Welcome to Bogleheads 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 Fure. Hi everyone, my name is Rick Ferry and this is Bogleheads on Investing. This episode is sponsored by the John C.

Bogle Center for Financial Literacy, a 501(c)(3) 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 Fure, 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. And 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 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, 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 it as 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.

And 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 incentivized to say or recommend certain things, do certain things, then we will. And I think that has just played out in the investing space.

And yeah, 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 became hooked on it.

Can you tell us about that? >> Well, that's right. It was 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. And they said, look, 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. And I suppose largely as a kind of 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?

So 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.

When we started interviewing, I started speaking in this strange accent. And my wife saw that, and she said, what are you doing? 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.

Well, Rick, I think you have written about a moment in your career. You referred to your aha moment of realizing 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. And I suppose I decided the same. And I'll be honest, I was shocked. 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.

That, I suppose, bothered me. I mean, I've always been, I suppose, a bit of a sort of campaigning journalist, if you like. I've always been interested in 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, biannually.

And it looks at the performance of active funds versus various indexes. It 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. I'm going to go straight down. And some of these countries are small, but some of them are big. 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. In Mexico, 89% of active managers underperformed the local index. In Brazil, 84%. In Chile, 86%. In Europe, which encompasses continental Europe and the UK, 86%. South Africa, 85%. India, 91%. Japan was the outliner. It had only 57% of the active managers underperformed.

And Australia, 86%. And what I found with a lot of state-of-the-art 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'll be different. It'll 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 SPIVA 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 Loser's Game, which is obviously inspired by Charlie Ellis's 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 that actually in the rest of the world, and 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 almost 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, at his 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 2/3 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 '98, '99, when he was in the papers, everyone was saying, this guy's completely lost it. That was back then. And of course, he subsequently was proved 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 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. Well, that's 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 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 of years ago, as you say, we had the report by the Financial Conduct Authority, the Asset Management Market Study.

And it basically found all sorts of conflicts of interest in the investing and 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 at a conference.

I was 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 seemed 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 then 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. I mean, 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. What type of messaging do you need versus-- you work in the US as well, and you work with US advisors. So I mean, what are the differences between the two? 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, Rick, 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, when people can actually see people like them.

I used to use active funds. Now I use index funds. I'm much better off. I'm much more relaxed. I 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 don't know. You probably might disagree with that. But here, it's still a burning issue, and I'm still very much in the minority, 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 journalist 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 compelling argument.

Well, you've got some help. There are some companies that have come into the UK recently, like Vanguard, for example, who's really growing a presence. And they must be marketing their information at a low fee. That must be helping. And I'll also make a plug for the Bogleheads forum. 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'd be nice for the UK to maybe start their forum. Absolutely. We'd love one, yeah. Well, you could start it, Robin. Why not? Why not? And this is the voice, if you will, 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, it 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. You kind of 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 fund 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 Britain.

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. Yeah. Robert, thank you for being on the show today. I greatly appreciate your time, and good luck spreading the word.

Rick, 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 Feuer. 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. Welcome to 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 introduction. 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 in 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 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 opened-end mutual fund ETFs, as opposed to Unit Investment Trust, which SPDRs and MIDIs were? Exactly, so very good memory. And so my job was to market SPY, 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 SPDR and WEBS. And in 1999, BGI, Barclays Global Investors, rebranded those WEBS to be iShares, because they were going to have a whole family of ETFs. And so most of your listeners probably know iShares 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. SPYDRs and MIDIs and WEBS and OPALs, and they had all these different acronyms. How is it that the term exchange-traded fund came around? Well, 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 was really to identify the fact that they were funds and they were exchange-traded.

And 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-end 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-end 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 we'd 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 OK. 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 then retail have access to the same toolbox of 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 an 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 a 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 a 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 given 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 it's been 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 I 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 58 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. It may be 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 definitely has been an interesting experience to be involved in the industry. But I expect it 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 ETFs, 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 makes 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, they 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 are making and how much you saved or didn't save. So robos are a very easy tool 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 US 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 bought 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 8, 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 eight 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 or a security. When that happens, there are banks or brokerage firms who are called APs, or authorized participants.

And they're allowed to trade these 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 redemption. 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 billion went into fixed income.

$3 billion went into active. We had just under $1 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 product 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.

That's what you 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 were 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 in South Africa.

So if you look at Mexico, Chile, Brazil, South Africa, 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 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 your 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 1 and 1/2% is kind of the typical average annual cost for an active fund. And often, you pay penalties if 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 costs you might incur when you buy different types of products.

So as countries take this data, and 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 advisor is 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 if we eliminated commission sales here, financial advisors couldn't do commission sales, that would go a long way toward getting advisors to do the right thing. So part of the challenge, too-- so 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 gone 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, et cetera. What you found is the way products are made today in terms of indices has changed a lot.

And 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 a type of exposure within even ETFs, right now, there's about $30 billion, 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 kind of in the US and domiciled there.

So I think it's moved on a lot. I think it's continuing to move on. And, you know, earlier when I spoke about the diversity ETFs, that, for me, would also fall into an ESG thing. Although there is some crossover between ESG and themes, right? 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 the governments are actually getting much more involved with here than I've seen in other jurisdictions around the world. - Well, thank you, Debbie.

I want to end with one more item, and that is you are the founder and a board member of Woman 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 Zhang, Michelle Mikos, and myself got together and thought, there's a real need and 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. After I helped set up the 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 or 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 10 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 8th, 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 nine to 33 exchanges to 45 to 65 to this year, we rang bells at 85 exchanges around the world, which is pretty exciting.

- Yeah, that's quite impressive. Well, great, congratulations on that growth. That's wonderful. Go ahead. - Sorry. And maybe I can just say, so we have over 5,000 members right now and 17% of our members are men. So having men as part of the solution is really important. And 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 mean, 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. - No, 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.

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