TOM WICKENDEN | from Betashares

In the latest episode I welcome Tom Wickenden, an investment strategist at BetaShares, to discuss the changing andscape of Exchange-Traded Funds (ETFs) in 2025.

ETFs have become the fastest growing investment vehicle globally. With a staggering US$1.5 trillion inflow into ETFs last year, the Australian market alone saw record net inflows of AU$30 billion. This surge highlights the increasing awareness and adoption of ETFs among both retail and institutional investors.

One of the key takeaways from the discussion is the importance of understanding your investment goals and timeframes. Tom emphasizes that what you aim to achieve with your investments will ultimately guide your choices. For those with a longer-term horizon, ETFs can provide access to growth assets like equities, while also offering defensive options like fixed income for those looking to balance risk.

The episode delves into the various types of ETFs available, including traditional index funds and more sophisticated options like smart beta ETFs. These smart beta funds allow investors to hold companies that align with specific risk factors, potentially enhancing returns while managing risk. Tom also discusses the concept of dollar cost averaging, a strategy that can help mitigate the risks associated with market volatility by spreading investments over time.

We discuss the importance of diversification and how it can reduce overall portfolio risk. Tom explains that by holding a basket of stocks through ETFs, investors can avoid the pitfalls of single-stock volatility, which can be detrimental, especially for beginners.

Looking ahead to 2025, Tom expresses excitement about ongoing product development in the ETF space, including the rise of diversified ETFs and innovative solutions that cater to a broader range of investors. He encourages newcomers to start with basic index-hugging ETFs to build their understanding before exploring more complex options.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Phil: Tom is an investment strategist at BetaShares and he's here to talk about the basics and building blocks in ETF Land. Before we started, Tom, I just wanted to ask, as an investment strategist, what is it you do when you first arrive at the office in the morning? What's a day in the investment strategist look like?

Tom: Yeah, most mornings start with the news, right? I mean, our job is to work with financial advisors, to talk with people like yourselves, to help educate retail clients as well. And a lot of it revolves around what's going on in markets, right? We've got such a plethora of ETFs ourselves at Beta shares, but also in the Australian ETF landscape, and they really are, in a way, uh, the macro trading tool, right? You can buy the Australian market or the US market, you can buy the cyberecurity industry, right? So there's big news going on overnight. We need to be across it because. Because it's very likely that someone's going to ask that question. So get in, read the morning updates from the plethora of researches I read, see if there's anything that we need to do immediately. Then we get into, you know, talking to people like yourself and the likes.

Phil: So this morning, I mean, what was it like this morning? And we were recording on January 28th and there was the route in Nvidia overnight on Wall street, then there was the bounce back overnight as well, and all to do with deepseek. I mean, what's your response to news like that?

Tom: Yeah, it's been a busy, busy few days. We're actually, we're currently putting together our, our outlook for 2025, we like to do it on, on this end of the new year, because if you wrote it a month ago, it's probably already mute. And we head out on the road next week to do a big roadshow around the country speaking to IT financial advisors. So I was in the midst of, you know, putting that outlook out and doing some slides, and then obviously the news dropped. Mainstream news dropped yesterday about Deepseek. And that threw things into chaos, really. We had a lot of pr, speaking to a lot of the journals about it, putting more publications out, and then also just trying to adjust our views, thinking, okay, how does this affect the current market narrative? Is this a serious threat to US Exceptionalism? What does it mean for AI narrative, which is so central to investing at the moment? And so all of those factors come into play and we have to, you know, really, you know, change quite quickly as to what we're speaking about and how we're speaking about markets.

Phil: So I guess you've gone long Trump Coin as well over the last week or so.

Tom: That was awesome. That was a lot of talk. We got back from holidays and then there's Trump Coin that, you know, made Trump more money than all of his developments did within a few days. And I mean, it's been. How do you even factor that in? Right? You've got an incoming US President who's then listed his own, uh, meme coin that, you know, theoretically could be used for a lot of different purposes. People trying to, you know, give him money for certain not great purposes. Could be people punting on it and losing a lot of money because they don't really understand what's going on. People thinking, you know, this could be so meddled with giveniviving he's the incoming US President and that surely it's going to the moon. But I do just want to make it clear that, know, we don't really promote those meme coins. They are speculative, they tools for gambling. And, you know, we focus more on, more on the real investment side of companies and ETFs and businesses. Right.

Phil: So, okay, well, let's get back to sensible investing. What happened in ETF world in 2024?

