 Welcome to Bogle Heads on Investing, episode number 10. Today we have a special program. We're going to look at index investing and exchange traded funds around the world with two special guests, Robin Powell and Debbie Fiore. Hi everyone, my name is Rick Ferry and this is Bogle Heads on Investing. This episode is sponsored by the John C. Bogle Center for Financial Literacy, a 501C3 Corporation. We have a special program today. We're going to be looking at the growth of index investing and ETF investing around the globe. And I have two special guests, Robin Powell, who is an award-winning journalist and the creator of the Evidence-Based Investor website and Debbie Fiore, who is the managing partner and founder of ETFGI, the world's leading independent ETF research firm. First up is Robin Powell. Welcome, Robin. Rick, it is a real honor to be on the podcast. Thank you for having me. Well, thank you. The reason I wanted you on the podcast is because you're going to tell us all about the growth of indexing in Europe. You have been an incredible advocate and growth factor to educate investors and advisors in Europe about index investing. Your passion for indexing came from an unusual place. You were a mainstream journalist and I worked at news services and you were also doing documentaries. How did you go from that to becoming such an advocate? I've been a journalist all my career. In fact, I still consider myself to be a journalist. I still work as a freelance. I was a general news reporter mainly in television for ITV, Sky News, a little bit for the BBC. It took me to some fascinating places, Baghdad under Saddam Hussein. I was one of the first journalists to really report on what was happening at Guantanamo Bay and had some really interesting assignments. But of all those fascinating stories I've worked on, I still contend that in many ways the biggest and most interesting story is the ongoing story that I'm working on at the moment, which is the kind of rigging by the industry of investing. It's a fascinating story and I'm working full-time on it now. By the rigging, you mean financial firms taking advantage of investors? Yes. There are people who see a massive conspiracy theory here that the industry, rather like I suppose big tobacco in the 60s and early 70s like the fossil fuel industry, for example, used their muscle and their might to deflect consumers' attention from the academic evidence. I do actually think there is quite a large element of that going on. I think just in more simple terms, you can pretty much explain anything that happens in economics by incentives. If we're financially incentivised to say or recommend certain things, do certain things, then we will. I think that has just played out in the investing space. It's got to a stage around the world where really the whole system is geared for the benefit of the people who work in it, rather than the people they're supposed to be serving. A few years ago, you found out about this by doing a documentary and you hooked on it. Can you tell us about that? Well, that's right. Shortly after leaving television, I set up my own production company and we were approached by a wealth management firm in Birmingham, which is the city in the UK where I'm based. We work mainly with high net worth clients, but we feel that we have found the way to invest, and not just the way for wealthy people to invest. As I say, they largely dealt with wealthy individuals, but for everyone to invest. I suppose largely as a pro bono initiative, they just wanted to get the message out there. They thought about writing a book, but then they'd heard about what we did and said, well, why don't we make a documentary? Well, Rick, that's when I met you. I came out to America, interviewed a number of interesting people. I think we met at a Bogle heads conference in Pennsylvania. I think that the following day I interviewed the great Jack Bogle. We also went to Ken French up at Dartmouth and interviewed him. We interviewed Bill Sharp over in California. And the documentary, I wouldn't say it bombed in the UK, but it was much better received in America, where of course you are very much more ahead of things and you certainly were there in terms of awareness of the benefits of low cost indexing. Here, people took one look at it and thought, what's all this about? And really it's a measure of how far we've come in the last few years that actually people have really started to sit up and take notice. I remember that interview because you talked with me for maybe 15 or 20 minutes and I somehow picked up your accent when I was talking with you and when we started interviewing, I started speaking in this strange accent. My wife saw that and she said, what are you doing? I said, I couldn't help it. I couldn't stop talking that way. Well, so you did the documentary and like you said it kind of bombed in the UK but something must have started a fire in you because you haven't stopped since. I think you have written about a moment in your career, you referred to your aha moment of realising that indexing is the way to go if you like and I think I remember you writing somewhere that you decided at that point that that's what your career was going to be from now on. That's what your mission in life, if you like, was going to be. I suppose I decided the same and I was shocked that there is all this academic evidence out there about how we should invest and yet we have almost an entire industry which is geared up to encouraging us to do the complete opposite. I suppose it bothered me. I've always been a bit of a campaigning journalist if you like. I've always been interested in kind of consumer issues and sticking up for consumers, sticking up for the little guy if you like. Yeah, it just inspired me and as you say, I haven't stopped. Now the data is compelling in the UK for doing index investing just as it is in the US in fact all around the world. One of the studies that we do over here is by S&P. Standard & Poor's does what's called the SPIVA scorecard and the SPIVA scorecard is published, I