Jul 09, 2019
Product in focus: ETFS Reliance India Nifty 50 ETF (ASX Code: NDIA) Key Points The Indian economy is primed to benefit from the structural reforms of the Modi government. Domestic consumption is powering 60% of Indian GDP. The average age in India is just 28 supplying a young and agile workforce that are increasingly connected. India is the world’s largest democracy, the sixth largest economy and has a population of 1.3 billion, 54 times the number of people in Australia for approximately the same land size. The nation is undergoing a rapid transformation that was truly initiated by the liberalisation of the economy beginning in 1991. Structural changes to the economy have been brought about in recent years by the Modi government aiding the significant growth seen today. The fundamental driver of this growth is the increase in domestic consumption throughout the nation. Structural Reform Key reforms initiated by Modi have begun the process of formalising India’s economy and created a better environment for business. This has been reflected in the World Bank’s ease of doing business ranking, India is now ranked 77th in the world and significantly, this represents an increase in 53 positions over two years. Contributors to this progress include the introduction of GST in mid-2017 which centralised 17 indirect taxes that were previously levied. 2017 also saw the sovereign credit rating upgraded one level by Moody’s, the first movement in this in 14 years. The evolution of the economy can be seen through the fundamental shift from the previous agrarian focus to the more service-based economy we see today. Consumption A 2019 report by the World Economic Forum identified domestic consumption as the key driver of India’s economy today, powering 60% of GDP. The report outlines five significant contributors to India’s growing consumption: 1. Income growth India is undergoing a transformation in wealth, it is projected that 25 million households will be lifted out of poverty by 2030, reducing the percentage of households in poverty from 15% today to less than 5%. This is introducing a huge expansion of the middle class and uptick in consumption of everyday items. 2. Urbanisation 40% of Indian’s will live in urban areas by 2030 as there is a steady migration from rural regions to cities and increased population density urbanises previously small towns. This movement is compounding the need for core infrastructure developments to cope with additional population pressures. 3. Demographic change India has a median age of just 28 years. This young and, comparatively, highly educated work force will remain young through to 2030 with an expected median age of 31 years. Compare this to the expected median age in Australia of 40 years and China at 42 years. (1) 4. Technology and innovation Indian’s have embraced the new digital age, and in many cases, they have leap-frogged many of those technologies that emerged during the dot-com bubble. 80% of Indian’s use their mobile as the primary platform for accessing the internet with the desktop computer bypassed completely. This has created a highly engaged and agile market who are adopting many of the new technologies the share economy has to offer. Rideshare company Ola, a strong rival to Uber, was valued at $6.2 billion in May 2019 and has set a goal to bring one million electric vehicles onto the roads by 2021. (2) Projections suggest there will be 1.1 billion internet users in India by 2030, with each representing further opportunities to extend consumption and engage with the new service-based economy. 5. Changing consumer attitudes As the Indian population has become wealthier and more connected, the core attitudes of consumers are also changing. The growing middle class has led to the emergence of sectors in the market that were previously very small, including dining out, personal hygiene, organic food, health and fitness. Opportunity Awaits The Nifty50 Index is primed to benefit from the structural reforms currently happening in India. Financials make up almost 40% of the Nifty50 and these companies will arguably benefit the most from recent changes. With the policy of demonetisation and the introduction of GST boosting their performance. The second biggest overall sector in the index is the consumer sector, making up about 17% of the index, which will also benefit from India’s growing middle class, household consumption and urbanisation. India’s overall economic growth has been driven through domestic consumption and the Nifty50 is no different, with the index constituents generating a significant portion of their revenue onshore, despite their large cap nature. As global volatility increases with the threat of trade wars and political uncertainty, India can rely on its domestic consumption to achieve the 7.5% forecast growth in 2020 (IMF, April 2019). 1 https://www.statista.com/statistics/260493/median-age-of-the-population-in-australia/ 2 https://www.financialexpress.com/industry/sme/indias-2nd-most-valuable-startup-ola-valuation-to-hit-6-2-billion-new-funding-proposal-by-hyundai-kia-motors-show/1565464/
