Cura and welcome to Shared Lunch, brought to you by Chase's. My name is Helen Madison, and today we talk about the US markets. But don't worry, this episode is not all about the election. In particular, we'll discuss the Vanguard S and P five hundred ETF index from near Philadelphia. I'm joined by David Sharp, who is a senior ETF capital market specialist at Vanguard, Vanguard being one of the largest and probably most well known fund managers in the world.
But before we get started, here's some important information.
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So good evening, David, thanks for being with us. It's you're just out of Philadelphia, is that right.
Yeah, that's right, Allen, Thanks for having me. Yeah, we are just west of Philadelphia, about forty five minuts. It's worse in Pennsylvania in terms of elections.
Typically, when I ask commentators about whether or not they move markets, they pretty much say, look, they've factored it all in. But I do wonder if this one is a bit different because we've had a few kind of things to think about. For example, I know, Robin Hood, the US trading platform in the US has given the opportunity for people to buy event derivatives where you can bet each way on which who will win. You've also had Donald Trump's social media platform go sky high in
terms of its value. And also have seen that with the markets, crypto and some of the small cap sort of stocks have supposedly done well because we have this election fever. But I was keen to get your perspective working in the capital markets in the US, to see whether or not you've noticed anything different.
Yeah, I mean, I would say again, I mean, it has been a noisy election season. But what we look out through our investment strategy research group, where we look at just researching over you know, time period as h as different administrations are in in office, we find that presidential elections can be, although hugely consequential on the direction of public policies, you know, they often aren't a good
guide for you know, dictating your investment decisions. You know, certainly, as you mentioned, there is you know sometimes particular sectors that could outperform others. We did see uh, you know, solar energy trading at a higher amount today in the US market on Monday. That could be an indication that maybe the market is seeing, you know, a potential for
for Harris victory. But last week we saw you know, Bitcoin hitting new highs, which were you know, I think generated somewhat by some of what the Trump administration has said that they potential Trump administration has said that they would look to do in that space. So it's really
going back and forth. It is, you know, a tight market, and when we look back to research dating back to all the way back to eighteen sixty, we really find no statistical relationship between the performance of a sixty forty
portfolio in presidential election or non election years. So, you know what we've really encouraged clients over the last couple of weeks as we build up to this election is to really just try to tune out some of that noise, really stick to your long term investment plan, and not make big changes based on policy proposals or election results because we just don't know. What we know for sure is the market will go up, and the market will
go down. But outside of that, you know, all the rest is purely speculation.
So that portfolio that you're talking about over that long period from eighteen sixty I think to about twenty twenty two, because I did read that article put out by Vanguard, was that a portfolio with it sixty percent shares forty percent bonds? Was that right?
That's right? Yep, correct?
Okay, So is that more typical for now though? Something like that? Was it sort of more traditionally what people would have had as a portfolio.
So we still think that the sixty forty portfolio has has value for the right investor. You know, certainly it has to be you know, kind of related to what your investment needs are, what your risk tolerance is, where you are in your investment journey. For younger folks that are just getting started in their retirement plan, then forty percent bond allocation would certainly be too much in our viewpoint.
But the sixty forty ends up being kind of a good dictation for where institutions can find the right balance, even more so than retail And it just tends to be, you know, a portfolio that gives you a little bit more neutral risk relative to you know, maybe somewhat muted performance by having that bond allocation we've seen in most year sixty forty ends up being a pretty productive portfolio to have. There are some years that that is off.
Twenty twenty two, with the raising rate environment, we did see stocks be depressed in value and bonds get depressed in value the same year, which is rare. Usually see those correlated in opposite directions. So for that to occur in twenty twenty two was kind of more anomalists that it was, you know, what we'd expect for the future, and it really just was the speed of the rates that were taking place that affected both sides of the investment landscape.
So, David, let's roll back to what Van Guard does. I think it was established back in nineteen seventy five, so nearly fifty years. You're sort of known as a passive index manager, low cost being a big part of that. Give us some idea of what you're doing today in and has that changed over that period.
