November 29, 2024 • 20 mins
So, ETFs—where do we even begin? These aren’t your average investments. They’re not just passive vehicles; they’re like mirrors to the world’s economic shifts—constantly reacting to everything happening in real-time. Inflation, market dips, trade wars, you name it—ETFs respond in ways that can leave you both impressed and, well, a bit surprised at how efficiently they manage to stay ahead of the curve. I mean, think about it—how often can you find an investment that’s not only global in scope but also able to give you access to sectors you’d never even consider diving into on your own? And all at a fraction of the cost you'd expect.
In this episode, we're pulling apart the layers of ETF strategy, looking at how they act almost like a barometer for the market’s pulse. From those jaw-dropping inflation spikes to the subtle (or not so subtle) signs of economic slowdowns, ETFs have this uncanny ability to adjust and provide an umbrella of diversity—no matter where the storm is coming from. And here’s the kicker: the secret sauce? It’s all backed by solid economic theory and how investors like you and me behave (I mean, haven’t we all freaked out at least once when a market crashes, only to realize that there’s a smarter way to ride out the storm?).
But let’s not kid ourselves—ETFs are a bit of a game-changer. If you’ve ever been curious about the power of these adaptable, low-cost investments that can weather just about any economic shift, this episode is for you. Get ready to understand why ETFs aren’t just some trendy option—they’re a reliable, powerful tool in anyone’s investment toolkit.
Want to tap into the flexibility and power of ETFs? Press play, get cozy, and dive in. Oh, and make sure to hit subscribe—because we’re just getting started. Share this episode with your investor circle, leave a review (seriously, we want to hear your thoughts), and let’s talk more about making smarter moves in a constantly changing world.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Hey everyone and welcome to another deep dive.
(00:02):
You know, today we are going to be taking a look at ETFs.
Okay.
But not just ETFs in general,
the listeners send in a bunch of stuff
and they seem really interested in how ETFs are well,
kind of affected by like the big picture economy.
You know what I mean?
Like all those things that are affecting the markets
(00:23):
like as a whole.
So that's what we're gonna be looking at today.
Yeah, it's like if you're sailing a ship,
okay, you need to understand the winds and the tides,
not just how to like work the boat, you know.
Yeah, perfect analogy.
Okay, so I guess what we're really talking about here
is macro economics, right?
So like inflation and interest rates and all those things.
(00:43):
Yeah, all the stuff that makes headlines.
Yeah, exact.
It affects our wallets.
Right, exactly.
I like to think of it as like,
instead of just worrying about like your grocery bill,
we're thinking about like the entire supermarket,
you know, like the prices in the entire supermarket
and then like even bigger than that.
You know, all the supermarkets.
Yeah, and like where the food's coming from
and all of that.
Yeah, the whole system.
(01:04):
Okay, so how does all of this supermarket stuff
affect ETFs?
Well, you can think of ETFs like baskets of assets
that are put together to like reflect a certain sector
or index or investment strategy.
Okay.
And so when the macro economic wins shift,
(01:25):
some of those baskets like become more attractive than others.
Okay, that makes sense.
So let's take inflation for example,
because that's been a big topic lately.
And one of the articles you sent in
talked about commodity ETFs, so things like gold.
Yeah, gold oil.
Yeah, oil exactly.
And how those often do well when inflation is high.
Right, it all comes down to hedging.
(01:47):
Okay.
And that is when your currency is losing value
because of inflation,
people look for assets that will hold their value.
Okay.
Like commodities.
Okay, so it's not just about the commodity itself,
it's also about how easy it is to get in and out
of those investments.
Exactly, and that's a key advantage of ETFs.
Especially compared to like traditional mutual funds.
(02:08):
Because ETFs trade all day long.
Oh, right, like stocks.
Yeah, like stock.
Okay.
So you can react quickly to like market shifts or news
or even macroeconomic announcements and stuff.
So it's all happening in real time.
Yeah.
That's really interesting.
One of the reports that you sent in talked about
the recovery after the pandemic
and how both growth focused ETFs,
(02:31):
you know the ones that are like in tech and healthcare
and cyclical ETFs, like travel and manufacturing.
Yeah, all those benefited.
Yeah, they all had this big surge.
Yeah, it's a great example of how ETFs can reflect
but also anticipate like the market sentiment.
So as the economy began to recover,
(02:53):
investors sort of flocked to those ETFs
because they were betting on those sectors to grow.
Yeah, it's like they were designed for that moment.
That's really interesting.
And it's not just limited to domestic markets either, right?