Tom: Yeah, 24 is another amazing year for ETFs both globally and here in Australia know, globally, the numbers are quite astonishing. Now, we saw about US$1.5 trillion inflow into ETFs globally last year. Right. So it's quite amazing, um, the numbers we've gotten up to within Australia. It was also a record y the market or the ETF industry ended around about 250 billion Australian dollars was what the FM got up to. It was a really strong year for net FLWs. We, we typically hit net FLWs. So the overall increase in assets under management is going to be impacted by two things, right? There's new money coming in and there's market movements. So last year was obviously a quite a good year for market movements that really helped the assets under management. But looking at actual net flows, how many more people buying into the Australian ETF industry? We saw about 30 billion Australian dollars of net inflows last year. So net buyers and sell, which was double what we saw in 2023. So a really strong year, a record year. The Australian market within the Australian landscape the flows are still fairly concentrated. So there's three big players in the Australian market being Vanguard, Betash shares, ourselves and is shares

00:05:00

Tom: between those three names. You know, we brought in 80% of all the inflows into the, all the net flows into the Australian ETF market. So and all those names you investors might be acutely aware, uh, uh, traditionally more passive investing names. So it's fair to say a lot of flow is still going to the, the larger passive players. You know, despite quite a large surge in active ETFs listing in the Australian market. A lot of active funds, uh, listing as ETFs because it's such a popular way for people to invest these days. We actually saw a billion dollars of net outflows from active ETFs last year in the Australia industries. They're actually uh, a detractor from that, that $30 billion figure.

Phil: So what do you think the overall awareness is like for ETFs? I mean there's a lot of people who still don't know what they're aware of. But do you think the awareness is increasing as time goes on?

Tom: I think definitely. I think sim, it's the fastest growing investment vehicle globally in here in Australia, it's fair to say. When I started, I started at BET shares about five years ago now. And at that time I would still speak to quite a few advisors and brokers who didn't understand the basic fundamentals of ETFs, didn't understand how they traded. They were confused about things like listed investment companies and ETFs and the differences there. And you know, fast forward to today, that's, that's a very rare conversation. ETF101 now it's really about what's available and what are they doing. I think that's also translated in the retail space as well to, you know, direct consumers who buy ETFs VI their platforms themselves without adviceeah ordinary punters. Exactly right. That the average punter, I think particularly after 2020, we saw, you know, the significant market crash following Covid in 2020 and then quite an amazing market rebound. And, and that year 2020 and 2021, we saw really large participation from the average punter within ETFs. It slowed down a bit in 2022 when things got a bit hairy again in markets. We saw a bit of a sell off due to interest rates rising. But it's fair to say the awareness, uh, has grown for that period. And yeah, most of the conversations we have now with the average puner or the financial advisor is what's available in your ETFs instead of what is your ETF. You know, do you think people are.

Phil: Becoming more aware as well in terms, I mean, you know, what an ETF is, but the fact that you're super or investments via a financial advisor, the overall costs can be reduced by using ETFs rather than manage funds which tend to cost a bit more.

Tom: Yeah, exactly right. It's all part of why ETFs have grown so large. You know, at their most basic, an ETF is just uh, an investment vehicle. Right. It's an investment vehicle that is very efficient for holding listed assets. Okay. So historically, before the etf, if you wanted to, you know, invest in listed assets, you'd have to go through a managed funder run listed fund. It's almost like an ETF is a new piece of technology and it just so happens to be really efficient for listed assets. And it was also synonymous, the growth of ETS with passive index investing. Right. Just it so happened there were index funds before the ETF, but it so happened to the popularity of ETFs and index investing kind of coincided and they became synonymous with each other because the ETF was a perfect way to access an index. Index investing was synonymous with the growth of ETFs. And part of the reason is, I mean an ETF is such a great way to access an index fund. And it comes down to, as you're mentioning, Phil, some of these, I guess, efficiencies of ETFs so you mentioned, they typically are low cost. Particularly if you're looking at an index fund. I mean there's no active management going on. You're not paying rockstar stock pickets to try and outform the market. M. You're really just buying the market, which is A bit easier for a portfolio manager to put together and make sure it's rebalanced. Well, you know, ease of access is another great advantage or efficiency if you will, because you can just buy them on the share mark on the ASX like you'd buy a stock which, you know, most people are, uh, intuitive with. And then finally another huge ones just diversification. This come, this has come along with, you know, more invested education. But people know, you know, being diversified is a great way to, uh, reduce volatility, to reduce some risk in portfolios and ETFs just bundle up a lot of those great advantages in one simple place.

Phil: So what are you looking forward to in 2025?

