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Chart: The Rise of ETFs and Passive Investing

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Chart: The Rise of ETFs and Passive Investing

Rise of ETFs and Passive Investing

Passive investing is huge, but it’s barely made a dent on active

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

For the investing world, the meteoric rise of ETFs, or exchange-traded funds, has been a key story to follow since the 2008 crisis.

The ETF landscape has changed dramatically over that timeframe. In 2007, there were 1,181 ETFs that existed worldwide. By 2015, that number sailed to 4,396 – that’s a lot of new ETFs. Today, there is so much selection out there that you can do pretty much everything.

Want to go 2x short oil? Then try the ProShares UltraShort Bloomberg Crude Oil ETF (SCO). Want to buy into the cybersecurity boom? Try the PureFunds Cybersecurity ETF (HACK). Want to focus in on a specific geographic region such as Singapore? Don’t worry, the iShares MSCI Singapore ETF (EWS) gets you precise exposure to large and mid-sized Singaporean companies.

You get the idea.

Part of a Bigger Trend

Even though the global ETF market is estimated to be worth $7 trillion by 2021, the ETF craze is actually part of a much bigger trend towards putting money into passive funds.

Passive funds aim to “track” a specific market, by allocating dollars in equal proportion to an index. This is in contrast to active funds, which employ professional managers who try to beat the market by having more discretion in choosing which securities make up a portfolio.

The vast majority of ETFs fit in the former category, and passive investing has been on a roll since the Financial Crisis. In 2015, for example, $413.8 billion was poured into passive funds, while $207.3 billion was pulled out of U.S. mutual funds with active management.

Passive or Active?

Why have ETFs and passive investing been so popular? In general, it is because many active managers have struggled to beat the market as a whole in recent years.

However, there are some important caveats worth considering.

First, while most managers fail to beat the market, some of them do succeed. Financial planners will be the first to tell you that there are revered mutual funds out there that do often perform to the upside.

Next, passive funds have also profited off of the extreme and unprecedented actions taken by central banks. Since the crisis, central banks have experimented by pumping trillions of dollars of liquidity into the system, creating a very unusual market situation. With the cost of borrowing at record lows, valuations have become extremely distorted in the market. This careful balancing act by central banks benefits passive investors until it blows up.

Lastly, low volatility by definition means smaller price movements that active managers can capitalize on. If the volatility environment changes, passive funds may lose a level of attractiveness as there are more winners and losers at any given time.

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Markets

Ranked: The Best and Worst Pension Plans, by Country

As the global population ages, pension reform is more important than ever. Here’s a breakdown of how key countries rank in terms of pension plans.

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Ranked: Countries with the Best and Worst Pension Plans

The global population is aging—by 2050, one in six people will be over the age of 65.

As our aging population nears retirement and gets closer to cashing in their pensions, countries need to ensure their pension systems can withstand the extra strain.

This graphic uses data from the Melbourne Mercer Global Pension Index (MMGPI) to showcase which countries are best equipped to support their older citizens, and which ones aren’t.

The Breakdown

Each country’s pension system has been shaped by its own economic and historical context. This makes it difficult to draw precise comparisons between countries—yet there are certain universal elements that typically lead to adequate and stable support for older citizens.

MMGPI organized these universal elements into three sub-indexes:

  • Adequacy: The base-level of income, as well as the design of a region’s private pension system.
  • Sustainability: The state pension age, the level of advanced funding from government, and the level of government debt.
  • Integrity: Regulations and governance put in place to protect plan members.

These three measures were used to rank the pension system of 37 different countries, representing over 63% of the world’s population.

Here’s how each country ranked:

CountryOverall ValueAdequacySustainabilityIntegrity
Argentina39.543.131.944.4
Australia75.370.373.585.7
Austria53.968.222.974.4
Brazil55.971.827.769.8
Canada69.27061.878.2
Chile68.759.471.779.2
China48.760.536.746.5
Colombia58.461.44670.8
Denmark80.377.58282.2
Finland73.673.260.792.3
France60.279.14156.8
Germany66.178.344.976.4
Hong Kong61.954.554.586.9
India45.839.944.956.3
Indonesia52.246.747.667.5
Ireland67.381.544.676.3
Italy52.267.41974.5
Japan48.354.632.260.8
Korea49.847.552.649.6
Malaysia60.650.560.576.9
Mexico45.337.557.141.3
Netherlands8178.578.388.9
New Zealand70.170.961.580.7
Norway71.271.656.890.6
Peru58.56052.464.7
Philippines43.73955.534.7
Poland57.462.545.366
Saudi Arabia57.159.650.562.2
Singapore70.873.859.781.4
South Africa52.642.34678.4
Spain54.77026.969.1
Sweden72.367.57280.2
Switzerland66.757.665.483
Thailand39.435.838.846.1
Turkey42.242.627.162.8
UK64.46055.384
U.S.60.658.862.960.4

The Importance of Sustainability

While all three sub-indexes are important to consider when ranking a country’s pension system, sustainability is particularly significant in the modern context. This is because our global population is increasingly skewing older, meaning an influx of people will soon be cashing in their retirement funds. As a consequence, countries need to ensure their pension systems are sustainable over the long-term.

There are several factors that affect a pension system’s sustainability, including a region’s private pension system, the state pension age, and the balance between workers and retirees.

The country with the most sustainable pension system is Denmark. Not only does the country have a strong basic pension plan—it also has a mandatory occupational scheme, which means employers are obligated by law to provide pension plans for their employees.

