Mailbag: incl. Should I buy equal-weighted ETFs? June 23, 2024

0:10Welcome to Motley Fool Money, our very special mailbag edition. It is Sunday morning. Andrew Page has been out treading the boards, pounding the pavement, swimming through the waves, flying his ultralight from New Zealand. I mean, the man knows no boundaries. Andrew Page from strawman.com. Good morning. Hashtag life goals. You know, you've got to cram every minute full of adventure. You've got to do what you can. We talked about Die With Zero. Is the ultralight flight from New Zealand on your bucket list? It seems like a very good chance of dying at some point with that as a pastime. I don't know.

0:45There is a chance. There is a chance. We'll have to see how it goes. Mate, Straw Man, I believe, is Australia's premier online investment club. Is that still the truth? Correct. It's still the case. Yep. Just checking. I haven't asked for a while. If you had something number two, it bodes me to ask on behalf of our listeners to make sure you are still the premier online investment club in the country. I am Scott Phillips, of course, from the Motley Phil. And we are doing a mailbag episode, mate. I'm going to start with this one from Simon. He just says, hey there, Scott and Ram. ShareSite recently listed their top 50 podcasts and you are not on it?

1:19What? You even mentioned them now again. Are they kidding? Get into them. You deserve to be there. I'm picking up the phone. I did not know that, Simon. Thank you. Because we're actually an affiliate partner. Right? And I know the guys pretty well. So 50? I mean, okay. Not number one. Okay. Not in the top 10. Not in the top. There are 50 finance podcasts in Australia. Like, okay. I'm ticked off now. Mate, where is the quid in quid pro quo if they're not doing the right thing? If you're an affiliate partner is all I'm saying. I am having very stern words with someone. Heads will roll. Either that or they are dead to us and they will never be mentioned in this podcast again because we are both petty and crave it.

2:02No, we don't. Do not use share site. Cancel your subscription. And definitely don't use the affiliate link that Andrew has on his website. Or if you want to, you can. Who am I to tell you what to do? Money talks and podcast walk. What can I say? That's it. I thought it was good. Thank you, Simon. Yeah, look, we will definitely have a chat. Hey, we mentioned the other day, Matt sent us the, I posted that on the socials. I think you retweeted it, the Statler on Waldorf picture, which was brilliant. Excellent. I just thought, I don't know if I mentioned this, but I want to mention the rest of this.

2:31This is just a comment from Matt, but it's just funny. He said, hi, Scott. Love the ranting in a recent episode. an incredible tapestry of balanced ranting where it felt like no one was safe government labor liberal economists business unions boards ndis investors property moguls supermarkets politicians savers borrowers australia usa esg fossil fuel companies super funds and even barbara streisand all delivered in good nature with the hope of prompting these important conversations for the national agenda and then he said as i think i said last time it really felt like a Statler and Waldorf moment.

3:05So I attempted a quick AI face swap. Thank you, Matt. I just love the list. Matt, can I tell you, mate, again, I love the people listen. If you have enough time and interest to actually write that list, you're paying way too much attention to what Ram and I are saying. I love it. I'm kind of quietly proud of that, just quietly. You seem very angry, though. Sometimes you get that wake-up call. It's like, wow, am I really? Is there anything that I'm positive on? Yeah, I just love it. It was a lovely list. Thank you, Matt. And again, if you haven't seen it yet, do jump on the socials. It was probably a couple of weeks ago now, maybe a month ago.

3:38I posted that photo. It's a very, very, very unflattering photo, but it's very funny. So if you're of a certain vintage where The Muppet Show makes sense to you, and if you're not, again, you have my usual disdain and hatred because I don't like young people because they have more years left than I do. But it is a pretty funny image. It's remarkably unflattering. Hey, Luke does have actually a question, mate, which is nice. So let's go with that. Luke just says, Hey team, I have an eight month old baby and I'm going to start investing for him and regularly top it up. I'm thinking of using a chess sponsored account through the ComSec or SelfWealth, I think.

