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ETF Securities Partner Series: Recharge your portfolio with battery technology
ETF Securities Partner Series: Growth vs value in uncertain times
ETF Securities Partner Series: How Morningstar identify the top tech stocks
ETF Securities Partner Series: Why gold should always be a portfolio staple

Recharge your portfolio with battery technology

Oct 21, 2020

The future of renewable energy and electric vehicles (EVs) is heavily intertwined with the growing battery technology industry. Batteries are an older technology but recent innovation, particularly spurred by EVs, is transforming the space. Investing in battery technology holds appeal to a wide range of investors, from those focused on green energy to those looking for different growth themes to incorporate in a portfolio. Kanish Chugh, Head of Distribution, spoke to Corentin Baschet, Head of Market Analysis for Clean Horizon, about the changing battery technology landscape. Clean Horizon is a consulting company dedicated to energy storage and is the data provider for Solactive, the index provider for ETFS Battery Tech and Lithium ETF (ASX code: ACDC). The basics of batteries As an older technology, battery technology is both familiar and unfamiliar. Traditional batteries used a lead-carbon system, while the form favoured for grid and EV use today is lithium-ion batteries which are typically safer, more efficient and cost-effective. “A container battery storage system is fairly simple. It looks a lot like a server, there are racks and there are modules within those racks of energy storage. Then you need the inverters, transformers, you need all the integration of the work, the construction work,” Mr Baschet says. In terms of lithium-ion batteries, he says, “lithium is the ion that exchanges from the cathode to the anode, so it’s the key to the system. It enables the currents to flow.” Despite the name, lithium is not the major component in lithium-ion batteries, representing only 2% of the mass of the battery ion cell, other important materials include nickel, manganese and cobalt. The primary demand at this stage is from the EV industry but demand for grid storage is anticipated to rise the greater the movement towards renewable energy. “More than 50% of the world’s production of lithium goes to the EV industries. There’s one World Bank study that has looked at how much material we would need if we were to decarbonise the grid and transport entirely by 2050 and their conclusion was that we will need 85% of the resources of lithium worldwide,” says Mr Baschet. Mr Baschet views the key to growth in battery technology will be increasing penetration of renewable energy but until then, most innovation in this sphere is coming from the EV industry with a push to make battery technology cheaper with increased storage. The growing EV industry The idea that EVs are driving battery technology innovation and growth may come as a surprise in the Australian market. Australians have been slower to move on EVs due to low government support, costs (including the luxury car tax), access to power docking stations nationwide and misconceptions around travel range1. Globally though, EVs are increasingly popular. Some countries, for example, Germany and the UK, even offer incentives and subsidies for those who purchase electric vehicles2. BloombergNEF predicts sales to rapidly increase from 2.7% of new cars sold representing 1.7 million cars in 2020, to over half of all passenger vehicles sold by 2040 representing 54 million cars3. China is likely to represent the lion’s share of sales and development of electric vehicles, even as it has been forced to slow down activity during the COVID-19 pandemic. More than 55% of all electric cars sold in the world are Chinese sales4 and the market there has been supported by government subsidies and regulations around certain percentages of automotive sales required to be electric. Chinese company BYD, a manufacturer of vehicles and battery technology, is responsible for the greatest portion of electric vehicles sold in the world5. More than the big names Tesla is typically front of mind when investors think of EVs or battery storage but there are many other companies involved in the industry. Mr Baschet views Tesla as an integrator of components, similar to companies like Sumitomo, Brookfield, General Electric, Lockhead Martin and Toshiba. Investors should be aware of the complete supply chain underlying battery technology, from mining to manufacturers, rather than just looking at the end integrating company. For example, he says, “Tesla also relies a lot on LG Chem, CATL and Panasonic.” According to Mr Baschet, some established companies may find alternative business opportunities via battery technology. “There's a couple of vehicle manufacturers which are interested in energy storage and will have future business doing energy storage just because they buy so many batteries, they might use them for a second life, for instance. So, taking the batteries from vehicles to put them into a container system and provide services,” he says. At the end of the day, battery technology encompasses a wide range of companies and even industries. Investors can look at anything from components such as lithium, battery manufacturers or companies with more diversified capabilities not purely restricted to battery technology either directly, or via managed options such as ETFs. Interested in learning more about investing in battery technology? Contact us to find out more about ETFS Battery Tech & Lithium ETF (ASX code: ACDC) 1 https://www.whichcar.com.au/car-news/australians-want-electric-vehicles 2 https://www.drivingelectric.com/news/1818/electric-car-incentives-and-subsidies-ps6000-uk-scrappage-scheme-possible 3 https://about.bnef.com/electric-vehicle-outlook/ 4 https://www.marketwatch.com/story/china-not-tesla-will-drive-the-electric-car-revolution-2019-05-14 5 https://www.bloomberg.com/opinion/articles/2019-09-20/electric-vehicle-market-so-far-belongs-to-china

