Investment Ideas

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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Trade Idea: 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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Trade Idea: 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.

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