Speaker 1: Welcome to chains.
Speaker 2: I'm Joel Webber and I'm Eric Balchunis Eric.
Speaker 3: We get to see a lot of ETFs. We talk
Speaker 3: about a lot of new ones, we talk about a
Speaker 3: lot of old ones.
Speaker 1: We talk about the market as a whole.
Speaker 3: I think that when we're going to talk about today
Speaker 3: is pretty cool.
Speaker 1: I haven't ever actually considered this idea before.
Speaker 2: Yeah, it's really interesting. It stuck out to me for
Speaker 2: a few reasons. You know, there's five hundred ETFs that launch,
Speaker 2: and only a couple stick out right off the bat,
Speaker 2: and this one does. It's called the Research Affiliates Deletions ETF.
Speaker 2: The ticker is next, which is pretty apropos and it's
Speaker 2: for research Affiliates. Who is Rob ar Nott's company and
Speaker 2: Rob are not is known as the grandfather of smart beta,
Speaker 2: So the godfather of grandfather one of those two, but
Speaker 2: he's he's he kind of really pioneered that space. And
Speaker 2: for those who don't know, smart beta effect effectively is
Speaker 2: taking an index and tweaking it and designing it with
Speaker 2: some activeness so that it does different things than basically
Speaker 2: just track market beta. Anyway, that's a big category with
Speaker 2: two trillion now and so here's another ETF that is
Speaker 2: sort of from his brain. And this one is also
Speaker 2: interesting because Athanasios on my team just covered the same thing,
Speaker 2: so that they independently found the sort of same data
Speaker 2: that when a stock gets into an index, you think
Speaker 2: that's the time to buy it, but actually when it
Speaker 2: gets kicked out, data shows that has a better performance
Speaker 2: after getting kicked out, which we thought was interesting. And
Speaker 2: obviously this index and ETF is trying to capitalize on
Speaker 2: so just an interesting product, and the fees low has
Speaker 2: a probably a good shot of success. So I just
Speaker 2: think it's also interesting because people do really look at
Speaker 2: how the indexes are impacting stocks and stock prices, and
Speaker 2: here's somebody saying, okay, let's stop talking about it, let's
Speaker 2: try to make some money about it.
Speaker 3: So joining us on this episode, Rob are not the
Speaker 3: founder of research, this time on trillions. Out with the
Speaker 3: New and with the Old, Rob Wilko A trillions, thank
Speaker 3: you so much so. Our colleagues in Bloomberg News wrote
Speaker 3: that lead that headline right there, Out with the new,
Speaker 3: end with the old. That was our colleague of Vildanna
Speaker 3: hi Rich, so fitting, I think, But where where did
Speaker 3: this idea come from? How did you see that there
Speaker 3: was this opportunity and sort of companies that had fallen
Speaker 3: out of the indexes that you know, if you pick
Speaker 3: them all up, might actually be, you know, we're worthy
Speaker 3: of a portfolio of their own.
Speaker 4: Well, we were at a paper back in twenty eighteen
Speaker 4: entitled by High and Sell Low with index funds, and
Speaker 4: the point of the paper was that index funds are
Speaker 4: most people think of them as passive, as representing and
Speaker 4: spanning the whole market, and they approximate do that they're passive,
Speaker 4: except that they do add new stocks and they do
Speaker 4: drop old stocks, hence in with the new and out
Speaker 4: with the old. But that's an active decision. In the
Speaker 4: case of S and P and MSCI, the indexes are
Speaker 4: additions and deletions are sorted through by a committee, and
Speaker 4: in the case of Russell, it's done in a somewhat
Speaker 4: formulaic way. But either way, stocks that get added to
Speaker 4: the index tend to be stocks that have swored, where
Speaker 4: their market value has risen to a point where they're
Speaker 4: big enough to grab a lot of interest and lo
Speaker 4: and behold. Those stocks tend to be trading at frothy multiples.
Speaker 4: On average, about twice the valuation multiples, price earnings or
Speaker 4: price to sales ratios of the broad market, and once
Speaker 4: they're added, the process of adding them pushes them higher. Still.
