Apr 07, 2021
This week's highlights Global equity markets marched onwards to fresh highs last week even with a shortened trading week. ETFS Ultra Long Nasdaq 100 Hedge Fund (LNAS) was the best performing fund for the week up 10.2%, while VanEck Vectors Global Clean Energy ETF (CLNE) was up 8.1%. Precious metals were amongst the worst performers, with ETFS Physical Silver (ETPMAG) down 1.9% and ETFS Physical Gold (GOLD) down 1.1%. Total inflows for the week totalled A$226m which consisted of A$305m of inflows and A$76m of outflows. The best inflows on a fund basis were seen by BetaShares Australia 200 ETF (A200) which had A$79.9m of inflows and iShares S&P/ASX 200 ETF (IOZ) had A$31.5m. The biggest outflows were in SPDR S&P/ASX 200 Fund (STW) A$38.1m and iShares Edge MSCI World Minimum Volatility ETF (WVOL) had A$5.2m of outflows. Turnover for the week remains highest amongst vanilla equity ETFs. Vanguard Australian Shares Index ETF (VAS) had A$21.1m of turnover and SPDR S&P/ASX 200 Fund (STW) had A$16.4m. ETFS Ultra Long Nasdaq 100 Hedge Fund (LNAS) provides hedged leveraged target exposure to the Nasdaq-100 in the range of 200-275%.
Mar 31, 2021
Lesson #1. Gold does well in crises, acting like portfolio insurance Every investor wants an asset that offers downside protection, or insurance of a sort. And preferably one that is not suspiciously complicated or synthetic. Perhaps the major lesson from the coronavirus is that gold can provide this type of insurance as gold historically does well during collapsing equity markets, as the chart below illustrates. Gold has performed well in times of crisis Source: Bloomberg, ETF Securities, 1 March 2021 The onset of the coronavirus crisis is generally dated from 31 December 2019, when the virus was first officially reported by Wuhan health authorities in China. The worst of things for markets ended on 18 November 2020, when Pfizer and BioNTech published phase 3 trial results for their vaccine candidate (suggesting that a mass vaccination drive was possible.) Throughout this period, gold provided a return of 25%, compared to the 9% delivered by the S&P 500 in US dollars. Nothing comes for free of course. And gold can underperform during strong equity market bull runs; such as the dotcom boom of the 1990s. However, this is often the way with insurance policies: when times are good, they fall in price, leaving investors mulling over whether they need them at all. Yet when bad times return, as they inevitably do, policy holders can be glad that they kept them. Lesson #2. Gold has outperformed most asset classes long-term The market is a noisy place. And getting caught up in the daily sound, it is easy to lose sight of the long-term picture. For gold, there are two ways of looking at the big picture. First, its long-term returns. Second, the impact that a small allocation can have on a portfolio. The pandemic has highlighted both benefits gold can bring. Average annual return of key assets in Australian dollars'* Source: World Gold Council (*Returns from 31 December 2000 to 31 December 2020. In Australian dollars of total return indices for S&P/ASX 200, Bloomberg Aus Bond Bank Bill Index, Bloomberg AusBond Govt 1+ Yr Index, and Bloomberg Commodity Index.) The long-term performance of gold is something that can surprise investors, as received wisdom suggests that Aussie equities outperform other assets over the long term. However, for the two decades leading up to January 2021, gold has been the top performing of the major asset classes. Gold’s outperformance was accentuated by the pandemic, as the ASX 200 is yet to re-achieve its pre-pandemic peak. Gold’s ability to enhance portfolio’s risk-adjusted returns was also on display. As gold maintains a low correlation with shares and bonds, it can improve the overall returns of a portfolio. (“Push out the efficient frontier” in the jargon). This can be seen below, with some simulations we have run with Vanguard’s famous LifeStrategy funds. It can be seen that the portfolio with a small gold holding does better on almost every measure. Investors are welcome to try their own simulations, with a small allocation to gold. Growth of $10,000: Vanguard LifeStrategy Simulation Source: Bloomberg, ETF Securities, Vanguard. Time period: 1/10/2005-30/9/2020 Lesson #3. The gold price is driven by negative real yields The gold price correlates with the real yield on the 10-year US treasury, the pandemic has shown. Meaning investors who want a signal on the gold price’s future direction potentially have one. It makes sense that gold would correlate with real yields. As gold provides no income, it can become more appealing when bonds do not have a real income either. And when bonds provide a negative income – meaning bonds are mathematically guaranteed to lose value if held to maturity – it is logical to expect gold to be more