Speaker 1:
From the library of the New York Stock Exchange, at the corner of Wall and Broad streets in New York city, you're inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision in global business. The dream drivers that have made the NYSE an indispensable institution for global growth for more than 225 years.
Speaker 1:
Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and ICE's 12 exchanges and seven clearing houses around the world. Now here's your host, Josh King, head of communications at Intercontinental Exchange.
Josh King:
Remember the old Alec Baldwin and Samuel L. Jackson ads for Capital One, the punchline of those spots was "What's in Your Wallet?" Today, the punchline is "What's in your portfolio?" This is the 25th anniversary of the first ETF, the first exchange traded fund.
Josh King:
We've had guests on the show to talk about how the underlying indexes are created. We interviewed one of the pioneers of smart beta ETFs, and heard some of the interesting exposures that ETFs can offer from cold stocks to patriotic companies.
Josh King:
But today we're going to try to answer why ETFs are growing, and who are the investors behind the nearly five trillion dollars currently invested globally in these products. Our guest today, Chris Johnson is from Charles Schwab, which lists 22 exchange traded product on the NYSE Arca, totaling 106 and a half billion dollars of assets under management.
Josh King:
He's here to share with us the findings of the 2018 ETF Investor Study that dives deep into the people and the rationales behind investing in ETFs right after this.
Betty Liu:
Hi everyone. I'm Betty Liu, executive vice chairman of the New York Stock Exchange and founder of Radiate. I started Radiate with the mission to make leadership learning more accessible to anyone interested in advancing their career and fostering a culture of excellence in their workplace.
Betty Liu:
My team and I have handpicked and interviewed successful CEOs and thought leaders, asking them questions such as, "What's your biggest time saving trick?" Or, "What's the best and worst advice someone gave you?" You can watch the answers from experts such as Jack Welch, Arianna Huffington, Gary Vaynerchuk, Steve Case, and many more by visiting radiateinc.com. That's www.radiateinc.com.
Betty Liu:
I'm excited about expanding radiate, and I'm working with my team at ICE and NYSE to offer this content and engage with our vibrant community. Keep listening to hear John Chen, chairman and CEO of NYSE-listed Blackberry, answer the question, what is the most important soft skill for a manager?
Josh King:
Christopher Johnson is vice president and head of equity trading and ETF capital markets at Charles Schwab Investment Management, Inc. NYSE ticker symbol S-C-H-W. In this role, he's responsible for overseeing the equity trading team, as well as the oversight and implementation of all ETFs, including managing relationships with authorized participants, market makers, stock exchanges, and regulators. Welcome to the ICE House, Chris.
Christopher Johnson:
Thank you.
Josh King:
I heard from the NYSE's head of exchange traded products, Doug Yones, that like him, your career took you to Asia for a few years. Were ETFs already part of the growing financial landscape in Singapore in early 2000?
Christopher Johnson:
They were, but only just beginning. So I was actually there from 2006 to 2009. And in fact, Doug and I worked together at one of our competing issuers at this point. But yeah, I was kind of early stages in the Asian markets in terms of ETFs.
Christopher Johnson:
I would say that generally speaking, the ETFs that existed there were locally domiciled, very focused exposures and difficult niches. Call it the Hong Kong Tracker Fund, the China A50, that stuff that was very specific to that market. But most of the investors in Asia at that time were generally using US-listed ETFs, given the scale and the liquidity profile of the ETFs in the US.
Josh King:
Go back to 2006. Was the relative sophistication of the Asian ETF investor different than the American ETF investor?
Christopher Johnson:
Yeah, I would say it certainly was. In 2006 from a retail context in Asia, I would say most investors were not even using ETFs. That market was probably something like an 80-20 institutional to retail split from an ETF usage perspective, with some pockets of money that were using it, but really more from a casino standpoint, if you will.
Christopher Johnson:
So high volatility products within the Asian markets were attractive to certain pockets in the retail community, but generally speaking, the investor profile there for ETFs was big institutional investors.
