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ETFs...What's next? (with Vanguard CEO Daniel Shrimski) · The Money Puzzle

0:09
Speaker 1: Hello, Welcome to the Australians Money Puzzle podcast. I'm James Kirby.
0:13
Speaker 1: Welcome aboard everybody. Well, this is our last podcast before
0:16
Speaker 1: the Federal budget and I wanted to do this for
0:19
Speaker 1: a while, which is to have a special episode on
0:22
Speaker 1: ETF's exchange traded funds. And the biggest player in the
0:25
Speaker 1: market is Vanguard and the CEO of Vanguard Australia is
0:30
Speaker 1: Daniel Shimsky and he's my guest today.
0:32
Speaker 2: How are you, Daniel good? Thanks for having me James.
0:36
Speaker 1: Nice to have you on the show. We have so
0:38
Speaker 1: many questions about ETF. They roll in all the time,
0:41
Speaker 1: and I think they have become very important to our
0:45
Speaker 1: listener base. ETFs as a core probably most of the
0:49
Speaker 1: time of their portfolios, and I think secondly as an
0:54
Speaker 1: access point, if you like, to other markets, where once
0:57
Speaker 1: upon a time it was very difficult to obviously from
1:00
Speaker 1: buying managed funds like whatever was around at the time, Perpetual, Platinum, Ageneral.
1:05
Speaker 1: These days, just as easily people will buy an ETF,
1:08
Speaker 1: and they will That's how they take their original sort
1:11
Speaker 1: of excursion into global markets, particularly the US. I'm just
1:15
Speaker 1: looking at the Vanguard suite of ETFs, and they are
1:20
Speaker 1: in terms of the money that goes into them, they're
1:22
Speaker 1: the biggest players in our local market by far. You've
1:26
Speaker 1: tell me if I'm wrong, but it seems to me
1:28
Speaker 1: that Vanguard has been terribly careful about getting involved in
1:35
Speaker 1: what I would call the widening of ETFs. That for
1:37
Speaker 1: most people, they just were a mirror, a plane, vanilla
1:42
Speaker 1: reproduction of a market, so you could buy the S
1:44
Speaker 1: and P five hundred or the ASX two hundred. It's
1:47
Speaker 1: evolved way beyond that. But you guys seem to be
1:52
Speaker 1: resistant maybe to some of these innovations.
1:56
Speaker 2: Yeah. Well, well, first of all, I would echo those comments, James,
2:00
Speaker 2: and we've just seen such tremendous growth in ETF volumes
2:04
Speaker 2: and all sorts of different investors, which is great. But
2:06
Speaker 2: you're right, I mean, there is a point where we
2:08
Speaker 2: won't go any further in terms of the types of
2:11
Speaker 2: ETFs that we launch. We're not an organization that'll just
2:14
Speaker 2: try to launch as much product as we can. That's
2:17
Speaker 2: not who we are. But we do think where we
2:20
Speaker 2: can launch a product where it will improve investor portfolios
2:24
Speaker 2: and it's low cost and it's simple to understand. That's
2:27
Speaker 2: our space and that's where we feel like we can
2:29
Speaker 2: add value. So look, we still think that investors are
2:33
Speaker 2: best served of its low cost if it's diversified index solution,
2:38
Speaker 2: and that should be the core of an investor's portfolio
2:40
Speaker 2: in our opinion. So look, we've launched a more product
2:43
Speaker 2: this year than we have for some time. As you say,
2:45
Speaker 2: we launched a suite of S and P five hundred products.
2:48
Speaker 2: We launched Global Technology, International High Yield and again they
2:52
Speaker 2: fit we think within individuals portfolios. So you know, we
2:56
Speaker 2: were asked to launch those and we have them. So far,
2:59
Speaker 2: so good. But just to maybe finish the point exactly
3:02
Speaker 2: as you say, we are much more cautious at that
3:05
Speaker 2: speculative end of the spectrum. And it's really hard to
3:09
Speaker 2: value speculative investments that there's no cash flow, and we'll
3:12
Speaker 2: leave that to others.
3:14
Speaker 1: Okay, So, but it's interesting you launched the technology ETF,
3:19
Speaker 1: for instance, and there isn't as such a technology index
3:23
Speaker 1: out there. There's a Nasdaq index, but there isn't a
3:26
Speaker 1: tech index per se. So how do you explain to
3:28
Speaker 1: people who started with you and understood that ETFs were
3:32
Speaker 1: simply a mirror of an existing indices that they were
3:37
Speaker 1: familiar with, and it has evolved, even you guys have
3:40
Speaker 1: evolved that there was a time you wouldn't have done that.