Tom: I think within the ETF industry, looking forward to, you know, more adoption. I think it will come. But I guess the product development is what's really exciting me at the moment. As I just mentioned that the initial growth of ETFs came in those more broad market index funds. You know, your ASX 200s, your NASDAQ 100s, everyone's pretty aware of those now. Those, those, the great low costs, et cetera. But where we're seeing ETFs going is almost into uh, a new iteration of funds. And we saw this for the first time last year. So in the flows last year, 21% of the flows in the Aussie ETF market went into what's called a smart beta etf. And this is just one type of, you know, product development that's going on. But a smart beta ETF essentially, rather than just holding the broader market, it looks to hold companies that align to certain risk factors in the market.

00:10:00

Tom: So what I mean by that are pretty common one'like a quality etf. Right. Instead of holding the misky world, which is like every company in the world by market cap, we say, you know what, I only want to hold the top 150 companies that have good earnings, you know, have sustained those earnings over a period of time and have low debt to equity. Now that's more sophisticated than your basic index fund, right? But you can still do that in a pretty cheap manner. Uh, it's still like, you know, fairly systematic. Uh, and you're not going as far as as stock picking or going down that path where you need to pay someone to do the stock picking. So uh, that category of ETF really excites me. Smart beta ETFs, it's not just quality. There's growth, there's value, there's income. So they're really exciting. But it's just one example of the new solutions that are coming out within the ETF wrapper. ETFs for fixed income, which is growing in popularity. ETFs or diversified ETFs. Even ETFs of ETFs but gives you, you know, access like 7,000 underlying equities with a single purchase. Really awesome for ETF beginners, for young accumulators and for growing that diversified portfolio.

Phil: So how would you suggest newcomers approach the ETF market? Because you've just come through with some pretty sophisticated kind of investments. You know, ETFs of ETFs and smart beta and that top 100 companies, 150 companies. Is that in the world or the ASX 200.

Tom: So we've got one, uh, global quality Leaders and it'it's in the world. Um, we've also got Australia. 1, 2 actually our Australian quality Leaders. Similar idea, but just in the Australian market. Yeah. Are you confused about how to invest? Life Shera can ease the burden of having to decide for yourself. Head to lifeshara.com/u to find out more. Life Sherpa. Uh, Australia's most affordable online financial advice.

Phil: Yeah. Okay, so a newcomer is approaching the market. I mean, would you suggest going straight into a basic index hugging ETF to start with and learn about it or what's the best approach?

Tom: Yeah, really important question. Right. So, and actually it's one, I get answerers a lot because a lot of my friends who work in different, they go, oh, you work in, you know, in ETFs. Can you give me some, some general advice as to how I y.

Phil: What share should I buy? What should I pick? You know, what lithium should I be?

Tom: Yeah.

Phil: What lithium miner should I be in?

Tom: And uh, I'll give you the exact same answer I give them. I say, you know, what is your investment goal? Why are you investing? You'investing to take an absolute punt on Trump coin. Probably not. Most, my friends aren't. Most people are investing, you know, as a young accumulator either. Uh, just as like to have this money aside in the market for the very long term for retirement. Some people will say, you know, uh, in seven to ten years I want to try and put a deposit down for a house. And some friends say, look, in one to two years I want to, you know, use that money for, I don't know, a big holiday. And that has to be the starting point for all investors because what your investment goal is, you, uh, know, and your investment timef frme will ultimately lead you to what you should probably be investing in. If you've got a one year time frme, you know, it is quite risky putting all your money in in a high risk asset because there's not a bad chance that could be negative after a year. Most people I speak to, I think most people listen to education podcasts like this typically have a longer term time horizon, are typically looking for long term growth. That's a bit of an easier conversation. You say, okay, say you've got a 10 plus year time horizon. You know, you've probably can take on a bit more risk though. Uh, everyone's different, everyone's risk times is a bit different. But if you're investing for the long term, you can typically take on a bit more risk. Thend you start a conversation around, you know, ETFs offer you access to growth assets both here in Australia and internationally, as well as defensive assets like fixed income. So what's your, you know, what split are you looking for? Do you want to go 100% in growth in Australian and US equities and you know, invest for long term and hope that those equity markets provide good wealth creation for the long term. Another important thing, you know, when we think about investing is the, the investment plan I speak to him about, you know, it's not just about okay, I've got $10,000, stay put that in, leave that for forever. What's much, much more common is we're getting an income, right? We've got money coming into our bank account each month. We want to put that to work. And this is actually it actually de risks using a strategy like what I'm about to mention, like dollar cost averaging, right? Because dollar cost averaging is I get my salary each month and I put 20% of it in uh, a select, you know, ETFs. If I do that every month, I'm kind of buying in slowly over time. So uh, it kind of do risks that initial entry point. You know, if I could invest today and the market could crash tomorrow, that's okay. It's my first passcel. I'll invest again the next time. And then to come to your original question, what actual ETFs were, I advise look for most my friends or most people who are starting out, I say keep it pretty simple, you know, keep it pretty simple in those, you know, low cost, broad market, well diversified ETFs. And over the long term, you know, history would say you can't do too wrong. Someone like myself, I, you know, because my role try and get a bit more Nuanced and a bit trickier with things. And I might use those, you know, quality ETFs or smart beta ETFs, but I guess I understand those avenues a bit better. And as investors go along their investment journey, once they've invested

00:15:00

Tom: in, you know, uh, broad market ETF'for a while and understand what that feels like, they can do some more research and maybe, you know, they'll get comfortable with, you know, more Smart BET or ETFs or more or more technical things as they go. But the key is, right, just, just getting started. Once you get started, you learn so much from that process.