appealing still. Negative real yields are made of gold Source: Federal Reserve; ETF Securities, 1 March 2021 Aiding golds tether to real yields has been the rise of ETFs, which have allowed more flexibility about how gold is used in portfolios. Prior to 2006, gold did not correlate with real yields. The correlation only emerged after the mainstreaming of gold ETFs in the early and mid-2000s. That gold ETFs should have this influence has caused some to raise an alarm. Campbell Harvey, professor of international business at Duke University, argues that gold ETFs driving the gold market could create larger drawdowns in the price of gold. He wrote: “The ETF financialization of gold ownership, in which the real price of gold may be correlated with the amount of gold held by gold-owning ETFs, could possibly lead to higher peaks and lower troughs for the real price of gold relative to the experience of the past.” From where we sit, the evidence suggests that the opposite is at least equally possible. Drawdowns in the gold price were larger in the 1980s and 1990s – prior to gold ETFs. What is more, it is hard to see how gold is different from some pockets of the bond market, such as local government bonds, where demand for ETFs can also set prices. This was in evidence in the March 2020 where bond ETFs provided price discovery on untradeable municipal bonds. Gold: Maximum Drawdowns Source: Bloomberg; ETF Securities, 1 March 2021 Nonetheless, if gold ETFs are part of the reason that gold follow real yields, and gold ETFs are also here to stay – then it follows that the relationship should be robust. And for investors wanting clues on the gold price: watch real yields on the 10 year. Lesson #4. Bitcoin is not the new gold Gold and bitcoin are sometimes lumped together – given their apparently limited supply and potential use as alternative currencies. Some analysts have taken the inverse flows between gold and bitcoin ETFs the past several months – gold has seen outflows at the same time bitcoin has seen inflows – as evidence of gold investors migrating to bitcoin. However, gold and bitcoin are very different, as the pandemic has shown. Past two years Volatility % of weekly returns lower than -2.5% 95% VaR per US$10,000 Bitcoin 9.9% 26.9% $1,382 Nasdaq 3.2% 8.7% $382 S&P500 3.3% 8.7% $306 Gold 2.2% 7.7% $291 Source: World Gold Council; ETF Securities, 1 March 2021 The most obvious difference has been their volatility—which hit fresh extremes in 2020. Gold for its part was far less volatile than equities throughout the most volatile trading days in February and March. As panic selling peaked, our gold ETF traded sideways, not sustaining any loss of value. The ASX 200, as measured by an ETF, fell quite significantly. So too, did the MSCI World. But bitcoin was another matter entirely. It dropped more than 50% in the panic in US dollar terms—in keeping with its reputation as a highly volatile asset. Bitcoin and gold behaved very differently. Gold was a safe haven during coronavirus panic Source: Coindesk; Bloomberg; ETF Securities, 1 March 2021 The second is that the sources for demand for gold are very different. Bitcoin’s use case is quite narrow, with most end demand coming from speculators. By contrast, most demand for gold comes from central banks and industry, according to the World Gold Council. Investment makes up a significant fraction of demand, but still a minority. This then feeds back into volatility: more diverse demand ensures that gold is, again, less volatile. Lesson #5. Tactically trading gold has risks While the gold price has crept steadily upwards over the past 50 years, the precious metal has had periods of sustained drawdowns. This cyclicality might suggest that gold should be traded tactically. In this way, some of the downtrend can be missed. However, the lesson from our own gold ETF throughout the pandemic is that tactical gold trading has risks. From 17 August 2018 – 6 August 2020 GOLD produced a return of 76% for those who stayed fully invested. But for those who missed the best 10 days in that two-year period, the return GOLD produced was just 29%. The consequences of missing the best days are not unique to gold. Burton Malkiel, Princeton professor and author of best seller A Random Walk Down Wall St, notes the same thing occurs in the share market. He takes it as evidence in favour of buying and holding an index fund. He wrote: “Buy and hold investors in the US stock market made an average annual return of 8% during the 15 years from 1995 through 2009. But if they had missed the 30 best days in the market over that period, their return would have been negative.” To be sure, tactical trading may also help avoid the worst days, which can then produce a better return. But knowing whether tomorrow will be a best or worst day is impossible. As we all know, no-one has a crystal ball.
