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Apr 15, 2020
The ETF Securities Partner Series joins with Australian and international investment professionals to discuss the big issues of the day and what these mean for investors. The Australian ETF market has grown rapidly in recent years, with current market capitalisation at $56.63bn across 212 products . Like other investment products, it has also been affected by COVID-19 driven market volatility. ETF Securities spoke to Martin Dinh, Senior Product Manager at the Australian Securities Exchange (ASX) to explore his insights on the Australian ETF market and what has happened in recent months. The increasing popularity of ETFs The first Australian ETF was launched in 2001 and while growth in assets and available products was initially slow, taking nearly 16 years to reach $30bn in assets under management, the Australian ETF market doubled in value between 2017 and 2020. Investors often consider ETFs for characteristics like liquidity, ease of access and cost efficiency. Mr Dinh views part of their popularity being driven by offering access to a wider audience. “ETFs have democratised investing, by opening up investment strategies and entire asset classes that were only historically available to the largest investors. Now a retail investor like you or me can get diversification in a single trade to virtually every asset class and investment strategy, improving our ability to diversify our portfolio and express our market views. ETFs have also performed as advertised, and even in the toughest of times, have provided investors with the ability to enter or exit their investment, or purchase their chosen ETF as and when required, with years of trading data showing that the ETF wrapper works,” he says. Mr Dinh still views there being a long way for the ETF market to go, particularly in terms of education. ETFs started as broad-based simple passive investments but have become more sophisticated over time. While there is still some confusion over how even basic forms trade, many investors are also trying to grapple with leveraged and inverse forms as well, not to mention newer active ETFs. Financial risks and regulation ETFs are regulated under an ASX system called the AQUA rules, which covers who can create an ETF, the structures for ETFs, assets which can be included in ETFs, along with other standards. ETFs are actively monitored for compliance with the rules after being admitted. “The objective of the AQUA rules is to ensure that investors are protected from the financial risk of the ETF provider, and that the ETF wrapper creates an ecosystem where investors can enter or exit the investment or purchase their chosen ETF as and when required,” says Mr Dinh. Has this held up in the recent market volatility? ETFs have continued to be accessible in the recent volatility, even experiencing increased levels of trading, but there’s no question these investments have been affected, just as any other products. “First, we saw FUM fall from $63.6 billion to $59.6 billion, marking the largest ever monthly drop in FUM, mainly driven by adverse price moments. Now, for as bad as March was, you expect to see millions of dollars worth of outflows. But in reality, ETFs actually brought in $300 million of assets,” says Mr Dinh. He notes flows largely went into broad-based Australian equities, with $919 million into the three largest Australian broad-based ETFs but was also surprised to see flows into poorer performing ETFs, including oil-related, property and domestic financial sector ETFs. These were not the only areas to experience trading growth as Mr Dinh noticed surges in trading activity for equity leveraged and inverse ETFs, equity and commodity currency hedged ETFs and gold-related products. “ETF trading activity increased exponentially. ETFs on average traded 770 million dollars a day, which was an astounding more than four times higher than its previous peak. We also saw an uptick in the number of transactions, with ETFs seeing approximately 748,000 transactions for the month, which was more than two and a half times higher than its previous peak,” says Mr Dinh. Mr Dinh views this trading activity as testament to investor confidence in ETF liquidity. Future development in ETFs Mr Dinh sees any continued volatility in markets as providing a case for fixed income ETFs, inverse and leveraged ETFs and currency hedged ETFs. He says, “On average, fixed income ETFs were only down 4.2% compared to the S&P/ASX 200 which was down 21%”. Many investors have also viewed ETFs as a short-term trading tool, which has accounted for some of the recent flows. “I think investors out there will see the COVID-19 pandemic, or at least some of them will see it, as a great buying opportunity, as they say, to take advantage of cheaper prices, or maybe take a swing at beaten down areas, hoping for a big rebound should the COVID-19 fears fade,” Mr Dinh says. Educating investors on the ETF market There is still a lot of misunderstanding around ETFs and how they work in the retail investment space. Investors seeking more information can access education on the ASX website, the education and research sections of the ETF Securities website, as well as by contacting our team.
