Under the Hood | A long term theme, or will it run out of steam?

Bryce: [00:00:36] Welcome to Get Started Investing feed podcast, where we attempt to answer the most common money and investing questions from the community to help us all become better investors. If you're joining us for the very first time, a massive welcome. We strongly recommend, though, that you scroll up and start at episode one. Now, while we are licensed, we are not aware of your personal circumstances. All information on this show is for education and entertainment purposes, and any advice is general advice only. With that said, let's crack on. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:01:06] I'm very good, Bryce. Very excited for this episode. We had a lot of fun launching under the Hood last episode and we're back for the second of ten in this series, where we are going under the hood of ten Australian listed ETFs, unpacking how they work and learning the skills to analyse these ETFs ourselves.

Bryce: [00:01:28] That's it. Under the Hood is proudly supported by GlobalX ETFs, who are a leading player in the ETF industry, and we are super excited to welcome a new expert to the Equity Mates Studio, head of investment strategy at Global X, Blair Hannon. Blair, welcome. 

Blair: [00:01:43] Your new expert. But my grey hair probably says I'm probably an old expert. So.

Bryce: [00:01:48] A podcast no one can see. 

Alec: [00:01:51] Blair, people still think I have hair. 

Bryce: [00:01:55] Now, the question that we're going to be asking today is how do we know when there is enough for an ETF? I don't think I've met anyone with more ideas for ETFs than Alec Renehan. Every day you've got a new idea for an ETF.

Alec: [00:02:09] We're going to spend the next 15 minutes. 

Bryce: [00:02:13] Yeah, actually that could be a good podcast. Because not all investment themes and opportunities can be wrapped up into an ETF. And we want to understand from the experts at Global X how they come to figuring out when there's actually enough for a proper ETF and an investment opportunity, Ren. 

Alec: [00:02:35] Now to do that and that ETF we're going to go under the hood on today is Global X's Battery Tech and Lithium ETF ticker code ACDC. We always love the ticker codes ETF providers come up with.

Bryce: [00:02:49] How do you know and have that ticker code, Blair, that's my question. 

Blair: [00:02:52] It's a good question. Well, this is sort of in the nascent days of ETFs and thematics, you know, this was, you know, unless a company did it, it provides now this become a bit more credit. 

Alec: [00:03:02] I just had the thought, does anyone have the ticker code ETF? 

Blair: [00:03:07] I don't think you can have it all because actually rules around it these days. 

Alec: [00:03:09] So because of that. 

Blair: [00:03:10] Would be like. 

Alec: [00:03:15] But to introduce this episode and I guess to talk about just how many ETFs are out there, I've designed a bit of a game. And so Blair and Bryce, we'll put you head to head. Is it just true or false? Do these ETFs really exist? Because there's a lot out there. But I guess the question is how many of these how far does the rabbit hole go when it comes to just random ETFs? All right. We'll start in America for the first one, the Nashville Area ETF, an ETF that invests in companies who have headquarters in Nashville, Tennessee. True or false? 

Bryce: [00:03:55] Fake? 

Blair: [00:03:56] No. I could not get there. 

Alec: [00:03:57] You couldn't get there. It was real. 

Bryce: [00:04:02] What happened to it? 

Alec: [00:04:03] It closed in 2018. I guess the state of Tennessee wasn't producing that many great companies. But yeah, it was real ETFs. 

Blair: [00:04:11] But I think that blows anyone away that. 

Bryce: [00:04:13] Any others. 

Alec: [00:04:14] Yeah, I'll go. 

Bryce: [00:04:15] Okay. Nice. 

Alec: [00:04:16] We go. What about this one? The Stock Exchange ETF, An ETF that tracks the biggest stock exchanges in the world. And so for like, think of, like the company, the ASX or like the company the London Stock Exchange. True or false. 

Bryce: [00:04:34] I think Awesome idea but fake. 

Blair: [00:04:39] Well, there is so many now. And if you go to the US, you know, we only have one, but there's multiple over there and then same through the, through Europe. So I think it's possible in terms of you could build a reasonable portfolio. It's like three or four is probably ten, ten, 15. So I think, I think it's possible. 

Alec: [00:04:53] I Couldn't find it. It's not true, but it is one that we often pitch because they're pretty good businesses, so feel free to take it. And then final one. True or false? The obesity ETF, it owns companies that profit from servicing the obese, including health care, weight loss and supplements. 

Bryce: [00:05:14] Good investment, same fake. 

Blair: [00:05:16] I think it's the possibly real, but maybe not the call that. 