Mar 30, 2021
This week's highlights Defensive stocks came to the fore last week as some big technology names took a hit. Infrastructure fund VBLD was the week’s top performing ETF, up 4.3%, followed by consumer staples fund IXI. Global quality (QUAL), income (INCM) and high yield/low volatility (ZYUS) funds were also amongst the top performers. Biotech fund CURE saw the biggest drop for the week, down 6.7%, while gold miners (MNRS), Asia tech (ASIA) and FAANG stocks (FANG) also declined. Precious metals were mixed, with silver (ETPMAG) amongst the biggest decliners, but other metals advanced. The Aussie dollar dropped below US 77c, with strong dollar fund YANK amongst the top performing ETFs and strong AUD fund AUDS amongst the poorest. Total reported flows into domestically domiciled ETFs were $302m, while outflows totalled $98m. Domestic equity fund A200 and cash fund AAA saw the week’s biggest inflows, followed by a range of equity and fixed income funds including XARO, BNKS, SUBD and ILC. Hedged S&P 500 fund IHVV and cash fund BILL saw the largest outflows for the week. VAS was the most traded fund for the week, followed by A200 and IHVV. VAP saw above average volumes. ETFS S&P 500 High Yield Low Volatility ETF (ZYUS) returned 3.4% for the week. ZYUS invested in a portfolio of 50 U.S. stocks selected on the basis of being strong dividend payers and exhibiting historically lower volatility. As such, ZYUS tends to have a more defensive sector allocation, with overweights to utilities, consumer staples and real estate companies. Year-to-date ZYUS has outperformed the S&P 500 Index by 9.8%.
Mar 29, 2021
Technology companies’ share prices have hit some turbulence. Thanks to rising interest rates, volatility in the tech sector is picking up. And as the Nasdaq-100 – a popular gauge used to follow the US tech sector – is retreating from its all-time pandemic-induced highs, investors are wondering how to profit from or protect against this influential sector. Nasdaq-100 up days and down days year-to-date Source: ETF Securities, (Dates: 1 Jan - 24 March 2021) Short and long Nasdaq 100 funds issued by ETF Securities offer one solution. In this article, we look at how they work and the benefits and risks they offer. What do short and long funds do? Long and short funds magnify the ups and downs of the Nasdaq-100. They are kind of like mirrors and magnifying glasses. ETFS Ultra Short Nasdaq 100 Hedge Fund (SNAS) ETFS Ultra Long Nasdaq 100 Hedge Fund (LNAS) The short fund, known by its ASX ticker SNAS, is like a mirror. It moves in the opposite magnified direction to the share market, rising in value when the Nasdaq falls, and falling when it rises. In this way, SNAS, like short selling, can provide a way to profit from or hedge against a falling share market. Performance of LNAS and SNAS since inception Source: Bloomberg, 25 March 2021 The long fund, or LNAS, is the magnifying glass. It follows the Nasdaq up and down – but to a magnified degree. In this way, LNAS gives investors a tool for expressing strong views on the movements of technology stocks. The graphs above and below illustrate what the results can look like. The graph above shows the performance of both funds since inception. As the Nasdaq 100 has strongly rallied the past year, LNAS, the long fund, has outperformed. The short fund by contrast has strongly underperformed over the same period. SNAS performed strongly when the Nasdaq fell Source: Bloomberg, 25 March 2021 However, over shorter periods the results can look very different, as the graphs above and below indicate. In times when the Nasdaq 100 falls, SNAS performs strongly. The first fortnight of September 2020 was one such period. By contrast, in periods where the Nasdaq falls, LNAS falls further. Late-February early-March this year was one such period. LNAS falls more than the Nasdaq during dips Source: Bloomberg, 25 March 2021 These funds have advantages over derivatives – like options and CFDs – in that they are more transparent and easier to trade. They are also potentially safer, as we discuss below. How do they work? Leveraged long and short funds use Nasdaq 100 index futures to achieve their aims. SNAS sells Nasdaq index futures. Whereas LNAS buys them. To magnify the ups and downs, these futures are traded “on margin”, by our trading desk. Our trading professionals monitor the exposure to the Nasdaq 100 to keep gearing within a set