Jun 02, 2020
Recorded on the 27th May 2020. This webinar focuses on the alternative asset that is gold. In this webinar, we discussed: Gold's strategic and tactical place in a portfolio Understanding gold's valuation factors: The short, medium and long-term price drivers Examining the recent rise of gold The future outlook To watch the webinar recording, please click here.
May 18, 2020
Product in focus: ETFS Enhanced USD Cash ETF (ASX Code: ZUSD) Trading the greenback Many investors view cash as part of the defensive, and somewhat static portion of their portfolios, but in uncertain markets it might also be used as a trading tool to act on shorter term views and expectations of currency exchange rates. The US dollar is one such option that investors could consider, using an ETF like the ETFS Enhanced USD Cash ETF (ASX code: ZUSD). ZUSD aims to track the performance of an interest-bearing US dollar cash deposit by investing in US dollar bank deposits with maturities ranging from overnight to three months and earning a variable rate of interest. Using USD as a defensive position Cash typically forms part of a defensive allocation in a portfolio for liquidity and downside protection, with Australian investors typically using the Australian dollar. Much like equities and fixed income, diversifying cash can assist with risk management, particularly in volatile periods. For example, holding currencies other than the Australian dollar might buffer the cash allocation in periods where the Australian dollar is weak. The US dollar often holds appeal to Australian investors as a result of its strength compared to the Australian dollar. AUD/USD 14 May 2015-12 May 2020 The US dollar has traditionally been viewed as a safe-haven asset, with most global central banks keeping it as a reserve currency and many international transactions conducted in the US dollar. The value of the US dollar tends to be less volatile, particularly compared to emerging markets, backed by what is to the most part seen as political and economic stability. Trade your conviction Investors can also use cash investments to make tactical decisions on how they expect a currency to perform. For example, investors who believe the US dollar is likely to appreciate, may increase their cash allocation to the US dollar while those who believe it is likely to depreciate may choose to reduce their allocation. An ETF like ZUSD is a simple and liquid way to trade your convictions on the US dollar, allowing you to move quickly based on your changing market views. It may also be more cost-effective and accessible for some investors when compared to setting up cash deposits internationally or using a currency exchange. Demand for the US dollar globally driven The US dollar is heavily used across the globe. There is more than $13 trillion in US dollar denominated assets held in banks outside the US, reflecting approximately 15% of world GDP. Approximately 80% of global trade financed by the Bank for International Settlements (BIS) is in US dollars (BIS finances 35% of global trade). The US dollar has also been used by the US Federal Reserve (the Fed) to improve liquidity within the US and other countries by way of swap accords. An example of how this works is as follows: the Fed has an agreement with the Reserve Bank of Australia to exchange US$60 billion of US dollars for Australian dollars and reverses this transaction at a later point in time. The Fed has permanent swap arrangements with the United Kingdom, Canada, Japan, European Central Bank and Switzerland but set up temporary relationships at the start of the COVID-19 pandemic with Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore, South Korea and Sweden. This has been to support the large demand and tight supply of the US dollar outside the US and has resulted in an increase from US$60 million in the first half of March 2020 in swap activity to nearly US$400 billion at the start of April 2020. Depending on how the COVID-19 pandemic continues to evolve, demand for the US dollar – either through swap activity or broader global activity – may put upward pressure on the greenback. Those who believe this is likely may choose to ‘go long’ on the US dollar by taking exposure to it either by buying US dollars or other means, such as ZUSD. Currency exchange and equity markets The exchange rate between the US and Australian dollars correlates negatively with US equity markets as represented by the S&P 500, meaning that the US dollar tends to appreciate against the Australian dollar when the US share market is falling and vice-versa. In other words, the Aussie dollar tends to perform well when markets are rising, which is linked to demand for Australia’s resources-heavy exports. This is demonstrated further in the following charts. As shown in the correlation panel at the bottom of the chart below, across 5 years there is a negative relationship between the movements of the S&P 500 compared to the USD/AUD rate. In periods of more pronounced downturns, the correlation has become more negative, as seen in the global financial crisis and the more recent volatility in March 2020. Long term S&P 500 vs USD/AUD rate (performance in top chart and correlation in bottom chart) Source: Bloomberg, 14 May 2020 To highlight how pronounced that relationship can be the chart below shows a strong negative