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ETF Securities Partner Series: What investors, like you, are buying
ETF Securities Partner Series: Investment strategies in uncertain times
ETF Securities Partner Series: Beyond healthcare - the future of biotechnology
ETF Securities Partner Series: What are the blue chips of the future?

The changing face of leveraged investing in Australia

Jul 15, 2020

Products like margin loans and contract for difference (CFDs) may have been the traditional face of leveraged and inverse investing, but the emergence of leveraged and inverse exchange traded products (ETPs) has changed the landscape. Kanish Chugh, co-Head of Sales for ETF Securities spoke to David Tuckwell, Editor for ETF Stream, Zac Zacharia, Founder and Managing Director for Centra Wealth Group and Adrian Rowley, Head of Equity Strategies for Watershed Funds Management about this growing space and how they are using these products. Leveraged and inverse ETPs While leveraged and inverse ETPs bear some similarity to exchange traded funds (ETFs) in that they are listed on a stock exchange and traded this way, they are managed and operate differently. “A leveraged ETF is a bit like a magnifying glass. So it starts off with your regular old index, like the ASX 200 or the S&P 500, then it essentially magnifies the return on that index. If it's an Australian-style ETF, then it will magnify the exposure within a certain band. If it's an American-style one, it'll do it slightly differently and give you exposure, but a magnified exposure, but only for the day. Just to give a little bit of information on the inverse ones, the way they work is like a mirror when the market goes up, they go down and vice-versa,” says Mr Tuckwell. Leveraged and inverse ETPs is a growing market in Australia – there are currently only 8 products listed on the ASX, compared to approximately 257 listed in the US [1]. Australia may follow the path of the US to some extent, though Mr Tuckwell notes there are differences between the markets. “Australia is not the United States. We're a very different country with different laws, with different regulations… In the United States, the way those leveraged inverse ETPs work is they give you the exposure just for one day… over the long-term, they go to zero, essentially, because of the way they compound. That's not allowed in Australia, those kinds of funds aren't allowed here… The way they work here is they're actively managed, they work like hedge funds and they try and give you a magnified or inverse exposure within a certain parameter. So, very different countries, very different laws, very different context,” he says. Increasingly popular Investors have shown increasing interest in and use of leveraged and inverse ETPs in recent months, with the most popular Australian listed inverse ETP tripling its assets since January. Market volatility related to the COVID-19 pandemic has been a key driver for this activity. Mr Tuckwell says, “investors are looking for a way to either hedge against it or in some cases, trade into the volatility…They're trying to do it without necessarily resorting to short selling, or they're trying to do it without being able to access derivatives.” Different ways of using leveraged and inverse ETPs Mr Zacharia and Mr Rowley both use leveraged and inverse products for their clients, though in slightly different ways. For Mr Rowley, it is about managing risk in the portfolio. He says, “So, late last year and certainly early this year with the maturity of our market, with the valuation that was clearly stretched in some of those macro risk building, we built up a fairly substantial index short position within our Large Cap Aussie Equity SMA. So what that means is, we could keep a larger percentage of the portfolio intact. So reducing turnover, keeping more of the portfolio in top 100 stocks, getting that 4 or 5% dividend, but by buying a leveraged and increasing a position for exposure to a leveraged short ETF, we could really dial back the overall market exposure at a point where we thought that the market was clearly stretched. So for us, it's a way to manage risk, but we have actually bought geared ETFs as well.” He views leveraged and inverse products as valuable tools in market volatility. Mr Zacharia uses such products slightly differently and focuses more on using leveraged ETPs, rather than inverse. “Where the client is moderate or high growth, that's where we bring in the geared Australian shares or international share ETPs as part of the core index exposure to those classes. Now, depending on the client, this can represent anything from 10 to 50% of the allocation. And where it works really well is if it's done in conjunction with a dividend reinvestment strategy. And that's where we really see the effects of compounding that works well in their portfolios,” says Mr Zacharia. He uses inverse ETPs occasionally as a hedge against market volatility but feels the leveraging is not enough in these products and market timing also holds concern. “You get the timing wrong and you really don't benefit as much as perhaps you should from those,” he says. What to consider when using leveraged and inverse ETPs Leveraged and inverse ETPs are sophisticated trading tools, and while listing on the stock exchange may make them accessible, this doesn’t mean they are suitable for all investors. Mr Tuckwell says, “it's fair to characterise index funds and ETFs as more defensive kinds of products for the most part. These types of funds aren't necessarily like that. So I think the first and most critical thing for investors considering using these, is know the risks and know what you're buying.” Similarly, Mr Zacharia says, “I think it's really understanding the risk versus reward story where it fits in the portfolio. Leverage is always going to be a double-edged sword and investors need to understand that you’ve got to take the good with the bad, I guess. Understanding the drawdown risk, if you are a passive investor in a traditional buy and hold sense. And remembering of course, that short ETFs are for the short term, dare I say it. Often people don't get the timing right, and they don't benefit from them.” Mr Rowley shares this concern but also highlights the importance of their role within the broader portfolio. “I think, for us, it's about really understanding how it fits within the client's broader portfolio. So, for us they're portfolio construction tools. So, it's about thinking how it fits within the broader portfolio and how that will change or alter the risk and return profile going forward,” he says. ETF Securities launched two new Ultra Short and Ultra Long Nasdaq 100 Hedge Funds in July, find out more or contact us. References [1] https://www.schwab.com/resource-center/insights/content/leveraged-and-inverse-etps-going-going-gone

