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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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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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India rises to the COVID-19 challenge

May 13, 2020

India is poised to be an economic superpower, benefiting from structural factors such as business reform, income growth, urbanisation, domestic consumption and demographics. Tipped to be the world’s third largest economy by 2035[1], India holds appeal from a business and investment perspective. The COVID-19 pandemic has changed the outlook in many global economies but the challenges may only be temporary for India. Kanish Chugh, co-Head of Sales at ETF Securities, spoke to Kinjal Desai, Fund Manager Overseas – Equity for Nippon India Mutual Fund, on her views about India and the COVID-19 challenge. Managing COVID-19 With a population of 1.3bn, some commentators may have expected COVID-19 to ravage India but its infection rate has so far remained low compared to its population size. The Indian government was swift to enact measures[2] including: - travel ban and quarantine measures for returning travellers - total lockdown from 24 March 2020 - financial relief package of INR 1.7tr[3] - monetary relief with interest rate cuts from the Reserve Bank of India (RBI)[4] Current modelling suggests, if the ongoing lockdown continues to be implemented effectively, by July 2020, less than 0.01% of the Indian population is likely to be infected[5]. Further stimulus may be announced to support small and medium sized enterprises, as well as harder hit industries like aviation, hotels and tourism. Challenges and opportunities in lockdown While lockdown has created challenges for the economy, Ms Desai notes certain sectors have been able to continue to function. “There are certain sectors which have functioned, I would say quite well given the circumstances, which I’m looking at FMCGs, staples, telecom, pharma, power and utilities… Over a slightly longer term, I would say that it is the consumer discretionary sectors, which is your auto, durable goods, capital goods sectors which will… perform better but they have taken a very bad hit now,” she says. Ms Desai suggests focusing on individual players in each sector which may be positioned to gain in this environment. “The companies which have a strong balance sheet are the ones which are going to gain market share… We’ve seen how telecom have been, and how banking has done better over NBFC [6],” she says. Reliance Jio Infocomm Limited (Jio) is an example of a telecommunications company which was positioned for growth before the pandemic and has apparently continued to benefit. It is the largest telecommunications operator in India with a mobile subscriber base of 370 million and 35% market share (as at December 2019)[7] . Facebook recently announced it has purchased a 9.99% share in Jio, announcing a potential collaboration with WhatsApp[8]. The broader global environment has also created opportunities for India across the pandemic period, with oil prices at extreme lows. “India is actually the third largest oil consuming economy in the world, just after China and the US, and we are dependent on imports for 80% of our oil needs… we’ve seen [oil prices] come down by almost 60%, this has presented India with an amazing opportunity to store and build reserves. Indian companies have actually procured almost 7 million tons of oil, which is 20% of our annual needs in these low prices,” says Ms Desai. Has the pandemic changed India’s outlook? India was on track to be one of the next economic super-powers prior to the COVID-19 pandemic, so investors may wonder how the pandemic has influenced its prospects. Ms Desai views the COVID-19 pandemic as an external event, with the structural factors behind India’s growth prospects still favourable. She points to India’s demographics, low private sector debt, domestic demand orientation and low reliance on foreign demand as a structural advantage over peers like China and other emerging markets. “There are various factors which have pointed towards a steady recovery in growth. First, there are clear signs that private capex has started to pick up. This was reflected in our domestic credit growth which had remained subdued for quite a few years. But now we are seeing it sustainably growing. Secondly, like I said, the RBI was actually in the midst of a rate-cut cycle in 2019. And apart from this, the central bank has also been very proactively supporting the economy with domestic liquidity this will finally lead to transmission of these policies, lowering of policy rates to real life lending rates,” Ms Desai says. She also sees an additional opportunity for India from the COVID-19 pandemic. “This COVID-19 pandemic can actually be a turning point for the global supply chain… which is currently highly concentrated in China, and India can be a huge beneficiary of this shift. Global Investors are definitely looking at India to rise up to this opportunity and take this leap ahead,” she says. The US-China trade war had seen a number of multinational companies consider moving operations to India. The combination of the COVID-19 pandemic, and resurgence of tension between US and China in a pandemic ‘blame-game’ may see many businesses take a more serious approach to rebasing their operations. Is now the time to invest in India? Global uncertainty may be putting off many investors, but for some, now could be the time to revisit their investment strategy around India. Ms Desai says, “the valuations have become very attractive since good businesses are available at decade low valuations. The current time is very uncertain, but our long-term fundamentals continue to remain intact.” The longer-term opportunities for India remain. Ms Desai points to the demographics of India, skewed younger compared to peers, which offers benefits in terms of a large working base easily able to support growth through taxes and consumption. Consumption and income growth are also factors driving India’s growth. “India is a hugely unpenetrated market compared to global average and that provides enormous opportunity. Again, an example is penetration of video goods has just begun to expand as we come close to that $2,000 per capita [income] mark. Experience from other countries suggests that discretionary consumption, your cars, white goods travel all improve exponentially once you cross the two to $3,000 per capita income mark,” Ms Desai says. She also notes that financial literacy in India has also been improving as incomes have grown, with a benefit to the financial services industry. Those considering exposure to India in their portfolio could consider an ETF like the ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) which covers 50 of the largest and most liquid Indian domiciled securities. [1] https://www.austrade.gov.au/Australian/Export/Export-markets/Countries/India/Market-profile [2] https://www.thejakartapost.com/academia/2020/04/19/indias-response-to-the-covid-19-pandemic.html [3] https://home.kpmg/xx/en/home/insights/2020/04/india-government-and-institution-measures-in-response-to-covid.html [4] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=49582 [5] https://timesofindia.indiatimes.com/india/lockdown-till-may-31-can-stall-coronavirus-pandemic-says-study/articleshow/75653149.cms [6] NBFC refers to the Non-banking financial crisis in India. You can read more in https://www.etfsecurities.com.au/idea/individual-investors/the-three-key-drivers-of-indian-performance-in-2019-5e5d8ff76d22670017b30dc8 [7] https://www.mobileworldlive.com/asia/asia-news/reliance-jio-widens-lead-as-profit-soars/ [8] https://techcrunch.com/2020/04/21/facebook-reliance-jio/

