Under the Hood | What about alternate assets?

Bryce: [00:00:31] Welcome back to Get Started Investing a podcast where we attempt to answer the most common money and investing questions from our community to help us all become better investors. If you're joining us for the very first time, a massive welcome. Thank you for joining the get started investing community and congratulations on starting your investing journey. We do strongly recommend 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. Any advice is general advice only. With that said, my name is Bryce and as always, I'm joined by my equity buddy, Ren.

Alec: [00:01:04] Now I'm very good. Bryce. Episode 9. You're starting to lose it. But that's alright. You've got this. I believe in you. 

Bryce: [00:01:14] Thank you. Thank you. 

Alec: [00:01:16] And we've got a particularly interesting episode today. The innovation that has been with ETFs has really opened up the world of investing for investors like you and I, small dollar investors, and we can now invest in far more than just shares in the share market. And that's what we are going to be unpacking today. 

Bryce: [00:01:34] That's it. We are continuing with our Under the Hood series supported by Global ETFs. We're episode nine with only two to go. It's been an awesome series. Every episode we have equipped ourselves with another tool in our kit to help us analyse ETFs. And it's our pleasure to welcome back to the studio, Head of Investment Strategy at Global X, Blair Hannon. Blair Welcome. 

Blair: [00:01:54] Boys. Great to be back. 

Bryce: [00:01:55] Yeah, it's been fun. We've got two to go and you're closing both out. No pressure. Let's say that Global X are a leading player in the ETF industry and they really pride themselves on their industry leading research team and I hope we've been able to expose you to that expertise over the last sort of eight episodes or so. Phenomenal global access. And as we've been going under the hood and as we go under the hood today, make sure you check out the website globalxetfs.com.au. Today we're asking how we approach non-equity investments with ETFs? And as always, we've been asking the equity markets community before we created this series to give us some of the biggest questions they have when it comes to analysing ETFs, and this was certainly one of them. So here's a question from the equity markets community: To kick things off. 

EM Community: [00:02:42] Hey equity mates, try and keep pretty across the news, especially with what's going on lately. And I've noticed that bonds are coming back into the equation in a pretty big way. Is there a way for me to get exposure to this through ETFs? And how would you go about exploring this. 

Bryce: [00:02:57] Awesome question? So that's where we're going to today and we're going under the hood with the global ex-U.S. High Yield Bond ETF Ticker USHY. 

Alec: [00:03:06] When we go under the hood will understand it all. But I think, Blair, the place to start is just to get our heads around how much the world of investing has been opened up by ETFs and what the options available base does. 

Blair: [00:03:19] This is the point of ETFs because when you think about what they are, they're just a rapper with something inside it. So that can be equity equities. Great. And which is what you probably talked about for the bulk of this under the Hood series, But it also can be in the case of this, which is a bond, it can be, you know, a range of other things which, you know, things like futures, which again, very hard for, you know, regular investors to get access to, not non-institutional investors. It can be things like gold holding physical gold probably maybe not be able to afford a whole copper. But you know, whatever it is, you know, it's real estate and other one like it. You can now wrap it in an ETF, stick it on an exchange again, open up to everyone. Yeah. So it's a really like you can go to go all the way back and go well it's essentially an investment technology that has opened the world up to everyone and broken down that mentality of, you know, whatever it was, you know, high minimums to get into to some of these asset classes or whatever it is. And that's open to everyone and the abundance of them being available, you know, back what the growth, you know, people using them is exactly why they continue to grow. 

Bryce: [00:04:26] Gone are the days of having to go and buy an actual gold bullion and storing it under the mattress can just buy an ETF now where you can also buy gold bullion. 

Blair: [00:04:38] And then set the bars up, run your house in, that's Up to you. 

Alec: [00:04:42] The thing that we really want to get across in this episode is while they all may look the same, these ETFs own very different assets. And you know, we've spoken, you mentioned the gold one there. And then on the other hand, there is a Bitcoin ETF or an Ethereum ETF, and you buy them through the same broker and you put in a ticker code and they look and acts the same. But the assets they're holding are very different. And so it's important to go under the hood with them. 

Blair: [00:05:09] Yeah look it is I think and this is that it's that whole kind of Netflix mentality. The demand for choice now is so great that not everything is equal. So that's exactly the point you want to make. I think there's something like nearly 9000 globally, which is out of control. Obviously I control. Now. The good thing is for Australians, the numbers are still going up, as you would expect. But it's sort of just above 300, which is still a huge number.

Bryce: [00:05:32] Still a huge, huge number. 

Alec: [00:05:34] They reckon that someone at the ASX, we can name them all. 

