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Weekly ETF Monitor for week ending 22 May 2020

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May 26, 2020

This week's highlights Equity markets returned to risk-on mode last week with cyclical sectors leading the way. Resource (QRE and OZR) and technology (ATEC) sector ETFs were the top domestic performers for the week. U.S. small- and mid-caps (IJR and IJH) along with global property (REIT) were the best performing international equity funds. Asian focused funds (CNEW, PAXX, NDIA, CETF, VAE and IZZ) were all amongst the week’s poorest performers along with gold miners (GDX) Gold stabilised above US$1,700/oz last week, while other precious metals advanced. Platinum fund ETPMPT was one of the week’s top performers, returning 6.9%. Oil continued to rise from its April lows, with OOO returning 10.7% last week. The Australian dollar moved back above US65c . Total flows into domestically domiciled ETFs were $372m, while outflows totalled $91m. Domestic cash fund BILL saw the biggest inflows for the week, followed by bond fund IAF and GOLD. Domestic cash fund AAA saws the bulk of the week’s outflows. Bearish equity fund BBOZ was the most traded fund for the week, followed by domestic equity fund VAS. GOLD saw above average volumes. ETFS Physical Platinum (ETPMPT), which invests in physical platinum bullion, returned 6.9% for the week. Prices are being driven by a combination of rising demand, mainly from China, as vehicle production comes back on line, in contrast to restricted supply caused by mine lockdowns in South Africa, the world’s largest producer.

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Weekly ETF Monitor for week ending 15 May 2020

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May 20, 2020

This week's highlights Equity markets mostly declined last week as the recent rally stalled, though the domestic market ended the week in positive territory. Gold miners (GDX) and biotechnology (CURE) ETFs were the top performing equity funds. Global property funds (REIT and DJRE) were the biggest decliners, followed by U.S. small caps (IJR), banks (BNKS) and global value stocks (VVLU). Precious metals rose across the board, with silver leading the way. ETPMAG gained 10.6% to be the week’s top performing fund, while GOLD rose by 3.8%. Strong U.S. dollar fund YANK was also amongst the top performers. Total flows into domestically domiciled ETFs were $407m, while outflows totalled $124m. Domestic equity fund IOZ saw the biggest inflows for the week, followed by bond fund IAF and STW. Global corporate bond fund IHBC, cash fund ISEC and resources sector fund QRE saw the week’s biggest outflows. IOZ was the most traded fund for the week, followed by bearish equity fund BBOZ. Cash fund BILL saw above average volumes. ETFS Physical Silver (ETPMAG), which invests in physical silver bullion, returned 10.6% for the week. Being a more industrial commodity than gold, silver saw much bigger drawdowns in late-February and early-March as markets reacted to the rapid spread of COVID-19. At that time the ratio of gold to silver prices hit all-time highs. Since bottoming on 19th March, however, ETPMAG has rebounded by 23.7%, compared to 7.6% for GOLD over the same period.