Alec: [00:05:20] It is called that. And its ticket code is SLIM. Not in Australia over in the States. But it is true.

Blair: [00:05:28] That this the some of the US codes are unbelievable. You can have them, you can have like a good time. 

Alec: [00:05:35] The the wildest one we found the America first ETF ticker Code MAGA. Like Make America Great Again. 

Blair: [00:05:43] So this is marijuana one called like MJ and so something like. 

Alec: [00:05:48] So anyway, I guess the point of that game was there are so many ETFs out there, but I think we can say that not every theme is created equal. Some have a lot more depth in terms of the companies that are available to be invested in, and some have a lot more maybe long term tailwinds behind them. And so that's what we really want to unpack today with you Blab, how do we know when these ETFs, when there's enough to actually create an ETF? 

Bryce: [00:06:17] So actually we heard from a member of our community with a question that actually aligned with this. 

EM Community: [00:06:22] Hey, Equity Mates, I've got a question for you. I've been looking to add a few somatic ETFs. My portfolio. Some of these thematic ideas, though, are pretty neat. So I'm just wondering how I can tell if these are long term plays or they're just going to run out of steam. 

Bryce: [00:06:37] So how do we know? Where do you guys start with this? Because as Ren just articulated, that the Tennessee was a great investment opportunity, but it went bust. Where do you start? 

Blair: [00:06:50] I can go all the way back. And when you're obviously there's two sort of buckets of ETF providers. Now there's the active guys who are picking stocks themselves, fundamental whatever you want to do, they're not going to they're not going to be doing what we're talking about. And that is the passive managers, which is, you know, Austin and a lot of other ones, they all share the Vanguard's in the world. So you got two options. If you're going to bring HCF out, you can either go to an index provider at some point, you know, you need to go to them, say what's on the shelf already, or take that off the shelf. We're going to build rapid around it. That's all we're doing. Is ATF wrapping in Asia Front end index. That's one option. The other option is and this is where you can't we're kind of getting down this path now, I'm assuming where Nashville went because I'm not sure that's on the shelf is you can go to them and say, hey, we've got a generic idea, stock exchange, one might be another one. Have you got something like that? You know, there's there's a multitude of index providers out there, the MSCI, S&P Slacktivism, you know, new ones coming up all the time. Do you have that? No. Okay. Well, this is kind of our general idea of what we're looking for is something you can build and run and manage. So they get to sort of starting points. And that's, you know, any it's a business has to do that. That's that's a bare minimum because the job of an ETF, you know a passive ETF is a tracking index. That's what you have to do. I think though, to the heart of your question, the heart of your question is, you know, that's great. But, you know, there's obviously always one on the shelf. We can just go and watch them all if we want. That's not going to serve anyone any benefit. And we know the abundance of the amount of tests in the market Now we talked about happening in the US is like, you know, is thousands and thousands. So if you going to do semantic semantics it is a bit different than the generic front of the mill market cap I sexism page 100 SPF 100 that's again they're brand names in their own right. When you talk about semantics you want to be I think it's going to three areas you want to do you want to have a level of conviction and this is kind of talked about you mentioned before or been robust, you don't have a lot of conviction that the theme is truly a proper paradigm shift in what you're trying to, you know, invest across. So this is not the fads. This is not you know, if you think about a somatic, I wouldn't say and we're just going to use your read one, the Nashville one as an example, because it's so weird. That's not a theme. That's just an area that might be growing for some demographic, right? That's not really a theme, you know, So when when you're when you're getting to the crux of it, it's like big paradigm shift possibly across demographics. But obviously technology, you know, changes in government, these sort of big moves are going to happen across, you know, possibly globally and imperfectly globally. So unless you have that real conviction of that being a proper big thematic paradigm shift, you know, then you're not going to do it as a as an ETF is going to be harder to get, you know, for people to digest. I mean, the secretary said a pretty obvious to you talk about this. It's got to be got to be investable. So you can't have three companies doing it because just go buy the stocks and then you got to have a broad enough range. The same is going to encapsulate what you're trying to achieve as well. So you get, you know, really tens probably it's I'd say Toby tends to be too little, but probably 20 to 40 is yet to encapsulate a novel Enough companies we're talking about equity based ones enough companies that you're going to get a broad enough spectrum across to say yeah, this kind of is following what we call the theme, so it's gonna be investable. And then there's a bunch of whole things behind that around liquidity. You don't want to be investing in these micro-cap stocks, which we've seen in the past, where ETFs can have a basically reverse effect on the stocks are impacting the stocks. You don't ever want to be that situation. They've got to see it over the top. There's obviously been lots of sort of doomsday stories around that in general didn't happen in Covid. You know, it's unlikely that you know that this is going to eventuate even with the rapid growth. But I think the third ones have done the first two is that's, you know, conviction of stability. And then the third one is really the time frame. So, you know, anything really short term, it's not going to work out. You've got to be convicted that it's long term or look, evergreen be the best, but you're to be convicted. It's long term. So when you think about the odds, we've got this really good shot and we'll give it to you guys if you want to. I don't know why you post it. You buy somewhere. It's called the S-curve, which is basically around technological adoption of, you know, anything, whether it's back on the Internet, dies. And now you can think about all the thematics that might feed on that. And it helps. Investors are kind of like a framework to think about, well, where do I want to play on this curve? Or like how adopted is that? If it's social media, it's right in the far right because everyone sort of got it. Or if you think Facebook smart and they're going back in the metaverse that's coming on the far left and it's going to be pre growth. 

