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Weekly ETF Monitor for week ending 27 April 2018

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Apr 27, 2018

Global equity markets mostly advanced last week as North Korea risks receded. The S&P/ASX 200 added 1.5%, the EURO STOXX 50 gained 0.7% and the Nikkei 225 added 1.4%. The S&P 500 ended the week flat after recovering from some disappointing earnings results, mainly across the industrials sector. Defensive sectors returned to favour, with global and domestic property funds (DJRE and RENT) amongst the top performers. ETFS S&P 500 High Yield Low Volatility ETF (ZYUS) benefited from strong performances across the utilities and real estate sectors, returning 3.3% for the week. The U.S. dollar strengthened last week, with the DXY Dollar Index gaining 1.4%, and U.S. 10-year Treasury yields reached 3%. ETFS Physical U.S. Dollar ETF (ZUSD) returned 1.4% for the week as the Australian dollar dropped below US76c for the first time in 2018. WTI crude oil held firm last week, close to its recent 3-year highs above US$68/bbl. Precious metals retreated, with gold declining 0.9% and silver falling 3.6%. The broad Bloomberg Commodity Index fell 0.5%. The Australian ETF market saw inflows of $66m into and outflows of $23m from domestically domiciled funds last week. The largest inflows were into iShares CORE Composite Bond ETF (IAF) and iShares Edge MSCI Multifactor ETF (WDMF). The largest outflows were from iShares S&P/ASX 20 ETF (ILC).

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Conflicting signals in the U.S. - Time for caution?

Apr 22, 2018

ETFSTrade idea – Conflicting signals in the U.S. - Time for caution? ETFS S&P 500 High Yield Low Volatility ETF (ZYUS) ETFS Physical U.S. Dollar ETF (ZUSD) The U.S. economy continues to surprise to the upside with markets rebounding strongly. Yet rising inflation, subdued long-term rates and geo-political risks remain a concern. For a defensive U.S. equity exposure, investors should consider ZYUS. Avoiding equity-risk and looking for currency? Consider ZUSD. In this week’s ETFS Trade idea, we look at the outlook in the U.S. for monetary policy, the economy and the dollar. We highlight two funds that can be used in different ways to play the U.S. story; ZYUS and ZUSD. Rate rises on the horizon… Market expectations for multiple rate rises from the U.S. Federal Reserve in the remainder of 2018 have firmed in recent weeks. The economy is still in expansionary territory, though inflationary concerns are becoming more pertinent. US Core CPI rose to 2.1% in March, its highest level in over a year, while March PPI numbers also exceeded expectations. The Fed Beige Book reported strong economic activity, but showed significant business concerns around Trump’s planned steel and aluminium tariffs. Figure 1 below shows the current probabilities the futures market is implying for Fed activity for the remainder of 2018, with two further hikes narrowly the most likely outcome. ...but longer-term growth concerns are becoming more pronounced. While short-term yields have been rising, the yield curve has seen a substantial flattening, with the difference between 2-year and 10-year Treasury yields at their lowest since late-2007 (see Figure 2). Speculation of a curve inversion is starting to emerge. Historically this would indicate that the peak of the current rate cycle is approaching and present a subdued outlook for growth. U.S. dollar weakness continues… Despite rising short-term rates, the U.S. dollar has been in a steady down-trend since early 2017, as shown in Figure 2. This can be partly attributed to President Trump’s rhetoric regarding trade and towards China, but also to a gradual unwinding of GFC-era flight-to-safety trades. …but political risks could be a catalyst With the impositions of tariffs and a potential trade with China, military action in Syria, sanctions against Russia and talks with North Korea on the horizon and February’s equity market volatility still fresh in the memory, there is no shortage of event risk candidates looming. With external events and any evidence of longer-term U.S. economic strength both likely to have a positive impact on the dollar, it appears that near-term risks may lie to the upside. Why ZYUS? ZYUS invests in U.S. stocks from the S&P 500 screened for both high yield and low volatility. As such, the fund tends to be overweight defensive sectors like utilities and real estate and underweight more volatile sectors like technology and financials. The S&P 500 Low Volatility High Dividend Index, which ZYUS tracks, has outperformed the S&P 500 by over 3.6% per annum over the past 10 years and has outperformed on a monthly-basis in over 70% of months during which the S&P 500 has posted a negative return. After underperforming the S&P 500 by over 9.5% in 2017, mainly due to its underweight to technology, ZYUS has recently picked up. Outperformance in March 2018 was over 3% as volatility hit the tech sector and risk-aversion appeared. ZYUS should be considered by investors wanting to maintain U.S. equity exposure, but take a more cautious view on growth and the landscape ahead. Why ZUSD? Investors looking for pure exposure to the U.S. dollar strengthening against the Australian dollar without taking on any equity risk may consider ZUSD, which tracks the exchange rate by investing in short-term USD deposits. How ZYUS invests ETFS S&P 500 High Yield Low Volatility ETF (ZYUS) is well positioned for investors for the following reasons: ZYUS captures the performance of a selection of 50 high yielding U.S shares selected from the S&P 500 Index and rebalanced twice annually. ZYUS initially screens stocks based on dividend yield, reducing the 500 stocks down to 75. ZYUS then selects the 50 stocks with the lowest volatility for inclusion and weights them according to their dividend yield. ZYUS has an MER of 0.35% p.a. ZYUS has a Recommended rating by Lonsec. How ZUSD invests ETFS Physical U.S. Dollar ETF (ZUSD) is well positioned for investors for the following reasons: ZUSD captures the performance of the U.S. dollar against the Australian dollar, by investing all of its assets in U.S. dollar bank deposits. ZUSD currently holds overnight USD deposits with Australia and New Zealand Banking Group Limited (ANZ), earning interest at 1.30% p.a. ZUSD has an MER of 0.30% p.a., making it the lowest cost U.S. dollar exposure available on the ASX. ZUSD has a Recommended rating by Lonsec.

