Investment Research

India: Down But Not Out

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Dec 09, 2019

Published: 5th December 2019 Product in Focus: ETFS Reliance India Nifty 50 ETF Key points: India’s economy has underlying strengths and over the past 12 years has become an economic powerhouse, jumping from the 11th to the 5th largest economy in the world. After a 2 year slow down, India’s outlook remains positive. RNAM forecasts GDP growth to recover towards 7% over the next 12-15 months. NDIA allows investors access to the Indian share market, a notoriously difficult region to invest, by tracking the performance of 50 of India’s leading blue-chip companies. India has been increasingly moving into the spotlight of many investors in recent years. Over the past 12 years India has jumped from the 11th to the 5th largest economy in the world and is likely to take 3rd position within a decade. This makes it difficult to ignore India when building a global equity portfolio. Further, the recent launch of ETFS Reliance India Nifty 50 ETF (ASX: NDIA), Australia’s first Indian-focused ETF, has provided investors with ready access to a market that was previously difficult to invest in. The case for India Structurally, India’s economy has underlying strengths that have enabled robust growth and provide a strong macro story. Demographics: with a median age of 28 years, India’s population is highly skewed towards young working-age people who drive both income and consumption. By 2030 India’s median age is forecast to rise to just 31, compared to 40 in the U.S. and 42 in China. Further, a dramatic urbanisation of the population is in progress, which will create a massive need for infrastructure investment across housing, transport, communications and utilities. Low debt levels: To this point Indian economic growth has not been excessively reliant on debt. Household leverage in India remains one of the lowest in the world, which presents a huge opportunity for sustained economic expansion. Strong domestic consumption: Nearly 60% of India’s GDP is driven by domestic private consumption, as compared to 40% in China. This provides India with a degree of protection against external demand shocks. Furthermore, India’s per capita spending is way below China and more in line with levels seen in China in the mid-2000s. Progressive reforms: India has undergone many reforms in the last 5 years. Most have been aimed at increasing compliance and transparency and removing red tape across the financial system. Longer-term, a stable and reform-focused regime should support an environment conducive to business and investment. Future Outlook While Indian growth has slowed over the past two years, the outlook remains positive. Reliance Nippon Life Asset Management forecasts GDP growth to recover towards 7% over the next 12-15 months. Key factors driving near-term growth include; Corporate tax cuts: India has recently reduced its effective corporate tax rate to 25.1% from over 30%. In addition, firms who set up new manufacturing units will enjoy an effective tax rate of 17.1%. This is expected to attract significant investment from foreign companies looking to access India’s domestic market and those looking to diversify away from China as uncertainty continues with regards to the global trade and tariff situation. Infrastructure spending: Government initiated infrastructure projects are a key driver of the Indian economy. It was recently announced that India will spend about $US 1.4 trillion over the next five years on projects including, for example, doubling the number of highways, airports and the capacity of ports, building 50 new metro systems in cities, electrifying and standardising the rail network and improving both rural irrigation and household access to piped water. Monetary policy: The RBI has cut policy rates by 1.35% over the past year to 5.15% to provide stimulus to the economy and counter the weakness seen in global demand. Low inventory levels: Inventory levels across the economy are well positioned to provide a favourable base for a recovery across the manufacturing sectors. Access to India The ETFS Reliance India Nifty 50 ETF offers Australian investors the ability to access the Indian share market via the ASX for the first time. NDIA tracks the Nifty50 Index, which is the primary benchmark for the Indian equity market. It not only provides a measure of the performance of 50 of India’s leading blue-chip companies, it also provides a representative picture of the entire Indian market. The 50 constituents account for 67% of overall Indian market capitalisation and 53% of total trading volume, as well as providing a broadly similar sector exposure to the wider market. Trailing returns Using India in a portfolio Investors looking to take a meaningful exposure to the Indian growth story should consider taking an exposure beyond broad emerging markets/Asia. India currently accounts for just 2.6% of global equity market capitalisation, despite having over 17% of the world’s population and 9.5% of the world’s GDP. In comparison, China, which is the most comparable country from a population perspective, currently accounts for 8.2% of global equity markets. [1] A tactical overweight to India would provide investors with a fairer reflection of India’s potential. While historical data does not present the entire picture of the Indian growth opportunity as it stands today, it is worthwhile investigating the impact that a heightened India exposure would have had on historic portfolio returns. To do so, we focus on the Asia ex Japan segment of world equity markets and compare the performance of the MSCI Asia ex Japan Index, which includes roughly a 10% allocation to India, to a portfolio comprised of 90% MSCI Asia ex Japan and 10% Nifty50 Index. The blended portfolio contains approximately a 19% India allocation. Cumulative returns over the past 20 years are shown in Chart 1. Over the full 20-year time series, the portfolio including the Nifty50 outperformed by 0.51% per annum, exhibited 0.5% per annum lower volatility and saw a 1% lower drawdown. By extension, risk-adjusted returns were also improved. Table Y summaries the portfolio risk and return characteristics over 3, 5, 10 and 20 years to give a picture of the contribution India would have made over a range of time horizons. In each case the over-weighting of India was positive for the portfolio from both a return and a risk perspective. Fund in Focus Name ETFS Reliance India Nifty 50 ETF ASX Code NDIA Management Fee 0.85%* Benchmark Nifty50 Index Inception Date 19 June 2019 Distributions Annual [1] Source: Bloomberg as at 30 November 2019. *Plus expense recoveries up to a maximum of 0.15% p.a.

