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ASX Week: The Guide to ETF Investing: John Caulfield’s Top 5 Mistakes to Avoid

HOSTS Alec Renehan & Bryce Leske|10 November, 2021

Sponsored by Australian Securities Exchange (ASX)

In this episode, Bryce and Alec chat to John Caulfield, Director, Intermediaries and Institutions from VanEck, and what he thinks are the 5 mistakes ETF investors should avoid. We know that ETFs are something that the Equity Mates community loves, and hearing about other people’s mistakes is a good way of not making them yourself! Prior to joining VanEck, John was the Director of Business Development at FTSE Group (Australia), and he’s also worked at the London Metal Exchange. To learn more about ASX Investor Week On Demand, and watch all the presentations and information on demand, visit asx.com.au/investor-day.

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Bryce: [00:00:31] Welcome to get started investing in this podcast, we cover all the basics that you need to start your investing journey. Are you joining us for the very first time or is this the very start of your investing journey? Well, before you dive into this episode, our is designed to go from the very beginning, so we strongly recommend that you scroll up and start at episode one. However, if you're feeling brave and just want to dive in, then of course, don't let us stop you here at Get Started Investing feed, we unpack all the jargon and the confusing bits. We hear your investing stories with the goal of making investing less intimidating. And of course, we want to have a good time along the way. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going? 

Alec: [00:01:07] I'm very good. Bryce That introduction just keeps growing and growing. Much like your investing portfolio every year, it compounds a lot. 

Bryce: [00:01:16] Thank you. So are you going to say something about my hair but nonetheless? 

Alec: [00:01:19] No, no, no. But great to be here. Great to be back for our latest ASX week episode. Yep, we've partnered with the ASX. We've taken some of the best presentations from their investor day and we're showcasing them on the podcast. And this one's going to be a good one because we love talking about investing wins and investing mistakes here at Get Started Investing feed too. We've made some big mistakes over time. Yes, and maybe if we'd listen to this presentation a few years ago, we could have avoided making some of them.

Bryce: [00:01:50] Absolutely. Well, luckily, those that are listening now should be able to avoid them. It is our absolute pleasure to welcome John Caulfield to get started investing. John, welcome. 

John Caulfield: [00:02:00] Thank you. Thanks for having me. 

Bryce: [00:02:01] So John is director of institutions and intermediaries at VanEck, a world leading global ETF provider. And the same for today is five mistakes that often investors make when investing in ETFs and essentially how to avoid them. Well, I hope that's the same. Anyway, you're going to tell us how to avoid this. Just a reminder that you can check out John's presentation online if you haven't already had to ASX secondary use slash investor dash day that is going to be in the show notes if you want to go and register and also check out all of the other amazing presentations that we're on. But yeah, John, we're going to crack into five mistakes made by ETF investors. Break them down and hopefully I can. I can tick a box next to them to say we haven't done it. 

Alec: [00:02:50] Yeah, I'm pretty confident you've done something like this and find out. So, John, let's start at the beginning. We want to unpack each of them, but let's just get the headline. What are the five mistakes that you I'm guessing you say a lot in ETF investors and that we should be avoiding? 

John Caulfield: [00:03:07] Definitely. So the first one would be don't get caught up on fees. The second one, make sure you understand what's going on under the hood. The third relates to cognitive biases. The fourth, don't invest emotionally. And the fifth, use limit orders when you trade.

Alec: [00:03:26] nice and you have told us that there's a bonus one, but is not till the end, so people stick around. So let's start at the beginning. Don't get caught up with fees now. Yeah. Bryce and I have a policy here at Equity Mates. We hate fees, but there are times when fees it's the right thing to do to pay pay fees. Yeah, but it can be confusing because when's the right time when, when the fees matter? When do they not? So help us understand it? Why should we not get caught up? 

