Investment Professionals
The conflicting challenges of retirement
Feb 11, 2020
To access the 'No retirement for investments' white paper, please click the download now button above.
Important notice: a previous version of this whitepaper incorrectly stated the ASFA comfortable retirement standards for a couple as $43,787/year and superannuation balance of $545,000. These figures relate to the comfortable retirement standards of a single not a couple. The standards for a couple are $61,786/year and $640,000 in superannuation balance.
Managing a retirement portfolio for income and growth
Retirement portfolios offer a particular challenge in advice, given their more complex needs. They need to generate a stable income, preserve capital and still offer some level of growth to allow investors to manage inflation and longevity risks, along with a reasonable standard of lifestyle.
In the paper No retirement for investments, ETF Securities considers how assets, portfolio construction and product selection can be used to manage retirement in the current market environment. You can download the full paper above, or read the summary following.
Part of the solution comes down to diversification of the assets used for income. Retired investors have traditionally relied on domestic fixed income to support their yield needs but are now forced to consider other options. Fixed income can still play a role, for example, diversifying to international sources such as US fixed income which currently offers a higher interest rate may be part of the answer.
Commonly, investors are being forced into riskier income approaches, such as through dividend streams.
High yield equities may work for some retired investors, pending their risk tolerance along with overall portfolio construction. For example, they may consider how to offset the higher risks of high yield shares in other parts of their portfolio. Using alternatives in the form of commodities like gold may assist with offering stability and diversification to manage the volatility which could occur in high yield shares.
Alternatively, looking to investments in more stable, less cyclical industries may be more suitable. Infrastructure is one option. It includes many essential services areas like utilities, telecommunications, industrials and transport which tend to be less vulnerable to market movements and cycles.
Finally, product choice can be part of the solution to market conditions. Flexibility is important in this environment, but retired investors also need to be conscious of costs, risks and quality. Bearing these in mind, ETFs may be a suitable option due to characteristics such as low costs, ease of use, liquidity and a wide range to assist in meeting specific portfolio needs or gaps.
For more information on the solutions ETF Securities offers, please contact us on:
Sales
Trading
Phone +61 2 8311 3488
Email: infoAU@etfsecurities.com.au
Phone +61 2 8311 3483
Email: primarymarkets@etfsecurities.com.au
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Investing in ETFs over Reporting Season
Aug 13, 2019
Published: 13th August 2019
Product in Focus: ETFS S&P/ASX 300 High Yield Plus ETF
Key Points
August reporting season is in full-swing, presenting investors with both opportunities and risks.
ETFs offer a simple and cost-effective way to diversify away from single name risks.
ZYAU, which holds companies based on quality and yield factors, could be an attractive solution over this period.
Reporting season is upon us as most Australian companies prepare to present their financial results for the period ended 30 June 2019. This article looks at the risks and opportunities that may present themselves during the up-coming weeks and demonstrates how ETFs can be used to avoid some of the pitfalls that can arise.
Reporting Season highlights
Of the S&P/ASX 200 constituents, 152 will report by the end of this month, with activity peaking in the middle two-weeks of August.
Highlights include Rio Tinto on 1st of August, Commonwealth Bank on the 7th, CSL Limited on 14th, Telstra Corp on the 15th and BHP Group on 20th. Wesfarmers and Woolworths report on 27th and 29th, respectively. Figure 1 provides a visual guide to the season ahead.
Opportunity or Risk?
Over the coming weeks market professionals will be positioning their portfolios and adjusting their ratings and targets in anticipation of earnings reports. Not only are they forecasting company results, following each announcement comes the task of digesting the details and evaluating how the market will react.
With China’s slowing economy, global trade concerns, Brexit, Hong Kong and rate cuts on the cards both locally and abroad, there are also a lot of external factors to consider.
For professional investors, reporting season represents an opportunity. Those with better insight into the workings of each company and a better ability to read how the market will interpret earnings reports and changes in external variables have a better chance of beating the market.
For average investors, however, the risks of making a bad call on a single company can often outweigh the potential rewards.
Stock Picking Is a Zero-Sum Game
It is often not appreciated that stock picking and active management is a zero-sum game. For every investor who outperforms the market, another investor must underperform. The average return earned by all investors is, by definition, the return of the market.