relationship between the S&P 500 and the USD/AUD rate in the recent months of COVID-19 driven volatility. Short-term S&P 500 v USD/AUD rate (performance in top chart and correlation in bottom chart) Source: Bloomberg, 14 May 2020 An enhanced approach to the US dollar ZUSD tracks the USD/AUD rate and invests in US dollar bank deposits with maturities ranging from overnight to three months and aims to earn a rate above the rate available on overnight deposits. Deposits are held with one or more Authorized Deposit Taking Institutions and earn a variable rate of interest spread across a range of maturities to enhance yield, while maintaining the liquidity of the fund. Generally though, exposure to the US dollar through ZUSD may assist as a buffer against weakness in the Australian dollar and offer diversification in the cash allocation of a portfolio. Alternatively, investors may choose to consider ZUSD as a trading tool for a short-term tilt to access any strength they may anticipate in the US dollar. ZUSD is the only physical US dollar ETF offering quarterly distributions. This may make it appealing to income-focused investors. More information on ZUSD Fund Name ETFS Enhanced USD Cash ETF ASX Code ZUSD Management Fee 0.30% p.a. Distribution Frequency Quarterly For more information on ZUSD, please contact us on: Sales Trading Phone +61 2 8311 3488 Email: firstname.lastname@example.org Phone +61 2 8311 3483 Email: email@example.com
May 13, 2020
How to build your clients’ portfolios to meet their goals The unpredictable nature of markets means that advisers need to be pragmatic and measured in their approach to meeting their clients’ goals, ranging from building a house deposit and paying for education to generating a consistent retirement income while maintaining enough capital for aged care deposits. Whatever the goals, most advisers typically need to be able to preserve a certain level of capital for their clients, while also investing for long term growth or for stable income. An enhanced core-satellite approach to portfolio construction can offer a cost-efficient and measured way to target investment goals and manage market volatility. Download the complete paper or read the summary below: What is enhanced core-satellite investing? In enhanced core-satellite investing, the core is made up of passive exposures, including smart beta, to major asset classes (mainly equities and fixed income) while satellite investments are more opportunistic and designed to seek specific growth outcomes, sometimes at higher levels of risk. Satellite investments might traditionally have been active managed funds or direct investments in companies or real estate but are now equally likely to be selected from the tailored ETFs available today. Generally, the core might be 65-85% of the portfolio, depending on the investor’s goals, investment horizon and risk tolerance, while satellites would represent 15-35%. How this might look in practice is as follows: an investor focused on income might use the satellite components for yield or proactively switch to defensive or growth tilts to bolster their core investments, depending on market conditions. Their core might include investments such as ETFS S&P/ASX 300 High Yield Plus ETF (ASX code: ZYAU) or ETFS EURO STOXX 50 ETF (ASX code: ESTX). In the current market conditions, the investor might choose to increase exposure to defensive investments to the satellite like ETFS Physical Gold (ASX code: GOLD), or include an exposure to foreign currencies like the US dollar which offer a higher yield compared to the Australian via an ETF like ETFS Enhanced USD Cash ETF (ZUSD). How enhanced core-satellite investing supports client needs and goals? Core-satellite investing is a flexible approach and the core will look different according to the individual investor. A high growth strategy might have a core with a higher proportion of ‘riskier’ assets like equities, while a defensive strategy might focus more on assets like gold or fixed income. Investors should consider the core as where they set their strategic asset allocation – where the long-term targets are set for the investment composition to meet your goals, needs and views. By contrast, the satellite is for tactical asset allocation – for shorter-term investments based on market and world conditions that are likely to be more temporary. [Learn about how core-satellite investing has worked during the COVID-19 pandemic here] Core-satellite portfolio construction also assists in cost management for investors. Passive investing is typically lower cost when compared to actively managed funds. Using ETFs may offer additional pricing efficiencies for investors, such as lower administration and management fees as well as lower entry point compared to managed funds and listed investment trusts. Other considerations from using ETFs may be benefits from liquidity which can assist in flexibility to move based on market conditions or to free up funds to meet specific cash needs. There is also a wide range of ETFs available, assisting advisers in identifying those which may fill specific portfolio gaps, match specific goals or even meet particular views held by clients. For more information on enhanced core-satellite portfolio construction or to find out more about using our range of ETFs in your portfolio, speak to ETF Securities.