Blair: [00:05:37] On other guy's ASX and no, no, maybe there is, I'm not sure. But I think the good thing is that at least you can break it down to talk about equities and that's obviously out of that section. There's a whole bunch of other ways you can dissect these, but there are segments that you can allocate so you can say, Oh, it's a decent Australian equities ETFs. These are international equity ETFs, these are straight bond ETFs. So it's actually like you can then start to narrow that down. So it is a huge list, but depending on what you want as part of the portfolio, you can figure that out by looking at a smaller, much smaller list and then narrow that down to what you want. So I think that's the power. And I know the good thing is whatever investing platform you use, a lot of them do have screeners now that you can start to, you know, take a box and it will only give you $10 and then take them 300 and then you can rank them any way you like or dig under the hood, you know, anyway, like so it's becoming easier and it will continue to become easier because as that ecosystem grows, more tools get put into place to help people figure out what they need. Doesn't that don't neglect you from having to do the work and to figure out if it's actually thriving or not. 

Bryce: [00:06:51] So just like we spoke about with an earlier episode about how ETFs have opened us up to the global opportunities of investing in global markets. And he gave some tips on navigating global ETFs. Are there any sort of tips you have on how to navigate ETFs that are giving us access to different asset classes?

Blair: [00:07:09] I think this is where some of them become a little bit esoteric. So you kind of again got to know what you're looking at. So if we think about if we use bonds, is it an easy starting point, as the example that's reasonably basic, possibly more basic than equities or shares. But, you know, if you take out three layers, then you can start to go really, really deep to do that. But essentially all that is is the debt of a company. And really the thing about that that fixed income ETFs or bond ETFs, whatever one might put it, is those were essentially inaccessible for I'd go as far as saying, you know, 90% of investors, if they want diversification, because if you, you know, the minimum spend, this sort of took a half million, then you get one bond of one company or one government. I'm sure you guys have done a thousand podcast on diversification and what that does for you. It's got great diversification. So this is sort of in the case of bonds, I mean, using bond always bonds as example, it's opened up the opportunity set for every investor. Again, go back to that point I made earlier to access an investment market which is deeper than the deep financial market and huge where you couldn't do before, and the same could be same for gold, right? Well, you might not have enough money to buy that. Go see, like I can't buy, I can't have it. It's part of my allocation. But, now you can. So the good thing is that many providers do and you keep an eye on this if they try to keep the dollar amount of the per unit reasonably low. So not like Berkshire Hathaway, where it's I don't know what it is now, Is it $70,000? I'm not sure what the number is. I'm not sure. But that's going to cap out a lot of people, at least with an ETF, you know, you go get a minimum of 500 in Australia, but that number is then you can actually get access to where maybe that again opens up your spectrum of what you can buy and allocate to. 

Alec: [00:08:56] Well, the great news is these days you don't even need 500 with some of the custodial brokers. Exactly. Good points.So I guess let's speak about fixed income, because it is, as you said, it's a bigger market than the equities market, but one that a lot of everyday investors probably aren't that familiar with because they just haven't been able to access it. When we say a bond ETF, we see terms like high yield Global X has another one, corporate Bond ETF, which for a lot of people on new terms, how do we navigate those ETFs? And I guess how do we have to change our thinking when it's a bond ETF as opposed to an equities ETF? 

Blair: [00:09:37] Yeah, all really valid questions because you're just playing a very different game. It's like playing on an iPhone, playing in the corner, like it's. 

Blair: [00:09:47] I am bad at Both of them. 

