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US Defensive Equities Starting to Look Well Valued

Jul 02, 2018

ETFS Trade idea:  US Defensive Equities Starting to Look Well Valued ETFS S&P 500 High Yield Low Volatility ETF ASX Code: ZYUS U.S. market has been high growth since Trump’s election This cycle looks like it may be turning Investors wanting to retain U.S. exposure but remove the high growth/high volatility companies should look at ZYUS In this week’s ETFS Trade idea, we look at opportunities in defensive U.S. equities and show how it may be a good entry point for ZYUS, which under performed the broader market in 2017, but has picked-up in recent months and had standout performance in 2016. ZYUS tracks the S&P 500 Low Volatility High Dividend Index, which selects a portfolio of the lowest volatility stocks from amongst the highest yielding names in the S&P 500. The story in 2017 - defensives appeared to be out of favour For most of 2017 the U.S. economy was in expansionary territory with GDP growth rising above 4%, the S&P 500 returning 22%, volatility remaining persistently low and normalisation of monetary policy accelerating. Information technology stocks dominated, returning 39%, but other traditional growth sectors also outperformed. Materials, consumer discretionary and financials all beat the benchmark. Defensive sectors, which traditionally include utilities, consumer staples, health care and real estate, on the other hand, suffered on two fronts. Firstly, the economic conditions of a growing economy and rising interest rates were not conducive to above-market performance in sectors such as utilities, consumer staples and telecommunications. Secondly, many companies in these sectors had become over-bought and over-valued in the post-crisis scramble for stable returns and yield, where low volatility and equity-yield strategies gained significant popularity. With rates rising and bonds starting to look more attractive, asset allocations shifted causing under-performance in defensives in 2017 and into early 2018. What has happened so far in 2018? 2018-to-date has seen the U.S. move further into expansionary territory, with GDP growth now sitting at 4.7% and the Federal Reserve having raised rates twice so far. However, signs of the expansionary cycle moving into a later phase have started to appear in recent months. Long-term bond yields have stabilised, inflation has picked-up and the S&P 500 has returned only 2.6% year-to-date. In addition, through a combination of geo-political and economic events, volatility has returned, with the VIX peaking at 37.3 in February and averaging 16.3 in 2018 compared to a maximum of 16.0 and an average of 11.1 for the whole of 2017. Defensives are currently looking more attractive on a valuations basis than at any time in recent years. On a relative-PE basis, utilities, consumer staples, telecommunications and health care sectors are all currently trading at lower multiples than the S&P 500. Even if the bull market still has further to run, now could be a good opportunity to re-allocate back towards defensive sectors. While the economy is not yet showing any signs of slowing, if you believe the U.S. is currently in a late-cycle boom, then it may be prudent to prepare for a sell-off in risky-assets. How does ZYUS’s sector allocation look? As can be seen in Chart 1, ZYUS is currently most overweight real estate and utilities along with smaller over-allocations to consumer staples, energy and telecoms. Information technology, health care and financials are the biggest under-weights. Overall, relative to the S&P 500, ZYUS is 34% overweight to the traditional defensive sectors, despite being 10% underweight health care, which is no longer considered to be as defensive as it once was. How has ZYUS performed relative to the S&P 500? In 2017 ZYUS underperformed the S&P 500 by nearly 9.6% as technology stocks accelerated away. This continued into early 2018 with ZYUS under-performing heavily in both January and February as the sell-off in defensives picked-up pace. This contrasts with 2016, where ZYUS outperformed by 8.8% . Monthly performance differentials are shown in Chart 3, below. Since the end of February, however, ZYUS has outperformed in three of the four months and added 4.7% to the S&P 500 on an AUD total return basis. Volatility-wise, on a 90-day historic basis, the spread between the S&P 500 and the S&P 500 Low Volatility High Dividend Index is currently at its lowest since 2012, as shown in Chart 3. Recently the low volatility screening is providing a degree of risk-reduction even in a more concentrated, 50-stock portfolio. On a yield basis, the S&P 500 Low Volatility High Dividend Index is currently yielding 4.3%, which is more than double the yield on the S&P 500 at 1.9%. Lastly, it is worth recalling that, despite the recent under performance, the low volatility/high dividend strategy has outperformed the S&P 500 by over 6% pa since the beginning of 2000, which demonstrates its ability to outperform across cycles. How ZYUS invests ETFS S&P 500 High Yield Low Volatility ETF (ZYUS) follows a rules-based strategy, tracking its benchmark Index, and has the following features: ZYUS captures the performance of a selection of the high yielding companies from the S&P 500 Index and aims to provide stable returns with regular income. ZYUS selects the 50 lowest volatility names from a list of the 75 highest yielding stocks at each rebalance. ZYUS is rebalanced semi-annually in January and July. ZYUS is weighted in proportion to the dividend yield of each constituent, meaning that the stocks with the highest yields receive the highest weightings. ZYUS applies individual stock and sector caps to ensure diversification. ZYUS has an MER of 0.35% p.a. ZYUS has a Recommended rating by Lonsec. Summary While low volatility and defensive sector strategies have underperformed over the past 12 to 18 months, with the U.S. possibly moving towards the latter stages of the current economic cycle, it could be a good time to revisit these strategies. ZYUS provides a generally more defensive sector allocation than the broader market, uses a low-volatility screening and produces a consistently higher yield.

