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Stefan Angelini is Joined by Blair Modica to discuss all things Index and ETF investing. You'll find out what people think is normally a boring and passive asset class, can become quite strategic and active.
Stefan Angelini
Okay. Alright, so let's go. Hey, welcome to another episode of the investor type podcast and video series. What we're talking about today is index investing or investing into ETFs. Now, you've probably seen this become huge in the last few years, probably the last 10 years, as everyone started looking at, well, if I'm a passive investor, and I want to invest for the long term, why don't I take a market approach? And that's essentially what we're talking about today, taking that market approach or investing into index funds, and I'm here with Blair Modica from Beta Shares. Beta Shares are basically Australia's largest index fund investor or fund manager. They they've got under over $10 billion. Correct. And the management at the moment, Blair is going to be the man to take us through what exactly is an index fund? So Blair, please tell me mate. Welcome aboard.
Blair Modica
Thanks for having me, Stefan. Good to be here.
Stefan Angelini
Lovely. What's an index fund?
Blair Modica
Yeah, look, absolutely an index fund or an exchange traded fund. An ETF is a basket of securities that are packaged up into one top of investment now the best way to explain that is, say a basket of a hundred equity securities. I think BHP Rio Tinto packaged up into one investment and then bought and sold on the stock exchange.
Stefan Angelini
Okay. So basically, the lot would you say the largest companies in a sector
Blair Modica
Well it can be, it can certainly be any type of investment vehicle we want. So some of the popular ones in Australia are the ASX 200. And you can buy that as an ETF. And then internationally, something like the NASDAQ 100. So at ticker code NDQ gives you access to the top 100 securities on the NASDAQ
Stefan Angelini
Right. So that's really interesting. So we could when you talk about index funds, you don't have to just stick to Australia and the Australian Stock Exchange so you can actually choose where you want to go around the world.
Blair Modica
Absolutely.
Stefan Angelini
Does that go even deeper where you can start investing into different sectors?
Blair Modica
Certainly does. And certainly over probably the last 15 years, the market has really started to expand into not just index type, you know, top markets but but certainly thematic top trades as well. A good example of that is the Beta Shares Hack Fund, which invests primarily in global cyber security companies. So an interesting thematic going forward into the future for a growth investor.
Stefan Angelini
Right. So where people might love a specific sector, whether it be the software security sector, you can buy an ETF. Does that take the largest companies in that sector from around the world into consideration?
Blair Modica
Yeah, really good question. So for, for example, with hack it does, so it invests in companies from the US, Israel, China, a bunch of different countries, and it's by market capitalization. So the largest companies are put into that portfolio.
Stefan Angelini
Right. And when we look at our market cap, it's something that the mortgage markets generate. But you can also apply that same style investing with sub securities into things like ethical investments.
Blair Modica
You certainly that right
Stefan Angelini
right you can that's been a huge topic over the last few years with greenhouse gas emissions coming out the move towards electric cars or driverless cars. Have you seen a lot of flow is going towards that top of an index fund?
Blair Modica
Yeah, it's really interesting. You mentioned that beta shares took out its first ethical fund around about three years ago. Now the ticker code for that ETHI. And that's a global 100 investment into the top 100 ethical companies deemed by a screening process. And that's a positive and negative screen. So the positive bang that you need to be 60% more carbon efficient than your peers. And then we run a whole bunch of negative screens. So whether that's carbon emissions, fossil fuels, exposure, gambling, tobacco, armaments, a bunch of different negative screens to wait at companies that we think aren't ethical
Stefan Angelini
Yeap.
Blair Modica
And include companies that are trying to do the right thing by the world
Stefan Angelini
Right. So you don't have to take the broader market approach, which is fantastic. And with a changing environment and changing dynamic dynamics of what people want to put their money into these type of investments mean you can make a return on your money, but you don't have to be pumping up the tires of the big players who might be doing bad things to the world.
Blair Modica
Exactly right. Look, what we've seen in that time is that investing ethically doesn't mean you have to give up returns. In fact, it's performed very well. And there's probably a few reasons for that. I mean, when you look at some of the ethical companies included. It's a lot of the technology thing where high growth companies
Stefan Angelini
Yeah.
Blair Modica
And and certainly they've done very well over the last few years. So we've seen that by investing ethically, you certainly not giving up returns.