Speaker 4: In the case of Tesla, just as one example, between
Speaker 4: the announcement date and the effective date of it coming
Speaker 4: into the index, it rose I think over forty percent,
Speaker 4: if memory serves correctly. Now, are the index funds traumatized
Speaker 4: by buying forty percent higher than they could have just
Speaker 4: a few weeks earlier, No, they're not. They're focused on
Speaker 4: tracking here. They want to track perfectly with the index,
Speaker 4: and so they want to buy at exactly the price
Speaker 4: at which the index adds the stock. Now, for every
Speaker 4: stock that's added, something has to go out, and in
Speaker 4: the case sometimes it's a merger or an acquisition or
Speaker 4: a bankruptcy, so there's no decision involved. But if they
Speaker 4: have to make a decision, it's what we would call
Speaker 4: a discretionary deletion. They have to choose a company to
Speaker 4: take out. Well, that's going to be a company that's
Speaker 4: been in free fall for a very long time, a
Speaker 4: company that's trading at a deep discount relative to the market,
Speaker 4: and the process of deleting it pushes it down even further.
Speaker 4: So what did we find. We found that once you
Speaker 4: add a stock on average underperforms for its first couple
Speaker 4: of years by a percent or two a year. The
Speaker 4: stocks that are dropped outperformed by about twenty percent in
Speaker 4: the first year. Now, averaged over time, a lot of
Speaker 4: that's clustered in the aftermath of the dot com bubble,
Speaker 4: in the aftermath of the global financial crisis, but averaged
Speaker 4: over time, the average deletion outperforms by twenty eight percent
Speaker 4: over the next five years. That's a heck of a margin,
Speaker 4: a heck of an incremental return.
Speaker 2: It reminds me of the Fallen Angels bond etf When
Speaker 2: a bond gets kicked out of investment grade and goes
Speaker 2: into high yield, a lot of times it gets over
Speaker 2: sold because so much institutional money tracks that index.
Speaker 1: Is this trying to.
Speaker 2: Exploit a quirk in the fact that indexes have gotten
Speaker 2: so big that when they kick a member out, it
Speaker 2: gets over sold beyond the sentiment. And that's important because
Speaker 2: if a stock gets kicked out of an index, it
Speaker 2: means that active has been selling it and it's in
Speaker 2: free fall. As you say, so, I guess it just
Speaker 2: seems like it could be a tricky business to try
Speaker 2: to capture the over sold part and yet not get
Speaker 2: burned by the fact that the company has been deemed
Speaker 2: to be not worthy by active managers.
Speaker 4: You know, you put your finger on a very very
Speaker 4: interesting and very important point. If active managers don't want it,
Speaker 4: then it falls in price. It's active managers, not the
Speaker 4: index funds that do the price discovery, that set the
Speaker 4: value of a stock. And if it's been in freefall
Speaker 4: for a long time so that it's now worth so
Speaker 4: little that they want to kick it out of the index,
Speaker 4: then who's going to buy it? The index indexes s
Speaker 4: and p indexes span about twenty five percent of the
Speaker 4: market value of every single stock they own. So when
Speaker 4: Tesla came in, twenty five percent of the stock outstanding
Speaker 4: had to be bought by the index funds. And when
Speaker 4: AIV went out, twenty five percent of its outstanding market
Speaker 4: value had to be sold. And it was now a small,
Speaker 4: ill liquid, rather thinly traded stock, So the impact on
Speaker 4: the price is huge. The beauty of a deletion strategy
Speaker 4: is that on average, you get a big rebound. Now
Speaker 4: if you want to time it just perfectly forget it
Speaker 4: active managers don't want it. You're absolutely right. But the
Speaker 4: fact that it's so depressed means that it has to
Speaker 4: only exceed a very low hurdle. It has to exceed
Speaker 4: bleak expectations in order to perform well. Well over half
Speaker 4: of all deletions go on to underperform, continue to underperform,
Speaker 4: but the ones that exceed those bleak expectations rebound in
Speaker 4: some cases so sharply that the overall average is improved
Speaker 4: to a twenty eight percent gain over the market over
Speaker 4: the next five years.