Blair: [00:09:47] I can't tell from what you look like. Know, it's just it's, it's a very different game in that we share in a buying company what are the companies or ETFs that is basically out of equities the upside is essentially unlimited. You know you can make as much money as you possibly can because the company can turn the revenue from 1.100. Are you going to obviously participate in that where where bond ETFs, again, it's the debt side. They're paying that down. So that's always going to go essentially back to what they call powered a bond was $100 in basically every single case. So it's a very different outcome because the outcome isn't about the growth, it's about the consistency of. The income, which is interesting because I think about it and who you guys talk to you, you hear the audience is listening to these is probably not they're not really thinking, oh, geez, I need some income. You know, like I'm investing I'm investing now to compare my money for when I do net income, which is, you know, deep in retirement. So what you likely find in fixed income, it's like a slightly sod angle here around allocation is that and you know, anyway I'm assuming haven't got super or most people have super, I would suspect, and I don't know why I speak for every single super fund, whether it's industry fund or for profit, that even at the aggressive level it it would be 90% shares, 10% bonds. So you've probably got exposure to them already because what that what they do what the whole point of them is as a portfolio tool is to sort of provide that defensive nature that when you know, there's, I think a correlation, they somewhat negatively correlate not perfectly correlated but somewhat negatively correlated to share. So shares are going up at some point, bonds going down and flip side. Now we're in a bit of a weird world right now. We're not going to dive into that. That's about another ten episode series, so we might go there. But again, going back to the point of ETFs, it's just the best guide opener for investors to access this world, which they could not even go anywhere near before. And you could do it. You could buy managed funds, you know, again, filling out paperwork. I don't know who wants to do that. So this is just really a really good guide open for people to go. Do I want to again as an allocation tool pair some of my shares with something that's a little bit more stable then I can allocate to that. If you get into your path around the differences in the fixed income world. So we sort of get and that's like skew finance allocation. You kind of got this very high level again but three buckets. Government bonds, sovereign bonds or treasuries, that kind of world which is issued by the Australian government, US government, whoever it is, obviously reasonably safe. These guys can print money to stay alive. Yet unlikely the US government or Austrian governments are going to default because they own the ability to keep printing money. Yeah, it's unlikely. Then you start to move down what they call the credit curve. You go to companies which to your point said corporate bonds are also called investment grade, which are those super high powered companies that you've heard of, again, possibly in your portfolio. If you think about it, the US, Apple, Microsoft, all these types of companies that the expectation is are they going to default? No. How reliable are they going to pay back their debts? Very high. They fit in that bucket. Then you get into that one you mentioned last, which is high yield. They are just two companies. You got to know Fords, one of them Netflix. I think Tesla's in that bucket, but the chances of them defaulting are slightly higher than Apple and Microsoft's. So what does that mean? They have to pay more income to you as a to on their debt. Hence I sit in a bit of a different bucket. 

Alec: [00:13:20] Higher risk high reward. 

Blair: [00:13:22] Pretty debt there.

Bryce: [00:13:23] No, that was good. I think. Very clear explanation. Yeah it's an asset class that Yeah. Experts often speak about it but I feel like the community sometimes struggles to wrap their heads around it. 

Blair: [00:13:36] It's an asset class built on jargon. Yeah. And built on people not being able to access it. 

Bryce: [00:13:42] Wait till you see the top ten holdings.

Bryce: [00:13:44] Oh my goodness. But it is. 

Blair: [00:13:47] It's very hard for any regular investor. The thing is this really what for many they get to, you know, investigate what are they looking at on Google or whatever that and I go, this is just yeah what's up? 

Alec: [00:14:00] And I think for investors of our generation, we grew up in a world of falling interest rates and then incredibly low interest rates and the idea of like a traditional 6040 stocks and bonds portfolio or anything like that was just not in our world. And the past six, 12 months as interest rates have come back up and you're now saying yield or interest paid on corporate bonds to be like maybe pretty reasonable. Yeah. Yeah. And so now the conversation is starting to pick up again. But for people who started investing when Bryce and I started investing, it is a conversation that's it's a. 

Blair: [00:14:37] Conversation that again, your age group, which probably is fine to be new because you've got the time, you've got the time to ride the equity markets out, whereas you know, the 6040 portfolios without, you know, to your point, 60% of that bank shares 40% paying bonds is usually people who are close to retirement. It basically skews as you get closer and then it even gets further. As you know, it might go 40, 60, you might go 70, 30, whatever it is. So it doesn't blow me away. And that's not necessarily a bad thing, but doesn't mean it should be neglected. So we need to be understood. It may possibly be when you start to know I'd say so, but like if you think about ten years ago, if you think about when fixed income ETFs in America were ten, 15 years after equity ETFs. Yeah right. Like they and you look at the lot and it is gigantic now and. The US $98 billion each. Some of these bigger ones that are huge, this is US dollars. I think the Vanguard one only came around 2007. I think one of the biggest ones, maybe 2002. So, you know, again, in the US, they've been around for a long time, but the growth for them has been incredible and it's starting to really flow through to Australia as well. We're obviously behind. We are, you know, we are but heavily used. Yeah, really heavily used tools and portfolios again due to accessibility. 

Bryce: [00:15:58] Do you own any bond ETFs? 

Alec: [00:16:00] No. Yeah. Oh, I own ETFs that have bond allocations as part of a Multi asset. but no specific bond ETF. Sorry, Blair. 

Bryce: [00:16:13] Yeah, a lot of this comes from us.

Alec: [00:16:18] But, you know, you said even if you're not investing in bonds, it's an important thing to start to get your head around and let's start to get our head around it by going under the hood of this ETF. And as we have in every episode of this series we've started with the ETFs, key information, the purpose, what it's trying to do, the index, it tracks how it's trying to achieve that purpose, and then it's phase how much it costs to do it. So let's start with the purpose. What does the global x UST a high yield bond ETF? What's it trying to do? 

