Is it a good time to invest in ETF index funds?

[InsvestoBoy]

If you look back at the GFC, it took the all ords 10 years to get back to where it was prior to the GFC

The price returned where it was 10 years later but the total return was much sooner, in 2013Q3, just ~5y later.

Price adjusts downwards to account for dividends paid and the ASX pays a lot of dividends, so it's not really accurate to ignore the total return.

 

[sptrawler]

The price returned where it was 10 years later but the total return was much sooner, in 2013Q3, just ~5y later.

Price adjusts downwards to account for dividends paid and the ASX pays a lot of dividends, so it's not really accurate to ignore the total return.

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Very true, but it does rely on dividends, a lot of funds and companies havent done that well, some have, some havent.
Run the ruler over AMP for that period.
You are correct, but it isnt popcorn and party poppers, every time the market tanks, this V shaped recovery isnt normal and I wouldnt expect it to become normal.
Thats the point Im making.
Take the 1987 crash, which affected Australian businesses much more than the GFC, which was U.S and Europe centred, the 87 crash sent many major Aust companies to their grave.

 

[Belli]

Take the 1987 crash, which affected Australian businesses much more than the GFC, which was U.S and Europe centred, the 87 crash sent many major Aust companies to their grave.

In those circumstances, in the absence of ETFs at the time, the most investor (aka the average) would have been better served by this and not tried to select specific shares:

https://www.argoinvestments.com.au/files/Dividend-history.pdf

I would have been financially better off now if I had understood and recognised one thing - the majority of us suck and remain blissfully unaware of our incompetence.

 

[Smurf1976]

Investment managers are expected to exercise all corporate actions and voting rights unless the Trustee (ETFs are a Trust structure and so there are Trustees) tells them how to direct a vote. If they do, the investment manager must exercise the corporate action or voting right according to the Trustee's direction.

If that's an actual rule then so be it but it does mean they aren't a truly passive tracker of the index if they're trying to influence the operations of companies within it.

If they absolutely must vote, because some rule requires it, then it should be in a manner that's as neutral as possible in my view without conscious decision making. Cover up the questions, toss a coin and tick the boxes accordingly.

My reasoning being that if they're consciously influencing the business then they're not doing what they say they're doing, that being passively tracking the index, but are instead aiming to manipulate the nature of businesses within that index. That's not a truly passive approach to investing if they're exercising their own opinion as to what ought to occur.

Same concept as a weather bureau shouldn't be setting up a sprinkler next to the rain gauge. Their job is to measure, record and report the weather, not to create it.

In the case of index funds, if a particular fund becomes large to the point that it holds enough shares in a company to change the outcome of anything being voted on well then that's getting a very long way away from a passive approach if they're effectively running the business.

 

[qldfrog]

The price returned where it was 10 years later but the total return was much sooner, in 2013Q3, just ~5y later.

Price adjusts downwards to account for dividends paid and the ASX pays a lot of dividends, so it's not really accurate to ignore the total return.

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Nor does it include inflation : not that negligible even then
You get 4% dividend but 2 or 3% inflation and get taxed on the privilege..and now,it is not 2 or 3%....

 

[Belli]

If that's an actual rule then so be it but it does mean they aren't a truly passive tracker of the index if they're trying to influence the operations of companies within it.

If they absolutely must vote, because some rule requires it, then it should be in a manner that's as neutral as possible in my view without conscious decision making. Cover up the questions, toss a coin and tick the boxes accordingly.

My reasoning being that if they're consciously influencing the business then they're not doing what they say they're doing, that being passively tracking the index, but are instead aiming to manipulate the nature of businesses within that index. That's not a truly passive approach to investing if they're exercising their own opinion as to what ought to occur.

Same concept as a weather bureau shouldn't be setting up a sprinkler next to the rain gauge. Their job is to measure, record and report the weather, not to create it.

In the case of index funds, if a particular fund becomes large to the point that it holds enough shares in a company to change the outcome of anything being voted on well then that's getting a very long way away from a passive approach if they're effectively running the business.