John Caulfield: [00:03:55] Yeah. Well, look, there are probably two elements to the fee question, and if you just look at explicit costs and where we talking ETFs, that'll typically involve aimia management fee. So what is the headline fee that an investor will pay? And that's often where people stop and they will just go. Here's an Aussie equity ETF. Here's another one I'm buying the cheapest, but they may be different, so I could say this headline in me, but you've also got to go a step further. You know, spreads. What are you actually paying to trade on ASX? So that'll increase your total cost of ownership? There's also brokerage, which obviously is outside of an ETF manager's hands. But all of these things, you know, accumulate and you need to sort of see them as a whole. Like I say, total cost of ownership. So there's that the explicit amount you're paying. But then there's also the value for money piece as well. So again, you need to be comfortable that the underlying ETF that you're buying is going to give you good bang for your buck. And if you're buying the broad market and you want to keep it simple, you would expect to pay a low fee if you're trying to buy something a little more sophisticated, whether that's a single country ETF, whether that's, you know, an ETF which screens stocks to get a particular sort of factor exposure or something like that, you should expect to pay more for that sophistication and you're going to be paying more for a good reason. That may be a risk related reason. It may be a potential performance related reason.

Bryce: [00:05:30] So we imagine that there's some sort of a balance, though, you know, you can't ignore fees completely, but you know, you shouldn't also based on what you're saying, get caught up in fees too much or make that the sole decision sort of point. So how do you strike the right balance? And I guess if you were to take it from a personal point of view, how do you think about it? 

John Caulfield: [00:05:49] You know, like I said, I think, you know, the very plain vanilla broad market index offerings have become quite commoditized over time. And that's where we've seen fee pressure and we've seen empires drop. And so if you want to buy the market, you would hope to do that cheaply and you wouldn't want to overpay. And then when you sort of comparing ETFs, you know, essentially there's a lot of overlap in terms of how things are approached. So fees become probably a little bit more black and white. Traditional active managers, you know, they charge what they charge. Some of the like I say, you know, more sophisticated index methodology sits somewhere in the middle. So, you know, whether you're taking a core satellite approach, you know your core should be cheap. Your satellites will be smaller in size as far as how much you allocate, but you might be willing to spend a little bit more of your fees on those particular exposures. 

Alec: [00:06:50] Yeah. And you know, we've recently come off a three-part series on ESG investing, and all of those sustainable funds have higher fees than a traditional index. But it makes sense because there's a lot more work, a lot more heads, a lot more effort that goes into actually screening stocks and building that index.

John Caulfield: [00:07:07] Yeah, yeah. No, there's IP in there in terms of, you know, research from the index providers side as well. A lot of sophistication and obviously managing the portfolio, you know, takes a little bit more as well.

Alec: [00:07:18] Mm-Hmm. So to summarise, if it's a vanilla S&P 500 ASX 200 index, then you can do a like for like comparison of fees because you're basically getting the same thing with different brand name on it. But if it's a more sophisticated index or it's something that is a bit more bespoke, don't expect to be paying three basis points in fees. Absolutely spot on. Nice one. All right. Well, that's the first of five. Pretty simple, pretty straightforward to understand. Speaking of understanding, the second mistake is not understanding what is under the hood. Yeah. Tell us about this. And what do you mean by under the hood? 

John Caulfield: [00:07:56] So I mean, that is again, looking beyond just this is an Aussie equity ETF. So you will see on ASX many Aussie equity ETFs, they are not all created equal and it all comes down to the index that that ETF seeks to replicate. So I mean, you mentioned comparing, you know, ASX 200 or S&P 500 ETFs, if it's the same index, it's like for like, you know, if, like I say, you've got a cawsey that tracks that index, but you've got a cawsey that tracks an equally weighted index, for example, you're going to get different risk return outcomes. So don't just look at something and say it's Aussie equities, it's the cheapest. I'm going to buy it because you might be buying something that you're not expecting, so you need to take the time. You need to do the research in terms of the index that the ETF is looking to replicate, and you need to understand what that index is actually trying to achieve. 

Alec: [00:08:53] And just as a point of clarification, you're talking about replicating indexes. Where can we go and find this information? 