Phil: So Tomm, you referred to risk. Now in finance land, that's interchangeable with volatility, isn't it? The up and down movements? Yeah, because I think a lot of people don't actually understand like risk. They think, uh, of, you know, they, the risk of losing your money. Like when you're punting on a horse when it, in fact it's to do with volatility. And you refer to dollar cost averaging as well because that takes advantage of the volatility because you're buying expensively sometimes and you're buying cheaply at other times. Just explain a little bit about the concept of risk versus volatility. Or are they the same two sides of the same coin?

Tom: Yeah, exactly. Right. Like a lot of times when you hear risk in finance, as you have alluded to, we are talking about volatility. And what volatility is in layman's terms is, you know, how much is the price your asset going up and down. Because if you think about it, if we start at point A and we've got two different assets, we, uh, got asset X and Y. If we start at point A and go forward one year, let's say they both end up returning 5%. Okay, great, they've done 5%. But one of them just want to put a nice long straight line, you sat there, trick it up each day in your portfolio. Lovely. That's great. The other one, it still returned 5% in the end, but that year it went up and down 20% each month. Now the one going up and down 20% is more, more volatile, more, more risky. And you know, investors might hear terms like risk adjusted returns. It's something people look at because if you can have an asset that goes, you know, that returns the same amount but for much less volatility, it's more appealing to the average investor. You don't want to see your investmenting up and down because, you know, What a lot of investor biases say you, you might actually sell that thing when it's gone. When it's gone down 20%, you might, you know, not stick to your original investing plan. So that's why we consider risk quite a bit in the finance landscape. And what's really good about a lot of diversified ETFs so. Or those broad market ETFs is because you're holding a basket of stocks, it can de risk or take away some of that volatility. So another example, you've got a single cyberbersecurity stock versus a basket of 30 cybersecurity stocks. Now, that single stock, it could shoot the lights out. It could have some idiosyncratic risk with the company and have a big falling out and drop a lot. And so that's going to be a bit more risky than holding 30 cybersecurity companies that, you know, you're kind of getting exposure to the cybersecurity industry, but since you got waiting in each of them, you're taking on less single stock risk or single or EOS syncratic risk. So you would expect that basket of companies typically to be less volatile than the individual one. And that's a great advantage of most ETFs. They tend to be fairly well diversified within their region or sector. Or oromatic, which can be really good for all types of ETF users, but particularly beginners.

Phil: Yeah. Avoid single stock shock Y.

Tom: Exactly.

Phil: Yeah, we've all seen that. So, okay, buying ETFs is only the first part of it. How should investors think about the relative weighting, how much of each kind of ETF should be in their portfolio? And again, it's, you know, there s. There's so many different answers to this, but just take us through a couple of simpler kind of examples.

Tom: Yeah, I think that probably the easiest way, just through a simple example. Start at the top, though. Starting at the top. So some of the concepts we've already touched on before we even get to the individual ETFs, we start with ASS allocation, right? And what I mean by ASS allocation is how much of our portfolio we're putting in growth assets versus defensive assets at its most simple. We already kind of discussed this a bit, but let's think about a young accumulator, right? A young investor who's investing for the next 20 years, very long term, probably going to have a higher skew towards the growth asset side of things, which are typically things like equities. We think about equities as growth assets. If you think about an Older investor, like a retiree who's got a large sum of money, wants to maintain that. Butget income from it, you'd be sitting more in the defensive camp, right? So that's the first way we have to think about splitting. Now if we move a level down below that, sticking with a young accumulator within the equities. Now there, we're Australian investors, uh, sure. Assume a lot of the listeners are Australian investors too. There's a great Australian stock market we can invest in. There's also the international stock markets there as a US Stock market, European stock markets, et cetera. So the next decision is, okay, within our equities, how much Australian and how much international do we want to hold? Right. And I guess to dig into that a tiny bit, each stock market is kind of different. At uh, the Aussie market in Australia, we've got some large mature banks and resource companies which are older companies, really good for income historically, but less growthy. If you look at the US market over in the United States, their market's concentrate these big technology giants like Amazon and Alphabet,

