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Buy the world in a couple of trades
Glenn Freeman: I'm Glenn Freeman for Morningstar in the offices of BlackRock Australia. I'm joined today by Jon Howie, Head of iShares, for his views on ETFs and his outlook for the rest of this year.
Glenn Freeman: What are the biggest areas of discussion for Australian ETF investors today?
Jon Howie: The biggest areas that we are talking to retail investors about, there's a few of those areas. One is the constant need for diversification. So, I think ETF investors or investors generally have realised that ETFs are a really simple way for them to significantly improve the diversification of their portfolios.
In just one or two trades you can buy an entire world of global equities, for example, on the ASX. So, that's the big one; diversification is one.
Simplicity is another. ETF investors, and investors generally, are realising that ETFs are a great way to improve the simplicity of their portfolios rather than picking individual companies or trawling through lists of managed funds. Again, with a number of ETFs you can buy the whole world in a couple of trades and keep a really simple approach to building a globally diversified portfolio.
And the last area specifically is income. We've seen a lot of investors who are looking to generate income in their portfolios. And what we've seen recently over the past year or so is that there has been a number of options come to the market in ETF form which are specifically designed to help investors generate income. One of those areas is global bond ETFs or global fixed income ETFs. We've got three of those fixed income ETFs launched on the ASX and a couple of them are yielding over 5 per cent, and that's been a real area of interest for many investors as they look to generate income in portfolios and do it in a diversified and low-cost way.
Glenn Freeman: What effect do you expect Australia's currency trends to have on ETF investor sentiment and fundamentals?
Jon Howie: I think if we look at what happened historically over the past two or three years, we know that the Aussie dollar has weakened considerably against another basket of currencies and specifically, against the U.S. dollar and what that has done has encouraged investors to move more and more into international investments.
The weakening Aussie dollar means that the price of international assets goes up. So, that's been a real benefit for investors, who saw that that was likely to occur and were smart enough to actually invest internationally as the Aussie dollar started to weaken.
I think our general view is that the Aussie dollar, perhaps not as much as it has done in the past, but it will probably continue to weaken to some extent over the next few months or perhaps over the next year or so.
So that probably continues to provide some support for investors who are looking to diversify internationally, and so we would expect that international ETFs, those ETFs that give investors access to overseas markets, are probably going to continue to be one of the biggest areas of growth for the ETF market locally on the ASX.
Glenn Freeman: What's your view on hedged versus unhedged ETFs, especially in times of volatility?
Jon Howie: I think it's fair to say that certainly BlackRock has many views inside from the portfolio managers that manage international portfolio. So, I don't think there's one specific or firm view on exactly how to manage currency volatility.
I think, generally, my personal view is that in the short term, currencies can be very volatile. And when we say short term, we mean less than a few years, three to five years and less than that.
Currencies can be very volatile and that volatility can actually cause heartache for some investors who perhaps have a slightly shorter-term view of their investments.
Over the long term, however, generally I think the view is that currency movements tend to wash out. That is that they net out to something approaching zero over the long term.
So, I think our view is that if the investor has a relative horizon, say, less than five years for their investments then removing currency volatility from the portfolio may be something that they are keen to do.
Or if they have a long-term view, it's possible that currency hedging is something that maybe won't be additive to their portfolio over the long term.
One of the benefits of the ETF structure is that there is now a number of currency-hedged ETFs available on the ASX and the difference between the unhedged version and the hedged version in terms of cost is very, very small, as small as three basis points.
So, for investors who are looking to remove currency risks from their portfolios, they can do that for a very, very low cost.
Glenn Freeman: What were the trends in Australian ETFs vs Global ETFs over the last fiscal year?
Jon Howie: Well, we certainly saw a lot of interest in global ETFs, probably in 2014 and 2015. As I said, as the Aussie dollar started to weaken then was a huge interest in diversifying offshore.
Over the past 12 months we've actually seen strong interest back into Aussie investments, both Aussie equities and also Aussie fixed income. So, I think the general trend has been back towards a more local investments theme in terms of where investors are putting their money in ETFs.
I think what we'll over the next year or so is that the international market continues to represent a much bigger opportunity for investors generally.
So, notwithstanding some short-term opportunities in the Australian or Aussie companies and Aussie bonds, for example, over the long term, we continue to see a lot of growth in international markets as the ETF, as a tool, investors use that to access the opportunities overseas which are overall much bigger than the opportunities locally in Australia.
Glenn Freeman: Just finally, given ETFs recent growth, are they more of a trend rather than a long-term investment?
Jon Howie: Our view is that the ETF really is a fundamental shift in the way that investors access investment markets.
We know that there are a number of really fundamental benefits of the ETF structure.
That is that they are very easy to use.
They are bought and sold like a stock.
They are generally easier to buy and sell than managed funds.
We know that they are a really simple way for investors to gain instant diversification in their portfolios.
We also know that they are very, very low cost.
Our core range of ETFs, for example, is around one-sixth the cost of your average managed fund in Australia. So, they are significantly less expensive than other ways to invest.
So, I think, what we're seeing in Australia is a growth in the ETF market which is similar to the growth that we saw in other developed markets around the world, five or even 10 years ago.
The U.S. ETF market went through a very, very rapid growth cycle in the early part of this century.
The European ETF market went through a very, very rapid growth cycle about five or six years ago, and I think what we're seeing in Australia is that that growth cycle is occurring now.
So, my expectation is that the ETF market in Australia will continue to grow incredibly rapidly for the next few years. But then as the market matures, obviously, you would expect that growth to slow down, but I don't think that's going to happen in the short term.
27/06/2017 -- Don't overdo benchmark consideration Glenn Freeman 27/06/2017 http://video.morningstar.com/aus/video/170623_Sareen_MIC_AUDIO.mp4
Transcript will be available shortly./video/transcript/2721 mailto: ?subject=Don't overdo benchmark consideration&body=http://www.morningstar.com.au/video/story/2721 Factor-based investing using ETFs
26/06/2017 Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors Factor-based investing using ETFs Glenn Freeman 26/06/2017 http://video.morningstar.com/aus/video/170623_Shead_MIC_AUDIO.mp4
Transcript available soon./video/transcript/2720 mailto: ?subject=Factor-based investing using ETFs&body=http://www.morningstar.com.au/video/story/2720 2 global themes that are finding favour among ETF investors
15/11/2016 Australian retail investors are increasingly turning to ETFs for specific tactical exposures to global themes, particularly in the context of large-scale market events such as US election 2016. 2 global themes that are finding favour among ETF investors Glenn Freeman 15/11/2016 http://video.morningstar.com/aus/video/161114_Vynokur_ETFS_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman from Morningstar and I'm joined today by Alex Vynokur, Managing Director of Betashares.
Alex, thanks for joining us.
Alex Vynokur: Great to be with you, Glenn.
Freeman: Alex, just firstly, do you believe that there is more understanding and awareness of ETFs now versus four to five years ago?
Vynokur: Look, ETFs have been around in the Australian market for well over a decade now. And the early days of the evolution of the ETF market have certainly been around asking the basic questions. What is an ETF? How does it work? How do I buy an ETF? How do I sell?
We feel at this point in time there has certainly been a significant evolution in the level of awareness of ETFs. Globally, ETFs now account for a very meaningful percentage. We're talking about 30 per cent, 40 per cent of all trading on the New York Stock Exchange, and at the same time, ETFs are accounting for more than $0.50 in every $1 that gets invested in a managed funds industry.
So, globally, ETFs have become a very important, almost a key part of the growth of the investment industry and Australia is well on its way. So, the growth has been significant. The level of awareness has evolved significantly, but there's still some way to go in the Australian market.
What we are finding is that the SMSF investors in particular are attracted to ETFs in Australia for their core benefits of diversification, low cost and ability to access certain investment themes or certain investment exposures which otherwise are difficult or costly to access.
Freeman: And what are some of the latest figures on the scale of the ETF market here in Australia and also globally?
Vynokur: Look, in the Australian landscape, ETFs currently represent about $24 billion worth of invested assets. The rate of growth in Australia has been quite significant.
We've been seeing over 40 per cent year-on-year growth over the past decade. So, the rate of growth is significant.
And the numbers that we're now talking about are quite meaningful. We are seeing that self-directed investors, SMSFs, are investing an increasing proportion of their portfolios into ETFs and yet, at the same time, a larger number of SMSF investors are adopting ETFs every year. So, the market is growing quite fast.
Globally, ETFs, as I was mentioning previously, are representing a very meaningful part of the global investment landscape and the market is now measured in trillions of dollars as opposed to millions or billions.
Freeman: And Alex, can investors use ETFs to capture different investment themes?
Vynokur: Look, that's a really good question, Glenn. We have seen the phase one in the evolution of ETF adoption in Australia has really been around buying broadly diversified index exposures and using them as core of the portfolio. So, there could be an index such as the ASX 200; it could be an index which is a smart beta index such as the FTSE RAFI 200, which underlies our QOZ fund, or it could be a broad international exposure, such as MSCI World or S&P 500.
What we've seen more recently and in the past few years in particular is that investors are moving further away from stock picking and they are moving closer to allocating their portfolios in line with core exposures but then adopting some global thematic exposures. So, if you look at the examples very recently with the US election, we've seen some sectors on the global scale are emerging as winners and some sectors are emerging as less favorable.
So, if I use a couple of examples, the global healthcare sector was being sold off quite significantly by investors around the world in anticipation of democrats winning the election and effectively pursuing a course of controlling the pricing of healthcare services and drugs. Now that the result of the election is Trump win, we've seen a very significant rally emerging in global healthcare stocks.
Now, in Australia, investors have an opportunity with the global healthcare ETF drug, that's the ASX ticker, as easily as one trade get exposure to a diversified portfolio of 60 global leaders in healthcare. That's a sort of example of Australians being able to utilise an ETF to provide them with that tactical exposure.
Another example is global banks. Once again, another recent sort of agenda item post-election has been deregulation of banks and allowing them pursue sort of their business a little bit more freely. What we've seen in response to that is the global banking sector has responded quite strongly in terms of price appreciation and a lot of commentators are starting to come out and saying that global banks could really be a key beneficiary.
So, once again, an ETF in Australia BNKS can provide investors as easily as a simple trade on the ASX exposure with those – sort of to that portfolio of global banks which interestingly would provide Australian investors with a lot more exposure to that theme than purely buying the Australian banks, CBA and NAB, et cetera, because they are not as affected – that would not have been as affected by those laws in the first place. So, tactical investing is definitely emerging as a really interesting additional element of ETF usage.
Freeman: And lastly, what are your thoughts on the resilience of ETFs and how well they perform in stressed market conditions?
Vynokur: Look, ETFs have been around for decades on a global scale. In the Australian market they have been around for sort of through the GFC and through other bouts of volatility. The most recent times we've seen it in Australian market have been January of this year of 2016 when China was going through some fairly turbulent times and the market was being shut several days in a row because of the volatility.
ETFs have passed with flying colors both in the global financial crisis and during the more recent stressed market environments. What we are seeing in fact is that investors are being drawn towards ETFs even more than on average during times of stress, during times of crisis and we're seeing that the proportion of the market turnover that ETFs represent in terms of volatility or in terms of crisis actually increases.
The key thing with exchange-traded funds is that investment of an ETF is in a portfolio of liquid underlying securities. So, ultimately, the liquidity of an ETF will always reflect the liquidity of the underlying portfolio of securities that it invests its assets in.
Freeman: Alex, thanks very much for your time today.
Vynokur: Thank you. Thank you, Glenn.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.
13/10/2016 From a relatively vanilla selection of exchange-traded funds (ETFs) on offer in the early 2000s, Australian investors can now choose from a wide range of exchange-traded products to suit various tastes. Finding the right flavour ETF amid expanding ETP menu Glenn Freeman 13/10/2016 http://video.morningstar.com/aus/video/161011_Prineas_ETFs_Mix_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar, and I'm joined today by Alex Prineas, Morningstar's Associate Director of Manager Research.
Alex, thanks for joining us.
Alex Prineas: Thanks, Glenn.
Freeman: First up, Alex, do you see this growth of flows into ETFs continuing for some time or is it starting to flatten out now?
Prineas: We think the growth in ETF assets is structural. It's a long-running trend, not a fad. We have seen ETF assets growing at about 50 per cent per annum for a number of years in a row.
Now, nothing is going to grow at that rate indefinitely. In fact, we have seen ETF asset growth slow down a little bit in the last 12 months or so.
The market was up about 21 per cent in the year to the end of August. But what you've got to keep in mind is the backdrop of pretty lack-lustre flows to more traditional unlisted managed funds.
So, 21 per cent growth against that lackluster backdrop is actually pretty incredible. And if you did see strong equity markets again, not that I'm sort of predicting what type of equity market environment, but if you saw a strong equity market environment, you could easily envisage ETF asset growth recovering to that 50 per cent level again.
Freeman: We've seen variations like exchange-traded managed funds. Are these genuinely different to exchange-traded funds or are they just the same thing just by a slightly different name?
Prineas: They are genuinely different. You can't just assume that all exchange-traded funds or exchange-traded products are the same or even similar.
For example, the most successful of these newer exchange-traded products is Magellan's active global equity strategy. We think Magellan has the research capability to outperform the index over the long run, but inevitably with any active strategy there are going to be periods where you do underperform as well. So, that's completely different from a passive approach, where you're likely to get the index returns day in and day out.
There's also the question of portfolio disclosure. So, with a traditional passive ETF, you have a very good idea from one day to the next and whenever you make your investment exactly what the portfolio is.
Whereas with these active exchange-traded products you don't necessarily know on the day that you buy what is in the portfolio. In the case of Magellan's product, you know that you're getting exposure to a portfolio of global equities that is favoured by Magellan's research. You just don't know exactly what those global equities are until a couple of months later.
So, that contributes to slightly wider bid/ask spreads. Or another way of thinking of bid/ask spreads is transaction costs on when you buy and sell an active ETP and those bid/ask spreads – I guess the lower level of transparency around the portfolio means that those bid/ask spreads are a little bit wider than passive ETFs and they could go even wider in periods of intense market volatility. This hasn't really been tested in a period of GFC-style volatility in Australia.
So, you know with these products that your investment is held in a custodial arrangement. So, you know that you have a claim on the underlying assets. So, there is no concern from that angle relative to traditional managed funds or passive products. It's more of a concern around transaction costs.
So, we think that these newer active style of ETPs are more suited to long-term investors who can simply wait out periods of volatility. Whereas if you're absolutely forced to trade on a particularly day when spreads maybe high, then that's an extra cost that you need to factor into your investment strategy.
Freeman: And are there also other types of ETFs being created now?
Prineas: Yeah, the market is growing rapidly, both in the number and the type of ETFs or ETPs that are available. So, in the early years, back in the early 2000s, you just had the basic building blocks of Australian equity ETFs from SPDR and Australian-listed property ETF from SPDR.
Then later on you had global equity ETFs. Quite a number of them launched by – probably iShares led the way in global equity ETFs. We've also seen fixed interest ETFs, both Australian and international and also, global properties. So, you've had these kind of basic building blocks of a portfolio being built out.
What we've also seen is ETF or ETP development go well beyond those basic building blocks with a number of more esoteric or specialized products. So, you can now buy, for example, equity products that have leverage or that have inverse exposure to the equity market or that use derivatives to generate extra income or manage risk in some way. So BetaShares has probably been leading the way in terms of products that offer those types of exposures.
There's also another group called Market Vectors that does a lot of, what we call, strategic beta or…factor indices that give you exposure to different vectors or factors of the equity market, so things like value, growth, dividends, equal-weighted ETFs and so on and there has also been other new ETP or ETF providers like ANZ ETFS have joined in launching products in the Australian market. So, the offerings have expanded rapidly.
On the whole, we think that's good for investors that enables them to tailor their exposure more precisely and enables them to manage risk in a more precise way. However, as I pointed out earlier, investors can't just assume that all these products are the same. There is a great variety of products each with pros and cons and of course, different costs associated with them. So, the key there is to dig deeper and look specifically at what the ETF does.
Freeman: Alex, thanks very much for your time today.
Prineas: Thanks, Glenn.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.