Yeah, they were exactly right. We're found in nineteen seventy five. So we're coming up on our fifty year anniversary next May, which we're looking forward to. We actually just passed in September our fifty years of incorporation, so our official incorporation before we launched that following May. But you know, the way that you know, we often will describe ourselves is just you know, one of the world's you know, largest
and hopefully most respected investment management companies. You know, we offered a lot of different investments, advice, retirement services, insights to individuals, institutions and financial professionals through thought leadership, through other research avenues, and we we really are a worldwide firm. Obviously we're known for our US presence, but we do manage over ten trillion dollars ten trillion US dollars assets under management, and we have more than fifty million clients,
and it's really all around the world. Even our ETF specifically, we have domiciled in the US, in Canada, in Mexico, in Europe and Australia. So even in our ETF realm specifically, we are you know, broadly diversified. And I think, as you mentioned, we are known to be an index shop. That is what we're most famous for, launching the first retail UH investment fund that follow on an index, which we're certainly going to talk more about in the next
you know, half hour to an hour year. But you know what I think is surprising to a lot of folks is we still we have one point eight trillion
dollars in active management as well. We do see ourselves as having an active prowess, and we do subadvise a lot of our equity to active managers, but we do in house fixed income active management, and we are really proud of that active franchise that we have within fixed income because it is, you know, a bit unique, and that that unique investor owned structure that we have where our clients own our funds and the funds own the company allow us to really operate at cost and keep
our costs very low. In our ETF lineup in the US, no product has an expensory issue over twenty two basis points, and you know they're as low as for our five hundred index fund VOO or we affectionately call VOO on the desk, we are down to just three basis points for that product.
Let's peg what the vote is for a stat because if we're tracking that index and it being I think one of your most famous what's it all about?
It's a great question and you know, I think when we look at the five hundred index that we have in our ETF FOO or VU as I mentioned earlier, it really dates back to August thirty first in nineteen seventy six in the mutual fund wrapper or that open ended wrapper. So that ETF really is a share class of that portfolio that is almost fifty years old now that tracks the S and P five hundred index and buys all the five hundred companies within the S and
P five hundred at the weights within the index. So that fund from nineteen seventy six all the way to twenty ten was just a open ended fund and index fund mutual fund that you couldn't buy on exchange. On September seventh of twenty ten, we launched a share class of that five hundred index and that was our ETF. So that is a unique style that we have at Vanguard.
That is a patented approach that we had with our first ETF we launched our Total stock market ETF in two thousand and one that we actually had patented and no one else could do this multi share class strategy in ETFs until our patent expired last May, and it still is awaiting other approvals. So what the great advantage that that actually provides us to have an ETF share class is that we got instant scale in that product.
The economies of scale that allows us to keep our costs very low, and it allows us to keep our tracking are very low as well. Because the fund is so large across all share classes, over a trillion dollars in this fund in total assets, that the ETF was able to basically get that history of getting exposure there in that fund at a really cheap cost with low tracking,
right out of the gate in twenty ten. So what we've seen that time period since that launch now about fourteen years ago, is just incredible growth on the product, especially over the last few years the cash flows that have entered that product as the megacap and large cap
companies have performed so well. In the US, we've seen Voo actually lead flows this year with close to almost eighty six billion dollars in flows so far this year, which is put us up as the close to the second largest ETF in the world, now only behind SPY and you know we are you know, it's certainly not focused on flows, but we're proud to see that adoption of our products really, you know, showing a testament to that low cost that we try to create within that product.
One thing must be said though about any market, but particularly the US markets in recent times, is the volatility. There's there's a fear bit. It seems to happen pretty much all the time. So I suppose from Vesta's thinking about the vou if you like, they would really have to be able to stomach volatility as it were.
Yeah, I mean certainly, you know, as as the S and P goes, this product will go. So you know, there's certainly been you know, some level of volatility in the market. You know that has ramped up a little bit as we go into this election cycle that we
spoke about earlier. You know, the the good news is again though it even though it's just five hundred companies of around thirty seven hundred public companies in the US, it is the five hundred largest, and you know, there is some level stability that does come with that, I believe relative to some of the lower market capitalizations that naturally have a little bit higher volatility profile, It's still
something that exists. It is still the stock market. The stock market still will go up and go down and the five hundred index no different. So there is absolutely that you know, potential of volatility in the market and especially during times of you know of stress in the markets, which hopefully we don't see in the near term.
What it's the wasting at the moment for the vo around about for the tech stocks as it used to be almost up to a shood with things like the Magnificent seven. So we're talking like Alphabet Tesla, Microsoft and the like.
