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Bogleheads on Investing with Debbie Fuhr and Robin Powell – Episode 10

Post on: June 3, 2019 by Rick Ferri

Debbie Fuhr and Robin Powell are our guests on Episode Ten. Our focus is on the global growth of index investing and ETFs.

Debbie is the Managing Partner & Founder founder of ETFGI, the world's leading independent research company. ETFGI has become the dominant independent research and consulting provider providing insights on the entire global industry of ETFs and ETPs listed globally as well as the service providers.

Robin is a journalist who lives and works in the UK. He is an investor advocate, consultant to progressive financial advisers and asset managers in the UK and US, and the founder of The Evidence-Based Investor website.

This podcast is hosted by Rick Ferri, and is sponsored by the John C. Bogle Center for Financial Literacy.

You can discuss this podcast in the Bogleheads forum here.

Listen On


Rick Ferri: Welcome to Bogleheads on Investing episode number ten. Today we have a special program. We’re going to look at index investing and exchange-traded funds around the world with two special guests, Robin Powell and Debbie Fuhr.

Hi everyone. My name is Rick Ferri  and this is Bogleheads on Investing. This episode is sponsored by the John C. Bogle Center for Financial Literacy, a 501(c)( 3) corporation.

We have a special program today. We’re going to be looking at the growth of index investing and ETF investing around the globe. And I have two special guests: Robin Powell, who is an award-winning journalist and the creator of The Evidence-Based Investor website; and Debbie Fuhr, who is the managing partner and founder of ETFGI, the world’s leading independent ETF research firm. First up is Robin Powell.

Welcome Robin.

Robin Powell: Rick, it is a real honor to be on the podcast. Thank you for having me.

Rick Ferri: Well thank you, and a reason I wanted you on the podcast is because you’re going to tell us all about the growth of indexing in Europe. You have been an incredible advocate and growth factor to educate investors and advisors in Europe about index investing. Your passion for indexing came from an unusual place. You were a mainstream journalist and worked at news services, and you’re also doing documentaries. How did you go from that to becoming such an advocate?

Robin Powell: I’ve been a journalist all my career. In fact I still consider myself to be a journalist. I still work as a freelance. I was a general news reporter mainly in television for ITV Sky News, a little bit for the BBC. It took me to some fascinating places: Baghdad under Saddam Hussein. I was one of the first journalists to really report on what was happening at Guantanamo Bay and had some really interesting assignments. But of all those fascinating stories I have worked on I still contend that in many ways the biggest and most interesting story is the ongoing story that I’m working on at the moment, which is the kind of rigging by the industry of investing. It’s a fascinating story, and I’m working full-time on it now. 

Rick Ferri: By the rigging you mean financial firms taking advantage of investors?

Robin Powell: Yes there are people who see it as a massive conspiracy theory here. That the industry, rather like I suppose big tobacco in the 60s and early 70s, like the fossil fuel industry, for example, use their muscle and their might to deflect consumers’ attention from the academic evidence. And I do actually think there is a quite a large element of that going on. I think just in more simple terms you can pretty much explain anything that happens in economics by incentives. You know if we’re financially incentivized to say or recommend certain things, do certain things, then we will. And I think that has just played out in the investing space and yeah it’s got to a stage around the world where really that the whole system is geared for the benefit of the people who work in it rather than the people they’re supposed to be serving.

Rick Ferri: Few years ago you found out about this by doing a documentary and you hooked on it. Can you tell us about that?

Robin Powell: Well that’s right. It was shortly after leaving television I set up my own production company, and we were approached by a wealth management firm in Birmingham, which is the city in the UK where I’m based, and they said, “Look we work mainly with high net worth clients but we feel that we have found the way to invest and not just the way for wealthy people to invest.” As I say they largely dealt with wealthy individuals but for everyone to invest and I suppose largely as a kind of pro bono initiative they just wanted to get the message out there.

They thought about writing a book, but then they’d heard about what we did, and said,”Well, why don’t we make a documentary”? So well, Rick that’s when I met you. I came out to America, interviewed a number of interesting people. I think we met at a Bogleheads conference in Pennsylvania. I think that the following day I interviewed the great Jack Bogle. We also went to Ken French up at Dartmouth and interviewed him. We interviewed Bill Sharpe over in California. And the documentary, I wouldn’t say it bombed in the UK but it was much better received in America, where, of course, you are very much more ahead of things, and you certainly were there in terms of awareness of the benefits of low-cost indexing. Here people took one look at it and thought, “What’s all this about.” And really it’s a measure of how far we’ve come in the last few years that people have really started to sit up and take notice.

Rick Ferri: I remember that interview because you talked with me for maybe 15 or 20 minutes and I somehow picked up your accent when I was talking with you. When we started interviewing I started speaking in this strange accent and my wife saw that and she said “what are you doing?” I couldn’t help it, I couldn’t stop talking that way. Well so you did the documentary and, like you said, it kind of bombed in the UK but something must have started the fire in you because you haven’t stopped since.