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Weekly ETF Monitor for week ending 29 June 2018

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Jun 29, 2018

Global equity markets declined last week on global growth expectations. The S&P 500 dropped 1.3%, led lower by technology stocks. The EURO STOXX 50 declined by 1.3% and the Nikkei 225 fell by 0.9%. China's Shanghai Composite continued its recent decline, having now dropped over 22% from its January peak. Domestically the S&P/ASX 200 dropped 0.5% as gains in materials and energy stocks mostly offset declines in the financial and health care sectors. Australian resources ETFs (QRE and OZR) were among the top performers for the week, while VanEck Vectors ChinaAMC A-Share ETF (CETF) and ETFS Morningstar Global Technology ETF (TECH) were amongst the biggest decliners. Bond yields declined and the U.S. dollar strengthened last week. The Australian dollar ended the week lower at US74.05c, having dropped as far as US73.24c mid-week. The Chinese renminbi declined by 1.8% against the U.S. dollar. Oil prices rallied strongly on expectation of reduced supply. WTI crude gained 8.1% to end the week at US$74.15/bbl. Precious metals declined across the board, with gold down 1.4% and silver down 2.1%. The Australian ETF market saw inflows of $100m into and outflows of $82m from domestically domiciled funds last week. The largest inflows were into BetaShares Australian Sustainability Leaders ETF (FAIR). The largest outflows were from SPDS S&P/ASX 200 Fund (STW) and SPDR MSCI Australia Select High Dividend Yield Fund (SYI).

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Weekly ETF Monitor for week ending 22 June 2018

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Jun 22, 2018

Global equity markets fell on trade concerns last week, with the S&P 500 down 0.9%, the EURO STOXX 50 dropping 1.8% and the Nikkei 225 down 1.5%. Chinese equities also took a hit, with the Shanghai Composite Index down 4.4%. Locally, the S&P/ASX 200 defied the trend, gaining 2.2% as the financial sector rebounded from its recent dip. Financial sector ETFs (MVB, OZF and QFN) were all amongst the top performing funds for the week, returning in excess of 5%. Chinese equity funds (CETF and IZZ) were amongst the week's poorest performers, declining by more than 4%. The Australian dollar ended the week slightly lower at US74.40c, having dropped to a mid-week low of US73.46c. The euro and yen also gained against the U.S. dollar. U.S. 10-year Treasury yields declined by 3 basis points. OPEC agreed to loosen output restrictions last week, though the added production fell short of expectations sending WTI Crude 5.4% higher to US$68.58/bbl. Precious metals declined across the board, with gold down 0.7%. ETFS Physical Silver (ETPMAG) and ETFS Physical Palladium (ETFMPD) were amongst the week's biggest decliners. The Australian ETF market saw inflows of $60m into and outflows of $14m from domestically domiciled funds last week. The largest inflows were into BetaShares Australian High Interest Cash ETF (AAA) and global sustainability ETFs (ETHI and ESGI). The largest outflows were from BetaShares Australian Dividend Harvester Fund (HVST).