May 13, 2020
Investing has become a game of chicken in the eyes of some investors. Has COVID-19 become a buying opportunity? Have we seen the bottom, or is the worst yet to come? It’s hard to make any solid predictions in this unfamiliar territory – investment markets have experienced a health crisis rather than being undone by poor fundamentals, such as in the global financial crisis. The essentials, defensive assets and growth trends should be considered by advisers exploring the opportunities to tilt the satellite portion of their clients’ portfolios. Incorporating the essentials There are a number of areas which may benefit from the current situation – or if not benefit, then at least be largely able to continue normal operations. Companies in the consumer staples sector is an easy starting point. People need basic supplies to live and supermarkets like Coles and Woolworths continue to operate and have seen increased demand in these times. There are even pockets to consider in the consumer discretionary sector as people use lockdown to carry out home based activities or upgrade the technology they use to work from home. Infrastructure, such as railways, energy suppliers and telecommunications, is a sector that continues to operate in periods of volatility. These types of companies normally have monopolistic fee structures and have very high barriers to entry with predictable revenue streams. This means they aren’t expected to rise as much in good times but are less likely to be materially impacted in the bad times. In the current situation, telecommunications has benefitted from an increased dependence from a population working from home. An ETF like ETFS Global Core Infrastructure ETF (ASX code: CORE) can offer exposure to global infrastructure companies in a client portfolio. Defending against volatility Defensive assets like gold or silver can offer a buffer in volatile markets. Gold in particular has been used as a safe haven asset in the past for its low and at times negative correlation to other asset classes. You might choose to use an ETF like ETFS Physical Gold (ASX code: GOLD) or ETFS Physical Silver (ASX code: ETPMAG) in the core of a portfolio or as an additional satellite tilt. Growth trends The volatility of COVID-19 has reset markets, and the time might be favourable for some investors to access growth trends at more favourable valuations. Technology trends have particularly accelerated during COVID-19, with ecommerce and online entertainment experiencing spikes in use. ETFs such as ETFS Morningstar Global Technology ETF (ASX code: TECH) or ETFS FANG+ ETF (ASX code: FANG) offer access to the companies withinthis theme. Biotechnology may be a longer-term trend but it is also particularly topical at the moment in the hunt for vaccines and a cure for COVID-19. The ETFS S&P Biotech ETF (ASX code: CURE) accesses this trend and offers exposure to some of the key players currently working against the virus, including Gilead, Regeneron and Moderna. The growing Indian economy may also pose an opportunity for some investors (learn more here). It can be accessed through the ETFS Reliance India Nifty 50 ETF (ASX code: NDIA).