4:12But the information on their websites is a little vague when it comes to tax. I know you've answered this before, but I couldn't find the podcast. Fair enough. We've probably got a few new listeners anyway. Can you please help me out? Fool on and keep up the podcast. I listen to them each week when running. For some reason, I find it motivational. personal luke uh my best guess is trying to just somehow trick himself into outrunning us i've got to get away from those guys i've just got to keep going that was going to be my theory too i know the fastest after i get home i can turn this thing off maybe that's maybe that's it i'm not sure which way luke's going with that um luke tax is really stupidly hard for kids um i've talked about this before speaking of ranting uh unfortunately some of your fellow australians and my fellow australians screwed it for the rest of us uh by using kids as tax shelters for their own investing and so the government kind of went well if you do that we're going to take it away so basically mate there is a massive issue if you earn more than i don't know the number it's 500 bucks odd a year um in income as an under 16 of unearned income in other words you didn't work for it the tax rate's like is it 60 or something around it's stupidly high um so it's really really hard um so be that bear that in mind luke um you can either use it to put your own name and cop the tax yourself when you transfer the shares you do it in the little one's name and you know Hopefully at some point between now and 16 years, more than 500 bucks a year in interest, you may just have to cough up the difference, which again, those are both two really, really crappy options, but that's where you've got.

5:35In terms of setup, mate, my accountant has told me, and this is not tax advice, set up the account in his name with you as the trustee. So Luke as trustee for the child, have a bank account in the child's name and use the child's tax file number. That's what I've been told to do. Again, I can't give tax advice. So please go get advice if you want to, don't rely on what I say. but that's just the kind of the very quick cook's tour through tax and investing for kids. Ram, do you have anything you want to throw on top of that? They're just labels, man. You can't label me or what I do. I would just say do it yourself, right?

6:08And then at some future point, transfer it across. The kid is not going to say, Daddy, what's the fiduciary responsibility you have? It's not going to happen. All they need to know is - With one difference though, right? When you transfer it, you have a tax bill. That is true, right? That's the only answer to doing it in your own name and then transferring it later. Yeah. I would just sort of say, son, we've put in some money aside for you. Yeah. You know, when you're X age, you'll get it. That's all they need to know. And actually, that's just the beginning, right? The more important lesson is what we've actually done with that money and why have we done it that way and why is that interesting?

6:51And then just to periodically remind them, like not every day but i don't know once or twice a year just just so they can have that observed lesson of yes exactly you know and they'll ignore it and they won't be interested in it despite what you do um because kids are kids and and but but that that background noise will will percolate through at some subconscious level at some point it's like wow you know as as they do come of age they'll think mom and dad did this for me and look at that it's worth x dollars today and they put this much in like holy moly that's really i need to do this i need to keep doing this that's yeah that's i mean you know the tax the designation i get it i'm not i shouldn't be so dismissive of it but that's it's all by the by um yeah uh the far more important point is that they see and observe what's actually going on.

7:48And that is an incredibly potent lesson. And even if you do it, it sounds like I'm shilling, but even if you do it through a play money paper trading account on Strawman, it's still - Hypothetically. You know, it's a free account. I get nothing for it, right? I guess I can boast a higher user count, but that's about it. But just, or not even me, I do it, I don't know, I do it on a spreadsheet, do it whatever way you want to do it. And that is, yeah. the technicalities just what I would say is the technicalities are just going to soul destroying, soul sapping bureaucratic nightmares that are just going to make any kid think that's really difficult and painful and I don't want anything to do with it.