Because you sent some material about how ETFs can make it
easier to invest internationally,
which used to be kind of hard for like the average person.
(03:15):
Right, exactly.
Yeah, you can invest in Asian growth markets
or Europe's green energy transition,
all without needing to be an expert
in those specific regions.
So it's like having a passport for investments
all over the world,
just right there in your brokerage account.
That's so cool.
And that ease of access combined with like
(03:37):
the diversification that a lot of ETFs provide,
it's really like opened up investing.
It's democratized it.
Yeah, exactly.
It's not just for super rich people anymore.
Exactly.
Okay, so we've talked about how ETFs are affected
by things like inflation
and how they react to like sudden changes in the market.
But a lot of the research that you sent in
(03:58):
also highlighted how ETFs can actually do really well
during tough times.
Like they don't just survive, they thrive.
And you had some good stuff about the COVID crash in 2020.
And the role that bond ETFs played.
Exactly, like when everything was super uncertain
and people were freaking out about bonds,
(04:20):
bond ETFs were like providing liquidity
and price transparency.
So they kept things moving
when the bond market was basically frozen.
Yeah, exactly.
That's amazing.
And a lot of experts say that this ability
to handle like the ups and downs
has to do with some key economic principles.
Yeah, you mentioned something called the efficient market
(04:41):
hypothesis.
What is that again?
So that hypothesis basically says
that all the available information,
like good news, bad news,
warnings about a recession, whatever,
it's already baked into the price of the asset.
So trying to outsmart the market is really hard.
So that's where ETFs come in.
(05:02):
Because instead of trying to pick individual stocks
and potentially like missing something important
with an ETF, you're kind of capturing the whole market
by tracking like a broad index.
Yeah, or a specific sector.
Okay, so it's more about going with the flow of the market
than trying to beat it.
Yeah, you're embracing the wisdom of the market.
(05:22):
Yeah, yeah, exactly.
Instead of trying to be like a stock picking genius
or whatever.
Okay, that makes sense.
So we've talked about how these ETF baskets
are affected by things like inflation
and how they react to like those sudden market changes.
But we've also seen that their structure
is kind of designed to weather those economic storms.
Exactly.
(05:43):
But you were saying earlier
that there's even more to the story.
Oh yeah, there's a lot more.
We've been talking about ETFs kind of generally,
but there's a whole world of nuance
within this universe of ETFs.
There are different types
that cater to different needs and strategies.
This is where it gets really interesting.
Okay, so in your notes,
(06:04):
you mentioned something called factor-based ETFs.
Uh-huh.
And also smart beta.
Yes.
Those sound kind of cool.
They are really cool.
Okay.
And they really show how ETFs have evolved beyond
just tracking basic market indices.
So what are they?
So factor-based ETFs, for example.
Okay.
They let you target specific investment factors.
(06:26):
Okay.
That have historically driven returns.
Okay, so what kind of factors?
Things like value, growth, momentum,
quality, even low volatility.
So if I believe that companies with strong momentum,
like their stock prices are going up,
they're gonna do better,
I could find an ETF that's focused on that.
(06:49):
Exactly.
Okay.
So it's a more targeted approach.
Okay.
You know, aligning your investments
with specific beliefs about what drives markets.
Okay, and what about smart beta?
So smart beta.
Is that similar?
Yeah, it's related.
Okay.
It aims to outperform traditional
market cap weighted indices.
Okay, wait, remind me what's market cap weighted again?
(07:09):
So market cap weighted just means that the weighting
of a company in the index is determined
by its market capitalization.
Okay.
So bigger companies have a bigger impact
on how that index performs.
Okay.
And smart beta tries to do things a little differently.
Right, instead of just following market cap blindly,
(07:29):
smart beta ETFs might use different weighting,
maybe focusing on things like value or dividends.
Okay.
To potentially improve returns.
Okay.
Or lower risk.
So it's like adding an extra layer of like smarts
to the way the index tracks things.
Exactly, tilting the scales
in favor of certain characteristics.
Okay.
(07:50):
And that's where the line between like passive
and active investing gets a little blurry.
Okay.
Because ETFs are usually considered passive.
Right.
And so like smart beta strategies
are bringing in a little bit of active decision making.
It's really interesting how ETFs are becoming
more and more customizable.
You know?
It's not just about buying the whole market anymore.
(08:10):
It's about like picking and choosing exactly what you want.
Exactly.
And this is happening because of like new financial technology
and also because we're understanding markets better.
Right.
Which brings us back to macroeconomics
and how it affects ETFs.