Apr 20, 2020
Watch Webinar Recording: The FANG Future Recorded on the 7th April 2020, this webinar looks at the ETFS FANG+ ETF: How the FANG companies have been affected by the current COVID-19 situation and the outlook ahead The highly traded high growth companies held in FANG Why we launched FANG and how to use it in a portfolio Why invest via an ETF rather than using alternative investment options Note: skip to 2:53 for start of presentation
Apr 07, 2020
Gold has grabbed headlines during the COVID-19 situation, as investors have raced to safe-haven assets. While gold is valued as a hedge against short term volatility, it can also hold a long-term role in a diversified portfolio given its defensive and growth qualities. Gold can represent 2-10% of a portfolio, depending on an investor’s needs or strategy, but many investors are missing this allocation. For these investors, it has become a question of why not? Gold as a safe haven Gold has both defensive and growth qualities, which has led to its position as an investment safe-haven in times of volatility. It can act as a store of value, as well as holding the potential to grow. There are two key reasons for this. 1) Gold has a low, and at times, negative correlation to other asset classes. That is, it performs differently to other asset classes and its performance is not necessarily associated with what is happening in other asset classes. This is shown in the table below: Australian Equity Global Equity Australian Fixed Income Global Fixed Income Commodities Correlation -0.29 -0.12 0.37 0.06 0.31 Source: Bloomberg data as at 31 December 2019. Correlations are calculated monthly over 20 years in Australian dollars. Australian equity is represented by the S&P/ASX200 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 Global Aggregate Total Return Index. Commodities are represented by the Bloomberg Commodity Total Return Index 2) Gold has the ability to offer positive performance in a range of market conditions, including periods of volatility. For example, if you consider the Global Financial Crisis, gold prices rose 26% while the S&P 500 fell 56%. Even in the current COVID-19 situation, between 19 February and 26 March 2020, gold gained 12.4% compared to the S&P 500 which fell 14.1% and the S&P/ASX 200 which fell 27.8% (all in AUD terms). You can see the performance of gold against other major asset classes in the chart below. Source: Bloomberg, ETF Securities, as at 26 March 2020 This ability to perform in a range of markets comes down to gold’s position as a consumer-driven and investment-driven asset. From a consumption perspective, while around 50% of its use is in jewellery, gold is also heavily used for other purposes such as electronics or even part of medical and diagnostics equipment [1,2] COVID-19: gold price falls and rises Given the facts around gold as a safe-haven asset, investors may therefore wonder what happened when gold prices fell across the week starting 16 March 2020 and how gold has performed across the COVID-19 situation to date. On the whole, gold has seen increased interest and flows during the COVID-19 situation, but markets did see price falls across the week commencing 16th March 2020. It is worth understanding why this happened, as it was less related to any concerns about gold and more related to other activities. Gold can be vulnerable to financial deleveraging – that is, investors needing to free up cash for a variety of reasons. Equity markets were hit simultaneously by the COVID-19 situation and a price meltdown in oil markets. This affected investors with leveraged positions who would have needed to sell other assets to free up cash to pay their liabilities. What this looks like is as follows. An investor using their own money and borrowed money to purchase investments is required to maintain the investment account at a certain value – this is a leveraged position (also called a margin loan account). If the total account falls below that value – generally because the investment itself has fallen in value, then the investor will need to ‘top up’ the account with their own cash to restore the account to its minimum value (this is a margin call). As markets fell across the week of 16 March 2020, many investors would have needed to top up their accounts and will have sold other liquid and performing assets, such as gold, to do so. This has occurred in the past too. During the Global Financial Crisis, gold was briefly sold in October 2008 to meet investors’ cash needs for liabilities from the equity market sell off but then recovered and returned 45% in US dollar terms from its October 2008 low into March 2009, compared to the S&P500 which fell 30% in the same period. Since then, gold has recovered, reaching seven-year highs on 25 March 2020 of A$2746.32 per ounce. Source: Bloomberg, ETF Securities The outlook for gold There are a few factors to suggest gold may continue to hold value across the current crisis. Market volatility from COVID-19 While China has begun to reopen after its COVID-19 lockdown, other countries are either in the midst of it or commencing stages of lockdown. From that perspective, investor concerns and volatility may continue for some time yet. The panic has been swift but recovery could take some time. Some sectors, like technology, are in theory well positioned for both crisis and recovery but investor confidence is a different matter. Other sectors, like retail and travel, will struggle during this period and may find ramping up post the crisis takes some time. From this perspective, many investors may continue to look for defensive assets like gold. They won’t be alone. Even central banks may bulk up their stores of gold across this period. The low interest rate environment and prospect of