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Growth vs value in uncertain times

Oct 07, 2020

In uncertain times, investors often question the best approach for their portfolio. The debate between investing in growth or value often comes up during uncertainty, particularly when certain aspects of growth investing may directly benefit from market volatility. Kanish Chugh, Head of Distribution for ETF Securities, spoke to Tom Schubert, Managing Partner and Portfolio Manager and Alex Cathcart, Portfolio Manager, from Drummond Capital Partners, about growth and value investing in the current uncertain market environment. The market outlook Drummond Capital Partners have developed three potential scenarios for the future, each dependent on whether certain events occur. Mr Cathcart says, “It has a lot to do with the interaction between fiscal and monetary policy, and what that means for the path of debt, both household and government, and ultimately what it means for inflation.” Scenario 1 Future scenario one is high inflation and is based on the potential of a Democratic win in the US, including the Presidency and the Senate. In this scenario, Mr Cathcart suggests that there would likely be policies enacting trillions in government spending, financed by the US Federal Reserve. Eventually, this activity would lead to higher inflation. Scenario 2 Scenario two is the middle ground where effectively markets act as they’ve acted for the past 10 years. “In that world, interest rates remain very low…You’re likely to see fiscal austerity coming out of that, which is quite damaging to growth,” says Mr Cathcart. Scenario 3 The third scenario assumes low inflation in an environment Mr Cathcart compares to the economic situation of Japan. He says, “most big developed economies have aging and old populations. Interest rates just continue to fall. Growth is low…You can have more deeply negative short-term rates than we currently do. In that world, it’s a world of low growth deflation.” Of the three scenarios, Mr Cathcart says the chance of the first has become slightly elevated nearing the US Federal Election. You can read more insights on this here. Investing for the scenarios? Many investors tend to fall into either of two camps – value or growth. “Value investors are essentially seeking to buy stocks which are undervalued relative to their intrinsic value today and they’ll use valuation metrics, such as price to earnings or price to book ratios…[Growth investors] tend to focus more on revenue and earnings growth and are generally looking for industries with larger addressable markets, you know, long runways for growth. They’re often prepared to pay higher valuations today for that long-term earnings potential,” says Mr Schubert. Given the evaluation metrics used, certain sectors tend to dominate certain styles. For example, value investments tend to be dominated by financials and industrials while technology and communications generally fall more under growth investments. For example, investments like ETFS Morningstar Global Technology ETF (ASX Code: TECH) or ETFS FANG+ ETF (ASX Code: FANG) generally fall under growth investments. Which style performs better is often influenced by where we are in the economic cycle. “Value tends to outperform when economic growth is accelerating. Growth tends to outperform when you have a period, such as the last decade, of low economic growth, low inflation and therefore low interest rates,” Mr Schubert says. “Our research suggests that the most common macro factor, relating to the relative performance between growth and value, is interest rates,” he