00:20:00

Tom: which is, which is Google's parent company, right? It's, they're more tech and more growth orientated. So you have to sit down and consider that and say, okay, well do I want more growth like from the US or more income from Australia? And look, most Australians, I think, uh, from some research I've seen, typically sitting about 40% Aussie, 50% Aussie and 50% global. You know, there's no right or wrong answer there, to be honest. Now once we've got down to that level, then we can think about the individual ETFs. So we've said we want to put 40% in our Aussie investments, right? Then we can go to the Aussie ETF landscape and say, well there's, you know, probably over 100 ETFs in Australia that focus on Australian equities. And so this comes down to how granular an investor wants to get. As I mentioned earlier, you can keep it simple. Like we've got an Australia 200 ETF to ticket codes. A 200, that's four basis points, right? So $4 for every 10,000 invested. Super cheap. It's diversified across the top 200 companies in Australia. That just gives you access to our market. Really simple. And you could stop there. There are actually other ETFs from uh, other providers that have that also do a similar thing like a Vanguard Australia 300 fund or an iShares one. In that land you really just want to look at if it's a similar thing, if it's a commoditized good or commoditized product. You really want to look at how they perform the way they should and what's the price of them. Right. So for instance, in that, in that landscape we've got the lowest costs. We think that's uh, a good advantage for investors. But then we could also compare outside of the broad market index. So uh, an investor could start to look at some of those smart beta ETFs I talked about earlier. You know, there's quality ETFs in Australia or value ETFs. When you're comparing those types of ETFs that are a bit more nuanced, you just want to look under the hood. You know, look at things like the management fee. How much is it costing? Is that similar to, you know, other similar ETFs are available? What are the holdings? The holdings look like they, you know, they look like growth holdings if you, if, you know, or maybe the sectors might be easier, you know, is it holding a bit of technology which tends to spe growthy. So is it, is it doing what it says on the box or does it look like a soonent says on the box? So once you've decided how much to allocate to the, to the Australian equities portion, then we can get to the ETF level fill. Sorry, it took a while to get there, but that's's okay.

Phil: It's great to listen. You know, I want people just to have the words wash over them because they might't understand every word to start withactly. Um, yeah, you've just got to listen to the words and things will become clearer after a while.

Tom: It's really important for framing. So that's when we can start comparing individual ETFs within the Australian, you know, market. Because that's what we've got into. Right. Um, there's a whole plethora of different ETFs. We can start again with those more simple ones. For example, we've got a, you know, Australia 200 ETF ticket codes. A 200, that's super simple. That holds the top 200 companies listed on the ASX weighted by their size. Right. And you can get that for four basis points, which is, which is really cheap. And that's, you know, there'I guess that first iteration of ETF that's really cheap, well diversified, great diversified access. And that's awesome for the, for the average investor, the starting out investor. But then within the Australian M landscape. There's also different types of ETFs. So there's ETFs that you know, really hone in on income. For instance, there are strategies that hold companies that tend to pay higher dividends. So uh, you know, maybe as you, and as an investor you want to get more income out of your Australian equities, part of your portfolio, you can look to that towards those type of ETFs or again, thinking about those smart beta funds I talked about earlier, maybe you want to, you know, try and extract a bit more growth out the Australian market. You know, I mentioned that it tends to be uh, a more mature market, so a little bit lower growth. But There are some ETFs Australia that focus on growth to I guess address that issue. Like a Australian quality ETF that I mentioned earlier. Now when you're comparing, you know, ETFs you want to look under the hoods, you want to look at the, you know, what type of fees they're charging per passive ETF typically ranges from you know, 40 basis points and um, rightite down to the four basis points I mentioned earlier. On the fun page, this is such a great tool, kind of stress enough. Each ETF in Australia will have its own web page, its own fun page. We've got a big website and every fund has one and there's a description there, it says this growth or income. It shows you the top holdings, the sectors, the geography. Really awesome tool for analyzing an individual ATF or comparing to ATF's. So that's really, really good way to uh, to start for investors.

Phil: Yeah, I always tell people as well to have a look at their super fund because you're going to start learning about asset allocation weightings. You know, like a uh, conservative balanced fund is going to have weightingss of different kind of asset classes and it gives you just a little bit more knowledge and tools I feel to be able to approach an ETF portfolio or a share portfolio as well that you might be trying to construct yourself.

Tom: Yeah, it's such a great example. Like, you know, if you're coming from a point of not having any idea about how to, you know, allocate towards the US or Australia or growth to defensive. Exactly. You can look to what your super fund is doing, what's their balance, what's their high growth. Even a good example is those diversified ETFs I mentioned. Right. Though within the diversified ETFs we run, we set an asset allocation in there so you can go and look at I ones and Go. Okay, so their growth ETF has, you know, 70% inequities, 30% ineensive.

