How Smart Beta Turned Dumb; It’s All Greek to Me; The World’s Biggest Brands

Milton Friedman vs J.K. Galbraith; George Washington’s "Dismal" Investment

Today at a Glance:

·       One Flop: Smart Beta Turns Dumb

·       One Market: It’s All Greek to Me

·       One List: The World’s Biggest Brands

·       One Smackdown: Friedman vs Galbraith

·       One Bust: George Washington’s “Dismal” Investment

One Flop

Smart Beta Turns Dumb

Few financial products are as marketing-driven as exchange-traded funds ( ETFs.)

Any time a new financial fad hits the headlines, a new-fangled ETF offering you “exposure” to the theme isn’t far behind.

Just consider the current AI boom.

Sure as day follows night, expect to see a small army of" smart beta” ETFs launched on the back of the AI Theme. Each one will track the performance of a new-fangled AI-linked Index.

My advice- borne from hard-won experience?

“Don’t buy it!”

Recent research reveals that newly-created indices often struggle to live up to their back-tested results once actual funds start tracking them.

Put another way, themed ETFs don’t live up to the hype.

Image Source: Financial Times

Here’s why…

First, back-tested data can be misleading. Such products rely on historical data mining and optimization.

A typical new index outpaces its category by 1.4% before launch based on hypothetical testing. Compounded over time, that’s a significant number.

But post-launch, its outperformance versus the category drops to just 0.39% per year over the next five years.

Secondly, to say most of these strategies have minimal track records when funds launch is an understatement.

The average index a new fund tracks is less than four months old.

Finally, once niche index funds underperform, they shift strategies and move toward active management styles.

As a result, most formerly passive funds increasingly mimic their active counterparts in performance.

The bottom line?

The bulk of ETF’s paper edge over mainstream benchmarks evaporates once actual trading begins.

So ignore hypothetical performance when evaluating a new index or fund.

Reality rarely lives up to the hype.

One Market

It’s All Greek to Me

“The US and China…”

That covers 98% of the markets US investors ever think about.

Yet, this year marks the first time in years that foreign markets are worth a closer look.

We’ve looked at Japan, India, and South Korea in recent issues.

And once again it’s time to add another one to our list.

I look at 47 global markets where US investors can invest through US Listed ETFs.

And at the top of that list is Greece, measured by the Global X MSCI Greece ETF (GREK). It's up 47.52% based on yesterday's close.

(The US ranks 14^th on the list)

Greece is regaining its financial footing after over a decade in foreign investors' penalty box.

Recently re-elected Prime Minister Kyriakos Mitsotakis has been working hard to restore Greece's economic vitality.

Mitsotakis' pro-business New Democracy party won a strong mandate for change in last year's elections.

The prime minister -himself a graduate of both Harvard and Stanford- is focused on revitalizing Greece's universities to build local talent.

He is also keen to promote high-potential sectors like renewable energy and easing regulations to encourage foreign investment.

He wants Greece to emerge as a leading logistics hub and energy exporter, leveraging its geographical position connecting three continents.

Tourism remains important at 19% of GDP. But manufacturing and exports are expanding under a more business-friendly legal framework.

Early results are promising. Bolstered by pro-business policies, Greece boasted one of Europe's faster GDP growth rates in 2021 at nearly 6 percent. Foreign investment has risen by 30% since 2019.

In sum, Mitsotakis' practical approach has set the country on the right path. And he is implementing the kinds of reforms global investors are looking for.

Remarkably, a promotion to investment-grade status could be in the cards soon for as early as next year. That would unleash a wave of foreign investors into the market.

And with a P/E of less than 8.5, Global X MSCI Greece ETF (GREK) is one of the cheapest markets around.

One List:

The World’s Biggest Brands

In today's knowledge economy, a company's brand value is increasingly its crown jewel.

Non-physical assets like patents and brand names now account for a staggering 90% of the S&P 500's total market value. That’s a 22 percentage point increase since 1995.

This seismic shift underscores the power of brand equity in cementing a company's market position.

Below are the world’s 100 most valuable brands in 2023 based on Brand Finance's annual ranking.

Tech titans Amazon and Apple top the list at #1 and #2 with brand values of $299 billion and $298 billion, respectively.

Supply chain woes and slowing growth clipped their wings somewhat, but their brand dominance remains unrivaled.

Fellow tech heavyweights Google, Microsoft, and Samsung round out the top 5.

China muscles into the top 10 with banking behemoth ICBC and social media phenom TikTok.

The most electrifying brand rocketing up the ranks?

China's own Tesla competitor BYD underscores the battery-powered future of mobility.

Brand value reflects the slice of earnings tied to brand strength.

In today's intangible economy, brand power separates winners from also-rans.

The world's most valuable brands have built formidable brand equity that cements their market leadership.

One Economist Smackdown

Milton Friedman versus John Kenneth Galbraith

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

― John Maynard Keynes

Milton and Rose Friedman's influential book Free to Choose (1980) highlighted how free markets can foster prosperity for all members of society.

It was essentially a response to an earlier book, The Age of Uncertainty (1977), by economist John Kenneth Galbraith.

Galbraith acknowledged the successes of capitalism. But he lamented its instability, inefficiency, and inequality. He advocated an increased role for government, pushing for expanded public housing, healthcare, and other government-run programs.

In contrast, the Friedmans argued that the free market is better able to solve problems than central planning. It was less regulation, and lower taxes that stimulated innovation and economic growth. They offered dozens of examples of how economic freedom leads to positive outcomes- and ones that benefit the broader population.

The Age of Uncertainty reflected the pessimism of one of the most challenging decades in American history- the 1970s.

Free To Choose set the theme for Ronald Reagan’s optimism and “Morning in America.”

Both Galbraith and Friedman's books inspired  BBC and PBS television series.

You can watch them here:

The Age of Uncertainty Episode 1 - The Prophets and Promise of Classical Capitalism

Free To Choose 1980 - Vol. 01 The Power of the Market

Agree or disagree with either narrative, you can’t help but be impressed with the civility of the debate.

Such courtesy is hard to imagine today.

One Bust:

George Washington’s “Dismal” Investment

In a vast open country like the United States, speculative land booms are as American as Mom and Apple pie.

One of the most colorful was the 37-year-old George Washington's investment in the Dismal Swamp Company in 1763. Despite his diligent efforts, it was a lifelong speculation that never panned out in Washington’s lifetime.

It was also one of the American continent’s first examples of land speculation- a bet that undeveloped, seemingly unusable land - in this case, Virginia and North Carolina- could explode in value through development and increasing demand.

You can read more about this episode in The Bubble Blog.