You're listening to Zing Talk.

I'm Matthew Boesler and with us today is Paul Hrabal, president of U.S. One and Chief Investment Officer of the One Fund.

Paul, welcome to Zing Talk.

Paul Hrabal:Thank you very much for having me Matt. Looking forward to it.

Paul, the One Fund—a broad-based ETF launched in May 2010. Speak about the One Fund and its investment approach.

Paul Hrabal: The One Fund is essentially a global stock portfolio covering 95 percent of the world's equity markets in a single ETF. It's designed for smaller investors who do not have or have limited financial advice from a professional, and they're looking for help and assistance in building out a portfolio of stocks that are appropriate, that use academic research and professional portfolio methodology to arrive at an optimal portfolio.

So what we've done is we've built out this single fund; it costs 51 basis points and it covers 95 percent of the world's 5000 companies—large and small-cap U.S., large and small-cap international, developed countries as well as large-cap emerging markets—really covering the entire spectrum of the equities universe available to investors in a way that gives them broad reach at a low cost.

We launched it because we just felt as though the small guy—the main-street investor maybe with less than $250,000 in investable assets—just doesn't have the professional advice in building and constructing their portfolio and monitoring and rebalancing it that more wealthy folks have with a professional advisor. And so this is a way for them to access some of that advice and professional approach in a very easily purchased ETF.

How does the One Fund compare to similar mutual funds that an individual investor might be able to invest in?

Paul Hrabal: Well, the first and most important thing is that we follow a passive, index-based approach to investing. So we don't believe in stock picking. Shareholders of our fund are essentially buying the entire market, as opposed to most stock mutual funds out there, which are doing some sort of stock picking. So that's fundamentally different.

The second is the cost side. The average actively managed stock mutual fund costs anywhere from one and a quarter percent to one and a half percent a year, and we're at just a half a percent a year. So we've really sort of said, “Stock picking doesn't work; we're not going to charge you for expensive research departments that pretend to be able to go out and consistently, over time, pick companies that are going to outperform the market.”

We follow a different approach. Some people call it the Chicago school, some people call it the Bogle/Vanguard approach, which is passive index investing where you say you can't pick winning stocks consistently over time. Instead, buy the entire market. So with our fund, the expectation for our shareholders is that we're going to achieve a return that closely tracks the overall market, obviously because we're investing in the total market, and that's what we've seen so far in our approach since we launched in May.

Right, but if we take a look at the S&P 500, we see that it's at the same level now as it was 12 years ago. So, what kind of time frame does a broad-based ETF like the One Fund need to generate a significant return on investment?

Paul Hrabal: I think a minimum of five years, but we're looking really for investors who have a long-term time horizon of 10 years plus to retirement. And certainly in that time frame, a diversified global portfolio can do quite well.

As you pointed out, many people call the last ten years “The Lost Decade,” because the S&P performed so poorly over that time. Now, when you factor in dividends that were paid out on the S&P 500 it really wasn't as bad as it looks initially. But when you also consider that that's just large U.S. companies in the S&P 500, what our portfolio has, for example, is about 50 percent of the portfolio is large U.S. companies. But then we have an overweighting to small U.S. companies as well as 30 percent in overseas, international companies. And when you build a global portfolio like that with much more diversification—both in geography and company size—what you see is over the last ten years, that type of global portfolio, such as ours as an example, beat the S&P by about 28 percent.

So while the S&P was down almost 10 percent over that decade, a global portfolio such as ours was up about 16 percent over the decade. So, there's a big difference, even within the stock segment—and of course, that doesn't include the fact that most investors would probably have a mix of bonds and other types of asset classes as well in their portfolio.

So I think that equities may be getting a little bit of a short shrift there when they talk about the last ten years because many people are just looking at large U.S. companies and not looking at what a globally diversified portfolio would have done.

Given the One Fund's predication on the long term rise in the price of equities and its weighting toward U.S. exposure, what is your outlook on the U.S. economy in the medium to long-term?

Paul Hrabal: I'm very bullish on the U.S, both U.S. companies and the U.S. economy. Take U.S. companies as an example. A lot of folks look at, let's say, an S&P 500 stock fund and they say, “Well, that's a U.S.-centric stock fund.” But it actually isn't. Half of S&P 500 companies—half of their revenues and profits—come from internationally, and a good chunk of that amongst the global companies come from emerging markets. So when you invest in U.S.-listed companies, you're actually in and of itself getting a very broadly-diversified portfolio with some of the global leaders getting the majority of their revenues and profits from overseas.

