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Howard, what is your view when data comes out showing that money is going into SPY, big cap US stocks , and coming out of high yield credit ? Well, you may or may not see this as constructive. The constructive explanation is that interest rates are going to rise, which is not good for bond investments, so people have decided to get out .
Um, and you can't argue with that ending. A less constructive explanation is that stocks performed much better than bonds last year , so now everyone is saying, " Oh, I want stocks." Now, what they really want are stocks from a year ago or maybe stocks from eight years ago. But in reality, you can't buy them.
But you know, people misunderstand and they think that what happened last year is indicative of what will happen next year . So, this is a momentum that is building on itself. At this stage of the market and economic cycle , what are you most concerned about ? Like equity ETFs that attract more bids by driving up prices, as you said, or high yield ETFs that promise liquidity even when the underlying securities are highly volatile?
Okay, good question. What am I most worried about ? The easy answer is, I'm worried about both . I find this difficult to calculate . But you're right. You know, I wrote about High Yield, yes. Bond ETFs and you know, high yield bonds are inherently volatile and people buy ETFs instead of bonds, thinking the ETF will be liquid .
But how can an investment vehicle be more liquid than the underlying assets? So that's a big question. And when it comes to stocks, yes, you should be concerned about jumping into stocks after they have gone up significantly . I released this memo you mentioned this week and the S&P 500's PE ratio is the third highest in history .
And you need to think about this. So, the answer is that we are in a world of low returns and there is no easy place to invest. This is one of the most interesting points you've written about buying assets on autopilot through passive funds like SPY, is n't it? This is absolutely true. It took almost a trillion dollars to buy that money .
I'd like to know your opinion on what smart beta is , it's a rules-based index, but it takes the fundamentals that active managers like, puts them into an index recipe and buys them based on the fundamentals. What is your opinion on Smart Beta? Charlie Munger, Warren Buffett's partner, once told me, "None of this is easy." Those who think this is easy are fools.
Can you achieve better results by moving from a passive vehicle to an active vehicle, isn't that what smart beta is all about ? I think we could call this a semi-active vehicle . The answer is, if the decisions made are good, it will be better. And if the decisions made are bad, it will be worse . The great thing about the investment business is that you can't get rich just by doing something.
You have to do it right. For example, if you want a smart beta fund, you want to prioritize small caps, technology, and low quality. That's an active bet. On those topics. If you make good decisions, you will make more money than a passive fund. If you make the wrong decision, you will earn less. Whether it's passive or semi-active, whatever type of ETF it is, I'd like to know your thoughts on the difficulties HYG has faced in the past .
We spoke to Matt Tucker, Head of Fixed Income at iShares, about whether HYG will ever trade at an 8% premium or discount, as it did in 2008 . He said that was impossible, and then gave this explanation . Let's listen. What those premiums or discounts are telling you is that the ETF is telling you where the market is .
In most cases, if an ETF is at a premium, it is because the prices of the underlying bonds have not risen, meaning they are not yet reflecting new market information , but the ETF is reflecting it in real time . So what Matt is saying is that ETFs can be an effective tool for finding prices in securities that have low liquidity.
Do you think what he said is correct ? Is he wrong? I think he is correct in theory . I think he is saying that ETFs trade more actively and in less time , which is why they accurately reflect current prices . What he's saying is , for example, there could be an ETF backed by a hundred bonds . Even though the value of those bonds did not increase, the value of the ETF increased on the expectation that they would.
It might work, again it's a proactive decision, do you like it? But, you know, ETFs are said to trade at NAV, and the word ' should' is very important in that sentence. Yes? In my 49 years of experience in this field, I have seen many times that ' should' and ' will' are not the same thing . Sometimes what is supposed to happen happens , other times what is supposed to happen doesn't .
True. True. In that regard, we heard that you are working with 'Eat Advance' for 'Next Shares'. It is an exchange- traded managed fund, which allows active managers to utilize the ETF structure without having to disclose their holdings every day. What was the reason behind your decision to participate in it?
An ETF is a vehicle used to participate in a specific set of securities. It could be a passive index . That could be smart beta , where you try to boost passive index returns by making some active decisions in terms of style . Or it could be active management provided through an instrument traded on the market .
You know, as long as people are buying ETFs for the right reasons and with the right expectations , I think they're good . And I think this is a way of offering investment products to the retail market .
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