John Caulfield: [00:08:59] Yeah, VanEck dot com. Today you has it all. As with sort of any ETF provider, there will be information on what the actual index is and then also links and summaries to, you know, what that index is trying to achieve. And I say it may be just the largest X number of stocks that may be a specific country. You will be able to see the methodology. I mean, the one good thing about ETFs is they're all transparent, so that look through is available. 

Bryce: [00:09:25] Okay, so you open the hood, you see what index that it's tracking, but I'm sure there are other things that you actually need to think about, you know, understanding actually what's under the hood? What's the main draw? What's the engine? What's the V8? What other things should we be looking for? 

John Caulfield: [00:09:40] I mean, it all comes down to actually, what are you trying to achieve? And we've mentioned sort of Aussie equities. I'll stick with that theme. Very concentrated markets, you know, with your ETF, are you actually trying to alleviate some of that concentration risk? And the index will either buy all the stocks and allocate the most money to the largest ones? You're going to be concentrated or you're going to relight that somehow. So again, you know, what is your investment objective? Is it to buy the markets and the whole market? Is it to be more diversified? Is it to focus on a specific sector or a specific factor? Ultimately, why are you there in the first place? 

Bryce: [00:10:20] I think one thing for me that it's worth pointing out is having a look at the percentage weighting of companies, particularly if you're looking at getting geography. Yeah. We've spoken about the MSCI World Index, for example, and you know, it's easy to see from the title that you're going to be getting thousands of stocks from around the world. But if you think you're going to be equally weighted with US stocks versus Aussie stocks first Japanese or us, you know, Iraqi, whatever you as soon as you look under the hood, you'll say that it's sort of 75 per cent us weighted. So it's those sorts of things as well not being exactly fooled by the title of the ETF. 

John Caulfield: [00:10:59] Yeah, I mean, a lot of people just assume passive means diversified means low risk. And I said, particularly in an Aussie context, it's not always that straightforward. 

Alec: [00:11:10] Mm-Hmm. So look under the hood. Go to the issuer's website. Have a look at what index it tracks. Have a look at the companies it holds, and compare that to other ETFs because you don't want to just be, you know, holding the same five big US technology stocks in three different ETFs, any other red flags or any other parts of the engine. We should be looking at how far can we use this metaphor? Think we could go? 

John Caulfield: [00:11:39] Yeah. Well, look, I mean that that overlap duplication point is probably one to reinforce, to be honest. Like you said, if you're buying a US ETF and then you think you're buying a tech ETF and you think you're buying different things at the moment, you know, not so much. So, you know, really looking at those holdings and again, just throwing it back to your investment objective, you know, what are you trying to achieve when you're doing your research in the first place? 

Bryce: [00:12:03] So just to break down that overlap bit for someone who's just started and they're looking at two different ETFs, what exactly do you mean by that? 

John Caulfield: [00:12:09] I mean, it's really just the largest holdings, like I say. I mean, if you buy, you know, a Nasdaq, can you buy an S&P 500? The names are going to be very similar. And the way things are going to double up if you put the two of those in a portfolio together. So like I say, I mean at the headline name you investing in different things, but the actual holdings 

Alec: [00:12:30] are the same. Yeah, yeah. So that's two down you go, plus the bonus. Now the next one is cognitive biases. Yes. We've spoken a little bit about this on the show, but probably not for a while. So let's start with the definition. What is a cognitive bias? And then why is it something we should avoid as investors? 

John Caulfield: [00:12:51] Yeah. Look, I mean, it's basically not letting your mind fool yourself. You know, we all have these inherent biases and we probably aren't aware of them. And it all relates to, I guess, misinterpreting or ignoring data that's put in front of you. You make a mistake by looking at something and interpreting it the wrong way, essentially. 

Bryce: [00:13:12] And so a key cognitive bias that you've written about is loss aversion. Yeah. And one we've spoken about in the show before. I've certainly been well, I've had loss aversion. I don't know about you, Ren. But he I don't think he has any cognitive biases. But can you tell us about what loss aversion is and why it matters for investors? 