says. Drummond Capital Partners tend to be style agnostic, pivoting their portfolios based on their current views, conscious of the macro environment and the potential for different scenarios, each with different interest rate levels. Mr Schubert says, “we have held a long-term overweight position to global growth equities and it’s really benefitted our portfolios. We did reduce this slightly… we're sort of sitting back with that cash we took off the table, and really watching, as Alex had started to talk about in terms of the U.S. election, what that potentially means from the fiscal standpoint, and if indeed we should be making the portfolio slightly more style neutral or indeed, you know, pivoting to value.” Blending investments Drummond Capital Partners uses a combination of passive and active investments in their portfolios, viewing it as offering a higher hurdle point for active investments and allowing them to back their views with solid investments on the passive side. Interested in understanding more about this? Visit our Partner Series video and summary on Active investing with passive funds. “Passive is not a bad way for us to express some of our tactical views that tend to be cheaper and more liquid in terms of access… we combine that with some good core long term growth managers and sector-specific managers, particularly in fixed income,” says Mr Schubert. ETF Securities offer a range of ETFs across asset classes, regions, sectors and themes for your investment portfolio. Find out more about our products, here. Important Information ETFS Management (Australia) Ltd (AFSL 466778) (“ETFS”), is the responsible entity and issuer of units in the ETFS Morningstar Global Technology ETF (ASX: TECH) ARSN: 616 755 652 and ETFS FANG+ ETF (ASX code: FANG) ARSN: 628 036 625. The PDS contains all of the details of the offer of units in the Funds. Any investment decision should only be considered after reading the relevant offer document in full. Source ICE Data Indices, LLC, is used with permission. “NYSE® FANG+TM” is a service/trademark of ICE Data Indices, LLC or its affiliates and has been licensed, along with theNYSE® FANG+TM Index (“Index”) for use by ETFS Management (AUS) Limited in connection with ETFS FANG+ ETF (FANG) (the “Product”). Neither ETFS Management (AUS) Limited, ETFS FANG+ ETF (the “Trust”) nor the Product, as applicable, is sponsored, endorsed, sold or promoted by ICE Data Indices, LLC, its affiliates or its Third Party Suppliers (“ICE Data and its Suppliers”). ICE Data and its Suppliers make no representations or warranties regarding the advisability of investing in securities generally, in the Product particularly, the Trust or the ability of the Index to track general market performance. Past performance of an Index is not an indicator of or a guarantee of future results. ICE DATA AND ITS SUPPLIERS DISCLAIM ANY AND ALL WARRANTIES AND REPRESENTATIONS, EXPRESS AND/OR IMPLIED, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, INCLUDING THE INDICES, INDEX DATA AND ANY INFORMATION INCLUDED IN, RELATED TO, OR DERIVED THEREFROM (“INDEX DATA”). ICE DATA AND ITS SUPPLIERS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY WITH RESPECT TO THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE INDICES AND THE INDEX DATA, WHICH ARE PROVIDED ON AN “AS IS” BASIS AND YOUR USE IS AT YOUR OWN RISK. The Morningstar® Developed Markets Technology Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the ETFS Morningstar Global Technology ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Developed Markets Technology Moat Focus IndexSM is a service mark of Morningstar, Inc.