So I'm bullish on U.S. companies because I think that our companies that are listed here are very efficient and well-run, and are holding their own or winning in various markets around the world in their industry segment. So I'm very strong and bullish on those companies, as well as the U.S. economy in general.

Obviously we've had a bad patch here recently, but in the long run, given our natural resources, given our political system, given the transparency of our financial markets, the rule of law, our entrepreneurial innovative spirit, and the constant influx of immigrants who bring new talent and people, I think that we have a very strong position globally in competing with some of the emerging countries.

The breakdown of the One Fund in terms of domestic to international is about 70 percent to 30 percent—is that correct?

Paul Hrabal: It is. It's 70 percent U.S.-listed companies and 30 percent non-U.S.-listed companies, and as I was saying before, that doesn't necessarily mean that's the exposure. So, we have less than 70 percent U.S. economy exposure, so to speak.

A great example—I was just at a conference this week for indexing. The head of research for Goldman Sachs (NYSE: GS) stood up and he gave a presentation and said that in the major, sort of the “S&P 500 index of China,” the equivalent in mainland China, that if you buy that index, you really are buying exposure to developed economies in Europe and the U.S. because most of the large companies in that index in China are exporters.

So a lot of people will go out and they'll say, “I want to own companies that have exposure to the vast Chinese consumer middle-class that is emerging.” Well, then they go out and they buy the index of mainland China large companies, and they end up getting exposure instead to a consumer in Germany and in Canada because they're really buying exporters.

So, you have to sort of “look under the hood” and see where the exposure is and not just focus on where the company is listed. So like a Sony (NYSE: SNE) or a Samsung (KOSPI: 005930) definitely are giving you exposure to emerging markets and the global economy as opposed to just Japan and Korea.

Where are some of your favorite emerging markets right now?

Paul Hrabal: Well, as a rule of thumb, we do not try to pick individual winners—either individual stocks or individual countries or individual sectors. We don't think anyone is smart enough over the long run to consistently outperform the market by picking winners in any of those segments.

But, having said that, we think it's very important obviously to have exposure to emerging markets and we have a five percent exposure directly with local companies in emerging markets as well as another seven to nine percent exposure through our investments in developed-market companies who have significant emerging-market operations. In total, we probably have about 15 percent of the portfolio with emerging market exposure.

In terms of the countries, just all the obvious ones—the largest, fastest growing—in particular, mainland China, India, and Brazil obviously are huge. But don't forget the small ones—like Singapore, Taiwan, and South Korea—and in certain sectors they're huge powerhouses, even though the populations maybe don't seem to indicate that they would be.

I lived overseas and spent seven years in emerging markets, living in eastern Europe, mainland China, India, and Malaysia, so I have deep-rooted experience in those markets and I'm very excited to have part of our portfolio have exposure to them.

You mentioned that five percent is invested in or has exposure to local companies in those emerging markets. What sort of instruments do you invest in to gain that exposure?

Paul Hrabal: One Fund is a 100 percent stock portfolio, so our investments are purely on the equity side.

Again, we're a passive, index-based investment approach. So if you wanted to have exposure to emerging markets, what I've found is that I don't want to try to determine whether or not we should overweight Brazil versus China versus India; I don't think that people can make those sorts of decisions and be more successful than the overall market in the long run.

What we've done in our portfolio is we own the MSCI Emerging Markets Index. So we actually own a market cap-weighted index of companies that cover the entire universe of emerging markets as defined by MSCI.

Any plans for new products to accompany the One Fund on the horizon?

Paul Hrabal: We're looking at a bond version of the same approach—global diversity, covering both investment-grade corporate bonds as well as government, fixed-income securities on a global basis at a low cost in one single ETF to give people that same sort of professional management and portfolio construction in a single fund where they might not have the resources to warrant the attention of an advisor that might build out that type of portfolio for them.

Is there a time frame we should expect to look out for that?

Paul Hrabal: I'd look out for that in the first quarter of next year. We haven't filed for it yet; we're waiting until around the one-year anniversary of our first fund, which will be in May.

So, somewhere around there, we'll be rolling out additional products.

Excellent. Paul Hrabal, president of U.S. One and Chief Investment Officer of the One Fund ETF. Paul, thanks for coming on today.

Paul Hrabal: Thank you, Matt.