Robin Powell: Well Rick I think you have written about a moment in your career you’ve referred to your aha moment of realizing that indexing is the way to go and I think I remember you writing somewhere that you decided at that point that’s what your career was going to be from now on. That’s what your mission in life was going to be and I suppose I decided the same and I was I’ll be honest I was shocked. I was shocked that there is all this academic evidence out there about how we should invest and yet we have almost an entire industry which is geared up to encouraging us to do the complete opposite. I suppose that bothered me. I mean I’ve always been a bit of a sort of campaigning journalist if you like. I’ve always been interested in consumer issues and sticking up for consumers, sticking up for the little guy. It just inspired me and as you say I haven’t stopped.

Rick Ferri: Now the data is compelling in the UK for doing index investing just as it is in the US, in fact all around the world. One of the studies that we do over here is by S&P; Standard & Poor’s does what’s called the SPIVA scorecard. The SPIVA scorecard is published biannually and it looks at the performance of active funds versus various indexes started here in the US but now S&P/ Dow Jones indices does this report for a number of countries: Australia, Canada, Europe, India, Japan, Latin America, South Africa, and I just want to read you a list. This is from the latest SPIVA reports from all these different parts of the world and it happens to be just the three year data. In other words, over a three year period of time what is the percentage of times the index, and they use an S&P index for all of these, but S&P of course has indexes that track markets all over the world. What is the percentage of the local country or regional index that outperformed the active managers?

I’m just going to read the list and go straight down, some of these countries are small but some of them are big, and some of the regions are big. So in the US roughly 79% of the large cap active managers underperform the S&P 500, which is what they used. In Canada, over the last few years 94% of the active managers underperformed. In Mexico, 89% of active managers underperformed the local index. In Brazil, 84%. In Chile, 86 %. In Europe, which encompasses continental Europe and the UK 86%. South Africa 85%. India 91%. Japan was the outlier, it had only 57% of the active managers underperformed. In Australia 86%.

And what I found, there’s a lot of static. You’re always going to have one outlier, whereas one of the regions is going to be off, but 10 years from now it’ll be different, it’ll be a different region.

So if you look at this it’s just amazing to me as I look at all these numbers from all of these countries, it falls right about 80 to 85 percent of active managers across the board in all countries and as I get into the SPIVA report even more, I look at small cap, large cap, value, growth they’re all the same numbers in every country across the board.

Robin Powell: You raise a really interesting point Rick, and funnily enough I actually made a sort of follow-up documentary, How to Win the Loser’s Game which is obviously inspired by Charlie Ellis’s book from the mid-70s, and included an extended interview with Eugene Fama and various other people. And when that went out I had a number of people in the UK say, “But this is all about America, all the figures you’re giving us are all about US fund managers, Wall Street managers, and we all know that they’re dreadful.” And I really couldn’t believe what these people were saying. I mean I will spare their blushes, but shall we say these are very senior executives that, I remember one in particular at a very well-known FTSE 100 good company, shall we say, trying to tell me that this was an American problem and actually the rest of the world and particularly in the UK where we have good fund managers, of course, it’s not an issue at all, but clearly as your S&P data you just quoted shows, we’re all about as bad or as good as each other, frankly.

Rick Ferri: Sometimes big big-name managers who fall off the wagon help to show that active management isn’t all that it’s cracked up to be and you just had an example of that recently.

Robin Powell: When I started writing about active management and the kind of randomness of active fund returns and so on, a common retort that I would have from people in the UK was “What about Neal Woodford?” Well Neal Woodford is a very successful, very photogenic fund manager who ran a fund for Invesco Perpetual for many years which was very successful, which outperformed. Actually when you look at it on a strictly risk and cost adjusted basis the performance was not actually as amazing as some people imply sometimes that it is.

Notwithstanding that you know it was good and it put him on a pedestal. And he then subsequently set up his own company, Woodford funds, and literally that was exactly five years ago, 19th of June 2014 he set up a fund called the Equity Income Fund, it’s his flagship fund and the performance of it, Rick, has been consistently dreadful. It’s been going down, down, down.  Things have gotten particularly bad in the last 12 months and now big investors are starting to desert it and, lo and behold, on Monday they announced that they suspended trading.

The reaction to that story in the UK is really interesting. I mean everyone’s saying, ” Wow, we thought this guy was a genius. What’s gone on? He’s completely lost it.” Which of course as you know completely misses the point that actually outperforming the market, outwitting the collective wisdom of millions of people around the world is extremely hard, it’s extremely rare, and his chances, frankly, of ever replicating his performance at Invesco Perpetual at his own company were always very, very slim. And yet everyone’s acting as if it’s a huge surprise. Extraordinary.

Rick Ferri: We had a similar situation here in the US a few years ago with Bill Miller who ran the Legg Mason Capital Management Value Trust. He had a fantastic track record of outperforming  the S&P for 15 years in a row and he was literally the man until 2007. And in 2007 when financial stocks started to go down, he started loading up, and he bought Bear Stearns and Citigroup and AIG and by the end of 2008 his fund had lost 2/3 of its value and people jumped ship. And I’m still managing money now and I think he’s doing much better with a much smaller fund. But the point is that there’s always going to be someone who is an outlier who just by randomness alone there’s going to be a fund manager who does well.