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Active investing with passive funds

May 06, 2020

The debate between active and passive investing has always been contentious but has taken an interesting twist in recent times. Some investors have sought a ‘best of both worlds’ approach by using passive investments in an active way. So, what does it mean to invest in this way, and does it work? Kanish Chugh, co-Head of Sales at ETF Securities, spoke to Nazar Pochynok, Financial Adviser at Bell Partner Creations and Andrew Wielandt, Managing Partner for Dornbusch Wealth, on Active investing with passive funds. Taking an active approach Normally when investors think of passive or active, they think of very specific investment products. Passive investments are defined as those which follow rules or a methodology to automatically follow an index or benchmark with the aim to “match the market”, while active investments are discretionary, meaning they are made based on a fund manager’s research and philosophy. “The way we use active management is a little bit different. We use it from a risk management perspective of looking at how to change the dynamic asset allocation of our passive portfolios,” says Mr Pochynok. He primarily uses passive investments like ETFs in his portfolio to offer cost-effective access to particular assets and markets. Mr Pochynok says, “nothing in passive is truly passive. Everything is an active decision. For example, the underlying constituents of companies and the relative benchmarks they track from ETF to ETF really does differ. Do you choose an index that is cap-weighted or equal-weighted? Should the index have style factors incorporated, such as quality, size, momentum and volatility? All these decisions are not submissive. And they're very much active manager thinking more so in a cost-effective and simple-to-use strategy.” Is passive really passive? Passive investing has become increasingly popular in recent years as it offers liquid cost-effective exposure across the market or to specific assets, sectors or themes which may otherwise be difficult to access. Despite this, some negative connotations have still lingered, namely that passive investing offers “passive performance” and that you need to “pay for performance”, that is, pay higher fees for active management to generate returns. The historic data suggests this view is a fallacy. Mr Wielandt points to research conducted by Standard & Poor’s over 18 years. “The 29,000 data sets basically [show] that if you’re trying to be active and outperforming the market, you’ve got a 95% chance of failing. And of the 5% that succeed, if you look at them over the next five years, only 5% of the 5% will succeed,” he says. This research is supported even by recent data. “One of the SPIVA reports for last financial year, so take away COVID, also suggested that in 2019, for the financial year, almost 93% of active managers underperformed the ASX 200. And that number also persists at 83% underperformance over three years and 81% underperformance of the index over five years,” says Mr Pochynok. This isn’t to say there isn’t a place for active investments, but rather investors should be selective in using them and seek to identify those consistent performers. Passive with active overlay for clients The switch to using passive investments in an active way reflects a change in attitude for advisers as well as their clients. Mr Wielandt says, “two years ago I would have said that we were more just choosing direct equities…But certainly over the last eighteen months we've been far more using ETFs and passive ETFs and, as you're saying, sort of using ETFs in a passive tool in an active manner…There's some difficult conversations happening with clients that have got this direct equities focus, that have got that mindset. That was a 1990s mindset. 2020 today, and it's about total return. It's about broad asset allocation and terrain. You're using passive tools but in an active manner.” He notes that the Australian market is behind global counterparts in terms of how it’s using passive investments like ETFs but will get there eventually, following the path of countries like Canada with a similar environment to Australia. The choice to use passive investments in an active way will continue to be something investors and advisers grapple with across the coming years. For Mr Pochynok though, it has been a simple decision that comes back to the value proposition he offers to his clients. “Looking at it from a macro perspective, the real value that advisers bring is solving big rock problems for clients, and making their lives simple, efficient and providing them with effective solutions,” he says. From his perspective, using passive investments to allow him to focus on active risk-management and client goals is a natural fit.