would say, by annually and it looks at the performance of active funds versus various indexes. Started here in the US but now S&P Dow Jones Indices does this report for a number of countries. Australia, Canada, Europe, India, Japan, Latin America, South Africa. And I just want to read you a list. This is from the latest SPIVA reports from all these different parts of the world and it happens to be just the three-year data. In other words, over a three-year period of time what is the percentage of times the index and they use an S&P index for all of these but S&P of course has indexes that track markets all over the world. What is the percentage of the local country or regional index that outperformed the active managers? And I'm just going to read you the list and I'm going to go straight down and some of these countries are small but some of them are big and some of the regions are big. So in the US, roughly 79% of the large-cap active managers underperform the S&P 500, which is what they used. In Canada, over the last three years, 94% of the active managers underperformed and Mexico, 89% of active managers underperformed the local index. In Brazil, 84%. In Chile, 86%. In Europe, which encompasses continental Europe 86%. South Africa, 85%. India, 91%. Japan was the outliner. It had only 57% of the active managers underperformed. In Australia, 86%. And what I found a lot of the state of is you're always going to have one outlier whereas one of the regions is going to be off but 10 years from now it will be different. It will be a different region. So if you look at this, it's just amazing to me as I look at all these numbers from all of these countries it falls right about 80 to 85% of active managers across the board in all countries and as I get into the speed of report even more I look at small-cap, large-cap, value growth they're all the same numbers in every country across the board. You raise a really interesting point, Rick and funnily enough I actually made a sort of follow-up documentary How to Win the Losers Game which is obviously inspired by Charlie Ellis' book from the mid-70s and included an extended interview with Eugene Farmer and various other people and when that went out I had a number of people in the UK say but this is all about America all the figures you're giving us are all about US fund managers, Wall Street managers and we all know that they're dreadful and I really couldn't believe what these people were saying I mean I will spare their blushes but shall we say these are very senior executives that I remember one in particular at a very well-known FTSE 100 company shall we say trying to tell me that this was an American problem and actually in the rest of the world particularly in the UK where we have good fund managers of course it's not an issue at all but clearly as your S&P data you just quoted shows we're all about as bad or as good as each other frankly Sometimes big big name managers who fall off the wagon help to show that active management isn't all that it's cracked up to be and you just had an example of that recently I mean when I started writing about active management and the kind of randomness of active fund returns and so on a common retort that I would have from people in the UK was what about Neil Woodford Well Neil Woodford is a very successful, very photogenic fund manager who ran a fund for Invesco Perpetual for many years which was very successful which outperformed actually when you look at it on a strictly risk and cost adjusted basis the performance was not actually as amazing as some people imply sometimes that it is notwithstanding that it was good and it put him on a pedestal and he then subsequently set up his own company Woodford Funds and literally what was exactly five years ago 19th of June 2014 he set up a fund called the Equity Income Fund it's his flagship fund and the performance of it, Rick, has been consistently dreadful it's been going down and down and down things have got particularly bad in the last 12 months and now big investors are starting to desert it and lo and behold on Monday they announced that they suspended trading the reaction to that story in the UK is really interesting everyone's saying wow we thought this guy was a genius what's gone on he's completely lost it which of course as you know completely misses the point that actually outperforming the market outwitting the collective wisdom of millions of people around the world is extremely hard it's extremely rare and his chances frankly of ever replicating his performance at Invesco Petuality's own company were always very very slim and yet everyone's acting as if it's a huge surprise extraordinary we had a similar situation here in the US a few years ago with Bill Miller who ran the Legg Mason Capital Management Value Trust he had a fantastic track record of outperforming the S&P for 15 years in a row and he was literally the man until 2007 and in 2007 when financial stocks started to go down he started loading up and he bought Bear Stearns and Citigroup and AIG and by the end of 2008 his fund had lost two thirds of its value and people jumped ship and he's still managing money now and I think he's doing much better with a much smaller fund but the point is that there's always going to be someone who is an outliner just by randomness alone there's going to be a fund manager who does well and something that really bothers me Rick is how many investors actually identified Bill Miller at the start of that amazing 15 year run or whatever it was or Neil Woodford at the start of his 20 year run and as you know it's in the nature of high-conviction active management and that's what Miller was and it's what Neil Woodford is as well it's in the nature of high-conviction active management that at some stage you're going to underperform the market horrendously and Woodford went through a phase just before the turn of the millennium I think in 1998-99 when he was in the papers saying this guy's completely lost it that was back then and of course subsequently what was proved to be