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What investors, like you, are buying.

Jun 30, 2020

The COVID-19 pandemic may have proved volatile for investment markets, but it also appears to have opened the door for new and existing investors seeking opportunities. What makes recent months particularly interesting is that investor behaviour in the latest market volatility has been unlike past panic activity. Kanish Chugh, Co-Head of Sales at ETF Securities, explored recent investor behaviours and interests with Gemma Dale, Director SMSF and Investor Behaviour at Nabtrade. Increasing investor activity ASX reports show a substantial increase in retail trading over the course of the COVID-19 pandemic, with average retail trading increasing to $3.3bn at the end of April 2020 compared to $1.6bn pre-COVID and many dormant accounts recommencing trading activity[1]. Nabtrade, one of the largest trading platforms in Australia, experienced much of this increased interest and activity. “We’ve seen just an unbelievable uplift in people who are suddenly really enthusiastic about buying shares…We saw a 500% uplift in new applicants in March. We saw another 300% increase in April – that’s off usual levels, not off March. And we saw that continue through May, but it’s starting to fall away,” says Ms Dale. Ms Dale found that investors have been focused more on quality rather than speculative purchases in the past few months. “They were buying largely blue-chip stuff that they were already very familiar with. We saw people buying stuff they wanted to own for a long time before but thought were too expensive,” she says. She points to CSL as being popular with investors along with banks. “Most of them saw that times are going to be tough for banks. When you give everyone a loan repayment holiday for six months and when you have high levels of unemployment, and so on, it's going to be tough, but these are still high-quality businesses. They're going to be around after all of this is ending,” Ms Dale says. She also found aggressive buying behaviour around buy-now, pay-later companies such as Afterpay, Zip and Splitit and, perhaps more surprisingly, the travel sector, with Qantas and FlightCentre a particular focus. She suggests the activity on travel relates to expectations that Australia will still need a national carrier and people will want to travel again once borders open. Investing for the long term in international International investments have also been popular with Nabtrade investors, with the US representing about 90% of those trades. “It’s where you see the huge tech stocks, which is what they’re most enthusiastic about buying. So when you talk about FAANG and the broader universe that you guys cover, that is absolutely where investors love to go when they go off-shore, they have been looking for those for a really long time,” says Ms Dale. Interested in FAANG companies? Find out more about ETFS FANG+ ETF (ASX code: FANG). International trades for Nabtrade have typically been buy and hold investments, with investors wanting to avoid trades where they need to move quickly (and would therefore be required to monitor activity overnight to be ready to act). Of the buy and hold activity, Ms Dale says, “a lot of it is of high conviction, very high-quality companies. The number one is Tesla. It's very, very popular among our base. It's been an absolutely wild ride. The 52 week low's around the $200 mark and it rocketed back up to well over a $1000. So a lot of our