John Caulfield: [00:13:32] Yeah. I mean, look, they've obviously been a few studies over the years where, you know, you give someone an option for a guaranteed kind of gain or you give them a chance to either make some or they're going to lose some more. And when you do the maths on the two different scenarios, you know, you actually would be better off taking the chance and kind of trying to go for the greater amount. But most people will prefer the kind of cash in the bank, so you want to avoid the losses rather than, you know, striving for the gains, even when the maths doesn't necessarily make sense. And that's not saying, I mean, your brain essentially, you know, tricks you. Whereas the data should be telling you something quite explicit.

Bryce: [00:14:12] Yeah, it's that feeling that you often get as a beginner investor where you know you're more likely to sell and lock in a profit than you are to sell and lock in a loss because it hurts more to lose than it does to actually take that win. Yeah. And so more often than not, you will hold on to those stocks that are falling and falling, falling, going, Oh, it's going to one day return to that $1 that I bought it. 

John Caulfield: [00:14:35] Well, that's another one good old anchoring. Yeah, yeah, exactly. I mean, I'll sell it when it gets back to what I paid for it. Yeah, you've got to, you know, clean sheet of paper rather, you know, what's it worth now? I mean, I forget about what you paid because that's no longer really relevant. 

Bryce: [00:14:52] Yeah, yeah, yeah. 

Alec: [00:14:53] Now there's so many cognitive biases. I think this whole podcast is for Bryce, and it is an exercise in the Dunning Kruger effect, having a low amount of knowledge and really overestimating also. And look, we could go through the whole list and talk about a bunch of different examples. But I think the important thing is, how do you become aware of these biases? And then more importantly, what do you do to prevent these cells from succumbing to them? So our brains play tricks on us that they try and make us bad investors. How do we become good investors?

John Caulfield: [00:15:25] Yeah. Look, I think there are a few things. I mean, getting good advice. Is probably one, you know, writing down investment objectives. A lot of people like to write down why they bought a stock when they bought a stock or an ETF. The rationale at the time. And then when it comes to sort of selling or reassessing, you look back in you again, you know, try and put a clean set of eyes on it and start from the stock. Does it still make sense? So again, just trying to basically take that step back and not be swayed by something, as you know, probably a good way to go. 

Alec: [00:16:01] I think that riding down your luck have keeping an investing journal is something that we often hear experts on the podcast talk about, but I don't think enough people do. And you sort of tell yourself, I know I'm buying this at the time, but then six months later, you can never Ren. Absolutely. Yeah, yeah. So you also spoke about a couple of other biases which may not technically be cognitive biases, but I think they're probably worth talking about here. You mentioned sort of personal and cultural biases. You gave the example of avoiding China. Can you sort of expand on how these can affect us as investors and what we can do to overcome them? 

John Caulfield: [00:16:37] Yeah. I mean, look, it's it's a fascinating one and obviously very topical at the moment, and I think the difficulty is going beyond kind of headlines and politics and that sort of thing and looking at it from an investment perspective. And I mean, nothing screams that louder than what we've seen through, you know, the month of September. As far as investment returns go, a lot of noise around China and you know, a lot of reasons why people shouldn't be investing or selling or making decisions for probably the wrong reasons. And then you look at the US market down three and a half per cent for the month and the A-share Mainland China market up six and a half for the month. So, you know, there you go, you've got a 10 per cent spread and it's, you know, something you've either missed out on or you've sold at the wrong time. And it's all just because you've gone with, like I say, politics or headlines rather than, you know, am I doing this for investment reasons? Mm-Hmm. 

Alec: [00:17:35] I guess the question there is, how do you know if it's a bias that you succumbing to versus having an opinion or having a thesis like how do you test where that line is? 

John Caulfield: [00:17:44] It is tricky. And I mean, they are definitely double standards, I think in terms of just again, probably biases, but also, you know, media, you have the tech complex in the US, you know, they've gone through data privacy issues. We've had politicians talking about breaking them up, regulating them. And that's all okay. When the Chinese talk about data privacy issues breaking up tech, suddenly it's they want to steal my money. The government's coming after me and I've said it's there's a definite double standard to me. It's pretty evident and I can say whether you are swayed by that as a bias or whether you choose to do that. Like I say, I think it's just different, you know, different approach. Same underlying two different standards. So we need to be careful of that. 

