☀️☕️ Active ETFs - paying more for (under) performance?

📝 Focus

• Active ETFs - paying more for (under) performance?

📊 In the Markets

• Single Digit Singles Day

📖 MoneyFitt Explains

🎓️ ETFs, Exchange Traded Funds

📚 What We’re Reading

📝 Focus

Active ETFs - paying more for (under) performance?

Fund management house GMO, co-founded by legendary value investor Jeremy Grantham, just launched its first exchange-traded fund, the GMO US Quality ETF (QLTY), which invests in big blue chip US companies with high and stable profitability, strong balance sheets and “moats” around their businesses.

But it’s not a low-fee passively managed index tracker like most ETFs. GMO is jumping onto the bandwagon of large active managers like Capital, Fidelity, T Rowe Price and Templeton desperately launching ETF versions of more or less the same old funds (the vast majority of which underperform passively managed index funds) with the same old high fees (sometimes slightly less.) To be fair, the new GMO ETF will mirror the US portion of an existing mutual fund that has, so far, performed very well against peers and major indices for many years (see below.)

As an industry, the drive into ETF “wrappers” for actively managed funds has been driven by the very poor performance of those funds over the long term despite, and partly because of, high management fees and other costs. This has, in the last decade, sent investors fleeing en masse into low-cost, passively-managed index funds. These now make up 45% of total assets managed in the US as of 2022, up from just 21% in 2012. The new active ETF strategy of these managers seems to be working, though: so far this year, 22% of ETF inflows were to active ETFs even though they only make up 7% of total ETF assets.

..... ▷ Active ETFs are a relatively new innovation in the world of ETFs. 

These funds are managed by portfolio managers who, usually supported by large teams of analysts, make investment decisions based on their own and investment banks’ research rather than passively tracking an index. 

To pay for all those highly paid professionals and the lush offices they definitely need, active ETFs typically charge higher fees than their passive counterparts, though that, unfortunately, isn’t a guaranteed trade-off to get higher returns. 

..... ▷ Over both short and long time periods, actively managed funds have dramatically underperformed passively managed index funds, whether they are traded as ETFs or not.

According to S&P Dow Jones Indices in its famous SPIVA (S&P Indexes Vs Active) studies, the percentage of All Large-Cap funds that UNDER-performed the S&P 500 in just a single year to June 2023 was 60%. 

That figure soars to 80% after only three years and gets well into the 90% range after fifteen. 

And SPIVA adds, "fees alone cannot explain the fact of majority underperformance in most equity categories."

This underperformance against the index has been the case for decades across market cycles, in multiple stock sizes and styles, in bonds and in other markets around the world. 

For example, 82% and 83% of European and Japanese funds underperformed their indexes after just one single year. 

But would picking past OUT-performers load the dice in your favour? SPIVA says no to that idea, too. In fact, those past outperformers are MORE likely to UNDER perform in subsequent years.

..... ▷ But according to a white paper by Morningstar, fund fees do have a remarkable predictive power for future fund performance. 

The total expense ratio is the best predictor of future fund returns, more so than the experience of the fund managers, the short and long-term track records of the funds or any other factor… including the rating of the fund BY Morningstar!

The cheaper the total expense ratios of a fund, the higher the chance of outperforming its peers (though not necessarily its benchmark.)

And this worked as well for large and small company funds both in the US and internationally. 

(Another discussion for another day: There are numerous systemic risks and issues related to the increasingly important role that passive index funds play in capital markets, including issues related to voting, pricing and volatility.)

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

Moody's Friday downgrade of the US credit outlook, coupled with concerns about a potential government shutdown, had kept investors a little on edge before benign inflation data sent everything through the roof on Tuesday. 

The S&P 500 and Nasdaq surged, with their largest gains since April, fueled by softer-than-expected inflation data, suggesting the Federal Reserve may halt interest rate hikes. Interest rate futures priced in a 65% chance of a rate cut in May 2024, compared with 34% late on Monday, according to the CME's FedWatch tool.

Consumer prices in October were flat compared to September, with underlying inflation at its lowest in two years, climbing 3.2% over 12 months, far lower than economists' projections of 3.7%. 

Meanwhile, there have been few signs that the Fed’s massive 5.25% rate hikes from about 0% since March 2022  have been severely hurting the economy. 

This "Goldilocks environment" sent traders piling into both stocks and bonds. 

The smaller company, more domestically-focused Russell 2000 index surged by 5.4%, outperforming the market, while the interest rate-sensitive S&P 500 real estate climbed by 5.3% for the largest daily gains since November 2022. The KBW regional banking index surged by 7.5%. 

Novo Nordisk showed the American Heart Association Congress that its blockbuster Wegovy weight-loss drug resulted in a 28% cut in heart attack risk in a trial of 17,600 participants with obesity and cardiovascular disease. Perhaps more importantly, it also showed that the benefits were not all from the loss of weight itself. 

Single Digit Singles Day

China's Singles Day sales managed to break records, but consumers were still cautious despite retailers' aggressive discounts, and generated growth of only 2.08% in cumulative gross merchandising volume (GMV) sales to CNY 1.14 trillion (or $156 billion) compared with growth of 2.9% last year, according to data provider Syntun.

..... ▷ The annual event, once a 24-hour extravaganza on 11.11 by Alibaba, has in the last 15 years expanded into a weeks-long festival across all the major e-commerce platforms and even sucked in bricks-and-mortar stores, making it the world's largest shopping festival. 

..... ▷ Alibaba and JD.com reported record-high sales volumes, but Alibaba refrained from disclosing specific sales numbers for the second consecutive year.

This year's feeble growth shows consumers cutting way back on spending amid economic struggles despite aggressive discounting for weeks and weeks. 

The subdued mood carried over into a focus on essential items rather than discretionary purchases, while return rates are expected to soar.

..... ▷ A major threat to the incumbent platforms like Alibaba's Tmall and JD.com in the ever-evolving landscape of Chinese e-commerce is coming from Xiaohongshu and Douyin (like TikTok in China), which emerged as significant players during Singles Day this year. 

Xiaohongshu witnessed a 3.8 times year-on-year surge in orders, while Douyin's GMV skyrocketed by 119%, with a massive increase in consumer numbers. 

These platforms leveraged live streaming and short video content to boost consumer engagement and “educate” buyers. Syntun estimated that live streaming platforms such as Douyin, Diantao and Kuaishou saw sales growth of over 10%.

These newer platforms are redefining the shopping experience through engagement and unique content, moving Singles Day away from a purely price-driven battle to a more holistic engagement and product-experience-oriented competition.