Josh King:
So fast forward, a dozen years, there are about 1.6 trillion invested dollars outside the US in exchange traded products. What does the international landscape look like for investing in ETFs today versus those days?
Christopher Johnson:
Yeah, great question. So today it's changed quite a bit over the last decade. I think access to more local product or regulatory regime that's changing across Europe and Asia, much on predicated on the UCITS.
Christopher Johnson:
And then now we have MiFID II coming into play in Europe. And all of that I think has transformed the landscape to a point where retail has much greater access to locally domiciled products that make sense, and there's enough liquidity for them to trade them.
Christopher Johnson:
Whereas, again, 10 years ago, you just simply couldn't trade the products if they weren't specific niches of the market that were very popular.
Josh King:
Has marketing ETFs changed a lot over there in the last 10 years as well? I mean, here in the US, you can't look at a billboard without seeing another ETF ad.
Christopher Johnson:
Oh yeah, certainly. I think if you hop in a cab in Hong Kong, or in Shanghai, or Shenzhen, or somewhere, you're going to see an ad in that taxi cab for... You name it. Whatever issuer it is. Soup du jour of the ETF, and everybody's on their mobile phones trading them at this point.
Josh King:
So until a couple years ago, only the largest or most complex individual investors would be in investing globally. But ETFs like the Schwab emerging markets equity are attracting capital to untapped investments across the globe.
Josh King:
What are the impact of US-held ETFs having on these emerging markets? Are you finding the Schwab ads in the taxi cabs too? Or are you marketing in more sophisticated ways?
Christopher Johnson:
I'd love to see those ads in the taxi cabs. But no, that's not generally the approach we take on a global basis. I would say I think investors, to your point, are having now more access to difficult parts of the marketplace, whether it's emerging or frontier markets. It's this kind of democratization of the landscape.
Christopher Johnson:
And I think a key piece of the driver there is around cost. If you think about emerging market equity as just an example, an investor who invests in the basket of securities directly is going to pay somewhere around 30 to 40 basis points to do that.
Christopher Johnson:
Now, as an investor, you could actually trade quite reasonable size, 50, a hundred million dollars or more in an EM equity ETF for something like five or six basis points. So it's really about having that direct access, but through a better mousetrap gets you cost efficiency.
Christopher Johnson:
So that's opened up the landscape to a much bigger, broader audience. And I think hand in hand with that has been the education efforts by a number of asset managers over the years about asset allocation. The EM markets were just too far out bounds for a long period of time, and I think the volatility scared a lot of people off.
Christopher Johnson:
So you kind of saw asset allocations of maybe one to 5%, and it was often in an active fund. Now it's more common to see upwards of 15% invested in emerging markets for someone who has a long time horizon. So that's rapidly changed the landscape.
Josh King:
So Chris Johnson, you are a more mature investor. You have a little gray hair around the temples, but you're still nice and brown up top. Over your career, you've worked for both ETF issuers like Schwab, but also on the sales side at Knight and Cantor. What drew you into exchange traded products, and how has the space changed over the course of your career?
Christopher Johnson:
Yeah, going back, my beginnings in the ETF market were in probably around the 2002, 2003 timeframe. I was actually at Vanguard at the time in the international business. So focused on all non-US business and growth there. And the start in the market actually for me was-
Josh King:
Had you been in international finance before, or were some of these assignments totally green space for you?
Christopher Johnson:
A little bit of green space. Actually, my undergrad degree was in Asian studies.
Josh King:
Where?
Christopher Johnson:
Colgate. So I was focused on the Japanese market there.
Josh King:
Fine institution, Upstate New York.
Christopher Johnson:
Thank you, sir. Go Gate. So we set a natural affinity for the non-US markets. And at the time, we had a series of UCITS funds being sold in Europe and Asia. And there was contemplation of how do we potentially use a share class structure on top of those. So Vanguard had launched our ETF lineup in 2001, so we're fast forward two years, but still very nascent stages at that shop.