quantitative easing Gold traditionally performs well in periods of low interest rates, with investors using it rather than cash. Interest rates have been low for some time but have dropped further in the current situation. Australian rates have reached lows of 0.25% while the US has dropped to a range of 0-0.25%. Many countries, including Australia have announced fresh rounds of quantitative easing too. Temporary shortage At the same time as increasing numbers of retail investors seek to purchase physical gold bullion, supply chains have been disrupted by COVID-19 . Refineries in Europe, particularly in Italy, have been unable to keep up with demand forcing traders to move into wholesale markets. While refineries in normal circumstances would be able to manage the surge in interest, lockdowns over COVID-19 may continue to place pressure on supply, in turn pushing prices higher. Accessing gold using an ETF The traditional forms of access to gold were either through physical holdings or an indirect exposure by owning shares in gold mining companies. Both had their challenges – physical holdings namely through prohibitive costs and indirect exposure by opening to assorted company risks. Generally speaking, physical holdings offer a more pure exposure. The first gold-backed ETF was launched in 2003 by ETF Securities, it still trades today as ETFS Physical Gold (ASX:GOLD) and held $1.65 billion in assets as at 27 March 2020. Gold-backed ETFs are literally as described, where physical gold is purchased and stored by a fund manager as part of a trust and investors buy units in the trust for exposure to the market movements of gold. Using an ETF for gold exposure has several features and advantages over the physical holdings. Cost tends to be a foremost consideration. Investors in physical gold may need to consider aspects like freight, storage and insurance, as well as the volumes available through their broker of choice. For example, some brokers may sell by the ounce which may be cost-prohibitive for some retail investors. Units in gold-backed ETFs tend to have management fees that are often cheaper than the costs for individuals to store and insure their own gold The liquidity and ease of use of gold-backed ETFs compared to physical gold is another consideration. Investors holding ETFs may be more easily able to adjust their holdings to reflect activity in the market, buying or selling small quantities when needed compared to those holding physical holdings which may have higher minimum trading quantities and take longer to transact. This can be a challenge for some investors depending on their size and horizon of their investment. ETFs are also typically easier to use compared to physical gold holdings, requiring as little as a trading account to get started and can be done anywhere. It can be less intimidating for many investors who may not be aware of even where to start for physical purchasing and trading. Understanding the risks As an investment tool, ETFs are subject to a range of general investment risks, such as market risk or counterparty risk. Market risk relates to loss of value due to movements in price. Changes in the price of gold relative to an investors purchase price create gains or losses. Counterparty risk is the risk that the other party to your investment defaults or mismanages your assets. For example, the risk that the custodian holding the physical gold (whether for an ETF or individual investor) has not securely stored the gold and it is stolen or lost. Custodians of assets in managed funds, like ETFs, typically use major international vaults to store the physical assets which offer highly sophisticated security arrangements compared to personal safes or small storage companies. Another example of counterparty risk might occur at the time of investment purchase if the trading tool or company doesn’t actually use your funds to buy the selected investment or asset. Using established and credible companies to purchase investments can be an important way of managing this risk. There can also be variation in the way that gold-backed ETFs are managed, so investors should research their options. One crucial difference to watch for is whether the ETF uses allocated or unallocated gold. Allocated gold means you own the physical gold based on your unit holding. In the event of a default by the custodian, your holding is unaffected. ASX: GOLD uses allocated gold and you can redeem your units for the physical gold. Unallocated gold means your cash investment is ‘backed’ by the physical gold holdings of the issuer still providing you with exposure, but these holdings remain the property of the issuer. This form of gold-backed fund has additional credit risk for investors. Should a default occur, you don’t have ownership over the physical gold so your claim is considered and paid alongside all other parties of the issuer who might also have a claim. Unallocated gold is used in many gold-backed ETFs so it is worth investigating the structure and management before you decide to invest. Both physical holdings and ETFs can also be subject to liquidity risk. Liquidity risk is the risk that the physical holding can’t be sold quickly or at a fair price in the market. Investors will need to weigh up all these risks before deciding to buy physical gold or a gold-backed ETF. Why aren’t you investing in gold? While events like COVID-19 and the Global Financial Crisis provide a clear demonstration of gold’s defensive qualities, investors should consider their longer-term strategy. Offering diversification, growth and stability over time, gold can be a suitable inclusion for many investors. In turn, gold-backed ETFs can offer liquid, cost-effective and easy to access exposure all using your existing trading platforms.