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Dividend Cuts and COVID-19, what it means for income?

Apr 30, 2020

The effects, impacts and dislocations of the COVID-19 pandemic have been felt very heavily in the investment markets, and the fluttering of the black swan’s wings has certainly disconcerted income-oriented investors. The Australian addiction to dividends As interest rates ground lower in the 2010s in the wake of the global financial crisis, typical income strategies based on bonds became harder to justify. Income-seeking investors were effectively forced up the risk curve, toward corporate bonds, high-yield bonds, cash-generating real asset investments, and the share market. In particular, the income aspect of share dividends – turbo-charged by Australia’s dividend imputation system – became a major attraction, with effective yields in the 6%–8% range readily available. For this, investors had to accept several facts: one, that the dividends cannot be considered certain until they are paid; two, that dividends are paid at the company’s discretion, and can be cut at any time – even abandoned; and three, that they bore the capital risk of the share market. Finding yield in new areas In 2020, as COVID-19 became a fact of life, all three of these facts have forcibly reasserted themselves; particularly the capital risk. The danger in holding ANZ Bank, for example, for the dividend yield, might have seemed largely dormant – until it was halved in price inside a month. “As interest rates have come down over the past decade, we've had to change the way that we look at income; it's become quite driven by growth assets,” says Angela Ashton, founder and director of managed account provider Evergreen Consultants. “Having the central part of a portfolio with respect to income production in growth assets like property or shares introduces a lot more risk, unfortunately for clients, but that's the way you need to generate income today,” says Ashton. While some of the “traditional buckets” that have produced income in the past are under pressure, Ashton says there are opportunities in areas such as diversified credit, some of the Australian REITs, some of the Australian and US ETF equity-income products, and high-quality Australian shares - particularly consumer staples names such as Woolworths, healthcare stocks and infrastructure stocks. Seeking a new growth story Jamie Nemtsas, director at independent financial advisory firm Wattle Partners, expects income-conscious investors to take a more ‘total-return-oriented’ approach going forward. “High income is generally more risky, and ‘sustainable growth’ looks less so at the moment, if you think in terms of total return. You might be looking at a regional building company in New South Wales that has got a strong dividend, on paper; but it’s going to be far better to hold something like Google that has got a massive audience, low cost of capital, great balance sheet, and you're sacrificing some kind of regular income for a very, very strong company.” In this strategy, Nemtsas says, the investor is looking to “harvest” capital gains, and put them back into an income-producing bucket. “A growth story like CSL, you can sell portions of that holding, for years, and keep putting it into cash. Then you have another stock – it might be Amcor –that is trading sideways, price-wise – but it’s generating income.” Rebalancing and portfolio management It simply comes back to rebalancing, he says. “Say you have 5% cash, 10% fixed-income, 30% Australian equities, 20% global equities, and 35% real assets. If you rebalance regularly, and your Australian equities has moved to 34%, you ‘harvest’ that 4%, and put it back to cash. Your capital gain is constantly being converted into your ‘core’ capital, which we like to have sitting there as effectively three years’ worth of cash needs.” Nemtsas agrees that areas such as consumer staples, healthcare stocks and infrastructure stocks – and what he calls “fallen angel” sectors like travel – offer good opportunities at present. “There are also some great opportunities in credit, particularly in the ‘distressed credit’ space. “We’re looking at a range of individual investments, some stocks, some ETFs, particularly where we think they’ve been oversold, to set up portfolios for the next few years,” he says. “We’re getting the opportunity at the moment to build portfolios totally differently than we were eight weeks ago. But we’ll stick to that rebalancing strategy – sell those that go up, keep those that go sideways while yielding income. And think in terms of total return, not in terms of maximising your income return,” he says.