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How Morningstar identify the top tech stocks

Sep 23, 2020

How Morningstar identify the top tech stocks The year 2020 is one that will stand out in the history books, most notably for the COVID Pandemic but also the seismic shift in the geopolitical landscape. On the local and global investment scene, technology stocks have been front and centre. In our universe, arguably the purest global tech play available to Aussie retail investors is the ETFS Morningstar Global Technology ETF, (ASX code: TECH). TECH is up 15.6% this year as at 31st of August 2020, and provides exposure to 50 global technology names, tracking the Morningstar Developed Markets Technology Moat Focus Index. Talking Tech Brian Colello, Director of Technology, Equity Research for Morningstar Research Services recently joined us for a discussion on the technology sector in today’s pandemic ravaged world and the outlook for global technology equity stocks. Brian highlighted the current investment climate with a spotlight on the winners and losers in the tech sector. He noted “There have been strong tailwinds within tech for the past few years and COVID-19 has only strengthened those tailwinds. Whether it's cloud computing, artificial intelligence, the beginning of 5G networks, there are some great things going on in tech that should lead to strong growth. But with more remote workers, companies have become even more reliant on technology.” Demand for tech stocks is coming from multiple sources, said Brian. “There's a lot of COVID related stimulus money in the US, and we believe some of that capital may be going into the tech stocks.”. Brian also notes, “we're obviously in a very low interest rate environment. The US has cut rates down to effectively zero, so bonds might be relatively less attractive as well and then finally, we certainly have sectors that have been hit hard by COVID.” A new safehaven? There’s a re-rating of tech to ‘safety’ according to Brian. He said “We would argue that tech represents relative safety in these times. Tech has never really been thought of as safety, but we are not cancelling our Microsoft Office subscriptions or our Salesforce subscriptions among salespeople because of COVID, so there's still some resiliency there.” Defining ‘Tech’ in 2020 Brian also addressed the vexed question of what a tech stock actually is, and where some of the FAANGs like Facebook, Amazon and others sit. “We could talk to a hundred different investors and they could define tech via a hundred different ways. So the way we model itis similar to the GICs codes and there've been some shifts in coverage of names like Google and Facebook that are now considered media names or advertising names.” According to Brian, even though Amazon is considered a consumer stock, obviously it has a hefty tech component. “The way we focus on tech and sort of the expertise of our group is in semiconductors software, hardware, networking, as some of these other names are within other teams, but we recognize there's overlap. We obviously keep an eye on them but that's how we classify this group when we're looking at tech stocks.” So what are the key trends in technology? Cloud computing is probably the biggest trend - renting out IT capacity in the cloud rather than building it yourself. 'Software as a Service’ continues to grow and be a bigger piece of the pie as companies continue to move to the cloud model and a subscription model of accessing the latest and greatest software at all times, that is secure. 5G is another one for technology. The companies that enable that 5G technology, the semiconductors, the equipment are certainly favourable trends in technology. Artificial intelligence - It's being done by the leaders in order to simplify and streamline, whether it's apps, software operations, or whether it's to glean insights from big data. Then ‘The Internet of Things’ is something we continue to hear more about - making devices smarter, more sensors, more processors, connectivity. How to find value in Tech “We would say today that technology is overvalued,” noted Brian. He said: “The median technology stock that we cover at Morningstar has a price to fair value ratio of 1.12, so 12% overvalued. At the height, maybe a few weeks back, it was as high as 24% of our value. This is the highest peak we've seen since 2007, so not only is the sector expensive, but it's the most expensive we've seen in at least 13 years. Some of our fair value estimates are even higher than they were two or three months ago yet it looks like the market is even more optimistic than we are expecting.” The ETFS Morningstar Global Technology ETF (ASX code: TECH) tracks the Morningstar Developed Markets Technology Moat Focus Index. It's more than just a tech sector play and combats some of the valuation concerns across the tech sector. Morningstar applies a fair value screen to its analysis of companies in the Index, setting it apart from many others, said Brian. “When we analyse companies, we provide a fair value estimate, it's the intrinsic value of what we think of businesses worth at any point in time. We look for companies with a price to fair value discount where the stock price is significantly below our fair value estimate. It's important that we identify firms that trade with a decent margin of safety. Microsoft is a name we think is fairly valued, so compared to our fair value estimate, we think the stock price is about right today.” The second defining feature of the Index is Morningstar’s Moat methodology. “A moat is the sustainable competitive advantage that companies possess and even though tech is a fast moving sector some companies have them. If you think about the competitive advantages of firms like Microsoft and Amazon Web Services – these are some of the strongest moats we probably see in the world to the point that there's antitrust concerns today.” Investors wanting to capture the growth of global tech can use products such as the ETFS Morningstar Global Technology ETF to intelligently access a diverse basket of global tech stocks with an economic moat over competitors. Important Information The Morningstar® Developed Markets Technology Moat Focus Index was created and is maintained by Morningstar, Inc and is licensed to ETFS Management (AUS) Limited by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), a subsidiary of Morningstar, Inc. Neither Morningstar, Inc. nor Morningstar Australasia Pty Ltd. sponsors, endorses, issues, sells, or promotes ETFS Morningstar Global Technology ETF, and neither Morningstar entity bears any liability with respect to that ETF or any security. Morningstar® is a registered trade mark of Morningstar, Inc. Morningstar® Developed Markets Technology Moat Focus Index is a trade mark of Morningstar, Inc.

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Why gold should always be a portfolio staple

