Under the Hood | What’s in a name of an ETF?

Bryce: [00:00:33] So hello everyone. Welcome to another episode of Get Started Investing, a podcast where we attempt to answer the most common money and investing questions that come from the amazing Get Started Investing community in an effort to help us all become better investors. If you are joining us for the very first time, we welcome you. We strongly recommend this call up and started episode one. Now, while we are licensed, we are not aware of your personal circumstances. So all info on this show is for education and entertainment purposes only. Any advice is general advice only. But 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: [00:01:08] I'm very good, Bryce. I am very excited for this episode. This is a series that you really wanted to get out for a while. I think you just loved the imagery of Under the Hood. Yeah, there was a dream of one stage of you and Darcy going and renting a car to film this. We haven't quite got there yet. 

Bryce: [00:01:29] We haven't Quite got yet. 

Alec: [00:01:30] But this is a series that we wanted to get off the ground for a long time, so I'm excited to do it.

Bryce: [00:01:35] Me too. So the series is called Under the Hood. It's supported by global ETFs and in essence, Ren. Whenever we're talking about ETFs and how to analyse them and how to think about it, people always say, experts always say you've got to go under the hood, you got to know what you're talking about, you've got to understand what you're buying. And that's where this series was really born from. We're going to be doing ten episodes with experts from global ETFs in the hope of answering some of the biggest investing questions around how to actually analyse an ETF. 

Alec: [00:02:08] In each episode will unpack one major global ETF. And so one major question about how to analyse an ETF and over the ten episodes will cover ten ETFs. We've actually snuck in a few more than ten, but will cover ten of the most common questions we get around how to actually analyse ETFs. 

Bryce: [00:02:27] Yeah, so it is our pleasure to welcome a returning guest to the Equity Mates Studio, head of distribution at Global X ETFs, and that is Commissioner Kanish. Welcome. 

Kanish: [00:02:36] Thank you for having me, guys. 

Bryce: [00:02:37] So Global X, they are a leading player in the ETF industry with a pretty robust platform and over 30 targeted products globally. They have a very trusted reputation with over a million clients in 95 countries and are uniquely positioned to identify and analyse disruptive companies and with their industry leading research team and global access. 

Alec: [00:02:58] Yes. So in this first episode of this ten part series, we're going to be asking what's in a name? We're going to be looking at how to make sense of the sometimes confusing terms, the jargon and the acronyms that you might find in an ETF name and the ETF that we're going to use as an example and we're going to then go under the hood on is Global X's Morningstar Global Technology ETF. 

Bryce: [00:03:24] Can you see how you would rate that name out of ten? 

Kanish: [00:03:28] Look, I think to start off an ETFs name needs to describe what the product is trying to give investors exposure to. So that's sort of one of the main jobs that we sometimes have with the name of an ETF. How would I write that? I think it does that job. So it goes, it tells you to do issuers, it tells you who the index manager is and for some small way to unpack that, that is important. But it also tells you what the exposure is, which is global technology. So it's global technology stocks. Yeah. And I think that's probably the key thing that we want to get across in this episode. It's not that we having a crack at the names of ETFs and we think they're bad. It's just we can look at it well they've evolved over time as well over the like. So the ETF industry in Australia is 21 or 22 years. Actually this year globally we've had over 30 years. ETF names have evolved because I was looking back at some of the first ETFs that were listed here on the market and they were very, very formal is what I would say in terms of they adopted a very similar approach, you know, would be ETF issuer index name like the actual index name. Yeah, the complete index name. 

Bryce: [00:04:44] Yeah. So everything that you mentioned, Kanish issue a name index characteristics I think are all like really good defining features that are important when analysing an ETF. But for a person coming into it cold, it is pretty confusing as to what on earth is going on. Yes, we have a question that's come from our community that really kind of illustrates this I guess. 

EM Community: [00:05:09] Hi guys just a question about the acronyms and jargon with ETFs. There's S&P 500 and then there's S&P 500, high yield and inverse and then S&P 500 leveraged. I'm sure there's even more. How do I go about working out? What's what? 

Alec: [00:05:25] Let's start, General. What are we looking for when we say an ETF? Like what? What's in the name? 

Kanish: [00:05:32] Firstly, you're looking for the issuer, so that's going to always be the first part.

Bryce: [00:05:36] And to break that jargon, what is the issuer? 

Kanish: [00:05:38] So the issuer is an ETF provider. So, for example, global ETFs are an issue of ETFs with the fund manager essentially. So we manage the money on behalf of clients. We, our job is to track the underlying exposure, the underlying benchmark that we're saying we're going to do in our product disclosure statement. So I take this example. We have a physical gold ETF. So our job there is to buy physical gold track that make sure the ETF does exactly that. So that's the ETF issuer's job. 

