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.
Can a Shorter Workweek Make People Happier?
The idea of a shorter workweek sounds enticing to most, but would it actually lead to a happier population? We look at the data so far.
Can A Shorter Workweek Make People Happier?
For many people, the concept of a shorter workweek is enticing. After all, it can be difficult to find enough time for the things we love.
Is it reasonable then, in our quest for happiness, to begin working less? Advocates of a shorter workweek would agree, but these policies have yet to be widely-adopted.
What Happens When We Work Too Much?
The unhealthy side effects of working long hours are well established. In extreme cases, however, symptoms can extend beyond the usual stress and fatigue.
For example, the American Heart Association found that people under the age of 50 had a higher risk of stroke when working over 10 hours a day for a decade or more. Another study, conducted across 14 countries, concluded that people who worked long hours were 12% more likely to become excessive drinkers.
If working longer days is so harmful to our well-being, what happens if we work fewer hours instead?
Comparing the Numbers
The tables below list the happiest countries as well as the unhappiest countries in the OECD; happiness scores range from 0 to 10, with a 10 representing the best life possible.
Based on the data, there appears to be some degree of correlation between a person’s happiness and the amount of hours they work.
Here’s how the five happiest countries stack up:
|Country||Happiness Score (0-10)||5-Yr Average Annual|
|Difference in Hours Worked
from OECD Average (1,682 hrs)
|🇫🇮 Finland||7.769||1,559 hrs||-123 hrs|
|🇩🇰 Denmark||7.600||1,406 hrs||-276 hrs|
|🇳🇴 Norway||7.554||1,422 hrs||-260 hrs|
|🇮🇸 Iceland||7.494||1,491 hrs||-191 hrs|
|🇳🇱 Netherlands||7.488||1,432 hrs||-250 hrs|
The five happiest countries each work over 100 hours less than the OECD average. Compare this to the five least happiest countries:
|Country||Happiness Score (0-10)||5-Yr Average Annual |
|Difference in Hours Worked
from OECD Average (1,682 hrs)
|🇬🇷 Greece||5.287||1,946 hrs||+264 hrs|
|🇹🇷 Turkey||5.373||1,832 hrs||+150 hrs|
|🇵🇹 Portugal||5.693||1,722 hrs||+40 hrs|
|🇭🇺 Hungary||5.758||1,749 hrs||+67 hrs|
|🇯🇵 Japan||5.886||1,710 hrs*||+28 hrs|
*OECD data includes full- and part-time workers. While this affects the entire data set, Japan’s high share of part-time workers (37% as of 2017) suggests it is particularly vulnerable to underestimation.
Coincidentally, all five of the least happiest countries work more hours than the OECD average, up to over 264 hours in the case of Greece.
Happiness is multifaceted, though, and we should avoid drawing conclusions from a single variable. For instance, the World Happiness Report 2019 calculates happiness scores based on eight distinct metrics:
|#1||Positive Affect||The average of 3 measures: happiness, laughter, and enjoyment|
|#2||Negative Affect||The average of 3 measures: worry, sadness, and anger|
|#3||Social Support||Having someone to count on in times of trouble|
|#4||Freedom||The ability to make life choices|
|#5||Corruption||The perception of corruption throughout business and government|
|#6||Generosity||Based on survey results about charity donations|
|#7||GDP per Capita (Log Scale)||Economic output per person|
|#8||Healthy Life Expectancy||Years spent in good health|
With these in mind, we can make a few additional observations.
Four of the five happiest OECD countries are located in the Nordics, a region known for low corruption rates and robust social safety nets. On the other end of the scale, economic hardship is a recurring theme among the OECD’s least happiest countries. The falling Turkish lira and Greece’s debt crisis are two significant examples.
To properly measure the happiness-boosting potential of a shortened workweek, it seems we need to isolate its effects.
Challenging the Status Quo
Employers are now experimenting with shorter work schedules to see if happier employees are in fact better employees.
Case 1: Successful Trial
Perpetual Guardian, a New Zealand-based estate planning firm, trialed a four-day workweek for two months with no changes to compensation.
The trial was hailed as a success. Employee stress levels fell by 7 percentage points while overall life satisfaction rose by 5 percentage points. Perhaps most impressive is the fact that productivity remained the same.
Employees designed a number of innovations and initiatives to work in a more productive and efficient manner.
– Helen Delaney, University of Auckland
Following the trial, the firm’s founder expressed interest in implementing the four-day workweek on a permanent basis.
Case 2: Successful Trial with Trade-offs
Filimundus, a Sweden-based software studio, trialed a six-hour workday in 2014. Staff reception was positive, and the company has since adopted it permanently.
There were trade-offs, however. While staff enjoyed more time for their private lives, productivity across different departments saw mixed results.