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Is COVID-19 the market correction “we had to have”?

Apr 22, 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. It may not be surprising that market volatility has soared since the COVID-19 pandemic hit, but could this also be, to misquote the famous line, the correction ‘we had to have’? We spoke to James Whelan, Investment Manager at VFS Group, Michael Ogg, Director at Providence Wealth and David Lane, Director – Wealth Management at Pitcher Partners on whether we should have expected the financial impact of COVID-19 and what comes next. An overdue correction At face value, COVID-19 has been responsible for immense uncertainty in markets (even aside from what it has meant for daily life), but there’s more to the story. “COVID-19 was the trigger for valuations to adjust from inflated levels rather than the cause. Valuations ultimately matter and its never obvious what the trigger may be,” says Mr Ogg. Long before Wuhan and COVID-19 started to hit the news, many had begun to wonder when the record length bull market would come to an end, and whether that time was now. Mr Lane says, “We had been concerned about the general level of equity markets for some time and had been anticipating a market correction.” From that perspective, many investors may have adjusted their portfolios in anticipation, but it is unlikely anyone could truly have been prepared for COVID-19 and the dramatic influence it has had. “You can’t prepare for a Black Swan event (which this most certainly is) and you can’t expect one every day otherwise you’ll never be in the market. The situation with this event, as with most major calamities, is that ‘correlation goes to 1’” says Mr Whelan. He notes the equity and bond market selloffs were expected investor behaviour in the face of uncertainty, but markets have also faced further challenges from the oil war, physical workplace disruptions and global interest rate cuts. Managing volatility While it is hard to create a portfolio to avoid every possible event to befall markets, investors can consider basic investment principles as an important tool to manage volatility. “Diversification of portfolios and avoiding highly geared expensive assets provides some protection for portfolios in an unforeseen event,” says Mr Ogg. Mr Lane holds a similar view to geared assets and says, “Leverage is one of the main reasons that investors (or traders) become forced sellers, and their returns can be magnified in the current markets.” Further to this, he says, “While there are always reasons to adapt to the current circumstances, a key element to being successful as an investor is to maintain a long-term core strategy.” How a diversified portfolio looks willvary according to the investor. Mr Whelan’s portfolios include “local and international fixed interest and bonds, thematic ETFs picked by our proprietary algorithm, tactical stock selections, protected dividend strategies and cash which is tailored to our client’s needs and risk tolerances.” Finding the right time to buy Some investors use volatile markets as a buying opportunity so may be wondering if now presents the right time to buy. All three experts are wary of picking the bottom. “One thing that never changes is human behaviour and the switch between fear and greed. It’s impossible in the current environment to form a view of what earnings may look like so trying to time entry points in equity markets is, at best, just a guess.” says Mr Ogg. Mr Lane agrees, saying, “the focus has shifted from earnings to balance sheet…Almost all expectations of revenue, earnings and dividends can no longer be relied upon. Everything needs to be rebased… Companies with low financial leverage, quality assets and sustainable business models will be the ones to survive.” This isn’t to say there won’t be opportunities, but the traditional measures investors may have previously focused on won’t necessarily be right for the current environment. While strong balance sheets are one key factor, Mr Whelan suggests long-term themes, including those stemming from the COVID-19 pandemic, can be valuable. Mr Whelan sees a new world order from COVID-19 that will open doors for certain companies. “We, as a planet, now have the template for what to do in a repeat event. Borders up, quarantine, work from home, order online, consume content from home. That will be (by default) the new way of life. We’re focusing on stocks and sectors that will assist that new way of life” he says. What next? Final words of advice “Be patient, do not panic and stay healthy,” says Mr Lane, offering a perspective for dealing with all aspects of life today. Mr Ogg suggests to those tempted to tweak their finances, “don’t try and be a hero, make sure that within asset classes you have quality and ensure you have enough liquidity to ride through the storm.” On the note of investment opportunities, Mr Whelan’s advice was as follows: “Get a plausible picture in your head of what the world looks like after this thing is done. Factor in the potential end of globalisation and even cheaper money at an unpayable debt. Think about what the average home and workplace will look like…Invest accordingly and don’t look at it every day.” If a new world is coming and markets were overvalued before, perhaps COVID-19 was indeed the correction “we had to have”.