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Weekly ETF Monitor for week ending 20 April 2018

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Apr 20, 2018

Global equity markets advanced last week. The S&P 500 added 0.5% on strong earnings reports, moving into positive territory YTD before pulling-back on Friday. The EURO STOXX 50 added 1.3%, while the Nikkei 225 gained 1.8%. Domestically, the S&P/ASX 200 Index was led higher by the resources sector, adding 0.7%. Domestic resource sector ETFs (QRE and OZR) were the top performing equity funds, returning in excess of 3.7% for the week. iShares MSCI Singapore ETF (ISG) was the top performing international equity fund for the week. The U.S. dollar strengthened last week, with the DXY Dollar Index gaining 0.6%. U.S. 10-year Treasury yields neared 3%, while the 2yr-10yr yield spread dropped to levels not seen since 2007. The Australian dollar dropped 1.2%, ending the week at US76.72c. WTI crude oil added 1.4% to end the week at US$68.38/bbl, reaching new 3-year highs. Gold dropped 0.7% to US$1336/troy ounce, but continues to trade well above its longterm moving average. ETFS Physical Palladium (ETPMPD) and ETFS Physical Silver (ETPMAG) were the top performing funds for the week, returning 5.9% and 5.0% respectively. The Australian ETF market saw inflows of $82m into and outflows of $13m from domestically domiciled funds last week. The largest inflows were into BetaShares U.S. Dollar ETF (USD) and ETFS Physical Gold (GOLD). Outflows were spread across a range of equity and cash funds.

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Weekly ETF Monitor for week ending 13 April 2018

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Apr 13, 2018

Global equities rose last week despite U.S. military action in Syria and further global trade concerns. The S&P 500 gained 2.0% as company tax cuts started to flow into Q1 earnings reports. Energy and technology were the top performing sectors. Elsewhere the EURO STOXX 50 rose 1.2%, while the Nikkei 225 gained 1.0%. Domestically, the S&P/ASX 200 added 0.7%. Energy and resource sector ETFs (FUEL and QRE) were amongst the top performers last week, while defensive sector funds like infrastructure (CORE) and real estate (MVA) were amongst the poorest performers. U.S. CPI inflation rose to 2.4% pushing the 2yr-10yr Treasury spread to its narrowest since 2007 and firming rate-rise expectations. The Australian dollar gained 1.0%, ending the week at US 77.64c. The euro gained 0.4% against the U.S. dollar, while the U.S. dollar gained 0.4% against the yen. Crude oil rallied on U.S. involvement in Syria. WTI crude added 8.6% for the week. OOO was the week's top performing ETF, returning 8.5%. Gold gained 1.0% on safe-haven flows, while palladium jumped 9.2% on Russian supply concerns. ETPMPD returned 7.2% for the week. The Australian ETF market saw inflows of $149m into and outflows of $26m from domestically domiciled funds last week. The largest inflows were into BetaShares S&P/ASX 200 Resources Sector ETF (QRE) and a range of equity and cash funds. The largest outflow for the week was from UBS IQ Morningstar Australia Dividend Yield ETF (DIV).

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Weekly ETF Monitor for week ending 6 April 2018

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Apr 10, 2018

US-China trade tensions dominated financial markets last week. The S&P 500 fell by 1.4%, with technology and industrial stocks leading the decline. The VIX peaked above 24.0 on Tuesday. In Europe, PMI data failed to meet expectations, but the EURO STOXX 50 still added 1.4%. Domestically, the S&P/ASX 200 gained 0.5%. Australian resource sector ETFs were amongst the best performers last week, with MVR, QRE and OZR all returning in excess of 1.6%. The Australian dollar range traded last week, ending slightly higher at US 76.84c. The U.S. dollar gained against both the euro and yen. U.S. and Australian treasury yields both rose. WTI crude oil dropped 4.4% for the week. Gold gained 0.6% as investors looked to diversify out of volatile equity markets. Platinum declined 1.6% and palladium dropped 5.0% as auto-industry concerns around U.S. - China trade tariffs heightened. Palladium was further impacted by potential sanctions on Russia, the world's largest producer. ETPMPD, OOO and ETPMPT were all amongst the poorest performing funds for the week. The Australian ETF market saw inflows of $27m into and outflows of $246m from domestically domiciled funds last week. Inflows were spread across a range of equity and fixed income funds. iShares S&P/ASX 200 ETF (IOZ), saw redemptions of $185m and BetaShares Australian High Interest Cash ETF (AAA) lost $56m in assets.