21/10/2016 Warning of "much lower market returns" ahead, Vanguard founder Jack Bogle urges investors to seek low-cost investment products. From Morningstar US. Bogle forecasts low stock and bond market returns Christine Benz 21/10/2016 http://video.morningstar.com/aus/video/
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I recently had the opportunity to sit down with Vanguard founder Jack Bogle. We discussed his return forecasts for the major asset classes. Jack, thank you so much for being here.
Jack Bogle: Always good to be here, an annual occasion, Christine.
Benz: It's an annual privilege for me. Let's talk about your return expectations for stocks and bonds starting with equities. I think you have a really intuitive formula for forecasting equity market returns over the next decade. Let's talk about how you get there and where you arrive.
Bogle: Sure. It's very simple, easy to explain. Everybody knows this, but I don't think anybody else has ever put it down in the way I have. I've been using it for 25 years and it's worked beautifully for the full period. Every once in a while a decade is off by a good bit and then it's made up in the next decade. But it places stock returns into two categories: investment return, that's what you're earning on the stock. That's your dividend yield when you buy in--a crucial number--and the earnings growth that subsequently follows. And the other is speculative return, which is change in valuation of stocks generally, easily measured by the change in the price/earnings multiple. And for example, which happened in the '80s and again in the '90s, the price/earnings multiples roughly doubled twice from 10 to 20, and that doubling is a 7 per cent per year increase in valuation, and it did the same thing the '90s, that's a 7 per cent.
Benz: Sent us into bubble territory at that point.
Bogle: Yeah, it got us into bubble territory. So in those two decades the markets had returns of about 17 per cent a year. But if you had even the most general idea that having gone from 10 to 20 to 40 times earnings, the next decade would have to go to 80 times earnings to continue those returns, you'd realize there was just a lot of air. That's what valuations can get to in bubbles. So, putting all that together, we're looking ahead--we'll deal with stocks here first--we're looking ahead to some challenges compared to what we've had in the past. So, today the dividend yield is 2 per cent, the previous 50-year average or so is like 3.5 per cent dividend yield, and that's a dead-weight loss of 1.5 per cent in return. You can make it up in other places, but you can't make it up there.
Benz: Relative to past history.
Bogle: And the growth in earnings over the past 50 years has been about 6.5 per cent. I don't think it's going to be that high. So I use 5 per cent for earnings growth and that gives me roughly a 7 per cent investment return on stocks. Those are pretty anchored, because we know the dividend yield, and earnings growth is such that you know we could have a 2 per cent earnings growth and we could have a 10 per cent, but we are highly unlikely to have zero and we're highly unlikely have 20 per cent. So there is a sort of centrality to earnings growth. So the problem is in the valuations. And today the stock market is selling at about 23 times earnings and the long-term norm is 17 times earnings, a little bit below that actually. And that would cost you 3 per cent if the market ended this decade--I don't do this for anything but decades; it doesn't work at all year-by-year, but that would mean you'd lose 3 per cent of that return.
Benz: So down to 4 per cent.
Bogle: Down to 4 per cent and ...
Benz: Not inflation-adjusted, so add in inflation.
Bogle: We'll get to the deductions in a minute.
Benz: The number is getting skinnier.
Bogle: 4 per cent or it could be around 5 per cent. I don't mean to be too precise. But safe to say in the range of 4 per cent to 5 per cent. And the bond returns, the 10-year Treasury, which is the basic benchmark, is at 1.6 per cent. And I think very few people are going to be satisfied with that. So by going a little longer and a little less in government and federal securities, US government securities, you could probably get 2.5 per cent return without an awful lot of problems. So, you've got that 4 per cent for stocks, 2.5 per cent for bonds. And we'll use a 50-50 portfolio, because it makes the math easier, as around 3 per cent. Am I doing that right? Yeah, around 3 per cent for a balanced portfolio.
Now, that's the good news, if you will. The bad news is, these are market returns and nobody captures the total market return. Even a good index fund, S&P 500, say, or a total bond market, it captures the total return of the market by--the market return itself minus five one hundredths of 1 per cent. That's probably going to be as well as you can do. But just for the fun of it, let's first take inflation out.
Benz: Right.
Bogle: And I think 1.5 per cent to 2 per cent is a reasonable way to look at inflation. We're not even running that high today. So you take that off that, what did we decide--3 per cent, and now you're at 1.5 per cent and that's not a very good--that's not something that's going to make you very happy.
Benz: Right.
Bogle: But the reality, just reality, maybe my view of reality may be wrong, but the reality is, we should be expecting much lower market returns. Now when you take inflation out and get to real returns, then we deal with the fact that nobody gets the market's return. They have costs. In a typical mutual fund, if you look at its expense ratio and add into its transaction costs, its portfolio turnover cost, it's 2 per cent a year. We're now into negative real returns. And so, it suggests--"suggests," he said commercially--that people should be looking to index funds.
Benz: Very low-cost products.
Bogle: Because you are only losing five one hundredths of 1 per cent. And then you take out of that. There is more to come, unfortunately and that is in the mutual fund field, particularly the actively managed mutual fund fields, you pay unnecessary taxes, capital gains taxes that index funds are not subject to.
Benz: In a taxable account.
Bogle: In a taxable account, not so in a tax-free account, fair enough. And then you have behaviour problems, investor behaviour, which the record clearly shows, Morningstar clearly shows, costs you 1.5 per cent a year, or the investor return lags the mutual fund's return by 1.5 per cent. And let's put the extra taxes at 0.5 per cent, that's another 2 per cent. So, the message is so obvious. We have managed funds that have much lower expenses than others and much lower turnover costs. But you know I'm not condemning all managed funds.
But I am saying an investor that doesn't look at the difference between the stock and bond market return, nominal, and the stock and bond market return, real, and then look at costs and then look at the unnecessary costs that comes with active management, they are making a big mistake, a very big mistake and a bad mistake because once you compound these kind of numbers, for an investment lifetime, it's dramatic. I mean you probably get 10 per cent--if you are positive, you might get 10 per cent of what you would get by just investing at those low rates in the right fashion./video/transcript/2649 mailto: ?subject=Bogle forecasts low stock and bond market returns&body=http://www.morningstar.com.au/video/story/2649 Buy the world in a couple of trades
20/06/2016 As the popularity of ETFs continues to skyrocket in Australia, Morningstar asks Jon Howie, head of iShares Australia how ongoing market volatility affects investors in this space. Buy the world in a couple of trades Glenn Freeman 20/06/2016 http://video.morningstar.com/aus/video/160616_JohnHowie_ETFs_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar in the offices of BlackRock Australia. I'm joined today by Jon Howie, Head of iShares, for his views on ETFs and his outlook for the rest of this year.
Glenn Freeman: What are the biggest areas of discussion for Australian ETF investors today?
Jon Howie: The biggest areas that we are talking to retail investors about, there's a few of those areas. One is the constant need for diversification. So, I think ETF investors or investors generally have realised that ETFs are a really simple way for them to significantly improve the diversification of their portfolios.
In just one or two trades you can buy an entire world of global equities, for example, on the ASX. So, that's the big one; diversification is one.
Simplicity is another. ETF investors, and investors generally, are realising that ETFs are a great way to improve the simplicity of their portfolios rather than picking individual companies or trawling through lists of managed funds. Again, with a number of ETFs you can buy the whole world in a couple of trades and keep a really simple approach to building a globally diversified portfolio.
And the last area specifically is income. We've seen a lot of investors who are looking to generate income in their portfolios. And what we've seen recently over the past year or so is that there has been a number of options come to the market in ETF form which are specifically designed to help investors generate income. One of those areas is global bond ETFs or global fixed income ETFs. We've got three of those fixed income ETFs launched on the ASX and a couple of them are yielding over 5 per cent, and that's been a real area of interest for many investors as they look to generate income in portfolios and do it in a diversified and low-cost way.
Glenn Freeman: What effect do you expect Australia's currency trends to have on ETF investor sentiment and fundamentals?
Jon Howie: I think if we look at what happened historically over the past two or three years, we know that the Aussie dollar has weakened considerably against another basket of currencies and specifically, against the U.S. dollar and what that has done has encouraged investors to move more and more into international investments.
The weakening Aussie dollar means that the price of international assets goes up. So, that's been a real benefit for investors, who saw that that was likely to occur and were smart enough to actually invest internationally as the Aussie dollar started to weaken.
I think our general view is that the Aussie dollar, perhaps not as much as it has done in the past, but it will probably continue to weaken to some extent over the next few months or perhaps over the next year or so.
So that probably continues to provide some support for investors who are looking to diversify internationally, and so we would expect that international ETFs, those ETFs that give investors access to overseas markets, are probably going to continue to be one of the biggest areas of growth for the ETF market locally on the ASX.
Glenn Freeman: What's your view on hedged versus unhedged ETFs, especially in times of volatility?
Jon Howie: I think it's fair to say that certainly BlackRock has many views inside from the portfolio managers that manage international portfolio. So, I don't think there's one specific or firm view on exactly how to manage currency volatility.
I think, generally, my personal view is that in the short term, currencies can be very volatile. And when we say short term, we mean less than a few years, three to five years and less than that.
Currencies can be very volatile and that volatility can actually cause heartache for some investors who perhaps have a slightly shorter-term view of their investments.
Over the long term, however, generally I think the view is that currency movements tend to wash out. That is that they net out to something approaching zero over the long term.
So, I think our view is that if the investor has a relative horizon, say, less than five years for their investments then removing currency volatility from the portfolio may be something that they are keen to do.
Or if they have a long-term view, it's possible that currency hedging is something that maybe won't be additive to their portfolio over the long term.
One of the benefits of the ETF structure is that there is now a number of currency-hedged ETFs available on the ASX and the difference between the unhedged version and the hedged version in terms of cost is very, very small, as small as three basis points.
So, for investors who are looking to remove currency risks from their portfolios, they can do that for a very, very low cost.
Glenn Freeman: What were the trends in Australian ETFs vs Global ETFs over the last fiscal year?
Jon Howie: Well, we certainly saw a lot of interest in global ETFs, probably in 2014 and 2015. As I said, as the Aussie dollar started to weaken then was a huge interest in diversifying offshore.
Over the past 12 months we've actually seen strong interest back into Aussie investments, both Aussie equities and also Aussie fixed income. So, I think the general trend has been back towards a more local investments theme in terms of where investors are putting their money in ETFs.
I think what we'll over the next year or so is that the international market continues to represent a much bigger opportunity for investors generally.
So, notwithstanding some short-term opportunities in the Australian or Aussie companies and Aussie bonds, for example, over the long term, we continue to see a lot of growth in international markets as the ETF, as a tool, investors use that to access the opportunities overseas which are overall much bigger than the opportunities locally in Australia.
Glenn Freeman: Just finally, given ETFs recent growth, are they more of a trend rather than a long-term investment?
Jon Howie: Our view is that the ETF really is a fundamental shift in the way that investors access investment markets.
We know that there are a number of really fundamental benefits of the ETF structure.
That is that they are very easy to use.
They are bought and sold like a stock.
They are generally easier to buy and sell than managed funds.
We know that they are a really simple way for investors to gain instant diversification in their portfolios.
We also know that they are very, very low cost.
Our core range of ETFs, for example, is around one-sixth the cost of your average managed fund in Australia. So, they are significantly less expensive than other ways to invest.
So, I think, what we're seeing in Australia is a growth in the ETF market which is similar to the growth that we saw in other developed markets around the world, five or even 10 years ago.
The U.S. ETF market went through a very, very rapid growth cycle in the early part of this century.
The European ETF market went through a very, very rapid growth cycle about five or six years ago, and I think what we're seeing in Australia is that that growth cycle is occurring now.
So, my expectation is that the ETF market in Australia will continue to grow incredibly rapidly for the next few years. But then as the market matures, obviously, you would expect that growth to slow down, but I don't think that's going to happen in the short term./video/transcript/2616 mailto: ?subject=Buy the world in a couple of trades&body=http://www.morningstar.com.au/video/story/2616 Bogle on Brexit and other threats to global markets
21/06/2016 We have more borrowing, more leverage, more government debt relative to GDP than we have ever had with no attempt to get it down, says Vanguard founder Jack Bogle. Bogle on Brexit and other threats to global markets Scott Cooley 21/06/2016 http://video.morningstar.com/aus/video/
Scott Cooley: So, if you think about things going on around the world, the possibility of the UK leaving the European Union, the slowdown in China, the US Presidential election doesn't make democracy look very good, there are probably lots of reasons for concern. As an investor how should you cope with that?
John C. Bogle: Well, you can only control what you can control. I think whatever your view of the world is, you have to invest. You can't put the money in the mattress and in this day and age of low interest rates, you can't put it in the money market fund or a bank CD, so invest, you must. Now, you might want to invest regularly. For people that are investing regularly, I would say for god's sake don't stop investing now. I know the market is not doing much this year, just about where it started a little bit down, but not much and bond yields are still very low, actually lower than they were at the beginning of the year, but you have to put your money to work. The alternative is--I mean, the only way to guarantee you will have nothing at retirement is to invest nothing along the way. So, you have to take your chances.
Now, this is a risky world. You are right. And nobody knows how the implications of all those risks are. You identified some of them. The British exit, if it happens, is going to be extremely disruptive. Now, particularly if it leads to a Scottish exit from the United Kingdom, which I guess will be in effect almost gone at that point, I guess Northern Ireland will be all its left and Wales--sorry about that--so, the world is a very risky place. And the possibility of--you didn't mention financial leverage. We have more borrowing, more leverage, more government debt relative to GDP than we have ever had with no attempt to get it down and to compound that further usually the traditional way of doing--trying to bring these things to bear is not only fiscal policy, which we view as much as we can.
I mean, monetary policy, which we view as much as we can, you really can't get interest rates much lower than they are today and negative in a lot of countries and even I don't know how to figure that one out very well. I don't think anybody does. But monetary policy has always been thought of as the twin of the fiscal policy and that means we need to take more action to do something about the government deficit. But here in the US and I think around the world taking these kind of actions is politically--well, around the world it's probably difficult.
In the US, it seems to be impossible and we lost the ability to govern ourselves. It sure looks that way, but there is an old statement if I can mention that here that back in the 1770s there was some contest going on for the Prime Ministership of Scotland and someone said Adam Smith, his election will ruin the nation and Adam Smith said, there is a lot of ruin in the nation. Now, I don't know if we're not pushing it here in the United States whether you got that much ruin over our present list of presidential candidates. I will leave it to wiser heads and I think in a setting like this, particularly it's probably a good idea to stay away from politics./video/transcript/2618 mailto: ?subject=Bogle on Brexit and other threats to global markets&body=http://www.morningstar.com.au/video/story/2618 ETF investing rules of thumb
05/01/2016 There are many potential benefits to ETF investing but there are a number of rules investors should heed in order to avoid problems. ETF investing rules of thumb Nicholas Grove 05/01/2016 http://video.morningstar.com/aus/video/151113_Prineas_Conference_Audio.mp4
Nicholas Grove: I'm Nick Grove from Morningstar.com.au and today I am joined by Morningstar's Alex Prineas. Alex why is it important for investors to consider ETFs and what are few of their benefits?
Alex Prineas: Well, I think the reason it is important to consider them is because of those potential benefits that can be there. So there are things like, they can be incredibly low-cost. They can be tax-efficient, the transparency that you get with things like regular portfolio disclosure. So you know exactly, generally you know exactly what you are investing in with an ETF. So those types of benefits are very good reasons to at least look at the structure. You are not necessarily guaranteed or you are certainly not guaranteed to get all the benefits of ETFs in every single product. So I think it's important to think about what products and which particular benefits are most beneficial to you.
Grove: And just secondly Alex, in your presentation you mentioned a couple of ETF investing rules of thumb. What are a few of these rules?
Prineas: Well, there are things like just trading when the ETF is fully up and operating. So we'd suggest avoiding trading in the last 15 minutes of the day, avoiding the end-of-day auction period, avoiding the first 15 minutes. Basically you want to just make sure that the market maker has had time to be fully up and running behind the ETF, and also you want to trade when that underlying market is in full swing. So for example, for something like an Asian equity ETF, you want to trade that in the afternoon, after the Hong Kong and Singapore exchanges have opened up. So there is more transparency, more liquidity as to the true price of those assets and so the ETF can then price itself with a narrower bid/ask spread.