3:43
Speaker 1: So yeah, you said you'draw the line somewhere, Well, how
3:46
Speaker 1: do you explain that to the average investor where you're
3:49
Speaker 1: going and how the industry is evolving like that?
3:51
Speaker 2: Look, I again, we actually do have an index that
3:54
Speaker 2: we're tracking, a three hundreds three hundred global technology stocks,
3:59
Speaker 2: and we debated that one a lot, and we think
4:02
Speaker 2: it's one that can add value to investors portfolio given
4:05
Speaker 2: obviously what's happening in the technology world. So look, we
4:09
Speaker 2: will launching, we will continue to launch product through the
4:12
Speaker 2: remainder of this year, and we think that one sits
4:13
Speaker 2: really nicely in our portfolio.
4:15
Speaker 1: When I say that there is not an index, I mean,
4:17
Speaker 1: of course there is. I mean I mean sometimes you
4:21
Speaker 1: know what I know that ETF providers will create an
4:24
Speaker 1: index and then launch a product to match that index.
4:27
Speaker 1: Virtually that's been going on, hasn't it. It's like it
4:30
Speaker 1: has evolved from the time where there was just an
4:32
Speaker 1: indeceeas meant a market that was well established, like the
4:36
Speaker 1: S and P five hundred, et cetera. But now the
4:38
Speaker 1: game has shifted, hasn't it like that?
4:40
Speaker 2: Yeah, for sure. And I think you know what we
4:42
Speaker 2: always say to investors is not all ETFs are created equal,
4:46
Speaker 2: and I think people just need to understand the makeup
4:48
Speaker 2: of the ETF and make sure they understand their risk tolerance.
4:51
Speaker 2: But look, we anticipate the ETF world continuing to grow,
4:55
Speaker 2: and thirty percent per adum since twenty eighteen just shows
4:58
Speaker 2: the attractiveness across the invest the population.
5:01
Speaker 1: So more recently there are active ETFs, so that it's
5:05
Speaker 1: sort of drifted ever so slightly. So it started off
5:08
Speaker 1: with this terribly conservative, perfect reproduction of existing markets. We'll
5:12
Speaker 1: just stick with that S and P five hundred example.
5:14
Speaker 1: And that was there, and someone said, I want to
5:16
Speaker 1: buy the S and P five hundred. I'd buy an
5:19
Speaker 1: index fund. It might later called an ETF, which might
5:22
Speaker 1: be from you, might be from any of the other
5:23
Speaker 1: well known ETF providers, and said it started to evolve
5:28
Speaker 1: more recently into what they call active ets where they
5:30
Speaker 1: just change the rules ever so slightly, right, so they
5:32
Speaker 1: don't perfectly reproduce something. They put in a rule which
5:36
Speaker 1: for instance, companies that are of a certain size or
5:39
Speaker 1: certain nature they put in these rules and they become
5:41
Speaker 1: active ETFs. Now, can you tell us what portion of
5:45
Speaker 1: your funds would be active as opposed to the traditional
5:48
Speaker 1: vanilla index fund.
5:52
Speaker 2: We're one hundred percent index ETFs, James, So yeah, again
5:57
Speaker 2: to your point, I think, you know, we just sort
5:59
Speaker 2: of think of the ETF as a rapper. Ultimately, whether
6:02
Speaker 2: it's a managed fund, or whether it's an ETF that
6:05
Speaker 2: become in an index form, or it can come in
6:07
Speaker 2: an active form, that's just ultimately a rapper and it's
6:10
Speaker 2: different from ultimately what the investment strategy might be. But
6:13
Speaker 2: all of our we've got approximately seventy ETFs, and they're
6:17
Speaker 2: all index based ETFs.
6:20
Speaker 1: But this evolution towards an active ETF, could you explain
6:24
Speaker 1: to the listener who isn't sure how this all works?
6:27
Speaker 1: A difference between an ACTIVITF and I won't call it
6:30
Speaker 1: an inactive yea IF, but a traditional PASSIVETF.
6:34
Speaker 2: Yeah. Well, I mean, I think again, we're tracking an index,
6:36
Speaker 2: and we are buying and selling stocks based on what
6:40
Speaker 2: that index has in it. And just like an active
6:43
Speaker 2: managed fund, active managers are ultimately you're taking bets on
6:49
Speaker 2: what might be happening out there in the market and Look,
6:51
Speaker 2: it's not something that we do here in Australia and
6:54
Speaker 2: I will stick to what we think we have proven
6:57
Speaker 2: we're good at and I certainly don't well see in
6:59
Speaker 2: each other in the coming years.
