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Weekly ETF Monitor for week ending 10 April 2020

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Apr 15, 2020

This week's highlights The rebound in equity markets continued into the Easter long weekend. Global and domestic real estate sectors provided many of the top performing ETFs for the week with REIT, SLF, MVA, VAP and DJRE all returning in excess of 13%. Small- and mid-cap U.S. equities (IJR and IJH) and global banks (BNKS) also posted strong returns. With most sectors and markets posting gains, only bearish funds were amongst the poorest performers across equity ETFs. Oil continued its slide, with OOO dropping 17.7% for the week. The US dollar declined against most majors. Precious metals advanced in US dollar terms, but declined against a strengthening AUD. Total flows into domestically domiciled ETFs were $398m, while outflows totalled $190m. Domestic equity fund IOZ saw the biggest inflows, while bearish funds BBOZ, BBUS, cash fund AAA and currency hedged equity funds (IHVV and QHAL) also saw strong flows. High yield fixed income fund IHHY saw the week’s biggest outflows for the second week running. Bearish domestic fund BBOZ was the most traded fund for the week, followed by broad-based funds VAS and STW. ETFS FANG+ ETF (FANG), which tracks the performance of technology leaders such as Apple, Alphabet (Google), Amazon, Facebook and Netflix, returned 4.6% for the week and is down by just 2.1% since its inception at the end of February 2020. The NYSE FANG+ Index, which FANG tracks, has posted a positive return of 11.2% year-to-date, despite the broad market sell-off.

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Weekly ETF Monitor for week ending 3 April 2020

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Apr 07, 2020

This week's highlights Domestic equities rallied strongly last week as early signs of declining infection rates emerged. Resource sector funds (MVR, OZR and QRE) were all amongst the top performing ETFs for the week. Global energy companies (FUEL) also rallied as oil regained some ground. On the negative side, global banks (BNKS) and real estate funds (REIT and DJRE) were amongst the poorest performers, along with Japanese equities (HJPN and UBJ). Gold and silver pushed higher, while platinum and palladium declined. Oil rebounded on hopes of supply cuts, with OOO topping the weekly performance charts, up 31.9%. The Australian dollar ended the week dipping back below US60c. YANK was amongst the week’s top performers. Total flows into domestically domiciled ETFs were $539m, while outflows totalled $292m. Domestic equity fund STW saw the biggest inflows, while bearish funds BBOZ, BBUS and BEAR and gold (GOLD) also saw strong interest from investors expecting further downside. High yield fixed income fund IHHY saw the week’s biggest outflows. Bearish domestic fund BBOZ was the most traded fund for the fourth week running, followed by broad-based funds VAS and STW. Hedged global equity fund VGAD saw above average trading. ETFS Physical Silver (ETPMAG) has returned 16.9% since its mid-March low. At that time the widely followed gold/silver ratio reached all-time highs above 120, meaning that gold was briefly more than 120x more expensive than silver per ounce.

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Ounces to dollars - why aren't you invested in gold?

