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Margareta Hricova Welcome to ETF TV – Your insight into the world of exchange traded funds, issuers and investments. I’m Margareta Hricova and joining me today is Julie Cane, CEO and managing partner of Democracy Investments and Deborah Fuhr. Welcome, Julie and Debbie.
Julie Cane Thanks for having me.
Deborah Fuhr Thank you. Julie, it’s great to have you and thank you for your service. I understand that your first job as a Navy aviator inspired you to launch Democracy Investments. Can you explain that to us?
Julie Cane I had the honor of serving my country at a very early age. I flew the SH-3 sea king helicopter and got to fly the Navy SEALs around in the Philippines and did torpedo recovery in Coronado. And that did shape my view of the world. I’ve stayed in touch with my friends who are serving, and they opened my eyes over the last ten years to the trends in democracy globally. And trends in democracy are not good around the world. And it was very much an inspiration for our mission.
Margareta Hricova And what is the mission of democracy investments?
Julie Cane We are striving to shift capital flows, to support the economies of democracies and encourage authoritarians to improve their democracy scores to get more capital. We’ve watched the other all world ex U.S. indices be pressured to allocate more and more into authoritarian states over the years. So the MSCI and FTSE you can be up to 9% or more in authoritarian states. Our mission is to provide a better alternative to investors that also supports democracy.
Deborah Fuhr And can you tell us about the Democracy Investment International index that you created?
Julie Cane So we start with the same basket of stocks that are in those all world ex-U.S. indices. So 2800 large cap and mid-cap, mostly developed markets and emerging markets. But then we very neutrally and systematically tilt the portfolio using the Economist’s Democracy index. The democracy index has been tracking countries scores since 2006, using 60 different indicators that roll up into themes, including electoral process, function of government, political participation and civil liberties. So we take each country score and apply it to the securities country of risk, and that neutrally tilts the portfolio towards democracies such as Japan, the U.K., Canada, Switzerland, Australia and Sweden. And then we neutrally tilt away from authoritarian such as Saudi Arabia, the UAE, China and Egypt. So our portfolio is supporting governments that respect the rule of law and enforce contracts and property rights. And we’re tilting away from countries that tend to have more revolution of war and civil unrest where the rules can change overnight.
Margareta Hricova Why did you create an ETF?
Julie Cane We chose an ETF for our first strategy because it’s more tax efficient than a mutual fund. Retail investors like the liquidity that combined with a small minimum investment. It’s more cost efficient, it’s cheaper, and there’s no commissions when you buy and sell on the platforms in the US. So we’re listed on the New York Stock Exchange, ticker symbol DMCY.
Deborah Fuhr And what types of investors have been using the ETF and how are they using it?
Julie Cane So we’ve had great feedback from all kinds of investors, from small RIAs to large banks to high net worth investors. Generally, we’re a replacement for your passive all world, ex-U.S. international exposure. Some people are using us also to replace their IFA exposure because we are, you know, mostly developed markets. We are hoping to get on platforms as soon as our AUM is a bit higher. But in the meantime, we have the support. We have a lot of retail investors watching us, especially given everything that’s going on in the world. Our strategy couldn’t be more timely.
Margareta Hricova Do you expect to launch further ETFs?
Julie Cane Yes, absolutely. As soon as we get this one to scale, we look forward to continuing our strategy, leveraging our license of the Economist’s Democracy index.
Deborah Fuhr That’s great. Thank you for joining us.
Julie Cane It’s been a pleasure to be here.
Margareta Hricova Debbie, can you tell us about some of the other news from the ETF industry?
Deborah Fuhr We’re still in the process of cleaning the data. It takes time to get it from exchanges around the world. What we see is, it was our second best year in terms of net inflows. So for 2022, the ETF industry gathered 856 billion of net inflows globally. A year ago that was 1.3 trillion. And in terms of the assets in the ETF industry, when we looked at the end of 2022, we were down at 9.3 trillion, where at the end of 2021 it was $10.3 trillion. So assets have come down because of market move. It was a very difficult year. 2022 proved to be a pretty good year for smart beta. The net inflows into those strategies were $139 billion, slightly higher than what we saw in 2021. Primarily driven by investors buying U.S. domiciled products. If we look at thematics, it was not a great year for them. We saw net inflows of 28 billion. Where in 2021 it was 92 billion, primarily driven by the fact that technology didn’t perform very well last year. When we look at ESG, the flows were significantly less than in 2021. We’ve gone from 164 billion down to 75 billion. But what we do see is a real driver of the adoption and use is Europe, which accounted for 56 billion of net inflows while the U.S. accounted for less than 5 billion. Looking at things like leverage and inverse, it was a very good year. The net inflows there were 32 billion. If we go back the year prior, it was only 9 billion. In the other area we’ve seen a good year but not terrific would be actively managed ETF. So the net inflows last year would have been 122 billion, which was down slightly from 2021 when it was 131 billion. It was actually a good year for emerging markets. If we look at the net inflows going into China, last year it was 68 billion, while in 2021 it was 52 billion. And if we look at emerging markets, they were 115 last year, down slightly from 129 in crypto, actually did take in net inflows of $701 million, which is down from 9 billion the year before. So those are some of the general trends that we see happening in the ETF industry and look forward to sharing more insights with you next week. Thank you.
Margareta Hricova Thanks so much to our sponsors, Syntax Advisors and of course, to all of you for watching. To watch prior episodes and to see news from the ETF industry, visit us at ETFTV.net. Thank you.
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