8:35Fair, fair. I will add one mate just as an additional thought. So I've done I've gone two ways. So we're putting some money aside for my young bloke as I've said many times before but I also have a small account that he puts his own money into um it's like 170 bucks there or something at the moment like it's really tiny yeah um but he does that himself and so there's never going to be any tax implications on that one because it's so small well i mean if you start saving well you will but he's already amazon's up like 77 cents if we bought or something again i own amazon shares so to see uh for full disclosure but um you know so the only thing i would say ram to your point is just involving the kids with that from a young age let them see it happening in real time and building that as a kind of a life thing that we slash you do over time can also be useful it's one thing about saying hey you're 18 here's here's x grand i've saved it for you you're welcome but the other thing of during those formative years involving them in some way shape or form in the process of selecting stocks or seeing compounding happen in action yeah um i know that you know my young kids got wow you mean we got the money yeah mate and guess what you did absolutely nothing for it right went up while you were at school and sleeping and so i was like oh that's amazing some of those life lessons i think are worth exposing them to in whatever form you feel comfortable during during that period can i be a little bit nitpicky here i don't know it's only if you throw some pessimism in right you can count on that um i i i've thought about this more and more lately you're so right in everything you say but i i the only stop there the only pushback i'll have and it's unintended and it's not beside the point but it's this because i've had friends and family to say this to me over the years you didn't do anything for it and it sticks in my craw because i i did a lot of stuff stuck in it mate okay well it's very it's a very chock full craw um is that it's not just the work and the research and the decision and this and and and the the the choice, the deliberate choice to not consume now.

10:33I mean, I could take that money I've invested with and go on a holiday or buy a nicer car or any number of things. And I didn't do it, right? I'm not after a medal, by the way. I'm not, you know. No, yeah, I understand. It's a fair point. And the real work, what I really did for, and what anyone who has done for it, is that they have rolled with the punches. They've resisted the urge to sell when there's a profit. it they've resisted the urge to panic when there's a loss and that is a that is a brutal journey that only those that have been on it can can fully appreciate and so when some muppet 10 years later goes oh you did nothing for i'm not putting words in your opinion it happened i'm sure you've had it before or you didn't do anything it's like do you have any idea what i've had to endure and the sleepless nights are like i earned i earned this money right i earned this money really through a through a lot of emotional turmoil and frankly, a lot of research and work.

11:29So no, I earned it. That's very, very fair. I think the benefit I'm trying to illustrate is the passive income idea. Yes. You can go and wash the car for 10 bucks or you can earn 10 bucks if you just put that money away and let it compound away. And all of a sudden that'll grow by itself. You're right. It's not doing nothing. It's just the, frankly, for me, because I'm lazy. I'm like, if my money can work for me while I'm asleep rather than me having to be actually working, I'll take that option. I guess I'm not trying to encourage his laziness, but I am trying to encourage that idea of it's kind of grinding away in the background.

12:01Yes, you have to have earned it, saved it, not spent it, not taken it out. So those things are absolutely true. It's just the very, very 11-year-old lesson of, you know how much you hate having to wash the car to earn 10 bucks? Well, you just earned 70 bucks over here where the number is. By doing, again, nothing in inverted commas. That's the lesson, but I take your point. Yes, yes. I mean, it is a pedantic point, but I'll put it out there to people when you have that. And also just to forewarn this forearm, because again, I think too many people in our position say, investing is really easy.

12:34Spend less than what you earn, put it in here, and one day you'll wake up and you'll compound a lot of money. It's like, yeah, I should totally. It doesn't set you up for the reality of the journey, which is a hard journey. Yeah, that's right. Hey, mate, I've got a question from someone who asks to be kept anonymous. And as the great part of this one is I put anonymous, please, at the very, very top of the email. As you all know, that's the best way to do it. Hi, Scott and Andrew. As always, please accept my gratitude for keeping the pod machine running. We would do nothing less anonymous. And churning out pearls of wisdom every weekend to power my walks and household chores.

13:09I recently attended the ASX Investor Day. I must say an incredible experience, and I came back with fundamental learnings of multiple concepts and ideas I am keen to explore. So I have three questions. By the way, halfway through the comment says, last question, a stretch goal if you both make it this far. So we'll see how we go. Question one, gearing. Now we did talk about this a little bit. I think it was last week, the week before, mate. But given the challenges of margin loans and borrowing money, I recently discovered a geared index fund. They usually have 40 to 50 % internal gearing, while the management ratio seems cheap at under 0.4%.