Speaker 3: So Rob, one of the things that's so interesting about
Speaker 3: the strategy is there's this smart beta that we've talked about,
Speaker 3: and it's actually one of the reasons Eric and I
Speaker 3: found each other all those years ago, because I was like,
Speaker 3: this is really interesting. It's like it's sort of got
Speaker 3: a part of passive and a part of active, and
Speaker 3: you come together because the strategy is basically rules, right,
Speaker 3: so it's not just active picking kind of whatever they
Speaker 3: feel like is could have outperformance. It's like you look
Speaker 3: at passive, you take some of the rules of passive
Speaker 3: and you and some rules of the active, and you
Speaker 3: kind of find a place, a heartless place in the middle.
Speaker 3: And I'm curious when you think about this, how how
Speaker 3: heartless is it?
Speaker 1: Right?
Speaker 3: Because I'm just drawn to like wanting to know what
Speaker 3: the companies are that sort of exemplify the strategy. And
Speaker 3: yet you, on the other hand, it's like you don't
Speaker 3: really care about the companies so much as the strategy.
Speaker 1: That's exactly the rules.
Speaker 4: Yeah, Well, the whole essence of smart beta originally was
Speaker 4: strategies that break the link between the price of a
Speaker 4: stock and its weight in the portfolio. With conventional indexes,
Speaker 4: the higher the price, the higher the valuation multiples, the
Speaker 4: bigger your weight in that portfolio, and so you're assuredly
Speaker 4: overweighting the overvalued and underweighting the undervalued. Well, deletions kind
Speaker 4: of tick that to a new level. There they fall
Speaker 4: in value so much that the index kicks them out
Speaker 4: and gives them zero weight altogether. So one way to
Speaker 4: think about this is it's a completion strategy. If you
Speaker 4: want to own the market and you own an index fund,
Speaker 4: you don't own the stocks that aren't in the index. Well,
Speaker 4: that includes tiny companies that may or may not make it,
Speaker 4: and size past successes that have fallen deeply out of
Speaker 4: favor and I think that's why you get the snap back.
Speaker 4: Your starting point is deep discount valuations, long term under performance.
Speaker 4: That sort of thing can lay a foundation for long
Speaker 4: horizon mean reversion for the bounce back that we're seeking
Speaker 4: to catch.
Speaker 2: Let's talk about this lack of you called it heartless,
Speaker 2: lack of emotion, because a lot of ETFs coming on
Speaker 2: hour active like active. I think last time I checked
Speaker 2: about it, three quarters of all the launches are active,
Speaker 2: and that's because the ETF rule has made it easier
Speaker 2: to do active and I won't get in details, but
Speaker 2: also active having a little bit of a renaissance anyway.
Speaker 2: Smart Beta is active but using an index. So once
Speaker 2: you set the index, you the human who manage the fund,
Speaker 2: you can't do a thing about it. And that lack
Speaker 2: of emotion, you know, is interesting because when you have
Speaker 2: an active ETF at the end of the day, a
Speaker 2: human can do a thing about it. And so I guess,
Speaker 2: can you talk a little bit about how the lack
Speaker 2: of emotion is you know, one of one of the features,
Speaker 2: not bugs, I guess, of the smart Beta ETFs, which
Speaker 2: by the way, now have two trillion in assets, that's
Speaker 2: about twenty two twenty three percent of all etfsts.
Speaker 4: Yeah, that's we crossed the two trillion threshold just this year.
Speaker 4: That's kind of an exciting transition. Emotions are our enemy,
Speaker 4: and investing emotions condition us to well, think about it
Speaker 4: this way. Whatever has caused us has given us profit
Speaker 4: and joy. We want more of that, even though past
Speaker 4: profits don't mean future profits. Whatever has given us pain
Speaker 4: and losses. Human nature says, get me out of here,
Speaker 4: even though past disappointment doesn't mean future disappointment. In fact,
Speaker 4: there's a market anomaly called long horizon meaner version, where
Speaker 4: assets that have performed badly for a very long time
Speaker 4: tend to outperform. That's one of the key drivers here. Well,
Speaker 4: human emotion will tell us not to buy those stocks.