Jul 09, 2019
Published: 9th July 2019 Product in Focus: ETFS Physical Gold (ASX Code: Gold) Key Points Gold has been on a run in 2019 reaching a new all time high in AUD terms of over A$2000/ounce. Gold price is influenced by economic uncertainty and momentum Demand is high, driven by central bank and ETF purchasing Gold has been on a great run in 2019. US$ spot gold is up 9.1% since the start of the year and has recently been trading above US $1,400 for the first time since 2013 (as at 8th July 2019). In Australian dollar terms gold is hitting new all-time highs above A$2,000 an ounce. Fuelled by equity market volatility in late 2018 and recent heightened expectations of easing monetary policy, gold has performed precisely as would have been predicated by anyone anticipating the broader macro forces at work over the past year. Equity market volatility in early 2018 triggered a rally, which subsided as markets regrouped and set sail for new highs in the third quarter. Volatility returned the fourth quarter of 2018, driving gold higher again. All of this occurred with the backdrop of an abrupt shift in monetary policy from major central banks. To put gold’s price activity into context, it is worth looking at the historic drivers of the gold price. Research by the World Gold Council highlights the four broad categories of factors that influence the price of gold; This article looks at these four key factors in the context of the current market from a global perspective. Factor 1: Economic Expansion Despite much talk about the uncorrelated and counter-cyclical aspects of gold, like most assets, demand for gold is at least somewhat driven by the overall level activity and wealth in the global economy. Where savings and investment levels are high, demand for gold is high. Recent years have seen growing demand for gold from both India and China as levels of disposable wealth have grown. These two countries now account for more than 50% of global demand for gold. Conversely, a slowdown in the technology sector in late 2018 saw industrial demand fall by 3% in Q1 2019. While a broader economic slowdown seems to be in progress, the diversity of demand for gold and its traditional role as a strategic investment asset makes it unlikely that a reduction in economic activity will have a significant negative price impact on gold in the short-term. Factor 2: Risk and Uncertainty As an investment asset gold is commonly deployed as a portfolio diversifier, inflation hedge and quasi-insurance policy. Gold has shown persistently low levels of correlation with stocks and bonds over the long term, which means that the addition of gold to a portfolio is often able to improve risk-adjusted returns by adding diversification. Figure 3, below, shows the impact of adding gold to a typical balanced portfolio invested across Australian and international equities and fixed income (as represented by Vanguard’s LifeStrategy Balanced Fund). The conclusion here is that over the long-run a relatively small allocation to gold in a portfolio can have a consistent impact on the risk/return profile of the portfolio. In addition, gold can also have a substantial impact when other asset returns are stressed. This is evidenced in Figure 3(b) by the lower drawdowns, or losses experienced during the largest negative events. This leads us to gold’s commonly cited role as an “event risk” hedge. When major, unexpected events occur gold has, time and again, had a better outcome than equity markets. Figure 4, below, shows how gold fared versus the S&P 500 and ASX 200 through a selection of major financial events over the past four decades. When negative market events occur, gold’s correlation with mainstream asset classes tends to reduce and even become negative. This is in stark contrast to many other “alternative” assets, such as hedge fund strategies. During the global financial crisis, these were seen to be highly correlated to equity markets as investors simultaneously rushed to the exit of anything but the safest stores of value. Not only is gold highly liquid, its other important feature is that it has no credit risk. Unlike other asset classes, during times of financial stress when risk premiums are raised correlations between other assets rise as investors simultaneously look to sell, while gold often moves the other way on safe-haven buying. While such major events are unpredictable by nature, there is a growing case to be made that equity market valuations are currently stretched and that the volatility seen in early and late 2018 could well return in the near-term. Even if the monetary authorities are ahead of the curve and manage to engineer a soft landing, late-phase bull-markets are synonymous with bouts of volatility. As with any insurance policy, premiums are paid in the hope you never need to make a claim. Factor 3: Opportunity Cost The most common argument made against investing in gold is that gold has no intrinsic value because it produces no income and in fact produces negative income if you account for storage and security costs. This is certainly true in a