Robin Powell: And something that really bothers me, Rick, is how many investors actually identified Bill Miller at the start of that amazing 15 year run, or whatever it was, or Neal Woodford at the start of his 20-year run. And as you know it’s in the nature of high conviction active management, and that’s what Miller was, and it’s what Neal Woodford is as well. It’s in the nature of high conviction active management that at some stage you’re going to underperform the market horrendously and Woodford went through a phase just before the turn of the millennium, I think ’98 – ’99 when he was in the papers, everyone was saying this guy has completely lost it. That was back then and of course he subsequently was proved right if you like and massively turned things around in the the 2000s, and everyone said he was a complete genius. So everyone talks about these outliers but even with those outliers, how many people actually identified them in advance and stuck with them through thick and thin? I’m sure it’s a very very small number.

Rick Ferri: Interesting that in the UK your equivalent of the Security Exchange Commission over here home near it’s the Financial Conduct Authority, the UK regulator. In 2017 they addressed a lot of these issues and a large report came out which sort of fundamentally changed how business is being done over there.

Robin Powell: Yes. So back in 2012 I think it was, we had something called the retail distribution review and that effectively banned commissions to advisors for recommending certain mutual funds and I think we were pretty well the first country in the world to do it. And the Netherlands was also one of the first. And very slowly now other countries around the world are starting to look to that kind of commission free approach.

Rick Ferri: But it’s very interesting in the US there has been no discussion about doing that.

Robin Powell: I’m amazed and frankly appalled at some of the stories, Rick, that I hear about the conflicts going on, in particular the kind of brokerage world in America. And in many ways you’re ahead of the game, you’re ahead of us in terms of fees – your fees are much lower than ours. The awareness of poor performing active funds is greater in the US than anywhere else in the world, and yet you have these horrendous conflicts which you know without getting political about it were going to be dealt with the fiduciary rule, and as you know that that hasn’t materialized or at least in the way that it was originally intended.

And then a couple of years ago, as you say, we had the report by the Financial Conduct Authority, the asset management market study and it basically found all sorts of conflicts of interest in the investing asset management industry really from top to bottom.

It also pointed out that after costs very few active funds actually outperform the market. I remember I was actually in America when this happened and I was at a conference, I was reading the report and I just could not believe what I was hearing. Here we have the UK regulator which, frankly, has been like all regulators around the world, has has been very very slow to get on top of this whole issue around conflicts of interest around opaque fund fees and charges and all of a sudden the FCA suddenly seemed to have sudden kind of conversion if you like. And you know it’s in the nature of these things that a report comes out and of course then it’s opened then to put out to consultation and the industry, then, the lobby sets to work on it and the final report was actually rather less damning than the original report that came out.

It’s exactly the same all around  the world. ESMA, the European Securities and Markets Authority brought out a report a few months ago and exactly the same thing has happened. I mean that the US and the UK fund industry lobbies are no better or worse than the lobbies in France, Germany, all these other countries as well and they too have been working on their own regulators to try to hold back the tide.

Rick Ferri: But things have been going well. I mean you’re growing, and your role is not only to help educate the public, but you also help advisors to educate their clients as well. Tell us about how things are different in the UK–type of messaging do you need versus, you know, you work in the US as well, and you work with US advisors. So I mean what are the differences between the two?

Robin Powell: Yeah, well I suppose the kind of rules are fairly similar, but both sides of the Atlantic, obviously in America you’re not allowed, the SEC does not allow as I understand it Rick, testimonial videos and so on. We can’t do those in America but we can do them here and they are very, very powerful. You know we call it social proof when people can actually see people like them. I used to use active funds, now I use index funds. I’m much better off, much more relaxed, don’t worry about the markets and that sort of thing. That’s very very effective.

It’s still a very raw issue here in the UK. I get the impression in America that people have actually now more or less accepted that passive is better than active. You probably might disagree with that but here it’s still a burning issue and I’m still very much in the minority, very much in the minority, and so I find the best thing is really not to get into arguments with people because very often people have had these very deep-seated ideas and particularly when you’re talking to other people in the industry, as well, you know they their whole careers they’ve been doing this for 30, 40 years some of them, they don’t want some journalist telling them that they’ve been wasting their time and more importantly wasting their clients money all of those years. So I do think you need to be emotionally intelligent, non confrontational, and really just present the evidence in a sort of unemotional way. And I think nothing as far as clients are concerned you know if you actually show them that they could end up with a retirement pot which is you know 25, 30, even 40% bigger if they use low-cost index funds, and other than rebalancing, do nothing else then that’s quite a compelling argument.

Rick Ferri: Well you’ve got some help, I mean there are some companies that have come into the UK recently, like Vanguard for example, you know is really growing a presence.  And they must be marketing their information and a low fee, that must be helping. And I’ll also make a plug for the Bogleheads forum. Bogleheads.org, we now have an international section and when you click that on we have at least one European country, Spain, which has their own forum. It would be nice for the UK to maybe start their forum.

Robin Powell: Absolutely, we’d love one.