Christopher Johnson:
And so I got into the market there. And I think the key driver there for me was, to your earlier point, it's green space. This is a new better mousetrap that I think had significant potential and a lot of upside from a career perspective, given that it was early days. So at that point in time, there were maybe 140 billion in assets total, globally in ETFs. And as you said before, we're now five trillion. So I think it was the right move.
Josh King:
Back in those days, we're talking early 21st century. And certainly at the end of the 20th century, the ubiquitous face was that of your boss, Charles Schwab on all of the marketing associated with Schwab. And here's a conversation that he had with Maria Bartiromo about fees. Let's hear that.
Maria Bartiromo:
What's your take on fees and the expense side of the business? I mean, fees are going down, you've got lots of competition everywhere, whether it's exchange traded funds and this race to the bottom, Vanguard keeps lowering fees. What's your take on all of this?
Charles Schwab:
I think it's really an important thing because that's what customers really need to be looking at, because fees takes away from your ultimate return. And from the various days, I've always been fee-conscious because that's how you get your end-result, is keep your fees low. And I think today because of technology, fees are near zero in many respects. You have to have the volume as we do.
Charles Schwab:
And fortunately, we have lots of volume, and so we can afford to have very low fees. And the other important thing is I think we are one of the lowest cost producers in the business. We're sort of like the Walmart of investing. We keep our costs very low and we don't have a lot of excess expenditures. And therefore we deliver to our clients a better value.
Josh King:
So the fact that Chuck intoned himself and compared himself to Walmart is an interesting comparison because on May 1st, 1975, Charles Schwab and another NYSE trailblazer, Muriel Siebert, along with a few others broke a 183 year old exchange rule by becoming the first discount brokers as a result of an SEC ruling. Is there a breaking point to where the price will go down so low that the product will suffer in the way that Chuck described?
Christopher Johnson:
Well, look, I think his drive is right. Expenses are the one thing you can control as an investor and as an asset manager. And I think we know through history that if you focus on the expense, the total cost of investing and you control that, that's generally where you're going to get the best performance over the long haul.
Christopher Johnson:
So that constant drive toward lowering expenses, gaining efficiency, and gaining scale is critical to our shareholders' success. But I do think at some point, there is an end. You can't go below zero necessarily without having some other form of revenue to offset. So there probably is a bottom at some point.
Josh King:
So take us inside the skeleton of an ETF structure. Because we so often hear people like Charles Schwab and others talk about driving expenses down, taking expenses out. What is actually involved in the process of removing expense from investment products?
Christopher Johnson:
Sure. I think you could probably draw an analogy to an Amazon. There are vendors in the middle, there are intermediaries. There are just a lot of inefficiencies in any business. Asset management is one that's similar where... I mean, let's look at what the trading environment's done over the past 15 years.
Christopher Johnson:
We've gone to decimalization. It used to be trading in eighths and before that quarters, and all of a sudden we're down to single basis points in terms of trading. And it's all about efficiency in computer driven efficiency. Really, it's technology lifts.
Christopher Johnson:
Same thing can be applied in the investment management world, where an index portfolio, if you imagine, you're taking in so much data. It's liquidity data around all the underlying issues. It's index data, it's corporate actions, all of that at some point used to be manual. Now it's all driven through a technology architecture and it's becoming faster and better.
Christopher Johnson:
Fewer mistakes will get you to operational efficiency. And as your assets grow also, a lot of those costs are fixed. They're not variable costs. And so you can continue to drive scale in that business. And I think that is where we're all headed.
Josh King:
It's been an interesting year, Chris. It started in late January, early February with the return of volatility of the market after so many years after the financial crisis of steadily increasing low volatile numbers in the marketplace. And that had a corresponding effect, I think.
Josh King:
And you can correct me if I'm wrong, on the ETF space because after years of picking up steam, partly because of the falling costs that you've just mentioned, inflows have slowed this year down about 50% from last year's pace. And some of the slowdown is being tied to global trade tensions. But do you think we're looking at a symptom of market conditions or a trend that's going to continue?