Bryce: [00:06:12] It's like the brand. The ETF brand. 

Kanish: [00:06:15] Yeah, exactly. Right. A good way to think about it is if you had a chicken burger and a chicken burger, you had to make chicken. So you've got a McDonald's chicken burger, you got a KFC chicken burger, and you had a Hungry Jacks chicken burger. The issuer is essentially Burger King, the McDonald's, the KFC. That's a great analogy. 

Alec: [00:06:33] Think this analogy is going to get a lot of. A lot of. 

Bryce: [00:06:35] You haven't had lunch. Obviously he's Hungry. 

Kanish: [00:06:39] I'm not saying what I had for lunch just now, but. Yeah. 

Bryce: [00:06:42] Okay. So that's good. So we've got the issuer is the brand. They identify who is who is owning that ETF or issuing it, issuing it. What is the next sort of thing that we should look for in the name? 

Kanish: [00:06:55] So again, traditionally what we've seen is the index being used. So in that example that question was asked. S&P 500 and S&P 500 is one of the largest US equity or US market indexes. And so traditionally you'll have and there are ETFs that track that. And so they would put that in the name. Now why do they do that? So maybe it was a bit more plain vanilla at the sort of nascent stage of the ETF industry. So that was sort of the more formal way to do it, a sort of very sort of traditional in its manner. But the other reason is some people have an association to an index. Some people know these indexes quite well because they watch watches, news on sunrise or whatever it is, you know, Ross Greenwood, etc. And they see the you know, I've got no affiliation to any of the channels, but they see the market update and they go, okay, I know that whenever they talk about finance, it's like the ASX 200 did this, the Footsie did this, the S&P 500 do this, the Nasdaq did this. So sometimes they people have that association to a particular index. And so issuers essentially when you think about it, a name is there as a and a way in which to engage investors to have them to look at the fund in more detail. People should not investors they look under the hood exactly. But people should not just invest based on the name of a native. I really need to be really clear on that. The name of an ETF is to engage an investor to ensure that they then look further and deeper into what that ETF provides. Because, you know, we don't have a thousand words that we can put in a name. You know, we try to keep it shorter as much as possible. That's really hard sometimes, but you have to do enough to go, Who's the issuer? The index. And that's where that second part comes in, more traditional sense. But now it started to develop. And the reason why I say that is we've got an ETF, the Global X Copper Miners ETF. So Global X, that's the provider of the ETF, copper miners that's on an index. But that is telling the investor what that ETF does. Yeah and that's that's where we've come to so sometimes initial we'll use an index name because there's some affiliation, some familiarity from investors and sometimes there may not be that familiarity and it may be better to use something like copper miners in that way. 

Alec: [00:09:11] Well, let's put it this way. Global x copper miners is a lot clearer than global X, Selective global copper miners. Total return index. 

Kanish: [00:09:18] Exactly right. Yes. 

Bryce: [00:09:19] And what have you just done there for people listing? Like what does all of that mean? 

Alec: [00:09:23] Yeah, that's the index. I just had a look on their website. That's where you can look under the hood Global X ETFs dot com to let you. Yeah and I had a look at the index that the copper miner's ETF to. 

Bryce: [00:09:34] Put the issuer with the actual index.

Alec: [00:09:37] Yes. 

Kanish: [00:09:37] And the other thing is the index names are very long sometimes so if I take you know we said that we'd be unpacking our tech ETF, which is the code and we haven't talked about the code, but you know that ETF, the name is Global X, Morningstar Global Technology ETF. Okay, that's long, but relative but still relatively short. If we used your way exactly what you have done it would be the global x Morningstar developed markets technology moat focus index ETF. I kind of like it. 

Alec: [00:10:05] Long goodnight. 

Kanish: [00:10:07] Exactly. 

Bryce: [00:10:08] So Ren, in that question we had someone saying S&P 500 yield leveraged, etc., etc.. Inverse. What's going on there? 

Alec: [00:10:18] Yeah. So these are the special characteristics. These are to extend the chicken burger analogy. Is the chicken burger fried or seeded grilled? Does it have Mayo or Iowa? What type of lettuce you got me? I told you, this is the flavour. I'm going to apologise. That's it. I didn't mean to stop this. Yes, it's. As Bryce said, I haven't had lunch yet. So now I'm thinking about a chicken burger.