Speaker 4: And so I love stripping emotion out of the decision
Speaker 4: process because emotion steers us to do the wrong thing
Speaker 4: at the wrong time all the time in investing.
Speaker 2: You know, this idea of no emotion. One of the
Speaker 2: best examples, and I cite it in my first book.
Speaker 2: Droll was something that a CTF nerds you included called
Speaker 2: the immaculate rebalance, And it was a time when one
Speaker 2: of Rob's indexes, which was linked to the ETF called PRF.
Speaker 2: It's a fundamentally weighted index. It had to do a
Speaker 2: rebalance in two thousand and eight, two thousand and nine,
Speaker 2: and because it had a certain program in it to
Speaker 2: look for deeply you know, troubled deep value and whatnot,
Speaker 2: it went and did a bout. It bought so many
Speaker 2: bank stocks that the financial allocation went up to fifty
Speaker 2: percent because no human on earth, no human manager, could
Speaker 2: stomach buying those banks. After what happened in two thousand
Speaker 2: and eight, I think I think you just got it
Speaker 2: to me once. Like it was like a portfolio manager
Speaker 2: running into a burning building and like.
Speaker 1: I'll buy it, I'll buy it all. Yeah.
Speaker 2: Yeah, it's like literally running into fire. But the index
Speaker 2: doesn't care. It's like a terminator. It runs into the fire.
Speaker 2: It doesn't it doesn't do anything.
Speaker 1: Right? Is that?
Speaker 2: And tell us about the index, the ETF versus the
Speaker 2: separate account you have with that index.
Speaker 4: Sure, well, the ETF you're referring to PRF is Investigo
Speaker 4: Power Shares RAFFI one thousand, RAFI being Research affiliates Fundamental Index.
Speaker 4: Fundamental index basically has a premise that we don't want
Speaker 4: to weight stocks according to how expensive they are. We
Speaker 4: want to wait them according to how big their business is.
Speaker 4: So when you had a situation where very large businesses autos, banks,
Speaker 4: and so forth were priced for oblivion, then Fundamental Index said, okay,
Speaker 4: it's time to rebalance. Let's find out how big these
Speaker 4: businesses are. Oh, they're still just as big as they
Speaker 4: were a year ago. Okay, so let's top them up
Speaker 4: to the weight that they had a year ago. And
Speaker 4: the result was massive buying of deeply out of favor
Speaker 4: financial services companies and autos and other consumer durables. One
Speaker 4: of the autos, GM went bankrupt sixty days later, so
Speaker 4: you bought into it and it went to zero. But
Speaker 4: on the other hand, you bought into City and b
Speaker 4: of A and other banks. City and b of A
Speaker 4: were two percent of the US economy each, so you
Speaker 4: bought back to two percent weight, and they went on
Speaker 4: to triple in the next six months. So those stocks
Speaker 4: were bought because waiting companies according to their economic footprint
Speaker 4: means if the price tumbles and the underlying fundamentals don't,
Speaker 4: you're going to top it up. And if the price
Speaker 4: soars and the fundamentals don't, you're going to trim it,
Speaker 4: so you wind up contratrating against the market's most extravagant bets. Well,
Speaker 4: those were big bets in the global financial crisis. And yeah,
Speaker 4: the best of my recollection, that particular index beat the
Speaker 4: S and P by fifteen hundred basis points that year. Well,
Speaker 4: let's bring this back was with a broadly diversified thousand
Speaker 4: stock portfolio.
Speaker 3: So let's bring this back to next because I'm curious
Speaker 3: about you know a thing that we haven't talked about yet, waitings.
Speaker 3: How do you decide what to what waitings to give
Speaker 3: the holdings in the portfolio.
Speaker 4: Well, firstly, we're not going to capitalization weight it because
Speaker 4: that just puts all of your money in the least
Speaker 4: unloved names on the list. And so we equally wait
Speaker 4: the stocks. Basically, any stock that falls out of the
Speaker 4: top five hundred or out of the top thousand in
Speaker 4: the US stock market, roughly corresponding to S and P
Speaker 4: five hundred and Russell one thousand. But stocks that fall
Speaker 4: out of those top tier lists and have done so
Speaker 4: anytime in the last five years become members of the
Speaker 4: next index. And so this consists of all of the
Speaker 4: stocks that have been deleted from top five hundred to
Speaker 4: top one thousand anytime in the last five years. Now,
Speaker 4: how big is that? Un that's a lot of stocks.