literal sense. As has already been demonstrated, however, this should not detract from the role gold can play in a portfolio and the potential value it adds. The opportunity cost associated with holding gold is driven by the income and gains forgone by investing in gold over other asset classes. This is clearest in relation to bonds - when interest rates are high the relative cost of owning gold is high. Bonds may provide the necessary diversification, while also providing attractive levels of income. When yields are low, however, that cost of owning gold is reduced, making gold a more attractive play. In cases where yields are negative, as we currently see across Japan and the eurozone, gold effectively provides a positive yield. In the current market, not only are interest rates at the low end of the historic range, but monetary authorities, most importantly in the U.S., but also in Australia and Europe, have recently shifted from a normalisation/tightening bias, to a stimulatory/easing bias. Figure 5, below, demonstrates the very close relationship between gold and the U.S. 2-year Treasury yield over the past 18 months. Furthermore, over the past two easing cycles in the U.S. between 2001-03 and between 2007-08 gold appreciated by 31% and 17% respectively. Research by the World Gold Council also suggests that not only do lower interest rates raise demand for gold, but that interest rates have a greater impact on gold in periods where there is a shift in stance, which is exactly what we have seen over the past few months. Markets are now pricing a 100% probability of a Fed cut at the end of July. The likelihood of this was less than 20% as recently as late-May. Factor 4: Momentum Like most assets, gold is susceptible to trends and changes in momentum as it moves in and out of favour and the current trend is overwhelmingly positive. A key area of investment demand is from exchange traded funds (ETFs). Figure 6 shows that global ETF holdings have been steadily rising since early 2016. There are now over 74 million troy ounces of gold supporting physically-backed ETFs, which provide investors with access to gold on most global stock exchanges. ETF users range from larger institutional to small retail investors. Central bank demand is also growing and has been doing so since 2010. Net purchases are at historic highs and diversified across a wide range of nations. According to the World Gold Council 9 central banks added more than a tonne of gold to their reserves in Q1 2019. Conclusion In summary, gold has picked-up a strong tail-wind in recent months. Demand for gold continues to grow on multiple fronts. The case for using gold as a portfolio diversifier is also becoming clearer as interest rates decline and future growth prospects of global economies are questioned. For investors who are concerned with the risk of drastic, unexpected events it is hard to go past the track record of gold in helping to reduce losses in such scenarios. How to invest? Investors looking to add gold exposure to their portfolios can do so via ETFS Physical Gold (ASX: GOLD). GOLD is the oldest and largest gold ETF traded on the ASX. It is fully-backed by physical gold bullion vaulted on behalf of investors in the fund. GOLD charges a management fee of 0.40% per annum.
Jun 21, 2019
Product In Focus: ETFS Reliance India Nifty 50 ETF (NDIA) Key Points India has the world’s second largest population and is soon expected to surpass China The median age is just 28, this young demographic is powering significant growth The World Bank has estimated that India’s 2019/20 GDP growth will be 7.5% ETF Securities have launched Australia’s first ETF giving access to Indian equities (ASX Code: NDIA) The colour and chaos that is India has always captivated the imagination like no other country. From ancient agrarian beginnings, shaped by five thousand years of political, cultural and religious diversity, India is now emerging as an economic powerhouse. With a population of almost 1.3 billion people and one of the fastest growing economies in the world, many commentators are hailing India as ‘the new China’. Australian investors now have the opportunity to access this vibrant and rapidly growing economy with the launch by ETF Securities of the first exchange traded fund offering exposure to Indian stocks. What is propelling the India growth story? It is difficult to ignore the sheer scale of India. Currently the world’s second most populous nation, India is expected to claim the number one spot from China within the next decade. By 2025, it is estimated that one fifth of the world’s working age population will be Indian. And, with a median age of just 28 years, India’s young demographic is expected to power the country’s economy into the next decade. The potential is clearly shown by the pace at which Indians have embraced digital technology. With a take up rate second only to Indonesia, the number of Indian internet users is expected to hit 1.1 billion by 2030. Already, Indians spend more time on social media than their counterparts in China and the United States. The World Bank recently