Every Monday, Owen Rask runs a Selfwealth Live session where we chat directly to the community, analyse stocks, and add holdings to our virtual portfolios.

Recently, we invited Benjamin Smith from BetaShares onto the show so he could provide a run-down on the Nasdaq 100 ETF, one of the most-popular ETFs across the ASX. In our interview we also cover the role that BetaShares hold in the market, and we touch on a number of other themes and how they might relate to some of BetaShares other ETFs.

You can watch the full episode above and tune into our interview with Ben, which starts at 20 minutes in. Alternatively, you can read our transcript below.

Note:

1. The below transcript has been lightly edited for clarity, but may contain nuances of conversational speech.

2. Owen Rask's questions are emboldened.

3. Key discussion points are categorised.

What do BetaShares do, and how are ETFs managed?

Now, we're going to bring in another investor. We're going to bring in Benjamin Smith. He coming to us from BetaShares ETFs. As you will know, BetaShares is one of the biggest ETF providers in Australia, and that's both by the number of ETFs, as well as the amount of money invested. So, I don't know if you can hear us Ben, but welcome to the show.

Thanks so much Owen, thanks for having me.

We're going to have some questions for you today mate. I've got a few for you, but hopefully for listeners' sake they'll have a few as well. I know we've had a few people ask a couple of curveball questions. There was one about bitcoin, but we're going to try and stick to ETFs today. The first thing that I wanted to ask you is what do you do? What does a typical day look like for you?

Yeah, sure. So my role is an Associate Portfolio Analyst. So what myself and my team do is we work with financial institutions and financial advisors trying to find ways that they can improve their portfolio. Whether that's portfolio construction, or more sort of specific fund-by-fund analysis. But we basically try and present them with opportunities from our suite of exchange traded funds in order to improve their portfolio, whether that's from a risk or return standpoint.

Okay, so you're primarily working with other professionals, which is probably reassuring to a lot of individual investors who may just think that ETFs are more for beginners or newer investors. But I see it too. There are a lot of professionals moving into ETFs and using ETF portfolios is basically the only tool in their arsenal so to speak because there's so much flexibility as we're about to get to. One of the things that I might throw at you Ben is what goes on inside an ETF? Because a lot of what we've covered in the past on Selfwealth Live has been, basically, like this is what an ETF does, it's like a basket of shares, or a basket of bonds, and you can buy the basket rather than buying each individual share or each individual bond. But what actually goes on if you click buy inside the Selfwealth platform, what actually happens? Like, what do you guys do at BetaShares? Can you describe the mechanics of that process?

Yeah certainly can. So I guess that the benefit, and almost the genius of ETFs is that they are just a wrap-up for, if you think about traditional mutual funds or index funds. So when you hit buy on your trading platform, typically you're trading with a market maker. So market makers are institutions that specialise in creating and redeeming ETF units. 

So the way they would do that is, for example for our Australia 200 ETF, they would purchase the underlying 200 companies within the A200 ETF. They would then trade with BetaShares or exchange with BetaShares that basket of stocks in exchange for a unit, which they then sell on the exchange. So usually when you're buying or selling ETFs through Selfwealth, that's going to be an exchange between you and the market maker. And then underlying that face level process, the market maker is in contact with us to create new units through that underlying basket of companies.

Okay, so we basically have the investors, we have BetaShares, and we have the market makers. Or the market makers maybe sit in between. And so they're authorised or they know what's inside an ETF and they are basically approved by you to transact with you, and that's the kind of process to facilitate the buying and selling. But it is also the case that sometimes when say, if i have a buy order in for A200 and you have a sell order, sometimes those are matched right, like we can trade investor to investor? Is that also the case?

Yes, so you can have natural buying and selling just with other retail investors, or even institutions. That tends not to occur just because we like to encourage the market makers to be available to trade with as much as the ASX opening hours allow. 

So they will always try and be there, and the reason for that is they're going to be able to price the ETF units at a very close margin to the Net Asset Value (NAV), whereas if you're buying with natural buyers and sellers, that price can deviate at that time. 

So it's certainly the case that you can match with another retail investor when you're purchasing or selling shares, and that will depend on the price that you're trading at relative to the price that the market maker has set, but typically the market makers are usually there and they're usually providing these units at a value that's very close, if not at the underlying value of the basket of stocks.

So I think this is an important point for viewers too. When we look at ETFs, what we're trying to do, we're trying to look at that spread. The distance between the trading activity of the buyers and sellers and we're trying to see that as narrow as possible right, because that's you know, we want that to be as small as possible because otherwise there might be some slippage in terms of a very small amount of money that goes away', and by encouraging market makers to do buying and selling constantly in the market, then you're basically improving the competition that's in the marketplace.That a really fascinating insight because a lot of people buy ETFs and they're like, well, I'm a bit worried, I don't know exactly what's going on. I don't know if it's kind of, like, a safe thing to do. But this is generally, like, approved around the world and here in Australia regulated by ASIC, right? I think that's a key point to touch on.