7:02
Speaker 1: Okay, So so just to make it clear that you
7:04
Speaker 1: don't do it, but your rivals will will launch active
7:07
Speaker 1: ETFs in various ways. And what I wanted to ask
7:09
Speaker 1: you was the acts as ETFs get classified as more
7:15
Speaker 1: and more active, and in the US, obviously they've reached
7:17
Speaker 1: a level which is quite exotic. I think people would
7:19
Speaker 1: be stunned to figure out what some of the products
7:22
Speaker 1: that are available in the US that are called ETFs.
7:24
Speaker 1: What I'll ask you is, has the gap between managed
7:28
Speaker 1: funds as we knew them, which was a bunch of
7:30
Speaker 1: stock pickers in an office basically picking stocks and index
7:34
Speaker 1: funds which do not do that, which reflect intoss has
7:38
Speaker 1: that gap narrowed? Yeah?
7:41
Speaker 2: Look, I mean I think there are many more active
7:43
Speaker 2: solutions out there and I imagine that will only increase.
7:47
Speaker 2: But look, I think you know what we keep saying
7:50
Speaker 2: is it's really hard to actually beat the index. And
7:54
Speaker 2: you've seen the Spever report, the S and P index
7:56
Speaker 2: versus Active report, James, and you know, we were show
8:00
Speaker 2: that irrespective of whether it's a managed fund or an
8:03
Speaker 2: active ETF, active managers find it really hard to beat
8:06
Speaker 2: the index. If you look at the last if you
8:09
Speaker 2: look at a ten year period, ninety percent of active
8:12
Speaker 2: managers have underperformed. And that's not to say that investors
8:16
Speaker 2: shouldn't be invested and shouldn't be investing in active but
8:19
Speaker 2: you know, we believe the core of one's portfolio should
8:22
Speaker 2: be low cost index solutions, and if you want to
8:25
Speaker 2: surround that with some active no, we think for the
8:28
Speaker 2: right risk for the people willing to as long as
8:30
Speaker 2: they understand their risk tolerance, that can make sense. But
8:33
Speaker 2: there's certainly a lot more active ETF providers out there.
8:36
Speaker 2: And again we the transparency, the liquidity, the accessibility of
8:41
Speaker 2: the ETF rapper I think is really appealing. But investors
8:44
Speaker 2: need to understand what they're buying and the risk that
8:48
Speaker 2: they're taking on.
8:50
Speaker 1: That's exactly what I was driving out that it's evolving
8:52
Speaker 1: all the time, folks, and it's for it's knowing and
8:54
Speaker 1: not assuming. By the way, what what you might have
8:57
Speaker 1: thought an ETF was when you first heard about them,
8:59
Speaker 1: perhaps ten years ago, it's not exact like today in
9:02
Speaker 1: many cases. Okay, just before we go to the break,
9:04
Speaker 1: I want to give people an idea just how big
9:06
Speaker 1: Vanguard is. I also want to bring up the point
9:08
Speaker 1: that you might explain it's not actually a company in
9:11
Speaker 1: the contraditional sense. It's still a sort of a mutual,
9:14
Speaker 1: isn't it.
9:16
Speaker 2: Yeah. Absolutely, we have sixty million investors around the globe,
9:21
Speaker 2: obviously predominant in the US. Andy, it is a mutual.
9:24
Speaker 2: You know, we are here to serve the investor. We
9:26
Speaker 2: are here to give investors the best chance of investment success.
9:29
Speaker 2: That is the model where it's actually the investors that
9:32
Speaker 2: own Vanguard, and philosophically, that's how we run our business
9:35
Speaker 2: here in Australia as well. And we've been here for
9:37
Speaker 2: thirty years. James were celebrating our thirty thirtieth year anniversary
9:41
Speaker 2: this year and really proud of what we've been able
9:44
Speaker 2: to do over the past thirty years.
9:45
Speaker 1: What's the figure, the astonishing figure of the amount of
9:48
Speaker 1: money under management now at Vanguard.
9:51
Speaker 2: Yeah, I think in Australian dollars it's probably about seventeen
9:53
Speaker 2: trillion dollars.
9:55
Speaker 1: Seventeen trillion, folks, just hear that part. It's trillion billion, yeah,
10:00
Speaker 1: billion dollars under management.
10:02
Speaker 2: Yeah. And you know, again, the interesting thing for Vanguard
10:04
Speaker 2: is it's just it's been all organic, so we haven't
10:08
Speaker 2: grown via acquisition. We have grown off the back of
10:10
Speaker 2: that model where we've driven down the cost of investing
10:14
Speaker 2: and put the investor at the center of everything we do.