Apr 13, 2020
The ETF Securities Partner Series joins with Australian and international investment professionals to discuss the big issues of the day and what these mean for investors. The COVID-19 pandemic is a serious threat, not just in terms of the virus itself but the broader implications to mental health from prolonged isolation. Collectively, we are experiencing something unprecedented in living memory. Uncertainty and rapid change tend to drive anxiety and fear, and the current situation is no exception. Kanish Chugh, Co-Head of Sales at ETF Securities, hosts a special edition of the ETF Partner Series to discuss How to survive isolation with Ian Shakespeare, Chief Executive Officer at SMG Health. Mental health, COVID-19 and isolation While China has been dealing with the COVID-19 pandemic since the start of the year, for the rest of the world, the situation really escalated from the start of March. In a short period of time, there has been dramatic changes to the way we live and work, and our freedoms massively curtailed. “The impact has turned people’s world upside down,” says Mr Shakespeare. Change is challenging at the best of times. Combined with a serious health threat and the inability to seek comfort physically from others due to social isolation, it also poses a threat to our mental health and wellbeing. Mr Shakespeare says, “social connectedness is so important for health and wellbeing”, commenting on how distancing is likely to drive an increase in depression and anxiety, particularly for those who may already have limited social networks. Some agencies are already seeing this increase, with Lifeline having reported a 25% increase in calls to its crisis hotline in March . In the uncertainty, Mr Shakespeare has also found that people become “information junkies” feeding off the 24/7 cycle of reporting which only serves to increase their stress levels and fears. Finding the best way to cope “Wouldn’t it be good if there was a one-size fits all solution?” says Mr Shakespeare. “For a moment, I would ask people to forget the top ten tips of managing the coronavirus… these types of things…what we need to acknowledge from the outset, is that there is no panacea in terms of how one copes with these types of extremely unprecedented challenges that we’re all facing.” Instead, Mr Shakespeare recommends taking a more personalised approach, daily or even more frequently, to work out what strategy might best suit you. “In coping with these things, what we must acknowledge is how’s it impacting me, when does it impact me, when do I get upset during the course of the day if I do get upset… try and log into those inner feelings and then that assists in what strategies each of us uses to cope with those things,” he says. Finding the right strategy People can consider a variety of strategies to help them manage these unusual times, depending on what resonates with them, how they feel at a particular time and what they enjoy. Those struggling with working from home might try to structure their home work day in a similar way to if they had needed to go into the office. They might get up at the same time, wear their normal work attire, follow a similar daily routine to help normalise the situation for them. Others might find different ways to do the things they normally enjoy but can’t currently do. Mr Shakespeare shares two examples of how people might do this. “People into arts and culture can find virtual tours of museums and galleries,” he says. Or some of his clients have used the Houseparty app to hold their Friday drinks, with colleagues, friends or family, to maintain social connections. Approaching colleagues and clients Changing ways of working also mean we are needing to find new ways to communicate with colleagues and clients alike. Mr Shakespeare suggests it can help to remember that your clients and customers are dealing with the same things as you, but how they feel about them and what they need might be different. This can give you an empathetic approach without forcing it. He recommends asking them how they would like to engage with you, how long they would like to meet and how they would like to structure time with you. He has found some clients have just wanted emails from time to time, while others have specified weekly video interaction – you won’t know until you ask. Using this approach now may have benefits beyond helping you, your colleagues and clients communicate and cope with the here and now. “When we’re through this… we may actually have a higher quality level of engagement with our family, friends, colleagues and clients,” Mr Shakespeare says. Taking some perspective to change your outlook Mr Shakespeare believes having some perspective on the situation can change your outlook. “In many countries of the world, they do not have the luxury of self-isolating. They have 20-30 people in a house in some parts of India, Manila, these sorts of places. We actually have the luxury of self-isolating and protecting ourselves and our family, and in many respects continuing to be able to work and make decisions,” he says. This sort of perspective can assist with driving a more positive view. Taking this a step further, Mr Shakespeare believes there is one activity all people should try. “All of us, in one way can, at least once a day, think what can I be grateful for, because that leads to a more optimistic and positive outlook than a negative one, which tends to feed on itself and lead to fear and anxiety,” he says. If you are struggling with the current situation, you may find support through: Lifeline 13 11 14 Mensline 1300 789 978 Kids Helpline 1800 551 800 Beyondblue 1300 224 636
Apr 07, 2020