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Trading the greenback

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May 18, 2020

Product in focus: ETFS Enhanced USD Cash ETF (ASX Code: ZUSD) Trading the greenback Many investors view cash as part of the defensive, and somewhat static portion of their portfolios, but in uncertain markets it might also be used as a trading tool to act on shorter term views and expectations of currency exchange rates. The US dollar is one such option that investors could consider, using an ETF like the ETFS Enhanced USD Cash ETF (ASX code: ZUSD). ZUSD aims to track the performance of an interest-bearing US dollar cash deposit by investing in US dollar bank deposits with maturities ranging from overnight to three months and earning a variable rate of interest. Using USD as a defensive position Cash typically forms part of a defensive allocation in a portfolio for liquidity and downside protection, with Australian investors typically using the Australian dollar. Much like equities and fixed income, diversifying cash can assist with risk management, particularly in volatile periods. For example, holding currencies other than the Australian dollar might buffer the cash allocation in periods where the Australian dollar is weak. The US dollar often holds appeal to Australian investors as a result of its strength compared to the Australian dollar. AUD/USD 14 May 2015-12 May 2020 The US dollar has traditionally been viewed as a safe-haven asset, with most global central banks keeping it as a reserve currency and many international transactions conducted in the US dollar. The value of the US dollar tends to be less volatile, particularly compared to emerging markets, backed by what is to the most part seen as political and economic stability[1]. Trade your conviction Investors can also use cash investments to make tactical decisions on how they expect a currency to perform. For example, investors who believe the US dollar is likely to appreciate, may increase their cash allocation to the US dollar while those who believe it is likely to depreciate may choose to reduce their allocation. An ETF like ZUSD is a simple and liquid way to trade your convictions on the US dollar, allowing you to move quickly based on your changing market views. It may also be more cost-effective and accessible for some investors when compared to setting up cash deposits internationally or using a currency exchange. Demand for the US dollar globally driven The US dollar is heavily used across the globe. There is more than $13 trillion in US dollar denominated assets held in banks outside the US[2], reflecting approximately 15% of world GDP[3]. Approximately 80% of global trade financed by the Bank for International Settlements (BIS) is in US dollars (BIS finances 35% of global trade)[4]. The US dollar has also been used by the US Federal Reserve (the Fed) to improve liquidity within the US and other countries by way of swap accords. An example of how this works is as follows: the Fed has an agreement with the Reserve Bank of Australia to exchange US$60 billion of US dollars for Australian dollars and reverses this transaction at a later point in time[5]. The Fed has permanent swap arrangements with the United Kingdom, Canada, Japan, European Central Bank and Switzerland but set up temporary relationships at the start of the COVID-19 pandemic with Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore, South Korea and Sweden[6]. This has been to support the large demand and tight supply of the US dollar outside the US and has resulted in an increase from US$60 million in the first half of March 2020 in swap activity to nearly US$400 billion at the start of April 2020[7]. Depending on how the COVID-19 pandemic continues to evolve, demand for the US dollar – either through swap activity or broader global activity – may put upward pressure on the greenback. Those who believe this is likely may choose to ‘go long’ on the US dollar by taking exposure to it either by buying US dollars or other means, such as ZUSD. Currency exchange and equity markets The exchange rate between the US and Australian dollars correlates negatively with US equity markets as represented by the S&P 500, meaning that the US dollar tends to appreciate against the Australian dollar when the US share market is falling and vice-versa. In other words, the Aussie dollar tends to perform well when markets are rising, which is linked to demand for Australia’s resources-heavy exports. This is demonstrated further in the following charts. As shown in the correlation panel at the bottom of the chart below, across 5 years there is a negative relationship between the movements of the S&P 500 compared to the USD/AUD rate. In periods of more pronounced downturns, the correlation has become more negative, as seen in the global financial crisis and the more recent volatility in March 2020. Long term S&P 500 vs USD/AUD rate (performance in top chart and correlation in bottom chart) Source: Bloomberg, 14 May 2020 To highlight how pronounced that relationship can be the chart below shows a strong negative relationship between the S&P 500 and the USD/AUD rate in the recent months of COVID-19 driven volatility. Short-term S&P 500 v USD/AUD rate (performance in top chart and correlation in bottom chart) Source: Bloomberg, 14 May 2020 An enhanced approach to the US dollar ZUSD tracks the USD/AUD rate and invests in US dollar bank deposits with maturities ranging from overnight to three months and aims to earn a rate above the rate available on overnight deposits. Deposits are held with one or more Authorized Deposit Taking Institutions and earn a variable rate of interest spread across a range of maturities to enhance yield, while maintaining the liquidity of the fund. Generally though, exposure to the US dollar through ZUSD may assist as a buffer against weakness in the Australian dollar and offer diversification in the cash allocation of a portfolio. Alternatively, investors may choose to consider ZUSD as a trading tool for a short-term tilt to access any strength they may anticipate in the US dollar. ZUSD is the only physical US dollar ETF offering quarterly distributions. This may make it appealing to income-focused investors. More information on ZUSD Fund Name ETFS Enhanced USD Cash ETF ASX Code ZUSD Management Fee 0.30% p.a. Distribution Frequency Quarterly For more information on ZUSD, please contact us on: Sales Trading Phone +61 2 8311 3488 Email: sales@etfsecurities.com.au Phone +61 2 8311 3483 Email: primarymarkets@etfsecurities.com.au

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Investing for better outcomes

