:29.280 --> 0:10:32.240 real life. Let's call it a case study. Do you 0:10:32.440 --> 0:10:36.079 have an example of a smart beta e t F 0:10:36.679 --> 0:10:38.600 and can you walk me through how how it did 0:10:38.640 --> 0:10:40.800 what it did? Right? So, here's a classic one came 0:10:40.840 --> 0:10:43.199 out in two thousand five. So this is like early 0:10:43.320 --> 0:10:47.120 settler smart beta product, right, This was the Power Shares FO. 0:10:47.520 --> 0:10:49.679 I can picture it out in the homestead it Well, 0:10:49.720 --> 0:10:52.960 back then it was a lot of open frontier people 0:10:53.000 --> 0:10:54.920 put flags everywhere. Now that's why the t flants. He 0:10:55.000 --> 0:10:56.439 is very crowded, hard to come up with new ideas. 0:10:56.679 --> 0:10:58.800 There's not much white space left, so to speak. But 0:10:58.920 --> 0:11:00.400 this really was one of the first ones. It's the 0:11:00.440 --> 0:11:04.240 Power Shares Foutsie Raffie US one thousand portfolio tik R 0:11:04.280 --> 0:11:08.720 PRF can see that again. No, Um, here's what it does. 0:11:08.800 --> 0:11:11.600 It's pretty simple. It tracks stocks based on four fundamental 0:11:11.679 --> 0:11:15.480 measures right book value, cash flow, sales, and dividends. So 0:11:16.000 --> 0:11:19.240 it just screens stocks a thousand stocks by those metrics, 0:11:19.480 --> 0:11:22.559 comes up with a score, sorts them by that, and 0:11:22.640 --> 0:11:25.319 then every quarter it looks for which ones go to 0:11:25.400 --> 0:11:27.040 the top, and then it waits them by the score, 0:11:27.120 --> 0:11:29.800 and that's the that's how the index works, and that's 0:11:29.840 --> 0:11:32.040 what the e t F tracks. It just that's all 0:11:32.080 --> 0:11:34.319 it does. And it it goes on like a little robot. 0:11:34.520 --> 0:11:37.280 It is. It's a total how often does it rebalance quarterly? 0:11:37.880 --> 0:11:40.439 So it is it's almost like a robotic version of 0:11:40.480 --> 0:11:42.400 a stock analyst, right, because it's doing things that a 0:11:42.480 --> 0:11:45.680 researcher would look for. Those are definitely popular fundamental metrics. 0:11:46.280 --> 0:11:49.240 Here's where I think this is a great example of 0:11:49.320 --> 0:11:51.560 how it works, especially on the lack of emotion side. 0:11:51.920 --> 0:11:54.559 In two thousand and eight, right bank stocks were hated. 0:11:55.160 --> 0:11:58.040 Nobody wanted to buy City Group at any of these stocks. Well, 0:11:58.080 --> 0:12:00.240 as you know, they got cheaper on a value ation 0:12:00.280 --> 0:12:03.800 basis because everybody sold them. Well, this thing is a robot. 0:12:03.840 --> 0:12:05.839 It doesn't it doesn't read the news, it doesn't know 0:12:05.880 --> 0:12:07.840 what's going on. It isn't not getting yelled at by clients. 0:12:08.120 --> 0:12:11.480 So it rebalanced into financials in a big way. It 0:12:11.559 --> 0:12:14.880 had fifty financials in the beginning of two thousand nine. 0:12:15.280 --> 0:12:17.840 Doubled down on it, doubled down it went. It went 0:12:17.920 --> 0:12:20.920 into the burning building, as Warren Buffett would say, big 0:12:21.000 --> 0:12:26.320 time with with a suit of gasoline. And on top 0:12:26.360 --> 0:12:28.439 of that, I mean, like, I assume maybe the guy 0:12:28.520 --> 0:12:31.280 in charge of this who is whom so the person 0:12:31.320 --> 0:12:33.839 who made the indexes Rob or not, and I'm guessing 0:12:33.960 --> 0:12:36.079 Rob maybe got some heat for that he did. So 0:12:36.360 --> 0:12:38.319 I interviewed him from my book and he said that 0:12:38.760 --> 0:12:41.840 institutional funds that tracked that index on a separate account 0:12:41.840 --> 0:12:44.360 basis called up and said, do not do the rebalance. 