Blair: [00:16:49] So this is giving you access to US dollar denominated bonds. So most of them is going to come out of the US going into it or the geography of these companies on companies that sit, as I just mentioned, in that high yield bucket, technically there's some credit criteria and that we won't dive into that necessarily. But again, it's companies that may be considered less likely than those massive mega-cap super cap corporates to pay the debts back. But still, as I said, well known companies. But what do you get for that? You get compensated on the income you receive. So the good thing about ETFs in this case is as always, it's a basket of these bonds to getting a huge boost of these bonds. You know, we can talk about the specifics, but, you know, the idea is when you build a portfolio, again, they really are asset allocation tools. You've got a few options. And in the case of what we've got, so we've got the US Treasury. So we talk about a government ETF, we've got a US corporate ETF and we've got the US high yield. The idea here is and this might be I'm not trying to make it complicated, it is since you want to pair those three together in a nice way to work out what risk you have to the government side or the high yield side or the corporate side to have a nice income coming from that also have much raises you want.

Alec: [00:18:03] And so Blair, like all of these ETFs we've been talking about, even in the bond world, it still does track and index. 

Blair: [00:18:10] That's right. So these are passive; they have rules around them. You know, what do we think about being active? It's someone making a decision at an individual company level or bond level saying, I want that thing in the portfolio where these have a set rule. These are what fit in because of these criteria. And then we have to then buy those particular bonds to allocate to that. 

Alec: [00:18:32] Yeah. So it's not someone at Global X saying get rid of those forward bonds and put some Spotify ones in there. 

Blair: [00:18:37] Definitely. 

Alec: [00:18:39] And the fees to access this ETF 40 basis points or 0.4%. 

Blair: [00:18:45] That's right. Yep. 

Alec: [00:18:46] So Bryce, you've been looking at the fund returns pulling. 

Bryce: [00:18:50] The numbers that's it Ren, well it's a newly listed ETF. It is yes so we don't have performance over the last 12 months but over the last three it is up just over 2%. 

Blair: [00:19:02] So that's been a revival over the last, you know, three months. It's you know, 2022 was a tough run for bonds as it was for equities. This is where I went through this period where they were reasonably correlated. So that means that moves somewhat in lockstep and that's broken apart, back sort towards more normal now. But the high yield in particular. So this one is probably more correlated to shares. Yeah. Then you would expect from the Treasury bond because it's a government issued versus you know company. So that doesn't sort of stack up. Yeah. 

Bryce: [00:19:38] Now Blair, in terms of the geographic allocation, no surprises that it's 78% the US, given that it's a US high yield bond. 

Alec: [00:19:47] Actually some people might be surprised that it's not higher if it says US Day on the name, why isn't it.

Blair: [00:19:53] You would think nominated though. So there are some companies that might denominate us in US dollars that aren't US companies. But again the majority is always going to be us. It's by far the deepest bond market globally by an absolute stretch. 

Alec: [00:20:08] And so just to really explain that, like Bryce and I running equity mates, if rather if we want to raise debt, we could sell bonds to an Australian investor in Aussie dollars, but we could go over to the US and sell bonds in US dollars to US investors and then we would show up on this as an Australian company. But US denominated. 

Blair: [00:20:29] If you go I somehow broke through into the US. 

Bryce: [00:20:31] We may somehow. 

Blair: [00:20:32] Somehow. Yes. And you had a business there and you had a reason to do it. And you can obviously do that. 

Bryce: [00:20:40] So then in terms of sectors, we've got consumer cyclical at 24%, communications 18, consumer non cyclical 15% and energy at ten. This is just representative of the types of companies that are rising debt with the bonds. Exactly. Giving you exposure. So that brings us to the top ten holdings. Now, every single example we've had thus far have been company names. Let me read out the first two holdings here. Number one holding is the TDG 61/4/03/15/26, and the second is the TIPX 61-233129. What are we looking at here?

Blair: [00:21:26] Not really. This is a little bit on us. That's basically the code, the payment and the maturity of the bond. Yes. We need to as a business make sure that's easy to understand. So we're actually going to improve that on the website. It's on the fact sheet. If you are in the fact sheet, that is a bit clearer. But we're going to go on the website, publish the company name in general rather than in the code and the bond sort of characteristics which will help people. I think what's important about this is what you said you get in in somewhat bond ETFs in this one you get over 2000 bonds. Yeah. So what's going to happen is a company is going to issue more than one bond sometimes and different different length of maturity. Maturity means they might issue it saying we're going to pay it back by 2025, make sure another one next year I'm going to pay that by 2026. So they've got to essentially running parallel. It's not like a mortgage necessarily. It's obviously different in that nature. So we've got over a thousand bonds, but only I think I calculated this correctly, about 390 companies. So you're getting multiple bonds for the same company? Yeah, I packaged up.