13:46A simple example was given that if you hold 50 grand, you can invest only 20 grand in a geared broad index fund and leave the rest for international bonds, etc., and get the same exposure while multiplying your returns and franking. While leverage I understand both ways, risk is limited to only capital you put in. What am I missing? Why aren't most people using it? For a long horizon, 7 to 10 years, can a geared strategy complement your index funds or is it much more suited to a short-term tactical approach and why i want to throw this question in is because the obviously what what this question had been told the asx invested or i assume is that you've got your 50 grand you can only put 25 in shares instead of 50 and then do something else with the rest of the money like international bonds etc so that was an interesting kind of uh wrinkle or different to what we know we talk about, which is pure magnification, leverage.

14:40This case is like, well, you could kind of have your cake and eat it too, have your leverage and put money elsewhere. Your thoughts? Yeah. If it sounds so good to be true, it usually is. That is absolutely life advice to live by. And I just did this very, this isn't a perfect comparison, but I looked at the GEAR ETF, G-E-A-R, and I compared that to the ASX 200. And guess what? The ASX 200 has done 18 % over five years and Gear has done 8%. Blimey down, yeah. How? How? I mean, square that circle. It's like, well, you multiply the losses on the way down as well. So it's sort of, and there are costs associated with it.

15:24So the fees are just, they might be reasonable, but they're still higher than otherwise. I just think it's too clever by half. I've mentioned many times on the podcast before, I'm actually not against using a modest amount of leverage. I just don't – well, I haven't done deep research into it, probably because of the ideological objection to some of these products. But maybe there's a product out there that's pretty reasonable. But they're trying to sell you something. And I guarantee the person at the ASX Investor Day works for Morningstar or somewhere. You know, like I'm going out on a limb here, but I would very strongly suggest that is the case.

16:04I've said before, the best way to do it is if you're in this position is to use your home equity because there's no margin call on that. And the interest is much cheaper than what you would get. You know, I'm even against, I've got a margin loan. I don't usually have much borrowed against. I use it like a credit card more than anything else. Yeah. Make sure I have capital when I need it and I pay it off really quickly. But that is an option as well. Just know thyself going into it because you've really got to be on top of it. And the rates of interest that you pay are criminal, frankly. Extraordinary.

16:37They're personal level interest rates, yeah. They really are. I used to work in a margin lending department years ago. And I can tell you a vast majority of clients didn't do well. I can imagine. They did not do well. The trading desk did rather well. so bizarre you know but how about that isn't that weird give people something they can use to yeah their own self-destruction and it's good for you yeah yeah so i mean look i'm not trying to be too pessimistic and rain on the the general premise is a reasonable one a reasonable we do it with property and no one blinks in fact people go 90 on property and on a negative cash flow basis and No one blinks at all.

17:16So, you know, there is that as well. But modest amount, prudently done, quality shares. You know, I've got no problem with that. If you're looking at these - Managed well is the only thing I'm going to add to the end. Oh, sorry. Don't panic, don't sell, all that kind of stuff. 100%. And by the way, we all say that. As a smart strategy, it's the ability, and you've just mentioned it before with kids, it's the ability to sort of see that through, the do nothing bit. That's the hardest thing. I mean, saving the money is harder, right? But other than that, the do nothing bit is the hardest part of all.

17:47Blaise Pascal, the hardest man's greatest challenge is sitting in a room and doing nothing. It's so true, particularly with investing, especially when you've got every expert, quote unquote, under the sun telling you you need to do this and do that. And, you know, and buy and hold is dead and all of this other rubbish. I was mentioning to a friend the other day, this great study, I've got to dig it up again. I think it was CD Waterhouse or Schwab or one of the US brokerages did a study of all their customers. And the best performing accounts were from deceased accounts because they just didn't do anything.

18:21Left the hell alone. They just bought some stuff. They died. The family forgot about it. And lo and behold, 10 years later, they'd all done incredibly well. There's a lesson. There's a lesson in all of that. It's the same lesson that the average mutual fund in the US loses to the index. the average mutual fund investor loses to the average mutual fund. How is that possible? It's because they change too often. They kind of jump around, try and do this, try and do that. And it's all that kind of stuff. Well, the Pascal quote, mate, just because it's cool and I know you want me to share it. All of humanity's problems stems from man's inability to sit quietly in a room alone.