Bryce: [00:18:34] So that is three down, John. Before we move to the fourth, which is the traps of investing with emotion, we're just going to take a quick break to hear from our sponsors. So, John, number four, is investing with emotion, and we know that money is an incredibly emotional topic. Big wins, big losses, it's easy to get caught up in work mates of doing FOMO. So what do you know? What do you see investors doing and where are they often tripping up? 

John Caulfield: [00:19:04] Yeah. Now it's the good old meme stocks. I mean, look, the obvious one is selling at the bottom. I think, you know, the good thing, if you like of the last sort of March April meltdown, it happened that quickly that we probably didn't see as much of it as in previous crises. GFC was kind of a longer, slower death spiral. And then people sort of lock it in right at the bottom and you never make it back. And again, you know, the last 18 months just shows you how much there is to be made back. If you just sit tight. Yeah. So that's kind of the obvious one. I think where ETFs come into it, they are diversified baskets of stocks. And what that does is it allows you to not get caught up too much in the individual names as well. And so you can again sit back, what's my investment objective? You know, why am I specifically targeting this region in this country, this fact? Whatever it may be. And then when price or value looks goods, you know, you buy. And again, it's trying to use the data, not get caught up in this one stock that I thought was fantastic has fallen or this one that I'm totally in love with. I should be selling now, but I'm just going to hang on a little bit more. You know, you want to really just take a step back again. I mean, it's it's pretty closely tied to the cognitive biases as well, but it really is just sort of saying, you know, I don't love you winners too long, but also don't be scared to sort of cut some losses. Have a nice, diversified portfolio. 

Alec: [00:20:39] It's a fine line to tread because there's such emotion on both sides. You know, you mentioned the GFC, your March 2020. On the downside, when you know everything's right and you're losing money, it's such an emotional time to save the money you worked so hard for go. But then on the upside, on the other side, if you see your mates making money, you get FOMO, you're taking their stock tips, but you're also like falling in love with certain sectors. You know, in our lifetime, well, in the last few years, we've seen lithium have a moment, we've seen medical marijuana have a moment and people just fall in love with certain sectors. So yeah, there's both the the intense highs and intense lows, I guess. How do we walk that middle path? How do we avoid the extremes and try and invest unemotionally? 

John Caulfield: [00:21:24] Yeah. Be strategic, I guess at the highest level, you know, and that means be diversified. Ultimately, I mean, across geographies, we have our sort of Aussie equity bias, no doubt, you know, names. We know names we love that we're familiar with, but plenty offshore as well. ETFs, as you will have seen a lot of new products coming to market. It gives people a lot more options. Whether you want to target, you know, something specific, whether it's clean energy. Like I say, we've spoken about China. It allows you to actually not have to hang on to this single investment thesis or the single stock that may have done so well for you in the past. 

Bryce: [00:22:03] I can safely say that I have invested with emotion and both successfully and unsuccessfully, but I think similar to cognitive bias, it's one of those things that if you recognise it, you definitely write stuff down. Remind yourself of why you bought things, why you've sold things. That's probably been one of my biggest things over the last couple of years is like almost journaling why you do things and you do really remind yourself, you know, you really come to understand your biases and then it's like, Okay, let's not be emotional here. This is what's happened to the book can move on. 

John Caulfield: [00:22:37] Exactly. And I mean, ultimately, when we we're investing in the market, this is the equity risk premium we are trying to capture. You know, it doesn't come in a straight line. You need to also be comfortable mentally with the volatility. I mean, that's you're buying the volatility to receive the returns. Essentially, you know, you just got to have the patience. 