Christopher Johnson:
Yeah, a couple points. The first one I'll raise is that thankfully in my business at CSIM, we've actually done the opposite. We're up about 12% year over year in terms of net cash flow. So we're number three in terms of the ETF issuer community in capturing new cash.
Josh King:
New cash, new investors, fresh money out of people's wallets? Or people coming to Schwab for quality?
Christopher Johnson:
I think it's a little of all of that. It's very difficult to track in the ETF space where necessarily the motivations are, where the money's coming from. But we're certainly seeing new accounts opened all the time on the broker dealer side of the business, continually growing at a rapid clip. So that would indicate that it is new to Schwab cash. But we're also having replacements of other products happening.
Christopher Johnson:
We see very large switch trades happening in the market. But our cashflow year to date's about 16 billion through end of June. And that is basically the entire total year figure for us in 2016. So two years ago, we're already surpassing that. That's counter to what we're seeing with our competition, to your point, where many are down 50% year to date. So that's the first point.
Christopher Johnson:
Second point is I think you're right. There is a bit of a market dynamic. I think it's a little bit point in time. It's not so much a trend. So you do have trade tensions, you have geopolitical fears here and there, North Korea, Iran. Importantly, you have the Fed tightening plus trying to reduce their balance sheet at the same time.
Christopher Johnson:
And we're at a near record bull market. We're approaching the end of that timeframe where people start to get jittery. The treasury curve is getting close to flat. And I think you... When you think about the diversity of investors using ETFs in the US, remember it's still about a 50-50 split between retail and institutional, I would say the retail money is still coming in, but I think some of the institutions are starting to pause.
Christopher Johnson:
I don't think that's a reflection around necessarily a go forward trend, but it's really a reaction to where are we in the market cycle right now, and how do people feel about that. Maybe we pause and think about it before we go wholesale all in.
Josh King:
What needs to happen to unpress the pause button and make sure the growth is sustained across ETFs, both at Schwab and the industry in general?
Christopher Johnson:
I think for Schwab, it's just really about executing on the same strategy. I think we have the right strategy. It is about providing foundational products to investors that are at the core of the investment. So we're not playing at the fringes or at the margins with niche products.
Christopher Johnson:
It's all about core and scale, and providing that value to our end investors. It's all about the client. So all we have to do is continue to execute. Now, I think broadly speaking, the markets sometimes do need to take a breath before they continue. But I think what is very interesting is that the SEC at the end of June did propose an ETF rule.
Christopher Johnson:
This is something that dates back to 2008 when they first considered it. ETFs operate outside of the regulatory framework with an exemptive relief structure. They are now proposing a rule that codifies the system it makes it law. That has the opportunity, I think, to transform the ETF landscape from where we are today. And most specifically, I think the interesting thing there is there are certain benefits.
Christopher Johnson:
Well, number one, it levels the playing field from a competitive perspective, but importantly adds potential benefits in the fixed income space that have been difficult to achieve to this point, universally across the field. And that really is all about basket flexibility in terms of how ETFs are created and redeemed
Josh King:
Was the culmination of the SEC's proposed ETF rule something that the industry has been working hard on for a while? Has it picked up pace since Jay Clayton has come into office? What's the difference between Mary Jo White's SEC and Jay Clayton's in terms of trying to work with the industry to make some changes?
Christopher Johnson:
I'd say... If we go back to 2008 timeframe, it was pretty high on the agenda. And Dalia Blass, who's back at the SEC as director of division of investment management was pushing that agenda then, and it was important. But obviously they got sidelined by the global financial crisis. There were other things that took precedent. In today's world, I think you're making a good point.
Christopher Johnson:
Jay Clayton, yes, definitely is pushing this quite hard. And that's coming from the Department of Treasury. So you go back last year and you look at the current administration's marching orders to the Department of Treasury. Part of that was an executive order to look at how do we look at the capital markets at large. One component of that was the asset management business.