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ESTX: Brexit Deal, Trade Deal, What’s New?

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Dec 04, 2019

Published: 4 December 2019 Product in focus: ETFS EURO STOXX 50® ETF Key Points As the chance of a no-deal Brexit becomes less likely and the UK looks set to leave EU in the next three months, the uncertainty that’s been overshadowing the European market for the last three years may soon be over. With the U.S. and China signalling they’re making progress to end their trade disputes, this could also offer some reprieve for the Eurozone’s economy, which has been a key victim of the U.S.-China trade war. ETFS EURO STOXX 50® ETF (ETSX) provides an investment proxy for those who believe these uncertainties will soon be alleviated, as the underlying economy of the Eurozone is deeply tied to both geopolitical events. Brexit May Come Soon Since the referendum held in June 2016, Brexit has remained in murky waters. In the latest turn of events, the EU has agreed to grant the UK another extension for three-months, however, given the frustration expressed by many leading EU countries, we expect this to be the last extension. Solving the deadlock around the Irish boarder is presenting a significant challenge for the UK parliament and EU to agree on. As such the UK may end up leaving the EU without a withdrawal agreement. Nevertheless, once Brexit happens, with or without a deal, the Eurozone will have one of its biggest overhanging uncertainties removed. Brexit has not been a good showcase to inspire other Eurozone countries to follow suit. The result of the European Parliament election held in May showed that although the uprising right-wing parties have seized more seats than ever before, the parliament is still firmly controlled by the pro-EU forces, while the next EU Parliament election won’t happen until 2024. We therefore expect a smoother ride for the Eurozone going forward, with other countries attempting their own Brexit seeming unlikely. Trade Wars and Europe President Trump started a big trade war with China and a mini-trade war with India, whilst also threatening to place tariffs on auto parts from Europe and Japan, although he is yet to act on these threats. America’s trade wars have caused havoc to the global economy and have already begun to harm America’s own economy. Investors who expect to see the U.S. unwinding more of its tariffs may invest in the eurozone, as it’s a good proxy for improving international trades. So how much damage has the U.S. trade wars brought to the Eurozone? Despite the U.S. not directly imposing tariffs on goods from the EU, the Eurozone economy has been affected by decreased trade and capital flows. Exports made up 46% of the Eurozone bloc’s output in 2018, compared to 12% of the United States’ and 19% of China’s, according to the World Bank. Looking into Germany, the biggest economy within the EU, the manufacturing PMI of the country has dropped from the 63.3 in December 2017 to the most recent 41.9 in October 2019, indicating that the manufacturing sector has been weakening for a while and is now in the contraction zone. Trade Talks Begin to Yield Results The most recent development of the U.S.-China trade war was a positive one. Following the meeting between the U.S. trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin with Chinese Vice Premier Liu He, both the U.S. and China had signalled the two countries are close to reaching a “phase one” trade deal. A resolution to the trade wars could see a boost to the economy of the Eurozone given their reliance on and recent decline in international trade. Fund in Focus: ETFS EURO STOXX 50® ETF (ESTX) ESTX is designed to provide a blue-chip representation of super sector leaders in the eurozone. ESTX can be used as a tool for a tactical play for investors who believe the day for Brexit and the U.S.-China trade war resolutions are just around the corner. Name ETFS EURO STOXX 50® ETF ASX Code ESTX Management Fee 0.35% Benchmark EURO STOXX 50® Index Inception Date 19/07/2016 Distribution Frequency Semi-Annual