Because even with these fancy ETFs,
those big macroeconomic forces are still in play.
(08:32):
So we always have to keep those in mind.
Exactly.
Those wins and tides we talked about.
They're always there.
This is way more complicated than I thought it was gonna be.
We've gone from like basic definitions of ETFs
to the mechanics of how they trade their global reach.
And now we're talking about smart beta.
It's a whole world.
Yeah, it is.
(08:53):
But I have a feeling there's even more.
Oh yeah.
We've only just begun to peel back the layers of the onion.
Okay.
We talked about how ETFs are resilient.
Yeah.
During past crises.
Mm-hmm.
But the future is full of new challenges and opportunities.
Okay, I'm ready for the next layer.
Right.
What's coming up for ETFs in this crazy world?
(09:14):
Well,
so we've talked about how ETFs can be like
really powerful tools for navigating the market.
Right.
But it's important to remember.
Okay.
They're not like a one size fits all solution.
Right, not every strategy works for every person.
Exactly.
Or every time.
(09:35):
So like when might ETFs not be the best choice?
Well, one scenario is if you're looking for something
very specific.
Let's say you're like really interested
in a super niche company.
Right.
Or a tiny sector.
Yeah.
You might not find an ETF that has that laser focus.
So it's like if you're looking for a rare gem.
Yeah.
(09:56):
You kind of have to go digging yourself.
Exactly.
Instead of relying on a preassembled collection.
Right.
Okay, that makes sense.
Another thing to consider is risk tolerance.
Okay.
So while ETFs do offer diversification,
which can help like smooth out the bars in the market.
Right.
They still move with the assets they track.
(10:16):
So if the whole stock market tanks.
Yes.
By diversified ETF is probably gonna go down too.
Right.
But just maybe not as much.
All right.
So diversification within an ETF doesn't mean it's immune
to what's happening in the market overall.
Right.
Okay, so if I'm like super risk averse,
like I really wanna protect my money.
Yeah.
There might be other options that are better.
(10:37):
Right, exactly.
And then this all kind of ties back to what we were talking
about earlier about macroeconomics.
Knowing how something like rising interest rates
could affect certain sectors.
Right.
Could help me pick the right ETF.
Absolutely.
Like for example, if I think interest rates
are gonna go up, I might wanna look at ETFs
that focus on financial companies.
(10:58):
Right, because they tend to do well in that environment.
Okay, so it's all about like matching my ETF choices
with what I think is gonna happen
in the economy.
It's like having a compass to guide you.
Even when things get rough.
Exactly.
And this is why that efficient market hypothesis
is so important.
Because if all the information's already out there,
(11:21):
and it's reflected in the prices,
trying to be smarter than everyone else
and pick individual stocks is really hard.
It's almost impossible.
Right.
So with ETFs, especially the ones that are tracking
like broad indexes, you're not really trying
to beat the market.
You're trying to capture the whole market return.
(11:43):
Exactly.
Okay, so it's a different way of thinking.
It's not about being a stock picking genius.
It's about going along for the ride.
Exactly, participating in the growth.
Okay, and long term being like the key word there.
Yeah, long term is key.
Because markets go up, markets go down.
So we gotta think long term.
Yeah, you gotta ride those waves.
(12:04):
Okay.
And ETFs are designed for that.
So we've talked about situations
where ETFs might not be ideal.
Right.
And we've talked about some key economic principles
that kind of make them successful.
But you were saying earlier
that there's more to this story.
Oh yeah, there's more.
Okay.
So we've been talking about ETFs.
(12:25):
Right.
Kind of generally.
Mm-hmm.
But there's this whole world of nuance.
No, okay.
Within the ETF universe.
Okay.
There are different types.
That are designed for different needs and strategies.
This is where it gets really interesting.
I know, right?
Yeah.
We touched on factor based ETFs and smart beta.
(12:46):
Yeah.
And those really demonstrate.
Okay.
That the ETFs have evolved.
Okay.
Beyond just tracking basic indexes.
So factor based ETFs,
they let you target certain factors
that have historically driven returns.
Things like value, growth, momentum, quality,
even low volatility.
(13:07):
So if I believe that companies that have strong momentum,
like their stock prices are going up consistently,
they're gonna outperform the market,
I could find an ETF that focuses on that.
Exactly.
It allows for a much more targeted approach.
Okay.
You can align your investments
with your specific beliefs.
(13:29):
Okay.
And what about smart beta?
So smart beta strategies,
they try to do better than traditional
market cap weighted indexes.
Okay, wait.