The ETF Securities Partner Series joins with Australian and international investment professionals to discuss the big issues of the day and what these mean for investors. Periods of market volatility often mean investors question the construction of their portfolios. Using a core-satellite investment approach has traditionally been valuable in periods like this, as it gives the ability to pivot satellite investments to manage market activity. The theory might be sound, but is it holding up to the COVID-19 test? ETF Securities spoke to Jonathan Ramsay, Director of InvestSense on the topic ‘Does core-satellite investing still stack up?’ What is core-satellite investing? Core-satellite investing is a two-pronged approach to portfolio construction, where the core is made up of broad passive exposures to major asset classes (mainly equities and fixed income) and the satellite investments are more opportunistic and designed to seek specific growth outcomes, sometimes at higher levels of risk. These might typically be actively managed funds, but could also be investments in individual companies, real estate or one of a growing number of more-targeted ETFs. Generally, the core might be 65-85% of the portfolio, depending on the investor’s goals, investment horizon and risk tolerance, while satellites tend to represent 15-35% . What a core-satellite portfolio looks like will vary depending on the investor’s needs. “We’ve got one [portfolio] which has an emphasis on cost, and it uses a lot of ETFs to keep the costs down… we’ll add some of the traditional satellite active managers alongside that. We’ve got another couple with more of a high net worth focus. And there, they might have a very active core,” says Mr Ramsay. In the same way, one product might sit in the core for a particular investor but be treated as a satellite investment for another. Gold is an example of this. Mr Ramsay says, “we had it as a kind of core alternative, if you like… We’ve had other clients who’ve also wanted to increase their defensiveness…who have used it as more of a proactive thing.” The theory behind the practice Core-satellite portfolio construction and its enhanced version are based on modern views of efficient market theory. Efficient market theory assumes that companies are correctly priced based on all known information at all times, which means that it’s not possible to consistently outperform the market using fundamental research . Research indicates efficient market theory is true to an extent - the true value of investments does typically win out in the long term – but it’s still possible to find short term patterns and opportunities to help generate higher returns . In the COVID-19 situation, the theory would suggest that it is possible to use the market fluctuations to protect or grow your portfolio. Mr Ramsay is putting the theory to the test, with some of his clients particularly focused on accessing the disruption. “They want to make changes quite often quite quickly. And especially in this kind of environment,” says Mr Ramsay. Active v passive The original view of core-satellite investing considers the core as purely passive, with satellites tending to be active. While many investors still use it in this way, given the cost efficiencies of having a passive core, some investors these days have reversed this approach. “There’s an ability to use an active core or a passive core, depending on the particular investor,” says Mr Ramsay. He doesn’t hold a preference for either style, seeing a use for both, but suggests that many investors may wish they’d used a passive core for the cost efficiencies down the track. For those investors with an active core, Mr Ramsay has found passive investments like ETFs valuable as satellites, particularly in these times. “These kinds of clients… have been transacting a lot more quickly and reacting to market environments and using ETFs for that purpose…For instance…rotating into Asia, out of Europe, out of the US is what happens at the moment,” he says. ETFs have also been useful during this period because their pricing closely matches the market at any given point in the day, compared to other unit trust products where you might not know what price you’ll get until the end of the day. Mr Ramsay explains, “your reason for making a shift can change radically during the day. So you might start off the day thinking… this market looks cheap, or we want to go more defensive or whatever it is.” From this perspective, using ETFs may better allow you to express your view on market activity at a particular point of time, responding to scenarios as they occur rather than waiting for them to play out. This makes them a natural fit for satellites, as well as for core investments. Performing into the future Fortuitously, Mr Ramsay had positioned his clients defensively before the COVID-19 situation became a concern, viewing markets as expensive. “Sometimes expensive markets are like a bug looking for a windshield,” he said, noting that initially this positioning dragged on performance but, “in this, you know we’ll probably have done 25% better than our market composite.” He remains a proponent for core-satellite investing as the structure has allowed him to move rapidly and flexibly for his clients. Does core-satellite investing stack up at the end of the day? Only time will really give investors the performance-based answer to this question. Since we don’t have a crystal ball, the facts are simply that core-satellite investing is a responsive and flexible approach where investors can adjust to changing markets while still holding a core portfolio targeting long term goals. From that perspective, core-satellite investing continues to stack up.  https://www.nasdaq.com/articles/case-using-coresatellite-portfolios-2016-06-30  Malkiel, Burton G. The efficient market hypothesis and its critics, Journal of Economic Perspectives, Vol 17, No 1, Winter 2003, pages 59-82.