Speaker 4: That turns out to be about one hundred and fifty
Speaker 4: to two hundred stocks. We then take out the twenty
Speaker 4: percent worst quality of these stocks, the ones that have
Speaker 4: debt equity ratios or debt coverage ratios that are terrible,
Speaker 4: the ones that don't have any profits at all. So
Speaker 4: the bottom twenty percent are dropped for quality reasons. We
Speaker 4: don't we want cheap stocks, we don't want value traps.
Speaker 4: And the result is that that takes the total list
Speaker 4: down to on average, one hundred and twenty two hundred
Speaker 4: eighty names. Right now, it's got I think one hundred
Speaker 4: and forty seven names equally weight them and no disaster
Speaker 4: stock is going to hurt you too badly. And if
Speaker 4: you have a half dozen or a dozen of them
Speaker 4: that triple, well, that boosts your aggregate return rather nicely.
Speaker 2: Okay, let me ask you a question, why not just
Speaker 2: buy a small cap value ETF. There's a couple ones
Speaker 2: that have taken off recently in that category. What's the
Speaker 2: difference here?
Speaker 4: Well, a couple of things though, small cap value The
Speaker 4: biggest name in small cap value I think is IWN,
Speaker 4: which is the Russell two thousand value ETF by I Shares. Firstly,
Speaker 4: that's capitalization weighted, so most of your money will be
Speaker 4: in the least inexpensive of the small cap value names,
Speaker 4: so the capitalization waiting reduces your opportunity. Secondly, it includes
Speaker 4: all of the Russell two thousand value stocks, including all
Speaker 4: the value traps. We try to filter those out with
Speaker 4: a quality filter. Thirdly, it includes a lot of little
Speaker 4: companies that may or may not turn out to be successful.
Speaker 4: The NIXT index owns companies that were successful that fell
Speaker 4: out of favor. Fallen angels is a perfectly legitimate label
Speaker 4: for it. So these fallen angels, some of them regain
Speaker 4: their footing, and you don't need a lot of them
Speaker 4: to regain their footing for the average return to be brilliant.
Speaker 1: Rob, I'm curious, you've been doing this for a while.
Speaker 3: Research affiliates been around creating indexes and whatnot, But this
Speaker 3: is actually the first time you had an ETF to
Speaker 3: your name, and I'm curious why this one, and what
Speaker 3: have you learned about the industry that you didn't know before.
Speaker 4: Well, a few things. Firstly, we've been associated with lots
Speaker 4: of ETFs. PRF that we were just talking about was
Speaker 4: launched based on our fundamental index concept. PRF was launched
Speaker 4: with power Shares before. It was part of Invesco reaching
Speaker 4: out to us and saying, we love your concept, can
Speaker 4: we launch an ETF. This was a little bit the
Speaker 4: other way around. ETF Architects is a one stop shop
Speaker 4: for turnkey launch of ETFs. We reached out to them
Speaker 4: to say would you like to launch this? And of
Speaker 4: course the difference is with a turnkey platform for launching
Speaker 4: an et most of the revenues come to us, where
Speaker 4: with power Shares most of the revenues would go to them.
Speaker 4: So it's just a different business model. What made it
Speaker 4: our first case where we initiated the launch of an
Speaker 4: ETF strategy was firstly, this is a niche strategy. It's
Speaker 4: a really cool, interesting strategy, but it's not a big
Speaker 4: market strategy that an organization like Invesco or I Shares
Speaker 4: is likely to want to launch. Secondly, the one stop shop,
Speaker 4: the turnkey system for launching ets didn't exist until the
Speaker 4: last few years and so it wasn't an option for us.
Speaker 4: We don't have ETF infrastructure. We don't have a trading desk.
Speaker 4: We specialize in product innovation, which is why our business
Speaker 4: model is to partner with others for distribution.