Sep 09, 2020

Why gold should always be a portfolio staple Gold prices have surged to record highs and investors have flocked to hold it as an asset in the uncertainty of the COVID-19 pandemic. But gold is more than a temporary hedge and its characteristics can make it a valuable long-term component of a diversified portfolio. Kanish Chugh, co-Head of Sales for ETF Securities, spoke to Chris Brycki, CEO and Founder of Stockspot, to discuss how gold has been used in Stockspot’s portfolios and why it should be considered a portfolio staple. Gold - more than just an alternative Gold has traditionally been viewed as an investment safe haven due to its defensive and growth qualities. It has historically performed differently to other asset classes and offered positive performance in a range of market conditions. The performance of gold over the year-to-date, covering the COVID-19 pandemic and associated periods of volatility is shown below. Gold prices January-August 2020 Source: Bloomberg, ETF Securities Read more about using gold in a portfolio here. Increasingly, investors are becoming aware of the value of including gold in their portfolios. While some are only beginning to invest in gold now, Stockspot’s portfolios have included an allocation for many years. Mr Brycki says, “we've constructed our portfolios based on Markowitz portfolio theory, which basically says that you actually want to include different assets in a portfolio that move in different directions i.e, they don't all move in tandem. They often move in the opposite direction… Unlike a lot of other assets that are sometimes seen as being defensive like property or infrastructure, gold actually has a much better standing at actually providing negative correlation to equities at the time when you need it most.” The correlations between gold and other major asset classes is shown below. Table 1: Australian Equity Global Equity Australian Fixed Income Global Fixed Income Correlation -0.3 -0.12 0.36 0.07 Source: Bloomberg data as at 31 July 2020. Correlations are calculated monthly over 20 years in Australian dollars. Australian equity is represented by the S&P/ASX200 Total Return Index. Global equity is represented by the MSCI World Total Return Index. Australian fixed income is represented by the Bloomberg AusBond Composite 0+ Yr Index. Global fixed income is represented by the Bloomberg Global Aggregate Total Return Index. Mr Brycki found gold’s negative correlation to equities has assisted in offering protection to his clients’ portfolios during this year’s market uncertainty. “When markets collapsed around March and April, it actually protected our client's portfolios compared to the equities market by between 50 to 80%. And that was just with a 12% allocation to gold,” he says. A long-term approach Investors can use gold in a variety of ways in a portfolio but Stockspot sees gold as a long-term holding, a portfolio staple. While some clients may have questioned the inclusion in early years, particularly in 2014-15 when gold was falling after highs in 2011, those same clients appreciate the vision now. Mr Brycki says, “We really had to explain to clients that it was that a form of insurance… that actually you want gold to not go well in your portfolio, because that means everything else is doing really well. And you're probably getting great returns… On years like this year, we get the opposite…So we end up having to explain the long and short of not having too much gold, but having enough to provide a cushion in your portfolio, which is why we feel that current allocation of 12% is the right amount.” Some commentators may wonder what the future holds for gold. While Mr Brycki personally believes momentum is set to continue, his view is to not make any predictions in portfolios and to manage for any scenario. “Our philosophy at Stockspot is really that you shouldn't be trying to predict where things are going. You should just prepare for all the potential outcomes. Our portfolios really take that perspective of we never try to predict. We always just try to prepare because we think that puts our clients in the best position,” he says. From that perspective, gold is a permanent and necessary allocation for Stockspot’s portfolios. How much gold is enough? Stockspot view a 12% allocation to gold as the right amount for their portfolios. This amount was set a few years ago and was an increase on their previous amount. Mr Brycki says, “we saw that the correlation between bonds and shares was moving from being more negative to being more positive, which meant that, in theory, bonds weren't going to provide the same level of protection in a share market fall. And that indeed happened earlier this year when the share markets fell. Actually, for a period of that fall, bonds fell as well until central banks got up and decided to stand behind the fixed income markets. And as a result, gold really did protect portfolios in a way that was advantageous and something that bonds weren't able to do.” To hedge or not to hedge Stockspot use ETFS Physical Gold (ASX: GOLD) for the exposure to gold in their portfolios. GOLD is not currency-hedged and for Mr Brycki, using an unhedged ETF was a deliberate approach. “It’s not taking a view on the Australian dollar as much as it’s thinking about why you have gold in a portfolio. One of the key reasons is to protect your purchasing power in your own currency. So if you hedge your gold exposure, what you’re doing is protecting your purchasing power in someone else’s currency that really has very little relevance to your day-to-day income expenses, assets and liabilities. If for some reason there was a huge devaluation in the Australian currency, you wouldn't enjoy the benefit of that if you hedge,” he says. Taking the simple approach The simplicity of gold is part of its appeal in a long-term portfolio for Stockspot. Mr Brycki says, “most investors think that by making their portfolios more complex, including more assets, they're going to give themselves better returns. Our view is actually the opposite and a lot of the evidence suggests otherwise and actually keeping things simple is better because simple is lower cost, simple as less risky and simple performs better.” Stockspot’s view on gold as a portfolio staple extends to its recently launched kids’ portfolios. “We take them on a bit of a journey where they can learn a bit about some of the companies that they're investing in. The great thing about investing is, as well as investing in things like gold, where there's a physical, tangible thing you can hold, you can also invest in great companies that you use every day,” Mr Brycki says. Is gold one of your portfolio staples? Contact us to find out more about ETFS Physical Gold (ASX code: GOLD) and using gold in your portfolio. To learn more about Stockspot and its offering, please click here. Client Services Trading Phone +61 2 8311 3488 Email: sales@etfsecurities.com.au Phone +61 2 8311 3483 Email: capitalmarkets@etfsecurities.com.au

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Is robo-advice the future of financial planning in Australia?