Christopher Johnson:
To think about deregulation or change in regulation that can better facilitate capital flow, capital formation. This was one of the initiatives that was identified as a top three. So that came across Clayton's desk. Obviously, he jumped on it. And Dalia Blass had been on the private side of the business, came back to the SEC recently. And I think together, they pushed the agenda.
Christopher Johnson:
And I will tell you, I watched the open meeting of the SEC on June 28th, and it was unanimous. Both sides of the aisle, all five of the commissioners voted without question to move this forward.
Josh King:
I want to listen to a clip of financial journalist, Diana Henriques give a recent lecture and get your reaction to it on the other side.
Diana Henriques:
ETFs are a very cumbersome way to funnel market opinion into the marketplace because the demand for an ETF's shares are not the same as the demand for the underlying stocks that they own. You may own all the blue chips you want, but if no one wants to buy the shares of the ETF, you can't sell them.
Diana Henriques:
So one of the things that concerns me, in '87 and in every market crash since, the forgotten risk factor is what? Liquidity. Liquidity. Can you sell when you want to sell, and at how big of a discount? And ETFs pose a significant liquidity problem.
Josh King:
So Diana Henriques is no fan of the ETF, at least in terms of that lecture. Are her concerns overblown, Chris? And is this issue something that Charles Schwab has began to look into, particularly considering the impending enactment of the SEC's Rule 22e-4?
Christopher Johnson:
Well, it's interesting. I've heard this type of opinion from others, even George Soros at times, or Howard Marks. And I will be honest, it's a misinformed statement. It just shows lack of understanding of the mechanics of an ETF. To the extent there is demand either buy or sell side for an underlying security, there will demand for the ETF because of the ability to create and redeem shares in the arbitrage function.
Christopher Johnson:
Market makers will make money when there is a gap between the ETF market price and the underlying securities. So when you have, for example, a selloff in a specific area of the market, this presents opportunity for someone in the marketplace to grab that apparent dislocation between ETF market price and the basket of underlying securities and capture that spread. So the likelihood that that dislocation would expand tremendously is very slim. And this is just simply not a concern that I share.
Josh King:
It came out on Tuesday that the SEC will delay making a decision on whether to approve the Bitcoin-related exchange traded funds until I think September. What are you hearing from your clients or through the ETF study about the appetite for such an investment vehicle? People ready to buy funds with Bitcoin?
Christopher Johnson:
Well, from a Schwab perspective, this just isn't an area where we would engage. This is certainly outside of the core building blocks of a portfolio. And it wasn't a question that we asked in the survey. Certainly, you hear things in terms of where the street is on this as being an innovative investment concept.
Christopher Johnson:
But I'll tell you, I sat on the other side of the fence in the market making community, and there's still a number of challenges with being able to formulate this type of product into an ETF. Very challenging still.
Josh King:
The amount of assets under management for ETFs in the United States is about 3.4 trillion dollars. Where is all this investment coming from? After the break, we'll drill down with Chris into who's investing in ETFs, and some of the findings from the 2018 Charles Schwab Investor Study after this.
Betty Liu:
Betty here again, and as promised, here's a quick answer from John Chen, chairman and CEO of Blackberry on the most important soft skill for a manager.
John Chen:
I think transparency is very important, and I think fairness is very important. If you could be transparent and could be fair, sometime it might be tough, but people will follow you because they know where they sit, they don't have to second guess what you're saying. And I think that makes the sign of a true good manager.
Betty Liu:
You can watch John Chen's answer and other short videos by visiting radiateinc.com. That's www.radiateinc.com.
Josh King:
Welcome back inside the ICE House. I'm joined by Christopher Johnson, vice president, and head of ETF capital markets at Charles Schwab Investment Management. Before the break, Chris and I were talking about the ETF market and Chris' career.