To demonstrate this, we introduce the concept of dispersion. Dispersion is a measure of how spread out stock returns are over a period of time. Figure 2 shows two simple examples.
In Panel A, where dispersion is low, the opposite is true. To use an extreme example, in the case where all stocks have the same return, which is the market return, dispersion is zero and there is no ability for anyone to outperform the market.
In Panel B, where stock returns are very spread out or dispersed, there are high rewards available for correctly picking the winners, but there are also high risks for backing the losers.
How Risky Is Reporting Season?
We now turn our attention to the Australian reporting season and investigate the dispersion of stocks over the two key reporting months; February and August. To do so we calculated the dispersion of S&P/ASX 200 stocks on a monthly basis over ten years, where dispersion is measured as the standard deviation of returns between stocks. Monthly dispersion numbers are then averaged across each calendar month over the sample period. Results are shown in Figure 3.
As anticipated, the two highest dispersion months are February and August. On average the dispersion across these two months is over 2% higher than over other months.
The conclusion that we draw from this is that reporting periods present both the biggest opportunity to beat the market, but also the biggest risk of lagging the market. For investors who do not have an edge, the risks of attempting to beat the market can be high.
So, what can the average investor do to avoid such risks?
Diversification using ETFs
Exchange traded funds offer a simple and easy solution. They allow investors to purchase an entire portfolio of ASX-listed stocks in a single trade. Low-cost diversification is a key feature of ETFs and this is exactly what investors need over periods where single-name risk and market dispersion is anticipated to be high.
Broad-based ETFs, which closely tracks the market, can be useful for riding-out risker periods, but investing in ETFs does not necessarily mean simply investing with the market.
It is still possible to take an active position, while diversifying-away single stock risk. ETFs offer a wide range of different exposures, most of which provide significant diversification benefits.
One strategy for reducing earnings-related volatility is to invest in high quality firms with stable income. ETF Securities offers a unique fund in this regard, which filters ASX-listed companies for both yield and quality.
ZYAU provides exposure to a selection of 40 Australian companies that have high dividend yields and/or share buy-back rates. To be eligible for inclusion the companies must have stable or increasing dividends and must generate Free Cash Flow to Equity above the amount of their distributions. This avoids companies who are using debt to finance unsustainably high yields and helps to identify high quality companies.
Companies with stable yields and strong cash flow generation tend to be well-established, stable businesses with strong balance sheets and may be less prone to negative earnings surprises.
Fund Name
ETFS S&P/ASX 300 High Yield Plus ETF
(ASX Code: ZYAU)
Management Fee
0.35% per annum
Benchmark
S&P/ASX 300 Shareholder Yield Index
Inception Date
9 June 2015
Distribution Frequency
Quarterly
12 Month Yield
5.09% plus franking credits
Holdings
A full list of current holdings is available through the product
PCF located here.
In Summary
ZYAU offers investors a portfolio of high quality, yield-paying stocks on the ASX that can help achieve diversification in a single trade at a relatively low cost. This can be particularly powerful over reporting season, where returns in individual stocks tend to be more spread out and the risks from choosing the wrong stocks is higher.
ZYAU is currently yielding 5.09% p.a. plus franking credits and has consistently been one of the best performing Australian equity-income ETFs since coming to market in 2015.
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Putting the Spotlight on Defenders
Nov 11, 2018
Key Takeaways
Recent market volatility has encouraged investors to position portfolios more defensively
ETF Securities has a selection of products more suited to a defensive strategy
ZYUS gives a low volatility approach to the US market
CORE gives exposure to the historically more stable infrastructure sector
GOLD provides the best-known hedge against equity market downturn and political instability
Introduction
Investors have battened down the hatches over the past weeks as waves of volatility have dominated the market. Maybe the market calms down and equities resurge, but now, is clear, that late cycle volatility is here and will probably become more violent at each episode.
The recent equity sell-off has heightened uncertainty, with consumer sentiment nicely described by the
CNN ‘Fear and Greed Index’ that looks to characterise the primary emotion driving the market (see
below).
Right now, this index sits at 11, or ‘extreme fear’. Why? The consensus among investors appears to be
that we’re in the ‘late stage’ of the investment cycle. Wall St’s thundering run has lasted a decade – the
longest ever. And the market has become increasingly wary because of that.