Remind me, what's market cap weighted again?
Oh, so it just means that the weighting of a company
within an index is determined by its
market capitalization.
So like the total value of all its shares.
(13:50):
Gotcha.
So bigger companies have a bigger impact
on the performance of the index.
And smart beta does things differently.
Right.
So instead of just blindly following market cap,
smart beta ETFs might use different weighting method.
Maybe focusing on value or dividends,
party enhanced returns or reduce risk.
(14:11):
So it's like adding like a layer of smarts
to the index tracking, tilting the scales.
Yeah.
Okay.
And this is where that line between passive
and active investing gets blurry.
Yeah.
Because ETFs are generally considered passive.
Yeah.
But smart beta strategies introduce an element
of active decision making.
(14:33):
It's really interesting how ETFs are offering this level
of like customization and strategy.
It's not just about buying the whole market anymore.
It's about targeting very specific parts.
Exactly.
And this evolution is driven by new financial technology
and a better understanding of how markets work.
Which brings us back to that connection
between macroeconomic and ETF performance.
(14:55):
It always comes back to that.
Because even with these more sophisticated ETFs,
we're still subject to those big economic forces.
Exactly.
Those wins and tides we talked about,
they're always shaping the landscape.
Okay.
This is way more intricate than I realized.
We've gone from like basic definitions
to like the mechanics of trading, global reach.
(15:17):
And now we're talking about smart beta.
That's amazing.
It is.
But I have a feeling there's more.
There is, we haven't even gotten to the good stuff yet.
We've talked about the resilience of ETFs in past crises.
But the future has its own set of challenges
and opportunities.
Okay.
I'm ready for the next level.
(15:38):
What lies ahead for ETFs in this crazy world?
Well, it feels like we've gone on this whirlwind tour
of the whole ETF universe.
I know, it's crazy.
From basic definitions to smart beta strategies.
It's clear there's a lot more to ETFs
than you might think at first.
(15:58):
Yeah, for sure.
You mentioned that the future holds
both challenges and opportunities for ETFs.
So what are some of the big trends on the horizon?
What one major trend is sustainability.
Okay.
So ESG investing, which considers environmental,
(16:19):
social and governance factors,
it's gaining a lot of momentum.
Yeah, I've definitely seen more ETFs focused
on things like clean energy and social responsibility
and ethical corporate governance.
Yeah, and that trend is only gonna grow,
especially as more investors,
especially younger generations, demand more transparency.
(16:40):
They want their investments to align with their values.
So it's not just about making money.
Right.
It's about making a difference.
Yeah, making a positive impact.
And ETFs are making those kinds of investments
available to more people.
Exactly.
That's great.
Another trend is thematic ETFs.
Thematic ETFs, what are those?
So these ETFs let investors
(17:02):
tap into specific mega trends.
Mega trends.
Yeah, those big long-term shifts
that are shaping the global economy.
Okay, give me some examples.
Okay, so think about things like the rise of AI,
the growth of e-commerce, the aging global population.
There are ETFs designed to capture all of those themes.
(17:23):
So instead of just investing in tech in general,
I can pinpoint specific areas within tech
that I think are gonna do really well.
Exactly.
Thematic ETFs let me be more focused.
Yeah, they give you that laser focus.
It was like I can invest in the stories
that I think are gonna shape the future.
(17:45):
I love that analogy.
It's so cool.
It really captures the essence of thematic investing.
Okay, but with all these new options, strategies,
how do I stay informed?
That's a great question.
Like how do I make good decisions?
It really highlights the importance
of continuous learning and due diligence.
Okay.
(18:05):
You know, there are tons of resources
to help investors understand all the different types of ETFs.
They're holding the potential risks and rewards.
That's about doing my research.
Exactly.
Staying up to date on market trends
and maybe even talking to a financial advisor.
Right, if you need help.
Okay, yeah.
(18:26):
Knowledge is power.
Absolutely, especially when it comes to investing.
And it's not just about picking winners.
It's about building a portfolio
that matches my goals, my risk tolerance,
my vision for the future.
Exactly.
That's powerful.
It is.
It's about investing with intention and purpose.
(18:46):
Right.
And ETFs can help me do that.
They can.
Because they're so flexible.
Yeah, and diverse.
This deep dive has been amazing.
We've learned so much about ETFs,
how they react to macroeconomics,
their real time advantages.
Their global reach and how they're constantly evolving.
And we talked about how important it is
(19:08):
to understand those big economic trends.
Absolutely, those wins and tides that shape everything.
