Question 1: Why are ETFs becoming more popular than managed funds? If managed funds outperform the index/ETF (that seek to match the index) by 2% or more over a 7 year period, then I do not mind paying an outperformance fee. It’s only a percentage. The base management fee is about twice that of an ETF, but still, if I am receiving more at the end, then that’s pretty good. Can you explain it to me
Answer: The reason that ETFs are becoming popular is that they have considerably lower management fees and the published research says that many active fund managers do not beat their benchmark index. In other words, they underperform. So why pay high base management fees for underperformance?
With an ETF, you are guaranteed to get benchmark performance, less a small fee. Nothing more, nothing less.
Not all active managers under-perform, but many find it hard to sustainably out-perform. Some argue that in more volatile markets (such as we have had since Covid), active managers will shine and that there will be a switch back from boring, passive ETFs. We will see.
Question 2: The share price of Coles (COL) dropped sharply after reporting results that seemed good. Any thoughts why? Would you consider this a buying opportunity?
Answer: I continue to prefer Woolworths (WOW). It is just a better business. Coles sales performance lagged Woolworths and underwhelmed. It is also heading into an investment cycle to “catch up”. Have a look at my article today in Switzer Daily https://switzer.com.au/the-experts/paul-rickard/woolies-shows-again-why-backing-the-number-one-is-the-best-strategy/ [1]
Question 3: Why did mortgage broking stocks Mortgage Choice and Australian Finance Group get hammered?
Answer: Mortgage Choice (MOC) and Australian Finance Group (AFG) got “hammered” because the MOC half year profit report was very disappointing. Despite a strong rebound in the home lending market, mortgage applications and settlements, Mortgage Choice’s half year profit was only up 1%. The market was expecting a lot higher. The interesting part of their report is that it looks like the banks are to some extent “fighting back” against the brokers. The “cashback” offers, some up to $3,000, are in particular cannibalising the brokers’ back books and they are losing out on historic trail commission.
AFG is set to report this Friday.
Question 4: There is a lot of talk about bond yields going up. Do you agree? What impact will this have on some of the fixed interest ETFs, such as VAF and IAF?
Answer: I think the steepening of the yield curve, that is, long-term bond yields increasing by more than short-term bond yields, has been very predictable. We are in a growth phase where Governments are borrowing like crazy and issuing bonds. Unless the Central Banks are prepared to allow negative interest rates, a steepening of the yield curve was always inevitable. Sure, there are scares about inflation (because commodity prices are increasing), but I think this is more about supply and demand. Too much supply.
If bond rates keep increasing, the prices of bond ETFs such as VAF and IAF will fall. In fact, IAF is down 3.2% in calendar 2021, VAF is down 3.4%. Bond funds (and ETFs) can have negative returns.
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