We have seen a very large sell-off in technology sector stocks with the Nasdaq, which is often taken as
a proxy for US tech, recording its worst month since 2012. This suggests that some are losing faith in
the continued performance of our recent equity stars (otherwise known as team FAANG).
Adding fuel to the fire, the world has been curiously watching on as China and the US continue their
game of trade policy tag. As the reverberations of any decisions by these heavyweights are felt by all,
this tension is creating a difficult environment for investors.
Playing Defence
Though we are all familiar with the old adage ‘past performance is not an indicator of future
performance’, it is sometimes helpful to look back at how previous storms have been weathered.
The traditional market response to a late cycle downturn can generally be characterised by a move away
from higher risk equities such as technology or emerging markets, greater focus on essential sectors
such as healthcare, utilities and energy, and a general movement away from equities and into cash,
short-term fixed income and commodities. As the bull market nears the close of its tenth year many are
considering if now is the time to reposition portfolios towards ‘defensive’ assets.
So, what are the options for investors looking to rearrange their holdings into a more defensive position?
** Gold is not considered in the risk illustration for two reasons. First, there is no counterparty risk with
gold whatsoever (with cash there is still sovereign risk). Second, gold has historically had low
correlations with equities, so its risk characteristics work differently.
Defensive Equity Solutions
America
If you take a glance at global headlines, the US right now may seem a difficult market to play, with high
levels of uncertainty around international policy and tariffs.
However, as the world’s dominant economy, many would wish to maintain some sort of equity exposure
but with a defensive tilt and an eye on capital preservation as much as growth. The ETFS S&P 500
High Yield Low Volatility ETF (ZYUS) is one option that is designed to achieve this.
As suggested by the name, this ETF has a low volatility filter built into its index construction. The
underlying assumption is that companies that don’t exhibit aggressive price movements are less likely
to be sold down heavily in a general market sell off.
Specifically, the index universe (the S&P 500) is ordered to select the 75 highest yielding stocks and
then the 50 least volatile of those 75 are selected creating a high dividend paying, relatively low risk
portfolio based on the trailing twelve months of price data.
With reference to the chart above it is clear to see that, since the VIX jumped in October, IVV has lost
approximately 10% whereas ZYUS has only lost 4%.
Part of the reason for this is because ZYUS has a 16% greater exposure to utilities (historically low in
volatility) whilst a 17% less to information technology (historically high in volatility) (as at 30th August
2018, source: S&P).
Infrastructure
Another strategy investors may consider in times of heightened volatility is increasing the allocation to
sectors that have historically had greater stability. One such area known for this is infrastructure. The
source of this stability can be explained by looking at the industries that fall into this sector: utilities,
telecoms, industrials and transport.
These industries typically have high capital costs, low elasticity of demand, long business timelines
and often exist as regulated oligopolies or monopolies. Their capital-intensive nature means that they
are very difficult and, in some cases, like energy distribution networks, nigh impossible to disrupt.
This can mean that these sectors have lower risk (as measured by standard deviation of returns) than
other sectors, such as technology or real estate. The table below illustrates the substantially lower
volatility of infrastructure against these sectors.
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The Aussie yield ETF that challenges active managers
Apr 09, 2018
ETFS Trade idea – The Aussie yield ETF that challenges active managers
ETFS S&P/ASX 300 High Yield Plus ETF (ZYAU)
In the wake of S&P Dow Jones Indices recently published
SPIVA® report, this week we have taken a look at how our ETFs
have fared against active managers over time.
This note highlights ZYAU, which has produced strong excess
returns since inception and outperformed many well-known
active managers.
Investors looking for cost-effective excess returns from domestic
equities should consider evaluating ZYAU.
In this week’s ETFS Trade idea, we look at the results of the SPIVA® Australia Scorecard released by S&P
Dow Jones Indices last month and compare the performance of ZYAU to a collection of well-known active
funds focused on Australian equity-income.
SPVIA® Australia Scorecard 2017
S&P Dow Jones Indices have been publishing SPIVA® Scorecards for major markets since 2002 and have
become leading contributors to the active versus passive debate worldwide. The SPIVA® Scorecards track the
performance of active fund managers in each market against benchmark indices across a variety of categories
and across multiple time horizons.