Okay, so as we wrap up,
what's the one big takeaway
you want our listener to remember?
I would say this.
Okay.
ETFs are more than just investments.
Okay.
They reflect this dynamic interplay
(19:29):
between economics, technology, and human behavior.
Wow, that's a good one.
Yeah, and when investors understand those forces,
they can really use the power of ETFs
to build portfolios that are not only profitable,
but also like aligned with their values
(19:50):
and their vision for the future.
I love that.
It's been great exploring this with you.
It has, it's been a pleasure.
And to our listener, thanks for joining us.
Thank you.
Let's dive into ETFs.
We hope you found it.
Yeah, we hope it was informative.
And inspiring.
And remember the journey of investing.
Yeah.
It never ends.
It's a lifelong journey.
So stay curious.
(20:11):
Yeah.
Stay informed.
Stay engaged.
And never stop exploring.
Never stop learning.
Hey everyone and welcome to another deep dive.
(00:02):
You know, today we are going to be taking a look at ETFs.
Okay.
But not just ETFs in general,
the listeners send in a bunch of stuff
and they seem really interested in how ETFs are well,
kind of affected by like the big picture economy.
You know what I mean?
Like all those things that are affecting the markets
(00:23):
like as a whole.
So that's what we're gonna be looking at today.
Yeah, it's like if you're sailing a ship,
okay, you need to understand the winds and the tides,
not just how to like work the boat, you know.
Yeah, perfect analogy.
Okay, so I guess what we're really talking about here
is macro economics, right?
So like inflation and interest rates and all those things.
(00:43):
Yeah, all the stuff that makes headlines.
Yeah, exact.
It affects our wallets.
Right, exactly.
I like to think of it as like,
instead of just worrying about like your grocery bill,
we're thinking about like the entire supermarket,
you know, like the prices in the entire supermarket
and then like even bigger than that.
You know, all the supermarkets.
Yeah, and like where the food's coming from
and all of that.
Yeah, the whole system.
(01:04):
Okay, so how does all of this supermarket stuff
affect ETFs?
Well, you can think of ETFs like baskets of assets
that are put together to like reflect a certain sector
or index or investment strategy.
Okay.
And so when the macro economic wins shift,
(01:25):
some of those baskets like become more attractive than others.
Okay, that makes sense.
So let's take inflation for example,
because that's been a big topic lately.
And one of the articles you sent in
talked about commodity ETFs, so things like gold.
Yeah, gold oil.
Yeah, oil exactly.
And how those often do well when inflation is high.
Right, it all comes down to hedging.
(01:47):
Okay.
And that is when your currency is losing value
because of inflation,
people look for assets that will hold their value.
Okay.
Like commodities.
Okay, so it's not just about the commodity itself,
it's also about how easy it is to get in and out
of those investments.
Exactly, and that's a key advantage of ETFs.
Especially compared to like traditional mutual funds.
(02:08):
Because ETFs trade all day long.
Oh, right, like stocks.
Yeah, like stock.
Okay.
So you can react quickly to like market shifts or news
or even macroeconomic announcements and stuff.
So it's all happening in real time.
Yeah.
That's really interesting.
One of the reports that you sent in talked about
the recovery after the pandemic
and how both growth focused ETFs,
(02:31):
you know the ones that are like in tech and healthcare
and cyclical ETFs, like travel and manufacturing.
Yeah, all those benefited.
Yeah, they all had this big surge.
Yeah, it's a great example of how ETFs can reflect
but also anticipate like the market sentiment.
So as the economy began to recover,
(02:53):
investors sort of flocked to those ETFs
because they were betting on those sectors to grow.
Yeah, it's like they were designed for that moment.
That's really interesting.
And it's not just limited to domestic markets either, right?
Because you sent some material about how ETFs can make it
easier to invest internationally,
which used to be kind of hard for like the average person.
(03:15):
Right, exactly.
Yeah, you can invest in Asian growth markets
or Europe's green energy transition,
all without needing to be an expert
in those specific regions.
So it's like having a passport for investments
all over the world,
just right there in your brokerage account.
That's so cool.
And that ease of access combined with like
(03:37):
the diversification that a lot of ETFs provide,
it's really like opened up investing.
It's democratized it.
Yeah, exactly.
It's not just for super rich people anymore.
Exactly.
Okay, so we've talked about how ETFs are affected
by things like inflation
and how they react to like sudden changes in the market.
But a lot of the research that you sent in
(03:58):
also highlighted how ETFs can actually do really well
during tough times.
Like they don't just survive, they thrive.
And you had some good stuff about the COVID crash in 2020.