We did see some decrease in production for some staff, mostly our artists, but an increase in production for our programmers. So money-wise, in costs, it evened out.
– Linus Feldt, CEO
Interestingly, the studio also trialed a seven-hour workday, and saw no positive effects.
Case 3: An Unsustainable Solution
Public healthcare workers in Gothenburg, Sweden, trialed a six-hour workday for two years. Similar to the first case, compensation was unchanged.
While the trial achieved good results—staff experienced lower stress levels and patients received a higher level of care—the policy was unsustainable.
It’s far too expensive to carry out a general shortening of working hours within a reasonable time frame.
– Daniel Bernmar
17 additional staff were hired to compensate for the shorter workdays, increasing the local government’s payroll by $738,000. The city council did note, however, that lower unemployment costs offset this increase by approximately 10%.
Picking Up Momentum
These experiments are garnering attention from around the world.
Even Japan, a country known for its “overtime culture”, is getting in on the action. Microsoft offices in the East Asian country tested a four-day workweek in August 2019, and reported happier staff, as well as an impressive 40% boost in productivity.
While the results of these early experiments are indeed promising, they’ve exposed the nuances that exist between industries and job types, and the need for further trials. One thing is certain though—shorter workweek policies should not be interpreted as a “one size fits all” solution for happier lives.
Ranked: The Social Mobility of 82 Countries
Ranked: The Social Mobility of 82 Countries
It’s an unfortunate truth that a person’s opportunities can be partially tethered to their socioeconomic status at birth.
Although winning or losing the “birth lottery” will continue to shape the lives of generations to come, climbing the socioeconomic ladder is possible. However, it boils down to what opportunities people are afforded in the country they live in.
Today’s chart pulls data from the inaugural Global Social Mobility report produced by the World Economic Forum. The report ranks 82 countries according to their performance across five key pillars: healthcare, education, technology access, working conditions, and social protection.
While most countries aim to create a level playing field, which places best live up to this lofty and challenging mission?
The Spectrum of Social Mobility
Social mobility refers to the movement of individuals either up or down the socioeconomic ladder relative to their current standing, such as a low-income family moving up to become a part of the middle class.
Countries with high levels of social mobility exhibit lower levels of income inequality and provide more equally shared opportunities for its citizens across each of the five pillars.
Here is how all 82 countries rank, according to the report:
There are a number of countries that set an example for social mobility that others can follow.
The Mobility Medal Winners
All of the countries in the top 10 are European, but it is the Nordic countries that sit comfortably at the top of the ranks.
Denmark holds the title for the most socially mobile country in the world, boasting an index score of 85.2. If a person is born into a low-income family in Denmark, the WEF estimates it would take two generations to reach a median income. In contrast, someone in Brazil or South Africa would take nine generations at the current pace of growth.
As one of the few non-European countries in the top 20, Canada also performs well across the majority of pillars, but similarly to Denmark, it could improve in the area of lifelong learning which includes providing support for the unemployed and teaching digital skills.
The Least Socially Mobile Countries
Developing country Côte d’Ivoire sits at the bottom of the ranks, with an index score of just 34.5. As a nation once ravaged by internal conflict and turbulent economic shifts, the resulting poverty rate remains high at 46.3%.
While the government has made improvements to its basic social services, the country falls behind on categories like access to education and fair wages, and retains the highest gender inequality rate in the world.
Despite a significant decrease in the percentage of people living in absolute poverty, India ranks low on the index in 76th place. Structural reform is required across all pillars if India is to increase its score, especially in relation to fair wages and education.
Why Invest in Social Mobility?
According to the report, most economies are far from providing fair conditions for their citizens to thrive, with the greatest challenges ranging from lack of social protection and low wages to poor lifelong learning systems.
Countries that fail to invest in the key pillars of social mobility could experience damaging consequences for governments and citizens alike:
- Precarity (the unpredictability of living without secure and well-paid employment)
- Perceived loss of identity and dignity
- Weakening social fabric
- Eroding trust in institutions
- Disenchantment with political processes
Aside from the social returns, the economic impact of investing in the right blend of social mobility pillars could be substantial.
Calculating the True Cost
The report dives into the opportunity cost of low social mobility and finds that if each country increased its score by just 10 index points, it could result in an extra 4.41% of cumulative GDP growth for the global economy by 2030—equal to $5.1 trillion.
China alone could add $1 trillion of GDP growth by 2030 if a 10 point increase is achieved:
Although social mobility can act as an economic lever, many countries are struggling to provide the optimal conditions for their citizens to thrive. For those countries, globalization and technology may continue to exacerbate income inequality.
If countries are unable to create new social mobility pathways towards more inclusive economies, they risk being stuck in a cycle where inequality remains entrenched—and history continues to repeats itself.
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