I understand the point you are making but, frankly, the voting aspects of ETFs are a side issue to me in comparison with superannuation funds sucking up an entire company (which is happening) and so denying anyone who is not a member of that fund access to the investment.

 

[InsvestoBoy]

Nor does it include inflation : not that negligible even then
You get 4% dividend but 2 or 3% inflation and get taxed on the privilege..and now,it is not 2 or 3%....

Real vs nominal is a different issue. Cash is cash.

 

[InsvestoBoy]

My reasoning being that if they're consciously influencing the business then they're not doing what they say they're doing, that being passively tracking the index, but are instead aiming to manipulate the nature of businesses within that index. That's not a truly passive approach to investing if they're exercising their own opinion as to what ought to occur.

It's surprising how many misconceptions smart people have about passive investing.

The passive just means it's a market cap weighted investment so you don't have to rebalance/trade any holdings. The fluctuations of the portfolio don't need adjusting to track the benchmark.

You're still an investor in the underlying businesses and part of the value of your shares is the voting rights. It would be stupid to throw that value down the drain, since you paid for it. If you don't want to pay for that, move up the capital structure and invest in the bonds instead. No voting rights, more senior in the cap structure and more certain cashflows.

Let's say you are a super fund with a passive investment of $10B into the ASX 200. That means today you are holding $800M worth of Commonwealth Bank shares. Surely you're not suggesting that super fund manager just throw their voting rights away because their investment portfolio happens to be market cap weighted?

 

[divs4ever]

so did those super funds vote against the remuneration report after the Hayne Royal Commission , for instance , after all they should be more interested in the corporate governance than other peripheral issues

 

[qldfrog]

so did those super funds vote against the remuneration report after the Hayne Royal Commission , for instance , after all they should be more interested in the corporate governance than other peripheral issues

the way I see this is that we (aka "the people") give these guys (ETF, super and other investment funds) the money and we then give away the power attached to the holding for free (be they union or retail super fund)
These fund managers can then gorge on side benefits be they golden handcuff, board position, consultancies and other benefits or personal insider info while the suckers (ka "the people") take the risks for appalling PE and potential balance losses while fees and salaries are mostly unchanged.
Where am i wrong?
Cynical but truly, not that fact from factual

 

[divs4ever]

some LICs seem to take that responsibility seriously , but yes unless you do the heavy lifting yourselves , you either abstain ( by default ) or your voting rights are used to suit someone else's agenda

but of course that is what some company boards count on

 

[Belli]

You're still an investor in the underlying businesses and part of the value of your shares is the voting rights.

With an ETF a person is a unit holder via a trust structure. While you may have a beneficial interest, the Trustee is the legal holder of the assets (at least I think it works that way.) A generalised view attached.

 

[InsvestoBoy]

With an ETF a person is a unit holder via a trust structure. While you may have a beneficial interest, the Trustee is the legal holder of the assets (at least I think it works that way.) A generalised view attached.

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An ETF has nothing to do with passive holding except that some ETFs track a market cap weighted index.

You can have a passive portfolio with no fund at all, and most large portfolios are exactly that.

 

[divs4ever]

An ETF has nothing to do with passive holding except that some ETFs track a market cap weighted index.

You can have a passive portfolio with no fund at all, and most large portfolios are exactly that.

yes , you are correct BUT that is not how they are advertised to the retail folk ( index ETFs ) , and they can be useful when used like that , unless we enter a long-term Depression , like say Japan ( still lagging from the 1990s)

and many shares in good companies have done nicely even in the 10 years i have held them , although adding to BHP in the dips makes them look better

BUT the trick is to buy GOOD companies ( not just ones with a large market cap. ) and that is why index ETFs have an edge they buy EVERY stock in that index at the time you bought it , and the attracted retail investors don't need to do much research ( but the SHOULD anyway )

 

[InsvestoBoy]

yes , you are correct BUT that is not how they are advertised to the retail folk ( index ETFs ) , and they can be useful when used like that , unless we enter a long-term Depression , like say Japan ( still lagging from the 1990s)

Sorry... I don't really know what you are talking about. I was simply referencing the idea that passive investing means you shouldn't vote.