estimated that India’s GDP would grow by 7.5% in 2019/20, and continue this pattern in 2021 and 2022, pointing to the increasing resilience of its economy. Consumption among India’s younger demographic is only part of the story. The growth upswing is also being driven by increased foreign investment, which has been encouraged by structural reforms in the taxation and business sectors. Reserve Bank of India figures show that investment activity accelerated by 12.2% in 2018/19 compared to 7.6% in the previous year. Significantly, much of the investment over the past two decades has found its way not into industry but into a booming services sector. Social reforms and policy initiatives in infrastructure development, health and rural transformation have also played a big part, shifting India’s economy from one characterised by overwhelmingly high levels of poverty to one with an increasing degree of self-sufficiency. The changing face of India is reflected in the shrinking number of its citizens living in extreme poverty, which was slashed from 46% to an estimated 13.4% in the two decades leading up to 2015, according to the World Bank. In the past two decades, per capita income in India has risen fivefold, passenger car sales by 5.5 times and the number of inbound tourists by 8 times. The Asian Development Bank in its latest Asian Development Outlook said that it, too, expected the Indian economy to outperform, although its forecasts were slightly less bullish than the World Bank at 7.2% for FY2019/20. “India has a golden opportunity to cement recent economic gains by becoming more integrated in global value chains. The country’s young workforce, an improving business climate and a renewed focus on export expansion all support this,” the ADB said. “An increase in utilisation of production capacity by firms, along with falling levels of stressed assets held by banks and easing of credit restrictions on certain banks, is expected to help investment grow at a healthy rate.” Challenges ahead Although India’s economic development in recent years has outstripped that of many other emerging markets, the country still faces some challenges to ensure progress extends to all demographic and geographic areas. These key challenges include skill development and employment for the future workforce, creating a healthy and sustainable population, and lowering barriers for socio-economic inclusion of India’s rural population. Some commentators predict that India needs annual growth of 8% to create enough jobs for the more than 12 million young Indians entering the workforce each year. However, the unevenness of the growth in the economy has meant that growth in jobs has not kept pace. A recent McKinsey Global Institute study concluded that the digitisation of India’s economy could create 65 million jobs by 2025 but 40 million workers would need to be retrained to do them. India is at a tipping point and the time is ripe for key stakeholders within the public and private sector to come together to address these issues head on. Doing so will unshackle the potential of India’s youthful and technologically connected population and allow India to be a model for other fast-growing consumers markets. Indian election The recent return to power of the Bharatiya Janata Party (BJP), headed by Narendra Modi has been viewed as a positive, although the government faces several challenges to maintain the country’s economic momentum. Modi has been praised for his swiftness in dealing with geopolitical issues and implementing key supply-side reforms. Some commentators, however, have been critical that he has not delivered on economic promises to create more jobs, particularly in rural areas, where two thirds of the population is based. This will be a key target for his government over his second five year term. First ETF for India (NDIA) ETF Securities has teamed with Reliance Nippon Life Asset Management, one of India’s largest asset managers, for the launch of its NDIA ETF. Reliance has a 23 year track record in India and has some $USD 61 billion under management. NDIA will invest in a basket of stocks based on the Nifty50 Index – which comprises the 50 biggest listed companies listed on the National Stock Exchange (NSE), including HDFC Bank, Reliance Industries, Housing Development Finance Corporation, Infosys, ITC, ICICI Bank and Hindustan Unilever. It accounts for 13 sectors representing about 66.8% of the free float market capitalisation of the stocks listed on the NSE. The Nifty50 is up 13.6% over the past year and 16.3% over five years. Until now, India has been difficult for offshore investors to access due to the country’s strict foreign investment rules. Although there are a few unlisted “active” funds that invest in India, ETF Securities’ NDIA is the first vehicle for passive investment available to Australian investors. ETF Securities is Australia’s only independent ETF provider. Founded by philanthropist Graham Tuckwell, the group has more than A$1 billion in funds under management, across sectors as diverse as robotics, biotechnology, infrastructure and commodities.