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The Aussie yield ETF that challenges active managers

Apr 09, 2018

ETFS Trade idea – The Aussie yield ETF that challenges active managers ETFS S&P/ASX 300 High Yield Plus ETF (ZYAU) In the wake of S&P Dow Jones Indices recently published SPIVA® report, this week we have taken a look at how our ETFs have fared against active managers over time. This note highlights ZYAU, which has produced strong excess returns since inception and outperformed many well-known active managers. Investors looking for cost-effective excess returns from domestic equities should consider evaluating ZYAU. In this week’s ETFS Trade idea, we look at the results of the SPIVA® Australia Scorecard released by S&P Dow Jones Indices last month and compare the performance of ZYAU to a collection of well-known active funds focused on Australian equity-income. SPVIA® Australia Scorecard 2017 S&P Dow Jones Indices have been publishing SPIVA® Scorecards for major markets since 2002 and have become leading contributors to the active versus passive debate worldwide. The SPIVA® Scorecards track the performance of active fund managers in each market against benchmark indices across a variety of categories and across multiple time horizons. Looking specifically at Australian large-cap equity funds, as at the end of 2017 59% of funds underperformed the S&P/ASX 200 Index. Over 3, 5 and 15 year periods, respectively, 67%, 63% and 77% of funds underperformed the national benchmark. An equally-weighted portfolio of active funds would have underperformed the benchmark over 1, 3, 5, 10 and 15 years. Similarly, in the mid and small-cap categories, 74% and 75% of funds underperformed the S&P/ASX Mid-Small Index over 1 and 3 years. How does ZYAU compare to active funds? ZYAU sits in-between a traditional active fund and a purely passive index tracker in the area commonly termed ‘smart-beta’ or ‘enhanced-alpha’. Smart-beta funds passively track an index, but the index they track has features that differentiate it from a standard market capitalisation-weighted index and aim to outperform a standard index in much the same way that active funds do. In the case of ZYAU, it tracks the S&P/ASX 300 Shareholder Yield Index, which aims to outperform the S&P/ASX 300 benchmark by selecting a sub-set of constituents based on ‘shareholder yield’ – a combined measure of dividend yield and buy-back yield. Because ZYAU’s investment strategy is pre-defined it has several potential advantages over active funds: its strategy is consistent, published and available for investors to evaluate and scrutinise its holdings are published in the public domain on a daily basis because it trades on exchange, investors can trade intra-day, unlike with many active funds because the fund does not require a team of fund managers to continually evaluate its holdings, it can charge management fees more in-line with passive index trackers. ZYAU’s stocks selections tend to be more “active” than many active funds, with its Active Share, or non-overlapping weight, versus the S&P/ASX 200 currently at 80.5%. This means that ZYAU can better compliment a core index holding in a portfolio. Table 2, below, shows comparative performances and headline management fees of ZYAU against a collection of well-known active funds that focus on Australian equity and equity income. Low Cost Firstly, to note, ZYAU’s management fee compares favourably to the active funds, as would be expected. ZYAU charges a fee of 0.35% p.a., which is below all of the active funds profiled and significantly below the average active MER of 0.83% p.a. Consistent Strong Performance With regards to performance, since its inception in June 2015, ZYAU has generated 2.19% p.a. excess return over the S&P/ASX 200, which puts it ahead of 16 of the 17 active funds. Only Bennelong Australian Equities Fund has outperformed, due to a very strong start to 2018. In the calendar year 2017, ZYAU outperformed the S&P/ASX 200 by 0.63% and beat 14 of its 17 active peers. In 2016, ZYAU outperformed 16 of the 17 active funds profiled and produced 5.42% of excess return over the benchmark index. Since inception, ZYAU has delivered strong performance at a fraction of the cost of many of its active peers and should be, therefore, considered by investors looking for cost-effective excess returns. How ZYAU invests ETFS S&P/ASX 300 High Yield Plus ETF (ZYAU) is well positioned for investors for the following reasons: ZYAU captures the performance of a selection of 40 high yielding Australian shares selected from the S&P/ASX 300 Index and rebalanced twice annually. ZYAU initially screens stocks based on liquidity, free cash flow to equity and dividend growth rates. This excludes stocks that are illiquid, are returning more cash to shareholders than they are earning, or have recently cut their dividend payouts. ZYAU then selects the 40 stocks with the highest shareholder yields for inclusion and weights them according to a mix of shareholder yield and market capitalisation. ZYAU has an MER of 0.35% p.a. ZYAU has a Recommended rating by Lonsec.

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