And the role that bond ETFs played.
Exactly, like when everything was super uncertain
and people were freaking out about bonds,
(04:20):
bond ETFs were like providing liquidity
and price transparency.
So they kept things moving
when the bond market was basically frozen.
Yeah, exactly.
That's amazing.
And a lot of experts say that this ability
to handle like the ups and downs
has to do with some key economic principles.
Yeah, you mentioned something called the efficient market
(04:41):
hypothesis.
What is that again?
So that hypothesis basically says
that all the available information,
like good news, bad news,
warnings about a recession, whatever,
it's already baked into the price of the asset.
So trying to outsmart the market is really hard.
So that's where ETFs come in.
(05:02):
Because instead of trying to pick individual stocks
and potentially like missing something important
with an ETF, you're kind of capturing the whole market
by tracking like a broad index.
Yeah, or a specific sector.
Okay, so it's more about going with the flow of the market
than trying to beat it.
Yeah, you're embracing the wisdom of the market.
(05:22):
Yeah, yeah, exactly.
Instead of trying to be like a stock picking genius
or whatever.
Okay, that makes sense.
So we've talked about how these ETF baskets
are affected by things like inflation
and how they react to like those sudden market changes.
But we've also seen that their structure
is kind of designed to weather those economic storms.
Exactly.
(05:43):
But you were saying earlier
that there's even more to the story.
Oh yeah, there's a lot more.
We've been talking about ETFs kind of generally,
but there's a whole world of nuance
within this universe of ETFs.
There are different types
that cater to different needs and strategies.
This is where it gets really interesting.
Okay, so in your notes,
(06:04):
you mentioned something called factor-based ETFs.
Uh-huh.
And also smart beta.
Yes.
Those sound kind of cool.
They are really cool.
Okay.
And they really show how ETFs have evolved beyond
just tracking basic market indices.
So what are they?
So factor-based ETFs, for example.
Okay.
They let you target specific investment factors.
(06:26):
Okay.
That have historically driven returns.
Okay, so what kind of factors?
Things like value, growth, momentum,
quality, even low volatility.
So if I believe that companies with strong momentum,
like their stock prices are going up,
they're gonna do better,
I could find an ETF that's focused on that.
(06:49):
Exactly.
Okay.
So it's a more targeted approach.
Okay.
You know, aligning your investments
with specific beliefs about what drives markets.
Okay, and what about smart beta?
So smart beta.
Is that similar?
Yeah, it's related.
Okay.
It aims to outperform traditional
market cap weighted indices.
Okay, wait, remind me what's market cap weighted again?
(07:09):
So market cap weighted just means that the weighting
of a company in the index is determined
by its market capitalization.
Okay.
So bigger companies have a bigger impact
on how that index performs.
Okay.
And smart beta tries to do things a little differently.
Right, instead of just following market cap blindly,
(07:29):
smart beta ETFs might use different weighting,
maybe focusing on things like value or dividends.
Okay.
To potentially improve returns.
Okay.
Or lower risk.
So it's like adding an extra layer of like smarts
to the way the index tracks things.
Exactly, tilting the scales
in favor of certain characteristics.
Okay.
(07:50):
And that's where the line between like passive
and active investing gets a little blurry.
Okay.
Because ETFs are usually considered passive.
Right.
And so like smart beta strategies
are bringing in a little bit of active decision making.
It's really interesting how ETFs are becoming
more and more customizable.
You know?
It's not just about buying the whole market anymore.
(08:10):
It's about like picking and choosing exactly what you want.
Exactly.
And this is happening because of like new financial technology
and also because we're understanding markets better.
Right.
Which brings us back to macroeconomics
and how it affects ETFs.
Because even with these fancy ETFs,
those big macroeconomic forces are still in play.
(08:32):
So we always have to keep those in mind.
Exactly.
Those wins and tides we talked about.
They're always there.
This is way more complicated than I thought it was gonna be.
We've gone from like basic definitions of ETFs
to the mechanics of how they trade their global reach.
And now we're talking about smart beta.
It's a whole world.
Yeah, it is.
(08:53):
But I have a feeling there's even more.
Oh yeah.
We've only just begun to peel back the layers of the onion.
Okay.
We talked about how ETFs are resilient.
Yeah.
During past crises.
Mm-hmm.
But the future is full of new challenges and opportunities.
Okay, I'm ready for the next layer.
Right.
What's coming up for ETFs in this crazy world?
(09:14):
Well,
so we've talked about how ETFs can be like
really powerful tools for navigating the market.