May 16, 2019
Product In Focus: ETF Securities Future Present Range Megatrends are powerful forces that have the potential to cause long term structural changes in the economy and society. The Future Present range has been designed to give investors access to the emerging megatrends that are starting to define the world we live in. The range’s products positive performance is testament to investor trends. CURE up 22.0% year to date, ROBO 22.5%, TECH 20.7% and ACDC 7.1% (as at 12 April 2019) One of the most challenging aspects of investing has always been identifying ‘the next big thing’. In a rapidly changing world, where megatrends are drastically reshaping the way we live and do business, that process has become even more complex. Megatrends are best described as powerful forces – either socioeconomic, environmental or technological – that have the potential to cause long term structural changes in the economy and society as a whole. Technological advancement, demographic shifts, urbanisation and climate change are just some of the key megatrends combining to redefine the investment landscape. While the various megatrends are disrupting our lives in different ways, they are intertwined by the common thread of digitisation and the associated explosion in the power of data. Some are already dramatically changing the way particular industries operate. For example, the push for renewable energy is transforming car manufacturing with the rise of electrification, while artificial intelligence has seen robots replace thousands of jobs on the assembly line. Certainly, with the pace of change across business and society growing exponentially, investors cannot afford to ignore the influence of megatrends. Accessing investment in these megatrends, however, can be difficult for investors with limited knowledge or expertise in the technologies involved. Many of the best investment opportunities to tap into megatrends also involve going offshore. A good option for investors looking for exposure to megatrends is to invest in one of the specialised exchange traded funds (ETFs) that have emerged in recent years. ETFs have the advantage of offering investors a cost effective way to access the growth potential of various megatrends, while also providing an avenue for global diversity. Most ETFs tend to focus on a particular theme associated with one or more of the megatrends. US and European issuers have led the way, with ETF’s offering exposure to a diverse range of megatrends including technological progress and automation, digitalisation, ageing population, Asia’s expanding middle class, healthcare innovation, urbanisation, cybersecurity, water supply and even diversity and gender equality. In Australia, ETF Securities offers the Future Present range, which focuses on four funds providing access to disruption in sectors that will have a more dominant role in the future. These include robotics and artificial intelligence (ROBO), battery technology (ACDC), biotechnology (CURE) and broad global technology (TECH). Robotics and AI Once the subject of fantasy and science fiction thrillers, robotics are increasingly part of our everyday lives and look set to dominate the future. Already being widely used in manufacturing and online retail distribution, robots are expected to rapidly penetrate other industries as automation continues apace and companies seek to unlock productivity gains and improve profitability. The potential for growth is reflected in the fact that the world’s largest economy, China, has approximately 1 robot per 100 manufacturing workers, well down on the 7 per 100 employee in Singapore and South Korea. The growth in robotics will be driven by the efficiency gains on offer as robots perform monotonous tasks with high levels of precision and lower costs than their human counterparts. A report issued last year by the jobs website, Adzuna, found that 1 in 3 Australian jobs are at risk of automation by 2030. The potential for Robotics and AI, however, extends far beyond manufacturing efficiencies. A recent article by Raffaello D’Andrea, co-founder of Amazon Robotics and strategic adviser to ROBO Global, noted the limitless applications. “Using AI-fuelled robotics to farm the land more efficiently, we will we be able to provide food and shelter for ourselves and our families with