Alec: [00:22:57] Yeah. And I think on that point, not checking the prices every day is a big way to just control your emotions because you can say it. It's especially true those days in the crypto market. You can see how the crypto world is feeling based on the price. And you know, when the price is up, the activity on Twitter goes up and there is shouting from the rooftops. And then when the price is down, everyone's depressed. But just stop taking the price. I mean, I personally check things quarterly in my portfolio. I think Bryce does similar. It just takes so much of the emotion out of the day to day. Yeah, yeah. 100 percent. 

Bryce: [00:23:34] Yeah, it also surprises you on the upside. I know a lot of beginner investors who go into the markets expecting it to make them rich incredibly quickly will often. I often buy into an ETF and whinge that it's gone up five per cent in a week and you're like, That's pretty damn good. You know what I mean? 

Alec: [00:23:55] Like every day? 

Bryce: [00:23:56] Yeah, it's like you're not. Firstly, find a stock that's going to go up 100 per cent overnight, like you're not going to have it. Secondly, understand what the role of an ETF is. And thirdly, understand that five per cent in a week over a year is a lot of money, and they get caught up in that emotion of, Oh, this, you know, it's not giving me as much return as I thought it would involve. It's fascinating. 

Alec: [00:24:19] The other, you buy it and it goes down two percent in the first week in lost money. And it's like, 

John Caulfield: [00:24:24] Yeah, exactly. I mean, look at the long term. I mean, there's many, many figures out there what you should expect from equity markets over 50, 70, 100 years. I mean, you know, those numbers are pretty accurate over the long term and you need to be realistic with those. 

Bryce: [00:24:41] So that brings us to number five, and this one is a little bit of a technical one, but worth chatting about and that is not using limit orders. So for those who have just started, they've signed up to their broker account. They've likely seen that when they go to buy a stock, they can buy it at a market price or limit price, and they can decide between those two. So can you define what a limit order is and how you put one on? 

John Caulfield: [00:25:08] So limit? Or are you essentially capping the price? You're willing to pay for something or, you know, putting a floor on what you're willing to sell at? Whereas market, you essentially just throwing it ASX and you know, whatever price is there at the time, your trade will be executed at. So your market order you lose control, your limit, order you maintain control.

Bryce: [00:25:29] So in practical examples, you are going to buy the ASX 200 ETFs and it is unknown. Thirty three bucks, whatever it may be. And so rather than saying I want to buy $500 worth, you're going to say, I want to buy it at thirty three dollars and 10 cents

John Caulfield: [00:25:46] up to that price. Yeah, I mean, you either say I want to buy X number of dollars or X number of units of the particular ETF, but you know, that is the price I'm willing to pay at the moment. And you put that sort of limit in. And then if the price is below that, you will get executed below that. It's really just saying, I don't want to pay more, then when are you buying? And it's like, you know, you walk into a shop, you know, you don't just say, I want to buy their thing on the shelf and I will pay whatever price you telling me at the time. We want to agree on the price, or at least I want to know what that price is before hand over my money. 

Bryce: [00:26:21] I can understand why that's important when you're buying individual companies, because this this spread and what people are willing to pay for can be quite different. But when it comes to an ETF, you know, it should really just be that the price of the ETF is the price of the ETF. So why does it is someone in there sitting? I can sell this ETF. 

Alec: [00:26:40] Forty via the price of the ETF is the price of the underlying assets. Net asset value added. 

John Caulfield: [00:26:44] Yeah, yeah, but it is still a spread. So is a spread on screen, as you would see for an individual share. And what that is is basically the market makers provide that liquidity so they will sit on the bed and on the ask. And so you will be able to buy and you'll be able to sell at any given point in time. You know, there's a market maker, there's a spread, but there's also individual investors. And I might be willing to sell mine at a different price to the market maker and I might come inside them. And you know, that spread could widen for very legitimate reasons. So, you know, that price will move around a bit. It'll trade very, very tightly around the nav, but it will move around again, depending on, you know, what the underlying stocks or bonds are. 

