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Weekly ETF Monitor for week ending 17 May 2019

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May 21, 2019

This week's highlights Resource sector ETFs (MVR, OZR and QRE) were the top performers for the week as iron ore prices rallied to 2-year highs on China demand and global supply concerns. Market positioning ahead of the Australian election saw domestic financial sector ETFs (MVB, QFN and OZF) underperform last week. Asia-focused ETFs were also hit by continuing U.S.-China trade concerns, with ITW, ASIA, IKO, IAA and CETF all amongst the worst performers. Total flows into domestically domiciled ETFs were $100m, while outflows totalled $48m. The biggest inflows were into domestic cash and fixed-income ETFs (AAA, IAF, RCB and PLUS). BetaShares Australian Equities Strong Bear ETF (BBOZ) also saw inflows ahead of the election. The bulk of outflows for the week were from SPDR S&P/ASX 200 ETF (ETF). STW and AAA were the most traded funds last week, while Vanguard Australian Property Securities Index ETF (VAP) saw above average volumes. ETFS EURO STOXX 50 ETF (ESTX) posted a strong 3.0% return for the week and has now returned 15.9% year-to-date as the European economy continues to show evidence of growth having bottomed-out in early 2019 and optimism returning.

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Megatrends Make Sense For Investors

May 16, 2019

Product In Focus: ETF Securities Future Present Range Megatrends are powerful forces that have the potential to cause long term structural changes in the economy and society. The Future Present range has been designed to give investors access to the emerging megatrends that are starting to define the world we live in. The range’s products positive performance is testament to investor trends. CURE up 22.0% year to date, ROBO 22.5%, TECH 20.7% and ACDC 7.1% (as at 12 April 2019) One of the most challenging aspects of investing has always been identifying ‘the next big thing’. In a rapidly changing world, where megatrends are drastically reshaping the way we live and do business, that process has become even more complex. Megatrends are best described as powerful forces – either socioeconomic, environmental or technological – that have the potential to cause long term structural changes in the economy and society as a whole. Technological advancement, demographic shifts, urbanisation and climate change are just some of the key megatrends combining to redefine the investment landscape. While the various megatrends are disrupting our lives in different ways, they are intertwined by the common thread of digitisation and the associated explosion in the power of data. Some are already dramatically changing the way particular industries operate. For example, the push for renewable energy is transforming car manufacturing with the rise of electrification, while artificial intelligence has seen robots replace thousands of jobs on the assembly line. Certainly, with the pace of change across business and society growing exponentially, investors cannot afford to ignore the influence of megatrends. Accessing investment in these megatrends, however, can be difficult for investors with limited knowledge or expertise in the technologies involved. Many of the best investment opportunities to tap into megatrends also involve going offshore. A good option for investors looking for exposure to megatrends is to invest in one of the specialised exchange traded funds (ETFs) that have emerged in recent years. ETFs have the advantage of offering investors a cost effective way to access the growth potential of various megatrends, while also providing an avenue for global diversity. Most ETFs tend to focus on a particular theme associated with one or more of the megatrends. US and European issuers have led the way, with ETF’s offering exposure to a diverse range of megatrends including technological progress and automation, digitalisation, ageing population, Asia’s expanding middle class, healthcare innovation, urbanisation, cybersecurity, water supply and even diversity and gender equality. In Australia, ETF Securities offers the Future Present range, which focuses on four funds providing access to disruption in sectors that will have a more dominant role in the future. These include robotics and artificial intelligence (ROBO), battery technology (ACDC), biotechnology (CURE) and broad global technology (TECH). Robotics and AI Once the subject of fantasy and science fiction thrillers, robotics are increasingly part of our everyday lives and look set to dominate the future. Already being widely used in manufacturing and online retail distribution, robots are expected to rapidly penetrate other industries as automation continues apace and companies seek to unlock productivity gains and improve profitability. The potential for growth is reflected in the fact that the world’s largest economy, China, has approximately 1 robot per 100 manufacturing workers, well down on the 7 per 100 employee in Singapore and South Korea. The growth in robotics will be driven by the efficiency gains on offer as robots perform monotonous tasks with high levels of precision and lower costs than their human counterparts. A report issued last year by the jobs website, Adzuna, found that 1 in 3 Australian jobs are at risk of automation by 2030. The potential for Robotics and AI, however, extends far beyond manufacturing efficiencies. A recent article by Raffaello D’Andrea, co-founder of Amazon Robotics and strategic adviser to ROBO Global, noted the limitless applications. “Using AI-fuelled robotics to farm the land more efficiently, we will we be able to provide food and shelter for ourselves and our families with ease. 5G networks will support everything from self-driving vehicles to digital medicine to ‘smart cities’” he said. ETF