investors were buying it on the lows and have done really well out of it.” Tesla is included in the portfolio of ETFS FANG+ ETF (ASX code: FANG) and ETFS Battery Tech & Lithium ETF (ASX code: ACDC). While generally activity has focused on long-term quality purchases, Nabtrade still have investors who are closely tracking markets and responding to it. “The one that shocked all of us, that was fascinating, and you asked about sectors that we haven't seen before, was oil stocks. So when the oil futures went negative, there was one night that the oil futures went negative, $30 negative as well… There was this massive panic selling. We had investors buying so enthusiastically that night, it was extraordinary. They were mostly buying ETFs based in the U.S. that gave them exposure, which was really interesting to see,” she says. Unusual investor behaviour Retail investors have traditionally been expected to panic in periods of market volatility, selling at the wrong time. Ms Dale has found current behaviour to be the opposite, with many investors taking the opportunity to buy companies at cheaper prices and focusing on quality. She says, “we saw existing investors putting cash to work that they'd had sitting there for quite some time and we saw a lot of new investors coming to the platform and to the market in general… We saw people buying stuff they wanted to own for a long time before but thought they were too expensive”. ETFs were also popular as a quick entry point for many investors. “What we saw in these really, really volatile days, was a lot of our investors wanted to get a piece of the action. They move extremely quickly. If they didn't feel they had time to do the research, or they didn't want to take a position on what was going to move, they just wanted to be in it… We saw a lot of active investing using ETFs to get access to particular positions that they might otherwise have found quite difficult, or just from a timing perspective,” Ms Dale says. Tips for new investors The COVID-19 pandemic has been an unusual event, and many investors capitalised off the opportunity to buy stocks at lower prices. While experienced investors may be accustomed and hardened to experiencing volatility in their portfolios, newer investors may still be yet to understand what this will mean financially and mentally for them. On this note, Ms Dale cautions newer investors to manage their expectations on market activity accordingly. “The windows in which this happened are very, very rare. You get this kind of event once every 10 years and the next time the market falls, you'll be on the wrong side of it because you now hold shares. You didn’t hold them before. So, you've never felt that way, watching them drop away. Now you have to learn how to hold your nerve when they do fall away because it happens sometimes, and events occur. If we get a second wave, whatever it might be. So it's brilliant that investors have come to market and done so well so quickly, right? It's fantastic. Just don't convince yourself that this is a normal experience. There are only a few windows in your lifetime of investing that you will be able to do this well this quickly, particularly if you're new to market,” she says. ETF Securities offer a range of ETFs across asset classes, regions, sectors and themes for your investment portfolio. Find out more or contact us. References: [1] https://download.asic.gov.au/media/5584799/retail-investor-trading-during-covid-19-volatility-published-6-may-2020.pdf