right if you like and he massively turned things around in the 2000s and everyone said he was a complete genius so everyone talks about these outliers but even with those outliers how many people actually identified them in advance and stuck with them through thick and thin I'm sure it's a very very small number interesting that in the UK your equivalent of the security and exchange commission over here over there it's the financial conduct authority the UK regulator in 2017 they addressed a lot of these issues and a large report came out which sort of fundamentally changed how business is being done over there yes so back in 2012 I think it was we had something called the retail distribution review and that effectively banned commissions to advisors for recommending certain mutual funds if you like and I think we were pretty well the first country in the world to do it Netherlands was also one of the first and very slowly now other countries around the world are starting to look to that kind of commission free approach if you like that's for interesting in the US there has been no discussion about doing that I'm amazed and frankly appalled at some of the stories Rick that I hear about the conflicts going on in particularly the kind of brokerage world in America in many ways you're ahead of the game you're ahead of us in terms of fees your fees are much lower than ours the awareness of poor performing active funds is greater in the US than anywhere else in the world and yet you have these horrendous conflicts which without getting political about it were going to be dealt with with the fiduciary rule and as you know that hasn't materialized or at least in the way that it was originally intended and then a couple years ago as you say we had the report by the financial conduct authority asset management market study and it basically found all sorts of conflicts of interest in the investing in asset management industry really from top to bottom it also pointed out that after costs very few active funds actually outperform the market I remember I was actually in America when this happened and I was reading the conference reading the report and I just could not believe what I was hearing here we have the UK regulator which frankly has been like all regulators around the world has been very very slow to get on top of this whole issue around conflicts of interest around opaque fund fees and charges and all of a sudden the FCA suddenly seem to have sudden kind of conversion if you like and you know it's in the nature of these things that a report comes out and of course then it's open to put out to consultation and the industry then the lobby sets to work on it and the final report was actually rather less damning than the original report that came out it's exactly the same all around the world ESMA the European Markets Authority brought out a report a few months ago and exactly the same thing has happened I mean the US and the UK fund industry lobbies are no better or worse than the lobbies in France, Germany all these other countries as well and they too have been working on their own regulators to try to hold back the tide if you like But things have been going well you're growing and your role is not only to help educate the public but you also help advisors to educate their clients as well. Tell us about how things are different in the UK type of messaging do you need versus you work in the US as well and you work with the US advisors Yeah, well I suppose the kind of rules are fairly similar but both sides of the Atlantic obviously in America you're not allowed the SEC does not allow as I understand it testimonial videos and so on we can't do those in America but we can do them here and they are very very powerful we call it social proof you know when people can actually see people like them I used to use active funds now I use index funds are much better off much more relaxed don't worry about the markets and that sort of thing that's very very effective it's still a very raw issue here in the UK. I get the impression in America that people have actually now more or less accepted that passive is better than active. Yeah I did you probably might disagree with that but here it's still a burning issue and I'm still very much in the minority and so I find the best thing is really not to get into arguments with people because very often people have had these very deep-seated ideas and particularly when you're talking to other people in the industry as well they've built their whole careers they've been doing this for 30-40 years some of them they don't want some journalists telling them that they've been wasting their time and more importantly wasting their clients money all of those years so I do think you need to be emotionally intelligent, non-confrontational and really just present the evidence in a sort of unemotional way and I think as far as clients are concerned if you actually show them that they could end up with a retirement pot which is 25-30 even 40% bigger if they use low-cost index funds and other than rebalancing do nothing else then that's quite a that's quite a compelling argument you've got some help, I mean there are some companies that have come into the UK recently like Vanguard for example really growing a presence and they must be marketing their information and it will low-fee that must be helping and I'll also make a plug for the Bogleheads forum our Bogleheads.org we now have an international section and when you click that on we have at least one European country Spain which has their own forum it'll be nice for the UK to maybe start their forum we'd love one, yeah well you could start it Robin why not, why not and you know this is the voice of the individual investor speaking with other individual investors and it's been very powerful here in the US because indexing in many ways has been a lot of word of mouth because there's not a lot of money in this indexing industry so people write articles write books and then there are forums like the Bogleheads forum where it's investor to investor