Kanish: [00:10:48] So that that characteristic is essentially what the issuer is trying to provide the investors exposure to the investment strategy behind it. So the S&P 500 at its core is essentially exposure to the S&P 500 index. You know, we've got physical gold. That's an exposure to physical gold. But when you go high yield, low volatility or leveraged or inverse or, you know, whatever it may be or equal weight is another one that has come on, That's essentially the nuance on what is the traditionally the index. So the S&P 500 is that base, and that's why some issuers will still use it because it's that affiliation to it. And then the descriptive of the characteristics of what the investment strategy actually is, is high yield, low volatility, etc.. 

Bryce: [00:11:44] It's the strategy bit of jargon in there. But yeah, it's the flavour. 

Alec: [00:11:47] Here's my rule, here's my rule of thumb. And you guys might disagree with this, but if there's a special characteristic, a flavour, a twist on it, and you don't know what it means, you don't need it. Like if you don't know what inverse means, you can live a long and happy life, never investing in it. If you don't know what leverage means, you can live a long and happy life till all the wealthy never invest in it. 

Kanish: [00:12:10] Well, yes and no. And that's a good point. But also I think as a provider, we need to be better at educating clients because I think we sometimes get caught up in the finance world of using jargon and using acronyms. And I think that's not necessarily a good thing when you're talking to self-directed investors. And so you need to try. We need to simplify things. So we're doing a lot more around that. So when we do that product development and we go, okay, we need to come up with the actual fund name, we need to come up with the code. So the fund name, we're making sure it does very clearly and simply you can see that funny and you can understand what you're essentially the underlying investment strategies. But as I said, the whole concept here is just the introduction. It's there to then go under the hood and actually take a bite out of the burger.

Alec: [00:13:05] Let's put this into practice. The ETF we're talking about today is the Global X Morningstar Global Technology ETF. Now we can already sort of see some of those building blocks that we were just talking about coming through. So Kanish, let's put them together and let's start with two company names at Front Global X, Morningstar. So issuance. 

Kanish: [00:13:26] So Morningstar is an index manager. They're not one of the largest in the world in terms of when you compare to the S&P, NASDAQ, Footsie MSCI, they're some of the most common names of index managers, but they are quite a large player, especially with certain sort of customised or certain sector based indexes. 

Bryce: [00:13:47] So we'll have a look in a bit more detail at that index when we go under the hood.

Kanish: [00:13:51] Where do these companies generate revenue from? So a Google majority of their revenue is ads emitter. Yes, it's technology platform based, but a majority of their revenue is ad based. So therefore it's a media, essentially media and comms company. It's a new type of media. It's not the traditional media, but that's where the innovation comes. The sectors can change, and that's what this ETF is providing you exposure to global technology sector. 

Bryce: [00:14:15] This is exactly why you need to go under the hood, exactly why Sirius is like PayPal. I bet if you went out on the street and said Global Technology ETF, name five companies that might be in there, we probably have the first five Kanish names. 

Alec: [00:14:28] Yeah, you'd like. 

Bryce: [00:14:29] Netflix. 

Alec: [00:14:30] Alphabet. Yeah. 

Kanish: [00:14:31] So what was interesting because we've launched this fund since, you know, 2016 and this fund at the moment actually did have those names in there. So it did have meta, it did have an alphabet in there. It didn't have Amazon because Amazon wasn't a tech company. But those were removed when the sectors rotated changed accordingly when they were updated. 

Alec: [00:14:53] It's an important reminder to not just look under the hood when you buy, but to stay under the hood. 

Bryce: [00:14:59] To keep checking. 

Alec: [00:15:00] Check your loyalty every now and then. 

Kanish: [00:15:03] Go for the service. 

Bryce: [00:15:09] Well, guys, I think it is time to actually go under the hood for the Global X Morningstar Global Technology ETF to have a look at its purpose the index, It tracks some of the fees and performance and then actually understand what is in this ETF. Can each maybe kick off with the purpose of this ETF. It has been spoken about. You've mentioned it's giving us exposure to technology. That's pretty much it in a nutshell. 

Kanish: [00:15:31] Essentially it's the only ETF listed here in Australia that gives investors exposure to the global technology sector. So again, people will go, Well, if I buy the global X fine plus ETF, which is essentially the FAANG stocks, plus, you know, a number of others like Tesla, Microsoft, etc., that's tech. But we've just gone through an alphabet and Netflix isn't tech. So if you just want the sector, how do you do that? This is purely that sector play. 

Bryce: [00:15:57] Tech sector they go only to Australia in and Ren, the index. What are we looking at? 

Alec: [00:16:01] So we mentioned that before. When we're talking about names, it's the Morningstar Developed Markets Technology moat Focus index. Probably a few things to unpack the developed developed markets, first of all. So you're not getting Chinese tech?