band of 200% to 275% of the fund’s net asset value. When gearing becomes too low, they increase the exposure to bring it back up. When gearing becomes too high, they reduce exposure to bring it back down. This means the actual degree of gearing varies day to day—but is always actively managed. The level of gearing can be viewed on our website every day. Crucially, all gearing is managed within the funds. This means that investors never face margin calls. It also means SNAS and LNAS can never cause investors to lose more money than they put in. This makes LNAS and SNAS different from – and potentially safer than – outright short selling and derivatives trading, where investors can face margin calls and losses of potentially more than their original investment. How are the prices determined? As the funds use futures, their prices follow the futures market. It is important to note that futures markets can move in different directions to the share market—especially for Australian investors. This tends to occur for two major reasons: time zone differences between Australia and the US; and the more flexible trading hours that the futures market allows. Unlike shares, futures are traded almost 24 hours a day six days a week. This can mean, for example, that even when the Nasdaq-100 index falls throughout the Chicago trading day, the Nasdaq-100 index futures held in our funds rise throughout the Sydney trading day. This could occur, for instance, because traders believe that the Nasdaq 100 will rise the following morning in Chicago. What are the risks? It is important that investors understand that LNAS and SNAS are not like index-tracking exchange traded funds (ETFs). Instead, they are actively managed hedge funds, and come with a higher degree of risk than ETFs. As leveraged short and long funds magnify both the profits and losses investors experience, they are only appropriate for short term trading and any holdings should be actively monitored. They should not be used as buy and hold investments.
Mar 24, 2021
For some years, commentators have been comparing the thundering run in technology stocks to the dotcom bubble of the 1990s. For the past three years, technology has outperformed all other sectors, as promising new technologies have captured investors' imaginations. But comparisons of the present day to the dotcom era are arguably misguided. And claims that technology stocks are in a dotcom-style bubble are most likely wrong. Today’s tech rally vs dotcom The first difference between the two eras is the strength of the tech rally. Simply put: the dotcom rally in technology stocks was far more powerful than today’s. Had you invested $1 into the S&P 500 Information Technology Index, the major gauge of US tech stocks in June 1997, it would have turned into $3.20 by March 2000—a whopping 320% return in just two and half years. Not dotcom - today's tech sector rally in perspective Source: Bloomberg, (Data from 1/1/1998 - 1/3/2000 and 26/11/2018 - 25/02/2021) Had you put $1 into the index in mid-2018, it would have turned into $1.99 by the end of February 2021—thanks largely to the coronavirus driving up the value of technology stocks. That is still a very handsome return of 99%. But it pales in comparison to the dotcom era. We see the same thing when we look at specific companies. Microsoft, Amazon and Apple were three of the major drivers of the dotcom boom. In the 1990s, the market judged them to be world-leading tech companies, with profits swelling well into the future (a correct conclusion, as things turned out). By all appearances, the market is making the same conclusion about these three companies today. Not dotcom - Microsoft, Amazon, Apple Market-weighted price return. Source: Bloomberg But again, we can see that the rally in these three sector-defining businesses has been weaker. And weaker despite Microsoft, Amazon and Apple being better businesses today – stronger profits, fewer competitors, more diversified – than they were in the 1990s. And despite interest rates being much lower today. We can also contrast the “darlings” of each era. In the dotcom era, Qualcomm, Cisco and Oracle were among the darlings. They were great businesses then; they are still great businesses now. Today, the “FANGs” – Facebook, Amazon (again), Netflix, Google – are said to be the companies of our time. But here again, the dotcom boom was very different. Qualcomm, Cisco