Looking specifically at Australian large-cap equity funds, as at the end of 2017 59% of funds underperformed
the S&P/ASX 200 Index. Over 3, 5 and 15 year periods, respectively, 67%, 63% and 77% of funds
underperformed the national benchmark. An equally-weighted portfolio of active funds would have
underperformed the benchmark over 1, 3, 5, 10 and 15 years.
Similarly, in the mid and small-cap categories, 74% and 75% of funds underperformed the S&P/ASX Mid-Small Index over 1 and 3 years.
How does ZYAU compare to active funds?
ZYAU sits in-between a traditional active fund and a purely passive index tracker in the area commonly
termed ‘smart-beta’ or ‘enhanced-alpha’. Smart-beta funds passively track an index, but the index they track
has features that differentiate it from a standard market capitalisation-weighted index and aim to outperform
a standard index in much the same way that active funds do.
In the case of ZYAU, it tracks the S&P/ASX 300 Shareholder Yield Index, which aims to outperform the
S&P/ASX 300 benchmark by selecting a sub-set of constituents based on ‘shareholder yield’ – a combined
measure of dividend yield and buy-back yield.
Because ZYAU’s investment strategy is pre-defined it has several potential advantages over active funds:
its strategy is consistent, published and available for investors to evaluate and scrutinise
its holdings are published in the public domain on a daily basis
because it trades on exchange, investors can trade intra-day, unlike with many active funds
because the fund does not require a team of fund managers to continually evaluate its holdings, it
can charge management fees more in-line with passive index trackers.
ZYAU’s stocks selections tend to be more “active” than many active funds, with its Active Share,
or non-overlapping weight, versus the S&P/ASX 200 currently at 80.5%. This means that ZYAU
can better compliment a core index holding in a portfolio.
Table 2, below, shows comparative performances and headline management fees of ZYAU against a
collection of well-known active funds that focus on Australian equity and equity income.
Low Cost
Firstly, to note, ZYAU’s management fee compares favourably to the active funds, as would be expected.
ZYAU charges a fee of 0.35% p.a., which is below all of the active funds profiled and significantly below the
average active MER of 0.83% p.a.
Consistent Strong Performance
With regards to performance, since its inception in June 2015, ZYAU has generated 2.19% p.a. excess return
over the S&P/ASX 200, which puts it ahead of 16 of the 17 active funds. Only Bennelong Australian Equities
Fund has outperformed, due to a very strong start to 2018.
In the calendar year 2017, ZYAU outperformed the S&P/ASX 200 by 0.63% and beat 14 of its 17 active peers.
In 2016, ZYAU outperformed 16 of the 17 active funds profiled and produced 5.42% of excess return over
the benchmark index.
Since inception, ZYAU has delivered strong performance at a fraction of the cost of many of its active peers
and should be, therefore, considered by investors looking for cost-effective excess returns.
How ZYAU invests
ETFS S&P/ASX 300 High Yield Plus ETF (ZYAU) is well positioned for investors for the following
reasons:
ZYAU captures the performance of a selection of 40 high yielding Australian shares selected from the
S&P/ASX 300 Index and rebalanced twice annually.
ZYAU initially screens stocks based on liquidity, free cash flow to equity and dividend growth rates.
This excludes stocks that are illiquid, are returning more cash to shareholders than they are earning,
or have recently cut their dividend payouts.
ZYAU then selects the 40 stocks with the highest shareholder yields for inclusion and weights them
according to a mix of shareholder yield and market capitalisation.
ZYAU has an MER of 0.35% p.a.
ZYAU has a Recommended rating by Lonsec.
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Unhappy With Your Dividends Fund's Performance?
Aug 22, 2017
ETFS S&P/ASX 300 High Yield Plus ETF (ZYAU)
In this week’s ETF Securities trade idea we look at dividend yield strategies and how they can be used in different ways depending on the investor's goals.
Dividend strategies can be implemented in different ways to achieve different goals, which have their own pros and cons.
Beware of dividend traps, chasing yield may lead to poor investment choices.
Capital growth versus income generation – don’t sacrifice one for the other.