helping out and that's really important Rick isn't it I mean humans, we are very social animals and I think part of the reason why this whole active management speculating thing has just got completely out of control is that there were so many people doing it and so many people benefiting from it journalists gave them something to write about it gave them advertising revenue analysts obviously they made a lot of money out of it brokers, advisors consultants and I see these people at conferences as well and they all kind of get together and they're all talking about the latest thing to invest in or the latest fun to keep an eye on and so on and actually that's why I think Bogleheads is really really important because it's a community of like-minded people who've actually discovered the truth if you like and sometimes even if you have discovered the truth you need to be reminded of it every now and again and again that's why I think something like Bogleheads would be really really valuable here in Bryn I have a saying that I got from someplace else but I don't know the source the truth must be repeated over and over again because lies are constantly being told absolutely right Robin thank you for being on the show today I greatly appreciate your time and good luck spreading the word it's been a real pleasure and I've been a big admirer of your work and your articles over the years and keep up the great work thank you and now I'd like to introduce Debbie Fuhr Debbie is the top ETF analyst in the entire world and I've known Debbie for many years and I've worked with her on many panels and I'm happy to have her with us today with the Bogleheads on Investing Podcast Debbie thank you I'm excited to be here well I'm excited to have you because you are one of my heroes in the indexing world you are I believe the most knowledgeable person anywhere on exchange traded funds and other exchange traded products you have the premier research company on exchange traded funds how did you get into this back in the 1990s well thank you for those really kind words and introductions so I got into it because I wanted to work for Morgan Stanley I was offered a job initially to work in marketing for the equity division London and the woman who was bringing me in ended up being moved into another role and a month later she contacted me and said they're interviewing to find someone to come in and be the director of marketing for Opals and ETFs and so in finance everything has acronyms and so Opals at the time stood for optimized portfolios as listed securities and they were very much like ETFs in that if someone wanted to invest in the S&P 500 Morgan Stanley's trading desk so I sat in sales and trading in the equity division would go out and buy the underlying portfolio and these products were listed on the Luxembourg stock exchange which isn't really a trading exchange but more a listing venue and we would mark up and down so kind of like the creation redemption ETFs the sorry the Opal so for those of you who know ETFs that sounds pretty similar to ETFs and we wanted at Morgan Stanley to create ETFs and we partnered with Barclays Global Investors and MSCI to create a family of 17 MSCI country ETFs which were called webs world equity benchmark shares Deb I remember the webs and weren't they the first open-ended mutual fund ETFs as opposed to unit investment trusts which spiders and middies were? Exactly so very good memory and so my job was to market by the unit investment trust in the US for US exposure and webs for the rest of the world many people didn't get what I was saying when I was doing spider and webs and in 1999 BGI Barclays Global Investors rebranded those webs to be I shares because they were going to have a whole family of ETFs and so most of your listeners probably know I shares are now part of BlackRock so BlackRock bought BGI the rest is kind of history and the term exchange traded fund didn't exist for quite a while spiders and middies and webs and opals and they had all these different acronyms how is it that the term exchange traded fund came around? Well you know it's funny you should say that because I've been based in the UK now for 25 years and there actually were exchange traded funds in Amsterdam for probably now over 100 years and so they were just traditional open-ended funds that were listed on exchange sometimes they had market makers and sometimes they didn't so when ETFs actually went to Amsterdam they called them tracker funds and not ETFs they became known as exchange traded funds because at the heart of it ETFs are highly regulated funds such as 1940 acts in the US or USITS funds the regulations here in Europe with some added benefits of being listed and traded on exchange so it's really to identify the fact that they were funds and they were exchange traded and you know I get disappointed when people say ETFs are asset classes or an asset class because inside of an ETF as you know you can have exposure to different types of equity benchmarks or fixed income or commodities and you can also have things that are active so it's really a wrapper that allows you to package like a mutual fund any different types of exposure and there are differences between a unit investment trust and an open-ended management company and the reason the webs went down the route of being an open-ended management company is if you do a unit investment trust that product must fully replicate it can't optimize or buy a subset it can't reinvest and it can't do any securities lending so when you came to these bigger more diversified markets where it was often difficult to buy all the securities especially if the fund started with a smaller size or the ETF did you needed to be able to buy a subset so you would use a quantitative model to build a basket that would track the index but not fully replicate and there are some benefits because it allows you not to buy names that are difficult to buy it allows you to save on some transaction costs but it does mean that it's not going to track as well as a product that is fully