Grove: And just finally Alex, what is Morningstar's mark of quality when it comes to an ETF?
Prineas: There are five key factors that it boils down to. So these are people, process, parent, performance and price. So, some of those might speak for themselves. Price--obviously you want the cheapest ETF that does what you want. Other things might be a little less obvious, so we consider things like the strength of the parent organisation because that speaks to things like, the likelihood that the parent company is going to treat investors well, continue to innovate, continue to pass on the benefits of ETFs. So for example, are they going to pass on cost reductions to the end investor?
Grove: Alex thanks for your time today.
Prineas: Thanks Nick.
Grove: I'm Nick Grove at the Morningstar Individual Investor Conference in 2015./video/transcript/2568 mailto: ?subject=ETF investing rules of thumb&body=http://www.morningstar.com.au/video/story/2568 What now for China-exposed ETFs?
27/08/2015 Morningstar's Alex Prineas discusses the growth of the ETF market and what the China market turmoil means for the A-Share ETFs. What now for China-exposed ETFs? Christine St Anne 27/08/2015 http://video.morningstar.com/aus/video/150813_etfs_audio_V2.mp4 How much have ETFs assets grown by?
Alex Prineas: The ETF industry grew about 4 per cent over the June quarter, which doesn't sound huge, but when you consider the Aussie equities were down about 7 per cent and globally equities were flat over the quarter, asset growth of 4 per cent for ETFs actually represents quite strong inflows.
Which ETF garnered the most assets?
SPDR ASX 200 ETF put on the most in dollar terms. It added more than $200 million. That was already Australia's largest ETF, so that's just made it even larger. It's now got more than $3 billion under management, but there were some other newer smaller ETFs that grew at a faster rate. For example, Magellan Global Equity put on about $80 million, which is an increase of about 65 per cent. So, it seems to be a success arising both as a result of Magellan's appeal as an active global equity manager, but also Magellan does seem to be benefiting from the preference for listed structures that offer that transparency and ease of execution.
What I have found really interesting was the number of new products coming to market. So there were 14 new launches in the quarter which is – that's more new products in one quarter than we saw in the entire of 2014, and anecdotally, we're hearing that there are still a number of products in the pipeline to be launched for the remainder of the year. So it's always difficult to predict exactly what's going to happen in the short-term, but it does seem that ETF assets and the number of products look likely to grow in the near-term.
What was the big trend in the June quarter?
There has been a lot happening. It's hard to keep up with at all. That most people would be aware that there has been a large correction in the China A-share market and ongoing volatility and there are some important developments happening around China A-shares, but it's also important not to get carried away. So, there are some dedicated A-share ETFs such as that offered by Market Vectors, but most ETFs in Australia don't have much direct exposure to the China A-share market, if any at all. For example, if you look at the iShares China Large-Cap ETF or iShares Emerging Market ETF, they don't have direct A-share exposure. They get their China exposure via H-shares which are listed in Hong Kong.
What is happening is that index providers are looking to include China A-shares in their benchmarks. So, for example, the well-known MSCI Emerging Markets Index and MSCI has announced that they are looking to include A-shares in there, although they have postponed the possible inclusion. But FTSE, another large index provider, has confirmed that it will compile an emerging market index that includes China A-shares. So Vanguard's Emerging Market ETF that tracks FTSE benchmarks will follow in line and gradually include China A-shares over the course of this year and 2016. So Vanguard estimates that's going to result in an allocation to China A-shares of about 6 per cent. But you also got to remember that ETF already has about 27 per cent exposure to China through China H-shares.
So, another 6 per cent is not a game changer in our view. But there are some longer-term ramifications. So FTSE has estimated that maybe it's only 6 per cent for now, but as the China A-share market opens up, they estimate that could include up to 32 per cent in China and if you included all Chinese shares, you could actually see half of the emerging markets benchmark made up of Chinese stocks. So we don't expect to see those kinds of chunky allocations any time soon. But 50 per cent exposure to a single country is a chunky exposure. So, we'll continue to watch that space over time.
/video/transcript/2529 mailto: ?subject=What now for China-exposed ETFs? &body=http://www.morningstar.com.au/video/story/2529 What the new ETFs mean for investors
09/07/2015 Investors are urged to drill down and understand the strategy behind the plethora of new ETFs coming into the market. What the new ETFs mean for investors Christine St Anne 09/07/2015 http://video.morningstar.com/aus/video/150724_etfs_audio.mp4
Christine St Anne: New exchange-traded funds or ETFs continue to come into the market. To make sense of these new products, I'm joined by Morningstar's Alex Prineas. Alex, welcome.
Alex Prineas: Thanks, Christine. Good to be here.
St Anne: Alex, we have had big named fund managers with new ETFs, and now a major bank, ANZ has come into the market. What are the drivers behind this trend?
Prineas: I guess, the key driver of any product launch is to gather assets, and the ETF market has been doing well more generally in that regard. It's been growing at about 50 per cent per annum for the last few years. So that's going to be the key driver behind any product launch, but underneath that why are investors favoring ETFs, why are they attracted to ETFs. It appears that they are attracted to features like the low cost, the transparency, the tax efficiency and the ease of execution. We've even seen some active managers recognize the appeal of the listed structure with some new listed investment company launches from the likes of PM Capital and Investors Mutual and even a listed managed fund launch from Magellan.
So what's important to remember though is that there are benefits to the listed structure, but there are also some drawbacks and that not every strategy will offer all the benefits. So you really need to drill down to the individual product and the strategy to understand what you're getting.
St Anne: Alex, some of the products like the Market Vectors Small-Cap ETF and BetaShares' first NASDAQ ETF seem to be quite niche products. So what are the portfolio implications?
Prineas: Well, it typically suggest most investors would construct a portfolio with a bias to products that broadly represent the large asset classes, so Australian shares, global equities and the bonds. There is room for smaller allocations to some of these more niche products or satellite holdings.
In the case of small-cap Australian equities, that's typically an area where our best ratings have been reserved for active managers. They have been able to pick winners within the sector and, more importantly, avoid the losers. So whether it be unprofitable mining stocks during the mining boom or speculative tech companies back in the tech boom, they have been successful at that.
In the case of something like the NASDAQ product, what you've got to remember there is that you may already have some exposure to that through your global equity portfolio. So, for example, two of the biggest global equity managers in Australia, Magellan and Platinum, they already have or have held at times exposure to stocks like Intel, eBay, Microsoft, which are NASDAQ stocks. But BetaShares product does present a useful tool for investors who may want a shorter term allocation or who may want to time their entry in or out of the technology or over the NASDAQ area, or for investors who want a more targeted exposure for a lower cost than an active fund.
St Anne: Alex, Vanguard has now announced that it will add China A shares to its emerging markets' ETF. Firstly, what are China A shares? And again, what are the implications for investors?
Prineas: China A shares are essentially Chinese companies listed on either the Shenzhen or Shanghai Exchange. So, historically, foreign investors couldn't invest directly in China. They could invest via companies listed in Hong Kong. So Vanguard's product, for example, has about 28 per cent exposure to China through companies listed in Hong Kong. So MSCI, one of the biggest index providers has basically announced that they plan to include A shares in their index methodology, recognizing the fact that foreign investors are increasingly being allowed to invest directly into A shares. So what does that mean for portfolios? We've already got about a 28 per cent exposure within say the Vanguard Emerging Markets ETF. You've got 28 per cent exposure to China. With the addition of A shares, you'll get another 6 per cent exposure. So it's significant, but it's not a huge change in strategy. What it does mean, is a little bit more diversified exposure to China, because you have some companies that are further down the market cap spectrum. And also a lot more access to the faster growth within China, whether or not that's good or bad growth, is debatable, that there's been about 100 IPOs in China, just in the first four or five months of 2015. There has also been quite a run up in share prices in A shares …
05/02/2015 While the growth in LICs is more cyclical, ETFs continue to develop from stronger structural growth. What's in store for listed investments? Christine St Anne 05/02/2015 http://video.morningstar.com/aus/video/141206_lics_audio.mp4
Christine St Anne: Morningstar's Tim Murphy joins us today to talk about the new LICs and ETF products that have come into the market. Tim, welcome back.
Tim Murphy: Thanks Christine.
St Anne: Tim a number of big name fund managers have recently launched LICs or listed investment company. What is the key driver behind this trend?
Murphy: Yeah, it's certainly been interesting as you say the number of fund managers have traditionally played in the unlisted managed funds base coming to the listed market with offerings recently. I think there are a couple of reasons behind that. I think firstly and this is only the primary reason that the managers involved would tell you is that. The SMSF market is obviously growing quite strongly. And SMSFs generally haven't been big investors in managed funds. And so by creating a list of vehicles through issuing a list of investment company appeals possibly more to that audience.
I think the more cynical view models would be that fund managers have struggled generating meaningful inflows into their unlisted managed funds in recent years and they have seen a bit of trend into the listed investment company market and they have seen that as a way of quickly growing some assets in the door. So I think there is both some investor merit to the investor type behind there as well as some more commercial reasons that will be driving the activity you've seen.
St Anne: Now one of these fund managers Perpetual aims to report its NTA or net tangible asset at the end of each day. What is the benefit of this to investors?
Murphy: It really depends on your timeframe. I mean if you are investing in these things on a long term view than it doesn't really make that much of difference to. That being said, we are certainly big fans of transparency and certainly the greater transparency through issuing a daily NTA as opposed to weekly or monthly is more from the case elsewhere. That certainly – it can only be good for investors, it's certainly not a bad thing.
St Anne: Now we've also had some activity in the ETF or exchange traded fund space. Can you give us an idea about the new ETFs that have come into the market?
Murphy: There is continuing to be ETF growth. In the last couple of months probably most of the new ETFs coming to market have been different flavors of global equities. We've seen a number of traditional market cap based ETF indices tracking global markets come to market from the likes of Vanguard. Another more interesting one with a strategic beta focused to it has been Market Vectors Global Quality ETF that's come to market.
So tilting portfolio stocks towards circle higher quality stocks. That's certainly been an interesting discussion point in investing circles in the last couple of years. Particularly the characteristics of those stocks tending to be lower beta or drawing down less in down market. So the role that that potentially plays for retirees and SMSFs is going to be interesting and we'll be watching that one closely.
St Anne: So Tim what key factors should investors look at when assessing these new ETFs and LICs.
Murphy: Well, you should always look at what's under the bonnet. As we say firstly obviously if there is Morningstar research available try and have a look at that for premium subscribers. Plus we've obviously done a lot of the kicking under the bonnet for you, that's the case. If there isn't Morningstar research available on the particular investment you are looking at. Certainly look at the holdings, look at the strategy, look at what it's trying to achieve and consider whether those – what it's trying to do and its objectives are similar to what you are trying to achieve for your own portfolio and your own objectives.
St Anne: Now these LICs and ETFs cover range of asset classes and countries and sectors. They are also touted as low cost. So can investors affectively view the whole portfolio using these listed investment products.
Murphy: It's only build a robust diversified portfolio using, ETFs and LICs. I think it costs is certainly something to keep an eye on. As we've seen more LICs coming to market, more ETFs coming to market, the costs are becoming more variable. So many of the first players particularly in ETF space cost was a big selling point it's not as big a selling point for some of the newer flavors of ETFs coming to market. And similarly with some of the newer LICs the management fees on those are more akin in some cases to their unlisted managed fund rivals as opposed to some of the more traditional LICs that have been around for decades, who certainly won't mind for their low costs.
St Anne: Finally Tim do you expect more products in 2015?
Murphy: There is always going to be new products coming to market and I think ETFs are going to continue to grow that's definitely a structural growth story on a listed investment company side. Maybe I think it will depend on the market environment and how that plays out, whether market stays strong and to its appetite. If there are new listings in that area so one of those is probably little bit more cyclical in the LIC side. So hard to tell will be somewhat market dependent, but on the ETF side that really is the stronger structural growth story and you are going to continue to see more ETFs list on the ASX in 2015 and beyond.
St Anne: Tim as always thanks for your insights today.
Murphy: No, problem Christine.
10/12/2014 Morningstar's Tim Murphy discusses the new ETF analyst ratings and reports that are now available to investors. Morningstar's new ETF ratings Christine St Anne 10/12/2014 http://video.morningstar.com/aus/video/141209_etfratings1_audio.mp4
Christine St Anne: Morningstar has recently released some new reports and ratings for ETFs (exchange-traded funds). These will be available on our website. To talk to us a little bit about the changes I'm joined by Morningstar's Tim Murphy. Tim, welcome.
Tim Murphy: Thanks Christine.
St Anne: Tim, so can you tell us a little bit about the changes to these ratings on ETFs.
Murphy: So we've redid the way that we are doing our ETF ratings for couple of reasons. Firstly we've added an extra level of granularity to the ratings scale, which I'll talk about shortly. But secondly we also brought it in line with our managed fund rating scale. Increasingly investors ambivalent between the vehicles that they want to invest in whether that's an ETF, a managed fund, direct equity what not. So we've changed the rating scale on our ETF research to make it consistent with managed fund research ratings.
St Anne: Tim, if we can delve a little further. You mentioned more granular rating. Can you please explain this a little further?
Murphy: So previously we had a rating scale of highly recommended and recommended for our best ideas worldwide, investment grade and below. Now at the top end of the scale we've got three positive ratings. So previously we had two positive with highly recommended and recommended. Now we've got three positive ratings, with gold, silver and bronze. So we are able to articulate different levels of conviction in a bit more granular manner. And then what used to be called investment grade we are now calling neutral. Clearly that's funds where we think they are okay, and may meet in or around their objective but don't really standout from their peer group. So in the new ratings scale you have gold, at the top end, silver, bronze and then neutral and then anything that we think is really floored will have a rating of negative.
St Anne: Tim what about the new format to the ETF report. What are the changes there?
Murphy: So we've expanded the format and size of our ETF research report which is exciting. So if you use our research you are going to have more in-depth information both in terms of the written research that we have done exploring different elements of the construct as well as the suitability of the ETFs. You are also going to have a lot more data visible on this. So we really surfaced a lot of the useful information that we capture on both the underlying holdings of each of these ETFs as well as different performance statistics as well. So a lot more of those are research, text for you to read, as well as graphs and information sort of bring that research to life for you. So certainly much more useful, much more value for users of that research.
St Anne: Do all these new ratings and research report apply to all the ETFs that Morningstar covers.
Murphy: Yes, every ETF, every research is in the new format of research and analysis. That's now over 34 ETFs. As part of this we've also launched research on fixed interest ETFs. So now we've got research across the broad asset class spectrum within the ETF universe. So one of the broadest offerings out there.
St Anne: So how often will these changes be updated.
Murphy: So our ratings we update on an annual cycle, in line with our regular sector review process. So look for that to happen, but equally too if there are material changes throughout the year. So in the case of an ETF if there is a change in index or some other material change effecting that particular ETF than we review those ratings as soon as possible in that scenario.
St Anne: Tim, thanks so much for your time again.
Murphy: Thanks Christine.
08/05/2014 A range of listed investment opportunities allow investors access to a myriad of offshore companies. Accessing global growth Christine St Anne 08/05/2014 http://video.morningstar.com/aus/video/140508_equities_audio.mp4 Christine St Anne: We kicked off our theme on listed investments this week. Today, I'm joined by Morningstar's Tim Murphy to look at what sort of opportunities are available in listed investments when it comes to global equities. Tim, lovely to see you again. It's been a while.
Tim Murphy: Hi, Christine.
St Anne: Tim, firstly, what sort of listed investments are available in global equities, say, for example, exchange-traded funds?
Murphy: Well, you've got a range of different options. If we talk about ETFs or exchange-traded funds, first, that's probably where the widest range of options is from broad, diversified global equity funds that you can invest anywhere in the world through to narrow regional-focused funds, so funds that only invest in America like the S&P 500 Index, for instance, or in specific regions like Europe or Asia.