Josh King:
Now let's focus a little bit on Schwab and this amazing annual study, the 2018 ETF investor study. When did Schwab start conducting it?
Christopher Johnson:
Right. So we've been doing this for eight years. This is the eighth installment.
Josh King:
Why create a study? Why not just create your products and market it? Why research what's sort of on the mood of investors?
Christopher Johnson:
Well, I think it's important as a business... I mean, I think there are a couple pieces to this. One is as a business to understand what the trends are. We're all about serving the end client. So naturally, we're going to want to know where they stand on certain issues and how they think about the products, what's useful to them, what is not useful.
Christopher Johnson:
And how do the age categories impact those trends over time. And I think, honestly, there's a bit of this that's academic and a little bit helpful to the overall industry to understand and do our part, to contribute to understanding investor behavior.
Josh King:
So the first ETF study, Chris that came out in 2011 among its finding was that only 6% of your clients described themselves as experienced ETF investors. And last year, you've had a fourfold increase that rose up to 21%. But is 21% where it should be, or should people have even more education than they do?
Christopher Johnson:
Well, I think there's always an opportunity for that. them to be educated further for people to self-fulfill their education needs. I mean, I think we saw another jump year over year, where now we're at about 33%. Now, of course, this is self-reporting, so difficult to gauge what individuals consider to be experienced in their own mind.
Christopher Johnson:
But I think the trend is right. And I think certainly at Schwab, we're doing our part to continue to educate investors. And I think the industry itself has been doing quite a good job.
Josh King:
So let's focus in on educating the investors. What are the specific ways in which you've certainly goosed the number from 6% to 21% last year, 33% now?
Christopher Johnson:
I mean, I think there's certainly online tools, whether it's asset allocation tools to play around with the numbers and figure out your risk characteristics, your tolerance, your time horizon. Figure out how you should think about investing at large.
Christopher Johnson:
We also put out more the educational content pieces, again, through the web or direct mailings to help people understand all sorts of different nuances of the market, whether it's product structure, to just basic mechanics of stocks and bonds and how they work.
Christopher Johnson:
And then we do quite a lot around thought leadership. So there may be specific themes in the marketplace that play out over time where we feel the need to make sure that we're putting out into the markets and to our end investors our views. Things like inflation, what does that do to your portfolio? How should you be thinking about it as those numbers start to tick up?
Christopher Johnson:
We see wage growth this year, that starts to impact inflation. Should you be considering maybe a different nuance to your portfolio like tips exposure? So I think it's that constant interaction over time with the investors that helps move the dial.
Josh King:
So many companies smaller than Charles Schwab don't have the resources, and capabilities, and personnel to do all this education, create all this material. Just take us behind the doors of Schwab a little bit and tell me about the resources, human and digital that you provide.
Christopher Johnson:
Yeah. So there are a couple of different sides of this equation. We have our broker dealer side with the platform that serves the individual investor from a broker dealer perspective, the advisor, client base, as well as institutions. And then we have my side of the business, which is the asset management affiliate.
Christopher Johnson:
Yes, while we're under the same umbrella, the same ultimate corporate parent, we do have a bit of a wall between us in terms of information barriers and the way we have to approach things. So we have a bit of a difference or a nuance in terms of our educational approach.
Christopher Johnson:
But I think we're very well aligned in terms of ultimately seeing through the client's eyes. And the infrastructure around those campaigns is quite large to your point, digital media, to print mail, to PR campaigns across the board. And I think, to your earliest point, there are many shops out there that are quite smaller.
Christopher Johnson:
And I think those of us that have the benefit of being a little bit larger and have the scale certainly feel the responsibility, of course, to pick up a bit of the slack and provide that education to the landscape that isn't so product central. It's simply about financial literacy.
Josh King:
We did a broad survey of some of the coverage, some of the news articles that got written about the 2018 study that Charles Schwab did. And if I could characterize all the headlines, they would be similar to this one. 91% of millennials say ETFs are their investment vehicle of choice. Millennials have proven themselves to be resistant to investing.