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Five reasons to hold gold at the core of your portfolio

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Nov 20, 2019

Published: 20 November 2019 Product in focus: ETFS Physical Gold Key Points: Gold has long been considered a safe-haven asset used by investors to hedge against event risk but is often not appreciated for the way in which it can aid portfolio returns in different market conditions. Over the long-term gold has close to zero correlation with share markets. This is good for investors. Uncorrelated assets provide diversification and help improve returns or reduce risk within a portfolio. ETFS Physical Gold (ASX: GOLD) is a simple and cost-effective and efficient way to access gold by providing a return equivalent to the movements in the gold spot price. At ETF Securities, as manager of Australia’s largest and the world’s oldest exchange traded gold product (ASX: GOLD), we spend a lot of time looking at how gold can work for our clients to improve outcomes across their portfolios. Gold is well-known as a hedge against event risk and as a way of preserving capital against inflation, but people often don’t appreciate how well a long-term holding can aid portfolio returns in different market conditions. When we talk about using gold in a portfolio, we tend to focus on its role as a core strategic holding, not an asset to trade in- and out- of on a regular basis. This article outlines five key reasons you should consider gold as a core holding. 1. Gold is an effective hedge against unpredictable events Gold has been one of best performing assets globally over the past year and has attracted a lot of attention. In Australian dollar terms gold has never been more valuable, having risen 32% over the 12-month period to the end of September. Not only has gold performed very well, but it has done so against a backdrop of rising geopolitical risk, periodic bouts of equity market volatility, global growth concerns and an abrupt shift in monetary policy, both domestically and abroad. The recent past is just one example in gold’s long history of performing well when markets are in turmoil or when risks are heightened. Other prominent examples include[1]; the 1987 stock market crash; gold rose 6% while the S&P 500 fell 33% the global financial crisis; gold rose 26% while the S&P 500 fell 56% the European sovereign debt crisis; gold rose 9% while the S&P 500 fell 19% It is not surprising, therefore, that many people use gold as a safe-haven asset in much the same way they would use insurance to protect their physical assets. Of course, you don’t just take out home insurance when you feel a flood or fire may be imminent, which is why we advocate holding gold long-term to protect against events that are inherently unpredictable. 2. The price of gold is driven by many factors and is difficult to predict Gold does not conform to traditional financial asset principles and there is no widely accepted model to determine a fair price for gold. While many different models exist, it is fair to say that the price of gold is driven by a wide range of variables and is difficult to predict. Gold is both a consumption and an investment asset, which often makes it both pro- and counter-cyclical at the same time. Levels of economic growth are positively related to demand for gold for use in jewellery and technology products, while expectations of lower growth may drive investment or safe haven buying. Gold is used as a store of wealth and as protection against inflation, while it is also in demand when interest rates and inflation are low and economic prospect look poor. Further, central banks are key investors and have massive reserves and a wide range of different motivations for owning gold, which can heavily influence demand. With such an array of competing factors for which to account, forecasting changes in the price of gold and the timing of changes is extremely difficult. We therefore rarely recommend gold as a trade-in/trade-out investment, where market timing is key. Instead we focus on how gold can be used as a core strategic holding. Depending on their circumstances, we often see investors using gold with a 2%, 5% or 10% allocation across their portfolios. 