You then drill down further, you can buy single country funds as well, Japan or alternatively you've got sector funds. So you can buy global consumer staples or global telecoms ETF, for instance. So there is a range of different options on the ETF side.
St Anne: And listed investment companies or LICs?
Murphy: The listed investment company side tend to be at the most part broadly diverse funds that can invest anywhere in the world. So names like Magellan and Platinum, for instance, are two of the bigger listed investment companies who have mandates that have them to invest anywhere right around the world.
St Anne: Tim, so what sort of companies do those sorts of investments invest in? Do they tend to be more of the large cap companies?
Murphy: It really depends on the listed investment company you are talking about. So they are all driven by underlying active asset managers. So, in the case of someone like Magellan, most of the companies tend to be fairly mega cap, well-known large names like American Express, Yum! Brands, which owns KFC among other things; so, really big large caps in that case.
When you look at, say, someone like Platinum, they tend to have some much more esoteric names, have historically had larger exposures to many smaller companies in Asia, in particular, that most Australian investors would never heard of, but clearly offering attractive investments and have done well over time.
St Anne: Tim, you mentioned broad exposure, sector-specific exposure and even country-specific exposure. When it comes to global equities, is it better for investors to take more of a broad approach?
Murphy: Like anything, it always depends on your own individual circumstance. This is a general rule of thumb. We encourage people to take more diversity rather than less when building portfolios. So, certainly taking a broad based exposure to global equities, we think makes sense for the vast majority of investors. Whereas people's willingness and need to invest in a single country fund, for instance, is probably questionable in most circumstances and as is their ability to actually time that decision right, because often people get excited about some of the narrower type investments after they have done well, which is usually the worst time to invest in such narrow areas.
St Anne: Tim, so what sort of role do these listed investments play in an investor's portfolio?
Murphy: Well, I think diversity and bigger breadth of opportunity are the two big factors I think. I mean, clearly in Australia, it's a very narrow market, heavily concentrated in banks, I think and resource stocks at the top end. Whereas when you go into global equities, you are giving much broader exposure to sectors like healthcare, to sectors like technology, which really are sort of big power players of the Australian equity market.
Additionally, the diversification benefits from things like currency exposure, for instance, are often underplayed. With lots of commentary out there about where the Aussie dollar rate is, is it over value, is it fair value and what not? Having offshore currency exposure from the diversification perspective, we certainly, think make sense in most cases out there for investors.
St Anne: Tim, you raised an interesting point about currency. So, finally, what sort of issue should investors take into account when it comes to global equities, particularly with currency and hedging issues.
Murphy: Sure. So the majority of listed investment companies and ETFs investing globally are unhedged. So again to give you currency exposure, there is at least one ETF that is hedged, if that's what you really want, but the majority are unhedged. So you are taking exposure to the U.S. dollar or the euro or British pound, depending on whatever the particular underlying exposure is. So, as I said, we think that is a benefit for portfolios, but again it comes back to your own individual circumstances to consider as well.
St Anne: Tim, thanks again for your insights.
Murphy: No worries, Christine.
/video/transcript/2401 mailto: ?subject=Accessing global growth &body=http://www.morningstar.com.au/video/story/2401 The rise and rise of ETFs
01/11/2013 Morningstar's Alex Prineas takes a look at the rapid growth of Australia's ETF market. The rise and rise of ETFs Christine St Anne 01/11/2013 http://video.morningstar.com/aus/video/131029_etf_audio.mp4
Christine St Anne: Morningstar's Alex Prineas joins us again to talk about the latest developments to the ETF, or exchange-traded fund, market. Alex, great to see you again.
Alex Prineas: You too, Christine. Thanks for having me.
St Anne: Alex, your latest report on the market has found that the sector has grown rapidly. So, what would be the key drivers behind that growth?
Prineas: That's true. Australian ETFs, the industry grew pretty rapidly over the quarter, more than $1 billion, so it's up to over $8.8 billion. Now, some have pointed out that the asset growth has been driven by the rising stock market and I'd agree that's part of it, but the ETF industry has grown faster than the rising market. If you look over the September quarter, the market – the ASX 200 index was up about 10 per cent; the ETF industry grew faster than that, at 15 per cent, or if you look over the year-to-September, the stock market was up about 24 per cent, but the ETF industry grew its assets 55 per cent, more than 55 per cent. That's particularly impressive given the backdrop of pretty tepid flows to unlisted managed funds over that period. So, of course, there are winners and losers within that, but overall I'd say 2012 was a fairly stagnant year for ETF inflows, but 2013 has been strong.
St Anne: So, Alex, which ETF providers are getting the biggest inflows?
Prineas: It looks like investors have been taking advantage of the high Australian dollar. So international share, ETFs have been getting pretty strong inflows. Our figures show strong flows into products like iShares S&P 500, which took in more than $130 million over the quarter; high dividend ETFs also continued their strong run, with inflows into products like Vanguard High Dividend, SPDR High Dividend. By far the most successful ETF launch in the last couple of years has been BetaShares Australian Cash ETF, that's quite popular with institutional investors as a place to park cash. It was only launched in March 2012, but it's already the ninth largest ETF in Australia and it's got almost $300 million in assets.
St Anne: Lo and behold, what about any outflows?
Prineas: There have been some outflows too, especially in areas like gold ETFs. So ETFS Physical Gold saw about $133 million flow out in just the September quarter. We've also seen outflows from the market leading ETF, SPDR ASX 200, STW, which has been losing market share to rival providers like Vanguard. So we estimate more than $130 million flowed out of STW in the third quarter. But just to put that into perspective, STW still by far the largest and most liquid ETF in Australia and GOLD, the gold ETF, that's the fourth largest ETF in Australia. So, large outflows in absolute terms, but relatively small compared to their size. But I think the biggest story is the inflows that we are seeing across the ETF industry and the benefits that that can bring for investors.
St Anne: Alex, on the managed fund sector, those managers managing large funds under management could be a hindrance to investors. So, why is the ETF market any different?
Prineas: Yes, it's true that for managed funds, for active managed funds, very large asset book can be a hindrance. But most ETFs are passive vehicles, especially in Australia, and it's a scale business. So within reason, bigger the better for ETFs, because we're larger asset book, investors can benefit from lower costs and greater liquidity. So what we've actually seen is that in the well-established ETF segments, like Australian shares, international shares, and high-dividend ETFs, trading volumes are higher as a result of those flows. So remember when you are analyzing the cost of any investment, you have to take into account management costs, which are your ongoing costs. But your one-off trading costs can be very important as well, especially if you are transacting frequently. So a bigger asset book contributes to higher trading volumes; higher trading volumes help to reduce buy/sell spreads and increase liquidity in the market.
St Anne: Alex, could you give us any examples?
Prineas: A good example is the Australian listed property ETFs, where buy/sell spreads are about half of what they were 12 months ago. Now, part of that is going to be low market volatility that we've seen; part of it could be increased activity from ETF market makers. But certainly there is no doubt that the larger asset book helps and we also think that a large asset book is a more sustainable liquidity advantage.
To illustrate that, you just need to look at STW, which we talked about before, is by far the largest ETF in Australia. It's got more than $2 billion in assets and it's consistently very low-cost to trade. It's bid/ask spread is typically around 5 basis points. So as other ETFs grow, STW demonstrates the types of low trading costs that are possible with a big asset book. Individual ETFs have seen inflows and outflows. But overall, the industry has grown a lot over the last year and we think that increased scale is a positive for the industry, because it contributes to increased trading volumes and lower trading spreads. So we already thought ETFs were a pretty attractive low-cost way to invest and they're now even more attractive.
St Anne: Alex, great to get your insights again.
Prineas: Thanks, Christine.
22/07/2013 Exchange-traded funds provide investors with a cost-effective way to access global companies. Getting to know global ETFs Christine St Anne 22/07/2013 http://video.morningstar.com/aus/video/130722_global_audio.mp4 Christine St Anne: People are increasingly interested in investing in global equities. There are, of course, a number of ways to do this. Today, I'm joined by State Street's Amanda Skelly to give us an insight in how to invest in global ETFs or exchange-traded funds. Amanda, nice to see you again.
Amanda Skelly: Thank you for having me, Christine.
St Anne: Amanda, so what, kind of, companies can investors invest in global ETFs?
Skelly: Sure. All global ETFs will invest in companies that have their primary home operations outside Australia. So in the U.S., for example, this would be a company like Apple, Google or General Electric, and in Asia this will be something like Toyota or China Bank. It depends on the type of global equity ETF that the investor is looking for, because there is a range available on the ASX today and each of them track a different strategy. There are ETFs on developed markets like the U.S. and there are ETFs on emerging markets like China and Brazil.
So, investors really just need to look at the types of overseas companies they would like in their portfolio before making their investment decision.
St Anne: Amanda, is it just about growth? What about the income benefits?
Skelly: I mean, global equity investing is mainly around growth and the growth opportunities there, but there is some income for investors. For example, we have a global ETF at the moment, WXOZ, and its dividend yield is around 2.5 per cent. So, if you are buying global equities, it should be mainly for the growth opportunities, but bear in mind there is a little bit of income.
Probably an important point to add is unlike Australian shares, there aren't any franking credits with global equities. So that's one thing that investor should look for as well when they are making their decision.
St Anne: Amanda, what about the currency risks? Can you talk to us about some of these issues?
Skelly: Absolutely, and it's really important that investors understand the currency risk when they are buying a global equity ETF. So, there are really two factors that drive performance of global equity investing. One is the performance of the underlying companies like the Toyota or the Googles and other is the performance of the Australian dollar relative to the foreign currency. And what this means is when the Australian dollar is falling relative to other currencies, investors will gain an additional return, and when the Australian dollar is rising compared to other currencies, Australia will have a negative impact on their returns.
St Anne: What about hedged and unhedged strategies in global equity?
Skelly: Absolutely, there are hedge strategies around, and we recently launched a new international equity, Aussie dollar hedged ETF. And investors can certainly manage the currency risk by using a combination of an unhedged ETF and hedged ETF. And that will really depend on the investors risk appetite. Sometimes currency can actually add additional returns to a portfolio, sometimes they can detract. Some investors really just don't want the fluctuating – the impact of a fluctuating Aussie dollar on their portfolio.
So, it really depends on what the investor is looking when they are investing in global markets.
St Anne: A lot of investors are concerned about the choppy nature of global equities. Given the ETFs tracking index, how do these sort of products work in down markets?
Skelly: That's really a good question, because I do get this quite often and essentially the ETF will follow what the index is doing. All of the ETFs are available on the ASX tracking index. So, if the index is declining, the ETF will also decline in value. Vice versa, if the index is performing well, such as what we've seen with the US markets and Europe recently, the ETF will perform well also.
St Anne: Amanda, finally your recently launched global ETF is not cross-listed like other global ETFs. Some might say this does not give you the economies of scale. Why did you decide not to cross-list that ETF?
Skelly: Certainly and I agree with that. I think there are pros and cons to both strategies, cross-listed and built here in Australia. The reason why we have built our recent range of global equity ETFs in Australia is we're able to create an index that was ex-Australia. So when you are buying the SPDR World Equity ETFs, there is no overlap with the Australian equity component, which is important to some investors.
The other important thing that we found when talking to our clients is with cross-listed. There some additional forms that investors need to complete, some U.S. tax forms, and we found that being able to alleviate that for investors by building here in Australia was really important.
St Anne: Amanda, thanks so much for your insights today.
Skelly: Thanks, Christine. /video/transcript/2327 mailto: ?subject=Getting to know global ETFs&body=http://www.morningstar.com.au/video/story/2327 Investing in Exchange-traded Australian Government Bonds
28/06/2013 Morningstar's Nicholas Yaxley provides an insight into how investors can access the new exchanged-traded bonds. Investing in Exchange-traded Australian Government Bonds Christine St Anne 28/06/2013 http://video.morningstar.com/aus/video/130625_govtbonds1_audio.mp4 Christine St Anne: Retail investors can now invest in Australian Government Bonds through the ASX. To tell us a little bit more about these bonds and how to use them, I'm joined by Morningstar's Nicholas Yaxley. Nicholas welcome.
Nicholas Yaxley: Thanks very much Christine.
St Anne: Nicholas, so how does it work and how can investors buy them?
Yaxley: Well, Australian traded government bonds are basically the same as what you would get in the wholesale market, except what they have done now is created a mechanism whereby the wholesale bonds will now be traded on the ASX by what's known as the CHESS Depositary receipt. So, you are not actually owning the legal title to the underlying bond, but what you do own is all the economic benefits of it.
St Anne: These bonds are of course backed by the Australian Government, does this make it safer? What are the investment risks?
Yaxley: So, basically the government bonds are the risk-free benchmark for the entire asset spectrum. So they are very much the low risk end of the market. They are defensive investments and investors should treat them that way. There are always going to be risks to investment. But they are designed to be a defensive part of your portfolio. But you also need to be wary of things like, interest rate risk and inflation.
St Anne: Nicholas what about impact of inflation?
Yaxley: Well the whole purpose of defensive investment is ultimately to maintain your purchasing power or the loss of the investment. So there is no real point investing in a government bond if you are yielding say 2.5 per cent and you have an inflation expectation over the same period which is say 5 per cent. So then you'll have a negative real return. So that would never make any sense for an investor over that period. So you've got to be aware of what the expectations are for inflation and how that in turn impacts these securities.
St Anne: Nicholas, finally how does this style of investing in fixed income compared to other traditional ways like managed funds.
Yaxley: Absolutely that's a very important question and some of it is discussed widely. So managed funds have all pretty much have exposure to government bonds in some of or another. The difference being with exchange traded government bonds is now that the investor has the option to have direct participation in these securities.
One of the primary things that comes up between direct investment and managed funds investment is that managed funds generally have a benchmark that they need to fit too. That benchmark is broadly a lot of the time designed to suit the issuance preferences not necessarily the investor's preference. So you need to be very cautious about what the duration maybe or the interest rate risk on the actual managed fund benchmark versus what you would like as your preferred investment.
St Anne: Nicholas thanks for your time today.
Yaxley: No problem.
St Anne: Subscribers can access Nicholas' report 'A guide to exchanged traded Australian Government bonds' by going to our website and clicking on the hybrid's tab. /video/transcript/2315 mailto: ?subject=Investing in Exchange-traded Australian Government Bonds&body=http://www.morningstar.com.au/video/story/2315 ETF quarterly wrap-up
21/05/2013 This quarter's wrap-up takes a look at the top performers and international ETFs. ETF quarterly wrap-up Christine St Anne 21/05/2013 http://video.morningstar.com/aus/video/130510_wrapup_audio1.mp4 Christine St Anne: Morningstar recently completed its quarterly wrap up of the exchange traded fund or ETF market. Today I am joined by Alex Prineas to talk about the key developments in the market. Alex, welcome.
Alex Prineas: Thanks, Christine.
St Anne: Alex, firstly, who were the strong performers over the quarter?
Prineas: The best performing ETFs were mostly somehow related to that theme is income and dividends and yields. So the top four spots on the performance charts were all financial sector ETFs, all up more than 15 per cent, some of them up as much as 25 per cent for the quarter.
Dividend products also did well. They were all up more than 10 per cent over the quarter and a lot of that has been around the strong performance from the Australian banks. So that's been on the back of monetary stimulus in the U.S., Japan, falling interest rates in Australia, generally just driving that thirst for income and dividends.
St Anne: What about the laggers?
Prineas: The worst performing ETFs were mostly related to commodities, mining, China and that's on the back of not just concerns around moderating growth in China, but also China's efforts to rebalance the economy towards less commodity intensive areas. So, towards consumption and away from investment.
So, you saw the DIGGA Australian Mining ETF, which holds a portfolio of Australian mining stocks that was down 14 per cent. We also saw falls from commodity ETFs from the likes of ETFS Wheat, ETFS Industrial Metals and also iShares China was down and finally the BetaShares British Pound ETF was down as Moody's stripped the UK of its AAA credit rating during the quarter.
St Anne: Alex, over the last quarter a new international ETF was launched. How does that differ from the existing international ETFs in the market?