Alec: [00:27:30] So I've got a confession I never use or very rarely use limit orders. And so I want you to tell me why I'm wrong. So I'll tell you why I just go market order most of the time, and then you tell me why I'm making a mistake. Yeah. So for me, I am everything I buy. I'm thinking long term in decades long time horizon, particularly with ETFs. And for me, I would rather buy something. And, you know, maybe it will jump up a little bit and I'll pay more than I expected to, but it's never going to jump up 100 percent in a morning. Yeah. Well, it hasn't happened to me yet. Yeah. And I would rather not miss out on the opportunity. I'd rather dollar cost averaging to something every month. If it's an ETF or buy something that I think is going to run up if it's an individual stock. Yeah, I would rather not miss it then than put a limit order on. Why am I wrong? 

John Caulfield: [00:28:22] Well, I think it's just best execution. Basically, like you say, the chances are you're going to be there and thereabouts anyway. You will have these anomalies, flash crashes, things happen. Planes hit towers. You know, all of these events that are out of your control impact markets. And if you've just lobbed an order into the. The market and it hasn't been fulfilled yet. Like I say, you just lose control if you're going to average in a tiny little bit over time, like I said, you're going to be neither here nor there. The idea is just to try and get the best execution possible. Let me pay a price that I'm happy to pay. And if I'm looking at the screen, you know, my limit order could essentially be the market price. All I'm doing is defining that, so I'm not deviating too far from it. I'm just being explicit with what that actual price is. 

Bryce: [00:29:17] So it's not as devastating as perhaps loss aversion may be, but as you said, it's just good practise. 

John Caulfield: [00:29:24] Yeah. And I mean, like I said, you know, prices can swing for very legitimate reasons. And thankfully with ETFs, because they're diversified and you're holding a bunch of stocks, it tends to be cents rather than Dollars, you know, the swing. But like I say, depending on how much you're investing, it can be sort of a not insignificant amount. And if you can avoid it just by doing something reasonably straightforward, that would be our advice. 

Bryce: [00:29:50] So you've brought a sixth and bonus mistake to the table, John. But just to recap, we had no one being not getting caught up in just comparing fees when looking at a bunch of ETFs. Not understanding what is under the hood was number two cognitive biases. Number three number four was investing with emotion and then number five was not investing using limit orders. So number six, the bonus is trading times and not being aware of them. So can you expand on what you mean by this? And sort of what are the best times for investors to be investing in ETFs? 

John Caulfield: [00:30:30] Yeah, I mean, look, this ties in quite closely to the one we've just spoken about in terms of being able to get that best execution. Obviously, ETFs trade during the ASX market hours. As you know, the ASX has a staggered open and so stock starting with a open first stock, starting with Z, will open, you know, potentially 15 minutes later. 

Alec: [00:30:53] I'm going to hazard a guess that a lot of people listening didn't actually know that. So yeah, 

John Caulfield: [00:30:57] there you go. So like I say, if you are thinking of just the banks, you know, ANZ will open. And then however, many minutes later, Westpac will open. 

Bryce: [00:31:06] Does that mean evannex down there?

John Caulfield: [00:31:08] No. I mean, it'll the ETFs basically start trading when the market opens. But what the market maker needs to do is price the underlying basket of stocks. So we have a bank ETF, it holds ANZ, it holds Westpac. Just if you know what the price of ANZ is, but you don't know what the price of Westpac is yet those spreads will be wider to reflect that uncertainty. So as that market fully opens and they know what the underlying nav is, spreads come in. You know, ETF is pricing tight. So basically, don't put in a buy or sell order in that first 15 minute sort of opening window because the underlying stocks haven't found their level yet, and therefore the market maker can't price them for the ETF and the ETF, you know, may be moving about in price a little. 

Alec: [00:32:01] Is that the same at the close? Is there a staggered close as well? 

John Caulfield: [00:32:04] Well, there's an auction and it's basically a match, and there will be a whole lot of orders going in, buys and sells. And I can say at the end of that auction, you come to the closing price. And again, whilst that's happening, you don't know where that's going to land. The market makers don't know where that's going to land. So they can't price the underlying basket of of stocks for the ETF. So again, that uncertainty, you know, 

Alec: [00:32:29] avoid it, is the piece of advice. You just avoid the very start and the very end of the day. 