Alec: [00:11:29] So if it's podcasting, it's right on the crest of the S-curve as it starts to go up. 

Blair: [00:11:34] So you're saying you guys better get richer? So that's I think that's the concept of but thematically is that is different than a lot of other areas like in terms of fixed income investing is different than semantics as is just broad based market cap investing. So those I think those three things will be helpful. And I think too to the point that's generally a framework you can use for investing in the ones that are listed as well. 

Bryce: [00:11:57] I was just going to say that's one way that if you're putting the hat on here and thinking, you know, building the toolkit of investing like the approach you just took in thinking about building the ETF should be the approach that we take when looking at an ETF and being that is is something that I actually want to invest in. Yeah. 

Alec: [00:12:12] And I guess the question that comes out of that is why is it important? Like if we start investing in themes or we start seeing ETFs produced in themes that don't meet those three criteria, like what's the risk for investors? 

Blair: [00:12:26] We all know we always know that investing is difficult because, you know, emotionally you're very connected to these things, so you inherently become short termist. But my background many years ago, this is why I got great here, because I've been through the GFC was an investment device and one of the biggest problems of that was, you know, working with people, with investors and, you know, keeping them sane through difficult times. And, you know, we've been through a really, really strong period. But it's very easy to become short term around thematics when, you know, the whole point of what you did was to invest in the long term and that was why you there if you believe in it. So I think that there's always that. And I think the second part of it is on the back of that, again, this is just an inherently a bias that's built into everyone somewhat and momentum trader. And what I mean by that is, is you're probably not going to be there on day one. Like it's harder to to be that convicted that, you know, be there on day one. So you're going to be there six months a year into the program of what this matic's doing. So, you know, you sort of catching on to the theme later on. So it's always interesting around how then that allocation builds in a portfolio because you got to start thinking strategically, what else have I got? You know, how is this pairing with other things in the portfolio now? Am I light and mature? Like, you know, where am I sitting in this journey? This is why this S-curve can kind of be a bit more of an indicator and be helpful. So it just depends. It depends on how your how you're thinking about where that allocation is. And I think that's a broader we're way out of out of scope here a little bit. But around portfolio construction, I know you guys are in a lot of work in this, but four or five construction strategies sticking to that strategy. How do you do that for the long term? That's really hard. It's really hard. It's really hard for professional investment manager and active funds. So how hard is it for someone who's got a day job? Yeah, and also doing this on the side. So it comes back to that whole thing to thing. I've just been convicted and sticking to the sticking to the truth of what you trying to do and then likely you'll be okay.

Bryce: [00:14:26] Yeah, I own for transparency one of your ETFs that has the fewest holdings of any ETF I have. I think you may own it as well. FANG+. Yeah, ten holdings. I'm pretty sure.

Blair: [00:14:39] That's why. Under the caveat that. But again, I wouldn't call it bang automatic in its own right, like it's mega-cap tech stock in kind of what it is. I nearly even call it a sector. You know, now it's not a theme. We have another ETF, which is semiconductors. You might be able to put this on a on a S-curve, but it's going to be way up to the far right. Like, that's around that. They're doing iterations on semiconductors now. It's going smaller and smaller from nano like. Again, that's a sector, not a theme anymore. So that's kind of what happens eventually. It kind of moves into that bucket. But yes, you know, that one is a sort of a bit of an outlier. But yes, it has ten year Ira. 

Bryce: [00:15:23] I like it. It's great stock.