Prineas: Yes, State Street launched SPDR S&P World ex-Australia ETF. So there is already a range of international share ETFs available in Australia from the large providers like Vanguard and iShares, but many of these are cross-listed products. For example, Vanguard's World ex-US ETF, it's a cross-listed product. It was launched in Australia in 2009 based on an identical U.S listing that's been available since 2001.
So unlike in active funds, generally we think with ETFs within reason bigger is better, because you get economies of scale, you get better liquidity, that liquidity can reduce your trading costs.
So Vanguard's asset base in the US is huge. So that cross-listing immediately brings Australian investors economies of scale. The flipside to that is that you can get some complications around tax, because you're essentially investing in a US financial product, but it will be interesting to say with State Street whether they can achieve or how quickly they can achieve those economies of scale.
They do have probably timing on their side, because there is a lot more talk at the moment around homebuyers in Australian investors' portfolios, and especially with the strong Australian dollar and some of the heat coming out of the mining boom that investors are talking more about how they can get more international exposure into their portfolios.
St Anne: Finally, Alex, what ETFs garnered the greatest inflows from investors?
Prineas: It was a very good quarter for ETF flows overall. Early 2012 saw flows pretty flat for ETFs, and that was not a bad result because you actually saw outflows from the broader Australian share managed fund industry while ETFs were flat. Then they picked up strongly in the fourth quarter last year, and that continued into the first quarter of this year.
They took in $350 million in flows, plus the increase from rising stock markets that increases the asset base. There were some areas of outflows. So gold ETFs saw a bit of outflow. It will be interesting to see what happens there, especially with the sharp decline in the gold price in April. So it'll be interesting to see sort of April and May ETF flows into gold products.
Also the behemoth of the industry State Streets ASX 200 ETF, it's more than $2 billion in assets, or roughly 30 per cent of the entire Australian ETF industry is in that one product, and it's being gradually losing market share. So it saw outflows of around $100 million over the quarter, although actually its asset base still increased because of the rising market.
The direction of inflows was interesting, too. A couple of new products did well, particularly BetaShares, High Interest Cash ETF, it's already up to A$150 million in assets, which means it's now knocking on the door of the top 10 largest ETFs in Australia despite having only launched in mid-2012.
Dividend ETFs also continued their strong run and there were also signs that investors are reconsidering their home bias to Australian equities with international products getting solid flows over the quarter, or up with $350 million inflows over the quarter plus rising markets, it was a good quarter for the ETF industry.
St Anne: Alex, thanks so much for your insights today.
Prineas: Thank you.
/video/transcript/2297 mailto: ?subject=ETF quarterly wrap-up&body=http://www.morningstar.com.au/video/story/2297 VIDEO l ETF quarterly wrap-up
18/02/2013 This quarter's wrap-up takes a look at the top performers and the popularity of ETFs over managed funds VIDEO l ETF quarterly wrap-up Christine St Anne 18/02/2013 http://video.morningstar.com/aus/video/130207_etf_audio.mp4
Christine St Anne: The Exchange Traded Fund or the ETF market certainly had a number of changes last year. Today, I am joined by Morningstar's Tim Murphy to give us the latest insights into the ETF wrap-up for 2012. Tim, welcome.
Tim Murphy: Hi, Christine.
St. Anne: Tim, so who were the top performers for the last quarter of 2012?
Murphy: So last quarter was a – very much a risk gone quarter. Lots of equity markets fared quite well around the world and that was certainly reflected in the types of ETFs and their performance that it was achieved in the fourth quarter. So topping the pops was the iShares' China ETF and then you saw a range of other new, mostly equity-related ETFs topping the charts behind that as equity markets were right around the world rallied quite strongly.
St. Anne: What about the laggers?
Murphy: So the bottom of the list was you know a couple of the commodity ones seem to have stood out in particular. You know things like natural gas where there has been a big over supply, come on board in the US. It really took a breather in the last quarter, it's fair to say.
St. Anne: Tim, last year we had a number of fixed-income and commodity ETF products coming into the market. How did they go with investor support?
Murphy: So you know, varying levels of support. None of those new ETFs took huge amounts of assets. I think one of the fixed interest ETFs got up just up by the $50 million, but in the rest, somewhere beneath that. So we haven't seen huge investor take-up just yet. But that's also partly a cyclical as well, given there wasn't a lot of new assets flowing into many e-products of any description last year, whether there were ETFs funds are into the market. So, I think you certainly saw a lot of new products being launched last year which will lay the ground work for all sorts of future development, future demand in coming years.
St. Anne: How are the ETF market compared with managed funds?
Murphy: In terms of flows, ETFs did pretty well. So, total asset levels sort of increased about 25 per cent year-on-year. Now a good chunk of that was market movement in relation to particularly the second half of the year, equity markets in particular taking off and certainly at this stage, most of the larger ETFs in Australia are equity related. So that factored in. But you did see some nice inflows too into a handful of some of the specific equity ETFs, and then Alpha was a combination of the newer ones particularly in fixed interest as you mentioned before.
St. Anne: Tim, so does this mean that you see more investors focus on ETFs rather than managed funds?
Murphy: Well, you are not going to see a wholesale shift but certainly at the margin, you are seeing that. And that comes back to the cost factor, you know, FOFA (future of financial advice) comes informally on 1 July this year. This trend towards lower cost investing is a structural change. It's not going to go away. So in most cases, at the margin that's going to favor lower cost ETFs at the expense of higher cost managed funds. At the same time you are seeing more managed fund products come to market that are lower cost and are addressing that. So certainly those are the structural change taking place is a benefit of ETFs and should be a tailwind to it rolling forward. But you are not going to see a wholesale – everything out of managed funds into ETFs, no, at this point.
St. Anne: Tim, thanks so much for your insights today.
Murphy: Thanks Christine.
20/11/2012 Russell Investments has found new value opportunities in the Australian market after rebalancing its value ETF. Finding value in the market Christine St Anne 20/11/2012 http://video.morningstar.com/aus/video/121116_value_audio.mp4 Christine St Anne: Russell Investments recently reweighted the stocks in its Australian value ETF or exchange traded fund. Today, I am joined by Russell's Scott Bennett to give us an insight into what value he's finding in the Australian market. Scott, welcome.
Scott Bennett: Thanks, Christine, great to be here.
St Anne: Scott, so what sort of sectors are you finding value?
Bennett: I guess the main kind of theme for the value ETF at the moment following last weight balance is really; one, it kind of gained more cyclical exposures. So, kind of the key sectors that were overweight include things like metals and mining is a part of the market we're seeing very attractive opportunities at the moment, and largely in the major miners there, so looking at things like BHP and Rio Tinto. In terms of that metals and mining sector, it's generally underperformed the market by about 20 per cent for the past year. So, we think that without kind of discount to the market, it's looking relatively good value at the moment; attractive opportunity.
Outside of that, we're also seeing some good opportunities in – as I say, the other cyclical areas such as media. So, Seven West Media is something we've brought into the portfolio or into the index back in 30th of September, and we think that that – the fundamentals on that Company look solid and they came out with a very good announcement earlier this week as well. Looking outside of that, other firms such as Incitec Pivot at the current valuation is looking very attractive as well. So, they're the kind of main cyclical themes that are driving the portfolio at the moment.
Outside of that, we also have an allocation to banks as well. Banks aren't looking overwhelmingly attractive from a valuation point of view, but relative to the more defensive parts of the market, they are looking relatively cheap. So, seeing good opportunities in the banks, and especially in this part of the interest rate cutting cycle, banks generally do perform very well.
St Anne: Scott, you mentioned the mining sector, but with the mining boom cooling, is that really of concern?
Bennett: Yeah, that's been a theme around for probably the last 18 months or so, and we've actually seen that kind of being reflected in the prices of a lot of these companies. We saw kind of obviously the slowing of Chinese growth issue. In 2013, we expect kind of China's growth to be back above 8 per cent and we expect – we think that most of the discounting of that, softening in the commodity cycle is actually more than factored into the prices at the moment. So, we think that the market is kind of over-discounted during that times, softening in the commodity cycle.
St Anne: Scott, in your report you're also underweight in the defensive sector. What are the key reasons behind that?
Bennett: Yeah, I mean largely it's due to valuations. So, if you look at kind of the key defensive sectors in the market, so if you look at healthcare, telecommunications and REITs are traditional defensive sectors. So, for the telecommunications, so effectively Telstra and the healthcare sector, the returns to those sectors have been over 40 per cent over the past year and the market is up roundabout 10 per cent. So, they've actually outperformed by 30 per cent. And for the REIT sector, they're up roundabout 30 per cent over the past year.
So, without effectively those premiums baked into that pricing, we think it's probably a little bit too much, and we think the investors are paying too much for a premium for certainty, and when kind of market sentiment shifts, you'll actually see those sectors to be the first sold as people look to kind of put more risk on into their portfolios.
So, purely from a valuation perspective, those companies are very good companies, and they do charge you a premium for a very good reason. But we just think that there are much more compelling opportunities in the market at the moment.
St Anne: Scott, and finally, can you give us an insight into what sort of processes you use when rebalancing this ETF?
Bennett: Yeah. So, with the ETF, it's focused on large-cap companies in Australia, and what we effectively do is we look at really two factors. So, we look at a valuation factor. So, we look to kind of measure how cheap a company is and we do that relative to other companies within the large-cap space as well. So, we're trying to find those that are trading on the cheapest multiples relative to others.
And then we also have almost a contrarian factor or anti-popularity factor. So what we look at is we look at expected growth rates for particular companies and we actually look to favor those companies almost with the lower growth rates. So, we're looking for those companies that are not very loved by generally the broking community. So, the types of stocks that we're really looking for are what we call contrarian stocks.
So, these are the things that are very unloved by the market. They've been sold down heavily, and people don't expect them to do much. What we generally find is that those stocks generally outperform in the market over time, but they're traditionally not the stocks that you'll hear about at the barbecue on Sunday, or the taxi driver braking on the way to the airport.
St Anne: Scott, thanks so much for your insights today.
Bennett: Thank you.
/video/transcript/2255 mailto: ?subject=Finding value in the market&body=http://www.morningstar.com.au/video/story/2255 ETF monthly wrap-up
30/10/2012 This month's wrap-up takes a closer look at the new ETF product offered by UBS. ETF monthly wrap-up Christine St Anne 30/10/2012 http://video.morningstar.com/aus/video/121030_etfs_audio.mp4
Christine St Anne: In this month's exchange traded fund or ETF wrap up. I'm joined by Alex Prineas, who talks to us about how the products have performed and the new product from UBS.
Alex welcome.
Alex Prineas: Thanks, Christine.
St Anne: Alex, so, what were the best performing ETFs in the month of September?
Prineas: The best performing ETFs were mostly commodity related. So, we saw an announcement of policy from the US Federal Reserve. It's been dubbed QE-Infinity. It's basically a commitment to continue the policy of quantitative easing indefinitely.
So, that has all sorts of repercussions some of which have do with possibly debasing the US dollar and so precious metal ETFs were popular in September. So, we saw things like ETFS Physical Silver was up more than 12 per cent and we also saw strong runs from the ETFS Physical Platinum and BetaShares gold bullion.
There were also some industrial and energy products that also did well. So, ETFS Natural Gas and ETFS Industrial Commodities ETF were both up more than 10 per cent each. The only non-commodity related ETF that performed strongly although it was in the top 10 over the month was iShares MSCI Hong Kong product, but we know that the Hong Kong dollar is pegged to the US dollar. So, when you get an announcement quantitative easing, you can't say a liquidity injection into Hong Kong, so that may have been related.
St Anne: The not so good performers?
Prineas: Well, funnily enough, the worst performing ETFs were also commodity related products and I think that highlights in the short run, the commodity complex doesn't necessarily move in unison, but the worst performing products were more agricultural or oil related. So, we saw ETFS Agriculture and BetaShares Crude Oil both down around 5 per cent. Oil prices were limited during the month by an oil production pledge from Saudi Arabia and then it wasn't surprising to see some weakness in agricultural commodity prices. They had a very strong run in the previous few months on the back of the U.S. drought.
I guess commodity prices can be volatile and they can also be un-correlated to other asset classes they can be affected by things like crop yields, the weather, political decisions. So we often see commodity related ETFs at the top or bottom of performance tables in the short run and this month they dominated both the top and the bottom of the tables.
St Anne: Alex, UBS has recently launched a new ETF product. Can you give us an insight into this product and how it differs from the existing ETFs out there in the market?
Prineas: Yeah, the UBS product is an interesting one and it's based on buy ratings from UBS's fundamental equity research team. They have some quality filters overlaid, so you end up with a 40 stock portfolio. But ultimately I guess you could say it is a rules based ETF, but those rules are based on an underlying group of equity investors looking for attractive stocks.
So, UBS can't market it as an active ETF, because the regulation in Australia doesn't allow that. But essentially it is an ETF with an active stock selection component to it or a listed fund, I guess you could call it. The pricing also suggests that that's where it's pitched with a fee of 0.7 per cent. Looks quite expensive if you compare it to passive or index based ETFs. But if you compare it to an actively managed fund, say your average Australian shares, unit trust or super fund, the pricing looks more competitive. So, UBS's product is an interesting development. It's an example of the lines being blurred between ETFs and actively managed unit trusts or funds.
St Anne: Alex, thanks so much for your insights today.
Prineas: Thanks Christine./video/transcript/2248 mailto: ?subject=ETF monthly wrap-up&body=http://www.morningstar.com.au/video/story/2248 A customised approach to ETFs
26/10/2012 UBS has offered investors a new ETF that is different to the existing passive offerings of its peers. A customised approach to ETFs Christine St Anne 26/10/2012 http://video.morningstar.com/aus/video/121024_ben_etfs_audio.mp4
Christine St Anne: UBS recently launched in Australian equities exchange-traded fund, or ETF, to the Australian market. To give us an insight into how this ETF works, I'm joined by Ben Heap. Ben welcome.
Ben Heap: Thanks, Christine.
St Anne: Ben, UBS has been offering ETFs globally since 2001, why have you decided to offer ETF now into the Australian market?
Heap: This is a market that's one of the larger investment markets in the world and it's a market where UBS has been committed for a long time. With respect to asset management, we've seen the success with our ETF offshore and we've seen the steady growth of the market here, and so we think that growth will continue. We think that's one of the things investors are looking for and our mantra is always to give investors products that meet their needs.
St Anne: There are a number of established ETF providers already in Australia. Ben, how is UBS going to distinguish itself from those other providers?
Heap: It's a very good question. I think a number of competitors, as you rightly say, have been here for a while and offering traditional passive ETF products. We had sought to do something a little bit different. We've sought to develop a product in our initial ETF, which offers a solution for investors which is a little bit better than might be available through a traditional passive ETF.
And in doing that what we've done is taken traditional market cap-weighted index and instead developed an index which takes account of quality of underlying stocks. In other words, do I hold all the stocks ASX 200, if instead you can hold a subgroup of those stocks which are likely to be better performing.
St Anne: Ben, can you tell us a little bit about the UBS preferred research index, which is what your ETF tracks?
Heap: Sure. That's right. So that is an index that the UBS Investment Bank has created and we are managing against. That index, instead of simply holding stocks in accordance with market capitalization, uses a series of filters to identify what we hope and expect will be a better performing subgroup of the overall index.
Now those filters are in part quality based, so very simply the buy recommendations that come out number one rated investment bank research type, traditionally that research has only been available to institutions, so this makes that research available to retail SMSF (self-managed superannuation fund) investors and in a series of quantitative filters as well.
So rather than simply holding in accordance with market capitalization, we use what's called a modified market capitalization. So that allows us to hold some smaller stocks that we think will be significant outperformance in a higher percentage and it means we're not obligated to simply hold the banks and the resource companies in large part.
St Anne: So what sort of companies are in that index?
Heap: It is still all stocks from ASX 200, so it's by definition large Australian well-known brand name stocks. We will always hold at least one bank. We will likely always hold stocks from the resources sector and then we'll hold industrial stocks as well. But instead of simply holding 50 per cent of our overall index in the top 10 stocks, which is roughly their percentage of market capitalization, we're able to hold a broader group of those stocks. So it will be traditional brand names and every day you can go to the UBS website and see exactly what stocks were in the index.