ease. 5G networks will support everything from self-driving vehicles to digital medicine to ‘smart cities’” he said. ETF Securities’ global robotics and automation ETF (ROBO) tracks the performance of the ROBO Global Robotics and Automation index. It invests in a mix of stocks whose business is related to robotics, automation and AI. Battery Technology Climate change is causing a major push towards renewable energy, which is in turn, driving investment in alternative energy storage. Ultimately the companies behind this technology hope to develop batteries efficient enough to fly planes and feed power stations. For now, however, the most tangible example of battery application is the rapidly expanding world of electric vehicles (EV). Although initially slow to take off, EV sales are dramatically ramping up in some parts of the world. Norway has had by far the biggest take up of electric cars, with 49% of all sales, followed by Iceland and Sweden. Notably, however, the five countries in which EVs are the most popular account for only 0.5% of the world’s population. Chinese drivers are rapidly coming aboard, with over a million new vehicles hitting the road in 2018. Crucially, China also leads the market for charging stations. Australian sales have been slow to take off but will gather momentum, particularly if the ALP wins power at the next Federal Election. The ALP has set a 50% target for electric vehicles as a percentage of new passenger vehicles sales by 2030. ETF Securities was the first Australia issuer to bring out an ETF focused on energy storage and production (ACDC). The fund provides investors with access to companies involved in battery technology and the mining of lithium, which is used to make a range of batteries, including those found in your mobile phone. ACDC tracks the Solactive Battery Value-Chain Index. Investors can also gain exposure to the renewable energy megatrend by investing in Palladium, a key metal used by car manufacturers to control emissions from gasoline engines, which are replacing diesel under crackdowns on vehicle pollution in overseas markets. Palladium prices have recently hit record highs, reflecting strong demand from car manufacturers. ETFS offers investors an avenue to invest through ETFS Physical Palladium (ETPMPD). Biotechnology Biotechnology is one of the original megatrends. Scientific advances in the development of potential new treatments for diseases such as cancer, as well as excitement around the application of DNA sequencing, have underpinned interest in biotechnology companies for many years. However, the prospect of an ageing population, coupled with the increasing incidence of chronic illnesses such as diabetes and dementia, have reinforced the significance of biotechnology companies going forward. As well as searching for therapies to help treat chronic illnesses, biotechnology may also hold the key to solving food security, which poses significant challenges with the world population tipped to exceed 9 billion by 2050. One of the difficulties posed by investment in biotechnology is its highly speculative nature and the lengthy lead times involved with new discoveries. For example, it can take 10-15 years from the conceptual stage for a drug to reach the marketplace, usually with little to no income in the intervening period. Another difficulty is that, with the exception of a few listed Australian stocks, the bulk of biotech companies are located overseas. For this reason, biotechnology is a megatrend that is particularly well suited to an ETF. The ETFS S&P Biotech ETF (CURE) issued by ETF Securities late last year replicates the S&P Biotechnology Select Industry Index, which offers exposure to approximately 120 small-to-large cap international biotech companies. These include the likes of Seattle Genetics which is focused on producing specialised cancer therapies and Amgen, whose Enbrel treatment for arthritis had 2017 sales of US$5.4 billion. The recent performance of ETF Securities’ Future Present range demonstrate that investors are warming to the megatrend thematic with CURE UP 22.0% year to date, ROBO 22.5%, TECH 20.7% and ACDC 7.1% (as at 12 April 2019). For retail investors, ETFs continue to offer a low cost way into some of the themes that look set to dominate the investment horizon for some time to come.