3. Gold’s long-term returns are better than many other asset classes Since gold became a freely traded commodity in 1971 its price has increased by an average of 11.7% per year in Australian dollar terms. Chart 1 shows how gold has performed relative to other major asset classes from the perspective of an Australian investor. While some investors worry that gold produces no regular income, its overall returns have out-stripped many more widely used investments. Gold has significantly outperformed both fixed income investments and diversified commodities. Its long-term returns are comparable with share market returns. Chart 1. Source: Bloomberg data as at 30 September 2019. Returns shown are compounded annual growth rates. Australian Equity is represented by the S&P/ASX 200 Total Return Index. Global Equity is represented by the MSCI World Total Return Index. Australian Fixed Income is represented by the Bloomberg AusBond Composite 0+ Yr Index. Global Fixed Income is represented by the Bloomberg Barclays Global Aggregate Total Return Index. Commodities are represented by the Bloomberg Commodity Total Return Index. 4. Gold helps diversify your portfolio when you need it most Over the long-term gold has close to zero correlation with share markets. This is good for investors. Uncorrelated assets provide diversification and help improve returns or reduce risk within a portfolio. Table 1 shows correlations between gold and other major asset classes over 20 years and you can see that gold generally has low correlations with other assets. It tends to be negatively correlated with equities, while being mildly positively correlated with bonds and commodities. Table 1. Source: Bloomberg data as at 30 September 2019. Correlations are calculated monthly over 20 years in Australian dollars. Australian Equity is represented by the S&P/ASX 200 Total Return Index. Global Equity is represented by the MSCI World Total Return Index. Australian Fixed Income is represented by the Bloomberg AusBond Composite 0+ Yr Index. Global Fixed Income is represented by the Bloomberg Barclays Global Aggregate Total Return Index. Commodities are represented by the Bloomberg Commodity Total Return Index. Not only has gold’s correlation with share markets been low, it has the nice property that it has tended to become more negative when stock markets are falling. Chart 2 shows the correlation between gold and global equities separately considering periods where the equity returns are positive, and then negative. This contrasts with other uncorrelated or “alternative” assets that became highly correlated with stock markets during the GFC. Not only does gold benefit from safe-haven buying during times of market stress, unlike most other financial assets, it has no element of credit risk, which immunises it from extreme market dislocations. Chart 2. Source: Bloomberg data as at 30 September 2019. 5. Gold can improve risk-adjusted returns over the long-term To demonstrate the impact that a core gold position can have in a portfolio, we have simulated adding a gold holding to a collection of typical asset allocation models that include Australian and international equity and fixed income assets with four different allocations representing Conservative, Balanced, Growth and High Growth profiles. Charts 3 - 6 below show the outright return, volatility or risk (measured by standard deviation), maximum drawdown or biggest loss and the risk-adjusted return (measured by the Sharpe ratio) for each asset allocation portfolio and for each portfolio with the addition of 2%, 5% and 10% gold. Source: Morningstar Direct data from 31 March 2003 to 30 September 2019. Conservative, Balanced, Growth and High Growth portfolios are represented by the Vanguard LifeStrategy funds, which have been live since February 2003 or longer. Gold is represented by ETFS Physical Gold (ASX: GOLD), which has been live since March 2003. Figures quoted are in Australian dollars and are net of fees. What we observe is that the addition of gold to an otherwise diversified portfolio has aided performance in every case. Outright returns are higher and increase as the gold allocation is increased. From a risk perspective, however, the impact of gold is even more important. The addition of gold reduces risk through gold’s ability to provide diversification. Risk-adjusted returns are higher and importantly drawdowns, or worst-case scenarios, are significantly improved. [1] Bloomberg data as at 30 November 2018