Kanish: [00:16:16] Not exactly. Yeah. So it's just focusing on those developed exchanges, the developed market exchanges. So there's no, for example, Taiwan in there, there's no China, there's no none of the emerging markets that are in that. And then moat focus. Now, this is something that Morningstar is quite known for. They every company they research, they give a moat rating its stars. It's like 1 to 5 stars, essentially a three about rating of three. So you've got no moat narrow moat or wide moat. And essentially the moat is Morningstar. They identify five sources of competitive advantage. 

Alec: [00:16:49] So before you get into them, for people who aren't familiar with the moat term, it's the analogy is, you know, the medieval moat protecting the castle. It's the things that protect a company and give it a long term competitive advantage. 

Kanish: [00:17:01] Exactly right. So if I looked at the five sources of economic moat that Morningstar analyst actively go in and they rate all the stocks, it would be switching costs, it would be network effect, it would be cost advantage, efficiency scale, and it would be intangible assets. So I'm going to give you an example there. An apple is classified as a wide moat. Now it's classified as a wide moat because essentially there's a switching cost that Apple has as a competitive advantage over its so Samsung. So you buy an Apple like you guys have the Macs, you're likely to have the iPhone, you're likely to have the iPad. There is just that synergy and seamlessness that you can go between device with a Samsung, it's just device space because the Android platform can go from a HTC to a Samsung to a Google. So they have a low switching cost. So Apple is seen as having a wide moat because of that. 

Alec: [00:17:57] The best competitive advantage for Apple is also the simplest the network effect of being able to get blue messages and being able to be an iMessage group chats really doesn't cost Apple anything, but it's such a competitive advantage. And then when someone gets a green message and can't be in the group chat, they feel excluded. That is a network effect, if I've ever heard one. 

Kanish: [00:18:18] Exactly right. Yes. 

Bryce: [00:18:20] All of this information is available on the issuer's website. So you can go to the global X website and there's a product landing page with all of the ETFs listed. You just click on that and and all the terminology that we're using here is terminology that's on the website. It's terminology that is consistently used across industry. So if you're looking for performance for fees, distribution, index purpose, they're all listed on those web pages. So you're not going to find that you come across terminology that we're not using on those landing pages. There's usually an actual nice PDF download that you can get for all of one, a nice one page of fact sheet that if you want to print out and put on your bedroom wall, go for it. 

Kanish: [00:18:59] But we also have a fun flyer because it's actually it's get updated monthly, but we have a fun flyer that is a bit more evergreen, which has some of the index description goes into sort of a rational investment strategy. You know, what's the underlying faces for for that particular exposure as well? 

Bryce: [00:19:13] They're you go. So this closes out Ren the fees on this is 0.45%. So and that's just off your underlying assets. 

Alec: [00:19:24] One question that we get a bit is when do I pay the fees? 

Bryce: [00:19:27] The fee is taken out of the unit price. 

Kanish: [00:19:30] That's correct. Yeah. So on a daily basis, the issuer will essentially strike, we call it striking and now the net asset value per unit. So we use essentially, you know, settle and go at the end of this day and there'll be a time that we go to these ETFs, unit price is X and that's daily. So within that calculation, the fee gets subtracted from that. 

Bryce: [00:19:54] So you don't see it, you don't see money coming in, you're not actually paying anything. 

Kanish: [00:20:00] Oh, look, I'm not going out there with a hot. 

Alec: [00:20:08] So I think there's some of the key things that we want to cover in every when we start going under the hood. The purpose, what's it trying to do, and then how is it trying to do that in terms of what index attracts, how much does it cost to do that, the fees? And then I guess the last question is, is it actually doing that? How's it performing and is it doing it? How's it going against its benchmark? 

Bryce: [00:20:28] Well, Kanish do you want to tell us the performance? 

Kanish: [00:20:31] Yeah. Definitely so. If I look at the performance as at the 28th of March 2023, you know, over one year, the performance is -3.93% over five years. This fund has returned 14.86% annualised. So per year, essentially. 

Bryce: [00:20:53] And then Ren, when we look at the top ten holdings, as we said at the top, you might expect to see apples year Amazon's year, you Netflix, you Facebook, so you matter. But the top ten holdings, there are a number of names in here that people may not have heard of.

Alec: [00:21:07] Pop quiz Tell me what these companies do. Salesforce. 

Bryce: [00:21:11] Customer Relationship Management. 

Alec: [00:21:13] ASMPT.

Bryce: [00:21:15] Rip off of ASML. I've never Heard of it. 

Alec: [00:21:19] Vontier. No idea. 

Bryce: [00:21:20] No idea. 