Yeah, it is. The portfolio is about thirty one point seven percent technology at this point, and it is driven by those mag seven. When you look at the Mag seven alone, they make up you know, a very large percentage of the portfolio, about twenty eight percent of the S and P five hundred is actually in those Mag seven. That's how strong their performance has been over the last you know, close to two years now, driven heavily by you know, DA Video as the leader there as that's
come up that that that board. So you know, when we look at it, the second largest you know holding there is still financials, but it's all the way to twelve point nine percent. So you know, one argument that could be mean to your point is that although it's diversified across all the major sectors. It is heavily weighted to technology at this time.
I mean in some of the other big sectors would be banking, and is healthcare perhaps another I'm just trying to think, Yes, it has diversified as five hundred companies, but actually there's all sorts of good and bad in there. Is there in terms of depending on your value when when you're investing.
Yeah, I mean, certainly, you know, it's broadly the five hundred you know, largest market cap companies in the in the US. Sometimes there is you know, naturally some additions and deletions around the the the bottom of that, but you know, for the most part it is that so you do get you know, over seventy nine percent of the portfolio has a market cap that's greater than you know, seventy two you know, billions, So you know, you're you're
there's some really large companies in that portfolio. But the diversification does change across sectors as certain sentiment comes into the market. It at times, you know, we look at last year and energy was actually one of the leading sectors last year, but it still makes up only about three point three percent of the portfolio, but it actually had a really good year last year, close through a
thirty five percent return. So you really have when you map it out over time that what sector bubbles up to the top tends to rotate at some level of frequency. It's just been a strong couple of years for technology. Frankly, one thing.
I wandered with Vanguard earlier in the year, you said you wouldn't be doing cryptocurrencies. I think that was when the Securities Exchange Commission approved bitcoin as ETFs. There was a lot of interest in that, and you know, we've seen markets sort of go up even with this election fever. As I said before, is that still something that you are not going to be going into or you're thinking more about it as perhaps it becomes more if you like mainstream.
Yeah, I would say, you know, wouldn't speculate too much on, you know, if the future would change our view, just because changing market conditions can certainly, you know, change our position. But at the current time it still stays stable in the fact that we don't plan to launch a bitcoin ETF, and it's really just related directly to our viewpoint on
the importance of intrinsic value in a security. And and our fear that that might be you know, a tougher to determine within bitcoin or cryptocurrencies relative to high quality stocks or you know, or the bond market, you know, quality within the bond market. So that's one of the
challenges when we look at that asset class. The other one is just the volatility that is naturally inherent there is much greater We have a retail focused client base that we want to make sure is thoughtful for long term investing and is you know, considering you know, where their their goals are for the long term is paramount to us, and we just you know, do have some fear that the volatility inherent in that product could send some of our clients kind of off of that trail.
So we are a little bit tepid and you know, relative to sell of our issuer partners to bring a product to market for those reasons. But I am not in the case to say, you know, I would I would definitely say never, say never, but you know, it is something that isn't high on our list at the current time.
A lot of Cheesy's investors tend to hold their et ifs, but there is a number two who like to buy and sell. Have you got any kind of sort of tips I suppose you'd say for thinking about timing with et ifs, because obviously they're quite different to manage fund as such.
Yeah, I would say, I mean, we are, you know, certainly believe the buy and hold strategy is really important because any sales and subsequent buys. Besides the difficulty of actually market timing, which we've proven, you know, over time, it's just if you do try to market time that the challenge to do that is great. You know. What we tend to see is, you know, low cost long term investing usually will have a better payoff than then
more frequent changes in different market conditions. The other part of that is just the cost that you incur the more you rebalance, the more you have to pay that spread to be able to buy and sell the security that will distract from some of your returns and make some of those returns harder to accomplish the you know, the same way you would in a buy and hold.
So we really you know, preach the idea of having large, diversified portfolios that give you exposure to many parts in the market and then holding on to those for a longer period of time and and you know, be thoughtful of costs. That's thoughtful of cost when it relates to expense. Ratios is very explicit how much you pay. Our founder has a great quote, Jack Bogol that says, in investing, you get exactly what you don't pay for. So you know, that is, you know, really at the heart of our
strategy to give you. If you have one hundred basis points of return in the s and P. Five hundred, if we only charge you three basis points, you keep ninety seven basis points of that and that compounds over time. We think that's really important for clients to achieve their investment success over the long run.
What about in terms of sort of assessing your portfolio, I mean, yes, to hold seit and forget if you like, over a period of time. I mean, how often would you suggest people need to have a look about maybe rebalancing.