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Global Infrastructure: Income Certainty and Stable Growth

Nov 13, 2019

Published: 13th November 2019 The global economy is showing signs of strain and expectations from investors around growth and income is decreasing. Can global infrastructure assets provide a solution? Infrastructure has long been a favourite equity asset class for investors as it offers the following characteristics: Access to long term stable cash flows, given people continue to pay for infrastructure in their day-to-day lives, e.g. toll roads, airports and utilities Upfront capital - investment is high for large infrastructure projects and generally the cash flows from investment are realised for long periods into the future High barriers to entry, reducing competition Infrastructure assets have the ability to produce stable income with low volatility and should therefore be a staple in investor portfolios. With the global uncertainty experienced so far during 2019, investors may look to infrastructure as a source of stable capital and yield. ETFS Global Core Infrastructure ETF CORE offers a low cost way to gain exposure to quality global infrastructure companies which have exhibited the least volatility in the last 6 months. CORE has been resilient during 2019’s market volatility and has returned 19% in the last 12 months with a yield of 4% (31 October 2019). Please see below some further information on CORE, outlining why you should consider this ETF for your infrastructure exposure. Attractive Income CORE has a 12 month yield of 4.11% to the 31 October 2019 Stable Growth Since CORE’s launch in 2017 it has returned over 13.5% p.a. Since its inception CORE has delivered risk adjusted returns (refer to sharpe ratio table) above both the S&P Global Infrastructure Index and the MSCI World Index Low Volatility CORE selects the 75 least volatile global infrastructure companies and weights them by their inverse volatility You can see the effect of CORE’s low volatility screen in the performance table below Period Total Return (p.a.) 3M 6M 1Y 2Y from 19 Sep 17 ETFS Global Core Infrastructure ETF (AUD, NAV, TR) 3.16% 8.19% 18.89% 11.70% 13.66% S&P Global Infrastructure Index (AUD, TR) 4.03% 8.75% 24.39% 11.61% 12.69% MSCI World Index (AUD, TR) 2.48% 6.00% 15.70% 12.61% 15.40% Annualised Volatility 3M 6M 1Y 2Y from 19 Sep 17 ETFS Global Core Infrastructure ETF (AUD, NAV, TR) 6.95% 6.97% 7.38% 8.04% 8.04% S&P Global Infrastructure Index (AUD, TR) 8.57% 8.37% 8.70% 8.95% 8.84% MSCI World Index (AUD, TR) 11.26% 10.74% 10.86% 10.67% 10.53% Sharpe Ratio 3M 6M 1Y 2Y from 19 Sep 17 ETFS Global Core Infrastructure ETF (AUD, NAV, TR) 0.31 1.00 2.35 1.25 1.49 S&P Global Infrastructure Index (AU, TR) 0.35 0.90 2.63 1.11 1.24 MSCI World Index (AUD, TR) 0.13 0.45 1.30 1.02 1.30 Source: Bloomberg as at 31 October 2019. Returns in AUD. Past performance is not an indication of future performance. Global Diversification Due to CORE’s rules based approach it does not have a significant concentration in any single company and instead offers a diversified infrastructure exposure As at 31st October 2019 the top 10 stocks in CORE accounted for just 18.80% of the portfolio The US and Canada make up the largest portion of CORE’s portfolio, followed by Asia and Europe. Australia has a very small exposure in the index, with QUBE Holdings as the only Australian stock currently in the portfolio Source: Bloomberg as at 31 October 2019. Returns in AUD. Past performance is not an indication of future performance.

