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With the desire for direct investments among self-managed super funds (SMSFs) seemingly well entrenched, 2016 saw a flurry of product development in the exchange traded fund (ETF) arena.
The range of ETFs available to Australian investors continues to expand, and has gone well beyond simply opening up opportunities to invest in different asset classes and overseas markets: the newer generation of ETFs specialise in offering targeted access to different ways of looking at the existing asset classes, all with the aim of locking-in highly precise investment allocations.
Here are five of the most interesting.
Not many major world share markets are as concentrated as Australia’s. By market value, the ASX is dominated by a handful of large stocks: the top 20 stocks account for more than 60% of the total value of the benchmark S&P/ASX 200 Index. The top seven stocks represent almost half of the index. Therefore, these stocks account for most of the movement of the index.
So, if you own a broad Australian index ETF or index fund, more than 60% of your investment will be in this in a group of whales, including the big four banks, Telstra and BHP Billiton. In effect, your portfolio is over-exposed to Australian banking, with resources and telecommunications representing about the extent of your diversification.
This has been exacerbated in recent years as the requirement for income has driven many investors (especially SMSFs) into those high-yield stocks where the yield is relatively safe. That means the likes of Telstra (which offers a grossed-up yield of 8.6%–8.8% over FY17 and FY18, based on analysts’ consensus forecasts) and the big four banks (where yields range from 8.1%–8.6% in FY17 and 8.1%–8.5% in FY18).
If your share portfolio contains the big yield stocks, you are to a large extent doubling-up, if you also own a broad Australian index ETF or index fund. EX20 solves this: it tracks the performance of the 180 stocks that are in the S&P/ASX 200, but not in the S&P/ASX 20. In this way, it reduces portfolio concentration and diversifies an Australian share portfolio into other sectors. Managed for 0.25% a year, the EX20 is a very handy portfolio tool.
ETF issuer iShares last year brought to the Australian market the first ETFs designed to pick up the return from particular “factors” in the stock market, which are stock characteristics that have been observed over the long term to be fundamental underlying drivers of equity return.
This is “smart beta” investing, which is an approach based around building a different index to the traditional broad market-capitalisation-based indices, so as to harvest a different return – staying within the same asset class, in this case shares.
One of the most common smart beta factors is volatility – specifically, low volatility, the stocks that historically have fluctuated in price less than the overall index.
These stocks tend to be more mature companies that rely less on continued economic growth. They tend to fall by less in market downturns, which is good for helping a nervous investor sleep better at night, but for that added safety layer, these stocks also tend not to rise as much in market rallies. Low-volatility stocks also tend to have higher-than-average yields.
This opens up one of the drawbacks of the factor ETF approach: because of its criteria, the MVOL portfolio is heavily weighted to the same stocks that dominate SMSF portfolios already, such as the big four banks and Telstra.
In a similar vein to MVOL, investors could go global by using the iShares Edge MSCI World Minimum Volatility ETF. This fund tracks the minimum-volatility strategy applied to the large and mid-capitalisation stock universe across 23 developed markets. Both ETFs are managed for 0.3% a year.
Bear in mind that WVOL is not currency hedged, meaning that investors are taking currency risk. But some investors don’t mind unhedged global exposure – they view the currency exposure as another layer of diversification away from Australian dollar denominated assets.
After ending 2016 with their first down year in five, European stocks might not be on the radar of many Australian investors, but the Eurozone could be a good investment destination this year: it will benefit directly from any pick-up in global growth.
However, with elections in the Netherlands, France and Germany in 2017, political risk will be a constant. Nevertheless, given that 50% of European companies derive their revenues from outside Europe – and 20% of European sales go to the US – any positive reaction to the Trump administration policies will likely be felt on Eurozone exchanges.
And particularly, in the Eurozone’s large-cap stocks – which makes the ANZ ETFS Euro Stoxx 50 ETF a potentially attractive way to play this scenario. It tracks Europe’s main blue-chip index, the Euro STOXX 50 Index, which contains 50 of the largest stocks from 12 countries within the Eurozone. (It does not include UK-based companies). Many of these are not really European stocks, in the same way that the Dow Jones Industrial Average heavyweights are not really US stocks – they are global mega-caps.
This blue-chip focus distinguishes ESTX from the other four Europe-focused ETFs on the ASX, which are more broadly based. ESTX gives investors access to global household names like L’Oréal, BMW, Siemens, Daimler, BNP Paribas, Unilever, Airbus, Philips and Nokia. Managed for 0.35% a year, ESTX is also unhedged, so investors take Australian dollar currency risk.
Several ETF issuers have launched global sector ETFs on the ASX, aiming to pick up on thematic exposures: last year’s launch of the ‘Global Sectors Series’ from BetaShares was in this vein, targeting sectors such as global banking, healthcare, energy and agriculture/food.
But one exposure that Australian investors had not been offered before in a single stock was cybersecurity, a major growth industry. Global spending on cybersecurity has risen at about 8% a year since 2011, reaching $US82 billion ($111 billion) in 2016, and is projected to grow to more than US$100 billion by 2019, as governments, companies and individuals try to protect their data.
BetaShares’ Global Cybersecurity ETF (HACK) is designed to track the performance of the Nasdaq Consumer Technology Association Cybersecurity Index, which covers the performance of the leading firms in the global cybersecurity industry. This includes global giants such Symantec and Cisco, as well as emerging leaders such as FireEye, Barracuda Networks and Proofpoint.
While almost three-quarters of the index is made up of US companies, HACK also picks up emerging players from other tech hotspots such as the Netherlands, Israel and Japan. This is a sector that will only continue to grow, and grabbing a diversified exposure to it through HACK could make for a well-targeted tactical portfolio tweak that gives a return uncorrelated to broader economic growth. Managed for 0.67% a year, HACK is also unhedged.