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To rebalance, or not to rebalance?

Apr 22, 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. Rebalancing portfolios to strategic or tactical asset allocation weightings is a standard part of portfolio construction but in light of recent market volatility, many investors may be considering whether or not now is the time to rebalance. Kanish Chugh, Co-Head of Sales at ETF Securities, spoke to Zach Riaz, Investment Manager and Director for Banyan Tree Investment Group, and Chris Brycki, CEO and founder of Stockspot on the topic, To rebalance, or not to rebalance?. What is rebalancing? Rebalancing relates to overall strategy and the identified asset allocations the investor or investment manager believes will assist in achieving their strategic goals. As investments gain or lose value, the portion of the portfolio they represent may start to vary, so periodically investors may rebalance back to their determined asset allocations by selling or buying assets. “Portfolio rebalancing is all about making sure the portfolios that our clients have remain suitable for their investment risk capacity, as well as their investment time horizon… Rebalancing is about selling assets that have performed well and grown into too large a portion of the portfolio back towards their target rates and using that money to redeploy into assets that have shrunk,” says Mr Brycki. A recent example of this comes from the COVID-19 volatility. Government bonds and physical gold grew in value while equity markets fell in value, changing the asset composition for portfolios. Mr Brycki sold some of the gold and bond assets and reinvested in equities to restore the portfolios to their original asset allocation targets. The trigger points to rebalance It’s easy to let emotion cloud investment decisions, but in the case of rebalancing, it is important to focus on data instead. Mr Brycki says, “our triggers for rebalancing are when assets move a certain distance from their target weights… The evidence suggests that around 25-30% in terms of the move an asset needs to make against its target allocation has historically been around the optimal.” Both Mr Brycki and Mr Riaz recommend against rebalancing too frequently, such as on a daily or weekly basis or when moves are only small, to manage costs like brokerage or tax from capital gains. “Every time you rebalance, you’re likely to be realising capital gains tax, unless you’re in a structure that you’re not repaying a lot of capital gains tax for. That’s going to become a big drag on your long term performance… For us, it’s a very systematised process and we think if something’s moved, lets say 30% from its target weight, that the benefit of rebalancing definitely outweighs the cost at that point,” says Mr Brycki. Rebalancing in the current environment In the current market volatility, some investors may have taken the chance to rebalance, while others may have held back. “In the current environment, you’ve got to also look at rebalancing as an opportunity-cost… We’re a lot more defensive heading into it. We should be looking at this sell-off as an opportunity to…add on extra risk. And certainly, we’re looking to do that… This is a good reset period for investors to just re-check what the next 12-18 months look like, because… the market has changed and there will be opportunities to take advantage as a consequence of that,” says Mr Riaz. In terms of rebalancing within asset classes, investors should also be mindful of what or how they are rebalancing – it might not always make sense to rebalance. For example, in a portfolio of direct shares, it might not make sense to rebalance out of high performing shares into low performing ones, or high performing sectors into lower performing ones. Investors may also need to be conscious of asset characteristics like liquidity which could make it harder to rebalance. Investors in ETFs will also find rebalancing is done at regular intervals to replicate the indices they track, without any additional action required by the investor. To rebalance or not to rebalance Both Mr Riaz and Mr Brycki view rebalancing as an important activity, done sparingly, and one which should be done mindfully and with data on hand to back decisions. “You don’t need to rebalance all the time but be dedicated to rebalancing based on whatever the strategy you’ve decided is,” says Mr Brycki. Mr Riaz agrees and says, “you’ve just got to follow your investment process, and follow what’s worked for you in the past.”