0:12:44.480 --> 0:12:47.880 We do not want to do this exactly, and in 0:12:47.960 --> 0:12:49.439 separate account you can do that. The e t F 0:12:49.559 --> 0:12:53.199 cannot well guess who won after five years. Basically, that 0:12:53.320 --> 0:12:58.680 rebalance accounted for almost all of the firm's out performance 0:12:58.720 --> 0:13:05.400 over the next five years and came from the financials 0:13:05.679 --> 0:13:08.959 read that one rebalance. Now Ben Johnson the Morning Star 0:13:09.040 --> 0:13:11.560 calls it the immaculate rebalance. He thinks that I'm bringing 0:13:11.640 --> 0:13:14.280 up a extreme situation. He also brings up that a 0:13:14.320 --> 0:13:16.280 lot of investors in the e t F left too 0:13:16.720 --> 0:13:19.360 because they couldn't handle it, and so part of smart beta, 0:13:19.400 --> 0:13:22.000 this brings up the behavior if you really want to 0:13:22.040 --> 0:13:24.760 benefit from it, and the lack of emotion, you have 0:13:24.880 --> 0:13:26.760 to hang in there. So the e t F did 0:13:26.800 --> 0:13:28.400 its job going the burning building, but a lot of 0:13:28.440 --> 0:13:31.640 investors couldn't handle the heat either. So that's why all 0:13:31.720 --> 0:13:34.439 of that is important to point out there. But that 0:13:34.600 --> 0:13:37.480 is an example of how the smart beta can work 0:13:37.559 --> 0:13:40.520 for you and arguably be better than a human being manager. 0:13:41.200 --> 0:13:45.280 Near do you have a case study that rivals erics? Well, 0:13:45.360 --> 0:13:47.199 and I don't know if it rivals erics, but it's 0:13:47.200 --> 0:13:51.199 a little bit different. Okay, why not? Okay, yeah, let's 0:13:51.280 --> 0:13:53.880 let's let's let's get it on. Um. There are two 0:13:53.880 --> 0:13:55.439 et f s that I wanted to bring up that 0:13:55.600 --> 0:13:58.520 illustrate the point that I made earlier about giving you 0:13:59.120 --> 0:14:03.040 different types different depths of exposure. Um. So, for example, 0:14:03.120 --> 0:14:06.160 I looked at value at the at value as as 0:14:06.160 --> 0:14:09.240 an active strategy, and one value e t F, which 0:14:09.280 --> 0:14:11.959 is basically a factor, right, like to simplify that, like 0:14:12.400 --> 0:14:15.680 value and there are many different types of factors. Value 0:14:15.840 --> 0:14:19.040 is basically probably the most famous one, right, Yeah, it's 0:14:19.120 --> 0:14:20.920 most famous, and for a good reason, by the way, 0:14:21.000 --> 0:14:25.160 because in the it has it works very often. I mean, 0:14:25.160 --> 0:14:26.760 in other words, if if you looked, if you back 0:14:26.800 --> 0:14:29.880 tested all these various types of factors value and quality 0:14:29.960 --> 0:14:33.400 and momentum and so on, the batting the success rate 0:14:33.480 --> 0:14:36.560 for value over rolling periods is exceedingly high, so it's 0:14:36.680 --> 0:14:41.400 very popular over time, that's right. And it's also intuitively appealing, 0:14:41.520 --> 0:14:43.880 right because it makes sense that if you buy a 0:14:44.000 --> 0:14:46.240 company that's beaten down, you should get paid more than 0:14:46.280 --> 0:14:48.520 a company that's not. Right. It just that has intuitive 0:14:48.800 --> 0:14:50.960 appeal and the and the you know, and the numbers 0:14:51.040 --> 0:14:53.560 check out. So that's why it's so popular. And there 0:14:53.600 --> 0:14:55.880 are there are two different ETFs that you can buy 0:14:56.160 --> 0:14:58.400 that give you different types of exposure to it. One 0:14:58.640 --> 0:15:01.800 is VTV, which is the Vanguard Value e t F, 0:15:02.400 --> 0:15:05.160 and that E t F sorts stocks based on a 0:15:05.320 --> 0:15:09.200 value uh based on