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.
Feb 18, 2019
Here’s the Buzz around Megatrends Products in Focus: The ETF Securities Future Present Range Q4 2018 saw high levels of volatility that particularly affected the tech sector and high beta areas of the market . YTD performance in 2019 has seen a rebound of many of these stocks . In this article we explore some of the key drivers of growth in the future . In the long term there is a positive outlook for technology, robotics, battery tech and biotechnology. At ETF Securities, we often talk about megatrends; disruption, displacement, game-changing and revolutionary technologies. Whilst it is easy to become cynical about the overuse of these terms, it’s clear that the pace of change is accelerating with no signs of slowing. Since 1956 there has been more than a trillion-fold increase in computing power where today the power of the iPhone 6 (an already outdated technology) could theoretically guide 120 million Apollo 11 rockets at once. Taking a step back, the greatest driver of this advancement is simply the enormous expansion in computing power. We now have capabilities to capture and analyse immense quantities of data, and this knowledge is being applied to a wealth of areas, with many of these technologies previously restricted to the realms of science fiction. The ETF Securities Future Present range gives investors a way to access disruptive technologies in a diversified manner. The range includes four funds targeting different sectors that are looking to have a greater presence in the future: TECH: ETFS Morningstar Global Technology ETF Once seen as a highly speculative investment, technology has now firmly cemented its place at the top of the S&P 500. It is fair to say that most people are highly dependent on leading tech firms that have become exceedingly integrated into our lives. We wake up, check the weather on our Apple iPhone, cycle to work on that (pricey) Cannondale and track the ride on our Garmin. Once at the office, the computer is booted up and Microsoft Office provides the tools to get us through the day. These technologies are ubiquitous and as such it is important to know the different ways of gaining exposure to the companies behind them. TECH holds a basket of 32 global technology stocks that have been identified using Morningstar’s moat methodology, meaning they have a competitive advantage over other similar businesses. With Morningstar’s active influence in this fund, it has outperformed the Nasdaq 100 since it was launched in April 2017. ROBO: ETFS ROBO Global Robotics & Automation ETF While the tech sector is dominating the present, it’s robotics, automation and AI (RAAI) that looks set to dominate the future. The outlook for growth in RAAI looks bright and with recent volatility providing increasingly attractive valuations in this sector, is now the time to consider to invest in this thematic? This year industry experts are pointing to improvements in network capabilities, particularly the roll out of 5G networks, aiding growth across the board, with the upgrade from 4 or 4.5G yielding as much as 10-100 time improvements in network speeds. These enhancements are instrumental in enabling the development and implementation of other technologies. Can you imagine using Netflix in the days of dial-up internet? Further penetration of manufacturing robots is also expected to occur as the automation of the workforce continues. Today’s China has approximately 1 robot per 100 manufacturing workers, with huge scope for growth if it’s to reach ratio’s in line with Germany and South Korea’s 6 per 100. These robots are performing monotonous tasks with high levels of precision and increasingly lower costs than their human counterparts, meaning companies will need to keep up with the levels of automation their rivals are using to keep up with the competition. ACDC: ETFS Battery Tech & Lithium ETF Global climate change and the move towards renewable energy is one of the most pressing issues of today and one of the key drivers of our success in addressing this issue will be in the development of energy storage. Imagine a world where battery technology is efficient enough to fly planes and feed power stations – this is the world companies behind this technology are striving for, and we’re already on our way with the explosion of electric vehicle development. But it’s not just electric vehicles making advances. In classic Musk fashion, Elon managed to make batteries the talk of the town in 2018 with his 100-day delivery of the Hornsdale Power Reserve battery in South Australia, currently the largest in the world. This drew attention for the necessity of pairing renewable energy generation with practical storage solutions. Whilst Tesla has had the first-move advantage in the electric vehicle (EV) market, it is rapidly being chased by established car manufacturers like BMW, Volkswagen and Nissan, who have equally ambitious goals to capture the growing consumer demand for green-transport. JP Morgan project EVs and Hybrid Electric Vehicles (HEVs) will account for 30% of all vehicle sales by 2025. CURE: ETFS S&P Biotech ETF Whilst biotechnology is arguably one of the oldest forms of technology, its prospects for future development are high. Since the first smallpox vaccine was administered in 1761, there have been huge advances in the biotechnology field. The sequencing of the first human genome in 2003 enabled a plethora of new biotech drugs to be developed. DNA sequencing has created hope for those previously suffering incurable diseases and has provided a quality of life where it was previously lost. At the time of writing 67 of the 119 stocks in CURE are either researching or producing diagnostic tools or drugs that treat cancer. Therapies are being developed for psychological disorders, inoperable tumours, chronic pain, hereditary diseases and degenerative illnesses. As an industry that is renowned for its volatility, biotechnology can be a particularly difficult sector to choose a winner. For the uninitiated, it is a realm full of highly specific medical jargon, tied up with regulatory barriers and inexplicable results to clinical trials. This is why CURE offers an equal weight and broad exposure to the biotech sector. And whilst it is difficult to know who will be responsible for the next breakthrough treatment, what we do know is that people will always pay for healthcare, especially as our aging population grows. This is an industry where success does not just mean more dollars in the bank, but lives saved, and families kept together. The Future is Now The examples above provide just a glimpse into the full scope of innovation that is captured by the ETF Securities Future Present Range. The future is now, and the way we live and work will continue to be defined by these mega trends. Accessing these sectors through a diversified, equal weight ETF allows investors to take a view on what trends will dictate the times to come.