Apr 07, 2020

Gold has grabbed headlines during the COVID-19 situation, as investors have raced to safe-haven assets. While gold is valued as a hedge against short term volatility, it can also hold a long-term role in a diversified portfolio given its defensive and growth qualities. Gold can represent 2-10% of a portfolio, depending on an investor’s needs or strategy, but many investors are missing this allocation. For these investors, it has become a question of why not? Gold as a safe haven Gold has both defensive and growth qualities, which has led to its position as an investment safe-haven in times of volatility. It can act as a store of value, as well as holding the potential to grow. There are two key reasons for this. 1) Gold has a low, and at times, negative correlation to other asset classes. That is, it performs differently to other asset classes and its performance is not necessarily associated with what is happening in other asset classes. This is shown in the table below: Australian Equity Global Equity Australian Fixed Income Global Fixed Income Commodities Correlation -0.29 -0.12 0.37 0.06 0.31 Source: Bloomberg data as at 31 December 2019. 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. Commodities are represented by the Bloomberg Commodity Total Return Index 2) Gold has the ability to offer positive performance in a range of market conditions, including periods of volatility. For example, if you consider the Global Financial Crisis, gold prices rose 26% while the S&P 500 fell 56%. Even in the current COVID-19 situation, between 19 February and 26 March 2020, gold gained 12.4% compared to the S&P 500 which fell 14.1% and the S&P/ASX 200 which fell 27.8% (all in AUD terms). You can see the performance of gold against other major asset classes in the chart below. Source: Bloomberg, ETF Securities, as at 26 March 2020 This ability to perform in a range of markets comes down to gold’s position as a consumer-driven and investment-driven asset. From a consumption perspective, while around 50% of its use is in jewellery, gold is also heavily used for other purposes such as electronics or even part of medical and diagnostics equipment [1,2] COVID-19: gold price falls and rises Given the facts around gold as a safe-haven asset, investors may therefore wonder what happened when gold prices fell across the week starting 16 March 2020 and how gold has performed across the COVID-19 situation to date. On the whole, gold has seen increased interest and flows during the COVID-19 situation, but markets did see price falls across the week commencing 16th March 2020. It is worth understanding why this happened, as it was less related to any concerns about gold and more related to other activities. Gold can be vulnerable to financial deleveraging – that is, investors needing to free up cash for a variety of reasons. Equity markets were hit simultaneously by the COVID-19 situation and a price meltdown in oil markets. This affected investors with leveraged positions who would have needed to sell other assets to free up cash to pay their liabilities. What this looks like is as follows. An investor using their own money and borrowed money to purchase investments is required to maintain the investment account at a certain value – this is a leveraged position (also called a margin loan account). If the total account falls below that value – generally because the investment itself has fallen in value, then the investor will need to ‘top up’ the account with their own cash to restore the account to its minimum value (this is a margin call). As markets fell across the week of 16 March 2020, many investors would have needed to top up their accounts and will have sold other liquid and performing assets, such as gold, to do so. This has occurred in the past too. During the Global Financial Crisis, gold was briefly sold in October 2008 to meet investors’ cash needs for liabilities from the equity market sell off but then recovered and returned 45% in US dollar terms from its October 2008 low into March 2009, compared to the S&P500 which fell 30% in the same period. Since then, gold has recovered, reaching seven-year highs on 25 March 2020 of A$2746.32 per ounce. Source: Bloomberg, ETF Securities The outlook for gold There are a few factors to suggest gold may continue to hold value across the current crisis. Market volatility from COVID-19 While China has begun to reopen after its COVID-19 lockdown, other countries are either in the midst of it or commencing stages of lockdown. From that perspective, investor concerns and volatility may continue for some time yet. The panic has been swift but recovery could take some time. Some sectors, like technology, are in theory well positioned for both crisis and recovery but investor confidence is a different matter. Other sectors, like retail and travel, will struggle during this period and may find ramping up post the crisis takes some time. From this perspective, many investors may continue to look for defensive assets like gold. They won’t be alone. Even central banks may bulk up their stores of gold across this period. The low interest rate environment and prospect of quantitative easing Gold traditionally performs well in periods of low interest rates, with investors using it rather than cash. Interest rates have been low for some time but have dropped further in the current situation. Australian rates have reached lows of 0.25% while the US has dropped to a range of 0-0.25%. Many countries, including Australia have announced fresh rounds of quantitative easing too. Temporary shortage At the same time as increasing numbers of retail investors seek to purchase physical gold bullion, supply chains have been disrupted by COVID-19 [3]. Refineries in Europe, particularly in Italy, have been unable to keep up with demand forcing traders to move into wholesale markets. While refineries in normal circumstances would be able to manage the surge in interest, lockdowns over COVID-19 may continue to place pressure on supply, in turn pushing prices higher. Accessing gold using an ETF The traditional forms of access to gold were either through physical holdings or an indirect exposure by owning shares in gold mining companies. Both had their challenges – physical holdings namely through prohibitive costs and indirect exposure by opening to assorted company risks. Generally speaking, physical holdings offer a more pure exposure. The first gold-backed ETF was launched in 2003 by ETF Securities, it still trades today as ETFS Physical Gold (ASX:GOLD) and held $1.65 billion in assets as at 27 March 2020. Gold-backed ETFs are literally as described, where physical gold is purchased and stored by a fund manager as part of a trust and investors buy units in the trust for exposure to the market movements of gold. Using an ETF for gold exposure has several features and advantages over the physical holdings. Cost tends to be a foremost consideration. Investors in physical gold may need to consider aspects like freight, storage and insurance, as well as the volumes available through their broker of choice. For example, some brokers may sell by the ounce which may be cost-prohibitive for some retail investors. Units in gold-backed ETFs tend to have management fees that are often cheaper than the costs for individuals to store and insure their own gold The liquidity and ease of use of gold-backed ETFs compared to physical gold is another consideration. Investors holding ETFs may be more easily able to adjust their holdings to reflect activity in the market, buying or selling small quantities when needed compared to those holding physical holdings which may have higher minimum trading quantities and take longer to transact. This can be a challenge for some investors depending on their size and horizon of their investment. ETFs are also typically easier to use compared to physical gold holdings, requiring as little as a trading account to get started and can be done anywhere. It can be less intimidating for many investors who may not be aware of even where to start for physical purchasing and trading. Understanding the risks As an investment tool, ETFs are subject to a range of general investment risks, such as market risk or counterparty risk. Market risk relates to loss of value due to movements in price. Changes in the price of gold relative to an investors purchase price create gains or losses. Counterparty risk is the risk that the other party to your investment defaults or mismanages your assets. For example, the risk that the custodian holding the physical gold (whether for an ETF or individual investor) has not securely stored the gold and it is stolen or lost. Custodians of assets in managed funds, like ETFs, typically use major international vaults to store the physical assets which offer highly sophisticated security arrangements compared to personal safes or small storage companies. Another example of counterparty risk might occur at the time of investment purchase if the trading tool or company doesn’t actually use your funds to buy the selected investment or asset. Using established and credible companies to purchase investments can be an important way of managing this risk. There can also be variation in the way that gold-backed ETFs are managed, so investors should research their options. One crucial difference to watch for is whether the ETF uses allocated or unallocated gold. Allocated gold means you own the physical gold based on your unit holding. In the event of a default by the custodian, your holding is unaffected. ASX: GOLD uses allocated gold and you can redeem your units for the physical gold. Unallocated gold means your cash investment is ‘backed’ by the physical gold holdings of the issuer still providing you with exposure, but these holdings remain the property of the issuer. This form of gold-backed fund has additional credit risk for investors. Should a default occur, you don’t have ownership over the physical gold so your claim is considered and paid alongside all other parties of the issuer who might also have a claim. Unallocated gold is used in many gold-backed ETFs so it is worth investigating the structure and management before you decide to invest. Both physical holdings and ETFs can also be subject to liquidity risk. Liquidity risk is the risk that the physical holding can’t be sold quickly or at a fair price in the market. Investors will need to weigh up all these risks before deciding to buy physical gold or a gold-backed ETF. Why aren’t you investing in gold? While events like COVID-19 and the Global Financial Crisis provide a clear demonstration of gold’s defensive qualities, investors should consider their longer-term strategy. Offering diversification, growth and stability over time, gold can be a suitable inclusion for many investors. In turn, gold-backed ETFs can offer liquid, cost-effective and easy to access exposure all using your existing trading platforms.