Securities’ global robotics and automation ETF (ROBO) tracks the performance of the ROBO Global Robotics and Automation index. It invests in a mix of stocks whose business is related to robotics, automation and AI. Battery Technology Climate change is causing a major push towards renewable energy, which is in turn, driving investment in alternative energy storage. Ultimately the companies behind this technology hope to develop batteries efficient enough to fly planes and feed power stations. For now, however, the most tangible example of battery application is the rapidly expanding world of electric vehicles (EV). Although initially slow to take off, EV sales are dramatically ramping up in some parts of the world. Norway has had by far the biggest take up of electric cars, with 49% of all sales, followed by Iceland and Sweden. Notably, however, the five countries in which EVs are the most popular account for only 0.5% of the world’s population. Chinese drivers are rapidly coming aboard, with over a million new vehicles hitting the road in 2018. Crucially, China also leads the market for charging stations. Australian sales have been slow to take off but will gather momentum, particularly if the ALP wins power at the next Federal Election. The ALP has set a 50% target for electric vehicles as a percentage of new passenger vehicles sales by 2030. ETF Securities was the first Australia issuer to bring out an ETF focused on energy storage and production (ACDC). The fund provides investors with access to companies involved in battery technology and the mining of lithium, which is used to make a range of batteries, including those found in your mobile phone. ACDC tracks the Solactive Battery Value-Chain Index. Investors can also gain exposure to the renewable energy megatrend by investing in Palladium, a key metal used by car manufacturers to control emissions from gasoline engines, which are replacing diesel under crackdowns on vehicle pollution in overseas markets. Palladium prices have recently hit record highs, reflecting strong demand from car manufacturers. ETFS offers investors an avenue to invest through ETFS Physical Palladium (ETPMPD). Biotechnology Biotechnology is one of the original megatrends. Scientific advances in the development of potential new treatments for diseases such as cancer, as well as excitement around the application of DNA sequencing, have underpinned interest in biotechnology companies for many years. However, the prospect of an ageing population, coupled with the increasing incidence of chronic illnesses such as diabetes and dementia, have reinforced the significance of biotechnology companies going forward. As well as searching for therapies to help treat chronic illnesses, biotechnology may also hold the key to solving food security, which poses significant challenges with the world population tipped to exceed 9 billion by 2050. One of the difficulties posed by investment in biotechnology is its highly speculative nature and the lengthy lead times involved with new discoveries. For example, it can take 10-15 years from the conceptual stage for a drug to reach the marketplace, usually with little to no income in the intervening period. Another difficulty is that, with the exception of a few listed Australian stocks, the bulk of biotech companies are located overseas. For this reason, biotechnology is a megatrend that is particularly well suited to an ETF. The ETFS S&P Biotech ETF (CURE) issued by ETF Securities late last year replicates the S&P Biotechnology Select Industry Index, which offers exposure to approximately 120 small-to-large cap international biotech companies. These include the likes of Seattle Genetics which is focused on producing specialised cancer therapies and Amgen, whose Enbrel treatment for arthritis had 2017 sales of US$5.4 billion. The recent performance of ETF Securities’ Future Present range demonstrate that investors are warming to the megatrend thematic with CURE UP 22.0% year to date, ROBO 22.5%, TECH 20.7% and ACDC 7.1% (as at 12 April 2019). For retail investors, ETFs continue to offer a low cost way into some of the themes that look set to dominate the investment horizon for some time to come.

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Weekly ETF Monitor for week ending 10 May 2019

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May 14, 2019

This week's highlights Global equity markets fell substantially last week as U.S. and China trade tensions escalated. Asia-focused ETFs were the hardest hit. The 10 worst performers for the week all included substantial Asian equity exposure, including iShares China Large-Cap (IZZ), VanEck Vectors ChinaAMC A-Share ETF (CETF) and iShares MSCI South Korea Capped ETF (IKO). Precious metals benefited from the risk-off sentiment with ETFS Physical Silver (ETPMAG) returning 1.3% for the week and gold funds (QAU, GOLD and PMGOLD) all amongst the top performers. Platinum also rallied. Domestic equities fared better, with resource sector (MVR) and property (MVA) funds posting positive returns for the week. Total flows into domestically domiciled ETFs were $83m, while outflows totalled $25m. The biggest inflows were into domestic equity ETFs (MVW and FAIR) and fixed income ETFs (AAA, CRED, HBRD and QPON). The biggest outflows for the week were from BetaShares Australia 200 ETF (A200) and international equity funds including IEU, IJH, FEMX and BNKS. STW and AAA were the most traded funds last week, while Magellan Global Equities Fund (MGE) saw above average volumes. ETFS Global Core Infrastructure ETF (CORE) posted a marginally positive return for the week and has now returned 8.8% year-to-date. It’s positive performance last week was despite a 30% allocation to Asia, demonstrating the important role of infrastructure assets in a portfolio and their ability to provide stability and aid diversification.