a value sort, and then awaits 0:15:09.240 --> 0:15:11.640 them by market cap. So that's one way that you 0:15:11.680 --> 0:15:14.360 can get value. But by contrast, you can also buy 0:15:14.400 --> 0:15:16.640 a different value t F that's v l U E, 0:15:16.880 --> 0:15:19.200 which is the I Shares Edge m S C I 0:15:19.800 --> 0:15:22.560 U S a value factor E t F. Don't ask 0:15:22.600 --> 0:15:24.360 me why these names have to be this long. And 0:15:24.480 --> 0:15:27.720 the difference here is that this two sorts by value, 0:15:27.800 --> 0:15:30.640 but then it also waits by value, and so the 0:15:30.720 --> 0:15:33.400 difference is you get more value exposure in the Eye 0:15:33.440 --> 0:15:35.640 Shares Fund than you do in the Vanguard fund. That 0:15:35.800 --> 0:15:38.240 that doesn't make the Eye Shares fund better, but it 0:15:38.320 --> 0:15:41.120 allows investors to express a preference as to how much 0:15:41.240 --> 0:15:43.600 value they want in their portfolio. If they want more, 0:15:43.720 --> 0:15:45.360 they go for the eye shares. If they want less, 0:15:45.400 --> 0:15:47.080 they go for the vangord Um. I would like to 0:15:47.160 --> 0:15:49.640 use a metaphor we Tom and I we use that. 0:15:49.720 --> 0:15:51.360 We have this thing called the smart data spectrum and 0:15:51.400 --> 0:15:53.600 what Near just described. If you could picture a spectrum. 0:15:54.120 --> 0:15:55.840 On one side, you have v t V. It's got 0:15:56.280 --> 0:15:57.640 just a little bit of value. It's going to do 0:15:57.720 --> 0:16:00.960 better if the regular market to doing well because it's 0:16:01.040 --> 0:16:04.200 mostly bulk beta. V l u E is sort of 0:16:04.240 --> 0:16:06.760 in the middle um and the value factor in the 0:16:06.840 --> 0:16:08.960 name is important because when you see that, that means 0:16:09.000 --> 0:16:11.200 it's waiting by the factor that's going to give you 0:16:11.320 --> 0:16:13.320 more juice. It's almost like v t V is o 0:16:13.440 --> 0:16:17.960 duels and vlu E barely any alcohol, and we have 0:16:18.040 --> 0:16:20.080 to think like like two cases to get you know, 0:16:20.200 --> 0:16:23.600 buzz the middle. There is vlu E that's going to 0:16:23.640 --> 0:16:25.760 be more like just a regular beer like a Budweiser. 0:16:26.240 --> 0:16:29.600 But then there's even ones that go further that are 0:16:29.760 --> 0:16:32.400 more hardcore value. Because v l u E and Near 0:16:32.480 --> 0:16:35.720 probably knows this has a volatility screen, So it's got 0:16:35.800 --> 0:16:40.040 this like screen to kick out really hardcore value stocks 0:16:40.120 --> 0:16:43.000 because it's trying to sell it to advisors who don't 0:16:43.000 --> 0:16:45.920 want that crazy of a ride. But there are more 0:16:46.120 --> 0:16:50.480 pure value like west Gray's q val the quant shares 0:16:50.800 --> 0:16:52.360 that are on the far end, which would be like 0:16:52.440 --> 0:16:58.120 that German beer that has exactly So I think this 0:16:58.360 --> 0:17:02.200 is a fascinating development in the E t F world. 0:17:02.280 --> 0:17:05.080 In this could make smart beta confusing to people, but 0:17:05.359 --> 0:17:07.640 really what you got to figure out is how much 0:17:07.800 --> 0:17:11.720 juice or factor content, how much aggressiveness do you want 0:17:11.840 --> 0:17:13.480 in this smart beta e t F because they have 0:17:13.600 --> 0:17:16.560 all flavors, Tom, can you give me a case study 0:17:16.680 --> 0:17:19.680 the tops erics. Yeah, so mine's a little bit different 0:17:19.800 --> 0:17:22.080 in that, you know what the example that Eric gave 0:17:22.200 --> 0:17:24.320 is more takes the mind of the act of manager 0:17:24.400 --> 0:17:27.520 and it kicks out the emotion. Right. This the product 0:17:27.560 --> 0:17:28.919 I want to talk about is a little bit more 0:17:28.960 --> 0:17:32.320 about targeting a specific outcome or helping somebody targeted outcomes. 