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Managing volatility for your clients

Apr 02, 2020

The current COVID-19 concerns have rattled markets, with advisers fielding calls from concerned clients. In some cases, advisers may choose to add tilts or hedges for their clients’ investments, while for others, it will be better to stay the course. There are a range of ways to manage market volatility in a portfolio, some universally valuable, others dependent on the individual clients. In this paper, we’ve highlighted some of the most common. Download now In your discussions with clients, these principles can be a helpful starting point in reinforcing your approach and providing comfort in uncertain times. 1. Diversification Reinforcing the value of diversification with your clients can be as simple as the analogy of not having all your eggs in one basket. The current environment has reinforced the importance of diversification within asset classes and sectors, with some companies able to benefit (ie supermarkets) and others needing to close down (i.e. travel and tourism companies). 2. Incorporating more stable, less cyclical investments Holding companies which are able to consistently operate regardless of market conditions, such as essential services infrastructure, can assist in buffering portfolios against falling markets. 3. Alternative investments Investments which are designed to perform differently to equity and bond markets can range in complexity. Gold is a simple asset with a low or even negative correlation with other asset classes which has acted as a safe-haven investment across a number of market events over time. 4. Strategic tilts For some investors, incorporating short-term tilts alongside the long-term core strategy can assist in managing market volatility. Depending on the strategy, this could mean adding a tilt to high growth (and therefore ‘riskier’ assets) or adding more defensive position. ETFs can be an effective tool for managing volatility for your clients. Beyond characteristics including liquidity and cost-efficiency, the wide range available, broad exposures and instant diversification mean they can be suitable across investor types. For more information on our range of ETFs and using them in your clients’ portfolios, 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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Four ways to manage market volatility