Right.
But it's important to remember.
Okay.
They're not like a one size fits all solution.
Right, not every strategy works for every person.
Exactly.
Or every time.
(09:35):
So like when might ETFs not be the best choice?
Well, one scenario is if you're looking for something
very specific.
Let's say you're like really interested
in a super niche company.
Right.
Or a tiny sector.
Yeah.
You might not find an ETF that has that laser focus.
So it's like if you're looking for a rare gem.
Yeah.
(09:56):
You kind of have to go digging yourself.
Exactly.
Instead of relying on a preassembled collection.
Right.
Okay, that makes sense.
Another thing to consider is risk tolerance.
Okay.
So while ETFs do offer diversification,
which can help like smooth out the bars in the market.
Right.
They still move with the assets they track.
(10:16):
So if the whole stock market tanks.
Yes.
By diversified ETF is probably gonna go down too.
Right.
But just maybe not as much.
All right.
So diversification within an ETF doesn't mean it's immune
to what's happening in the market overall.
Right.
Okay, so if I'm like super risk averse,
like I really wanna protect my money.
Yeah.
There might be other options that are better.
(10:37):
Right, exactly.
And then this all kind of ties back to what we were talking
about earlier about macroeconomics.
Knowing how something like rising interest rates
could affect certain sectors.
Right.
Could help me pick the right ETF.
Absolutely.
Like for example, if I think interest rates
are gonna go up, I might wanna look at ETFs
that focus on financial companies.
(10:58):
Right, because they tend to do well in that environment.
Okay, so it's all about like matching my ETF choices
with what I think is gonna happen
in the economy.
It's like having a compass to guide you.
Even when things get rough.
Exactly.
And this is why that efficient market hypothesis
is so important.
Because if all the information's already out there,
(11:21):
and it's reflected in the prices,
trying to be smarter than everyone else
and pick individual stocks is really hard.
It's almost impossible.
Right.
So with ETFs, especially the ones that are tracking
like broad indexes, you're not really trying
to beat the market.
You're trying to capture the whole market return.
(11:43):
Exactly.
Okay, so it's a different way of thinking.
It's not about being a stock picking genius.
It's about going along for the ride.
Exactly, participating in the growth.
Okay, and long term being like the key word there.
Yeah, long term is key.
Because markets go up, markets go down.
So we gotta think long term.
Yeah, you gotta ride those waves.
(12:04):
Okay.
And ETFs are designed for that.
So we've talked about situations
where ETFs might not be ideal.
Right.
And we've talked about some key economic principles
that kind of make them successful.
But you were saying earlier
that there's more to this story.
Oh yeah, there's more.
Okay.
So we've been talking about ETFs.
(12:25):
Right.
Kind of generally.
Mm-hmm.
But there's this whole world of nuance.
No, okay.
Within the ETF universe.
Okay.
There are different types.
That are designed for different needs and strategies.
This is where it gets really interesting.
I know, right?
Yeah.
We touched on factor based ETFs and smart beta.
(12:46):
Yeah.
And those really demonstrate.
Okay.
That the ETFs have evolved.
Okay.
Beyond just tracking basic indexes.
So factor based ETFs,
they let you target certain factors
that have historically driven returns.
Things like value, growth, momentum, quality,
even low volatility.
(13:07):
So if I believe that companies that have strong momentum,
like their stock prices are going up consistently,
they're gonna outperform the market,
I could find an ETF that focuses on that.
Exactly.
It allows for a much more targeted approach.
Okay.
You can align your investments
with your specific beliefs.
(13:29):
Okay.
And what about smart beta?
So smart beta strategies,
they try to do better than traditional
market cap weighted indexes.
Okay, wait.
Remind me, what's market cap weighted again?
Oh, so it just means that the weighting of a company
within an index is determined by its
market capitalization.
So like the total value of all its shares.
(13:50):
Gotcha.
So bigger companies have a bigger impact
on the performance of the index.
And smart beta does things differently.
Right.
So instead of just blindly following market cap,
smart beta ETFs might use different weighting method.
Maybe focusing on value or dividends,
party enhanced returns or reduce risk.
(14:11):
So it's like adding like a layer of smarts
to the index tracking, tilting the scales.
Yeah.
Okay.
And this is where that line between passive
and active investing gets blurry.
Yeah.
Because ETFs are generally considered passive.
Yeah.
But smart beta strategies introduce an element
of active decision making.
(14:33):
It's really interesting how ETFs are offering this level
of like customization and strategy.
It's not just about buying the whole market anymore.