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Investment strategies in uncertain times

Jun 17, 2020

Uncertainty and periods of volatility are an expected part of life as well as financial markets and investors should be considering how to factor these into their investment strategies. While there’s no easy fix strategy that can be used for all investors, effective strategies tend to share a few aspects in common. Kanish Chugh, co-Head of Sales at ETF Securities, discussed investment strategies for uncertain times with Andrew Connors, Founder and Director of Quilla, one of Australia’s leading independent investment consultants serving financial advisers and institutional investors. The characteristics of a good investment strategy A good strategy will be tailored to the individual investor’s needs, goals and circumstances but there are a few aspects that should hold true regardless. “You can’t avoid diversification. It’s still the only free lunch you get with investing, and what I mean by that is you can invest in two securities that, in combination, mitigate some of the risks of each of those securities individually, without necessarily impacting the return,” says Mr Connors. He notes that diversification is more than just holding a variety of shares, it’s avoiding a concentration in one sector, region or asset class. Australian investors tend to have a home country bias where they mainly hold assets listed on the Australian stock exchange rather than spreading investments internationally and across assets. Mr Connors says, “another characteristic of a good strategy would be to manage excessive turnover in your portfolio. Turnover is one of those things that chips away at your returns in the background. So being aware of the impact of transacting and the transaction costs is important for a good investment strategy.” Understanding the products you are invested in, the risks involved and any correlation between your investments is also valuable to setting an investment strategy, for example, knowing that the performance of two particular assets is positively related may reduce the diversification benefits of both. Or alternatively, only investing in high risk investments may mean you are more exposed to volatility than you would like to be. Mr Connors also believes that investors should be aware of liquidity in their portfolios. “Liquidity was certainly impacted during the period of March when we saw the majority of the market falls… Being able to get your money out when you want it is an important characteristic of a portfolio, but also understanding those assets that don't necessarily have that liquidity. It's not necessarily a bad thing, but you need to be aware of it so that you are not surprised when we go through periods like that,” he says. Adjusting in periods of uncertainty Mr Connors has sought to incorporate investments that might perform differently to financial markets or offer stability to hedge riskier assets in the portfolios he recommends. “Cash is an asset you shouldn't be afraid to hold in your portfolio to protect wealth, and that's especially important in this current market environment given the swings we've seen in shares. Related to cash, but with slightly more risk, is bonds or bond funds. These still have a place in your portfolio, even when yields are so low, but you've got to understand they're not risk-free assets,” he says. In the current environment, Mr Connors has also seen value in foreign currencies and precious metals to support investment portfolios. “Foreign currency exposure… can insulate some of that volatility that we see from holding shares in your portfolio,” he says. Investors can incorporate such exposure by using unhedged international investments or by taking a direct currency exposure. This could be by transferring cash into other currencies or using ETFs like ETFS Enhanced USD Cash ETF (ASX code: ZUSD) for exposure. In terms of precious metals, gold has been a focus for Mr Connors. He says, “gold's been something we've used in portfolios over the last six to seven months as a tactical hedge against certain risk events… Gold has been up 9% this year to the early part of June, although it did experience some volatility throughout the pullback we saw in March.” Interested in investing in gold? Find out more about ETFS Physical Gold (ASX code: GOLD) Mr Connors uses a blend of actively managed and passively managed investments in his portfolio, with active credit managers gaining in recent times. The liquidity and ease of use of ETFs has been valuable during the past few months. “The specific benefits of ETFs, for us, include being able to use the ASX clearing house. So that means that we can implement complex transactions with multiple buys and sells, and that they all can be executed at exactly the same time. And that's a really important point, that speedier execution, especially in times of heightened volatility when the markets are going up or down by 7% in a day. So you don't want to be out of the market in that type of environment. So that's certainly an advantage compared to the slower process utilized when you're buying or selling managed funds,” he says. On the horizon for markets: time to invest or time to exit? Mr Connors considers the strong recovery in prices since March concerning and not reflected by the fundamentals in companies globally. He says, “we're still seeing the Coronavirus as not being under control, even though investors seem to have already priced in a recovery. We're also concerned about the impact of the geopolitical conflict between China and the US, and its allies, for that matter, like Australia. So that has the added potential to disrupt the fragile recovery that's underway in the US. And that would certainly add further pressure to the rally in equities that we've seen over recent months as well.” Mr Connors suggests investors go back to the basics of portfolio construction and focus on the long term, considering measures like dollar-cost averaging (i.e. consistent investing over time) as part of their strategy. “Don't expect to get the results you want in too short a time frame. You've got to let these things play out, and… complement that good investment philosophy and that good investment strategy, with an approach that perhaps sees you gradually entering back into the market,” he says. Learn more about building an investment portfolio through the core-satellite investing approach here or contact us.

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Beyond healthcare: the future of biotechnology