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May 13, 2020

How to build your clients’ portfolios to meet their goals The unpredictable nature of markets means that advisers need to be pragmatic and measured in their approach to meeting their clients’ goals, ranging from building a house deposit and paying for education to generating a consistent retirement income while maintaining enough capital for aged care deposits. Whatever the goals, most advisers typically need to be able to preserve a certain level of capital for their clients, while also investing for long term growth or for stable income. An enhanced core-satellite approach to portfolio construction can offer a cost-efficient and measured way to target investment goals and manage market volatility. Download the complete paper or read the summary below: What is enhanced core-satellite investing? In enhanced core-satellite investing, the core is made up of passive exposures, including smart beta, to major asset classes (mainly equities and fixed income) while satellite investments are more opportunistic and designed to seek specific growth outcomes, sometimes at higher levels of risk. Satellite investments might traditionally have been active managed funds or direct investments in companies or real estate but are now equally likely to be selected from the tailored ETFs available today. Generally, the core might be 65-85% of the portfolio, depending on the investor’s goals, investment horizon and risk tolerance, while satellites would represent 15-35%[1]. How this might look in practice is as follows: an investor focused on income might use the satellite components for yield or proactively switch to defensive or growth tilts to bolster their core investments, depending on market conditions. Their core might include investments such as ETFS S&P/ASX 300 High Yield Plus ETF (ASX code: ZYAU) or ETFS EURO STOXX 50 ETF (ASX code: ESTX). In the current market conditions, the investor might choose to increase exposure to defensive investments to the satellite like ETFS Physical Gold (ASX code: GOLD), or include an exposure to foreign currencies like the US dollar which offer a higher yield compared to the Australian via an ETF like ETFS Enhanced USD Cash ETF (ZUSD). How enhanced core-satellite investing supports client needs and goals? Core-satellite investing is a flexible approach and the core will look different according to the individual investor. A high growth strategy might have a core with a higher proportion of ‘riskier’ assets like equities, while a defensive strategy might focus more on assets like gold or fixed income. Investors should consider the core as where they set their strategic asset allocation – where the long-term targets are set for the investment composition to meet your goals, needs and views. By contrast, the satellite is for tactical asset allocation – for shorter-term investments based on market and world conditions that are likely to be more temporary. [Learn about how core-satellite investing has worked during the COVID-19 pandemic here] Core-satellite portfolio construction also assists in cost management for investors. Passive investing is typically lower cost when compared to actively managed funds. Using ETFs may offer additional pricing efficiencies for investors, such as lower administration and management fees as well as lower entry point compared to managed funds and listed investment trusts. Other considerations from using ETFs may be benefits from liquidity which can assist in flexibility to move based on market conditions or to free up funds to meet specific cash needs. There is also a wide range of ETFs available, assisting advisers in identifying those which may fill specific portfolio gaps, match specific goals or even meet particular views held by clients. For more information on enhanced core-satellite portfolio construction or to find out more about using our range of ETFs in your portfolio, speak to ETF Securities.

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Investing to meet your financial goals

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May 13, 2020

Whether your goal is to build a house deposit, pay for education or create a retirement income, taking a measured approach to your investments can help. Most investors typically need to be able to preserve a certain level of capital, while also investing for long term growth or income. An enhanced core-satellite approach to building your investment portfolio can help you target your goals and manage market movements. Download the complete paper or read a summary below. What is enhanced core-satellite investing? Enhanced core-satellite investing is a two-pronged approach to portfolio construction, where the core is made up of 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. Satellite investments could be targeted ETFs, actively managed funds or investments in individual companies or real estate. 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]. Assisting you with your goals This approach can assist investors in meeting their goals because it allows the main component to focus on long term growth and stability and use the satellite component to take on investing opportunities which may carry greater opportunity of returns alongside greater risk of loss to help meet specific goals. Interested in finding out how this approach has worked during the COVID-19 pandemic? Read more How this might look is as follows. An investor might use an ETF like ETFS S&P/ASX 300 High Yield Plus ETF (ASX code: ZYAU) to represent the Australian equities exposure in the core of their portfolio. They might then choose to incorporate a growth theme like robotics and artificial intelligence in their satellite portion by using an ETF like ETFS ROBO Global Robotics and Automation ETF (ASX code: ROBO). Using ETFs in the investment portfolio can be beneficial due to characteristics like liquidity (allowing investors to be flexible based on needs or market conditions), low costs along with flexibility and variety. With a wide range available on the ASX, investors are more likely to find an ETF to meet specific goals or match particular views. For more information on enhanced core-satellite portfolio construction or to find out more about using our range of ETFs in your portfolio, speak to ETF Securities.

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