Yeah, that's right. So these market makers, not only are they incentivised naturally to provide prices very close to the NAV just because they can effectively make an arbitrage profit by bringing the price closer to the NAV if it deviates, but there are also other incentive structures so the ASX actually gives incentives to market makers who keep funds trading within a certain range of their NAV. And as you mentioned, this is all regulated by ASIC. It is a very, very similar process to just buying a share. Whether that's BHP or Woolworths on your Selfwealth account.

Inside the Nasdaq 100 ETF

Yeah that's great. Okay. Ben, I've got some questions for you. I know the audience is going to have some questions for you too, so if you do have any questions for Ben, please send them through into the live chat now. We're going to take a look at the Nasdaq 100 ETF. This is the NDQ ETF. Can you tell us just at the start, like what does it do? What do investors get when they buy into NDQ?

Yep, so the Nasdaq ETF, the ticker for that one is NDQ. Basically it's just holding the largest 100 companies listed on the Nasdaq exchange, excluding financials. So it's a very typical index fund. It's low-cost, it's only 0.48 percentage points per annum, and that's going to give you exposure to a number of those large companies listed on the Nasdaq. 

And when we typically think about that, it's a lot of the big tech names. Companies like Apple, Meta, Netflix, Amazon, Tesla. These are sort of the companies that are involved in that index and they're companies that are sort of leading the way into the future in terms of technology. Everybody uses these companies and they've become a pretty huge part of the global economy. So that's what the Nasdaq ETF is giving you exposure to.

I've just got the ETF up in front of me here. I can see that Apple accounts for about 12% of the portfolio, Microsoft 10%, Amazon 7%, and so I know a lot of our listeners, I think Daniel mentioned it just before, it's an ETF that is very popular because it's almost like a ready-made portfolio tracking one of the most-prominent indices or indexes in the world.What do you find people are using the ETF for? So we've talked in the past on the show about how you can have like, a core portfolio, which is more longer-term, really sensible compounders whether it's an ETF or not, you can invest in that and it's kind of like let's just hold this for the next 10 years kind of thing. And then we've got on the other side, we might have people with more aggressive and risky positions that they have with much much smaller amounts of capital. It kind of feeds that innate design of ours in our nature to go and seek high returns. Where does this ETF typically sit in a portfolio structure? If you've spoken to advisers, where are they using it?

Yeah, so a lot of advisers will use the Nasdaq ETF as a core holding. The reason for that is that as you mentioned, a lot of these companies, these big tech names, have really moved to the forefront of the economy. So if you look at more sort of traditional old school indices, if we think about the S&P 500, there's actually quite a significant overlap between the Nasdaq and S&P 500 now just because the constituents of the Nasdaq are some of the largest companies in the world, these sort of multi-trillion dollar companies that we do use every day. 

So it's certainly nested itself as a core holding for a lot of advisers as exposure to these large-cap companies. It can naturally as well be used as sort of a satellite. So as a satellite exposure that gives you a very high percentage allocation to technology. So at the moment, that ETF is around 50% allocated towards the tech sector, so investors can potentially also use it for that reason as well.

Yeah it's one of those things I know we've talked on the show in the past about, how the indices are what people should focus on, because it's what you get. Basically it shows you what you get inside the ETF and the Nasdaq 100 is probably one of the two or three, you know, preeminent indices in the world. Because it's really popular, it includes the largest technology, not necessarily just technology, but technology companies in the United States are a really popular benchmark for a lot of people to stick to. We've actually got some really interesting questions here, some of them might be a bit technical, but that's okay. The first one is from Errol who asks with the HVST ETF, when do you take the charges? As in, the fees. Do they come from the dividends or do they come from the price that people see inside their Selfwealth account?

Yeah so this is actually the same. Not just for our HVST ETF, but across all of our ETFs. The way we charge our fees is they're basically accrued on a daily basis and that then gets built into the price. So you won't see all of a sudden one day a massive amount of money has been taken from your Selfwealth account or the price drop significantly. What really happens is, that management fee, and those management costs are deducted on a daily basis throughout the course of the year, and that will then be reflected in the price of the ETF units. 

Yep, cool. Daniel has asked a question. Daniel says in January 2021 there was an NDQ distribution. He says, but in January 2022, there was none. Is this due to the loss of the Nasdaq index, and will there be a distribution in July 2022? I guess the question is around distributions inside NDQ.

So I believe that one is semi-annual, so usually it'll have two distributions every year. An important thing to think about when you're looking at ETF distributions, it's not necessarily purely dividends from the companies. There can be changes in the index, which causes the fund to realise capital gains. And when we do realise capital gains, we then distribute them out to investors in order to not get taxed at a higher rate, at the rate that a managed fund would usually get taxed at. So there's the potential there that distribution in January, and a portion of capital gains as well. So it's not 100% dividends, you can also get a bit extra from capital gains there.