Jun 04, 2020

The search for cures and vaccines during the COVID-19 pandemic has brought the biotechnology industry into sharp focus. Beyond the COVID-19 pandemic though, what does the future hold for this industry and the broader healthcare sector? Kanish Chugh, co-Head of Sales at ETF Securities, discussed the future of biotechnology and healthcare with Scott Power, Senior Analyst covering Healthcare, Life Science and Technology for Morgans Financial Limited. Defining healthcare and biotechnology The healthcare sector represents all businesses providing medical goods and services to treat patients. “The way we look at healthcare in Australia is we put it into four buckets…Pharmaceuticals, so that’s like CSL. Medical devices, so Cochlear, ResMed. The services, so the hospital operators like Ramsay Healthcare, and the fourth bucket is diagnostics. So that’s Sonic Healthcare and some of the telehealth offerings that are out there,” says Mr Power. He notes healthcare represents about 8% of the ASX300 index within Australia, with 23 companies listed, ranging from CSL with a market capitalisation of $130 billion down to Monash IVF with a market capitalisation of $230 million. Biotechnology falls within the healthcare sector, often within the pharmaceuticals space. Specifically, though, biotechnology refers to technologies using biological processes. Biotechnology companies focus on research, development, manufacturing and/or marketing of products based on biological and genetic information to treat human diseases. This is the sub-industry covering COVID-19 vaccine development and testing. Mr Power says, “I think it’s 12 products in human testing at the moment and with over 100 in pre-clinical development…It’s big household name companies like Merck, Pfizer, Gilead, Eli Lilly are all working towards trying to find some sort of vaccine and/or therapeutic (cure).” The US and FDA approvals In terms of healthcare and biotechnology, the US is the largest market with the US Food & Drug Administration (FDA) approval process considered the gold standard. “The US FDA is one body, once you've got it, it goes right across the whole country. Their healthcare system is much more complex than ours, but again, once you have the approval and the appropriate reimbursement encoding, the ability for you to get across a larger patient population is much easier,” says Mr Power. From that perspective, many healthcare companies such as Moderna or Gilead have based their companies within the US to improve ease of access to both FDA approvals and the large US population. The COVID-19 pandemic has resulted in fast-tracked processes for testing vaccines and therapeutics for the virus but this may be a negative for non-COVID vaccines and cures. Mr Power says, “a lot of clinical trials have been put on hold. So, if you can’t recruit, because of isolation type issues, then you can’t actually conduct the trial. So a lot of companies, not only in Australia but around the world have actually put their clinical trials on hold.” While the fast-tracking during COVID-19 has given some hope for more efficient FDA processes in the future, Mr Power believes change is unlikely. “The drug approval process is well entrenched, well established, you’ve got to go through certain hoops, safety… and tested against larger population groups, that’s not going to change. Will the timing of those trials change? I think we are always finding better ways to get through these clinical trials,” he says. Ongoing evolution of the sector The COVID-19 pandemic has accelerated some change within healthcare. Mr Power says, “we are seeing some clear structural shifts, we've talked about telemedicine or remote monitoring. It's really gone from a nice to have to a must have… In terms of government policy… one of the issues previously is the reimbursement for teleconsult has been quite low. They have increased it during the COVID crisis to encourage more teleconsults but it needs to be maintained. So, I think we can definitely see a change in government policy from that perspective. In terms of other structural shifts we're seeing, we spoke about the diagnostic side, there's real trend towards rapid diagnostic, whether it's home testing, particularly with the current pandemic, but putting that to one side, that whole concept of early quick detection of conditions and diseases is certainly very much to the forefront. And that will continue.” Healthcare and biotechnology as a sub-industry have been tipped to benefit from a globally ageing population and the ongoing need for disease treatment. Biotechnology in particular is forecast to reach more than $729 billion in 2025[1]. “What we’ve seen over the last 10 years is healthcare as a sector tends to outperform most other sectors… We expect that to continue… I think it’s important for investors to make sure they have exposure to global healthcare companies,” says Mr Power. He notes that company selection from the global front can be difficult but it complements and diversifies the more concentrated Australian exposure to the sector. “Do you want to back Gilead… or Moderna, they’re working on a vaccine, they’ve got a market cap of $30 billion, but they actually don’t have a product. So that’s a highly speculative play,” he says. From that perspective, he suggests using ETFs such as ETFS S&P Biotech ETF (ASX code: CURE) or actively managed funds which capture the top companies, to assist investors to manage the risks and volatility inherent in the sector. Learn more about using global biotechnology in your investment portfolio by clicking here or contact us.

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What are the blue chips of the future?

