How Objective Is Your Index Fund?

Mentioned:Tesla Inc (TSLA)Vanguard Total Stock Mkt Idx Inv (VTSMX) Inc (CRM)Exxon Mobil Corp (XOM)

Christine Benz: Hi, I’m Christine Benz for Morningstar. How much subjectivity goes into creating and maintaining indexes? Joining me to discuss that topic is Ben Johnson. He’s Morningstar’s global director of ETF research.

Ben, thank you so much for being here.

Why Index Funds and ETFs Are Good for Retirees

Mentioned: Tweedy, Browne Value (TWEBX)FPA Crescent (FPACX)Longleaf Partners (LLPFX)Vanguard Dividend Growth Inv (VDIGX)SPDR® S&P Dividend ETF (SDY)Vanguard Dividend Appreciation ETF (VIG)

  • Millennial investors were more likely than investors in other age groups to own exchange-traded funds, according to a survey from investment provider BlackRock.  Among investors age 21 to 35, 42% said they owned ETFs in 2017, up from 33% of investors in that same age group who said they had ETFs in their portfolios the year prior.
  • Given that ETFs are a new(er) investment innovation, it’s probably not surprising that the youngest investors would embrace them. What’s unexpected, however, is just how much ETFs have found a home in the portfolios of what BlackRock calls “Silver”-aged investors–people over age 70. Thirty-seven percent of investors within that age band said they owned an ETF in 2017, up from 22% a year earlier. That’s a higher uptake than among generation X investors, 29% of whom said they own ETFs, and baby boomers (27%). While older adults are often characterized as slow to adopt new products and services, that’s definitely not the case with ETFs.
  • Older adults’ embrace of ETFs may have something to do with the fact that, as retirement approaches, many investors look at their portfolios with a fresh set of eyes and make adjustments accordingly. A portfolio that was geared toward growth in all of those working years is now being tasked with a different job–providing cash flows for living expenses in retirement. That necessitates changes to the portfolio’s asset allocation, which may in turn prompt changes to the underlying investments in the portfolio.
  • Of course, active funds can work well in retiree portfolios, too, provided they’re of the very low-cost variety. My baseline model bucket portfolios–geared toward people who are retired–include both actively managed and index funds. Yet the more I work with in-retirement portfolios, the more I like ETFs and traditional index funds for the job, for the following reasons.

Facebook’s Legal Battles Could Provide Upside

Mentioned:Facebook Inc (FB)

  • The Federal Trade Commission and 47 states have filed separate antitrust suits against Facebook (FB). The FTC claims Facebook has illegally attained market power through the acquisitions of Instagram and WhatsApp and is requesting that the courts order Facebook to spin off those businesses. The FTC also wants to restrain Facebook from making acquisitions in the future. We expect the courts to side with the FTC regarding limitations on future acquisitions, but we think the likelihood of a forced breakup is low. In addition, competition for Facebook continues to emerge. Even if Facebook is forced to spin off Instagram and WhatsApp, its shareholders may ultimately benefit; we estimate that the three companies could fetch more than our $306 fair value estimate for Facebook if valued separately.
  • Our skepticism concerning a forced Facebook breakup is based primarily on our review of how interpretation and enforcement of antitrust acts have changed over time. While antitrust laws were initially intended to foster competition by protecting rival companies, interpretations of those laws began to change in the 1970s as courts emphasized consumer welfare, not only firm size. Facebook’s dominance (including Instagram) has not led to explicitly higher consumer prices, as the services remain wholly ad supported. The firm’s network effect benefits current customers as additional users jump on the platform. Also, competition exists in the social network market, where switching costs are minimal. Pinterest, Snap, and Twitter have accelerated user growth and monetization recently, and newer competitors like TikTok have emerged.
  • Undoing Facebook’s Instagram and WhatsApp acquisitions would also likely hurt advertisers. Given that all of Facebook’s businesses are globalized and have created strong engagement among users in nearly all areas globally, advertisers have gained the ability to reach potential customers in new ways, with ad prices generally falling in recent years.
  • Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Airbnb IPO raises at least $3.5 billion, challenging DoorDash and Snowflake for largest IPO of the year

  • After pricing well higher than an already elevated range, vacation-rental company receives valuation topping $40 billion from Wall Street ahead of expected Thursday debut
  • Airbnb Inc. pulled off one of the largest initial public offerings of 2020 despite a pandemic that laid waste to much of the travel industry.
  • The lodging-booking platform priced its initial public offering at $68 a share Wednesday, the Wall Street Journal (link) reported, well above its most recent target range of $56 to $60, which it had already revised upward. At its IPO price, Airbnb is expected to raise at least $3.5 billion with an initial market capitalization topping $40 billion.
  • That would top Airbnb’s opening act on the 2020 IPO train, DoorDash Inc (link)., which began trading Wednesday morning, and Snowflake Inc (link)., both of which raised $3.36 billion before overallotments and private placements, according to PWC data. The only offering this year to top Airbnb was of a different sort: Bill Ackman’s $4 billion special-purpose acquisition company, or SPAC (link).
  • Airbnb shares are expected to make their debut Thursday on the Nasdaq Global Select Market, trading under the symbol “ABNB.”
  • The San Francisco company had planned to go public in the spring but was stunned by the COVID-19 pandemic and the subsequent travel restrictions that followed. It has since seen a rebound in its business, which allows people to rent out their homes or apartments online. Airbnb’s third-quarter revenue bounced back to $1.34 billion from $334.8 million in the second quarter. The company attributed its comeback to the strength of domestic travel, short trips and long-term stays as restrictions loosened.
  • But travel, and therefore Airbnb’s business, may be affected in the short term as coronavirus cases rise again, a perfect example of a risk factor the company listed in its prospectus: that the COVID-19 pandemic “will continue to materially adversely impact our business, results of operations, and financial condition.”

See:5 things to know about Airbnb as it goes public (link)

  • Airbnb was founded in 2008 after its co-founders rented out room in their San Francisco apartment the previous year to help pay their rent, and the company has raised $6.5 billion from investors including Sequoia Capital, Founders Fund and DST Global. The IPO will be led by Morgan Stanley and Goldman Sachs, along with more than 30 other underwriters, and they will have access to an additional 5 million shares that could drive the total raised higher, as eventually happened with Snowflake.
  • Airbnb’s public offering will come the day after the big stock-market entrance (link) of DoorDash, which saw a first-day pop of 85% Wednesday. Other tech companies that IPO’d during this roller-coaster of a year for the stock markets and beyond include Asana Inc. (ASAN) and Palantir Technologies Inc. (PLTR). Roblox (link), Affirm and Wish are also expected to go public by the end of the year.

-Levi Sumagaysay; 415-439-6400;

(END) Dow Jones Newswires

12-10-20 0727ETCopyright (c) 2020 Dow Jones & Company, Inc.