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TECH: Combining Growth with Value and Quality

May 08, 2019

Product in Focus: TECH - ETFS Morningstar Global Technology ETF The tech sector has provided significant opportunities for growth investing in recent years Prudent technology investors should examine value and quality stocks TECH actively selects technology leaders that have a competitive advantage over other companies The portfolio contains 25 to 50 stocks from a global universe Technology Is On A Roll The Information Technology (IT) sector has contributed nearly 30%(1) of total global equity returns over the past 5 years. This is more than double the performance of the next best sector - consumer discretionary, which itself can attribute much of its performance to 'tech style' stocks such as Amazon. Although there have been speed bumps along this growth trajectory there is a consensus that the incorporation of technology into our daily lives and the subsequent growth of the companies behind this will continue for some time. The big-name FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have sky-rocketed, with Apple and Amazon becoming the first two companies to top the US$1 trillion mark in 2018 and Microsoft recently achieving the same milestone. The Nasdaq 100 hit new all-time highs in April and to date has only posted a single negative week in 2019. As such, losses in the correction of the last quarter of 2018 have largely been recouped, but the volatility has not been forgotten by many. Questions, rightly, are being raised as to whether valuations are overblown, whether we are building towards a second tech bubble or, alternatively, whether the technology revolution is only just beginning. How Do you Navigate Stretched Valuations and Volatility? Exciting times lie ahead for technology companies, but it’s unlikely to be completely smooth sailing, with bouts of volatility always a possibility. Prudent technology investors should consider: Introducing ETFS Morningstar Global Technology ETF (ASX: TECH) ETFS Morningstar Global Technology ETF (TECH), which tracks the Morningstar Developed Markets Technology Moat Focus Index, was designed with this approach in mind. Here’s how its stock selection works to provide exposure to technology sector growth, while focusing on value, quality and diversification. ➢ Growth As a technology sector fund, TECH is by default highly exposed to growth as an investment factor. It is worth, however, clarifying exactly what constitutes a technology stock in this context. Relative to the well-known Nasdaq 100, this fund is less broad from a sector viewpoint, but broader on a regional basis. The Nasdaq 100, while highly technology exposed, is currently only about 45% invested in pure technology companies. TECH is therefore a more pure-play in terms of exposure to technology growth. Of the FAANG stocks TECH currently holds Apple, Google and Facebook. ➢ Value TECH benefits from research and analysis conducted by Morningstar’s extensive team of global equity analysts in assessing the fair value of eligible index constituents. Eligible companies are ranked according to their ratio of price/fair value and only the most undervalued companies are included in the Index. TECH currently holds positions in 31 companies, of which 20 are showing fair value above current market price (Chart 1). The weighted-average discount to fair value across the portfolio is 6.6% as at the end of April. This compares with a 5.5% weighted average premium to fair value across the Nasdaq 100(2). Further, companies that fall into the bottom 20% based on price momentum are screened out to ensure that the Index is not mistaking negative sentiment for value. ➢ Quality TECH invests only in quality companies and does this by screening firms according to their Morningstar Economic Moat Rating. An economic moat, as the name suggests, is something inherent in a company’s business model that defends its market position and cannot be easily replicated by competitors. It is the source of their competitive advantage and only well-established, high quality businesses achieve moat ratings. Wide Moat companies are the highest rated and are deemed able to maintain above average returns for the next 20 years. Narrow Moat companies are the next highest rated at should maintain excess returns for at least 10 years. TECH currently holds 12 Wide Moat companies including Adobe and Salesforce and 19 Narrow Moat companies including Computershare and LINE. ➢ Global Diversification The Index selects between 25 and 50 stocks from across global developed markets and equally weights them on a quarterly basis. Diversification benefits arise from the number of stocks chosen and the fact the they are drawn from an international universe. TECH currently holds stocks from the U.S., Japan and Australia. The equal weighting scheme is designed to both limit excessive exposure to the mega-cap names and to provide a greater opportunity for smaller companies to meaningfully contribute to performance. How has TECH performed? Chart 2 and Table 1, below, show the performance of TECH relative to a selection of prominent ETFs that offer technology-related exposures. These funds include Nasdaq 100 trackers listed in Australia and the U.S. (NDQ and QQQ respectively), a fund tracking the broad, market cap weighted S&P Global IT Sector Index (IXN) and the largest U.S. technology sector ETF (XLK). Returns are in Australian dollars and are net of fees. Since its inception on 7th April 2017, TECH has returned 30.1% p.a., which is 3.5% p.a. ahead of XLK and 6% p.a. ahead of the two Nasdaq 100 ETFs. Performance Without Taking More Risk Not only has it performed strongly, it has achieved its performance without taking undue levels of risk – it’s volatility since inception ranks fourth-lowest amongst the five funds shown. IXN, which holds close to 120 stocks compared to TECH’s 31 at present, has been about 1% p.a. less volatile. Performance During the Recent Market Correction Chart 3 shows the performance of the same five ETFs since the end of Q3 2018, which encompasses both the period of market volatility seen in the last quarter of the year and the subsequent recovery in 2019 to the end of April. Over that period TECH returned a total of 12.2%, which is more than double the return of the Nasdaq 100 funds and over 4% ahead of the next best performer, XLK. TECH’s maximum drawdown over the period from the end of September 2018 was 17.4%. This was almost 4% ahead of the next best fund, IXN, which dropped 21.4% over the period. In the recovery since Christmas, TECH returned 35.8%, which ranks second amongst the funds, behind only XLK, which rose 38.1% to the end of April. Summary The ETFS Morningstar Global Technology ETF (TECH) affords investors a simple solution to allocate assets to the technology sector in an intelligent way. This fund has been designed to provide pure exposure to the sector with stock selections seeking to choose a diversified portfolio of companies that have a competitive advantage over others operating in the field. Sources: 1 Bloomberg data as at 30 April 2019. The Information Technology sector contributed 13.2% of the 5-year total return of 46.4% of the iShares MSCI World ETF as a proxy for the global equity market. 2 Morningstar Direct as at 30 April 2019. Based on Morningstar analyst fair value ratings, which are available for 97.3% of the market capitalisation of the Nasdaq 100 index.