May 28, 2020

Blue chip is synonymous with quality and dividends in the mind of the Australian investor, but are the companies considered as the blue chips of today likely to remain as the blue chips of tomorrow? The ability to generate a consistent dividend stream has been a mainstay of those companies we deem blue chip but in the wake of COVID-19 related dividend cuts, does the Australian view of blue chip need to evolve? Kanish Chugh, co-Head of Sales at ETF Securities, discussed the future of blue-chip investing with Peter Green, Head of Listed Products for Lonsec Research and James Gerrish, Portfolio Manager for Shaw and Partners and author of investment newsletter, Market Matters. Defining a blue chip investment “Blue chips have been in the past large size, industry leaders, well run and in the Australian context, very much also looking at dividends and fully franked dividends. So, we’re talking companies like the big four banks, Telstra,” says Mr Green. The top 20 companies listed on the S&P/ASX 200 have often been treated as a default blue chip index and this provides an interesting demonstration on the evolution of blue chip investing. Only 20 years ago, the top 10 constituents of the S&P/ASX 200 were filled with banks, telecommunications and even news media, with Telstra topping the list [1]. While the list of today is still heavily dominated by banks, there’s a few we might not a have predicted in the past such as Australian biotech leader CSL Ltd or supermarket companies like Woolworths or Wesfarmers. Mr Gerrish finds it interesting that CSL Ltd has joined the definition of blue chip. “It’s moved the needle from thinking about dividends underpinning blue chips to more towards stocks that are delivering really strong absolute returns. So blue chip to me is something that’s reliable, generally large, robust, a leader in their industry,” he says. Both see this movement towards a view on absolute return as a trend for the future. “Increasingly blue chip is being equated with a quality style. A quality style looks at things like ROE growth, EPS growth, large investment in intellectual property and also low leverage,” says Mr Green. Dividends and blue chips COVID-19 may be driving the trend towards viewing blue chip investing as about absolute return in Australia. Investors have had to start to reconsider their understanding of blue chip investing and their strategies in the wake of many companies, including traditional blue chip investments in the form of the big banks, cutting their dividends. In this instance, we may be starting to move towards the way the US or Europe view blue chip investing. Mr Gerrish says, “The S&P 500 back in the early 1900s[2] had a dividend payout rate of about 90%. Every 90 cents in every dollar was paid out as dividends to investors. Now the S&P 500 has a dividend payout rate probably around 30%. So, the bulk of those earnings are being reinvested into future growth, and that's why you see those growth orientated companies sort of rise to the top overseas the way the market's set up. And that's probably one of the reasons why it's been outperforming a bit over Australia at a rate of one and a half times.” By contrast, he notes that the Australian market has dividend payout ratios of around 75%, slightly skewed in the current environment but overall a traditionally high ratio. Mr Gerrish sees the focus on dividends as having hampered the growth of companies in Australia. “Afterpay for instance in 2016 had a market cap of about $165 million and are an $11.5 billion dollar company now. Telstra at that same time was around a $60 billion company and it’s now a $34 billion company. They invested in growth dividends along the way but examples like that start to change investment mentality,” he says. That’s not to say that we’ll see the current blue chips disappear. “There’s always going to be a role for the big four banks and Telstras in portfolios. I think people are increasingly aware of the total return of investing but this is more of a focus on capital growth than income returns. Over time, that sort of earnings growth will lead to dividend growth as well,” says Mr Green. Turning to Asian blue chips Mr Green notes that the composition of Asian markets has seen the rise of different blue chips compared to Australia. “Asia certainly is showing strong growth in the tech sector but also we’ve seen in Asia, you’ve got the rise of the middle class there. So, when you look at the financials and consumer discretionary sectors there, they are a large part of those indices and they have much greater EPS growth trajectory compared to the Australian context, just because of those demographic factors that are driving those stocks and earnings,” he says. Consumers have embraced technology across Asia, with blue chip companies like Alibaba and Baidu a prime example of this . {Note: these companies are included in the ETFS FANG+ ETF (ASX code: FANG)}. Both Mr Green and Mr Gerrish find including international blue chips is an important way of diversifying their clients’ portfolios, particularly given the dominance of financials in Australian blue chips compared to internationally. They’ve used direct investments or ETFs depending on client needs. An example of an ETF focused on Asian blue chip investing is the ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) which invests in the 50 largest and most liquid Indian domiciled companies. The future of blue chip investing Mr Green views the future of blue chip investing as linked to some of the rising global themes. “I think the market is really taking a good, hard look at things such as we’ve just seen with COVID-19, all of a sudden, we’re working online and this happened quite seamlessly. The whole idea of the digital economy is a very interesting area. We spoke about Asia before and the rising middle class and also what they’re calling the fourth industrial revolution, the automation, the AI, the machine learning,” he says. Some of companies following the trends might not be blue chips now but could be down the track, such as Afterpay. Mr Gerrish notes payment platforms have huge potential. “We’ve got the incumbents, these being Visa, Mastercard which are really dominant over in the US, but I think there’s other kinds of payment platforms that are interesting… You need to wait to see what companies get to that point of reliability of earnings before they become a blue chip,” he says. Interested in investing in the trends of the future? Learn more about our future present range of ETFs here or contact us. Sources: [1] https://www.spindices.com/documents/education/education-marking-20-years-of-the-sp-asx-index-series.pdf [2] While the S&P 500 began in 1957, the S&P Weekly Index has been used as a substitute for earlier years.

