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Crypto ETF tracking errors | Reducing the risk of asset bubbles

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Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

  1. Other types of portfolio insurance besides Gold [01:25]

  2. High tracking error of cryptocurrency ETFs [03:28]

  3. How StashAway reduces the effects of asset bubbles [05:34]

Philipp | 00:01 

Hello and welcome, everyone, to another weekly market commentary from StashAway. Of course, with us as every week, our Chief Investment Officer, Freddy Lim. Hey, Freddy.

Freddy | 00:10 

Hey Philipp, good to see you again!

Philipp | 00:13

Good to see you as well! Freddy, we've got more than 10 questions from last week. So I know we usually do like a little bit of a market update first, but we wanted to make sure that we get to as many as possible today, right? Because we got a lot of interaction - I think it also had something to do with the Bitcoin topic we discussed, which we'll get into here in a second. But in terms of markets, I think we both agree - we did a little bit of talking beforehand before this recording - not much has happened in the markets or like any notable news. Obviously, in the US, we do have the power outages due to the snowstorms in the Midwest and especially in Texas but these are like very temporary, very closed events. So we are all hearing about them, probably not much impact on markets either. So markets have been pretty stable throughout the week already. So what we'll do is, we'll focus today on the questions because I think that covers a lot of topics anyways that we want to talk about. So Freddy, let's get right to it. First one was from Ridz M. So thank you Ridz for your question, "Are there any other types of portfolio insurance besides Gold?".

Freddy | 01:30 

I think that's a great question as usual, thank you, Ridz M. And also, particularly when everything is going up and people simply couldn't even think about the reasons why anything would go down anymore, this is a time to think about risk management. So, a great question. There's a lot of ways to achieve portfolio insurance. One is through the types of assets you have, you can go for higher quality bonds. That's relatively boring, we understand, but that's for protective reasons. You can go for treasury bonds, different governments around the world so you also diversify on currencies. You can also have inflation-linked bonds, that sort of, it's one of those that protects you from inflation. And you can also invest in Gold, which is a well-known commodity of portfolio insurance. Gold hedges inflation in a way, it also hedges against systemic market meltdowns. So, there's a lot of ways you can do that. And lastly, at StashAway we actually use currency allocations as a method of creating portfolio insurance. I think in the past videos where we have mentioned before that in most systemic market meltdowns, safe haven currencies such as the Yen, the Swiss Franc, and the US Dollar, they do tend to outperform a lot of the other currencies. So when times are good, keeping that in mind, creating some portfolio insurance through various methods is one way to ensure your portfolios are resilient when you have these unexpected corrections that you never know when it is going to come. So it's always when times are good, you prepare for it and we try to prepare it in all channels that we can at StashAway. 

Philipp | 03:28 

Exactly. So, thanks Ridz again for asking that question. I think that's on a lot of people's minds because it's not just Gold, right? For portfolio insurance, as Freddy pointed out here. Next question Freddy, and now we get into the Bitcoin thing again, right? So I think you stirred some feathers last week. So people are interested to hear a little bit more. The listener, Mean Martine, and he's saying, "Wouldn't it be prudent to diversify a small part into Bitcoin? As a StashAway customer, he would like to get exposure to it. And by the way, there soon will be an ETF,” he's saying. What are your thoughts?

Freddy | 04:04

There already are ETFs that track various cryptocurrencies but in my personal opinion, it's not a safe thing to do to use an ETF today because the tracking error is actually very high. And in most cases, when the market is up, the funds, the ETFs, tend to trade at a premium, a pretty big premium against the underlying securities. So I would prefer that you get your hands dirty, get a cold wallet. If you don't, you can always use a cryptocurrency exchange. The only problem with cryptocurrency exchanges is that they generally are, except for the ones in the US, they generally are in jurisdictions that's less transparent in terms of regulations. So do read up on that. But why only Bitcoin? Why not more coins? Why not blockchains, right? So, cryptocurrencies are an interesting invention, but the ultimate goal is to power transactions and processing of information on the blockchain. So, there are also a lot of... There are ETFs emerging on the blockchain side that should also diversify your future. So it's not about whether the price goes up or not, it's also about whether you are invested in how blockchain technology changes societies or not in the future. So, diversify way more than that, it's not just about Bitcoin.