John Caulfield: [00:32:35] Basically, that would get you a long way. 

Alec: [00:32:37] Is there a Goldilocks time within the day that's like the traders are out to lunch is the right time to do it.

John Caulfield: [00:32:43] It depends on what country you're talking about. The Aussie market, like I say, is open during our day. All the stocks are trading. Market makers can price them. You also have international ETFs. The US markets closed. So you know, those won't be subject to the same sort of movements, except for currency and futures and things like that. You know where we do see a little bit of overlap, but some difference countries in the region. And again, we can talk about mainland China. So, you know, Mainland China will start trading, you know, I call it around midday at our time. So our China A-shares ETF between 10 and 12 will be pricing. But the underlying market isn't yet open. Come midday, when that market opens, you'll tend to see the spreads tighten up a little bit. They also have a lunch break that spreads might widen a little bit. They then come back in for the afternoon session. You can price the underlying. The way you got again. So just being aware of, you know, how that underlying markets being open, being closed. Public holidays, you know, that obviously affects things. We've just had China or for an entire week, our maintains trading. You know, there's price discovery through the ETF, even though the underlying stock isn't trading. So just understanding that nuance, what is your ETF holding? Is that market open? Is it on a holiday? You know, has something crazy happened overnight so that, you know, when you come back in tomorrow morning and the US markets dropped? You know, I don't put a market order in if market open because, you know, prices will move. I mean, we saw last March, April come 2:30 in the afternoon here. Futures were sort of limited down, so they go five per cent and then they stop. Yeah. And then, you know, market makers don't know where that's going to end. So, you know, how do they price risk? You know, they need to compensate themselves by widening spreads. So, you know, just being aware, you know, stocks go to trading halts. If you've got an ETF that's only holding five six seven stocks and one of them's in a trading halt, like I mentioned, one of the big banks, you know, that could potentially be 20 per cent of your ETF, not pricing. Just know what's going on. Mm-Hmm. 

Bryce: [00:35:05] So a bit of jogging in there. And if you have just started your investing journey and wondering what a lot of that meant, we have Covid off a bunch of that sort of technical stuff in a few ETF episodes earlier in Get Started Investing feed. Go and check that out, but also don't let that put you off getting into the markets through ETFs. We've said many times they're a great way to start your investing journey. So, John, that does bring us to the end. Thank you for the sixth. Always good. Always good to have a bonus. 

Alec: [00:35:34] Should we try and one up the ASX and ask for a on the spot. 

Bryce: [00:35:37] Seven Nice Segway though Ren the ASX investor week continues. Head to ASX.com.au/ investor-day. As we said, Link in the show notes John's presentation will be in there along with many others from the day as well. If you'd like more info on VanEck and the products that they have on offer, head to Vaneck.com.au. John, is there any way that our community can follow you or you online you and tik-tok you on Twitter? 

John Caulfield: [00:36:09] All the socials, as you mentioned, you know the website, but you know, Twitter, Facebook, LinkedIn, Reddit, I think we were around as well. 

Alec: [00:36:17] Not Tik-tok. No, no, no guidelines for this.

Bryce: [00:36:21] But look, it is always great, as Ren said at the start, to hear about mistakes, particularly if you're at the start of your journey trying to avoid them as best as possible. I will put a caveat that it is. It takes a while to get to know your cognitive biases, know whether or not you invest with emotion and a few of the other things that we spoke about. But don't be freaked out and sort of put off by them because it's a journey. 

Alec: [00:36:44] So and everyone makes these mistakes. Warren Buffett, Hamish Douglass all the way through to Bryce Leske, like every investor, makes these mistakes and continues 

John Caulfield: [00:36:53] making part of the journey. Obviously, just do your research, do your best, try and understand it all. 

Bryce: [00:36:58] Yeah, absolutely. Well, John, it's been a pleasure. Thank you very much, and we look forward to catching up soon 

John Caulfield: [00:37:02] and I appreciate it. Thank you both.

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Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

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