replicating I remember also there was a couple of countries where one stock would be 50% of the entire exchange and it violated IRS rules and mutual fund 40 act rules to create a fund that had non-diversification like that so the web structure, the open-ended fund structure rather than the unit investment trust structure was the answer exactly and another thing they could do is if there weren't enough names in the index stocks they are allowed to buy securities that are similar to the securities in the index such as some of the smaller European countries so that they could then be diversified so there are some additional benefits that were accrued to the open-ended management structure including being able to do securities lending and sharing that with the fund or the investors being able to use derivatives and doing some other things that can benefit and reinvest at least in the short run so it does add benefits to the ETF offering I had a feeling that when you and I started going down memory lane that would get very esoteric very quickly so I had to pull it back to how you ended up starting your company after BlackRock, Barclays and so forth could you continue on sorry to have interrupted you no that's okay so maybe I should say I spent 11 years working at Morgan Stanley on the sales and trading floor I had various roles so I was doing product development I was doing sales and marketing I was writing research sitting on the sales and trading floor until Spitzer came along in the US and then rather than technically moving into research and changing where I sat and what I did I started writing market commentary became a managing director and then the fixed income division took over equities in 2007 I left with my team in 2008 and looked around for different places to go liking ETFs a lot because I believe they offer a lot of benefits being low cost, transparent easy diversification and uniquely democratic in that both institutions financial advisors and retail have access to the same toolbox or products at the same small size with low cost which is quite unique and this is when you decided to join Barclays so decided that I would join Barclays global investors as a managing director to create ETF industry research for them and work on implementation strategy so my first day at BGI was the day Lehman filed for bankruptcy so that was interesting first day I spent about three years at BGI which as many of your listeners will recall BGI was bought by BlackRock because BlackRock was an active asset manager saw the benefits of ETFs and index and after that happened I decided I wanted to go back to the sell side meaning to the brokerage firm so that I could interact with more clients and get more involved in the things that I enjoyed doing in the past so decided to accept the job to be the global head of Delta one strategy at an investment bank the beginning of July 2011 and resigned from BlackRock that investment bank as many often do reorganized almost just two weeks later decided that the changes at this brokerage firm it was probably unlikely that they would follow the strategy I thought they were going to follow I had offered to go set up my company at that point we spent the summer at Starbucks putting together the plan for ETFGI which is an independent research and consulting firm based in London we offer paid for subscription research we do some consulting work and we also do some events and an interesting journey started it in the beginning of 2012 and have been able doing that to go and see the world through ETF so I've actually been lucky to have gone to 63 different countries now talking about ETFs at events that are organized by regulators or others and sometimes they get to do fun things like when I was in Kenya to speak at an event I actually went to an elephant orphanage and adopted a baby girl elephant which means you're paying for their milk for a year and I went to the giraffe center where they're trying to stimulate more giraffes of the Rothschild breed because they're getting close to extinction so sometimes you get to do fun things that you wouldn't be able to do in your normal day job now you went to 63 countries I have a research report it might be a couple of months old from you that says that there are 28 countries that currently have exchange traded products is it now expanded I haven't been to all the countries that have ETFs and I've been to some countries that do not have ETFs so as an example I've been to Brunei and I was in Lebanon recently there are countries that don't have ETFs and maybe surprising to your listeners there are even ETFs in Iran they have a type of ETF there that's kind of interesting which is physical real estate and you might say well what does that mean so to comply with Sharia law the asset manager would buy property they would build a building with apartments sell the apartments and then pay back profits to the investors so you find around the world there are some tweaks on what can be done and how it's done but it's definitely has been an interesting experience to be involved in the industry but I expected to continue on for some time I still very much enjoy what I'm doing so let's talk a little bit more about the trends globally what people are buying what's driving the assets to exchange traded funds not so much in the US but globally what are the big factors that are causing the growth of ETFs and driving assets to it that's a great question so I think it really comes down to for many investors and everyone would love to be able to be a great stock picker and pick something that's going to do better than the market and so most investors have this thought that they would like to find alpha either through buying stocks buying mutual funds buying hedge funds buying something that gets increasingly difficult and that challenge of finding active funds that consistently deliver alpha hedge funds that consistently deliver alpha or even as an individual picking stocks or relying on your financial advisor to do that is challenging so what you find is most investors