Alec: [00:22:36] For the first one, Bryce read TDG 6 and a quarter of 031526 TDG Transdigm the company? 61/4 for six and a quarter percent yield. And then the American way of presenting a date the 15th of March 2026. 

Blair: [00:22:56] It's criminal. I know, but yes, that's correct. Yeah. I think I worked out the numbers like the names that you're going to get at the top of the list. If you amalgamate all those which we can provide to anyone who wants us to do that is the Fords of the world. Again, Netflix and the test. These are the companies that are again, they're not going to be huge weights, 2% at best of their bonds or 3% of the total weighting at this bet. They're the ones you get to. Again, people will know and are at the top because they likely are larger companies that have more debt.

Alec: [00:23:24] Yeah, just looking at some of these companies, DISH has to pay 11.75% interest on their loans. Tough. 

Bryce: [00:23:34] Rookies. So you will find more information on the holdings on the fact sheet and on the company on the product page. So don't be put off. That's just the jargon and the nature of the bond market. But as rent sort of alluded to there, you can kind of work through it if you wanted to. But just to close out, we've been with all of these episodes trying to figure out where they fit in our portfolios and the role that they can play. Generally speaking, it's either a core or a satellite approach. how would you think about where bonds fit in in a portfolio? 

Blair: [00:24:09] Yeah, they're not it. It kind of breaks the core and satellite model a little bit because bonds aren't sexy and they're not meant to be. So I like them but they look. I call them a core as a function again of how you want to build out your portfolio as a broader asset allocation space. So whether that split is not perfectly nice at 9010, 80, 20, whatever that number is, it's not going to be perfect. And I'd again, the audience in this room, I don't have any. I don't have any bond ETFs in my portfolio. I do in the super, but not in my, my, my personal portfolio. You know, I'm 40 years old. Hopefully I've got an I know that now that 's an age from 9 to 25 years of working like there's enough time to grind out those down times I've already been through the GFC I didn't lose that much money. I got great hair from it. But I know I'm losing money because I write it out. So you got more time. But as I get older that's when you want to start allocating to these. So you know, it really is actually an allocation tool and it is yes, definitely in the core. I've never heard anyone talk about Bonds, a record said a lot because it's just the basis of what you're building. Yeah. It's kind of is that that foundation of the portfolio. 

Alec: [00:25:21] When you sort of could do your own core and satellite when it comes to bonds and you have a core which is like triple A-rated core. Bonds and government bonds. And then you have a satellite, which is your dish paying 11% interest.

Bryce: [00:25:35] Oh, my goodness. 

Alec: [00:25:39] Anyway, we don't have To go.

Bryce: [00:25:42] Because we set out to answer the question, how do we approach non equity investment with ETFs? Now, we did get a bit into bonds there, but to bring it right back to the start, which was ETFs provide us with great opportunity to get access to non-equity asset classes. We spoke about gold, we spoke about cryptocurrency, we've spoken about bonds, and they all have a different role to play in our portfolios. 

Alec: [00:26:06] Yeah, I think it's just worth thinking about the world before ETFs and the world after ETFs when it comes to like, you know, imagine being a millionaire in the 1950s and you wanted a diversified portfolio and the efforts you would have to go to add gold and property and, you know, alternative assets and bonds and shares into one portfolio and the ease at which any of us can do it now with a few ETF.

Blair: [00:26:33] Yeah. Oh, well it's 100% in the golden age for, for non you know ultra rich people to invest and it's only going to get better. The technology is getting better and better. There's this whole new world of sort of direct indexing where you can actually figure out your own self pull, pull, put out. So hopefully in ten years time, you know, we're sitting here in an ETF still a massive part of. But there's a whole new thing that's out there that you can do. So I totally agree. And Bonds is a really good example of that golden hour example. You know, all kind of alternate asset type structures are a great example of the opening the access that ETFs given people. 

Bryce: [00:27:09] Yeah, well global X has plenty of options when it comes to the type of ETFs that we've been talking about, over 30 targeted products globally and an industry leading research team behind all of them. So Blair, thank you so much for coming on. We've got the final episode in our Under the Hood series. It's going to be sad to say it over, but we've really covered a lot of ground. So thank you for this episode and can't wait to pick it up in the next one.

Blair: [00:27:33] It sounds good.