Josh King:
How is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange beating out the excitement of owning all those individual names that we were talking about, the one that plummeted this week or Spotify, or any of the other FAANGs that you'd think a millennial would want to go through a direct brokerage account and say, "I want to buy this one, that one, the other one." "No, I'm just going to stick with a Schwab ETF."
Christopher Johnson:
Well, thank them for doing that. I think a lot of it has to actually do with the way millennials grew up with ETFs. If you look at the numbers, at 91% for millennials as being the preferred investment vehicle, you get down to the mature investors where it's a fraction of that. I don't have the number right in front of me, its probably around 20% or something like that.
Christopher Johnson:
And it's a linear scale across the age groups. And I think it has much to do with where you came from. Millennials grew up with Amazon. They grew up in a technology age, they're technology natives. ETFs are a better mousetrap that is technology-driven. They've been there the whole time they've been alive. So they've been exposed to it.
Christopher Johnson:
Whereas perhaps my generation, with Gen X, it's the age of you grew up with 401(k)'s index funds, a little less ETF. Boomers, basically no ETFs for their entire lifetime, and it was much more about pension funds. So you see a little bit more resistance as you get into the older age groups around ETFs.
Christopher Johnson:
And I think it also has to do again with the technology itself provisioning in the millennial age. It's comparison buying. You're comparison shopping. It's almost like Amazon, again, where you look at ETFs. There's a huge menu out there, and there are a number of technology tools you can use to figure out which one makes sense for you. And I think that appeals to them.
Josh King:
I mean, I think there was a light bulb that went off for me, 10 years, maybe 15 years ago, or so, going from mutual funds or individual names. I said, I can buy China. I can buy South Africa. I can buy Austria. I can buy defense stocks. I can buy technology stocks, the things that interested me on a broader scale than either those individual names.
Christopher Johnson:
Yeah, great point. So the macro themes, very easy to play out in the ETF space. That's more familiar to most people who aren't going to spend the time doing fundamental analysis around a single stock. The diversification benefits, as you said.
Christopher Johnson:
If you want to buy a sector, at least in that investment, you're still probably picking up anywhere from 20 to a hundred different names. And so your exposure is really a macro bet. And I think that does appeal to that younger crowd.
Josh King:
Are you concerned that boomers who made up almost 33% of the study are not as eager to turn to ETFs?
Christopher Johnson:
No, I'm not surprised by it, not concerned about it. I think over time, that will likely change, and there will be more adoption. I think another way to think about this is in terms of... What I think is actually very interesting, is if you looked at those percentages by generation, those who prefer ETFs to some other investment vehicle, it's almost a representation of the underlying asset classes of the whole ETF market.
Christopher Johnson:
So if you were to look at a spectrum from the millennial side at 91%, equities dominate the ETF market. And this isn't I don't think entirely by chance. And then you get down into the mature investors, and it's a much smaller percentage, which mimics more closely short duration, fixed income ETFs.
Christopher Johnson:
The point there is that it's partly about life cycle and where people are. I would not expect or hope that boomers and mature investors would have a significant portion of their savings in emerging market equity ETFs at this point in their life cycle. So that 33% number looks pretty good to me because maybe are investing in a few bond ETFs or tips, products.
Josh King:
Other observations through the course of the study that paint this picture of the millennial as a different investing bird?
Christopher Johnson:
Yeah. So I think you'll see a similar structure of charts if you will, when you look at anything market event related. So we asked a number of questions about how do you react within your portfolio? And do you use ETFs? Do you feel confident that ETFs are flexible enough or would you make a switch using an ETF in the event of let's say tax reform, or the market volatility of February.
Christopher Johnson:
You'll see a similar type of structure where the millennials have a far higher likelihood of making those shifts or feeling confident about the shift using an ETF than you would as you get into the more mature investors. Now, to me, that's also a note of caution.