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ASX update: COVID-19 - transforming the investment space

May 20, 2020

COVID-19 has been responsible for significant changes in the way we live and work, but it is also influencing the ways we invest. After significant volatility in March, Australian markets posted gains in April with the S&P/ASX 200 returning 8.7%, the largest monthly gain in its history. Investment activity increased too, with even largely dormant investors returning to the fold[1]. Kanish Chugh, co-Head of Sales at ETF Securities, spoke to Anastasia Anagnostakos, Business Development Manager in the Investment Products Division of the ASX, on her views about how COVID-19 is changing the investment space. Changing investment behaviour Activity in April has been a contrast to the fears and defensive activity seen in March, as investors responded to global lockdowns and market volatility. “Last month, we saw a flight to safety through precious metal ETFs or broad-based market ETFs, whereas this month, investors, rightly or wrongly, are reading into the signs of a recovery, with Australian equity and property ETFs being the main beneficiaries, both being up by almost 12% on the month,” says Ms Anagnostakos. On the flip side, oil was a particular concern in April with prices becoming depressed and the futures market even turning negative for the first time. While the type of investments sought has switched, the volume of activity generally has remained high. According to ASIC, average retail trading increased from $1.6bn pre the COVID-19 crisis to $3.3 billion at the end of April 2020[2], with many dormant accounts recommencing trading activity. Ms Anagnostakos says, “in terms of the ETF market, a usual day, pre-crisis, accounted for about 4% of total trades on the S&P/ASX 200, but during this time it has ballooned to about 10% of total trades.” Trading on conviction Ms Anagnostakos believes that this increase in activity comes down to an increasingly aware and educated retail base compared with the past. “Many investors have learnt from our most recent crisis, the GFC, such times often present a good price point to buy into the market, and have been doing so with long-term and short-term ideas in mind,” she says. According to Ms Anagnostakos, the ASX has noted an increase in shorter term trade activity on a retail front, with the cash equities market one such area which has experienced trading spikes, along with commodity and geared funds. In terms of the cash equities market, an example of investors trading based on expectations is through the US dollar, which some anticipate strengthening compared to the Australian dollar. There are a range of ways to trade for exposure to the US dollar, from cash holdings to using ETFs such as the ETFS Enhanced USD Cash ETF (ASX code: ZUSD), and many such corresponding investments may have experienced activity increases in April. Some activity in investor demographics such as retirees may be a response to the change in the status quo. That is, their dependence on fully franked dividends for an income which is under threat in the current environment. “With the big banks either deferring or cutting their dividends altogether in their most recent announcements, one of the most common discussions advisers are having with their clients is about mobilising capital within their portfolio to sustain their income streams… so these kinds of discussions we have with advisers are around the different income options that are available to them via the ASX investment products through the vast amount of fixed income ETFs, fixed income and private credit LICs, LITS available for steady income flow,” Ms Anagnostakos says. A more diverse market in crisis While the GFC and COVID-19 crises are vastly different events, the increased trading activity in this situation may also be related to the broader and more diverse investments available this time around. “You just have to look at the sheer size and the growth of the ASX product suite just to see how many different options are now available to investors. Let’s look at the market at the height of the GFC, June 2008. There were only 198 products for investors to choose from after buying individually listed companies on the ASX. As at the end of April 2020, investors have over 614 products to choose from, on top of all the individually listed companies on the ASX. So you could most definitely say that investors are spoiled for choice these days,” Ms Anagnostakos says. As an example, the Australian ETF market was barely existent during the GFC, with only 19 available in December 2007 compared to the more than 211 now available on the ASX[3]. Ms Anagnostakos notes the increase in ETF trading activity during this crisis may be in part due to their ability to offer diversification. “If you want to diversify and lower your overall portfolio risk, ETFs are a classic way to do this as they are a pure beta play. If you believe in the long-term direction of certain asset classes, strategies, sectors or geographies, and they represent good value to you in this crisis, then investors can seize the opportunity to invest in and potentially lower their overall portfolio volatility, while still achieving good long-term returns,” she says. Some slowdown in product launches Despite the increased April activity, there has been some slowdown in the issue of new products on the ASX, with only one new investment product released in April. Ms Anagnostakos suggests it is too early to determine whether the pipeline of ETFs coming to market has really slowed down but in the case of LIC or LIT investments, it has made more sense for issuers to delay given the volatility in asset prices. On the whole though, she believes this is an unusual time so a slowdown in new products wouldn’t be entirely surprising. Ms Anagnostakos says, “there’s volatility because people are working from home, which is another reason that we may not have seen any products made…. And it might be safe to say that issuers in this space will be wanting to see some stability before bringing some new products to the market.” To find out more about investing with ETFs during COVID-19 or the ETF Securities Partner Series, please contact us.

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