Apr 01, 2020
The ETF Securities Partner Series joins with Australian and international investment professionals to discuss the big issues of the day and what these mean for investors. COVID-19 has dominated headlines for months and is influencing rapid change in the way we live and work. Change at any time can be unsettling, but combined with a serious health threat, it can drive anxiety and concern not just on a social level, but also in financial terms. ETF Securities spoke to Jon Reilly CIMA, Chief Investment Officer for Implemented Portfolios and Adam Dawes, Senior Investment Adviser for Shaw and Partners on the topic ‘Where are we now? Where are we going?’. The state of the nation for financial markets “We’re in the middle of a deliberate demand shock. We’ve chosen for very good reasons to shut down our economies, and it’s going to be a hugely dislocated, disruptive event, we know that.” Says Mr Reilly. While markets rebounded slightly this week on the news of positive manufacturing numbers in March from China, it’s fair to assume the volatility is not over and recovery may be some time away. “It’s been a very stressful time for all of us in the financial markets and certainly, going forward, I think it’s not going to get any easier,” says Mr Dawes. If we look at China as an example across the peak of the crisis, the economic data was worse than many analysts had anticipated. Across January and February 2020, Chinese industrial production fell 13.5%, service production fell 13%, retail sales fell 23% and exports fell 17% . Even assuming China is able to move back into full scale production rapidly, it is trying to recover in a world where other countries are moving into full scale lockdown and we are yet to see what the lockdown has meant in terms of income shock to individuals and businesses alike in China . Alongside China, US markets continue to dominate the global economy so consideration of their ability to recover also needs to be factored. There are questions around its ability to contain the pandemic or whether economic and political measures from the government and the Federal Reserve will offer enough of a buffer to prevent a recession. In the wake of the US death toll now exceeding official Chinese numbers, US President Trump is anticipated to release a fourth wave of stimulus focusing on infrastructure (a policy from his 2016 campaign) . Australia has taken a number of measures to manage the current situation. The Reserve Bank of Australia reduced the official cash rate to 0.25% and announced a program of quantitative easing – a significant announcement given it was not a measure used even in the heights of the Global Financial Crisis . The Federal Government has also announced a number of stimulus measures to support businesses and individuals – with some predicting more announcements to come . Uncertainty plays into investor psychology and it’s been hard to find pockets of safety in the volatility. “There was nowhere to hide, whether it was Aussie equities versus international equities. Bonds got sold off significantly as well. That was disconcerting for people in the early days. It’s been pleasing to see some sense of order returning to those markets” says Mr Reilly. A greater market correction than expected While no one could have anticipated the COVID-19 pandemic and the influence it would have on market volatility, both Mr Reilly and Mr Dawes suggest that a market correction (to an extent) had been overdue anyway. “I certainly feel that markets were overvalued… we had some conception that markets were a little bit toppy” says Mr Dawes. Mr Dawes has found specific assets and sectors have offered defensive positioning. “Consumer staples has been a fantastic spot. We were overweight in that sector and we didn’t do a lot of selling of Coles, in fact, we added to it even if clients did have Woolworths in their portfolio. Two years ago, we put 5% of gold in everybody’s portfolio and … it has held up really, really well for us”, says Mr Dawes. In this environment, it has been valuable to focus on fundamental beliefs and research for investments. “When we look at what we put into a client’s portfolio and what we don’t, we look at how much income will they get, how quickly are earnings going to grow, and what’s the valuation price? What’s someone going to pay for your investment in the future?” says Mr Reilly. Where are we going? Both suggest there may be opportunities from the current environment but caution that a slow and steady approach is beneficial to managing potential ongoing volatility. “We’ve made a first step in to buy a little bit more Aussie equities, a little bit more A-REITs. We’re still taking a long-term view. We think there’s absolutely some generational buying opportunities here” says Mr Reilly. Mr Dawes adds, “You don't need to be a hero, you just need to buy quality and good quality companies with good balance sheets and just absolute quality, top 50, top 100, top 200. Even if you wanted to go with some of the ETFs, ZYAU is a very good one also because it provides a good dividend.” ETFs across the COVID-19 pandemic As with the rest of the market, ETFs have not been immune to the volatility, particularly bond ETFs, but they continue to offer a responsive way for people to adapt to these changing markets. “ETFs, as a whole, have really made this market today what it is. The ability now for me to go into gold, to go into the US, to go into far-reaching parts of the world on the ASX and be able to buy that and be able to put a portfolio together. The diversification that I’ve got in my clients’ portfolios now is far greater than it was 10 years ago,” says Mr Dawes. ETFs traditionally offer a cost-effective way to instantly deliver broad, diversified exposure. This characteristic may be useful in the current market volatility to allow investor to tilt in favour of defensive or growth investments. Mr Reilly suggests this, along with liquidity, may even drive new converts to ETFs after this crisis. Even so, investors should refer to the basics of investing and the fundamentals of the companies, sectors and countries they want to invest in. “ETFs are a wonderful portfolio tool, but it doesn't preclude you from doing the work to understand what you own in this very convenient wrapper of an ETF structure.” says Mr Reilly. Finishing on a note of optimism It’s worth remembering that, as with most things in life, the COVID-19 situation will not last forever and this too shall pass. Being measured and taking a long-term approach can assist in managing the volatility and in positioning you well for the eventual recovery.