are looking at this barbell approach to investing so if they believe or want to believe that they can generate some alpha have funds that are going to do it they put money there but as people invest in more asset classes segments of the markets types of exposures they're increasingly turning to index products like ETS and sometimes active but mostly index because the goal for many is to generate alpha through asset allocation and so you see this barbell approach to investing where it's active stuff on one hand index stuff on the other trying to create good returns so I think that's a big driver I think that the fact that it is very difficult to find active funds that consistently deliver alpha is a big challenge and a driver so if you look at the performance of say the S&P 500 index and you compare it to large cap active funds and S&P every six months does what they call their SPIVA study the last one I looked at said that on a three-year basis 79% didn't and on a five-year basis 76% did not so you can spend a lot of time trying to find the funds that are doing it now the likelihood of them doing it going forward is challenging so many people decide going to index make sense we've also seen that ETFs have become a solution or a tool for many investors for those that are more sophisticated that might use futures if you're not looking for leverage and just want to put money into the market or what I would call equitized cash ETFs can be more cost efficient in many cases due to regulatory changes causing the cost of rolling futures to be more expensive many are using ETFs today for plain vanilla exposure rather than using futures I think Robos have been a big driver getting people to use ETFs because every day in the US 10,000 turns 55 years old and when those people get to that age and start looking at where and how should I invest and having that conversation about investing is often very challenging where you don't often want to tell your friends your family you don't know what you're doing you often don't want to divulge how much money you've made or making and how much you saved or didn't save so Robos are very easy tools to go play with asset allocation to learn about the impact of cost so buying less costly products help you over the long run and many people at the end of that end up using ETFs because most Robos use ETFs and it's also interesting because the average age of most Robo users is 47 and not millennials but I think the real reason many people just use ETFs is today when we have so much political and economic news happening in the market people want to be able to adjust their allocations in a very easy and timely fashion and within the U.S. alone over 2,000 products and globally we have 7,700 ETFs with 5.7 trillion people use ETFs in many different ways so to equitize cash short term tactically to adjust and about half of investors use ETFs for more than two years individuals though aren't the only ones who are propelling this market some large institutions are doing it also, correct? If you were to look at ETFs in Japan about 70% of all the assets and there's about 323 billion there 70% is owned by the Bank of Japan they have been using ETFs for quantitative easing in Hong Kong the biggest ETF is the Hong Kong Tracker Fund and that is an ETF that was created after the government in Hong Kong shares during the Asian crisis just over 20 years ago and after the Asian crisis had gone away the government looked at so what do we do with all these securities and they decided rather than selling them back in the market which would have looked negative they created the Hong Kong Tracker Fund which will celebrate its 20th anniversary in November this year the government of India has created ETFs as a way to dispose of securities that they own that they also don't want to sell them to the market so they've created new indices on the equity side twice they're working on creating a new fixed income product as well as a new equity one and we've seen others decide that they want new types of products such as diversity has been a thing where many of your viewers might have seen the fearless girl statue that was placed in front of the raging bull down by Wall Street that product that kind of goes along with the fearless girl was a diversity ETF that was seeded with 100 million from one of the California pension funds and we've seen the same a year ago where RBC launched in Canada a diversity ETF also around March 8th International Women's Day which was seeded with about 100 million from one of the Canadian pension funds so we've seen a lot of innovative things going on and when you look at the flows you can measure flows typically within a few days after the end of the month where with mutual funds as you know it takes often 8 to 10 weeks to get the data could you elaborate on ETF flows so I think what I would say is the overall flows and when I talk about flows what I'm measuring is creations versus redemption so most ETF trading is secondary trading so you might own shares in an ETF and you decide to sell them someone else wants to buy them so those shares of the existing ETF move around primary trading is when there's a really big order and big is more than 20% of the average daily volume in an ETF for security when that happens there are banks or brokerage firms who are called APs or authorized funds and they're allowed to trade the securities in an ETF and so every ETF has what's called a creation basket and this is typically either a fully replicating set of securities that match the index or something that is optimized or a subset they will trade that typically in increments of 50,000 that gets sent to the custodian and the ETF gets bigger so we're measuring creations versus the other side redemptions and in the month of April as an example globally we had 46 billion of net new money going into ETFs globally and about 35 billion went into equity focused products about 12 went into fixed income 3 billion went into active we had just under a billion going into leverage and inverse some currency hedge