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Chapter 1: What are Exchange Traded Funds (ETFs) and their significance in investing?
Hello, welcome to the Australian's Money Puzzle podcast. I'm James Kirby. Welcome aboard, everybody. Well, this is our last podcast before the federal budget. And I wanted to do this for a while, which is to have a special episode on ETFs, exchange traded funds. And the biggest player in the market is Vanguard. And the CEO of Vanguard Australia is Daniel Shimsky. And he's my guest today.
How are you, Daniel? Good. Thanks for having me, James. Nice to have you on the show. We have so many questions about ETFs. They roll in all the time and I think they have become very important to our listener base. ETFs as a core probably most of the time of their portfolios.
And I think secondly, as an access point, if you like, to other markets where once upon a time it was very difficult, obviously, apart from buying managed funds, like whatever was around at the time, Perpetual, Platinum, Magellan. These days, just as easily people will buy an ETF and that's how they take their... original sort of excursion into global markets, particularly the US.
I'm just looking at the Vanguard suite of ETFs and they are, in terms of the money that goes into them, they're the biggest players in our local market by far. You've
Tell me if I'm wrong, but it seems to me that Vanguard has been terribly careful about getting involved in what I would call the widening of ETFs, that for most people, they just were a mirror, a plain vanilla reproduction of a market. So you could buy the S&P 500 or the ASX 200. It's evolved way beyond that. But you guys seem to be resistant maybe to some of these innovations?
Yeah, well, first of all, I would echo those comments, James. I mean, we've just seen such tremendous growth in ETF volumes and all sorts of different investors, which is great. But you're right. I mean, there is a point where we won't go any further in terms of the types of ETFs that we launch. We're not...
an organization that'll just try to launch as much product as we can that's not who we are but we do think where we can launch a product where it will improve investor portfolios and it's low cost and it's simple to understand that's our space and that's where we feel like we can add value so look we still think that investors are best served if it's low cost if it's diversified index solution.
And that should be the core of an investor's portfolio, in our opinion. So, look, we've launched more product this year than we have for some time. As you say, we launched a suite of S&P 500 products. We launched global technology, international high yield. And again, they fit, we think, within individuals' portfolios. So, you know, we were asked to launch those and we have and so far so good.
But just to maybe finish the point, Exactly. As you say, we are much more cautious at that speculative end of the spectrum. And it's really hard to value speculative investments if there's no cash flow. And we'll leave that to others.
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Chapter 2: How is Vanguard evolving its ETF offerings in Australia?
And just like an active managed fund, active managers are ultimately taking bets on what might be happening out there in the market. And look, it's not something that we do here in Australia and we'll stick to what We think we have proven we're good at, and I certainly don't foresee any change in that in the coming years.
Okay. So just to make it clear, you don't do it, but your rivals will launch active ETFs in various ways. And what I wanted to ask you was... As ETFs get classified as more and more active, and in the US, obviously, they've reached a level which is quite exotic. I think people would be stunned to figure out what some of the products that are available in the US that are called ETFs.
What I ask you is, has the gap between managed funds as we knew them, which was a bunch of stock pickers in an office, basically picking stocks, and index funds, which do not do that, which reflect indices, has that gap narrowed?
Yeah, look, I mean, I think there are many more active solutions out there and I imagine that will only increase. But look, I think, you know, what we keep saying is it's really hard to actually beat the index. And you've seen the SPIVA report, the S&P index versus active report, James.
And, you know, it would show that irrespective of whether it's a managed fund or an active ETF, active managers find it really hard to beat the index. If you look at the last if you look at a 10 year period, 90% of active managers have underperformed.
And that's not to say that investors shouldn't be investing in active, but we believe the core of one's portfolio should be low cost index solutions. And if you want to surround that with some active, we think for the right risk, for the people willing to, as long as they understand their risk tolerance, that can make sense. But there's certainly a lot more active ETF providers out there and
Again, the transparency, the liquidity, the accessibility of the ETF wrapper, I think is really appealing. But investors need to understand what they're buying and the risks that they're taking on.
Yes, that's exactly what I was driving at, that it's evolving all the time, folks, and it's worth knowing and not assuming, by the way, what you might have thought an ETF was when you first heard about them, perhaps 10 years ago. It's not what they are today in many cases. Okay, just before we go to the break, I want to give people an idea just how big Vanguard is.
I also want to bring up the point that, and you might explain, it's not actually a company in the traditional sense. It's still sort of a mutual, isn't it?
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Chapter 3: How does Vanguard ensure low-cost investment options for investors?
And we sort of consider it much closer to, I would say, gambling than actually investing. And people can do what they want with their money, James, but need to keep eyes wide open in terms of what investing is. And it's only a productive asset, something that compounds over time. And the concern we have is that
blurred lines between you know what we would call it gambling and investing and you know people can get very excited about and exhilarated in the moment and it can do real damage to long-term wealth creation so you know we are concerned about that okay right
Now, also, I wanted to talk to you about the budget and you've got, you had some very clear policy suggestion for the government, which we'll see if they come up with it in the budget about housing. Just before we talk about that, also in the budget coming up, we know, we're pretty certain in Australia there's going to be a change to CGT, capital gains tax.
We've been talking about it on the show. It's highly likely that capital gains tax will no longer have a discount of 50% if you hold shares for more than a year. Rather than that situation, they're going back to the old situation where it's going to be inflation indexed every year. Big outcry about that from many investment leaders here. I have two things to ask you.
One is specifically, this is a question without notice because it only happened this morning. Chris Brickey, who you may know, Stockspot, who is a great fan of ETFs, but he has put out something this morning saying that the ETF investors will lose, will over 10 years, will make less. on their after-tax returns and he's modelled various outcomes for ETF investors on the change to CGT.
That's one thing. Do you think that this tax policy will cool off investment in ETFs and shares if CGT rules are tighter than they were?
Yeah, look, possibly, and again, we obviously haven't seen any particular policy detail yet, but we would be concerned about any CGT changes that, I guess, discourage everyday Australians from investing in capital markets and ultimately building wealth. So, you know, that is concerning for us. I think we're seeing record number of young investors invest in capital markets.
And we think that's great. You know, markets have delivered great returns and over time they will. So anything that discourages that or gets in the way of that, we're concerned about that. And it's one of the reasons why
measures and love to talk to you about our My Investments idea, but that's why we think if there are going to be changes to the CGT, complementing that with actions that help Australians or younger Australians invest, you know, it could be really meaningful and we think they have merit. So look forward to talking to you in a moment.
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Chapter 4: What is the difference between active and passive ETFs?
Yeah, but I think if you want to continue having that exposure with that graduated company, so to speak, then you can continue that journey and buy maybe the ASX 300 or different global market indices, which is where that company will most likely show up. So I think it's a great question. And again, small caps, really interesting space.
We think of that as a real satellite that can sit around a broadly diversified, I guess, core index solution. But it's a great question from Blake.
OK, well, thank you, Blake and Trevor and Bosh for the questions. And thank you, Daniel Shrimsky, for talking to us all the way from Los Angeles airport, to be precise, this morning. Good to have you on the show. Thank you very much. Enjoyed it and look forward to next time. Thanks, Daniel. That was Daniel Shrimsky, the CEO of Vanguard Australia. Very good.
Let's have some correspondence, themoneypuzzle at theaustralian.com.au. As you can see, sometimes the questions are there for a while, but then I find the ideal person to answer them. OK, today's show was produced by Leah Samaglou and our email is themoneypuzzle at theaustralian.com.au. Talk to you soon.