Rick Ferri: Well you could start it Robin.

Robin Powell: Why not, why not. [Laughter]

Rick Ferri: You know this is the voice, if you will, of the individual investor speaking with other individual investors and it’s been very powerful here in the US because indexing in many ways has been a lot of word-of-mouth because there’s not a lot of money in this indexing industry. So people write articles, write books and then there are forums like the Bogleheads forum where it’s investor to investor helping out.

Robin Powell: And that’s really important, Rick, isn’t it? I mean humans we are very social animals and I think part of the reason why this whole active management speculating thing has just got completely out of control is that there were so many people doing it and so many people benefiting from it. Journalists, you know we gave them something to write about, it gave them advertising revenue. Analysts obviously, you know, get a lot of money out of it. Brokers, advisors, consultants. You see these people at conferences as well and they all kind of get together and they’re all talking about the latest thing to invest in or the latest fund to keep an eye on and so on.

And actually that’s why I think Bogleheads is really, really important because it’s a community of like-minded people who’ve actually discovered the truth if you like. And sometimes, even if you have discovered the truth, you need to be reminded of it every now and again, and again that’s why I think something like Bogleheads would be really really valuable here in Britain.

Rick Ferri: I have a saying that I got from someplace else but I don’t know the source: “The truth must be repeated over and over again because my lies are constantly being told.”

Robin Powell: Absolutely right yeah.

Rick Ferri: Robin, thank you for being on the show today. I greatly appreciate your time and good luck spreading the word.

Robin Powell: Rick it’s been a real pleasure and I’ve been a big admirer of your work and your articles over the years and keep up the great work.

Rick Ferri: Thank you. And now I’d like to introduce Debbie Fuhr. Debbie is the top ETF analyst in the entire world and I’ve known Debbie for many years. I’ve worked with her on many panels and I’m happy to have her with us today. Welcome to the Bogleheads On Investing Podcast, Debbie. 

Debbie Fuhr: Thank you. I’m excited to be here.

Rick Ferri: Well I’m excited to have you because you are one of my heroes in the indexing world. You are, I believe, the most knowledgeable person anywhere on exchange-traded funds and other exchange-traded products. You have the premier research company on  exchange-traded funds. How did you get into this back in the 1990’s?

Debbie Fuhr: Well thank you for those really kind words and introductions. So I got into it because I wanted to work for Morgan Stanley. I was offered a job initially to work in marketing for the equity division in London and the woman who was bringing me in ended up being moved

into another role, and a month later she contacted me and said they’re interviewing to find someone to come in and be the director of marketing for OPALS and ETFs. And so in finance everything has acronyms. And so OPALS at the time stood for Optimized Portfolios As Listed Securities. And they were very much like ETFs in that if someone wanted to invest in the S&P 500, Morgan Stanley’s trading desks – so I sat in sales and trading in the equity division – would go out and buy the underlying portfolio. And these products were listed on the Luxembourg Stock Exchange, which isn’t really a trading exchange but more a listing venue, and we would mark up and down, so kind of like the creation/ redemption in the ETFs, the ETF, sorry the OPAL, so for those of you who know ETFs, that sounds pretty similar to ETFs. And we wanted at Morgan Stanley to create ETFs and we partnered with Barclays Global Investors and MSCI to create a family of seventeen MSCI country ETFs which were called WEBS, World Equity Benchmark Shares.

Rick Ferri: Deb I remember the WEBS, and weren’t they the first open-end mutual fund ETFs as opposed to unit investment trusts which Spyders and Midis were?

Debbie Fuhr: Exactly so. Very good memory. And so my job was to market SPY, the unit investment trusts in the US for US exposure, and WEBS for the rest of the world. Many people didn’t get what I was saying when I was doing Spider and WEBS, and in 1999 BGI Barclays Global Investors rebranded those WEBS to be iShare’s because they were going to have a whole family of ETFs and so most of your listeners probably know iShares are now part of Blackrock. So Blackrock bought BGI, the rest is kind of history.

Rick Ferri: And the term exchange-traded fund didn’t exist for quite a while. Spiders and Midis and WEBS and OPALS, and they had all these different acronyms. How is it that the term exchange-traded fund came around?

Debbie Fuhr: Well you know it’s funny you should say that because I’ve been based in the UK now for 25 years and there actually were exchange-traded funds in Amsterdam for probably now over a hundred years. And so they were just traditional open-ended funds that were listed on exchange. Sometimes they had market makers and sometimes they didn’t. So when ETFs actually went to Amsterdam they called them tracker funds and not ETFs. They became known as exchange-traded funds because at the heart of it, ETFs are highly regulated funds such as 1940 Acts in the US, or UCITs funds, the regulations here in Europe, with some added benefits of being listed and traded on exchange. So it’s really to identify the fact that they were funds and they were exchange-traded. 

And you know I get disappointed when people say ETFs are asset classes or an asset class because inside of an ETF, as you know, you can have exposure to different types of equity benchmarks or fixed income or commodities, and you can also have things that are active. So it’s really a wrapper that allows you to package, like a mutual fund, many different types of exposure. And there are differences between a unit investment trust and an open-ended management company. And the reason the WEBS went down the route of being an open-ended management company is if you do a unit investment trust, that product must fully replicate, it can’t optimize or buy a subset, it can’t reinvest and it can’t do any securities lending. 