Alec: [00:15:26] Well, let's take some of those considerations you were talking about earlier and apply them to this ETF we're looking at today, Battery Tech and Lithium. Now, lithium is obviously one of the hottest investing trends of the past few years, particularly in Australia. There's a lot of interest in a lot of companies, but a hot trend doesn't always make a great long term investing product is. 

Bryce: [00:15:49] Buy now, pay later.

Alec: [00:15:50] That is a great example. That's one we're not going to be a cheap. 

Bryce: [00:15:55] Hot trend.

Alec: [00:15:56] So let's talk about the work that you guys did to go from Battery Tech. And lithium is hot right now to Battery Tech. And lithium is investable through an ETF. 

Blair: [00:16:07] This has been out for a while. So it kind of goes back to it probably was just before the really big lithium bull run. 

Alec: [00:16:13] Which was Great for early investors in the ETF. 

Blair: [00:16:16] Yeah, right. But I think it's interesting to note how this ETF is split up. And it goes back to your point, like, how do we design this? And this is one of those ones where it actually it was already listed elsewhere. So again, it's now the ones on the shelf essentially took it off the shelf. But the interesting here is it's the full value chain with the full supply chain across, I guess, lithium. And you got this you got battery technology in the middle there. Now moving on lithium to battery technology and then the actual aves in the end. So it kind of you know, lithium has been the big winner there in terms of those three pieces. But it's not always me, though. I would say in the last quarter, it hasn't been it hasn't been a great investment. It's been tough. You know, we're starting to see some urbanise That's interesting, obviously, in the space, But it's one of those ones where it's helpful because if you think about the real theme, lithium is in theme. It's a material. I'm not saying it's on an eighth and it's not we don't have one in Australia, but you know, there is there is one globally or you can buy stocks. But the same thing, we're talking about things as what the true sense of that word, it's the electrification of mobility. You know, it's moving towards from traditional combustion vehicles to electric vehicles and all the pieces that are go to go into that. So that's kind of what we want to get to the heart of, is, you know, when you do a truth metric, you really are going back to the core of what that theme is and thinking about how you would invest in it. So I think for many, like, you know, they probably look at that and go, Oh, it's just a lithium ETF. Maybe, maybe they haven't looked under the hood, you know, as an example like that. I think they should because you can look at the top ten. That's again, power of ETFs. It's all transparent and know what you're actually getting and you're getting components of all three of that part. So you're getting lithium stocks, great. You're getting battery component makers, you're getting battery manufacturers great, and you're getting some electric vehicle manufacturers getting also some sort of, you know, the regional manufacturers, you know, the BMW, these guys who are moving towards that future. This is always the thing about looking under the hood of an ETF, like don't look at the title, go in and just just do me a favour, please. Just go and please peruse the top ten to make sure that you're like, okay, this kind of fits what I want. 

Alec: [00:18:23] Well, it feels like that's a good segue way for us to go under the hood, because when I went under the hood of this ETF, I was surprised by some of the biggest holdings. It's not what I expected. 

Bryce: [00:18:33] So it's not ten lithium miners. 

Alec: [00:18:36] It's not You obviously haven't right now know it. So, Blair, when we go under the hood, we always like to look at what the ETF is trying to do, its purpose, how it then goes about achieving that purpose by looking at the index that it's tracking and then how much it costs to get access to it. So the phase so let's start there. Battery tech and lithium. What's it trying to do? What's the purpose of the ETF?

Blair: [00:19:01] Yes. So just going back to that previous point, it's trying to capture that whole value chain across electric vehicles because you can if you really want to pick those bits apart and invest in them separately. I think there is electric vehicle specifically in the market. You can buy lithium stocks, but this is about being much broader than that and sticking to the idea that this is a large theme in play and all the you know, the research stacks up that that's happening. So you're not being as particular on materials or on batteries or on EVs or you're buying the whole part of it. Yeah. 

Bryce: [00:19:37] Now in. The index that it tracks is the selective battery value chain index. So as I mentioned, it's kind of off the shelf and global checks are tracking that index. And in our next episode with Kennish, we talk about what actually is an index and are going to a bit more detail on that and the fees on this ETF 0.69%. So right in terms of performance, it's had pretty good performance since inception. 

Alec: [00:20:03] Pretty good. 33% a year, a long time, three years of things. I don't know what's good for you. 

Bryce: [00:20:11] It is still in my portfolio. 

Blair: [00:20:12] But oh, look, it's obviously been a cracker. It's but I think. Anyone probably listening to your podcast has some interest in investing probably knows that lithium space up. As has battery technology which is getting better and better every day and some of those eBay manufacturers, Tesla obviously number one BYD, they obviously done really well. So that shouldn't surprise anyone. I wouldn't be. That's about me. Why? 