10:16
Speaker 1: So one of the things I think is really interesting
10:18
Speaker 1: with Vanguard folks, as they say, you mightn't have known
10:21
Speaker 1: that it was a mutual and once the time, part
10:22
Speaker 1: of time across we had all part of mutuals. Amp
10:25
Speaker 1: was a mutual, Colonial was a mutual. But they're not longer,
10:28
Speaker 1: no longer mutuals. They all privatize. Once upon a time,
10:31
Speaker 1: Vanguard didn't do that, which is an interesting dimension I
10:34
Speaker 1: think if you weren't familiar with that. But another part
10:36
Speaker 1: that's interesting, and I think this would be very when
10:38
Speaker 1: we get to the next part of the show. I
10:40
Speaker 1: think you'll find this fascinating. Until now, Vanguard often didn't
10:44
Speaker 1: have much to say on many issues. They didn't get
10:46
Speaker 1: involved in policies, but of late they have and Vanguard
10:52
Speaker 1: in Australia have also had some ideas which they have
10:54
Speaker 1: been putting forward which I want you to hear about.
10:56
Speaker 1: We'll be back in a moment. Hello, Welcome back to
11:11
Speaker 1: the Australian's Money Puzzle podcast. James Kirby here with Daniel Shrimsky,
11:15
Speaker 1: who is the CEO of Vanguard Australia. Okay, Daniel, Now
11:20
Speaker 1: there was a time I think that you do guys
11:22
Speaker 1: didn't say much about anything, and more recently you have
11:26
Speaker 1: and I'd be interested to hear what you have to
11:28
Speaker 1: say about that how I phrased that. But one or
11:32
Speaker 1: two things I want to put to you just before
11:35
Speaker 1: we get into what you've been working on locally in Australia.
11:40
Speaker 1: Your chief in the US, Salem Ram, the global head
11:44
Speaker 1: of Vanguard. He recently came out and made the point
11:48
Speaker 1: that speculation and investing are very different things, which sounds
11:52
Speaker 1: like sort of a motherhood statement. But to be specific,
11:56
Speaker 1: there's a lot of action now in the US and
11:59
Speaker 1: it will come here to These trends invariably do come
12:01
Speaker 1: here into what they call the poly markets. This is
12:04
Speaker 1: basically people betting on just about anything and highly speculative
12:09
Speaker 1: investing that is not really linked with intrinsic value in
12:12
Speaker 1: any way. Thinking about the robin hood sort of seen
12:14
Speaker 1: in the US and your CEO. Basically he made the
12:20
Speaker 1: point that younger people that there's an element of exploitation
12:24
Speaker 1: going on here that wasn't in the share market before.
12:29
Speaker 1: We may not have quite the same problem, but it's
12:32
Speaker 1: definitely there is that an issue. You see there could
12:35
Speaker 1: be a threat in Australia.
12:40
Speaker 2: Well potentially. Obviously we've seen a large amount of growth
12:43
Speaker 2: in that activity over the past court twelve to eighteen months.
12:47
Speaker 2: But I think when you look at activities that are
12:50
Speaker 2: centered around short term outcomes or I guess you could
12:53
Speaker 2: say battery events were sort of very different to time
12:57
Speaker 2: tested investment strategies, and we sort of consider it much
13:02
Speaker 2: closer to I would say gambling than actually investing. And
13:06
Speaker 2: you know, people can do what they want with their money, James,
13:09
Speaker 2: but needed eyes wide open in terms of what investing is,
13:13
Speaker 2: and it's only a productive asset, something that compounds over time.
13:19
Speaker 2: And you know, the concern we have is that blurred
13:22
Speaker 2: lines between what we would call it gambling and investing
13:27
Speaker 2: and people can get very excited about and exhilarated in
13:31
Speaker 2: the moment and it can do real damage to long
13:33
Speaker 2: term wealth creations. So you know, we are concerned about.
13:37
Speaker 1: That, okay, right now. Also, I wanted to talk to
13:41
Speaker 1: you about the budget, and you've got you had some
13:43
Speaker 1: very clear policy suggestion for the government, which we'll see
13:46
Speaker 1: if they come up with it in the budget about
13:48
Speaker 1: housing just before we talk about that also in the
13:51
Speaker 1: budget coming up. We know it's pretty certain in Australia
13:54
Speaker 1: there's going to be a change to CGT capital gains tax.
13:57
Speaker 1: We've been talking about it on the show. It's highly
13:59
Speaker 1: like that capital against tax will no longer have a
14:02
Speaker 1: discount of fifty percent if you hold shares for more
14:04
Speaker 1: than a year. Rather than that situation, they're going back
14:08
Speaker 1: to the old situation where it's going to be inflation
14:11
Speaker 1: indexed every year. Big outcry about that from the from
14:15
Speaker 1: many investment leaders here. I have two things to ask you.