So when you came to these bigger, more diversified markets, where it was often difficult to buy all the securities, especially if the fund started with a smaller size or the ETF did, you needed to be able to buy a subset. So you would use a quantitative model to build a basket that would track the index but not fully replicate. And there are some benefits because it allows you not to buy names that are difficult to buy, it allows you to save on some transaction costs, but it does mean that it’s not going to track as well as a product that is fully replicating.

Rick Ferri: I remember also there were a couple of countries where one stock would be 50% of the entire exchange and it violated IRS rules and mutual fund ’40 Act rules to create a fund that had non-diversification like that, so the web structure, the open-end fund structure rather than the unit investment trust structure was the answer. 

Debbie Fuhr: Exactly, and another thing they could do is if there weren’t enough names in the index stocks, they are allowed to buy securities that are similar to the securities in the index such as some of the smaller European countries so that they could then be diversified. So there are some additional benefits that were accrued to the open-end management structure including being able to do securities lending and sharing that with the fund or the investors, being able to use derivatives and doing some other things that can benefit and reinvest at least in the short run. So it does add benefits to the ETF offering. 

Rick Ferri: I had a feeling that when you and I started going down memory lane that would get very esoteric very quickly. So how to pull it back to how you ended up starting your company after Blackrock, Barclays and so forth, like could you continue on? Sorry to have interrupted you.

Debbie Fuhr: No that’s okay. So maybe I should say I spent eleven years working at Morgan Stanley on the sales and trading floor. I had various roles so I was doing product development. I was doing sales marketing. I was writing research, sitting on the sales and trading floor until Spitzer came along in the US, and then rather than technically moving into research and changing where I sat and what I did, I started writing market commentary, became a managing director, and then the fixed-income division took over equity’s in 2007. 

I left with my team in 2008 and looked around for different places to go, liking ETFs a lot because I believe they offer a lot of benefits being low-cost, transparent, easy diversification, and uniquely democratic in that both institutions, financial advisers, and then retail have access to the same toolbox or products at the same small size with low cost which is quite unique.

Rick Ferri: And this is when you decided to join Barclays.

Debbie Fuhr: So decided that I would join Barclays Global Investors as a managing director to create ETF industry research for them and work on implementation strategy. So my first day at BGI was the day Lehman filed for bankruptcy. So that was an interesting first day. I spent about three years at BGI, which as many of your listeners will recall, BGI was bought by Blackrock because Blackrock was an active asset manager, saw the benefits of ETFs and index, and after that happened I decided I wanted to go back to the sell side, meaning to a brokerage firm so that I could interact with more clients and get more involved in the things that I enjoyed doing in the past. So decided to accept a job to be the global head of delta one strategy at an investment bank the beginning of July 2011 and resigned from Blackrock. That investment bank, as many often do, reorganized almost just two weeks later. I decided that given the changes at this brokerage firm it was probably unlikely that they would follow the strategy I thought they were going to follow.

I had offered to go set up my company at that point. We spent the summer at Starbucks putting together the plan for ETFGI, which is an independent research and consulting firm based in London. We offer paid for subscription research. We do some consulting work and we also do some events, and it’s been an interesting journey. Started it in the beginning of 2012 and have been able doing that to go and see the world. So I’ve actually been lucky to have gone to 63 different countries now, talking about ETFs at events that are organized by regulators or others, and sometimes I get to do fun things like when I was in Kenya to speak at an event I actually went to an elephant orphanage and adopted a baby girl elephant which means you’re paying for their milk for a year. And I went to the giraffe center where they’re trying to stimulate more giraffes of the Rothschild breed because they’re getting close to extinction. So sometimes you get to do fun things that you wouldn’t be able to do in your normal day job.

Rick Ferri: Now you went to 63 countries. I have a research report. It might be a couple of months old from you, that says that there are 58 countries that currently have exchange-traded products. Is it now expanded?

Debbie Fuhr: I haven’t been to all the countries that have ETFs and I’ve been to some countries that do not have ETFs. So as an example I’d been to Brunei and I was in Lebanon recently. There are countries that don’t have ETFs. It may be surprising to your listeners there are even ETFs in Iran. They have a type of ETF there that’s kind of interesting, which is physical real estate, and you might say, well what does that mean? So to comply with Sharia law, the asset manager would buy property. They would build a building with apartments. Sell the apartments and then pay back profits to the investors.

So you find around the world are some tweaks on what can be done and how it’s done. But it definitely has been an interesting experience to be involved in the industry. But I expect you to continue on for some time. I still very much enjoy what I’m doing.

Rick Ferri: So let’s talk a little bit more about the trends globally. What people are buying? What’s driving the assets to exchange-traded funds, not so much in the US but globally?  What are the big factors that are causing the growth of ETFs and driving assets to it?

