Less Is More For This Active Global ETF

August 15, 2018

ETF.com: Outside the U.S., DWLD has a big allocation to China. That’s paid off in the past. It's not doing so well this year. What's your view on China going forward?

Goei: I just returned from six weeks in China meeting with companies there. Part of our research effort is going to meet with companies and talk to management, as well as to their competitors, suppliers and customers. China is an area we’re very interested in. But we don't invest in a country. We have a very focused approach, and only own names we find interesting, and that’s in the consumer space.

Even though historically China's been driven by commodity, industrial and construction companies, the consumer space is faster-growing. Chinese net exports as a percentage of GDP in 2007 was 9%. That’s fallen to 2% last year because the economy in China has been pivoting toward much more of a consumer-led, domestically driven economy. Just like ours, the U.S. is driven by how the U.S. consumer does.

You can find some great businesses in the consumer space, where there are high barriers to entry, real competitive advantages, high-free-cash-generation-type of businesses, whether you have economies of scale or brand.

But right now, China’s been struggling a bit, mainly because of macro fears around trade disputes. That said, a trade war would have some impact on the Chinese economy, but it would be limited due to its growing consumer focus. The companies we invest in have very little exposure to exports; they’re domestically driven.

ETF.com: DWLD is still pretty young, but you have a lot of experience in this space. Have you ever picked a stock that turned out to be a complete sour apple? How did you manage that?

Goei: Yes, we've certainly had our misses in the past. Even though the ETF is a year-and-a-half old, our global strategy is almost 15 years old. So, we have a long track record there with lots of winners, but also our share of misses.

We want to be long term. But we assess every holding we have on a daily basis relative to the opportunity costs that are out there. If something is amiss for whatever reason—we were wrong about management, or about the market opportunity or competition or regulatory environments—and we now think the risk/reward is poor from here on, we'll certainly sell. We're not tied to the idea that we have to hold it for at least three to five years.

ETF.com: Active management gets a pretty bad rap for often underperforming benchmarks, failing to deliver consistent performance year after year and for being expensive. You’re out there pitching a high-conviction, concentrated global active ETF at 0.65% when you have funds like ACWI at 0.32% and VT at 0.10%; that can’t be easy. Are there any misconceptions people have about what an active ETF like DWLD can offer at the end of the day?

Goei: We realize the competition is funds like ACWI. But we think our rates are very competitive, and that's one of the reasons we started the ETF. We were already low rate relative to other active managers, so we thought we were a great candidate to do ETFs. But we realize the passive manager is even lower. Still, we can add a lot of value. We talked about ACWI and its 2,500 names—it’s way overdiversified.

And it’s not just the number of names, but the list is chock-full of state-owned enterprises, like banks, industrials, insurance companies, telecom. A lot of these companies, outside the index, investors would never dream of investing in—a Chinese state-owned bank or an Indian telecom company run by the government? They aren’t well run and they’re not run for the benefit of shareholders.

An active manager in the global space can really add a lot of value by avoiding those types of companies, and focusing on the right ones.

Contact Cinthia Murphy at [email protected]

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