Speaker 2: Let me ask you something. You're a veteran of the
Speaker 2: ETF space. When I bumped into a couple veterans over
Speaker 2: the past year, and they are getting a little old
Speaker 2: man on launish about all of the new launches, you know,
Speaker 2: the single stock leverage ETFs, the buffer ETFs. It's sort
Speaker 2: of like what happened to my beloved ETF industry. It's
Speaker 2: gone crazy. Are you Are you part of that kind
Speaker 2: of mindset or are you a little more libertarian?
Speaker 1: You know, go crazy?
Speaker 4: You know, I am a libertarian with both in my
Speaker 4: politics and in my approach to business. I love exploring
Speaker 4: new ideas, and if somebody wants to launch a three
Speaker 4: x leveraged in Vidia single stock ETF, more power to them.
Speaker 4: I'm not going to be a buyer, but the marketplace
Speaker 4: sort out the good ideas from the bad. I'm a
Speaker 4: huge proponent of free market.
Speaker 3: Well, I guess that's a pretty interesting way to bring
Speaker 3: it back to next. So when do you decide that
Speaker 3: it's your any of these holdings are no longer worthy.
Speaker 1: Of being in your in your team. It's the exit strategy.
Speaker 4: The exit strategy is very simple. If it's been readded
Speaker 4: to the top five hundred to the top thousand, then
Speaker 4: it's no longer a reject, so it comes out of
Speaker 4: our portfolio. So it's as you said in the opening tagline,
Speaker 4: out with the new and in with the old. So
Speaker 4: the second way you get kicked out of our index
Speaker 4: is after five years, because there's this window of time
Speaker 4: of five years in which you get twenty eight percent
Speaker 4: average incremental return over the next five years. That's five
Speaker 4: percent compounded per annum. It dissipates after the first five years.
Speaker 4: It's still positive, but it's not as interesting.
Speaker 2: On the five years. Is that because once it gets
Speaker 2: kicked out, you need active managers to have some time
Speaker 2: to sort of sort through and go, wait a second,
Speaker 2: this is undervalue. But if it lasts five years as
Speaker 2: a dog, it's just bad.
Speaker 4: I think there's truth in that. Although a beautiful counter example.
Speaker 4: Dillard's is a small department store that I believe has
Speaker 4: been in the Russell one thousand, four separate times in
Speaker 4: the last thirty years. It's been kicked out four times
Speaker 4: the last time it was kicked out was two thousand
Speaker 4: and seven.
Speaker 2: That is a great We do trivia shows on here.
Speaker 2: That is a killer Jeopardy one thousand level question right there.
Speaker 1: Four times.
Speaker 4: Huh yeah, And the last time was twenty seventeen, and
Speaker 4: it's up something like five hundred and fifty percent since then.
Speaker 4: Most of that was in the first five years that
Speaker 4: I'm guessing that next year they'll probably be readmitted for
Speaker 4: a fifth time. So if index funds buy high and
Speaker 4: sell low, buy high multiple stocks when they're added, sell
Speaker 4: low multiple stocks when they're kicked out. We try to
Speaker 4: buy low and sell high by buying deeply out of
Speaker 4: favor and selling when they come back into favor. Now
Speaker 4: some of them, roughly half of them never do come
Speaker 4: back into favor. But if the ones that underperform underperform modestly,
Speaker 4: and the ones that outperform underperformed by a big margin,
Speaker 4: you've got a winning strategy. So I think it's a
Speaker 4: lot of fun. I think it's a cool idea. I
Speaker 4: think it's also a way to complete your market portfolio.
Speaker 1: If you own.
Speaker 4: Russell one thousand or s and P five hundred, you
Speaker 4: don't own the stocks that aren't in the index. This
Speaker 4: is a way of cherry picking out of that roster
Speaker 4: companies that were once successful, that are dirt cheap and
Speaker 4: that have in many cases better chances than the market
Speaker 4: thinks of bouncing back. And that creates a completion strategy
Speaker 4: that can fill out your portfolio nicely.
Speaker 3: Now I'm actually I am curious about that bottom twenty
Speaker 3: percent that you that you mentioned earlier, that screening mechanism.
Speaker 3: Is that just a one time thing or is it
Speaker 3: every single time that the that the index rebalances.
