Tyson, What Do You Think Of ETF's?
During the past week I have been up in sunny Townsville to surprise my parents with a visit and spend some time with them. While this has been brilliant, it hasn’t meant that I haven’t been working away still (in fact often these visits involve more meetings and client queries than a standard work week).
As my existing clients know, I do not want to be just your advisor. In fact, if you are just looking for a transactional relationship, I would say that I am not the advisor for you. I love becoming involved in my clients lives and many I consider to be among my closest friends.
Yesterday afternoon I went to watch the footy with some clients and their early 20’s kids, I have to admit a pint or two was had. Eventually, as it always happens, conversation turned towards what was happening in the financial world and then I got asked one of the most common questions of the past 5 years. One of kids asked “Tyson, what do you think of index funds and ETF’s? I’m thinking of putting a couple of thousand into (I’ll leave the ETF unnamed)”
The answer to this one is always the same, although my wording may change from time to time. In a nutshell my response will typically be: “In general I am a very big fan of ETF’s and Index style investing. The ability to get exposure to hundreds or even thousands of shares/bonds/other assets in a low cost, low fee transaction is amazing for investors. Over the long term, it has been proven to be nearly impossible to consistently beat the market index and trying to pick fund managers that will do is about the same odds of me kicking a series winning field goal for the Maroons this year. The downside to these though is not all ETF’s and Index funds are created equal. There can be some huge differences in how the sausage is made.” The index fund and ETF industry is massive. Blackrock (iShares) and Vanguard are two of the biggest players in the space, but I don’t think the majority of people realise just how much money these low-cost managers actually are responsible for investing.
For a little perspective, in 2020 the Gross Domestic Product (a measure of the value of all of the goods and services a nation produces) of Australia was roughly $1.33 Trillion United States Dollars. A truly staggering sum. To write it out is, $1,330,000,000,000. It’s so large it looks like typo but trust me it’s not.
Blackrock and Vanguard combined have assets under management globally that exceed $17 Trillion. More than 10 times the entire value of the Gross Domestic Product of Australia.
Needless to say, with that much money under management, there are now a world of Index and ETF products that are significantly different from how they were in the past.
The earlier ETF’s focused on simple ideas such as holding the 200 biggest shares in Australia based on how big they are (the bigger the company, the more they bought) and doing so at a very low cost.
Today there are ETF’s that cater to investment niches such as: the value factor (looking to buy super cheap businesses), the quality factor, investing only in ethical companies, looking to utilise an equal weighting methodology, investing only in banks, investing only in oil and gas, investing in technology, investing in high dividend paying stocks, investing in high growth companies etc.
With the growth and specialisation of these products, I am waiting for the day that someone releases an ETF that only invests in companies with someone called Tyson on the board. While I’m clearly joking with that one, the fact remains that these products are becoming far more complex, specialised, and more expensive than the initial products.
Take a little time to look under the hood of the ETF you are thinking of investing in or come have a chat me and the team.