Passive doesn't mean ETF (predated by market weighted mutual funds by decades), passive doesn't mean don't vote, it just means your benchmark is market cap weighted so you only have to trade when money is flowing in or out of your fund. Fluctuations in the portfolio don't require trading, which is very important once your portfolio is in the size of billions of dollars.

and many shares in good companies have done nicely even in the 10 years i have held them , although adding to BHP in the dips makes them look better

BUT the trick is to buy GOOD companies ( not just ones with a large market cap. ) and that is why index ETFs have an edge they buy EVERY stock in that index at the time you bought it , and the attracted retail investors don't need to do much research ( but the SHOULD anyway )

Sorry... I don't really know what you are talking about.

 

[divs4ever]

i was talking about the retail sales pitch of index funds , but low ( no ) activity to your investment portfolio has been a strategy for over 100 years ( but less retail folk participated in the market pre-1920s )

the second part is about picking solid investments ( or fund managers ) against 'vanilla ones ' ( buy some of everything and hope )

 

[Belli]

May have been at cross purposes here.

I have invested in ETF for many years (first, STW which was swapped to VAS, and then VGS.) and LICs for longer.

The unit holder in ETFs, i.e. me and others, do not have any voting rights at all.

Being a holder of LICs I have voting rights but only in respect of motions put by the LIC in respect of it's operations only, election of Directors, etc. I cannot direct the managers of LICs how to vote in regard to specific companies the LICs may hold.

 

[divs4ever]

I cannot direct the managers of LICs how to vote in regard to specific companies the LICs may hold.

again true , but those managers ( hopefully ) get plenty of scuttlebutt on the various companies , via their analysts , networking , company presentations , the better managers are aware of a company they are invested in , has stretched the credit limits , has a flailing management , faces staff issues or supply chain issues , etc etc , and of course can access solid data on whether a take-over offer ( of an invested company ) is a good deal or not .

not perfect , for sure ( for everybody ) but not a bad compromise ( if invested in the better LICs ) , some managers are more interested in short-term gains

 

[InsvestoBoy]

the second part is about picking solid investments ( or fund managers ) against 'vanilla ones ' ( buy some of everything and hope )

I think history and data has shown repeatedly at this point that despite what you might hold as personal belief, those solid investments or fund managers, despite all their effort/research/thought/care/diligence in the end haven't really done any better than "buy some of everything and hope" - which BTW I do not believe is a fair/accurate assessment of passive investment.

The portfolio managers cannot afford to underperform the benchmark by a lot so they tend to hug it. At the sector level, which is what largely drives returns for equity portfolios, they are usually just making quite small "tweaks" to the index composition.

Here's from the most recent AFI annual report which I think off the top of my head has done better than MLT or ARG... pages and pages of explanation of how they research and carefully chose stocks and over the last 10y it got them... 0.3%p.a. outperformance?

And that's just if you compare them against the local passive index benchmark. If you compare them against a global passive index benchmark then they have desperately underperformed.

 

[divs4ever]

beating that performance hurdle is harder than it looks , and even the Index ETFs only hope to equal it ( before fees and charges )

now if the retail holder/investor charged THEMSELVES all the fees due ( research time , bandwidth usage , home-office rent ) how would they go

and i'm was lead to believe even ARG only aspired to replicate the XJO returns , and i am aware some fund managers 'tweak ' their personal performance hurdle , but how many investors would be comfortable with a major shift in the mandate ( as some have .. say CIE => WLS or HHV => PIA )

and only time will tell if ARG or AFI will have a very nice run in the next 3 years ( if the ARG or AFI share price was lower i would be interested in buying in )

of course all that research only does so much

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