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Is COVID-19 a boon for robotics and AI?

Apr 21, 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. Robotics, automation and artificial intelligence (AI) have rapidly advanced in recent years as humans look for more efficient and better ways to manage a range of activities. As the COVID-19 pandemic has forced us to rely more on technology than we ever have before, in many ways this crisis has been a benefit for this sector. ETF Securities spoke to Jeremie Capron, Director of Research for ROBO Global, on how robotics and AI have been affected during the pandemic and the prospects of the ROBO Global Index going forward. The COVID-19 era of uncertainty The pandemic has affected all areas of investment markets, with uncertainty and lockdowns reflected in market volatility. Most sectors offered negative performance for the quarter ending March 2020, but it is interesting to note that the ROBO Global Index was able to outperform broader global equities. According to Mr Capron, this comes down to a few aspects of robotics and AI companies. Digitalisation forms part of the solution to managing the changed way we work and live during the pandemic but is also part of a longer-term trend. Some companies will even directly benefit due to faster technology adoption. The companies in the index have strong balance sheets, with 60% holding a net cash position. This means they’re well placed to weather any lockdown challenges. This is a sector which, as a whole, has minimal exposure to areas that will be challenged during the pandemic. “ROBO has virtually no exposure to the maximum pain points in this crisis. Things like energy, or bricks-and-mortar retail, transportation, leisure, hospitality,” says Mr Capron. Robotics and AI form the solution The global efforts to work from home, almost instantly, has meant that there has been faster take-up of newer technology than would normally have occurred. While video conferencing might be of the first technology that comes to mind as an area benefitting from the current environment, Mr Capron says logistics and warehouse automation is an interesting area of growth. “E-commerce has seen another step-up increase in terms of utilization. There's an enormous strain that's being put on the logistical aspects of e-commerce... A good example of that would be Zebra Technologies here in the US, that provides all the track and trace technology that's used throughout the e-commerce supply chain or Manhattan Associate, another American company that provides the software that's behind warehouse management systems. Or… a Japanese company called Daifuku, that's the world leader in material handling and automated equipment for distribution centres,” he says, adding that these types of companies represent 12% of the ROBO Global Index. In a similar vein, he views factory automation as an area to revisit post the crisis. Companies who have had to deal with labour shortages and shutdowns during the COVID-19 pandemic are more likely to reconsider factory robots and automation to avoid any reoccurrence of challenges they may have faced this time. Computer processing and AI, representing around 22% of the ROBO Global Index, may be seeing an immediate benefit from the pandemic. “Those are the companies that provide the software or the computer power that’s behind the infrastructure backbone of online businesses… So, companies like Nvidia or Xilinx, SericeNow, all these businesses are seeing a surge,” Mr Capron says. Is now the time to buy? Given the reliance on technology and the prospects for the future, investors may be wondering if now is the right time to buy into the robotics and AI sector through ETFs like the ETFS ROBO Global Robotics and Automation ETF (ASX code: ROBO). Mr Capron views robotics and AI as a crucial sector now and in the future. “Robotics and AI is not a niche. It is really a set of general-purpose technologies that can be applied to all markets, all industries, and it's happening now,” he says. He is wary of saying when is the best time to buy in, given the difficulties of calling the bottom of the market but suggests from a longer-term perspective, buying robotics and AI could be attractive at this point. Mr Capron says, “from a valuation standpoint, the index is trading on a trailing PE that’s around 22-23 times, that’s basically a 20% discount to the historical average, and at the high, we see the PE of 30 times. I don’t know if we’ve seen the low for this cycle yet, but I know that once we are past the lows, small and mid-caps will outperform and our strategies are very strongly tilted towards small and mid-caps.” Whether you focus on the valuations now, or longer term, there is no question that robotics and AI are driving a major global industrial shift. If there’s a silver lining to the COVID-19 pandemic, perhaps it’s that it’s moving that shift faster, with benefits to how we work, as well as the companies fuelling that change.

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ASX Insights: the Australian ETF market

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 [1]. 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.

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How to survive isolation

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

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Does core-satellite investing still stack up?

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% [1]. 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 [2]. 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 mar