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Weekly ETF Monitor for week ending 15 June 2018

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Jun 15, 2018

Global equity markets were mixed last week with North Korea talks dominating the news flow, though with limited market reaction. The U.S. announced tariffs on $50bn of Chinese imports late in the week, sending index futures lower after market close on Friday. The S&P/ASX 200 added 0.8%, with Utilities and Telcos being the top performing sectors. The S&P 500 ended marginally higher, while the EURO STOXX 50 added 1.7% as the euro weakened. ETFS Morningstar Global Technology ETF (TECH) and iShares Global Consumer Staples ETF (IXI) were the top sector plays for the week. The Federal Reserve raised its target rate by 25 basis points, in line with market expectation. The Australian dollar fell by 2.1% to US74.42c. The euro declined by 1.4% against the U.S. dollar as the ECB said it would end QE by year-end. Commodities mostly declined last week. WTI Crude was down by 1.0% to US$65.06/bbl as speculation mounted that this week's Opec meeting will see an agreement on increased supply. Precious metals declined across the board following the tariff announcement, with gold down 1.5%. ETFS Physical Silver (ETPMAG), which fixed its NAV before the announcement, was the top performing ETF for the week. The Australian ETF market saw inflows of $64m into and outflows of $25m from domestically domiciled funds last week. The largest inflows were into iShares S&P/ASX 200 ETF (IOZ) and domestic and global sustainability funds (FAIR and ETHI). The largest outflows were from USD and YMAX.

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Weekly ETF Monitor for week ending 8 June 2018

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Jun 12, 2018

Global equity markets returned to risk-on last week. The S&P/ASX 200 gained 0.9%, led higher by energy and mining sectors. Three resources ETFs (QRE, OZR and MVR) were amongst the top performers for the week. The S&P 500 gained 1.6% and the Nasdaq 100 hit a new high. In Asia the Nikkei 225 added 2.4% and FTSE China A50 Index gained 0.8% as China A-shares debuted in the MSCI Emerging Markets Index. In Europe, the EURO STOXX 50 declined by 0.2% as the fall-out from the Italian election continued to impact market confidence. The Australian dollar gained 0.4% against the US dollar last week to end the week just above US76c. The euro regained some lost ground adding 0.9% against the U.S. dollar. U.S. 10-year Treasury yields rose 4 basis points. WTI Crude declined slightly to US$65.74/bbl. Gold added 0.4%, while silver gained 2.3%. ETFS Physical Palladium (ETPMPD) returned 1.9% for the week. The Australian ETF market saw inflows of $126m into and outflows of $17m from domestically domiciled funds last week. The largest inflows were into SPDR S&P/ASX 200 Fund (STW) and other domestic equity funds (QOZ and MVW). The largest outflows were from domestic dividend and strategy ETFs; RDV, HVST and MVOL.

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ETF Volatility - Truths and Misconceptions

May 31, 2018

ETFSTrade idea:  ETF Volatility - Truths and Misconceptions In this week’s ETFS Trade idea, we look at the misconceptions around ETFs causing volatility and explain why these are myths. High level observations: ETFs have been unfairly targeted as the cause of market volatility ETFs tracking the ASX 200 have successfully stayed in line with the volatility of the benchmark ETFs can cause movements in the underlying market but so do active funds and investors buying securities directly In nearly all cases ETFs match the volatility of the market they track and this is what should be expected from an index tracking fund

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