00:25:00

Tom: That, you know, gives me a bit of an idea around how professional managers, uh, are managing their money.

Phil: When should investors consider dividend reinvestment plans rather than taking the dividend themselves every quarter or month?

Tom: Yeah, good question. So maybe for those that aren't aware of what that is, essentially, you know, within an ETF or even an individual share, you can often, you know, uh, set it up so when a dividend's paid or distribution'paid instead of that going to your bank account, it actually buys more units of the same ETF or buys more shares of the company. This can be a really handy tool. And again, it comes down to, you know, why have you invested that etf? Right. If you'd invested in it for income? Okay. Chances are you're probably going to want, you know, to take the income as normal from the distribution and just use that for whatever you saw fit. But some investors, you know, they're investing for the long term for growth and you know, the ETF might spit out a 1, 2, 3% dividend and instead that hitting your bank account and heading out in the weekend and spending it, you can really accelerate your capital growth by, you know, opting in for that drp, putting the money straight back into the investment, pretending it, you know, don't hit your bank account, put it straight back in this be a really powerful tool for long term wealth creation because you're not only is your, you know, capital growing, if the investment's growing, not only hopefully are you maybe contributing each month to it, but you're also having income flow back into it. So all these different sources of growth are really, really powerful over the long term and um, they compound over the long term to generate really strong growth.

Phil: Yeah. And they're otherwise known as drips, aren't they? Another one. A bit of jargon there, but yeah, it's just worthwhile thinking about say the basic ASX 200 for the last 10 or 15 years. There hasn't actually been that much growth, but a lot of the income has helped the value of, you know, a dollar invested in say 2006 to what a dollar worth these days? Am I saying that correctly?

Tom: Yeah, that's exactly right. If you had invested in the Australian market. Kind of. Exactly. I think it was over the last. We did this recently for uh.

Phil: Yeah, that's right. I think it was only like, it was like the peak before the financial Crisis was around 7,000. I think for the 6, 200 or something, which it's only just been beaten in the last year or so.

Tom: Exactly right. So if you had invested in the Australian market and not had that DRP on, for instance, sure you, you would have returned a decent amount of income, but your capital would be flat, which is, you know, quite remarkable to a lot of people. The other great thing, let's say, you know, um, let's say you're getting towards that stage where maybe you want to start taking some income out of the market. By using the drp, you're actually growing your capital base higher and highest that when you want the income, it'd be a high income base coming out anyway. So it's a great way to grow that capital base until you've got enough in there to say, you know what, that's good in there. I can get some pretty good income out of this. And you know what's cool as well, Phil? You don't have to do 100% DRP. You can do 50% DRP. So, you know, leave half the money in, take half the money out. And so maybe as you're going on your investment journey, as you're getting towards a retirement phase, you can start with 100% DRP when you're younger to grow your capital and as you get later on, you know, turn it laa and la and take more of the income out as you need it.

Phil: So what's concentration risk? That's something we hear about in ETF land. And you just basically want to make sure that you're as diversified as you really think you are.

Tom: Yeah, exactly right. I think there's probably, there's probably two things to consider here. The first one is concentration risk. Even within a single etf, it is possible, like, you know, to have an ETF that's tracking a market. That market might become concentrated. There's a lot of talk, uh, at the moment about how big the US tech companies have become. If it looks like the S&P 500, for instance, which is a broad market index, you've got like about 25% of the weight of that index in five names. So that's one concept of concentration which we manage in various different ways. For instance, uh, May as well mentioned, we like AN S&P 500 equal weight ETF. So rather than that traditional, you know, market cap weighting, where the bigger you are, the more weight you get, you just give each 500 companies the exact same way. So that's one way of, you know, diversifying single ETFs. But I think your question also alludes to if you're holding multiple ETFs, you have to make sure you understand what's under the hood because, you know, you could hold, you know, three ETFs that essentially hold the same thing. And so it's just as good as the, the one. Right. And the best way to solve this is to know what you're investing in. So, you know, if you're holding like a Misky World index, which invests in lots of companies around the world, and then the S&P 500, which I just mentioned, you'renn have decent overlap at the top end. And some big US tech companies, maybe you're completely comfortable with that, maybe that's what you're investing in those for. But just understanding that and then saying, okay, I could buy the Australian market instead. Because you know what, the Australian market only has a 2% representation in the Misky world. So there's not much overlap there. And that's a great way of diversifying amongst ETS's, but yeah, super important. And it comes back to looking under the hood. Having a look on the website and just looking at those top, Even the top 10 names will give you a good indication of your overlap with other ETFs.