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ACDC: Beneath the Bonnet

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Oct 09, 2019

Published: 10th October 2019 Product in Focus: ETFS Battery Tech & Lithium ETF Key Points Bloomberg New Energy Finance predict that global lithium-ion battery demand will grow 8-fold by 2030. Over 2 million electric vehicles were sold in 2018, accounting for less than 2% of global passenger vehicle sales. Sales forecasts are estimated to rise to 56 million by 2040. ACDC aims to provide investors with exposure to growth across the entire battery technology value-chain, including lithium miners and energy storage companies. Recent years have seen significant developments in lithium-ion battery power output and efficiency. Lighter and smaller batteries with increased output and falling prices have opened-up a wide range of new applications. These have already had big impacts on the consumer electronics market. The next step in the evolution of the battery technology industry is in larger scale applications. Electric vehicles for private and mass transportation, aided by the emergence of autonomous vehicle technologies and the rapid reductions in charging times. Further, use of lithium-ion batteries is promoting the growth of renewable energy technologies such as solar and wind, which are now able be consumed on demand and not only at the right times, or when weather permits. ETFS Battery Tech & Lithium ETF (ASX Code: ACDC) aims to provide investors with exposure to growth across the entire battery technology value-chain, from lithium miners to energy storage companies across a range of established and emerging companies. This note looks at the key areas driving growth across this quickly developing industry and highlights the operations of several selected companies to provide real-world examples of technological developments and how they are being monetised. Lithium – exploring the supply and demand outlooks Forecasts complied by Bloomberg New Energy Finance predict that global lithium-ion battery demand will grow 8-fold by 2030. This will have a significant impact on demand for lithium carbonate equivalent (LCE) and other core metals, such as copper, aluminium and nickel as well as rare earth metals, such as cobalt. China maintains a dominant position in the supply-chain through both its control of mining companies and its dominance of refining capacity. Electric vehicle demand is anticipated to be the core growth driver over the coming decades, with passenger EVs dominating. Current forecasts point to a supply surplus out to at least 2025, which has been reflected in recent price action. As shown in figure 3, lithium prices have been in decline for the past 15 months, following a three-year bull-run during which prices trebled. Stock in Focus: Albemarle Corp Stock Code: ALB Albemarle is the world’s largest producer of LCE and a pioneer in the development of brine production processes that are commonly used today. Products include lithium metal as ingots, foil, rods and anodes, high purity lithium alloys, lithium salts and lithium sulphide, all of which have battery-related applications. One of its stated aims is to provide materials and to support the growth and success of lithium-ion technology to promote advances in mobile communication, power storage and electric mobility. Production and storage sites are located in Europe, North and South America, Asia and Australia, while Albemarle’s customer base is spread across more than 100 countries. Source: www.albemarle.com Financial information as at 30 Sep 2019: Electric vehicles Over 2 million electric vehicles were sold in 2018, which represents significant growth from a low base, but accounts for less than 2% of global passenger vehicle sales. Forecasts compiled by Bloomberg New Energy Finance indicate accelerating growth over the coming decades with sales to rise to 10 million in 2025, 28 million in 2030 and 56 million by 2040. By the mid-2020s electric vehicle sales are expected to reach parity with internal combustion vehicles, at which point 30% of passenger vehicles on our roads will be electric. Stock in Focus: BYD Stock Code: 1211 BYD is a Chinese manufacturer of passenger vehicles, mass transit vehicles and battery technology and is heavily backed by Warren Buffett's Berkshire Hathaway, which holds a 25% stake. China currently represents around 60% of the global electric vehicle market, with over 600,000 fully electric vehicles sold in the first half of 2019. BYD is the largest Chinese producer, with market share currently running at close to 25%. BYD’s market share has increased in 2019 to-date, despite a slowing in the Chinese market as a result of the removal of subsidies. 63% of BYD’s revenue is currently generated by electric vehicles. Aside from passenger vehicles, BYD is currently a major supplier of electric busses, with government contracts across Asia, Europe and North and South America. BYD is also investing in large-scale battery storage projects. Source: www.byd.com, Bloomberg New Energy Finance Financial information as at 30 Sep 2019: Grid storage batteries The electric power sector has seen significant disruption from renewable sources in recent years, with wind, solar and other sources quickly becoming more economically viable relative to fossil fuel sources in many markets. Component costs are falling and efficiency is rising but improvements in battery technology have been the key to releasing these technologies and allowing them to meet consumer demand at times when the sun isn’t shining and the wind isn’t blowing. Bloomberg New Energy Finance predicts 50% of world electricity output to be wind and solar generated by 2050 and that this transformation will require heavy investment in battery technology. There are numerous competing battery types and new technologies under development. Examples include flow batteries, lead-carbon, sodium-sulphur and compressed-air energy storage. Lithium-ion, however, is the established technology of choice and currently accounts for 85% of commissioned, utility-scale battery storage worldwide. Source: Bloomberg New Energy Finance “New Energy Outlook 2019” Stock in Focus: GS YUASA Stock Code: 6674 GS Yuasa is a Japanese company that manufactures and sells automotive batteries, industrial batteries, power supply systems and other electrical equipment. They are a leader in lithium-ion technology and provide a range of storage solutions for renewable and reserve power applications. The company is involved in multiple large-scale energy storage projects including constructing one of the world’s largest lithium-ion batteries, to be connected to a wind energy plant in North Hokkaido, Japan. The battery will have an output of 240MW and a capacity of 720WMh, which is equivalent to 45,000 electric vehicles. Source: www.gs-yuasa.com Financial information as at 30 Sep 2019: About ACDC ACDC tracks the Solactive Battery Value-Chain Index, which aims to capture the performance of companies that are providers of electro-chemical storage technology and mining companies that produce metals that are primarily used for manufacturing of lithium batteries. Companies comprising the Index are determined by reference to: 1. The U.S. Department of Energy's DOE Global Energy Storage Database, which identifies companies that are electro-chemical storage technology providers; and 2. Metal Bulletin, which identifies mining companies that produce lithium. Constituents are equally weighted to provide maximum diversification. ACDC currently holds 29 stocks from seven countries with sector allocations heavily in favour of the Industrials, Materials and Consumer Discretionary sectors.

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