14:19
Speaker 1: One is specifically this is a question without notice because
14:22
Speaker 1: it only happened this morning. Chris Brickey, who you may
14:24
Speaker 1: know stock spot, who's a great fan of ETFs, but
14:27
Speaker 1: he has put out something this morning saying that the
14:30
Speaker 1: ETF investors will lose will over ten years, will make
14:33
Speaker 1: less on their after tax returns, and he's modeled various
14:38
Speaker 1: outcomes for ETF investors on the change to CGT. That's
14:43
Speaker 1: one thing. Do you think that this tax policy will
14:47
Speaker 1: cool off investment in ETFs and shares if CGT rules
14:50
Speaker 1: are tighter than they were?
14:52
Speaker 2: Yeah, look possibly in again where we obviously haven't seen
14:55
Speaker 2: any particular policy detail yet, but you know, we would
14:58
Speaker 2: be concerned about any c GT changes that I guess
15:02
Speaker 2: discourage everyday Austraands for investing in capital markets and ultimately
15:07
Speaker 2: building wealth. So you know that is concerning for us.
15:10
Speaker 2: I think we're seeing record number of young investors invest
15:14
Speaker 2: in capital markets and we think that's great. You know,
15:17
Speaker 2: markets have delivered great returns and over time they will,
15:20
Speaker 2: so anything that discourages that or gets in the way
15:22
Speaker 2: of that, we're concerned about that. And it's one of
15:24
Speaker 2: the reasons why measures and love to talk to you
15:28
Speaker 2: about our mind Investments idea. But that's why we think
15:31
Speaker 2: if there are going to be changes to the CGT,
15:34
Speaker 2: complementing that with actions that help Austrands or younger Austraans invest,
15:39
Speaker 2: you know, could be really meaningful and we think they
15:41
Speaker 2: have merits. So look forward to talking to you.
15:44
Speaker 1: The moment you have actually put something happened to you
15:46
Speaker 1: is directed to the government, which is a policy idea
15:50
Speaker 1: whereby younger investors has ended younger investors would have some
15:57
Speaker 1: sort of tax protection around early only participation in this
16:01
Speaker 1: year market. Explain how it works a you good.
16:04
Speaker 2: Yeah, and look just to your points earlier. We will
16:06
Speaker 2: vanguard as I said thirty years here, and we will
16:09
Speaker 2: continue to be vocal where it's something that we're about
16:12
Speaker 2: and where we feel like investors deserve a better shake.
16:15
Speaker 2: And we've done that, James, things like fee transparency and
16:19
Speaker 2: just the overall level of fees. You know, we have
16:21
Speaker 2: advocated hard maintaining the integrity of the performance tests with
16:25
Speaker 2: Super and this is just another idea where you know,
16:27
Speaker 2: we're passionate about it. We think we've got one of
16:30
Speaker 2: the world's best retirement systems here in Superannuation, but there
16:34
Speaker 2: is a gap outside of Super, and particularly for the
16:36
Speaker 2: younger Austraians where it's hard to build wealth outside of Super.
16:41
Speaker 2: And if there are younger Austraians that do have cash,
16:45
Speaker 2: a lot of it sits on the sidelines. You know,
16:47
Speaker 2: twenty three percent of financial assets in Australia sits in cash.
16:51
Speaker 2: And if you think about Australian market delivering over ninety
16:54
Speaker 2: percent over the past ten years the US, over fifteen
16:57
Speaker 2: percent those Austraands missed out by having cash on the sideline.
17:02
Speaker 2: So we're proposing to create a tax incentivized investment scheme
17:06
Speaker 2: that will enable more Australians to invest in a regulated
17:11
Speaker 2: way and it will help them achieve sort of medium
17:14
Speaker 2: turn goals, maybe saving for a deposit on a house, renovation, education,
17:19
Speaker 2: and it's a scheme that's tested in other markets. We've
17:22
Speaker 2: seen it hugely successful with the ISA and the UK
17:25
Speaker 2: and NISA and Japan, Canada, Sweden, many different jurisdictions have
17:30
Speaker 2: had it because it's and it's worked because it's neutral,
17:33
Speaker 2: it's accessible, and it's simple.
17:36
Speaker 1: Let's say I'm twenty eight and I'm interested in this.
17:40
Speaker 1: How would it work? What specifically have you proposed?
17:43
Speaker 2: Yes, so it was essentially it would be a dedicated
17:46
Speaker 2: investment account outside of super you know, we think there
17:49
Speaker 2: needs to be some eligibility criteria. Potentially it's for under
17:53
Speaker 2: forty five year olds and essentially they'll be able to
17:56
Speaker 2: contribute up to a cap every year. We're proposed twenty
18:01
Speaker 2: thousand dollars every year you can contribute and it would
18:04
Speaker 2: be taxed advantaged in terms of capital gains, dividends, interests
18:09
Speaker 2: that you would receive, so you have to hold it
18:12
Speaker 2: again our proposals, you'd have to hold it in this
18:14
Speaker 2: account for two years to take advantage of the tax
18:17
Speaker 2: advised scheme. But investments wouldn't be speculative, you know. We
18:22
Speaker 2: think of a menu of eligible products, things like bonds
18:25
Speaker 2: or broad shares, and again it will encourage sensible long
18:30
Speaker 2: term investing.