Phil: And I'll

00:30:00

Phil: just point out the share site lookthroug tool, which is a great way of looking at ETFs as well. What's a geared fund? Because I believe there. How many geared funds have you got now?

Tom: I think we've got five geared funds now or five positive geared funds.

Phil: Yeah. So what does that mean? And are they suitable for all investors?

Tom: Yeah, good question, good question. So, I mean, a lot of Australian investors will already be familiar with the concept of gearing through the property market. Right. We know, you know, generations build a lot of wealth in the property market and a lot of that was due not only to the price appreciation of property, but actually due to people gearing into the property market by taking out a mortgage. Right.

Phil: So only putting 20% down, butly, uh, advantage of the capital gain over the, the whole of the property.

Tom: Exactly. It's like a super simple example for, for investors who are still scratching their heads. Let's say I had $5 and I borrowed $5. Okay. So I invest $10 into the stock market and it goes up by 10%. Right. So it's gone up by $1. Now that $1 goes to me, I've certainly borrowed $5. Now I've got $6 of my money. So the market is going up 10%. My return is 20%. I've doubled my return right now. A uh, fairly recent iteration of ETFs has been U some funds we launched last year, some moderately geared ETFs. And it's just a really simple way for investors to get access to gearing or borrowing into the stock market. You know, historically investors could do this through things like margin loans, but they're typically pretty expensive and it's quite an onerous process. Like now you can just buy a single ETF ASX the same way you buy BHP or a 200. And underneath the hood, you know, internally we're borrowing money, we're unit portfolow where rebalancing to make sure it's uh, in the right range. So really awesome tool. So they're not for every investor? No, it's hard to say that any single ETF is for every investor.

Phil: But these one are they. Is their price reflected in thee or the volatility reflected in their price?

Tom: Yeah, exactly right.

Phil: They can go down um, a lot more than just an ungeared fund.

Tom: Yeah, exactly right. So it sounds all good and well, you know, you that example of that it goes up by market, goes up by 10%, the market goes down by 10%, you lose double that in that previous example. Right. So you have to be careful as we talked about earlier, there's higher risk or higher volatility within these types of ETFs where they probably can be good use cases. You know that young accumulator investing for the very long term. So time can usually hedge out some of your risk. Also for people who, you know, understand them well, are using them, you know, as a portion of their portfolio to maybe put less capital in to get the same amount of the equity market within a diversified portfolio. But even like, you know, a good use case we've seen a few times is you know, quite wealthy investors, people with who hit that $3 million superannuation cap and they can use a gear ETF to get even more than that. You know, three men they're meant to. So um, there's a few interesting use cases. We've got really good resources on our website actually if you look up, you know, Betash shares, wealth builder funds, we did a brochure, you know, talking about just you know, gearing into stocks in general, not specifically our funds. We get to that point. But' awesome education tool for investors who think that could be of interest to them or of use to them. Definitely do your research first as you said. But potentially high return but you know, that always comes with high risk.

Phil: Can you buy those geared funds in an smsf? Because I think there's very limited ways of leveraging into the share market if you're running an SMSF.

Tom: Yeah, yeah. So you know all of our ATTF's are listed on the ASX, right? So if you SMSF, which most, which I think all do have access to secures and ASX, you can, you can buy those ETFs and it gives you a great way of accessing, you know, a moderate level of gearing within ANSF. You know, even within some um, non SMSFs, there are some superannuation platforms for those who are not the SMSF stage just yet, um, that allow you to pick your ETFs. Actually there's some out there in Australia I. And even those you can use some geared funds as well. So, uh, there's a few ways you can use them in superannuation.

Phil: So you mentioned moderately geared. What does that mean? I mean say compared to say a property that you own, which is 20% your own money and 80% the banks, is that highly geared? And how does that compare to a moderately geared share portfolio in an etf?

Tom: Yeah, really good question actually. So, uh, historically, I'll uh, take us back a little bit so. And I'll take US to the US. Firstly, in the US they've got a lot of leveraged ETFs, a lot of their leveraged ETFs, three times leverage, so getting three times a return and three times the volatility of the underlying. In Australia there have been some leveraged ETFs available for quite some time and those were around 2.5 to 2.75 times leverage. So those we'd classify as, as probably, you know, more highly geared, you know, 2 to 2.75 times your returns is quite a lot more risk being taken on, um, when I talk about moder gear, these are some funds we put last year that are down to, you know, they're around the 1.3 to 1.7 times range. So there's just

00:35:00

Tom: a lower level of borrowing going on which is going to give you a lower level of volatility which is typically more stomachable for the average investor. For most investors that it's easy to stomach that level of volatility and we think it's a good level for, you know, the average.