0:17:32.359 --> 0:17:33.879 So let's just say you want to own the market, 0:17:34.400 --> 0:17:36.040 but you want to own it in the least vollowed 0:17:36.040 --> 0:17:38.080 a way. You don't want to own the riskiest stocks. 0:17:38.320 --> 0:17:40.840 So I want to bring up SPLV, which is the 0:17:41.040 --> 0:17:45.639 SMP five Low Volatility et F by Power Shares. The 0:17:45.760 --> 0:17:47.800 name long enough. I was gonna say, Eric, we should 0:17:47.800 --> 0:17:50.119 do a whole episode about the longest names in the 0:17:50.200 --> 0:17:51.840 e t F in the et F world. A new 0:17:51.880 --> 0:17:53.960 one was just filed that broke the record. Really Yeah, 0:17:54.000 --> 0:17:57.639 the goobelly pet parents, Pet companions and their parents and 0:17:57.760 --> 0:18:02.200 pet Ecosystem TMF. What I know, there's a multiple reasons 0:18:02.240 --> 0:18:05.960 why that's insanely amazing. We don't know yet, but it's 0:18:06.000 --> 0:18:08.600 gotta have five. I think it's gonna be kitty or doggie, 0:18:08.640 --> 0:18:11.520 but um, that's a whole different story. A couple of 0:18:11.520 --> 0:18:14.719 east also have thirteen fourteen words in the name, but um, 0:18:14.840 --> 0:18:17.600 that one's long. Okay, back to SPLV, uh sure, And 0:18:17.760 --> 0:18:20.320 why I wanted to highlight this one is because it's 0:18:20.359 --> 0:18:22.880 in a smart bit of category that's gotten pretty popular. 0:18:23.440 --> 0:18:25.520 It's just it's low volatility, right, so it's owning the 0:18:25.560 --> 0:18:28.720 market in the least volatial way. So this launched back 0:18:28.760 --> 0:18:31.480 in two thousand and eleven. And if you remember what 0:18:31.600 --> 0:18:33.520 happened in the summer of two thousand eleven was the 0:18:33.640 --> 0:18:36.119 U S got downgraded by the SMP. There's a lot 0:18:36.160 --> 0:18:38.000 of market volatility, and this thing kind of got put 0:18:38.080 --> 0:18:40.879 on the map like, hey, it's down less than the market. 0:18:41.600 --> 0:18:45.520 So it's very simple messogy it is and it's very simple, 0:18:45.520 --> 0:18:47.160 and I think this is why it's had some success 0:18:47.280 --> 0:18:49.680 is it takes the SMP five hundred and it says 0:18:49.800 --> 0:18:51.720 we are only going to take the one hundred least 0:18:51.800 --> 0:18:55.160 vottle stocks. It's very simple, right, so you're gonna own 0:18:55.200 --> 0:18:58.280 on hundred least bottle stocks in the SMP. So when 0:18:58.320 --> 0:19:00.440 you look at you know, some big draw sounds in 0:19:00.520 --> 0:19:03.400 the SMP, it's down less, holds up a little bit better. 0:19:04.040 --> 0:19:06.040 So it's kind of maybe like a little bit of 0:19:06.080 --> 0:19:07.639 a foam O E t F that you still want 0:19:07.680 --> 0:19:10.600 to own the market, but you want to do it 0:19:10.640 --> 0:19:13.360 in at least volowed away um. And it's twenty five 0:19:13.359 --> 0:19:15.080 basis points. It's been out for a lot. It's gotten 0:19:15.080 --> 0:19:18.440 pretty big, about six six or seven billion. Also like 0:19:18.520 --> 0:19:21.359 that you didn't uh, you didn't pampa product that you 0:19:21.440 --> 0:19:23.520 used to work on. That's that's classic of you. And 0:19:23.840 --> 0:19:25.720 let me talk. I want to add on to this 0:19:25.720 --> 0:19:28.639 because it's interesting. When SPLV came out, it tracks just 0:19:28.800 --> 0:19:31.879 those one stocks, so it has no sector. It doesn't 0:19:31.880 --> 0:19:34.040 care where it just goes where it ends up, having 0:19:34.359 --> 0:19:37.560