and Oracle – and the rally they enjoyed – was of an order of magnitude greater than Facebook, Netflix and Google’s. In fact, Facebook and Google have underperformed the tech sector index over the past two and five years. It is hard to see any dotcom-style boom in these businesses today. Dotcom darlings versus the FANGs Source: Ycharts, (Market weighted price return. Dates from 2/6/1997 - 28/2/2000, and 4/6/2018 - 26/2/2021) Dotcom era lesson: valuations matter While it is hard to see a dotcom-style bubble in technology today, the lessons of that era still apply. The first is that when rallies are too strong, a correction can follow. The second more important lesson is valuations matter. During the late 1990s, the revenue and profits of tech companies were growing rapidly. In five years leading up to 2000, the earnings of Qualcomm, Oracle, Cisco, Intel, Microsoft and other tech leaders more than quadrupled. But investors got too optimistic. They projected these profits too far into the future. As the rally peaked in early 2000, Oracle, Cisco and Qualcomm were all on triple-digit price-to-earnings ratios and double-digit price-to-sales ratios. These valuations may have been justified on a very long-term outlook. (Qualcomm and Oracle went on to exceed their 2000 peaks). But they proved unsustainable in the following decade. June-99 Revenue (Quarterly YoY Growth) EPS Diluted (Quarterly YoY Growth) PE Ratio PS Ratio Amazon 171% Unprofitable Unprofitable 19 Cisco Systems Inc 45% 800% 119 21 Oracle Corp 22% 31% 41 6 Qualcomm Inc 15% 800% 223 6 Dec-20 Revenue (Quarterly YoY Growth) EPS Diluted (Quarterly YoY Growth) PE Ratio PS Ratio Facebook 33% 53% 27 9 Amazon 44% 118% 74 4 Netflix 22% -8% 89 10 Google 23% 46% 30 7 Source: Ycharts Today by contrast tech stocks are on far more modest valuations. Suggesting that many investors have taken the lesson about valuations to heart. And perhaps suggesting that investors can become suspicious these days when tech stocks rally strongly (which could also explain the headlines). Investing in technology today Any technology investor should exercise caution when making stock selections – especially after a long rally. Caution is something that we have built into our own tech ETF, which takes a different approach to garden a variety market-weighted ETFs. Our tech fund – ETFS Morningstar Global Technology ETF (ASX Code: TECH) – uses a valuation filter to exclude overvalued companies. When picking tech stocks Morningstar’s team of researchers, who control the index, remove companies that they believe are overvalued. They look at many valuation metrics, including price-to-earnings, price-to-sales and monitor them continuously. As such, stocks that are on dotcom-style 100+ PE ratios almost never make the cut. How technology companies fare as the global economy “reopens” from the coronavirus we will have to wait and see. But for now, at least, it seems the lessons have been learned and tech stocks are safe from a potential bubble.
Mar 23, 2021
This week's highlights Global equity markets experienced heightened volatility last week as quadruple witching occurred. Precious metals rallied and were the best performers over the week. ETFS Physical Palladium (ETPMPD) finished the week up 10.9%, ETFS Physical Precious Metals Basket (ETPMPM) up 4.5% and ETFS Physical Silver (ETPMAG) up 2.8%. The worst performers over the week were energy funds. VanEck Vectors Global Clean Energy ETF (CLNE) was down 8% and BetaShares Crude Oil Index ETF - Ccy Hedged (OOO) was down 6.4%. Total inflows for the week were A$206m which consisted of A$257m of inflows and A$50m of outflows. The best inflows on a fund basis were seen by BetaShares Australian High Interest Cash ETF (AAA) which had A$30m of inflows and VanEck Vectors MSCI World Ex-Australia Quality ETF (QUAL) had A$23.5m. The biggest outflows were in BetaShares Australian Bank Snr Floating Rate Bond ETF (QPON) A$12.5m and BetaShares Global Sustainability Leaders ETF (ETHI) had A$6.7m of outflows. Turnover for the week remains highest amongst vanilla equity ETFs. Vanguard Australian Shares Index ETF (VAS) had A$18.7m of turnover and SPDR S&P/ASX 200 Fund (STW) had A$16.4m. ETFS physical palladium (ETPMPD) returned 10.9% for the week. ETPMPD is fully-backed by physical holdings of palladium and provides exposure to the supply and demand dynamics for palladium in areas like the automotive industry.