Phil: It's a sweet spot. Is it?

Tom: Somewhat. It's just, it's just lower than what was available before and because before the leverage GTF's in the US and those, those high level ones that have typically been used as trading tools, right. That you know, short term, you know, trying to pick the market, which is not what we want to do with long term investing. We want to be able to hold something over a long time horizon and grow from it. And these work much more like they should for a long term investor is probably the best way to put it. Yeah.

Phil: So tell us about buying ETFs directly from BetaShares. You don't actually have to go to the market, do you?

Tom: No, not anymore. So a really exciting development over the past few years here at BetaShares is we have launched our own platform for investing. It's called Beta Shares Direct. So again people can find out a lot about it online. But essentially just like you know, other investment platforms, you can go into BetaShares Direct, you can buy any Australian ETF which is great. Not just BetaShares ETFs, you can buy our uh, competitors ETFs as well. And we've also got access on there now to you know, the 300 largest companies or 300 of the largest companies shares on the ASX. So that's really awesome. So invests go there. One of the great features feel is that it's zero brokerage. So uh, you know we talked about dollar cost averaging earlier and how it can be really good to buy a little parcel each month. You know, one, I guess one hindrance and one hindrance to all. All investing is fees and costs. Right. ETFs are great because they're typically low cost. That's a first tick for long term investors. One issue can be uh, though depending on you know, the investment platform, you can pay 5, 10, 15, $20 each time you go to buy and sell your shares or ETFs. So what's really awesome and what we're trying to do with Beta Shares Direct just like we've done with ETFs is to make investing frictionless. And you can now access the low cost ETFs for free, which is really, really awesome through Betaares Direct.

Phil: Are they recorded on a holder identification number like if you're in the CHESS system or is it a different kind of ownership structure?

Tom: No. So it's the Omnibu structure. Obviously that was a pretty, you know, important consideration. A lot of, I'd say a lot of the legacy investment platforms were using the hint hing structure. That means they've got their own holder identification number. However it's becoming more and more common to use OGAR Structure, which means it's just held under a single. The single hint, obviously, the assets are still under the same regulations, they're still safeguarded with the custodian. But it allows us to do some really awesome things like fraction investing. You can buy a fraction of ETF for a fraction of a share. We've got features like auto invest, which allow, you know, money to come out of your bank account straight into the investments in the ETFs. We've got managed portfolios. You can build your own set of portfolios. And a lot of these things have made a lot easier and a lot more efficient using that omnibus structure. So we went down that route because we thought it was the, you know, the most frictionless way for investors to get access to the market.

Phil: And so apart from that, the management fees are still only the fees that are embedded in the ETFs themselves. Is that how it works?

Tom: That is correct. So if you just go on and you're just using it very simply to, you know, buy and sell different ETFs and shares. It is, if you want to use some of those extra features that I mentioned, like, I personally use the model portfolio. I build my own little portfolio and say I want, you know, 10%, this fund 20 in that fund, 20 that fund 10 and that, so on and so forth. I set that and then when I put money in, it automatically rebalances for me into those funds. They charge. There's a small, you know, fee for that feature or there's a small fee for the aut best feature. But you can use the platform, its's most basic to buy and sell ETFs as you're probably doing on other investment platforms at the moment, for completely free for zero brokerage.

Phil: So if listeners want to find out more, where can they go for everything?

Tom: We've talked about the BetaShares website. You know, a lot of the concepts we talked about earlier on, about asset allocation, about investing in Australia versus us, about what's interesting at the moment. You know, we've got insights pages and education courses on our website for the individual funds under the hood. As I mentioned, fund pages with the fees, description, what it's holding and then beta shares direct as well. Awesome information and videos and everything on the website there to, uh, to give investors all the information they need.

Phil: And as a proud Aussie, it's great that Beta shares what number two amongst all the global giants that run ETFs in the world.

Tom: Yeah, that's here in Australia. Here in Australia, Yeah, yeah, exactly right. We're pretty proud of that fact. Like I'm pretty sure it's true that if I look to all developed markets in the world, if you at their ETF industry, the 1 and 2 is Vanguard and BlackRock or Vanguard n ever in the world except here down under in Australia. You know, we're very proudly Australian. We've, you know, in our growth we've listened and we've understood, you know, the Australian investor I think better than our competitors and it's led us to now, yeah, being number two in the Australian ETF industry for funds under management just behind Vanguard. But we're chasing them down, don't worry.

Phil: Phil Tom Wickendon, thank you very much for joining me today.

Tom: Thanks, Phil. It was a pleasure. Thanks for

00:40:00

Tom: listening to Shares for Beginners. You can find more at sharesforbeginners.com. if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

00:40:12

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