Debbie Fuhr: That’s a great question. So I think it really comes down to for many investors and everyone would love to be able to be a great stock picker and pick something that’s going to do better than the market. And so most investors have this thought that they would like to find alpha either through buying stocks, buying mutual funds, buying hedge funds, buying something. That gets increasingly difficult, and that challenge of finding  active funds that consistently deliver alpha; hedge funds that consistently deliver alpha; or even as an individual picking stocks or relying on your financial adviser to do that is challenging.

So what you find is most investors are looking at this barbell approach to investing. So if they believe or want to believe that they can generate some alpha, have funds that are going to do it, they put money there. But as people invest in more asset classes, segments of the markets, types of exposures, they’re increasingly turning to index products like ETFs and sometimes active but mostly index, because the goal for many is to generate alpha through asset allocation and so you see this barbell approach to investing where it’s active stuff on one hand, index stuff on the other, trying to create good returns.

So I think that’s a big driver. I think that the fact that it is very difficult to find active funds that consistently deliver alpha is a big challenge and a driver. So if you look at the performance of say the S&P 500 index and you compare it to large cap active funds, and S&P every six months does what they call their SPIVA study, the last one I looked at said that on a three-year basis 79% didn’t and on a five-year basis 76% did not. So you can spend a lot of time trying to find the funds that are doing it. Now the likelihood of them doing it going forward is challenging, so many people decide going to index makes sense. We’ve also seen that ETFs have become a solution or a tool for many investors. For those that are more sophisticated that might use futures, if you’re not looking for leverage and just want to put money into the market or what I would call “equitize cash,” ETFs can be more cost efficient in many cases due to regulatory changes causing the cost of rolling futures to be more expensive. Many are using ETFs today for plain vanilla exposure rather than using futures.

I think robos have been a big driver getting people to use ETFs because every day in the US 10,000 turn 55 years old and when those people get to that age they start looking at where and how should I invest. Having that conversation about investing is often very challenging, where you don’t often want to tell your friends, your family you don’t know what you’re doing. You often don’t want to divulge how much money you’ve made, or making, and how much you saved or didn’t save. So robos are a very easy tool to go play with asset allocation to learn about the impact of cost. So buying less costly products help you over the long run. And many people at the end of that end up using ETFs because most robos use ETFs. And it’s also interesting because the average age of most Robo users is 47 and not Millennials.

But I think the real reason many people just use ETFs is today when we have so much political and economic news happening in the market, people want to be able to adjust their allocations in a very easy and timely fashion. And within the US alone over 2000 products, globally we have 7700 ETFs with $ 5.7 trillion. 

People use ETFs in many different ways so to equitize cash, short-term tactically to adjust, and about half of investors use ETFs for more than two years.

Rick Ferri: Individuals though aren’t the only ones who are propelling this market. Some large institutions are doing it also, correct?

Debbi Fuhr: If you were to look at ETFs in Japan about 70% of all the assets and there’s about 323 billion there, 70% is owned by the Bank of Japan.  They have been using ETFs for quantitative easing. In Hong Kong the biggest ETF is the Hong Kong tracker fund and that is an ETF that was created after the government in Hong Kong bought shares during the Asian crisis just over 20 years ago, and after the Asian crisis had gone away the government looked at so what do we do with all these securities? And they decided rather than selling them back in the market, which would have looked negative, they created the Hong Kong tracker fund which will celebrate its 20th anniversary in November this year.

The government of India has created ETFs as a way to dispose of securities that they own that they also don’t want to sell into the market. So they’ve created new indices on the equity side twice, they’re working on creating a new fixed income product as well as a new equity one.

And we’ve seen others decide that they want new types of products such as diversity has been a thing, where many of your viewers might have seen the fearless girl statue that was placed in front of the raging bull down by Wall Street. That product that kind of goes along with the fearless girl was a diversity ETF that was seeded with a hundred million from one of the California pension funds. And we’ve seen the same a year ago where RBC launched in Canada a diversity ETF also around March 8th International Women’s Day, which was seeded with about 100 million from one of the Canadian pension funds.

So we’ve seen a lot of innovative things going on and when you look at the flows you can measure flows typically within a few days after the end of the month where with mutual funds, as you know, it takes often 8 to 10 weeks to get the data.

Rick Ferri: Could you elaborate on ETF flows?

Debbie Fuhr:  So I think what I would say is the overall flows– when I talk about flows what I’m measuring is creations versus redemption–so most ETF trading is secondary trading. So you might own shares in an ETF and you decide to sell them. Someone else wants to buy them so those shares of the existing ETF move around.

Primary trading is when there’s a really big order and big is more than 20% of the average daily volume in an ETF for a security. When that happens there are banks or brokerage firms who are called APs or Authorised Participants and they’re allowed to trade these securities. And so every ETF has what’s called a creation basket and this is typically either a fully replicating set of securities that match the index or something that is optimized or a subset. They will trade that typically in increments of 50,000, that gets sent to the custodian, and the ETF gets bigger. So we’re measuring creations versus the other side, redemptions, and in the month of April, as an example, globally we had 46 billion of net new money going into ETFs, globally, and about 35 billion went into equity focused products; about 12 went in fixed income; 3 billion went into active. We had just under a billion going into leverage and inverse, some currency hedge. There’s also commodity products, although they had net outflows, and on a year-to-date basis, so far this year we’ve seen 145 billion going into ETFs.