St Anne: Ben, you mentioned that index is more customized and uses filters. Does this mean your ETF is a bit more active than some of the other passive ETFs out there?
Heap: Yeah, I think that's a good question. We, obviously, also have actively managed funds, which are based on the fundamental research from our teams all around the world and this ETF is not designed to replace those actively managed funds at all. That is a solution that meets a lot of our investors' needs.
For some investors a pure passive solution at a very low cost is what meets their need. For institutional investors to look at something in between and that is a cost-effective solution, which is based on an index so it provides broad exposure to the Australian equities market, but with a better return than you would otherwise be able to earn from simply investing in the index itself.
St Anne: How is that research shaped with your ETF product team, are there any processes in place?
Heap: Yeah, absolutely and there's very clear Chinese roles around these types of things in practice, the investment bank has constructed an index and that index is made available every day through our website and on that index, you can see exactly what stocks make up the index. We are in managing to that index.
So investors have absolute transparency, which is one of the strong advantages of ETFs. They know they are, through this ETF, holding the underlying stocks. It's what's called a physical replication ETF, which is a very important principle and they're able to take advantage of that expertise and invest in those preferred stocks in a way that we think is very cost-effective versus the alternatives in the market.
St Anne: Ben, a lot of our investors love their dividends. Does your ETF give investors these dividends?
Heap: Absolutely. So this ETF will pay semi-annual dividend based on the dividends that come from the underlying companies and therefore, the sort of dividend return will be very similar to the overall market return in terms of income. However, Christine, this is a space we certainly see appetite from investors and one of the things we are looking at going forward is developing a dividend or income skewed version of our ETF as well and that's something we'd like to offer to investors in the near future.
04/10/2012 In the latest Morningstar ETF monthly report, we look at the popularity of high-dividend ETFs. ETF monthly wrap-up Christine St Anne 04/10/2012 http://video.morningstar.com/aus/video/121004_etf_wrap_audio.mp4
Christine St Anne: Today I'm joined by Morningstar's Alex Prineas to give us the latest update on the ETF or Exchange Traded Fund industry.
Alex, welcome.
Alex Prineas: Thank you.
St Anne: Alex, so what were the best performing ETFs for August?
Prineas: Sure, the best performing exchange traded products were mostly specialized commodity products in August. So, you had things like ETFS, Brent, crude oil, that was up more than 12% on the back of political tensions in the Middle East and a hurricane in the U.S. You also had ETFS Physical Silver, that was up more than 10%. In fact the precious metals products did quite well over the months of the top five performers. Three of them were precious metals related, so you had the Silver ETF that I just mentioned and then ETFS Platinum and Palladium products were also up more than 7% each.
August highlighted that commodities don't always move in unison especially in the short-term. A lot of the worst-performing ETFs were commodity related, but more so focused on industrial commodities. In any given month you'll often see commodity ETFs at the top or bottom of the performance tables because of their volatility. So that makes them quite popular with traders, but we tend to focus – well, Morningstar focuses its research more so on the diversified broad-based ETFs that are more likely to form the building blocks in an investors' portfolio. So, things like State Street's ASX 200 ETF, which is a diversified portfolio of Australian shares or Vanguard's world ex-U.S. ETF.
St Anne: Alex, high dividend ETFs did quite well? Was that a reflection of investors demand for yield?
Prineas: Yeah, high dividend ETFs did deliver solid returns in August. Most of them were up 2% or more after more than 5% rise in the month of July. They have flattened out in September though, but what you've got to remember with high dividend ETFs is, the name doesn't tell you everything.
So if you take, for example, the iShares high dividend ETF, that was actually much flatter over those three months of July, August and September. The iShares product has a bit more of mid-cap flavor to it. So the large cap high-yield stocks have actually been sort after recently because of investors want to put their money somewhere. They want to get a decent yield, but they're also concerned about the safety of that dividend.
So it's been the large-caps that have done well whereas the mid-caps, which are more volatile have been a little more stagnant. So, you've seen that differentiation between the different type of high dividend ETFs.
St Anne: ETFs have continued to grow. They grew 4% in July and then another 2% in August. Alex is this because of new product launches or investor demand?
Prineas: Yeah. We have seen a proliferation of exchange traded products this year. The volume of ETF assets is more often than not is driven by market movements rather than investors actually rushing into the ETF market.
However, if you look over multiple months, the new products have made an impact. It's not across the board, some of the new ETF products are still tiny, but some of them have been quite successful. So, if you look at say the BetaShares high interest cash ETF, that was I think launched in March 2012, but by the end of September, it already gathered $60 million in assets. So, still small, but it's growing at quite a quick rate.
St Anne: Alex, finally in 2012, we've seen 22 new products come into the market, do you expect more ETFs to come for the remaining year?
Prineas: Yeah. The number of launches has slowed down a bit in the last month or so and fixed income was a major gap in the ETF market earlier this year, but then when the ASX allowed fixed income ETFs, all the major providers wanted to be in that space. So, you saw a lot of launches from iShares, Vanguard, Russell, State Street and you also saw that BetaShares cash ETF that I mentioned before.
We also saw 10 new commodity exchange traded products from ETFS, so that added to the numbers. I wouldn't expect as many ETFs or exchange traded products going into the closing period of 2012. So we just aren't seeing the demand from investors and advisors. But even if there are a lot of launches, I don't think there is any reason for investors to rush in.
St Anne: Alex, thanks so much for your insights today.
Prineas: Thank you, Christine./video/transcript/2235 mailto: ?subject=ETF monthly wrap-up&body=http://www.morningstar.com.au/video/story/2235 ETF monthly wrap-up
30/07/2012 This month we look at the newest listed vehicle, a BEAR product that aims to outperform in down markets. ETF monthly wrap-up Christine St Anne 30/07/2012 http://video.morningstar.com/aus/video/120726_ETFWrap_audio.mp4
Christine St. Anne: It's that time of the month again, the ETF or Exchange Traded Fund monthly wrap up. Today, I'm joined by Morningstar's Tim Murphy to give us the latest update to the market.
Tim, welcome.
Tim Murphy: Thanks, Christine.
St. Anne: Tim, the usual question; what were the good performing ETFs and the not so good performers?
Murphy: Sure. So, June was an interesting month, and certainly like most of the other months, it's those commodity ETFs dominating the top and both the bottom of the list. Dominant in the top was agricultural commodities in this sector. So, the BetaShares agricultural basket was the top performing ETF for the whole month. But alongside that in the early June, we saw ETF Securities launch a range of different commodity including soft commodity ETFs, and while they didn't perform for the whole month, since they weren't listed for that time they certainly offer a very strong start.
On the flipside of that, you saw weakness in precious metals. So, some of the ETF Securities are in the palladium, platinum, these sorts of things were at the bottom of the pile, and more domestically focused sectors. You saw some of the results of mining sector ETFs also show weakness during the June month.
St. Anne: Tim, BetaShares also launched a BEAR ETF. Can you give us a little insight into this new product?
Murphy: Sure. So, like the name, like the expression in the 'bear market', the BEAR ETF tries to profit from bear markets. So, it's promising to deliver inverse exposure of the broad market. So, while it's not perfectly going to track it from day-to-day, through time what you'd expect is if the market goes down, the BEAR product will make money, and I should highlight that the BEAR isn't strictly speaking an ETF.
But equally too, if the market goes up then that product will lose money. So, it's really trying to provide a tool for people who want to take a short-term view on the market may be going down, and that's one way to profit through an ASX listed security.
St. Anne: Tim, you mentioned that it wasn't a strictly an ETF. So, what exactly is the structure of this product?
Murphy: It's a listed fund. So, because it doesn't it purely track an index, the way they manage the inverse exposure, it can vary between sort of 90% and 110% of the actual index through time. And so because of that, it's not strictly speaking an ETF, but what you should expect through a cycle is it to broadly deliver the opposite performance of the market.
St. Anne: So Tim, is this product more of a short-term trading tool?
Murphy: Well, I guess it all depends on your outlook and your timeframe. So, most of us would think that over the long-term, markets tend to trend upwards, in which case, this product - the BEAR product, wouldn't be a particularly good long-term investment and so that's certainly I think going to make it more of a short-term tool. If you want to take a shorter-position with a view that the market may go down, then this is one way of being able to do that.
St. Anne: Tim, finally, global provider Van Eck entered the Australian market. Does this mean more product innovation in the ETF market?
Murphy: Yeah, it will be an interesting one. Time will tell. Certainly, Aii, they took over - hasn't been a strong player in the Australian ETF space. Their ETFs have been quite small, very limited assets. Van Eck is one of the larger players, particularly in the U.S. with their Market Vectors ETFs. So, it's going to be quite interesting to see how their Australian ETF products strategy develops.
We don't have any clear indications on what that may look like at this point, but I'll certainly watch this space, because most of the global providers are certainly looking at Australia as a big opportunity and somewhere where they can bring new more innovative products to market over time.
St. Anne: Tim, thanks again for your time.
Murphy: Thanks Christine./video/transcript/2181 mailto: ?subject=ETF monthly wrap-up&body=http://www.morningstar.com.au/video/story/2181 ETF monthly wrap-up
11/07/2012 In the latest Morningstar ETF monthly report, we take a closer look at the recently launched exchange-traded commodities. ETF monthly wrap-up Christine St Anne 11/07/2012 http://video.morningstar.com/aus/video/120706_ETFwrap_audio.mp4
Christine St Anne: A number of new products have come into the ETF market. To make sense of these products and what they mean for an investors' portfolio, I am joined by Morningstar's Tim Murphy. Tim welcome.
Tim Murphy: Thanks Christine.
St Anne: Tim, so ETF securities have launched a number of ETCs or Exchange Traded Commodities, can you give us an idea about what these products are?
Murphy: Sure, so there is lot more tools now available to construct commodity based portfolios for investors in Australia. ETF securities launched a range of commodity ETFs as you said across both soft commodities and metals. So things like natural gas, copper, corn, wheat, as well as baskets of combinations of all of those as well. So there certainly are lot more options now available to invest in a range of commodities, both metal based and soft commodity.
St Anne: How do these ETCs differ from ETFs or Exchange Traded Funds?
Murphy: So what you'll find is in most cases, most ETFs will be physically backed and by that I mean the ETF will hold the underlying securities that make up that index. With many commodities, in particular soft commodities, if you think about it, it's not practical to physically hold the underlying asset.
So when you buy the corn ETC, there isn't a warehouse full of corn backing that, but rather these things tend to be based on futures curves or in the case of ETF securities, a differed purchase agreement, which is a derivative type agreement that introduces a different set of risks to deliver that exposure. So, rather than having the physical underlying asset you introduce derivative credit exposure risk to the counter party to that transaction.
St Anne: Tim, the derivatives element behind the ETCs - does this mean risk for investors?
Murphy: It just means a different risk that you need to be aware of. So when your derivatives aren't necessarily bad, but if you want to get say corn exposure that's the most efficient way of getting it. Because physically holding corn; the storage costs, the chance of it going off past its used by date, that sort of thing doesn't make it practical, if that's the financial exposure you want to achieve. So using a derivative based product to get that exposure is the most efficient way of doing it. It's just a different set of risks that you need to be aware of and understand before making such an investment.
St Anne: Finally Tim, how do these ETCs fit in an investment portfolio?
Murphy: Most of these should only be niche players in a portfolio. Some of these exposures are very particular and very specific and also potentially very volatile. So things like any of these individual commodity ETFs, if they're used at all, should only form or a very small part of an investor's broader portfolio, which is diversified across a number of areas.
St Anne: Tim, thanks so much for your insights again.
Murphy: Thanks, Christine./video/transcript/2167 mailto: ?subject=ETF monthly wrap-up&body=http://www.morningstar.com.au/video/story/2167 Top-yielding stocks unveiled
24/04/2012 Russell Investments recently made changes to its high-dividend ETF pushing a number of new companies into the index's top 10 holdings. Top-yielding stocks unveiled Christine St Anne 24/04/2012 http://video.morningstar.com/aus/video/120424_yield_stocks_audio.mp4
Christine St. Anne: Russell Investments recently made changes to its high dividend ETF. Today, I'm joined by Scott Bennett to talk to us about who are the companies that are giving you, the investors the high dividends. Scott, welcome.
Scott Bennett: Hi Christine.
St. Anne: Scott, besides the major banks, who are the companies in your top 10 holdings?
Bennett: Yeah. We've got a really diverse set of holdings in the top 10 for our high dividend index especially. So when we look through the major holdings, in that we have allocations to things such as telecommunication, obviously through Telstra, which is a very high yielding stock. We also have allocations to areas such as media as well, so Seven West Media is a company that has come up and shown fairly good yield over the past 12 months and we expect that to continue, obviously. Then outside of that we've got exposures in gaming, through companies such as Tatts, and then also more the consumer staples through Wesfarmers and also Woolworths, which have very sustainable - what we think a very sustainable dividend yields. On top of that we also ensure that we do have exposure in the resource sector as well, and that exposure is primarily through BHP, which has a very strong history of paying growing dividend.
St. Anne: Scott, on the point of BHP, a number of investors have been a little bit cranky about the company not giving them the dividends they deserve. So where are they among your top holdings?
Bennett: Yeah. I mean that's quite interesting. I mean BHP generally, the yield on BHP stocks are round about 3% per annum, and that's before including for franking credits. So once you to include franking credits on top of that, you are looking at something around about a 4% yield, which is around about 2% below market, so not the best yielding stock. The reason for that is, I mean, BHP, while it's not necessarily a fantastic growth company, it is very capital intensive in terms of them seeking out acquisitions and the like. But what we've seen with BHP, and what might not actually show up on dividend yield. So they have actually been fairly good in terms of managing their capital structure.
Last year, we saw around a significant result of that being, their $2 billion buyback, which many investors were able to participate in and that resulted in substantial amount of yield pickup and income for investors, where that $2 billion effectively treated as a special dividend. BHP, while the yield might not look that attractive in terms of its dividend policy, we think it's been fairly conservative, but definitely progressive in terms of the way it manages dividends over time.
St. Anne: Scott, can you give us a little idea about the processes you have in identifying the sustainable dividends?
Bennett: In terms of the process of using for RDV, what we really want to focus on is not so much what the companies have paid out in the past, but what they are likely to pay out over the next three years. So the reason for that is that dividends, like earnings can be highly sporadic. Those companies are actually likely to pay dividends next year, and for several years after that. So that when we buy a stock, we have a very high likelihood, that it will actually pay dividends over the next three years. So that's where we put the greatest emphasis on the stocks that we are looking at. We obviously do make sure that those companies that we are holding have had a history of paying out a dividend over their history. So we look out over the last five years and look at what their dividend payments have been like over those five years.
The other criteria that we look at, this relates back to the BHP stories, it's really important for investors that their dividends are growing through time. So, if you just save the same amount of dividend each year, over a 10 period, inflation would have eaten away around about a third of the value of that dividend. So you need your dividends to be constantly growing to maintain the purchasing power. So, we explicitly look for dividend growth, and make sure that the companies we are buying have the history of increasing their dividend over time.
Then the final measure we look at is earnings variability. So we want to make sure that the companies that we are investing in are sound, and then they're not highly cyclical.
St. Anne: Investors love the banks when it comes to income stocks. What about the importance of diversification?
Bennett: In the Australian market, we think it's very important to think about diversifying, especially when you are looking at income investing. Because while income investing should be relatively safe way to invest, there are traps obviously associated with very high yield stocks; and while we have confidence in the ability of banks to meet their dividend payments, we think there are lot of a opportunities that investors could forego by just limiting themselves to the banks, and we think there is some very good solid defensive opportunities out there for investors.
ETF include things like SP AusNet, which is an electricity supplier in Victoria. Very stable growing dividend and on a yield of around about 10% fully franked, we think that that offers obviously an attractive opportunity to investors outside of what they might hold within the banks; and we think that level of diversification is important, just so that you're not overwhelmingly reliant on one source of income.
St. Anne: Scott, banks are also facing a lot of pressures at the moment, so do you think that they are able to sustain the relatively high dividends?