May 08, 2019
Product in Focus: TECH - ETFS Morningstar Global Technology ETF The tech sector has provided significant opportunities for growth investing in recent years Prudent technology investors should examine value and quality stocks TECH actively selects technology leaders that have a competitive advantage over other companies The portfolio contains 25 to 50 stocks from a global universe Technology Is On A Roll The Information Technology (IT) sector has contributed nearly 30%(1) of total global equity returns over the past 5 years. This is more than double the performance of the next best sector - consumer discretionary, which itself can attribute much of its performance to 'tech style' stocks such as Amazon. Although there have been speed bumps along this growth trajectory there is a consensus that the incorporation of technology into our daily lives and the subsequent growth of the companies behind this will continue for some time. The big-name FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have sky-rocketed, with Apple and Amazon becoming the first two companies to top the US$1 trillion mark in 2018 and Microsoft recently achieving the same milestone. The Nasdaq 100 hit new all-time highs in April and to date has only posted a single negative week in 2019. As such, losses in the correction of the last quarter of 2018 have largely been recouped, but the volatility has not been forgotten by many. Questions, rightly, are being raised as to whether valuations are overblown, whether we are building towards a second tech bubble or, alternatively, whether the technology revolution is only just beginning. How Do you Navigate Stretched Valuations and Volatility? Exciting times lie ahead for technology companies, but it’s unlikely to be completely smooth sailing, with bouts of volatility always a possibility. Prudent technology investors should consider: Introducing ETFS Morningstar Global Technology ETF (ASX: TECH) ETFS Morningstar Global Technology ETF (TECH), which tracks the Morningstar Developed Markets Technology Moat Focus Index, was designed with this approach in mind. Here’s how its stock selection works to provide exposure to technology sector growth, while focusing on value, quality and diversification. ➢ Growth As a technology sector fund, TECH is by default highly exposed to growth as an investment factor. It is worth, however, clarifying exactly what constitutes a technology stock in this context. Relative to the well-known Nasdaq 100, this fund is less broad from a sector viewpoint, but broader on a regional basis. The Nasdaq 100, while highly technology exposed, is currently only about 45% invested in pure technology companies. TECH is therefore a more pure-play in terms of exposure to technology growth. Of the FAANG stocks TECH currently holds Apple, Google and Facebook. ➢ Value TECH benefits from research and analysis conducted by Morningstar’s extensive team of global equity analysts in assessing the fair value of eligible index constituents. Eligible companies are ranked according to their ratio of price/fair value and only the most undervalued companies are included in the Index. TECH currently holds positions in 31 companies, of which 20 are showing fair value above current market price (Chart 1). The weighted-average discount to fair value across the portfolio is 6.6% as at the end of April. This compares with a 5.5% weighted average premium to fair value across the Nasdaq 100(2). Further, companies that fall into the bottom 20% based on price momentum are screened out to ensure that the Index is not mistaking negative sentiment for value. ➢ Quality TECH invests only in quality companies and does this by screening firms according to their Morningstar Economic Moat Rating. An economic moat, as the name suggests, is something inherent in a company’s business model that defends its market position and cannot be easily replicated by competitors. It is the source of their competitive advantage and only well-established, high quality businesses achieve moat ratings. Wide Moat companies are the highest rated and are deemed able to maintain above average returns for the next 20 years. Narrow Moat companies are the next highest rated at should maintain excess returns for at least 10 years. TECH currently holds 12 Wide Moat companies including Adobe and Salesforce and 19 Narrow Moat companies including Computershare and LINE. ➢ Global Diversification The Index selects between 25 and 50 stocks from across global developed markets and equally weights them on a quarterly basis. Diversification benefits arise from the number of stocks chosen and the fact the they are drawn from an international universe. TECH currently holds stocks from the U.S., Japan and Australia. The equal weighting scheme is designed to both limit excessive exposure to the mega-cap names and to provide a greater opportunity for smaller companies to meaningfully contribute to performance. How has TECH performed? Chart 2 and Table 1, below, show the performance of TECH relative to a selection of prominent ETFs that offer technology-related exposures. These funds include Nasdaq 100 trackers listed in Australia and the U.S. (NDQ and QQQ respectively), a fund tracking the broad, market cap weighted S&P Global IT Sector Index (IXN) and the largest U.S. technology sector ETF (XLK). Returns are in Australian dollars and are net of fees. Since its inception on 7th April 2017, TECH has returned 30.1% p.a., which is 3.5% p.a. ahead of XLK and 6% p.a. ahead of the two Nasdaq 100 ETFs. Performance Without Taking More Risk Not only has it performed strongly, it has achieved its performance without taking undue levels of risk – it’s volatility since inception ranks fourth-lowest amongst the five funds shown. IXN, which holds close to 120 stocks compared to TECH’s 31 at present, has been about 1% p.a. less volatile. Performance During the Recent Market Correction Chart 3 shows the performance of the same five ETFs since the end of Q3 2018, which encompasses both the period of market volatility seen in the last quarter of the year and the subsequent recovery in 2019 to the end of April. Over that period TECH returned a total of 12.2%, which is more than double the return of the Nasdaq 100 funds and over 4% ahead of the next best performer, XLK. TECH’s maximum drawdown over the period from the end of September 2018 was 17.4%. This was almost 4% ahead of the next best fund, IXN, which dropped 21.4% over the period. In the recovery since Christmas, TECH returned 35.8%, which ranks second amongst the funds, behind only XLK, which rose 38.1% to the end of April. Summary The ETFS Morningstar Global Technology ETF (TECH) affords investors a simple solution to allocate assets to the technology sector in an intelligent way. This fund has been designed to provide pure exposure to the sector with stock selections seeking to choose a diversified portfolio of companies that have a competitive advantage over others operating in the field. Sources: 1 Bloomberg data as at 30 April 2019. The Information Technology sector contributed 13.2% of the 5-year total return of 46.4% of the iShares MSCI World ETF as a proxy for the global equity market. 2 Morningstar Direct as at 30 April 2019. Based on Morningstar analyst fair value ratings, which are available for 97.3% of the market capitalisation of the Nasdaq 100 index.