Bryce: [00:20:37] Past performance is no indication of future settlements either. So but let's continue with Under the Hood. So just like the ETFs that we'll discuss throughout this series, there's a mix of geography. For once, the main country is not the USA. Finally, we've got Japan sitting at 25% of the of the index. But let's move through to the top holdings. I think that's a little bit more interesting and shows a bit more detail about what you were talking about. Blair around the true sort of end to end I guess supply chain and then perhaps you can discuss why you think it was surprising. So Blair, what are some of the top. 

Blair: [00:21:15] Holdings back to basic 1 to 1 like understanding the rules methodologies of thematics is way more important than the broad market cap one. So you know, market cap we know is just the largest companies can be right at highest. It's going to have the largest impact on the returns where there's always nuances with these sort of thematics, these somatic ones. So you just again, you got to do your research and that takes a bit of work. So you look at this one, for example, this is an equal weight of one. So you look at the top ten. Now once the rebalance happens, which I think is in the end of May, that's going to sort of be reset and change again. So it's all good to look at this now saying, but, you know, you're going to sort of get a bit of a reweighting back to that space. So but at the moment, you know, we've got. Yeah, top ten. What are you talking about? We've got some of the car manufacturers, the BMW, Renault, Merck. So again, what are those guys doing? They're moving their fleet to electric vehicles and that's driven by a couple of things driven by regulation and embodiment. Now, right now, then you've got some other ones like it's interesting, once I saw Reg is one that's sort of doing more in the battery space. I think a large part of the business is focussed on solar, but a lot in the battery space and a lot in charges and that sort of that's a very similar to A.S. there in the space of batteries and these other ones in that. So you can get in waste and you can say I mean resources there, which I'm sure many of your listeners are. Well listen yeah again Sumitomo in the battery so getting it, you know encapsulating a lot of different styles of businesses mixing together which is which is good and bad. And you know, in good times, obviously some of those businesses can do really well. Other ones are because some are industrial, some aren't. Then and then in times like we're in now, when lithium is off, some of these other companies doing really well because if we got cheaper lithium, the car manufacturers are going to be better because that can obviously on sell that term or keep the margins higher, whatever it might be. So, you know, it could be a good mix if you think about the whole value chain of that. 

Alec: [00:23:11] Yeah. So a few Australian companies in there, you mentioned minerals, mineral resources, also Pilbara minerals, or as Bryce calls them, Pilbara minerals. 

Blair: [00:23:21] That's criminal. That needs to stop right now. But you guys Have a real problem with that. 

Alec: [00:23:28] We've already lost all our listeners. Yeah, yeah. I guess I was surprised by the car makers being so big in the ETF and it's a real reminder to look under the hood and how you can do it. The more I thought about it, the more it actually wasn't that surprising that it's so it's Tesla from the US bid from China and some of the Europeans BMW Renault and Mercedes-Benz and we know how I guess ahead of the curve Europe is in terms of regulating transport emissions and so not surprising that they're in that ETF. But you know sometimes you have to look yeah nice. 

Bryce: [00:24:09] Well we set out to answer the question: how do we know when there is enough for an ETF? And I guess that then flows in. How do I know if there is actually something here for me to invest in as a, as a retail investor, thinking about building my portfolio, we discussed: is it robust, Is there an invest, is it actually investable? Is it a long term thematic? Is it not a fad? This isn't the inverse Trump tweet ETF or whatever the Cramer ETF or whatever was. Inverse Cramer ETF, but that. 

Alec: [00:24:40] Was long term and.

Bryce: [00:24:43] So some really good points there too. To help you think about not only that's how our global experts think about building ETFs, but you should be thinking about how you I guess select ETFs as well. And super important, just like we discussed with Condition Episode one. What's in a name? It's so important you actually go under the hood here and don't take battery tech and lithium for face value. Make sure you go in and understand what you're actually investing in. So Under the Hood is proudly supported by global ETFs. A leading player in the ETF industry with a robust platform and over 30 targeted products globally. They've got a trusted reputation with over a million clients in 95 countries and are uniquely positioned to identify and analyse disruptive companies with their industry leading research team. So head to globalxetfs.com.au for more information and for the product information pages of everything that we talk about. So absolute pleasure. Thank you for helping us unpack that. You will be back in a few episodes. Time to continue the conversation, but we very much appreciate it now.

Blair: [00:25:41] Thank you, boys.