It's about targeting very specific parts.
Exactly.
And this evolution is driven by new financial technology
and a better understanding of how markets work.
Which brings us back to that connection
between macroeconomic and ETF performance.
(14:55):
It always comes back to that.
Because even with these more sophisticated ETFs,
we're still subject to those big economic forces.
Exactly.
Those wins and tides we talked about,
they're always shaping the landscape.
Okay.
This is way more intricate than I realized.
We've gone from like basic definitions
to like the mechanics of trading, global reach.
(15:17):
And now we're talking about smart beta.
That's amazing.
It is.
But I have a feeling there's more.
There is, we haven't even gotten to the good stuff yet.
We've talked about the resilience of ETFs in past crises.
But the future has its own set of challenges
and opportunities.
Okay.
I'm ready for the next level.
(15:38):
What lies ahead for ETFs in this crazy world?
Well, it feels like we've gone on this whirlwind tour
of the whole ETF universe.
I know, it's crazy.
From basic definitions to smart beta strategies.
It's clear there's a lot more to ETFs
than you might think at first.
(15:58):
Yeah, for sure.
You mentioned that the future holds
both challenges and opportunities for ETFs.
So what are some of the big trends on the horizon?
What one major trend is sustainability.
Okay.
So ESG investing, which considers environmental,
(16:19):
social and governance factors,
it's gaining a lot of momentum.
Yeah, I've definitely seen more ETFs focused
on things like clean energy and social responsibility
and ethical corporate governance.
Yeah, and that trend is only gonna grow,
especially as more investors,
especially younger generations, demand more transparency.
(16:40):
They want their investments to align with their values.
So it's not just about making money.
Right.
It's about making a difference.
Yeah, making a positive impact.
And ETFs are making those kinds of investments
available to more people.
Exactly.
That's great.
Another trend is thematic ETFs.
Thematic ETFs, what are those?
So these ETFs let investors
(17:02):
tap into specific mega trends.
Mega trends.
Yeah, those big long-term shifts
that are shaping the global economy.
Okay, give me some examples.
Okay, so think about things like the rise of AI,
the growth of e-commerce, the aging global population.
There are ETFs designed to capture all of those themes.
(17:23):
So instead of just investing in tech in general,
I can pinpoint specific areas within tech
that I think are gonna do really well.
Exactly.
Thematic ETFs let me be more focused.
Yeah, they give you that laser focus.
It was like I can invest in the stories
that I think are gonna shape the future.
(17:45):
I love that analogy.
It's so cool.
It really captures the essence of thematic investing.
Okay, but with all these new options, strategies,
how do I stay informed?
That's a great question.
Like how do I make good decisions?
It really highlights the importance
of continuous learning and due diligence.
Okay.
(18:05):
You know, there are tons of resources
to help investors understand all the different types of ETFs.
They're holding the potential risks and rewards.
That's about doing my research.
Exactly.
Staying up to date on market trends
and maybe even talking to a financial advisor.
Right, if you need help.
Okay, yeah.
(18:26):
Knowledge is power.
Absolutely, especially when it comes to investing.
And it's not just about picking winners.
It's about building a portfolio
that matches my goals, my risk tolerance,
my vision for the future.
Exactly.
That's powerful.
It is.
It's about investing with intention and purpose.
(18:46):
Right.
And ETFs can help me do that.
They can.
Because they're so flexible.
Yeah, and diverse.
This deep dive has been amazing.
We've learned so much about ETFs,
how they react to macroeconomics,
their real time advantages.
Their global reach and how they're constantly evolving.
And we talked about how important it is
(19:08):
to understand those big economic trends.
Absolutely, those wins and tides that shape everything.
Okay, so as we wrap up,
what's the one big takeaway
you want our listener to remember?
I would say this.
Okay.
ETFs are more than just investments.
Okay.
They reflect this dynamic interplay
(19:29):
between economics, technology, and human behavior.
Wow, that's a good one.
Yeah, and when investors understand those forces,
they can really use the power of ETFs
to build portfolios that are not only profitable,
but also like aligned with their values
(19:50):
and their vision for the future.
I love that.
It's been great exploring this with you.
It has, it's been a pleasure.
And to our listener, thanks for joining us.
Thank you.
Let's dive into ETFs.
We hope you found it.
Yeah, we hope it was informative.
And inspiring.
And remember the journey of investing.
Yeah.
It never ends.
It's a lifelong journey.
So stay curious.
(20:11):
Yeah.
Stay informed.
Stay engaged.
And never stop exploring.
Never stop learning.
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