Speaker 4: Just every rebalance, so it's.
Speaker 1: In constant constant flux. Basically what's in the portfolio?
Speaker 4: Right? So that that gets back to the earlier question,
Speaker 4: what gets you kicked out of this index? If your
Speaker 4: quality tumbles below that threshold, you're out. If you've been
Speaker 4: in for five years, you're out. If you are readmitted
Speaker 4: to the top five hundred or the top thousand, y're out.
Speaker 4: So the goal is to have rejects that have a
Speaker 4: good chance of a rebound.
Speaker 1: Rob real quick.
Speaker 2: I have to squeez in this sort of ETF NERD question.
Speaker 2: Earlier on you said, well, smart beta is you know
Speaker 2: indexes or ETFs that look for value basically. Now, smart
Speaker 2: beta has morphed into many categories qualities side sure is
Speaker 2: you could you consider growth or momentum to be a
Speaker 2: smart beta ETF.
Speaker 4: I don't, but keep in mind fundamental index was the
Speaker 4: strategy that prompted Towers Watson to coin the expression smart
Speaker 4: beta in the first place, and they coined it based
Speaker 4: on this is an idea for how to capture beta
Speaker 4: exposure to the market that's smart, that has a rebalancing
Speaker 4: component for that beautiful two thousand and nine rebalance. So
Speaker 4: they then went and looked for other strategies that do
Speaker 4: the same thing, that break the link with price equal weighting.
Speaker 4: As simple as it is, is smart beta. Well, the
Speaker 4: term got taken over by the industry and attached to
Speaker 4: everything under the sun, including ideas that were really smart
Speaker 4: and ideas that were really stupid. And so there's some
Speaker 4: very stupid smart beta strategies out there. I'd put a
Speaker 4: momentum in the not smart beta category. I wouldn't call
Speaker 4: it stupid, but it certainly doesn't contratrate against stocks that
Speaker 4: are falling out of favor. It gets you out of them,
Speaker 4: and so it winds up doing the opposite of what
Speaker 4: the original term smart beta meant growth. Likewise, quality always
Speaker 4: trades at a premium, so quality could be smart beta
Speaker 4: depending how it's implemented. Most of the time it's implemented
Speaker 4: cap weighted, which by definition isn't smart beta. So I'm
Speaker 4: just describing the much narrower definition of smart beta that
Speaker 4: used to exist. The term as it exists now doesn't
Speaker 4: mean anything.
Speaker 2: Yeah, it's a big tent at this point. But Joel
Speaker 2: Quick anecdote, I remember when smart beta was all the
Speaker 2: debate at all the conferences. It must have been like
Speaker 2: ten years ago, twelve years ago. Is at a conference
Speaker 2: and this advisor was like smart beta. So let me
Speaker 2: get this straight. If I buy a smart beta ETF
Speaker 2: and then short beta, am I long smart?
Speaker 4: Oh? I love it. That's great.
Speaker 3: I think, I think crowd think you are okay, rob
Speaker 3: final question, what is your favorite ETF ticker other than
Speaker 3: your own or any that you're affiliated with.
Speaker 4: Oh gosh. Perth Toll is one of my favorite people
Speaker 4: in the ETF world. She came up with an idea
Speaker 4: of investing in emerging markets waited by how free their
Speaker 4: economy is, how free their society is, and zeroing out autocracies.
Speaker 4: And I love the ideas. So I was actually a
Speaker 4: seed investor UH when she launched the fund. UH ticker
Speaker 4: FRDM Freedom. It's great, well, very cool ticker.
Speaker 3: We should check back in with. It's been a while
Speaker 3: since we spoke with her, Robert or not. Thanks so
Speaker 3: much for joining us on Trillions.
Speaker 4: Thanks for the invitation. This has been great fun as always.
Speaker 5: Thanks for listening to Trillions until next time. You can
Speaker 5: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 5: or wherever else you'd like to listen. We'd love to
Speaker 5: hear from you. We're on Twitter, I'm at Joel Webbers Show.
Speaker 5: He's at Eric Balchunis. This episode of Trillions was produced
Speaker 5: by Magnus Hendrickson.
Speaker 1: Bye