Christopher Johnson:
I think it warrants caution because, again, I think back to is this because some of these investors just haven't had enough experience to realize that you shouldn't necessarily be shifting your assets around at points of volatility or macro events that you're effectively trying to time. We know over time that this strategy is a losing strategy.
Christopher Johnson:
So I think that again, while the millennials show a propensity to want to use ETFs at these times of market stress or otherwise, I think through time as they mature, they're going to get the experience and have those painful lessons that tell you that probably the best course of action is to just keep your asset allocation where it was and forget about it.
Josh King:
This study, Chris, showed that men and women were equally willing to go all in on ETFs. But I found it interesting how they selected ETFs varied greatly by their gender. Have you modeled out which gender had better returns on their investments?
Christopher Johnson:
I don't think we have, but I've seen some other studies around that. And I believe that the studies I saw that female investors had better returns over time. And I think it's very interesting in telling in our study that, to your point, about how do you choose what to invest in?
Christopher Johnson:
I think the female investors typically had a higher percentage who use advisors, and are not do it yourselfers. And frankly, again, looking at past studies, I would probably attribute that to a little bit of overconfidence on the male side of the spectrum, which also plays out in the returns.
Josh King:
A quarter of investors use technology to select ETFs. How are most ETFs selected? 8% by an automated investing platform, 17% using a portfolio building tool designed for self-directed investors, 29% by an advisor, 46% by myself.
Christopher Johnson:
Yes. A little scary, 46%, frankly. I mean, certainly 46% of the investment population is not financially literate. So that is, I think, again, a word of caution. And I think when you look at those statistics, when you drill down into the age groups, the higher propensity to use an electronic device of some kind to give you automated, either asset allocation or a DIY type of tool tends to be at the younger age groups, not the older.
Josh King:
So on the next page of the study, it does break out by all sorts of demos, millennials, Gen X, boomers, matures, male, female, et cetera. How does or should the findings of this study affect your business plan? Moving forward, different approaches to how you educate the marketplace? And what changes are you expecting to occur between now and the next time the study comes out?
Christopher Johnson:
Well, again, it's hard for me... I'm on the asset management side of the business, so it's difficult to talk too much about the broker dealers plans on the platform. But I would imagine that when we look at these statistics, you think about, again, these volatility events and things like that. That throws the flag up to me that more education is necessary.
Christopher Johnson:
Cautionary tales are around what happens when you choose to make allocation shifts at points like that. I think if we use the February 2nd through 8th period of this year, it's a great indication where if you had gone to bed that Thursday afternoon before those wage figures came out on the 2nd I believe it was, and the volatility trend started.
Christopher Johnson:
And you woke up a week later, didn't touch your investments. You'd basically have been flat. On the other hand, if you woke up on that Friday morning and maybe through Monday started to trade heavily on this high volatility that spiked in the 40s, measured by VIX, you'd be in a world of hurt, potentially.
Christopher Johnson:
So sometimes just shutting the eyes and ignoring it helps. And I think that we as experienced investors and as an asset management firm need to do our part to continue to get that message across, to stick to the basics.
Josh King:
So you can go to the beach with some level of comfort and satisfaction that when you come back from the beach at the end of the day, or return at Labor Day, the markets will... Markets go up, markets go down, but the overall trend is in a good direction.
Christopher Johnson:
That's right. And just when you see that selloff in the marketplace, if you sell too, you've now realized the loss. If you just let it go, it'll come back over time.
Josh King:
Thanks so much, Christopher Johnson for joining us today inside the ICE House.
Christopher Johnson:
Very much appreciate being here. Thank you.
Josh King:
That's our conversation for this week. Our guest was Christopher Johnson, vice president and head of ETF capital markets at Charles Schwab Investment Management. If you like, what you heard, please rate us on iTunes so other folks can know where to find us.
Josh King:
And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected]. Or tweet at us at @NYSE. Our show is produced by Pete Ash and Ian Wolf, with production assistance from Ken Abel and Steven Portner. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
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