Apr 02, 2020

From the current COVID-19 situation to the future, markets will always face periods of uncertainty and volatility. A measured approach to investment management can assist with supporting your investment portfolio in these periods. In this paper, we discuss four common approaches. Download now Market volatility refers to the magnitude of upward and downward movements in asset prices over a period of time. A company whose stock price moves up and down by 1% daily is considered less volatile than one with 5% daily moves. Investors tend to think of volatility in terms of downward market movements, as we are currently seeing, but it can equally relate to the pace of rising markets. Approaches to managing volatility 1. Diversification Different assets, regions and sectors may react differently to market events and perform better in certain market conditions. For example, travel and tourism are struggling in the current situation while supermarkets are thriving. For this reason, spreading your money across a range of investments can help balance your exposure to volatility experienced in different areas. 2. Incorporating more stable, less cyclical investments Some investments may not offer high growth but tend to be consistent across a range of markets. For example, essential services infrastructure is needed regardless of market conditions so can continue to offer stable performance in times of volatility. 3. Alternative investments Some investors seek out investments which specifically perform differently to share and bond markets. The aim of this strategy is to help neutralise any negative outcomes experienced in share and bond investments. One asset used in this way is gold which typically has a low or negative correlation with other asset classes. 4. Strategic tilts For certain investors, incorporating short-term investments during market volatility might be part of their strategy. This might mean temporarily adding defensive investments to help protect their portfolio or it might mean seeking out high growth (riskier) investments if they believe there may be opportunities from an eventual market recovery. ETFs can be an effective tool for investors in periods of market volatility. They can assist by offering broad exposure and instant diversification in a liquid and cost-effective manner. The wide range of specialised ETFs available on today’s stock exchanges also offer investors choice and flexibility in how to adapt to changing market conditions. Beyond these measures, it’s worthwhile stepping back to consider the what, why and how of your investments rather than simply following the crowds. It can also help to speak to a financial professional about your strategy and options. For more information on the solutions ETF Securities offers, 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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India: A Long-Term Opportunity Amidst the Current Panic

Apr 01, 2020

Key highlights India, like all other markets, has been deeply affected by COVID-19 However, this has now reset company valuations to highly attractive levels When the markets begin to recover there are strong reasons to believe India can flour-ish anew One of the easiest, most cost-efficient ways to get exposure to India for Australians is via the ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) India: Current State of Play In the past month, the Indian stock market has undergone one of the sharpest corrections in history. Growth forecasts have seen sharp downgrades and India is no exception, with expected weakness for the remainder of the year. While these concerns are real, global policymakers have responded to this crisis with unprecedented levels of monetary and fiscal stimulus. Still, the panic in the market is visible in record levels of volatility which has led to deep cuts across most sectors. Market Valuations Return to GFC Levels After this sharp correction, market valuations have returned to near record lows not seen since the GFC. (Source: Blomberg & IMF Estimates) Policy support is expected to continue for a prolonged period and it is hoped that the COVID-19 epidemic will begin to subside in the second half of the year. With this in mind and given valuations are at near record lows, it seems the fallout of this epidemic is already priced in. While nobody can predict the extent to which the markets will continue to fall, or how long it will take for the current situation to return to normal, most market experts agree that current market valuations are attractive. Therefore, this could represent an attractive buying opportunity for long-term investors. Why India can recover Fiscal Response: If the COVID-19 epidemic results in prolonged lockdown a fiscal stimulus of at least 2% of GDP is likely. As an example of past stimulus, during the GFC additional expenditure amounting to 3% of GDP was provided [1] Strong Monetary Response: The RBI is expected to cut rates by at least 100bps, with the first rate cut of 75bps announced on the 30th of March [2] Rapid sequential growth for H2: Given India is a domestic consumption country, assuming COVID-19 can be contained and the lock down laws lifted, consumption can pick back up rapidly, without the reliance on international inflows [3] Access To India: ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) One of the simplest ways to access the Indian stock market is through the ETFS Reliance India Nifty 50 ETF (ASX code: NDIA). NDIA tracks the Nifty50 Index, providing exposure to the top 50 large cap Indian companies (covering approx. 60% of the Indian market), most of which are currently available at their multi-year lows. Advantages of investing in the Nifty 50 index: Low cost Eliminates non-systematic risks like stock picking/portfolio manager selection Provides building blocks for portfolio construction Provides exposure to the top 50 blue chip companies who are, potentially, less likely to feel the long-term effects of the COVID-19 shut down For more information on ETFS Reliance India Nifty 50 ETF, 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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