Aug 19, 2020

Is robo-advice the future of financial planning? The future of financial planning may feel uncertain at the moment, off the back of a raft of significant reforms and large numbers of financial advisers leaving the industry. Some speculate the future is digital, in the form of robo-advice. With even large international corporations, such as Goldman Sachs or Vanguard, incorporating such offers, robo-advice could have an attractive future. Kanish Chugh, co-Head of Sales for ETF Securities, spoke to Pat Garrett, co-CEO and co-founder of Six Park Asset Management, an Australian online investment management services firm founded in 2014. Six Park Asset Management aims to offer investors low-cost access to investment management. What is robo-advice? In basic terms, robo-advice is automated online investment management. Mr Garrett says, “it is taking a number of these activities and interactions that a person might normally have face to face with an advisor on the investment management side and takes the components that can be automated, which include things like a risk assessment, and a fact find.” He views robo-advice as changing the traditional landscape of financial advice, which typically catered more to high-net worth individuals, by making access to advice more affordable. “You can streamline the efficiency of delivering an investment management service and therefore, construct a well-diversified portfolio primarily using index funds, at a very affordable price point relative to what people might normally buy, or simply not have access to,” he says. Robo-advice typically uses passive investments, particularly ETFs, to construct portfolios. The reason for this comes down to their simplicity to use and ease of access to different markets, along with the low costs involved in many ETFs. ETFs and index funds can also be easily implemented within modern portfolio theory and core-satellite portfolio investing. {Read more about enhanced core-satellite portfolio investing} Mr Garrett says, “picking individual stocks at any time in the market is very hard. And most experts get it wrong, let alone retail investors. So, our investment philosophy is that the two most important decisions that any investor can make is to be well-diversified and to keep your costs low. And what index funds do is basically help you accomplish both of those very efficiently because they are listed on the ASX. They track an index that typically has hundreds, if not thousands, of components either across a region, an industry, or an asset class, which can be defensive or growth. And because they are tracking an index, as opposed to actively trying to get in and out of the market, the fees are quite low. So, they are incredibly efficient investment vehicles to build diversified portfolios.” Wide appeal for investors Robo-advice appeals to a range of investors for a variety of reasons, though Mr Garrett says it tends to attract investors between 30-50 years old. “It is sort of a midlife saver accumulating, they have a fairly medium to long-term investment horizon, and they don't need sophisticated financial advice that comes with a commensurate price tag,” he says. Some investors even use robo-advice as a form of risk management. “We have a number of clients who will use our service and then do some stock picking or buying a racehorse or whatever it is, bitcoin, around a service like ours. And so, it's a form of risk management, using a robo-like service, and then maybe doing active, more speculative investing around it,” says Mr Garrett. He notes that Six Park Asset Management has seen an influx of smaller value accounts recently, as a result of market activity. Mr Garrett has also seen significant interest from investors wanting to set up accounts for children and grandchildren, without the need for complex financial advice. Complementary rather than competition to traditional financial advice That’s not to say that robo-advice will replace traditional forms of face-to-face financial advice. Mr Garrett sees them as complementary and filling existing gaps in the market for low-cost, low touch investment needs. “Wealth managers and planners really need to modify their service delivery model a little bit to incorporate digital offerings, like robo-advice, so that they can address these types of needs in the market,” he says. He points to the US as a model for how robo-advice has become an integrated financial service tool. “You're seeing the biggest banks, wealth managers, fund managers introduce digital, low cost, low touch offerings into their suite of services, either directly or through partnering with the likes of a robo-service. I think that that will happen in Australia… I think you'll see robo-advice services working with incumbents who already have the relationships with the mass market. And so, I just think you'll find it as an extension of the service spectrum, to be integrated within the wealth management industry. Like it has in America,” he says. Just as technology is playing a massive role in the emergence of robo-advice, it can also be said that the ETF landscape has been crucial to its growth and future success. As the ETF landscape continues to evolve and tailor, it is likely that robo-advice will also evolve with it. For more information about investing with ETFs or enhanced core-satellite portfolio construction, contact us.

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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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