18:53That's better. Much more than that point. Have I pronounced the first name correct? Because I've only ever read it. Blaise Pascal, I believe. My name here, actually. Yeah. I believe so. It could be Blaise. Blaise. Probably Blaise. Let's go Blaise. ourselves here. There'll be someone screaming at the pot machine right now going, you idiot. Someone. All of the people. The only thing anonymous I'm going to add to Andrew's response, mate, you know my views generally on margin, which is don't do it, ideally. But what I hate about the suggestion you were given is, hey, put all this money into shares, use leverage to do it.

19:24So instead of investing 50, invest 25, put the other 25 grand in bonds. It's like, oh. So you're paying to invest on one hand and the other hand you're putting the money in bonds. Look, bonds and international, which I like international, by the way. The idea of borrowing to then diversify is kind of bananas to me. So if you're going to leverage to improve, increase your exposure to an asset class overall, like shares, quality, long-term shares, as Ram says, again, I can see the benefit of that. I don't think I'll ever say, yes, you should take a marginal loan. But, you know, that's, yeah. Doing it to invest in bonds, I think is the world's worst outcome.

20:02So I wouldn't do it. I'm going to say just as a general comment I just think bonds are a really bad investment and that's like I guess so against tradition Historically yeah well I mean there are times when they do better than shares right and that's if you can time the market then let's have a different conversation because you can time everything I hate that argument I mean I know you're correct but I hate that argument because that is true of anything you know there is a period where investing in chicken farms is outperformed up you know Enron was a great investment for a while it doesn't make any good idea you could have invested in bonds just in a broad-based bond ETF.

20:33In fact, the ETF is bond, B-O-N-D, 10 years ago, and you've lost money in the safest investment. And that's not inflation adjusted. So you've probably lost 35, if you're lucky, percent on that, on the safest investment known to man. Like, apparently. And you feel good because you've at least diversified and you've been safe and your financial plan said it's a good idea. Oh my goodness. And you've probably saved yourself some volatility on the way through. So, you know, you kind of feel like it's done its job. and yet you've only got two thirds of the money you started with. And there's some all kinds of, I mean, we could go way down the rabbit hole here and sort of mark to market accounting and held to maturity assets and all of this kind of stuff.

21:11But there is a lot of bondholders who are bleeding badly, whether that has been recognized in the accounts or not yet, because interest rates have gone up, which means the bond prices have gone down. So yeah, maybe if they hold their 30-year bond to maturity, they'll be made whole in nominal terms. But in the meantime, if they have to sell right now, they're a massive loss in the world's largest economic powerhouses, IOUs. If I'm going to lend money to anyone, I'm not lending it to the US government. Let me tell you right now. I will say too. And I want to just illustrate my point, Ram's point.

21:49In hindsight, there is always going to be a good time to abort bonds and a bad time to abort bonds. And some people will be saying right now, well, you just buy them X and you sell them Y. and there are some times when they outperform, those things are all true, right? But my point about timing the market is if you knew that, well, as Ramp said, you buy Enron, then you sell that, then you buy some.com thing in 98 and sell them in early 2000. I mean, in hindsight, I could craft a billion-dollar portfolio for 100 bucks over 40 years if I get to only buy the good stuff, right? If you can't time the market, and if you can, you're a unicorn because no one else can, then go for it.