Jul 23, 2018
ETFS Trade idea: Five reasons to consider an investment in TECH now In this week’s ETFS Trade idea we focus on the ETFS Morningstar Global Technology ETF (TECH) and look at five reasons why you might want to consider an investment in technology in the current market. High level observations: Technology stocks have continued their strong run in 2018Technology firms may be more resilient to a global trade war TECH includes valuation and quality features that may alleviate concerns of some investors Investors considering the technology sector should look at TECH The sector has proven to be robust in changing market conditions over recent years
Jan 22, 2018
How the Future Present series fits your portfolio Trade idea – ETF Securities Future Present series i. ETFS Morningstar Global Technology ETF (TECH) ii. ETFS ROBO Global Robotics and Automation ETF (ROBO) Key Takeaways: Technology was the top performing sector in 2017, returning 39% for the calendar year and contributing 25% of the total global equity market return(1). The pace of innovation continues to grow and adoption of new technologies in fields such as robotics and AI is quickly spreading across many industries. Adding funds like TECH and ROBO to an otherwise diversified portfolio offers investors unique opportunities to capture any future growth in this sector, while also reducing overall portfolio risk. (1) Source: Bloomberg data as at 18 January 2017. Information technology companies contributed 5.73% to the total return of 23.06% of the MSCI World Index in 2017. Future Proofing Portfolios Investors looking to future-proof their portfolios in 2018 should consider the opportunities that are presented by investing in new technology and innovation. Fields such as robotics, automation and artificial intelligence (RAII), in particular, are forecast to grow massively in the coming years and impact almost every industry by providing key enabling technologies and new applications for existing technologies. Investments in technology have traditionally been viewed as high return/high risk, however in recent years the established players in the technology world have become highly cash generative and broadly entrenched in our everyday lives. This has given many technology companies defensive, counter-cyclical characteristics that are traditionally more associated with utilities and real estate investments and has changed the way many investors look at the technology sector. ETF Securities Future Present Range The Future Present range of ETFs allows investors to combine well-established technology firms with strong competitive advantages, using TECH, with highly innovative firms from the exciting world of RAII, using ROBO. The below study explores the impact of adding the Future Present range to a simple, diversified ETF portfolio consisting of Australian equities, international equities, fixed income, gold and property. Hypothetical portfolio allocations are detailed in Charts 1 and 2 below: Over the four years of available history, adding a 10% allocation to the Future Present range (5% each to TECH and ROBO), while keeping the allocation to equities constant, not only improves the overall total return by 0.84% per annum, but also reduces the portfolio volatility by 0.95%2. Charts 3 to 6, below, show the risk return characteristics of the two portfolios as well as each of the constituents over 1, 2, 3 and 4 years. Benefits to Your Portfolio Apparent from the four charts below is the strong historical performance of the Future Present ETFs, with the two funds ranking first and second on the basis of returns across all tenors. With regards to volatility or risk, as measured by standard deviation, TECH and ROBO are at the higher end, though not substantially more volatile than either the Australian or international equity ETFs or gold. In all four cases, however, diversification benefits are seen in that adding above average risk investments lowers the overall portfolio risk in all cases, providing investors with better risk/return profiles. This is particularly true for Australian investors with high portfolio allocations to the domestic market, which is very underweight the technology sector. Source: Morningstar Direct as at 31 December 2017. Benchmark index returns are used as a proxy for TECH and ROBO due to insufficient fund history. Returns in AUD. Past performance is not an indicator of future performance. These graphs illustrate the trade-off between risk (standard deviation or volatility around the mean) and reward (expected or average return). The ideal position is within the upper left quadrant of the graphs. Placement here indicates that the portfolio returned more than the risk-free benchmark (typically the yield on high quality government bonds) with lower volatility. The bottom right corner is the least desirable, since this represents highest risk with lowest return