Yeah, rebalancing is still important for sure. You know what is what your target allocation is, and determining that target allocation up front allows you to ensure that you're rebalancing back to that target allocation. So we do say that, you know, quarterly is a good opportunity to kind of take a look and see how much your how far away you are from your target allocation. If it's only a percentage or two, that could quickly go back the
other way. What we really like to see before you would spend the potential transaction costs to rebalance that would be to start to stray about five percent away from your target allocation at that point, which if you're reviewing on a quarterly basis, allows you to tie that back in and ensure that if equities have the run they have this year relative to bonds being a bit flat, and now your equity position is greater than your target allocation, then it is a good idea to rebalance that back
and stay focused on that long term strategic allocation that you hope to have in your portfolio.
One of the criticisms often leveled at the US markets is that they're topping out. They're just keeping on going, and all of a sudden there's going to be a crash and people are going to burn as a result. I mean, what do you sort of say to investors in terms of keeping that longer term view, knowing that markets, as you said before, go up and go down.
Yeah, it's important to just think of that long term time horizon. If we look at twenty twenty two, the sixty to forty portfolio we mentioned earlier had one of its worst years and since nineteen thirties because both stocks and bonds were down together, which is rare. So you know, that was a clear example of a time where people were feeling a little bit of the pain of the
market and having that drawl down. But those that stayed in it, that return we've seen since twenty twenty two is almost forty five percent in the S and P five hundred, and it is sixty to forty portfolio would be muted a bit to that, but it's still you know, that growth that you've had in that time period by just staying the course and staying focused on your long term plan and not reacting to short term market events even if they aren't you know, it's not easy to
see on your portfolio when the number goes down, but it's really important, and we've showcased over time this. You know what happens when you get out of the market when the time is in stress and you miss that
you know, return to positive returns. What that does with the long term investment because of the impact of compounding is quite great, So we really try to reinforce to tune out the noise that's in the market and really just be focused on if your plan is twenty years from now, your portfolio doesn't need a lot of change right now to be able to achieve the goals that you have for your long term investment returns.
What would you say to New Zealand investors who are thinking for the first time to invest in the US market. So might have played around a little bit with individual stocks, but perhaps now they're thinking exchange traded funds is probably an easier, cheaper, maybe safer way to go.
Yeah, I mean, I think that's we do. You know, stress the importance of diversification, and that is something that ETF gives you. You can trade it like a stock within the market, but it still gives you the broad exposure of what the underlying portfolio is made up of, and in this case the five hundred largest companies in the US. So that diversification that you get over choosing one single stock really is an important risk mitigation tool.
When we look at securities over time, the number one secure already in the S and P five hundred at you know, in two thousand and five, in nineteen ninety five and nineteen eighty five. It's different every time you look, because you know markets are going to you know, there's just different situations for different securities that are going to
increase their value or decrease. So having that broad exposure instead of maybe even looking at you know, everybody looks at We just take na Vidia as an example because of the great ride that it's had. Everybody wants to have the number one stock in the market, but the video won't always be the number one stock in the market. And how are you diversified when there is a drawl down there if the valuation might get too high, the rest of the portfolio helps to kind of pick that up.
So we really just stress that diversification. We think this gives a great opportunity to get that and a wrapper that again is really low cost and easy to access.
Diabet there's a phrase online where people say voo and chill. Just wondering what your take on that is.
Yeah, it's it's a funny phrase that you know, I think we are starting to see following the Alexicond a little bit more and it's really to me it resonates a lot of what I just mentioned. It's you know, you don't have to get complicated in the market. You don't have to be chasing returns or looking for opportunities to maybe find the next hot product. Just buy voo, buy vu and and chill, just you know, kind of sit on that, continue to invest it as you have
new monies go into it. And because what we see is over the course of you know, long dated period, say fifty years as the longest, only about two percent
of active managers can beat the index. So instead of chasing some of those returns from that active management or some of those strategies, buying the index, that whole index and just you know, sitting it out and just waiting for the long term or vo and chill, as as ken Be said, is really a you know, we think a really great strategy to just get those long term investment returns that we talked about.
Thanks for your in science today, David, and thanks to everyone else for joining in too. You can watch Sheared Lunch on YouTube or follow us on your favorite podcast app. Leave us a rating and a comment about what you'd like to hear next. Ma Tewa