Stefan Angelini
Yeah, yeah, yeah, so there's obviously a lot of different types of of index funds or ETFs. In your, within your business, approximately, how many do you guys have access to?
Blair Modica
Yeah, so we have around about 60 ETFs in the market that covers the whole gamut of I guess, asset classes. So you know, bread and butter is cash and fixed income. So triple A cash basically invest in bank deposits, negotiating a rate higher than what you'd normally see in the market, and people invest into that get a monthly distribution of cash and it's quite a secure investment. We then go up the August risk chain into different types of fixed income equities, so both Australian and international equities. The thematic top tribes I talked about global cybersecurity global energy companies is ethical investing. But but certainly then moving more into diversified one stop shop type trade. So you can buy an ETF that covers the whole world in one trade and then sit on that and, and basically diversify your portfolio very easily
Stefan Angelini
Right. So you're getting access to a broad market approach or or big portfolio of securities. And that takes the risk out of stock investing where people might normally think of buying one buying a stock, and it goes up and down has huge volatility. Whereas if you buy a market, you essentially got a diversified approach.
Blair Modica
And that's the way I would explain it by diversifying your risk from one security or one stock into potentially hundreds, you're diversifying your risk away in some manner
Stefan Angelini
Right. One of the great things about ETFs is you don't have to just go into one of them. And that's what's becoming really relevant now. And we'll touch on that. It was before knowing that or I'm going to invest an index are going to be the world index, the Australian index of property index, but you really go into the depths of it now and a lot of people, Warren Buffett was one of the people that said Invest when others are fearful and be greedy when others are fearful and be fearful when others are greedy. And you can see things happening in Europe now where there's a lot of fear in the market over there. People still don't know what's going on over there. But you've got a European ETF as well. Which of course might for those risk taking people might be drawn to something like that.
Blair Modica
Yeap
Stefan Angelini
I could imagine.
Blair Modica
Yeah, absolutely. Look, I think there's a the way the ETF markets developed in Australia, there's certainly something for all risk appetites and the and all where there's, I mean, you talk about Europe, certainly, there's European ETF and to go into it a little bit further. If you are bullish on the market, you can certainly gear into the market via one trade. And you can also go short so if you're expecting the market to crash tomorrow, you could express that view in a short position on one on an ETF like a bear fund.
Stefan Angelini
Yeap. So essentially, you can take the you can be so strategic when you're using index funds. You don't really have to just say sit back and let it go, you can start to be more strategic about where your money is invested. If you're a real market lover, and you love the macro economics and how the world is performing, then tell me from index funds where you can choose your strategy might be really attractive.
Blair Modica
Yeah.
Stefan Angelini
Something like that.
Blair Modica
Absolutely. Look, I think the key there is you can now purchase, you know, the wider market in one trade. So you can you can take an A 200, mix it with a NASDAQ, or or a European type ETF to get global exposure, credit that as you call part of your portfolio, but then if you do want to take a tactical view into global cyber security and ethical fund, or emerging markets, you're also able to do that as well. So you can construct a portfolio completely via ETFs, you can certainly use that as a core and then break off into say, a hedge fund is a satellite approach.
Stefan Angelini
Yeap.
Blair Modica
And build your portfolio that way.
Stefan Angelini
Yeap.
Blair Modica
So in some respects, as many ways to skin a cat.
Stefan Angelini
Yeah, I know over the last few years, a lot of people have been directing their money into index funds. A lot of people been loving it. They've gone away from the old school managed fund where they take your money, and they're strategically placed into different kinds of stocks. Why do you think people have gone away from managed funds and more focusing on just the index approach now?
Blair Modica
Yeah, it's a really good question. I think it. And look, let me preface this by saying there's a lot of quality managers out there. But a lot of the time active managers aren't able to perform consistently, what ETF investing gives you is that market top performance, and we've seen that that's as well as lower costs generally by investing in ETFs has really saying that the flows towards ETF increase. So the market at this point in time is around 60 billion in Australia and obviously a lot bigger over the world. But but in Australia, the markets growing quicker than the rest of the world. I think it's a 48% compound growth rate in Australia. And certainly we say that looking to continue, but I guess the key points there are you getting market returns, and you're also getting a product it's cheaper in cost compared to say a traditional active manager.