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Weekly ETF Monitor for week ending 3 May 2019

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May 07, 2019

This week's highlights The best performers over the week were iShares MSCI Taiwan ETF (ITW) up 2.1% and UBS IQ MSCI Asia APREX 50 Ethical ETF (UBP) up 2%. The worst performers were dominated by miners, physical commodities and property. ETFS Physical Palladium ETF (ETPMPD) and BetaShares Global Gold Miners ETF (Hedged) (MNRS) were both down 4.7%. The SPDR S&P/ASX 200 Listed Property Fund (SLF) and VanEck Vectors Australian Property ETF (MVA) were both down -4.2%. Over twelve months ETFS Physical Palladium ETF (ETPMPD) remains the best performer with a return of 48.9%. ETFs tracking Morningstar’s moat focused index methodologies have also performed well. VanEck Vectors Morningstar Wide Moat ETF (MOAT) has returned 29.7% and ETFS Morningstar Global Technology ETF (TECH) is up 29.1%. The market saw inflows of $116 Million over the week and outflows of $98 Million. The best flows for the week were seen by Australian based ETF offerings including, VanEck Vectors Australian Equal Weight ETF (MVW), BetaShares Australian High Interest Cash ETF (AAA) and BetaShares Australian Investment Grade Corporate Bond ETF (CRED). The biggest outflows were across BetaShares U.S. Dollar ETF (USD) and ETFS Physical Gold (GOLD). Looking closer at weekly, year to date and 12 month turnover. Australian focused strategies STW, VAS and AAA hold the top three rankings.

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Weekly ETF Monitor for week ending 26 April 2019

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Apr 30, 2019

This week's highlights Equity markets rose last week on strong U.S. corporate earnings, particularly across technology, communication and consumer sectors. BetaShares Global Cybersecurity ETF (HACK) was the top performing fund for the week and ETFS Morningstar Global Technology ETF (TECH) was also amongst the top performers. Healthcare and biotechnology funds (IXJ, CURE and DRUG) also performed well. China ETFs (CNEW and CETF) declined as economic stimulus expectations receded. Precious metals all rose last week, with ETFS Physical Palladium ETF (ETPMPD) up 4.2%, while the broader commodity universe (QCB) fell. The US dollar rose amongst most majors, including a 1.5% gain against the Aussie. Total flows into domestically domiciled ETFs were $108m for the week, while outflows totalled $93m. The biggest inflows were into Australian fixed-income funds including BOND, IAF and AAA. Despite inflows into IOZ, S&P/ASX 200 (and similar) funds saw net outflows of close to $40m. STW and BOND were the most traded funds last week. ETFS Morningstar Global Technology ETF (TECH) has posted a strong 26.9% total return since the start of 2019, and is now close to 10% above its previous highs in September 2018.

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