Apr 08, 2019
Product in Focus: ZUSD: ETFS Enhanced USD Cash ETF Most portfolios hold cash to provide liquidity and downside protection Investors can seek to increase the return on their cash allocation using ZUSD Current US rates are significantly higher than Australian rate The deposit rate of ZUSD is currently 2.36% (as of 7 April 2019), enhanced by holding funds in deposits ranging from overnight to 3 months Cash Is King Defensive assets such as cash hold an important place in portfolios not only for liquidity but also downside protection. When you look at the typical asset allocation ranges for the five main risk profiles it’s clear what a critical part cash plays in a portfolio; now more than ever with many deeply concerned about the end of the equity cycle. However, many Australian investors only consider cash as AUD cash. This is understandable, but cash balances should be diversified in the same way as equities and fixed income. This gives the benefit of both diversification and, often, better yields. The ETFS Enhanced USD Cash ETF (ZUSD) achieves this for the low cost of 0.30% p.a. The United States Of Play The Federal Reserve has two main objectives. They are: Low and stable inflation over the long term (a target of 2% in the U.S) Full employment With both objectives looking stable in the current US economic environment Powell looks to be fulfilling his mandate and this has been reflected in the current Fed Target rate - set at a range of 2.25% to 2.5% - giving the market a strong indication that rates are likely to be unchanged for the remainder of the year and if on what looks like to be a small chance there is a change, it is likely to be in the form of a cut. He is unphased by short term misses of inflation targets and concentrates on long term trends. This resonates with his recent statement (March 2019) about the use of Monetary policy, he stated that: “We don’t see data coming in that suggest that we should move in either direction. They suggest that we should remain patient and let the situation clarify itself over time.” The Fed And The Reserve – Are They Kicking Goals? The current US yields are higher than the equivalent Australian duration. As you can see in the chart above the 10-year yields on government bonds are over 50 basis points better in yield terms in the US than Australia right now. Even with the yield curve displaying inverted characteristics, shorter duration US yields are better than the Australian equivalent. Current Market Deposit Rates For US And Australian Cash The cash rates on offer on US cash deposits are significantly higher even in the scenario that the RBA raises rates and the Federal Reserve holds. Even in the unlikely event that the RBA has consecutive increases (given inflation looks stable and economic growth looks late in the cycle) to the cash rate and the Fed held rates constant, the cash deposit rates on offer to investors could remain in favour of those with US deposits. In the graph below the spread between US and Australian deposits has been more beneficial to US deposits since March 2018. Product Solution Investors holding US Dollar Cash should be aware of the benefits of the ZUSD - ETFS Enhanced USD Cash ETF that achieves the following: Exposure to US dollar cash Enhanced yield Quarterly distributions ZUSD makes use of higher yielding deposits out to a term of 3 months in duration to help enhance the yield for investors in the fund. Using a combination of “at call”, 1M and 3M duration deposits ZUSD is designed to give investors an enhanced US dollar cash position rather than just holding exposure to the physical US dollar. Investors should consider diversifying their cash positions by holding non-domestic cash in addition to Aussie dollars via ZUSD.