But one of the unique things, I would say, is we have had 63 months of consecutive positive net inflows into ETF globally.  I do not know of any other product that could say that, that’s more than five years.

Rick Ferri: And what would the flows be for traditional mutual funds during the same  time period?

Debbie Fuhr: Most active funds have had net outflows during that time and hedge funds have a lot of outflows during that time.

Rick Ferri:  Let me circle back to something you said about what’s driving all this, and you said one of the things is just exposure to asset classes. You’re looking to get the return of the market that they live in, and on the other side if they’re confident that they might outperform they’re making an active bet. That’s what you mean by barbell, correct?

Debbie Fuhr: Exactly.

Rick Ferri: And we talked about the fact that 79% of US large-cap active managers didn’t beat the S&P 500, but I went through with Robin a laundry list of all the other countries. It’s not just the US. When we look at Europe 86% over the last three years underperformed the European index. If we look at India 91% of active managers under underperformed the index that S&P uses for India.  Australia 86%. I mean these numbers, the run was consistent, and they’re mutually exclusive. Canada,  94% of active managers underperform. These are all mutually exclusive because of all different countries, but the numbers are almost the same, I mean it averages out over the last three years to about 80% to 85% if you were to look at all of these.

Debbie Fuhr: Yeah it’s true, I mean I have a map of the world that S&P made for me a long time ago partially because I asked them to do a SPIVA study when I was speaking in South Africa. So if you look at Mexico, Chile, Brazil, South Africa you know you can add that to the list, it’s typically seven out of ten active funds do not beat their benchmark in any given one year period. And then you know it tends to get worse on a  three-year basis, so that’s a real challenge. And they charge higher fees, right, so all in all if you were to look at you’re paying higher fees if many of these products didn’t charge such high fees they might actually be beating their benchmark. But it is the higher fees that they tend to charge, and fees vary a lot around the world, but typically it would be over one and a half percent is kind of the typical average annual cost for an active fund, and often you pay penalties if you move your money out in a period that’s less than six months of holding that product. So you have to be careful of the different costs you might incur when you buy different types of products.

Rick Ferri: So as countries take this data, with your help as a consultant to these countries, and they decide they’re going to launch ETFs in that country, or the regulators in that country will go and launch ETFs, the first ones that come out are generally broad market tracking.

Debbie Fuhr: I would define them a little bit differently. They tend to be the blue-chip indices on the equity side that people know. So people open the newspapers in the US most people would know the S&P 500 or something that’s a well-known index, so you tend to find when products come to market in different countries around the world it tends to be one of the indices that is quoted in the newspapers all the time.

Rick Ferri: How long after a country which has never had this type of a product before, when they launch an ETF that might be tracking those blue-chip indexes, how long does it take before it really starts to catch on and people begin to understand what it is?

Debbie Fuhr: That’s a great question. So part of the challenge for ETFs is that although we think of them as a retail product, in many jurisdictions around the world financial advisors are paid by the firms that make mutual funds or structured products or other types of financial products. They’re paid to sell these products and so when that happens the financial advisors do not talk about ETFs because ETFs do not pay advisers to sell them. They work best where financial advisors are paid explicitly for advice and then the advisors are helping to build portfolios to suit their clients.

Rick Ferri: When John Bogle and Vanguard launched the first S&P 500 index fund here in the US they went through the brokerage industry to do it. They thought they were going to raise, I believe, 150 million in assets, and they only raised 11 for the exact reason you’re talking about.

Debbie Fuhr: Advisors are still paid to sell products in markets like India, most of Asia-Pacific is that way. In Europe it only changed in January this year that across Europe, if a financial advisor is independent, they are no longer allowed to be paid to sell products. So that’s been a big change, but it takes time even for that to cause people to change their behaviors.

Rick Ferri: But I think it’s a good thing. In fact in the US we’re battling over this fiduciary rule and it doesn’t seem like we’re going to get one. We’re going to get a best interest rule and I was just thinking that if we eliminated commission sales here, financial advisors couldn’t do commission sales, that would be, that would go a long way toward getting advisors to do the right thing.

Debbie Fuhr: So part of the challenge too, so the UK change happened in 2013, so it’s called the retail distribution review or RDR, and in Holland it happened a year later. In the UK we still find that many financial advisors have historically gone to what we call mutual fund platforms, or platforms, to buy mutual funds, and they still go to these platforms because they’re kind of tied into them. The challenge is to buy and sell mutual funds you don’t need access to the stock exchange, so many of these large platforms don’t offer the ability for financial advisors to use ETFs. And when asked about it they say, “Well there’s no demand.”  But the real challenge has been it would cost them some money to develop the technology. It’s not that expensive and it’s not that difficult but to make the change, to be able to have connectivity so that advisors could access ETFs is something they just say there’s no demand so they’re not doing it.  So it’s still not a level playing field even when regulations have changed in many cases.