18:31
Speaker 1: What sort of tax would you pay? Compare if I
18:34
Speaker 1: buy shares on the side as search outside of super
18:37
Speaker 1: I've got to get taxed atp to forty five percent?
18:40
Speaker 1: What taxwad are you suggesting that this would be?
18:43
Speaker 2: Neil? So up to for the twenty thousand dollars you
18:46
Speaker 2: could contribute every year, we're proposing zero tax on capital
18:51
Speaker 2: gains and dividends.
18:53
Speaker 1: Okay, very good.
18:54
Speaker 2: I see it done with what we've been these that's
18:57
Speaker 2: consistent with what we've seen work overseas.
18:59
Speaker 1: What you see with the ISAs in the UK. I'm
19:01
Speaker 1: familiar with them. I not this part A key part
19:04
Speaker 1: of them, Daniel. Is it's a user or lose it,
19:08
Speaker 1: isn't it? It twenty thousand per year and if you
19:10
Speaker 1: don't do it one year, you can't double and do
19:13
Speaker 1: forty the next year. Would it be use it or
19:15
Speaker 1: lose the type scheme you're suggesting.
19:17
Speaker 2: Correct correct ut a year and look what we're what
19:23
Speaker 2: we've seen in other jurisdictions is it's been very attractive
19:26
Speaker 2: with medium to low income earning household and that's where
19:30
Speaker 2: we need help. That's the group that needs help. And
19:33
Speaker 2: you know, we think it can, as I said, say,
19:36
Speaker 2: help people save for a deposit on a home in
19:38
Speaker 2: the earlier we get a strains into housing, the better.
19:41
Speaker 2: So don't think there's a.
19:43
Speaker 1: Real meror can they with this ISA suggestion? Maybe you'll
19:47
Speaker 1: call it an ASSA, an Australian savings account work called
19:52
Speaker 1: the acronym. But what I want to ask you.
19:54
Speaker 2: Is we needed we need an acronum from that though
19:56
Speaker 2: you're right, Jack.
19:56
Speaker 1: You need an act. You'll have to hire an advisor
19:58
Speaker 1: and pat and talents to do that for you. Can
20:01
Speaker 1: the person spend the money on anything they like once
20:05
Speaker 1: the investment is achieved in the tax.
20:08
Speaker 2: Center and the proposal is they would need to have
20:11
Speaker 2: it in the scheme for two years, yes, and then
20:15
Speaker 2: they can obviously take it out and take advantage of
20:18
Speaker 2: the benefit that they've gained. And if they can hopefully
20:21
Speaker 2: use it to help them build wealth.
20:23
Speaker 1: Build wealth. Yeah, okay, so it's not a channeled in
20:26
Speaker 1: any particular direction. One last question on that, did you
20:30
Speaker 1: get any sitting response from the government to the idea.
20:35
Speaker 2: Look, we're spoken to both sides of government, very constructive discussions.
20:40
Speaker 2: We're really happy with the level of interest and we
20:42
Speaker 2: will keep advocating. This is united like I do, James.
20:46
Speaker 2: These things take time, but we think there's a real
20:48
Speaker 2: place for it, and we'll keep pushing advocating, and you know,
20:51
Speaker 2: we're confident that it has real merit and benefit for Australians.
20:56
Speaker 1: Okay, all right, Well, I'd be going through the budget
20:59
Speaker 1: measures next week and I'll be peering through to see
21:02
Speaker 1: if there's anything at all in there. Who knows. All right,
21:05
Speaker 1: we'll take short break. We'll be back in a moment.
21:06
Speaker 1: I have some questions on ETFs from our listeners, where
21:10
Speaker 1: Daniel will come to the party, I'm sure and find
21:13
Speaker 1: them awfully easy to answer. Okay, back in a moment. Hello,
21:25
Speaker 1: Welcome back to the Australian's Money Puzzled podcast. James Kirby
21:28
Speaker 1: here with Daniel Shrinsky. He is the CEO of Vanguard
21:32
Speaker 1: the ETF house index funds House Australia coming to us
21:37
Speaker 1: this morning actually from the US, where of course Vanguard
21:39
Speaker 1: is based in the US and they are a mutual
21:43
Speaker 1: of which I think most people don't realize it's not
21:45
Speaker 1: a company. Okay, now, Trevor, he asks, regarding the popularity
21:50
Speaker 1: of BTF, something I think is covered very lightly is
21:54
Speaker 1: the dealing of capital gains. Apparently ETFs have to distribute
21:58
Speaker 1: all their capital gains each year, so a high income
22:01
Speaker 1: owner has titically controlled I went to realize these gains.