Stefan Angelini
Yeah, yeah, yeah and that's one of the big draw cards as well, the cost to invest in some of these things. So these managed funds might take somewhere between a point 8 and a 1.5 percent management costs to actually manage your money. Whereas index investing can be anywhere between a point one to point eight spot on a lot lower, but you can still get those access to market returns.
Blair Modica
Exactly.
Stefan Angelini
And if you look at the market returns were in 2020, at the moment, over the last five years, on average, have been pretty astronomical. Fairly great.
Blair Modica
Yeap.
Stefan Angelini
So it's been a great approach to keeping costs low, but keeping investment returns
Blair Modica
What I should say as well as a lot of people have had success with blending ETFs with active managers just to bring the costs down. So taking that core index type of approach and then adding an active manager maybe as a 50-50 split to try and generate some alpha over the market.
Stefan Angelini
Yeah. Tell me, index funds sounds amazing. What are some of the times I haven't really performed that? Well?
Blair Modica
Yeah, good question. I mean, in general, an ETF is operates the exact same way as a managed fund. So you say in something like the GFC when the markets sold off, you're investing in the markets today for the performance was poor. Now that's that's not really to be any surprise or be surprised about given the market performance was poor, active management filed, or I shouldn't say filed, I mean, the markets sold off and therefore stock sold off. And people lost money. So ETFs essentially, for the most part reflect the performance of the water market in general. And there should be no concerns with respect to investing otherwise, I mean, the ETF is is essentially a reproduction of the market and the way it moves up and down. And that's essentially how they function.
Stefan Angelini
Okay, so let's look at 2008 2009, the market dropped approximately 40%. And you'd expect that if you're in the S&P if you're in the ASX 200, that your index fund investment would fall by the 40% as well spot on, okay. So it's just sort of tracked market returns. When you look at the papers or you read the papers and you see that the the index or the S&P, the ASX 200, or 300 has dropped by 20 points or 30 points. Expect your your index funding or ETF into that specific asset class that go with it. There's a lot of different people out there that like a lot of different investing types, I'm going to property, some got some people like investing into that individual stock, who's the type of person or the type of personality or the investor type that will typically invest into an index fund?
Blair Modica
Really good question. And there's probably no specific person that that would invest in an ETF. I mean, it could be anyone, but I can give you some ideas of what type of investors would suit different types of investing. So for example, an index fund may fit really well into someone looking to accumulate well, putting some of their money insight and A 200 top of exposure and looking for that to grow over time. But it could also you know, suit someone that's that's established looking to generate some returns across the market and mixed in with some other risk management techniques could be a really good way to to have a really well diversified portfolio. It can also suit I mean, if you look at growth investors, something like a NASDAQ or a Hack Fund is going to perform in a growth like manner. And really, I guess accelerate returns when those stocks are doing really well. But you can also invest in manage risk funds through at ETFs as well, where you're essentially paying for a risk management overlay over the top of say, the ASX 200, or the water MSCI world.
Stefan Angelini
Okay, so it can be for the really, really risk averse,
Blair Modica
Yeap.
Stefan Angelini
Or someone that likes to take more risk in their portfolio but still get a market approach.
Blair Modica
Absolutely. And then you look at cash and fixed income, I mean, triple A cash is basically bank deposit money. So you're investing in in bank deposits, and therefore it's quite a relatively safe top of investment that's generating monthly income for you. So that might infer that that might be preferable to someone that's a defensive type of investor looking to generate yield across a different time frame. And certainly from triple A cash you can then invest in flooding, right, no bonds, corporate credit all the way up to hybrids. So really, for for all type of investors there is something in an ETF for everyone.
Stefan Angelini
Well, that's that's a lot to take in index fund investing is it's a lot more sexy than I originally thought. Coming into this you probably thought just index fund investing would be just a boring boring approach to investing in a very passive approach. But as you've learned to you with with Glenn Modica, you can get very active in the way you do invest in it. Or you can still take that passive approach and just let the long term runs. Take it out. So I hope you've learned something here. If it is your type investing investment to go into if you did like what we had to say or you have any questions, leave a comment below. Blair, I want to say thanks a lot, mate. I really appreciate you taking the time to come in world of world knowledge.
Blair Modica
Stefan has been an absolute pleasure. Thanks for having me and hope to do a few more. They say
Stefan Angelini
Look forward to chatting soon. Thanks a lot. Speak decent beautiful, good stuff.