Rick Ferri: Let’s switch gears a little bit. I want to talk about ESG, environmental, corporate and social governance. Everywhere I turn right now it’s all about ESG, different ESG funds coming up all over the place. Do you see a big future for ESG, a permanent stable future for ESG, or is this just another fad that’s going on.

Debbie Fuhr: I believe it’s here for the long run now, partially because what it means when you talk about ESG has changed a lot. So it used to be, many years ago, that ESG was basically removing the sin stock, so taking out tobacco, pornography, etc. What you found is the way products are made today, in terms of indices, has changed a lot. In many cases what they’re doing is they are evaluating companies on how well they perform on different governance issues, on environmental issues, and companies that tend to perform better, actually are better-run companies and do perform better.  

And so it used to be that the sin stocks actually did better than the non sin because tobacco had such high margins. And so I think that fundamental shift, believing climate change, believing in the need to look at solar and alternative energies and all these other things, is really being embraced very significantly here in Europe. So when we look at ESG as a type of exposure within even ETFs, right now there’s about thirty billion dollars, which is not a lot out of that 5.7 trillion globally.  But what we see is, if we were to look at the overall industry, the US product set in the US accounts for 70% of all the assets; and Europe is only like 17%. When we look at ESG, Europe accounts for nearly 60% of all the assets. 

So we have a lot more people in Europe individually and asset owners – so pension funds, and others – are embracing investing using this lens, and the reason is in many cases the governments, and France and Belgium are saying that asset owners must look at things this way. So I believe that over time ESG will be incorporated mainstream into everything. I mean there’s actually been a very large launch of a new ETF in the US in the past two months. It was actually a Finnish insurance company that seeded a new ETF listed in the US based on the  MSCI ESG criteria with 845 million dollars. So although it’s in the US it’s still coming from Europe, although in our numbers it would show up as being kind of in the US and domiciled there.

So I think it’s moved on a lot. I think it’s continuing to move on and earlier when I spoke about the diversity of ETFs, that for me would also fall into an ESG thing. Although there is some crossover between ESG and themes, right, because some would say diversity is a theme, so right now we have governments in Europe and in the UK trying to define what is ESG and what are the standards, what is impact investing. So it’s something that governments are actually getting much more involved with here than I’ve seen in other jurisdictions around the world.

Rick Ferri: Thank you Debbie. I want to end with one more item and that is you are the founder and a board member of Women in ETFs and it’s been a huge organization here in the US, and could you talk about that?

Debbie Fuhr: So thank you for mentioning that. That was something that five of us started in the US. We just turned five years old and so Joanne Hills, Sue Thompson, Linda Zhang, Michelle Mikos and myself got together and thought there’s a real need and opportunity to help women come into the ETF industry, to stay in the ETF industry and to have a good career. And often it’s difficult to ask your boss, especially if you’re sitting on a trading floor and it’s all men and they’re very busy. So we wanted it to be a way to help educate people, to help them grow their career. So the three pillars are really connect, support, and inspire.

After I helped set up the organization in the US, which is nonprofit, I decided we should have something similar in Europe. So we actually have a legal entity here and we have chapters across Europe and also we have a chapter in South Africa. And we have a chapter, actually two, in Canada, and we also have them out in, Asia, so it’s been exciting.

I mean we do university outreach so we go and teach lectures and do events at universities. We do one-on-one mentoring schemes that last 10 months. We also have mentorship dinners where people can just meet more senior people. We have a speaker’s bureau to encourage the press to speak to women that are qualified and allowed to speak to the press or to speak at events. We do various types of educational events. So on Friday here in London we have an event on “Investing in China.”

We’ve done diversity events and one of the things that I’ve been involved with a lot is for International Women’s Day, which is March 8th, Women in ETFs in the first year rang the bells at 9 exchanges. I noticed that the UN was ringing some different bells and I asked  them if they would work with us to do it next year. And so we now partner with UN Women, UN Global Compact, the Sustainable Stock Exchanges Initiative, the International Finance Corporation and World Federation of Exchanges. So we went from 9 to 33 exchanges to 45 to 65, to this year we rang bells at 85 exchanges around the world which is pretty exciting.

Rick Ferri: That’s quite impressive. Well great that–congratulations on that growth. That’s wonderful. 

Debbie Fuhr: Okay, sorry. Over 5000 members right now and 17% of our members are men, so having men as part of the solution is really important. I should say we probably should change our name from Women in ETFs. We really do want to embrace all types of people to get into the industry and have a great experience. 

Rick Ferri: Well thank you so much for your time Debbie. I mean I really appreciate it. I know we could go on for a long time talking about this and we wouldn’t even be scratching the surface  on the knowledge that you have on indexing in the ETF industry and the growth globally and so thank you so much for spending the time with us today.

Debbie Fuhr: No, thank you. It’s been a pleasure.

Rick Ferri: This concludes the 10th episode of Bogleheads on investing. I’m your host, Rick Ferry. Join us each month to hear a new special guest. In the meantime visit bogleheads.org and the Bogleheads wiki. Participate in the forum and help others find the forum. Thanks for listening.




About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant



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