Emma Wall: Hello and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Jose Garcia Zarate, Senior Fund Analyst for Morningstar.
Hello Jose.
Jose Garcia Zarate: Hello.
Wall: So, passive strategies are your specialism and we're going to talk about ETFs today because they have had a very good year, haven't they?
Zarate: Indeed they have. I mean, we so far into the year at the end of August we've got record inflows into ETFs just above $50 billion in net new money going into these products which is a record high actually.
Wall: And that's against a pretty dodgy backdrop, isn't it? You'd expect when you see these sort of inflows that that's been because people are feeling very positive because the market is rising but it hasn't really been the case, especially in the last month.
The last month has been very volatile. So, how are ETF investors able to get over the mental block that so many other investors have and where are they putting their money?
Zarate: Well, this has actually been a rather curious month actually because I was going to – I expected August to be really bad in terms of net new money going into any kind of investment vehicle given the turbulence in China. But actually it's been a pretty good month for ETFs and in particular, for equity ETFs. And what we see is that European investors are perhaps taking the long-term view and they are saying, okay, there may be some trouble in China and some troubles in the emerging markets, but the fundamentals for the European economy and the U.S economy in the medium to long term look pretty okay.
So, whether it's the timing actually of the investment is the right one is another issue, but it is interesting to know that they are putting the money into sort of like the European large caps and U.S. large caps on the expectation that medium to long-term they are going to perform well.
Wall: And that's really good because as you say, it's not about the market, it's about taking a long-term view. And normally when we see times of volatility investors actually do one of three things. They pull their money out altogether and hoard it in cash because they get scared off by that volatility or they go for some of the more perceived safe heavens of things like gold or bonds, but to take that long-term view in equities especially if you are a long-term investor to saving perhaps for your pension, this is a really savvy choice.
Zarate: It is. It is indeed and that's why I was pleasantly surprised with the August results quite frankly.
Wall: Let's have a chat then about strategic beta, small beta as it's also known in the industry. We have been hearing lots about this for the last couple of years, but it's taken a while for real investors to catch up with the rhetoric. How are things looking year-to-date for strategic beta?
Zarate: Well, we continue to see inflows into these products in not sort of same level as in the U.S. perhaps, but they are growing also in the European markets space. Around 10% to 15% of net new money into ETFs are going into these particular products and we see a variety of exposures and one that is particularly popular this year is Japanese in particular the Nikkei 400. This index that kind of like selects companies on the basis of good governance and that's proven a very popular investment choice.
Wall: That's been called the shame index, hasn't it, because if you're not in it, you're shamed into going into it and that sort of prioritizing of shareholders is a real – well, it's part of Abenomics really, isn't it, about getting Japanese corporates to prioritize returning cash to shareholders.
Zarate: And it also goes to share that investors are also quite confident that these Abenomic policy settings are going to be good for the long-term health of the Japanese economy because these are not tactical investments; these are investments for the medium to long term.
Wall: Let's hope they are right.
Zarate: Right.
Wall: Jose, thank you very much.
Zarate: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