Bennett: Yeah. We think from a capital perspective and from a balance sheet perspective there is not that much pressure to the banks being able to sustain their dividend payouts, and also kind of increase their dividend payouts. What we've seen is the banks have been fairly resilient through time, in terms of supporting their dividend, even though their earnings may have been at risk through some period.
So just as a general policy, the banks don't like to reduce their dividends as a whole. So we think structurally, there isn't really much of a threat to the bank dividend. However, we do kind of realize that from an earnings perspective, the banks can be somewhat at risk. But we think that that risk isn't enough to erode their ability to pay dividends.
St. Anne: Scott, thanks so much for your insights today.
Bennett: Great, thanks Christine.
10/04/2012 How the new fixed-income ETFs fit in your portfolio and how they compare with term deposits. Putting the income in your portfolio Christine St Anne 10/04/2012 http://video.morningstar.com/aus/video/120305_fixedint_etfs_audio.mp4
Christine St Anne: A number of fixed income ETFs have already hit the market. Today I'm joined by iShares' Tom Keenan, and financial advisor, Russell Medcraft, who'll both give us an idea about these products and how to use them in a portfolio.
Gentlemen, welcome.
Russell Medcraft: Thank you.
St Anne: Tom, can you give us a rundown about the types of fixed income ETFs you've just launched?
Tom Keenan: Yes, we've launched three. iShares have launched three new fixed income exchange traded funds on to the ASX. There's three ETFs, and all track benchmarks of high quality bonds. By high quality bonds, we're meaning AAA rated Commonwealth of Australia Government Bonds, semi-government bonds, which are essentially state government bonds, and investment grade corporate bonds, so high quality corporate bonds.
St Anne: And with the yield generated from these products, how is that redistributed back to investors?
Keenan: So just like our equity ETFs, our domestic equity ETFs, the fixed income ETFs will pay a quarterly distribution, and that's the way the income is paid out to investors.
St Anne: So, what sort of benchmarks do they track?
Keenan: So as I said, there are three benchmarks associated with the three ETFs that we've launched. The first one to talk about is the UBS Treasury Index, so that is an ETF that is giving an investor pure exposure to AAA rated Commonwealth Government of Australia debt. Remember Australia is only one of a dozen countries left with a AAA credit rating, so the Australian government is viewed as one of highest quality lenders in the marketplace.
We also have an ETF tracking the UBS Government Inflation Linked Bond Index and this is state and Commonwealth Government Inflation Linked bonds, and inflation linked bonds provide investors with a very pure hedge against inflation or a very pure way to protect a portfolio against the long-term corrosive impact that inflation can have on purchasing power over the longer term.
And then there's is the UBS Composite Bond Index, now this is the broadest measure of fixed income in Australia and it's because it includes roughly a third Commonwealth Government debt, roughly a third semi-government debt, which essentially is state government debt, and roughly a third high credit quality corporate bonds. So, it's a much broader measure of the Australian bond market, has a slightly higher yield due to that corporate component and certainly one of the - certainly is the most widely used benchmark by the industry when measuring the performance of the Australian bond market.
St Anne: Russell, as a financial advisor, how do you use these fixed income ETFs in a portfolio?
Medcraft: Well, we develop model portfolios with predominantly these ETFs, term deposits and a bit of cash. We've been using hybrids for the last couple of years quite actively to give us that bit of extra spread, if you like, in a portfolio. But since these have come on to the marketplace, we've now altered our asset allocation, moving out of hybrids into these types of ETFs.
We've been waiting for a while for these to come on to the market, and for a retiree or a person with a self-managed superfund looking at a good income stream, this combined with a good spread of ASX200 or whatever is, I think, an ideal way to get for a lot of retirees; low cost, transparent, and you can pretty much trade these things in and out very, very frequently. But predominantly our clients are retirees that are looking for a high degree of security, so I feel that these give them that high degree of security, but also low cost and the ability to be able to get in and out of the market. So, we don't have those disasters like frozen funds that we had a few years ago.
St Anne: Tom had mentioned the different benchmarks tracked. Can investors use all these ETFs?
Medcraft: A combination of the ETFs and it really all comes back to the client profile; what asset allocation you put together in a model for a client. But I would recommend that you could probably use all of them or a combination of them.
St Anne: Russell, can you just drill down and give us a little bit more of an idea about how this portfolio is allocated?
Medcraft: Good question. A lot of investors over the last number of years have taken up these hybrids vigorously, and we've experience the over-subscription even over the last three to four, five months. We've found that traditionally they have been substituting fixed interest for hybrids, because they're wanting this extra yield. So, that's what they want. They needed a greater performance in their portfolio, but they're really unaware - they get their higher yield, but they are unaware of the security issues and the risks that they are running and this is what's coming through now. People we find are now substituting - not totally replacing, but substituting some of their hybrid exposure to these sorts of ETFs, these sort of assets to really protect their portfolio against possible downturns and giving them higher - they don't want the volatility, they want the security. So, these are an ideal solution for that.
St Anne: Term deposits continue to attract investor interest, Russell. So, can these fixed income ETFs be used in conjunction with term deposits?
Medcraft: Yeah, we're already finding now that we're - as their term deposits are maturing, we're contacting our clients to have a greater allocation of this sort of asset. We find that they're giving it a little bit extra yield, but also a greater degree of spread because retirees and investors these days really want a great deal of spread across the asset class and across manager and so on. So, I think this part of the market is going to really be a dominant player in the next three to five years to protect against the - as Tom said, the asset allocation in equities, it's like an direct inverse relationship to the equities market, and that's what we're very excited about.
St Anne: Gentlemen, thank you both for your time.
Medcraft: You're welcome.
Keenan: Thank you.
/video/transcript/2108 mailto: ?subject=Putting the income in your portfolio&body=http://www.morningstar.com.au/video/story/2108 ETF monthly wrap-up
27/03/2012 In the latest Morningstar ETF monthly report we take a closer look at an actively-managed ETF. ETF monthly wrap-up Christine St Anne 27/03/2012 http://video.morningstar.com/aus/video/120327_etf_wrap_audio.mp4
Christine St Anne: In this month's ETF wrap-up, I'm joined by Morningstar's Tim Murphy, who shares his insights into the latest trends in the market including the actively managed ETF.
Tim, welcome.
Tim Murphy: Thanks, Christine.
St Anne: Tim, firstly, can you give us an idea about who are the winners and laggards from last month?
Murphy: So, it was a big risk-on trade month in February, and so that meant some of the commodity ETFs topped the pile, specifically Silver in the BetaShares Oil ETF were at the top of the pops. With that risk-on trade, one of the common risk-on elements is the Aussie dollar, and so the flipside of that meant some of the worst ETFs during the month were some of the foreign currency exposures again, with a couple of BetaShares, currency, British pound, U.S. dollar, this sort of thing lagged and dropped during the month.
St Anne: In this month's report, Tim, you take a closer look at an actively managed ETF, can you give us an idea behind this product?
Murphy: Sure. So, there is currently no active ETFs in Australia. All the ETFs are purely passive, but there is a lot of interesting developments going on offshore in this space. Now there has been a few active ETFs in the last couple of years coming about in the U.S., but nothing has really gained a lot of traction to-date. However, on the 1st of March, PIMCO launched an ETF version of the world's largest mutual fund, the PIMCO Total Return Fund, which is a fixed interest fund run by Bill Gross, has well over $200 billion in assets in it. And so now there is an ETF version of the world's biggest fund, it's really going to be a litmus test for where active management can work in the ETF structure.
Of course, one of the things with ETFs is the increased transparency, so publishing daily what the portfolio managers are up to, and certainly most active managers out there complain about having to provide that level of transparency to the market and fear about being front run, and there's certainly some asset classes, something - particularly like small caps, where that would be a valid concern. However, this - the world's largest mutual fund now available as an ETF is really going to be the litmus test for whether active management can play a role and can work inside the ETF structure.
St Anne: You mentioned that this product is not available in Australia, but do you expect it to be eventually offered to our investors?
Murphy: I think, at some point in the future, you're likely to see that, as the whole world is watching how this PIMCO ETF is going to track over the next year or so. It's going to be very interesting and really is going to help people make a firm decision about whether active management can or will work inside that. Because certainly then, if the world's largest fund run by probably one of the world's best known investors in Bill Gross can get away and run an ETF successfully while telling the world what he is doing on a daily basis, then it kind of dispels most fund manager concerns about being front run out there, if the world's biggest fund manager and most followed fixed interest manager certainly can get away and do it successfully.
St Anne: Is the actively managed ETF quite similar to a listed investment company or a LIC?
Murphy: They share some similar traits, however, there are certainly some important differences and it comes back to the structure, so yes, like most listed investment companies are actively managed, so an actively managed ETF you might ask, what's the difference? The important differences are the open end versus closed end structure of those, so listed investment company is closed ended, and by that I mean, does an initial capital raising, and then there is a fixed number of units on issue into perpetuity unless they do a buyback or do another capital raising.
An ETF is open ended, so that means authorized participants can create and redeem shares on a daily basis to meet the demand or supply on either side of the buy-sell trade to keep the ETF closer to the NAV, and so that's the important implication of that open ended structure for ETFs, as they'll always trade in and around the NAV of the underlying constituents.
Whereas, anyone who has invested in LIC will know that over time given the closed end nature of it, that LIC can trade at either a premium or in some cases a significant discount to its underlying NAV, purely based on those mismatch of supply and demand dynamics in the market.
Certainly, at the moment, most of the LICs in Australia are trading at fairly steep discounts to their underlying NAV, which shows you there isn't a great demand buying for those at the moment. So, trading at 10%, 20% discounts in some cases to the underlying value, whereas, if that was an ETF structure, the market maker would quickly be able to bring that back to the close to the underlying NAV, by creating redeeming units to arbitrage that premium discount away.
St Anne: Tim, thanks so much for your insights today.
Murphy: Alright. Thanks, Christine.
16/03/2012 Morningstar co-head of research Tim Murphy looks at the new fixed-income ETFs in detail including the indexes behind these products. The ins and outs of fixed-income ETFs Christine St Anne 16/03/2012 http://video.morningstar.com/aus/video/120316_ETF_fixed_audio.mp4
Christine St Anne: Earlier this year, the ASX changed its operating rules to allow fixed income ETFs to list. Now, new products have finally entered the market. To give us an idea about what these fixed income ETFs mean, I am joined by Morningstar's Tim Murphy.
Tim, welcome.
Tim Murphy: Hi, Christine.
St Anne: Tim, so can you give us an idea about these new fixed income ETF products?
Murphy: Sure. So there's been lots of talk in the market about this for quite some time now, but you know, the ASX has had to change its rule. It's been a long drawn-out process, but finally got there at the start of this year, and so now you've just seen BetaShares come to market with a cash ETF and now Russell and iShares on the same day both launched fixed interest ETFs tracking a range of different domestic indices.
So, it's really adding an extra piece to the puzzle. We've had equities and commodities and property-based ETFs to-date, and now you've got the sort of fixed interest and cash options as well, which really fill out the multi-asset range of ETFs you can now trade on the ASX.
St Anne: Tim, you mentioned indexes, so do investors need to be mindful of the different indexes these ETFs track?
Murphy: Absolutely. Like any ETF investment, your investment is - you're party to whatever the underlying constituents of that index are, and so looking specifically at the fixed interest ETFs we've seen launched. There's a mix of treasury or government security-only. There is some corporate-only, and then there is some, what we might call aggregate or combination of those two.
So, for instance, for example, the well-used Australian Bond Index, the UBS Composite, iShares has an ETF tracking that index, which is a combination of government, semi-government, and corporate issuance.
Then on the other side of that, say like Russell has launched both government-only and corporate-only as well. So, you've got myriad different options that have been launched in a space of just this week.
St Anne: Tim, investors have traditionally had access to fixed income products via managed funds. How do fixed income ETFs differ from these managed funds?
Murphy: Yes, so structural differences of an ETF versus a managed fund are no different for fixed interest as they are to equities or any other asset class. So, the key difference has been the ETF is obviously listed, traded on the exchange as opposed to a managed fund, which has a buy and sell with the NAV struck once a day. So, you are open to the vagaries of the market, but then also those structure and tax benefits that are applicable to the ETF structure are equally applicable here as well, whereas the managed funds structure you are more attune to being, suffering or benefiting from the tax consequences of other investors in the pooled unit trust, ETF tends to be a cleaner tax structure for investors.
St Anne: Delving a little more into the structure, Tim, how are things like capital appreciation and income yield distributed in these ETFs to investors?
Murphy: Sure. So, as with ETFs and distributions, it's really just a pure function of the underlying constituents of that. So, the ETFs will typically - as coupons in the case of fixed interest ETFs are paid out, they will collect those and then periodically distribute those and typically you will find that quarterly pay those out straight through. And generally speaking, the yield on the ETF will match the, sort of, weighted average yield of the underlying portfolio.
That's slightly different to a managed fund distribution where the yield on the underlying constituents is one element of it, but certainly flows in and out of the managed fund. It can also have an effect, as can capital gains that are realized within the managed fund structure. So, distributions coming out of an ETF, the rest being equal will be a bit cleaner and bit closer to the underlying yield of the investments as opposed to the managed fund structure.
I should just add too that another advantage of the ETF thing that you can get, when you're looking at the yield is the transparency. So, often you look at a lot of fixed interest managed funds and you wouldn't have the faintest idea what they're actually investing in, whereas now with the transparency of the ETF you can see exactly what the underlying constituents of this - of each ETF are. So whether it's Commonwealth government securities, New South Wales Treasury Corp issues, Commonwealth Bank paper, whatever it is, actually being able to understand who the issuers are in your ETF is much more transparent than in most managed funds.
St Anne: So, how do these fixed income ETFs differ from other income yielding investments?
Murphy: Yes. So, at the current time, the obviously topical one out there is term deposits, whose rates continue to be quite elevated. So, the running yields on a lot of these ETFs at the moment aren't particularly standout relative to term deposits. That's just a function of where the market is at the moment. So, looking in on a pure yield basis, not necessarily relatively attractive versus term deposits, but that won't always be the case and equally too, fixed interest does play a different role to what pure cash does in the sense of the duration exposure that you get and insurance of your portfolio, if you like, that that provides during bad times is necessarily a cash alternative deposit holding, who doesn't provides two different sort of things there.
St Anne: Finally, Tim, what type of investors will these ETFs appeal to?
Murphy: Sure, so like any fixed interest investment, it's going to appeal to those that are most conservatively-minded, have more of a focus on some regular income generation and a high degree of capital preservation.
So, that's really we've being waiting for in the ETF space today. You've only had these growth asset classes, so the likes of equity and property to choose from. But now as with fixed interest ETFs now live up and running on the ASX, those with the real conservative investment mindset have the option within the ETF space of choosing between a range of fixed interest and cash conservative options now.
St Anne: Tim, thanks for your insights today.
Murphy: Thanks, Christine.
/video/transcript/2093 mailto: ?subject=The ins and outs of fixed-income ETFs&body=http://www.morningstar.com.au/video/story/2093 ETFs: What are my choices?
