Investor's Bookshelf: A chief economist's guide to Australia's ETF revolution
In 2016, David Bassanese, currently the chief economist at Betashares, one of Australia’s leading ETF providers, took on an ambitious task: to demystify exchange traded funds (ETFs) for Australian investors.
His book, The Australian ETF Guide, emerged as a pioneering work in a market where ETFs were still a novelty.
"I'm a macro economist, so I'm not a stock picker. I was never trained to be a stock picker, so the world of funds management, in that sense, wasn't open to me," Bassanese told AsianInvestor.
Bassanese describes his eureka moment coming during a business trip to America in 2014.
Betashares
"I was doing a presentation at an investment conference in America. What struck me as I walked through the conference was that many of the individual booths had been set up by ETF providers," he said.
"I remember asking myself, 'What is an ETF?' It was literally the first time I'd ever heard of the term."
Back in Australia, Bassanese found himself in a financial landscape that was, to put it mildly, ETF-deprived.
"At the time, there was no book on ETFs and, like me, very few people had even heard of them," he explained.
"There were only three ETFs run by State Street, and they weren't advertised to the retail public because they were mainly used by fund managers for cash equitisation."
As more ETFs gradually came into the market, especially a suite of global ETFs by iShares, Bassanese realised there was an opportunity to educate the public about this great new investment vehicle.
"I realised there was this huge gap in the market," he said. "There were lots of books on how to invest in the stock market and pick individual companies, but my idea was to give people a different way of investing, a more global macro type of approach."
MYTHS AND DEMOCRATISATION
Bassanese's book isn't just a guide; it's a myth-buster. He takes aim at one of the biggest misconceptions proliferated by fund managers which is the idea that "ETFs are distorting markets."
This misconception often stems from the belief that the rise of passive investing through ETFs leads to indiscriminate buying of stocks, potentially inflating asset prices.
However, Bassanese argues that this overlooks the fact that ETFs are simply replicating what many active managers were already doing - closely tracking market indices.
“The change hasn't been as dramatic as some suggest. We're essentially seeing a shift from 'closet indexing' to explicit passive investing. Many active managers were already hugging the index, just not admitting to it. ETFs are simply making this approach more transparent and cost-effective," said Bassanese.
"The shift in investment patterns really hasn't been that great. If anything, it's just exposed index hugging. Managers that were delivering beta for alpha fees have been pushed out of the market a little bit."
Most importantly, Bassanese sees ETFs as a great equaliser in the world of finance.
"ETFs are democratising investing," he said.
"You can now invest in a whole bunch of different exposures by yourself without relying on active fund management."
This democratisation is particularly crucial in Australia's unique financial landscape, he said.
"The superannuation industry is enormous in Australia, and about one-third of that is made up of individual mum-and-dad investors running their own fund," Bassanese explained.
"If you're running your own self-managed super fund, ETFs are great because you can have a very diversified portfolio at very low cost using just a handful of investments."
NAVIGATING A SEA OF ETFs
As the ETF market continues to evolve at breakneck speed, Bassanese's book remains a steady hand on the tiller.
"Every day there's a new ETF coming out," he said. “In 2024 there are now around 360 ETFs available," Bassanese said.
“I would say 80% of the core, more important ETFs in the market are still covered by that book."
For those feeling overwhelmed by the choices, Bassanese offers a reassuring perspective: "Develop a portfolio and a strategy that helps you sleep at night," he advised.
"The saying I use is that 'volatility is the price of admission'. When you invest in the equity market, it's volatile. It can be stomach-churning, but that's what generates the returns over time. Either turn down the noise, try to ignore it, or set a portfolio that's only as noisy as you can tolerate."
As the market continues to evolve, one thing is clear: David Bassanese's The Australian ETF Guide isn't just a book – it's a front-row seat to a financial revolution that's reshaping the way Australians invest.