22:05
Speaker 1: Is this the case? Is that the case that you
22:08
Speaker 1: have to do that each year, Daniel? Is that how
22:10
Speaker 1: it works?
22:10
Speaker 2: Yeah, yeah, it's a good one. It is true. I
22:13
Speaker 2: mean it is true. Pulled investments like ETFs and managed
22:16
Speaker 2: funds are the same, will distribute the income that they generate,
22:19
Speaker 2: and capital gains are included there. But look, you know,
22:22
Speaker 2: we're very conscious of trying to run the fund as
22:25
Speaker 2: efficiently as we can, and because we track an index,
22:28
Speaker 2: I think we're a little different. Ultimately, we have low
22:30
Speaker 2: turnover in the portfolio. So if you look at something
22:33
Speaker 2: like the Australian Shares ETF, that's which is the biggest ETF.
22:37
Speaker 2: In the parket it turns over less than five percent,
22:41
Speaker 2: so there's not a lot that's capital gains. Obviously large
22:44
Speaker 2: in terms of the size of the ETF, but there's
22:46
Speaker 2: not a lot of turn I just think it's more
22:49
Speaker 2: when the index changes that you have to sell out
22:52
Speaker 2: and you have to buy into. So if a company
22:55
Speaker 2: drops out of the X and something comes in, then
22:58
Speaker 2: you need to change. But I think it's important to
22:59
Speaker 2: know that it's only realized gains that get distributed. Obviously
23:03
Speaker 2: unrealized gains stay in the fund.
23:06
Speaker 1: Okay, So folks, that's what Daniels talking about there is
23:08
Speaker 1: you know, the ASX two hundred, it's not a set thing.
23:11
Speaker 1: It gets reordered on a sort of episodic basis, and
23:14
Speaker 1: they say, well, the two hundred is changing, these three
23:17
Speaker 1: or four are dropping out, these three or four are
23:19
Speaker 1: coming in. That happens all the time, so that will
23:20
Speaker 1: be when that curves. Thank you for that, Trevor. I
23:23
Speaker 1: hope I think that the answer was pretty clear. This
23:25
Speaker 1: is information only, it's not advice, of course.
23:28
Speaker 2: Okay.
23:29
Speaker 1: A question from Bosh b or sEH and my parents
23:33
Speaker 1: are chasing the best returns from banks for cash and
23:36
Speaker 1: they have sitting in their SMSF. What are the risks
23:41
Speaker 1: with cash ETFs? With the major providers Vanguard, Better Shares, Blackrock,
23:47
Speaker 1: which appear to have pay above four percent and charge
23:50
Speaker 1: fees of approximately noer point one eight percent. Yeah, So
23:55
Speaker 1: the person who says, you know, what's the difference for
23:58
Speaker 1: I put my money in the it's government guaranteed in cash,
24:03
Speaker 1: Why would I go through the elaboration of putting it
24:06
Speaker 1: in a cash ETF. Just to clarify, you do offer
24:08
Speaker 1: a cash ETF.
24:09
Speaker 2: Do you we offer a cash fund, not an ETF.
24:12
Speaker 2: But again, I think the same principles applient. But we're
24:15
Speaker 2: getting more and more questions on this wash. So it's
24:19
Speaker 2: a good one. I think it's investors look for higher
24:21
Speaker 2: returns on cash. So look, I think you know, our
24:25
Speaker 2: fund essentially invests in very short term, high quality debt
24:28
Speaker 2: instruments like bank bills. But I think, just like any investment,
24:33
Speaker 2: it's important to sort of keep in mind not all
24:36
Speaker 2: cash products are the same, and it's important tonan, what
24:40
Speaker 2: underlying investments actually exists within the EU.
24:44
Speaker 1: Well, why do you offer? I mean, it's the product proposal.
24:47
Speaker 1: If I say to you, why shouldn't I just put
24:49
Speaker 1: it in the bank.
24:51
Speaker 2: Yeah, I mean I think it comes down to the return.