there's also commodity products although they had net outflows and on a year to date basis so far this year we've seen 145 billion going into ETFs but one of the unique things I would say is we have had 63 months of consecutive positive net inflows into ETFs globally I do not know of any other products that could say that that's more than five years and what would the flows be for traditional mutual funds during the same time period most active funds have had net outflows during that time and hedge funds have had a lot of net outflows during that time let me circle back to something you said about what's driving all this and you said one of the things is just exposures to asset classes they're looking to get the return of the market that they live in and on the other side if they're confident that they might outperform they're making an active bet I mean by barbell correct exactly and we talked about the fact that 79% of US large cap active managers didn't beat the S&P 500 but I went through with Robin a laundry list of all the other countries it's not just the US when we look at Europe 86% over the last three years underperformed the European index if we look at India 91% of active managers underperformed the index that S&P uses for India Australia 86% I mean these numbers are almost consistent and they're mutually exclusive Canada 94% of active managers underperformed these are all mutually exclusive because of all different countries but the numbers are almost the same I mean it averages out over the last three years to about 80 to 85% if you're going to look at all of these yeah that's true I mean I have a map of the world that S&P has made for me a long time ago partially because I asked them to do a SPIVA study when I was speaking South Africa so if you look at Mexico, Chile, Brazil South Africa you know you can add that to the list it's typically 7 out of 10 active funds do not beat their benchmark in any given one-year period and then you know it tends to get worse on a three-year basis so that's a real challenge and they charge higher fees right so all in all if you were to look at you're paying higher fees if many of these products didn't charge such high fees they might actually be beating their benchmark but it is the higher fees that they tend to charge and fees vary a lot around the world but typically it would be over one and a half percent is kind of the typical average annual cost for an active fund and often you pay penalties and you move your money out in a period that's less than six months of holding that product so you have to be careful of the different cost you might incur when you buy different types of products so as countries take this data with your help as a consultant to these countries and they decide they're going to launch ETFs in that country or the regulators in that country are going to launch ETFs the first ones that come out are generally broad market tracking I would define them a little bit differently they tend to be the blue chip indices on the equity side that people know so people open the newspapers in the US most people would know the S&P 500 or something that's a well known index so you tend to find when products come to market in different countries around the world it tends to be one of the indices that is quoted in the newspapers all the time how long after a country who has never had this type of a product before when they launch an ETF that might be tracking those blue chip indexes how long does it take before it really starts to catch on and people begin to understand what it is that's a great question so part of the challenge for ETFs is that although we think of them as a retail product in many jurisdictions around the world financial advisors are paid by the firms that make mutual funds or structured products or other types of financial products they're paid to sell these products and so when that happens the financial advisors do not talk about ETFs because ETFs do not pay advisors to sell them they work best where financial advisors are paid explicitly for advice and then the advisors are helping to build portfolios to suit their clients when John Bogle and Vanguard launched the first S&P 500 index fund here in the US they went through the brokerage industry to do it they thought they were going to raise I believe 150 million in assets and they only raised 11 for the exact reason you're talking about advisors are still paid to sell products in markets like India most of Asia Pacific is that way in Europe it only changed in January this year that across Europe if a financial advisors independent they are no longer allowed to be paid to sell products so that's been a big change but it takes time even for that to cause people to change their behaviors but I think it's a good thing in fact in the US we're battling over this fiduciary rule and it doesn't seem like we're going to get one we're going to get a best interest rule and I was just thinking that you know if we eliminated commission sales here financial advisors couldn't do commission sales that would be that would go a long way toward getting advisors to do the right thing so I'm part of the challenge too so you know the UK change happened in 2013 so it was called the retail distribution review or RDR and in Holland it happened a year later in the UK we still find that many financial advisors have historically go on to what we call mutual fund platforms or platforms to buy mutual funds and they still go to these platforms because they're kind of tied into them the challenge is to buy and sell mutual funds you don't need access to the stock exchange so many of these large platforms don't offer the ability for financial advisors to use ETFs and when asked about it they say well there's no demand but the real challenge has been it would cost them some money to develop the technology it's not that expensive and it's not that difficult but to make the change to be able to have connectivity so that advisors could access ETFs is something they just say there's no demand so they're not doing it so it's