22:21Otherwise, yeah, not worth it. Point to me, a famous investor that's made a fortune out of bonds. I mean, I can think of Howard Marks, who's a macro bond kind of investor. But that's all emerging market kind. And distress stuff as well. Very sophisticated stuff. Yes, exactly. And by the way, we say about property shares all the time. There are also people who made a lot of money out of property. Doesn't mean the average person has, but some people have. Some people made a lot of money out of bonds. Some people made a lot of money out of... Monkey NFTs. like people who bought yachts off the back of that insanity right right doesn't mean it's a good idea no equal weighted indexes or indices asks our questioner academic research seems to I bet you the I know who would have been selling this one sponsored by yeah academic research sponsored by seems to show equal weight has performed better than a weighted a market cap weighted index given the full concentration of banks and mines on the ASX where every 50 cents out of every dollar goes to a top one of the top 10 of these are people better off investing in equal weighted or continue with a market cap weighted index now we've talked about this one before uh i've been pretty clear on this one from my perspective i my problem is that we've talked before about how like how reasonable it is to take past performance and extrapolate it and that is kind of the general legal boilerplate but it's also true and there are times when it would have been you know we talked about this with the the other week with the S &P 500, right?

23:49You know, if you look at the S &P 500 15 years ago, there's no tech there, that's terrible. How can you possibly do any good? The answer was, well, the big companies became bigger and took over and then went to, and because they are growing faster, they get bigger and they power the index higher. I'm in two minds. I really, really am. I have, I think I've said before, I'm in a small odds ETF because I wanted to kind of avoid banks and miners. In the event, it's not been a particularly good idea for me. And I think it's kind of, we've talked about this before, if you're going to go passive, go passive.

24:15If you're not, pick stocks. um there is the fact that equal weight has done better in the past maybe it continues to or maybe it doesn't there is just nowhere near enough data to suggest in my opinion that we can take that and assume that the future is going to be the same as the past and i think you know you can say about any data or any time and frankly we always should there always should be an at risk on any piece of data including stock market returns over a century um you know could it be different in the future yes uh but the equal weight indices have only been around for a short amount of time uh during that time by the way there have been massive fundamental changes in the indexes or indices like the the rise of tech now maybe that happens again or maybe it doesn't and i just don't personally i think the returns of market weighted indices over a century give me enough confidence to say do i really want to mess with that so for me i'm saying no even though the data looks good.

25:10Yeah. Yeah. I mean, I was just, I, as you were speaking, I say, well, let's see the VanEck Australian equal weight ETF. MVW is the ticker there. And compare that to a general index ETF, Vanguard VAS. Yeah. It's well, the regular one has done better over the last year. The other one's done better over the last three and five years. Right. Exactly. So I get, I get the intention because. Yeah, correct. I likewise think that the Aussie market is way too concentrated in a handful of banks. And everyone knows my opinion on banks. Even ethics aside, just their performance have been woeful. I was going to say I would argue and then I'll change that to facts would demonstrate.

25:59And miners. So it makes a huge amount of sense to try and correct for that. But time will tell. We just can't know. Sometimes, in fact, not just sometimes, oftentimes, simple is better.

26:18I can't predict the future, but I think it's a reasonable guess to say that, look, if I just go your standard boring vanilla index ETF, I will guarantee you that I will look back in 10, 20 years and go, oh, there were better investments. obviously by definition, but almost by the same definition, I'll be better than, you know, half of the other investments. I'm just going to come straight down the middle more or less. Yeah. And it's probably going to be a really, I'm probably going to compound at a rate that's greater than the rate of inflation. I'm going to, I'm going to, I'm going to grow my wealth over time.

26:53You know, hindsight's going to be 2020. It's going to mess with your head. If I was investing with hindsight, I would have put all my money in Nvidia. Yeah, that's right. Right. Or I go back to 2010 and put it all in Bitcoin at one cent. It's just going to mess with your head. And so what of it is if you're really torn, and I get being torn, have a little each way, 50 % in the equal weight and 50 % in the regular one if you want. We're at this sort of point where we're all in the ballpark of sensible investing. And reasonable people can reasonably disagree over the finer details. But look, if someone said to me, I was at a barbecue and they sort of said, hey, I've got each month I just save a little bit of money and I tip it into an equal weight ETF.

27:44I'm not going to go, oh, my God, spit out my beer and go, you're an idiot. What are you doing? That's a good point. Okay, fine. Fine. No, I like it, man. That's a really good point. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.