Adequacy versus Sustainability

Several countries scored high on adequacy but ranked low when it came to sustainability. Here’s a comparison of both measures, and how each country scored:

Ireland took first place for adequacy, but scored relatively low on the sustainability front at 27th place. This can be partly explained by Ireland’s low level of occupational coverage. The country also has a rapidly aging population, which skews the ratio of workers to retirees. By 2050, Ireland’s worker to retiree ratio is estimated to go from 5:1 to 2:1.

Similar to Ireland, Spain ranks high in adequacy but places extremely low in sustainability.

There are several possible explanations for this—while occupational pension schemes exist, they are optional and participation is low. Spain also has a low fertility rate, which means their worker-to-retiree ratio is expected to decrease.

Steps Towards a Better System

All countries have room for improvement—even the highest-ranking ones. Some general recommendations from MMGPI on how to build a better pension system include:

  • Increasing the age of retirement: Helps maintain a more balanced worker-to-retiree ratio.
  • Enforcing mandatory occupational schemes: Makes employers obligated to provide pension plans for their employees.
  • Limiting access to benefits: Prevents people from dipping into their savings preemptively, thus preserving funds until retirement.
  • Establishing strong pension assets to fund future liabilities: Ideally, these assets are more than 100% of a country’s GDP.
  • Pension systems across the globe are under an increasing amount of pressure. It’s time for countries to take a hard look at their pension systems to make sure they’re ready to support their aging population.

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Business

Football Fever: Investing in the Beautiful Game

Football’s global appeal has boosted the game into a billion-dollar industry. How can fans and investors cash in on their favorite clubs?

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Football Fever: Investing in the Beautiful Game

The very mention of football conjures up images of cheering fans from all corners of the world.

The global appeal of the game is undeniable, and it’s the strong support of fans that has propelled its growth into a multi-billion dollar industry.

Today’s infographic from Swissquote tracks how the sport has reached far and wide—even onto the stock exchange.

The Timeline of the Manchester United IPO

Manchester United is the largest publicly-traded football club in the world. The journey of its initial public offering (IPO) can be traced back almost 30 years.

  • 1991: Man United floats on the London Stock Exchange (LSE)
    It aims to raise £10 million, but falls short and finally raises £6.7 million.
  • 2003-2005: Malcolm Glazer acquires ownership of Man United
    This raises the club’s market capitalization to £790 million, and it delists from the LSE.
  • 2012: Man United lists on the New York Stock Exchange
    It aims to raise £62.8 million in this IPO, but surpasses this with a final raised value of £146.3 million. Interestingly, George Soros was the biggest investor in this deal, buying a nearly 2% stake in the club.

What makes a football team like Manchester United so attractive in the eyes of investors?

Over decades, a flourishing fan base from viewers to consumers has been the force behind the football industry’s success as a whole.

The Big Business of Football

FIFA, the international governing body of football, organizes and promotes all major tournaments. Its total revenue between 2015-2018 can be broken down into a few main components:

Revenue SourceAmount% of total
Broadcasting rights€2,800 million48%
Marketing rights€1,500 million27%
Accommodation and ticket sales€600 million11%
Licensing rights€500 million9%
Other revenue€300 million5%
Total: €5,800 million

In fact, 83% of this total revenue came from the 2018 Russia World Cup alone. This was viewed by approximately 3.6 billion people—nearly half the world’s population.

The World Cup’s revenue even rivals the combined strength of the top five European clubs. How do the five major clubs make their money?

ClubMatchdayBroadcastCommercial/ Sponsorships2019 Revenue
FC Barcelona€159M€298M€384M€841M
Real Madrid€145M€258M€355M€757M
Man Utd€121M€274M€317M€712M
Bayern Munich€92M€211M€357M€660M
Paris Saint-German€116M€157M€363M€636M
Total€633M€1.2B€1.8B€3.6B

As viewership climbs, broadcasting rights furiously grow too—presenting numerous investment opportunities in sponsorship on the pitch and on the screen.

Cashing in on Clubs

Manchester United (NYSE:MANU) set a new precedent for publicly-traded football clubs—with a market cap worth near €1.8 billion today.

Following Man United’s example, other major clubs have since gone public across Europe. As well, Asia presents an emerging opportunity as the sport’s regional popularity expands.

ClubStock TickerMkt Cap (Jul 31, 2020)
🇮🇹 Juventus FC S.p.AJUVE:IM€1.19B
🇩🇪 Borussia DortmundBVB:GR€511M
🇮🇹 AS RomaASR:IM€320M
🇬🇧 Celtic F.C.CCP:LN€108M (£97M)
🇨🇳 Guangzhou Evergrande TaobaoNEEQ:834338N/A
🇮🇩 Bali UnitedIDX:BOLA€57M (Rp894B)

China’s most valuable football club—backed in part by e-commerce giant Alibaba—closely matches the valuation of Manchester United.

In Southeast Asia, Bali United was the first team to go public in June 2019. Shares jumped 69% higher than the initial listing price upon its IPO. This move is already propelling more planned IPOs for more football teams in the region, such as Persija Jakarta—the 2018 Liga 1 champion—and Thailand’s Buriram United.

The Future of Football

Football has the power to stir passions and unite people—and it’s reinventing itself constantly.

The 2019 Women’s World Cup was the most watched in tournament history, with over 1.12 billion tuning in. FIFA plans to invest almost €454 million more into the women’s game between 2019-2022, and grow the number of female players to 600 million by 2026.

Additionally, the annual esports tournament eWorld Cup is taking place in Thailand in 2020—tapping into the esports boom in Asia, which hosts 57% of esports enthusiasts.

Any football fan will tell you that the beautiful game is more than just a sport. And for investors, there are a variety of ways to gain exposure to this market—meaning fans can be both personally and financially invested as it continues to grow.

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