still not a level playing field even when regulations have changed in many cases let's switch gears a little bit I want to talk about ESG environmental corporate and social governance everywhere I turn right now it's all about ESG different ESG funds coming up all over the place do you see a big future for ESG a permanent stable future for ESG or is this just another fad that's going on I believe it's here for the long run now partially because what it means when you talk about ESG has changed a lot so it used to be many years ago that ESG was basically removing the sin stock so taking out tobacco pornography etc what you found is the way products are made today in terms of indices has changed a lot in many cases what they're doing is they are evaluating companies on how well they perform on different governance issues on environmental issues and companies that tend to perform better actually are better run companies and do perform better and so it used to be that the sin stocks actually did better than the non-sin because tobacco had such high margins and so I think that fundamental shift believing climate change believing in the need to look at solar and alternative energies and all these other things is really being embraced very significantly here in Europe so when we look at ESG as type of exposure within even ETFs right now there's about 30 billion dollars which is not a lot out of that 5.7 trillion globally but what we see is if we were to look at the overall industry the US product set in the US accounts for 70% of all the assets and Europe is only like 17% when we look at ESG Europe accounts for nearly 60% of all the assets so we have a lot more people in Europe individually and asset owners so pension funds and others embracing investing using this lens and the reason is in many cases the governments in France and Belgium are saying that asset owners must look at things this way so I believe that over time ESG will be incorporated mainstream into everything I mean there's actually been a very large launch of a new ETF in the US in the past two months it was actually a Finnish insurance company that seeded a new ETF listed in the US based on the MSCI ESG criteria with $845 million so although it's in the US it's still coming from Europe although in our numbers it would show up as being in the US and domicile there so I think it's moved on a lot I think it's continuing to move on and early when I spoke about the diversity ETFs that for me would also fall into an ESG thing although between ESG and themes because some would say diversity is a theme so right now we have governments in Europe and in the UK trying to define what is ESG and what are the standards what is impact investing so it's something that governments are actually getting much more involved with here than I've seen in other jurisdictions around the world Thank you Debbie I want to end with one more item and that is you are the founder and a board member of Women in ETFs and it's been a huge organization here in the US and could you talk about that? Yeah so thank you for mentioning that that was something that five of us started in the US we just turned five years old and so Joanne Hill Sue Thompson Linda Zang, Michelle Mikos and myself got together and thought we need an opportunity to help women come into the ETF industry to stay in the ETF industry and to have a good career and often it's difficult to ask your boss especially if you're sitting on a trading floor and it's all men and they're very busy so we wanted it to be a way to help educate people to help them grow their career so the three pillars are really connect, support and inspire organization in the US which is a nonprofit I decided we should have something similar in Europe so we actually have a legal entity here and we have chapters across Europe and also we have a chapter in South Africa and we have a chapter actually two in Canada and we also have the mountain Asia so it's been exciting I mean we do university outreach so we go and teach lectures and do events at universities we do one-on-one mentoring schemes that last ten months we also have like mentorship dinners where people can just meet more senior people we have a speakers bureau to encourage the press to speak to women that are qualified and allowed to speak to the press or to speak at events we do various types of educational events so on Friday here in London we have an event on investing in China we've done diversity events and one of the things that I've been involved with a lot is for international women's day which is March 8 women in ETFs in the first year rang the bells at nine exchanges I noticed that the UN was ringing some different bells and I asked them if they would work with us to do it next year and so we now partner with UN Women UN Global Compact the Sustainable Stock Exchange Initiative the International Finance Corporation and World Federation of Exchanges so we went from 9 to 33 exchanges to 45 to 65 to this year we rang bells at 85 exchanges around the world which is pretty exciting quite impressive well great congratulations on that growth that's wonderful sorry maybe I could just say we have over 5000 members right now and 17% of our members are men so having men as part of the solution is really important I should say we probably should change our name from women in ETFs we really do want to embracing all types of people to get into the industry and have a great experience well thank you so much for your time Debbie I really appreciate I know we could go on for a long time talking about this and we wouldn't even be scratching the surface on the knowledge that you have on indexing in the ETF industry and the growth globally and so forth thank you so much for spending the time with us today now thank you it's been a pleasure this concludes the 10th episode of Bogleheads On Investing I'm your host Rick Ferry join us each month to hear a new special guest in the meantime visit Bogleheads.org and the Bogleheads Wiki participate in the forum and help others find the forum thanks for listening