24:54
Speaker 2: I think it's down to the return. And I mean,
24:57
Speaker 2: you know, when wash asks the question around four percent,
25:01
Speaker 2: that probably is where it should be. But look, I
25:03
Speaker 2: think you made the point, James. I mean cash ETFs
25:07
Speaker 2: and funds, they're not government guaranteed. There's always so a
25:10
Speaker 2: little there's obviously exposure to interest rates. Credit risk I
25:13
Speaker 2: think is an issue to a lesser extent. But yeah,
25:17
Speaker 2: I think volatility is generally pretty low, so that's probably
25:20
Speaker 2: less of a risk. But again, four and a four
25:22
Speaker 2: and a half percent feels pretty reasonable right now. But again,
25:25
Speaker 2: we've seen a lot more money flow into our fund,
25:27
Speaker 2: and I think other ETF providers have seen same.
25:31
Speaker 1: So you're proposing on your side of the fence is
25:34
Speaker 1: that you will basically hunt and manage cash in en
25:39
Speaker 1: optimal work to try and improve match or improve what
25:43
Speaker 1: banks would offer.
25:44
Speaker 2: Yeah, exactly, and obviously you know alled investments. So yeah,
25:49
Speaker 2: so look, it's something that with rates where they are,
25:52
Speaker 2: was saying a lot more appeal from investors, so we
25:55
Speaker 2: need to we need to keep on top of that one.
25:58
Speaker 1: Okay, okay, Well, the last question is for Blake. He says,
26:01
Speaker 1: I'm interested in the small cap stocks and the idea
26:03
Speaker 1: of getting in early, and I've been looking at small
26:05
Speaker 1: cap ETFs under two ETFs he mentions have codes that
26:10
Speaker 1: start with V, so I presume their yours, Daniel. My
26:13
Speaker 1: question is, how do these actually work? If a company
26:15
Speaker 1: in the fund does really well and grows beyond the
26:17
Speaker 1: small cap definition, does the ETF have to sell it?
26:20
Speaker 1: That's such a clever question, Thank you, Blake. So, yeah,
26:22
Speaker 1: so you've got a small cap fund, right, you buy
26:24
Speaker 1: widget Makers Limited at ten books, they go to one hundred.
26:28
Speaker 1: They're not a small cap anymore, They're a winner. Do
26:31
Speaker 1: you have to sell them?
26:33
Speaker 2: Yeah? I think it's to your point. I think it's
26:35
Speaker 2: such an interesting question. It really gets to how indexing
26:39
Speaker 2: actually works. So with an index ETF, obviously the goal
26:42
Speaker 2: is to track the specific slice of the market. Blake
26:45
Speaker 2: in this case asks about smaller companies. So you know what, Ultimately,
26:51
Speaker 2: when a company does well and grows beyond that small
26:55
Speaker 2: cap definition, it will essentially leave the index and you
27:00
Speaker 2: will have to sell it down. So Blake's spot on.
27:02
Speaker 2: But importantly, investors have actually benefited from the company's growth
27:07
Speaker 2: while it's been in that so you've been capturing those returns.
27:10
Speaker 2: But it's part of the design of the product. As
27:13
Speaker 2: I guess small caps graduate, they're replaced by new, smaller companies.
27:20
Speaker 1: So the promises you'll find the next winner one of
27:24
Speaker 1: the or is it the winner leaves.
27:25
Speaker 2: Yeah, But I think is if you want to continue
27:28
Speaker 2: having that exposure with that graduated company, so to speak,
27:31
Speaker 2: then you can continue that journey and buy maybe the
27:34
Speaker 2: ASX three hundred or different global market indices, which is
27:38
Speaker 2: where that company will most likely show up. So I
27:41
Speaker 2: think it is it's a great question, and again we
27:44
Speaker 2: small caps really interesting space. We think of that as
27:47
Speaker 2: a real satellite that consider around a broadly diversified I
27:52
Speaker 2: guess core index solution. But it's a great question from Blake.
27:57
Speaker 1: Okay, Well, thank you Blake and Trevor and Bosh for
28:01
Speaker 1: the questions, and thank you Daniel Shrimsky for talking to
28:03
Speaker 1: us all the way from Los Angeles Airport to be
28:06
Speaker 1: beside this morning. Good to have you on the show.
28:09
Speaker 2: Thank you very much, enjoyed it and look forward to
28:12
Speaker 2: next time.
28:12
Speaker 1: Thanks Daniel. That was Daniel Shrimsky, the CEO of Vanguard Australia.
28:16
Speaker 1: Very good let's have some correspondence the Money Puzzle at
28:20
Speaker 1: the Australian dot com dot au. As you can see,
28:22
Speaker 1: sometimes the questions are there for a while, but then
28:24
Speaker 1: I find the ideal person to answer them.
28:26
Speaker 2: Okay.
28:27
Speaker 1: Today's show was produced by Leah Samon Glue and our
28:31
Speaker 1: email is the Money Puzzle at the Australian dot com
28:34
Speaker 1: dot au. Talk to you soon.