Kanish: [00:21:22] Yeah. So Vontier is essentially they do the R&D, the manufacture, sale, development, technical equipment. So essentially hardware like computer hardware. When you think about technology, you've got hardware, software, semiconductors. They are three broad sub industry groups. So a lot of these companies will fit into one of those three. 

Alec: [00:21:42] Yeah. Okay. What is ASMPT do? ASMPT. 

Kanish: [00:21:46] So ASMPT semiconductors. So you're not too far off. semiconductor assembly and packaging. And that's essentially their global business that is in that semiconductor space. 

Alec: [00:22:00] There you go. Yeah, some fascinating companies there. And the good thing about ETFs as opposed to other investment options like listed investment companies and stuff like that, is that ETFs disclose every holding. So you can go on any ETF issuers website and say every company or asset that's held in an ETF. So you can really go under the hood. 

Bryce: [00:22:24] There's a couple of semiconductors. Infineon, the fourth biggest, is Germany's largest semiconductor player. 

Alec: [00:22:31] But you see this is where they shoot themselves in the foot a little bit because the biggest semiconductor players in the world are TSMC from Taiwan and Samsung from South Korea. Yeah, but they get excluded. 

Kanish: [00:22:42] Well, Samsung Central, yes, they do. Being Korea's is seen as Taiwan because it is an emerging market so just developed. But what's interesting here when I look at this is you've got basically in that top ten, you've got Hong Kong, the US, Germany, Israel. So there's a good cross-section of the world just in your top ten. And the idea being from an ETF, do I, do I know enough to buy Vontier versus Microsoft versus ServiceNow versus Zuber versus Teradyne? Maybe you know you take it some people will take that stock price and take a bet on one of them and hope. But the idea behind the ETF is give that birds eye view.

Alec: [00:23:24] Yeah. And I think, you know, one thing we often speak about on the show is ETF overlap. And, you know, a lot of people would have started this episode thinking, oh, global technology that's very similar to the Nasdaq 100 ATF that I have. Yep. But looking at this list, it's actually incredibly different. Like the overlap wouldn't be nearly as high as you think because outside of Microsoft, none of those big tech names are in this one. 

Kanish: [00:23:48] Well, yes, If I looked at the Nasdaq index, I think it's 49 or 48% is actually technology. So in that information technology sector. So yet you're already, you know, only looking at half of that. And then the actual index has other sort of screens and value valuation screens and things like that. So it's global, so you're already going further away from that. So the overlap to some other common ETFs that people use, maybe less than I think. 

Alec: [00:24:19] Yeah, that's why you gotta look under the hood. 

Bryce: [00:24:21] That's it, That's it. So to close out the where does this sort of fit in our portfolios Ren and how would you think about this with your investment. 

Kanish: [00:24:30] So given that it's not a market cap weighted index product, you know, it's not just tracking like an overall market. I would think this for me sits in satellite, but given that tech is a long term that has a lot of long term tailwinds, for me, it's a long term satellite holding. Yeah. What do you think, Kanish?

Kanish: [00:24:51] Yeah, I agree. It's a satellite exposure within someone's global equity sleeve because it's sector specific. So it complements broader, broader indexes, the broader exposures that they have. 

Bryce: [00:25:03] So guys, we set out to ask the question or to answer the question: what's in a name? And I think the big takeaway from me here is that, as you said at the top, a name is really a good indicator to go further. You've got the issuer in there, which is a good reminder to do some research on the issuer. You've got the index in there. Good reminder to have a look at the index to understand what's going on in there. You can have special characteristics. You can have defining features to then go further and actually understand. What that means. Don't just take it as a book. What is it? Don't judge a book by its cover. Don't invest purely based on the name. There are some telltale, I guess, signals and reminders for you in there as you go to to research ETFs. 

Alec: [00:25:47] If a name is just to get someone to research ETF more. Have you ever thought about calling an ETF? Honestly, you must research this ETF. 

Bryce: [00:26:01] That's actually quite good. Yeah. Yeah. Now this is only the first of ten questions that we're answering in our next episode where answering how do we know when there is enough to actually make an ETF? And that's with another expert from Global X and then we'll be returning with in episode three. But for more information on global ETFs, you can head to their website, Global X ETFs dot com. They do pride themselves on the differentiated offerings that they have and the industry leading research team that they have behind a lot of the ETFs that they're putting up in the incredible global access that they're giving. So check them out globalxetfs.com.au, but it's been an absolute pleasure.

Kanish: [00:26:44] Thanks for having me.

Bryce: [00:26:44] We will definitely be hearing from you in many more episodes to come. Thank you so much.