Philipp | 05:34

Thank you, Mean Martine, for the question. Next one is from WR HEW. Freddy, he has two different questions. So let's take them one by one, because I think they're both super interesting. First one is, he would like to ask how or what steps StashAway has taken to prevent or reduce the effect of asset bubbles.

Freddy | 05:55 

Well, that's a great question again, I'm glad you asked because it's easy to forget the risk management aspect when everything is up. Well, first of all, the key pillar for StashAway is at the beginning of investing, we try to create portfolio insurance. So, this relates to Ridz's question, on Day 1, we created that through all the channels we mentioned. Through a bond holding that's diversified across different countries, through quality bond holdings, through inflation-linked bonds, through Gold, through this implied exposure to safe haven currencies. Those are the things that we attempt to do at the very moment of investing. And two, we also rely on valuations. So in a way, every asset class, we sort of compared its valuation against its fundamental fair value implied by economic factors, implied by interest rate factors as well. So that when things are getting a bit frothy, we attempt to sort of re-optimise the portfolio in search for another asset class that gives you similar exposure, but at a lesser valuation. So, if it's not possible, then we tend to use other asset classes anyway to create protection. So in general, it's all of the above, the take no prisoners approach.

Philipp | 07:28

And the second question the person had was, "Does StashAway Malaysia also get the Income portfolio in the future?". The person saw that this is a feature that we offer in Singapore, right? Freddy, are you foreseeing this being offered in Malaysia, in the future?

Freddy | 07:46

I don't quite get the question, but we do have a Singapore Income portfolio. It's called Singapore Income portfolio because it's only invested in onshore Singapore asset classes. Would we have a Malaysian version in the future? We hope so. It does take time to work on it. It's a very different market structure. But would we make the Singapore Income portfolio available to clients in other jurisdictions? This is something that we would like to do over time. So stay tuned with that. Would we offer a global version of Income? That's also another thing that is on the table for us to work on. So anything is possible. We want to bring as many investment offerings, options to you as much as possible. It's a matter of time.

Philipp | 08:34

So thank you, Freddy. Thank you, WR HEW. Thank you everyone else for asking questions. For everyone that we didn't get to today, we'll get to you probably over the next few weeks and otherwise keep asking away in the comments section below. We do have a few really cool webinars coming up next week. I want to spend some time explaining to everyone what they are because I think a lot of them will be very interested in joining those. The first one is on the 24th of February. It's actually for the Singapore audience. We have a joint event between Spenmo and StashAway and it's called Spending Efficiently and Investing in Your Employees. So, if you work for a company in HR or in a leadership position in any company, you own a company. This will be a very, very great event to learn more about spending efficiently as well as investing in your employees. So that's 24th of February during lunchtime. So from 12pm to 1pm, you can sign up - the link is in the show notes below. In Malaysia, on the same day from 6pm to 7pm, 24th February, we have our Personal Finance Basics webinar. So, again you can sign up for that as well, in the show notes there's a link. And then, on top of that next week, we also have on the 25th February, an event that actually is jointly held by SPDR, which is the State Street ETF division, as well as the World Gold Council and us from StashAway. And it's called Investing in Gold. I don't know Freddy, are you in that as well? You are, right? Yeah. So, Freddy is actually in the event, so you'll be able to ask him some more questions where they talk about Gold, especially after the question today. If you're more interested in that, join that webinar. It's our global one. So you can join that, 25th February, 7pm to 8.30pm Singapore time. That is 3pm to 4.30pm in the Middle East region. So, please find the links in the show notes below or on our website as well. Again, thank you everyone so much for being with us again today. Freddy and myself will check back in with you next week. Until then, have a wonderful week, OK? Bye-bye.

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