Four key talking points: inflation, crypto, oil and forex 

Yep, makes sense. I've got a couple of other questions here, which relate to different ETFs, this one from Elaine asks: Ben, what is the short-term, medium-term outlook for the Nasdaq performance taking into account the current global tension, as well as the very high inflation rates in the US? Obviously when we talk about forward-looking statements here on Selfwealth Live, we are not making predictions necessarily. I think Elaine question is more so just about how do the companies within NDQ, generally speaking, fair in this kind of environment?

Yeah sure. So there was obviously a lot of chat last year around inflation and fears around that for a lot of growth stocks in the US. I think an important factor to take into account here is that a lot of the companies within Nasdaq are, as we have discussed, multi-trillion dollar companies. They are truly at the forefront of the global economy. So when we think about something like Meta, which sold-off quite heavily after an earnings report a few weeks back, that's a company that has 3 billion users just on their Facebook platform. That's nothing to snort at. These companies are generating significant revenue and significant earnings. 

So if you think about the typical growth stocks, if we look back even to the Dot-com bubble, we're not really talking about pets.com anymore. We're talking about Amazon. which is the largest e-commerce retailer in the world and the second-largest retailer in the US. So these companies are truly sort of instilled within the economy and some of them are actually trading at quite attractive multiples at the moment. So we're not necessarily looking at a high-end growth exposure, which was a lot of fears around that late last year in inflation. But we're seeing that Nasdaq isn't actually something that's trading at a huge multiple relative to its history.

Yeah and to me that makes a lot of sense. I recently recorded a video where we talked about companies that may be more resilient to inflation than those that might be more susceptible to the risks there. And a lot of the companies that are in the Nasdaq ETF, those top ten in particular, are really resilient businesses. There's a reason they are so big and dominating that industry. Okay, that's great. We've got a couple of other questions we might squeeze these in here. So Ben, Sandy asks about the BetaShares CRYP ETF and says that it's lost a bit since it launched. Is it in line with the crypto, meaning, if crypto is up, will it also be up? Therefore it's kind of extremely volatile both ways?

Yeah, sorry to hear that Sandy. Look, with the Cryptocurrency Innovators ETF, it has historically had quite a high correlation to bitcoin, ethereum and a few other cryptocurrencies. So usually what you'll expect to see is that on the upside you're going to pick up a lot of that benefit. So if we see bitcoin rally again, obviously it's fallen quite recently, quite sharply. But if we do see a lot of cryptocurrencies rally in the future, it can sort of be expected that the companies within the ETF, so we're talking about crypto miners, we're talking about crypto exchanges, we'll also see some of that upside as well. 

The thing that I guess we're just trying to talk about here is remember that the companies inside the ETF are kind of what you should be focusing on. Of course the Crypto Innovators ETF invests in companies, we've seen companies like Coinbase and companies that operate in blockchain technologies and around that web 3.0 thematic as well, so remember to focus on those while you go about your business here.We might have time for one more question here. This is a slightly technical one so I hope that myself and viewers can keep up. And this comes from Samuel, who asks how does backwardation or the contango effect ETFs like OOO. So the question is basically, what happens when oil prices can, you know, the futures contracts and the oil prices can be really volatile? If we just kind of simplify it down to that, but in terms of backwardation or contango effects, I don't know if you have anything to add on that Ben? It's quite a technical one.

Yeah that is quite a technical question. There's probably not enough time to go into that in depth but effectively backwardation and contango are going to impact the crude oil ETF. So the ticker OOO there. If the oil market is in contango, because it's a futures-based fund, we're effectively going to make a capital loss as we roll those futures over. So as they approach expiry, we effectively close out the position and move into the next month. And so when the oil market is in contango, so when the curve of the oil futures is upward-sloping, we're going to see some capital loss. Equally when the oil market is in backwardation, which is the current state of the market, we're going to see a capital gain being realised by the fund. So that's sort of a very brief overview of contango and backwardation, but effectively because the WTI crude oil market moment is in backwardation, the fund will realise a small capital gain as it rolls those futures contracts over.

Wonderful, that a good explanation. Actually there is time for this one last question here, which is: what's the difference between NDQ and HNDQ. Can you just give us a really quick 30 second explanation of it?

Sure, so the difference there is just that HNDQ is currency-hedged. So when you invest in NDQ, you're also getting exposure to the US dollar because you're holding equities in the US. Whereas if you hold HNDQ, we use forward-contracts to effectively remove the impact of currency between the Australian dollar and the US dollar. So if you're particularly bearish on the US dollar, you might prefer HDNQ rather than the unhedged Nasdaq ETF.

Wonderful. Well Ben, you've answered so many of our questions today. I know our listeners love it when we get experts like yourself on the show, hopefully this isn't the last time that we see you. I know people can head to betashares.com.au, I just put the link in the live chat for anyone that's following on the replay or live, you can go and check out the NDQ ETF on the website. They're also available on all the social channels, so you can reach out to them there, and there is a phone number on the website too. So a pleasure to have you with us today, and thanks for sharing your wisdom in your first Selfwealth Live.

Thanks so much Owen, really appreciate your time. Cheers.