-- Country specific, sector specific and different blends of our ASX - what are our choices? ETFs: What are my choices? Julia Newbould -- http://video.morningstar.com/aus/video/ -- /video/transcript/1597 mailto: ?subject=ETFs: What are my choices?&body=http://www.morningstar.com.au/video/story/1597 The ABC of ETF investing
-- Morningstar's Tim Murphy explains ETFs and how they fit into a portfolio. The ABC of ETF investing Christine St Anne -- http://video.morningstar.com/aus/video/ -- /video/transcript/1707 mailto: ?subject=The ABC of ETF investing&body=http://www.morningstar.com.au/video/story/1707 ETFs: All you need to know 6
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part six of six. ETFs: All you need to know 6 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1751 mailto: ?subject=ETFs: All you need to know 6&body=http://www.morningstar.com.au/video/story/1751 ETFs: All you need to know 5
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part five of six. ETFs: All you need to know 5 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1750 mailto: ?subject=ETFs: All you need to know 5&body=http://www.morningstar.com.au/video/story/1750 ETFs: All you need to know 4
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part four of six. ETFs: All you need to know 4 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1748 mailto: ?subject=ETFs: All you need to know 4&body=http://www.morningstar.com.au/video/story/1748 ETFs: All you need to know 3
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part three of six. ETFs: All you need to know 3 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1747 mailto: ?subject=ETFs: All you need to know 3&body=http://www.morningstar.com.au/video/story/1747 ETFs: All you need to know 2
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part two of six. ETFs: All you need to know 2 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1746 mailto: ?subject=ETFs: All you need to know 2&body=http://www.morningstar.com.au/video/story/1746 ETFs: All you need to know 1
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part one of six. ETFs: All you need to know 1 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1744 mailto: ?subject=ETFs: All you need to know 1&body=http://www.morningstar.com.au/video/story/1744 The growing ETF market
05/04/2011 State Street Global Advisors' senior managing director Jim Ross discusses how investors around the world are using ETFs. The growing ETF market Christine St Anne 05/04/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1827 mailto: ?subject=The growing ETF market&body=http://www.morningstar.com.au/video/story/1827 ETF market overview
22/09/2011 Morningstar's Tim Murphy looks at the latest trends in the sector and the importance of understanding the different market indexes. ETF market overview Christine St Anne 22/09/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1973 mailto: ?subject=ETF market overview&body=http://www.morningstar.com.au/video/story/1973 ETF monthly wrap-up
02/02/2012 The latest Morningstar ETF monthly report looks at what investors can expect from the ETF landscape this year. ETF monthly wrap-up Christine St Anne 02/02/2012 http://video.morningstar.com/aus/video/120202_etf_wrap_audio.mp4
Christine St Anne: Today we speak with Morningstar's Tim Murphy about the latest changes to the ETF market, and what investors can expect for 2012.
Tim, welcome.
Tim Murphy: Thanks, Christine.
St Anne: Tim, so what were the top performing ETFs?
Murphy: So, top of the pops in December for ETFs was the agricultural side of things. So as tends to be the case, when you've a bit of volatility in markets, last month you saw, I mean, the beta shares - one of the beta shares hedged agricultural ETFs at the top of the market, so that was a strong performer for December.
St Anne: With agricultural ETFs, are they more susceptible to extreme price movements?
Murphy: Well, like any commodity, they're cyclical - highly cyclical, and often speculative sort of sectors. So as I said, they're sorts of niche exposures just tend to be at either the top or bottom of any performance list on a given short-term basis.
When you get concentrated niche ideas like that, that's the very nature of them. So, whereas the more probably broader diversified types of ETFs, which should form the core of most portfolios, all - most of the time tend to be in the middle of performance tables, the more volatile concentrated niche sectors, like single commodities will tend to be top or bottom on any short term basis.
St Anne: So, Tim, what were the ETFs that didn't perform as well as expected?
Murphy: On the flipside, so other commodity ETFs, some of the precious metals, things like silver and gold instead have been - particularly gold being very popular themes, but in that environment, in the back end of 2011, really suffered from sharp outflows and weakening sentiment driving prices down there. So as tends to be the case, at either end of the - both the top and the bottom on short term basis, you tend to see the more concentrated volatile sectors dominating those areas, and the end of 2011 was no exception to that.
St Anne: There's also been a lot of discussion about fixed income ETFs, do you expect any product launches shortly?
Murphy: Yes. It's certainly been a while coming, and ASIC and ASX have finally gotten their act together, and given the final regulatory tick of approval to allow fixed interest ETFs to now be listed and launched in Australia in 2012. And we certainly expect to see that being the big trend in 2012 ETF product launches. All of the key product providers that we talk to have got fixed interest ETFs in the pipeline. So, by the mid-year, expect to see all of the large ETF offerers: iShares, Russell, Vanguard, State Street, expect to see all of them having ETFs or fixed interest ETFs available in the market.
St Anne: Tim, so it's 2012, what are your thoughts of some of the major trends that will happen in the ETF market this year?
Murphy: It's interesting, I mean, 2011 turned out - had been sharp growth in the years leading up to that, tended to - it was a solid rise year. I think that was a function of market flows and sentiment more generally. Most investors were parking their money in the bank, flows into things like term deposits were very strong. Flows into any sort of risk assets, whether it was equity markets, funds, ETFs were stagnant and non-existent. So, you saw the market track sideways last year.
This year with the increase of product availability in ETFs with fixed interest, we certainly expect to see that drive an increase in investor interest, and subsequently assets. But also too we would expect to see the growth trend in ETFs pick up and become more in line with that sort of long-term growth trend we expect to see in the Australian ETF market, which continues to be a long way behind ETF developments in the rest of the world.
St Anne: Tim, thanks for sharing your insights with us today.
Murphy: Thanks, Christine.
30/11/2011 With rates falling on term deposits, income from equities investments can be a solution. The case for equity income Christine St Anne 30/11/2011 http://video.morningstar.com/aus/video/
Christine St Anne: With interest rates now falling on term deposits, investors are looking for new sources of income. Today, I am joined by iShares Tom Keenan to discuss the case for equity income. Tom welcome.
Tom Keenan: Morning, Christine.
St Anne: Tom, how does yield from shares compared with term deposit rates?
Keenan: Well, term deposit rates depend on the provider and also the term. So, it varies, but if you look at one-year term deposit rates at the moment, they're hovering just above the 5% mark depending on the provider. Now that's a significant change from only a few months ago, when these were close it to 6%. So, with bond markets pricing in further falls in interest rates over the coming months, there is the growing risk that these term deposit rates could fall further and this is something that investors should be very aware of.
If we compare term deposit rates with the yield that investors are getting for equities, equities can be returning or yielding significantly more than that. Certainly, the Dividend Opportunities Index, which is the index that Ivy Dividend ETF, the iShares High Dividend ETF tracks to the end of September, when you account for franking credits, has yielded over one-year 7.98%.
St Anne: Tom, you run a High Dividend ETF, what's in that portfolio?
Keenan: Yes. So, our High Dividend ETF, which is the iShares S&P/ASX High Dividend Fund or ETF attracts the Dividend Opportunities Index. That's an index that holds 50 companies. So, if the company is to be included in that index, they must meet firstly, minimum size and liquidity criteria, and then they must meet certain stability criteria around profitability and earnings growth. So, once they meet that criteria the stocks are then ranked according to their yield.
StAnne: So, how do you generate these high dividend distributions?
Keenan: So, the fund must payout all dividends that are paid by the individual companies in the fund. So, the companies will pay through time and then we will distribute those dividends each quarter. So, there is a quarterly distribution that the fund will pay.
St Anne: Tom, as you know the banks are very well known for delivering high dividends. How do you get the diversification in your portfolio?
Keenan: So, this fund is quite unique in terms of the universe of high dividend ETFs, in the sense that it's got in-built diversification rules. So, there are sector limits of 20%. So, no one sector in the fund can be more than makeup 20% of the total assets under management of the fund, and that's significant because if you think of the financial sector, and the financial sector waiting to the broader market, that's closer to 40%.
So, this fund is underweight the financial sector and that's mainly due to that sector limit. Then at the stock level, the diversification rule state that no one stock can be more than 4% at the time of rebalance. So, those diversification rules ensure that you get diversification beyond the big four banks.
Really, this fund can then work very well, potentially work very well with the existing investments that Australian's already hold. Most Australian's already have allocations to the big four banks for their source of equity income, this fund allows them to diversify their overall portfolio away from just the big four banks.
St Anne: Tom, investors like cash because it's a safe asset class. Doesn't this strategy make sense in times of volatility?
Keenan: So, investors are right to think about total return, and there is no doubt that the term deposits do shelter investors from markup volatility, but there is a couple of things that investors need to take in mind. Firstly, term deposits do not protect investors against inflation, and so those investors that are heavily invested in term deposits, could be eroding the purchasing power of their retirement income. Equity income does provide that hedge against inflation or can provide that hedge against inflation, due to the potential for capital growth, and certainly, that's something that we've seen over the longer term from equities.
The final point that I would make is that Australian corporates are in relatively good shape and there is a lot of bad news priced into equity markets at the moment. So, it could be a difficult decision for investors to reconsider their equity income as a source of their overall portfolio income, but often it's those in difficult decisions that are the most rewarding over the long-term. Now could be a good opportunity in light of those falling interest rates to reconsider their source of equity income.
St Anne: Tom thanks for your time today.
Keenan: Thanks, Christine.
28/11/2011 The latest Morningstar ETF monthly report looks at how the market has change over the year. ETF monthly wrap-up Christine St Anne 28/11/2011 http://video.morningstar.com/aus/video/
Christine St Anne: In this month's Monthly ETF wrap-up, I'm joined by Morningstar's Alison Stauss to look at any new products in the market and who were the best performers. Alison, welcome.
Alison Stauss: Hi.
St Anne: Alison, to start off with, who were the best performing ETFs?
Stauss: So, overall October, the best performing ETF was Aii's energy ETF. It had 12.24% return which is well and above the others. This was followed by the financial ETFs all had about 10% return.
St Anne: Which ETFs lagged the markets?
Stauss: Interestingly, the two bottom ETFs this month were the two best performing ETFs in September, and this was BetaShares' USD product, and iShares Japan. These both lost about 8%, and this flip-flopping sort of highlights the volatility in the share markets that we've been seeing lately.
St Anne: Alison, this month you look at the breakdown in the market, what ETFs are investors now demanding compared to what they looked at the beginning of the year?
Stauss: So, we had a look at the number of assets in each different type, and so -- a broad-based international ETFs seem to have gained the most, and this has been at the expense of the broad-based Australian assets which, while they are still far and away the largest sector, largely due to STW's half market share. They were the only sectors that lost money over the past year.
Another interesting change was that the strategy-based ETFs, which we include the four income ETFs and Russell's Value ETF doubled their assets over the month, and I think this just shows that investors are looking not only for ETFs that they can understand and are transparent, but also that can provide a specific exposure for their portfolio.
St Anne: Alison, any new products to the market?
Stauss: Yeah, BetaShares actually just last week launched an oil ETF, which again just shows that investors are looking for specific exposures for their portfolio. So, we expect to see more of this kind of niche product come out into the market.
St Anne: Alison, you also looked at small cap ETFs and they seemed to perform differently from each other. What was this so?
Stauss: The performance of the small cap ETFs, so there is three in the market, is a good opportunity to look at the effect that the index can have on the performance of an ETF. So, Vanguard's VSO tracks the MSCI Australian Small Companies Index while State Street's SSO and iShares' ISO track the S&P/ASX Small Ordinaries Index. So, there was about 1% difference in return between Vanguard's product and State Street and iShares product, and this is due to the underlying index. So, in order to understand it you need to look at the construction of the index. So, the MSCI index targets the bottom 14% of the share market, while the S&P/ASX Index excludes companies in the ASX 100 but goes down to including the 300, and they target a total 7% of the market cap, and so this results in sort of different holdings in the stock. So, the MSCI Index has about 70% mid-cap companies while the S&P only has about 55%. And there is similar difference when you look at the small and micro-cap as well. So, the different holdings will ultimately affect the performance of the ETF.
And to further break it down, ISO and SSO which both track the S&P Index also had different returns, and this is because they both use an optimized sampling method which means that each manager has a specific model that they are using to determine the optical weightings in which stocks are actually included in their ETF.
St Anne: Alison, so how should people use small cap ETFs in their portfolio?
Stauss: Well, because the small caps are historically more volatile and there is a lot of sector concentration, we suggest that the small cap holdings be used just as a part of a broader Australian equities exposure.
St Anne: Alison thanks for your views today.
Stauss: You're welcome.
11/11/2011 The latest Morningstar ETF monthly report looks at cost and liquidity issues for the industry. ETF Monthly wrap-up Christine St Anne 11/11/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/2007 mailto: ?subject=ETF Monthly wrap-up&body=http://www.morningstar.com.au/video/story/2007 ETF Monthly wrap-up
16/09/2011 The latest Morningstar ETF monthly report looks at the structure behind the industry and the key players. ETF Monthly wrap-up Christine St Anne 16/09/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1969 mailto: ?subject=ETF Monthly wrap-up&body=http://www.morningstar.com.au/video/story/1969 Using ETFs effectively
24/08/2011 ETFs still have a role in investment portfolios despite the recent decline in sharemarkets. Using ETFs effectively Christine St Anne 24/08/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1946 mailto: ?subject=Using ETFs effectively&body=http://www.morningstar.com.au/video/story/1946 ETF monthly wrap-up
28/07/2011 The latest Morningstar ETF monthly report highlights the growth of exchange-traded commodities. ETF monthly wrap-up Christine St Anne 28/07/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1917 mailto: ?subject=ETF monthly wrap-up&body=http://www.morningstar.com.au/video/story/1917 Outlook for Australian shares
22/06/2011 Investors can still access opportunities in the challenging Australian sharemarket through low-cost strategies. Outlook for Australian shares Christine St Anne 22/06/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1884 mailto: ?subject=Outlook for Australian shares&body=http://www.morningstar.com.au/video/story/1884 ETF trends in Australia
10/06/2011 State Street Global Advisors managing director Frank Henze gives us his views on what types of ETF products investors can expect. ETF trends in Australia Christine St Anne 10/06/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1880 mailto: ?subject=ETF trends in Australia&body=http://www.morningstar.com.au/video/story/1880 Essential guide to ETFs 6
07/06/2011 In the sixth and final part of this video series, Vanguard's Edward Caser looks at the practical application of ETFs in your portfolio. Essential guide to ETFs 6 -- 07/06/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1877 mailto: ?subject=Essential guide to ETFs 6&body=http://www.morningstar.com.au/video/story/1877 Essential Guide to ETFs 4
24/05/2011 In the fourth of this six-part video series, State Street's Graeme Smith outlines the mechanics behind their ETFs. Essential Guide to ETFs 4 -- 24/05/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1868 mailto: ?subject=Essential Guide to ETFs 4&body=http://www.morningstar.com.au/video/story/1868 Essential Guide to ETFs 5
01/06/2011 In the fifth part of this six-part video series, BetaShares' Drew Corbett looks at how to evaluate different types of ETFs when considering them for investment. Essential Guide to ETFs 5 -- 01/06/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1873 mailto: ?subject=Essential Guide to ETFs 5&body=http://www.morningstar.com.au/video/story/1873 Essential guide to ETFs 3
17/05/2011 In the third part of our five-part ETF video series, Russell Investments' Peter Burnett outlines why you should look at this increasingly popular product. Essential guide to ETFs 3 -- 17/05/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1862 mailto: ?subject=Essential guide to ETFs 3&body=http://www.morningstar.com.au/video/story/1862 Essential guide to ETFs 2
09/05/2011 In the second part of our five-part ETF video series, Morningstar's Zac Wallis gives an insight into researching your ETF investments. Essential guide to ETFs 2 -- 09/05/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1853 mailto: ?subject=Essential guide to ETFs 2&body=http://www.morningstar.com.au/video/story/1853 The investment case for gold
06/05/2011 Investors can access the benefits of gold through ETCs The investment case for gold Christine St Anne 06/05/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1851 mailto: ?subject=The investment case for gold&body=http://www.morningstar.com.au/video/story/1851 Essential Guide to ETFs
02/05/2011 In the first part of our five-part ETF video series, the ASX's Jonathan Morgan lays out the fundamentals. Essential Guide to ETFs -- 02/05/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1847 mailto: ?subject=Essential Guide to ETFs&body=http://www.morningstar.com.au/video/story/1847 Gold and silver as an asset class
12/04/2011 Morningstar US' Abraham Bailin and State Street's Anthony Rochte discuss shifts in thinking on gold, silver, and their application in a portfolio. Gold and silver as an asset class Paul Justice 12/04/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1832 mailto: ?subject=Gold and silver as an asset class&body=http://www.morningstar.com.au/video/story/1832 Dividends: designer vs cheap yields
07/04/2011 A high dividend yield does not always mean a healthy company. Dividends: designer vs cheap yields Christine St Anne 07/04/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1829 mailto: ?subject=Dividends: designer vs cheap yields&body=http://www.morningstar.com.au/video/story/1829 What happens to ETFs in times of crisis?
15/03/2011 What should investors keep in mind about country-specific ETFs when turmoil or disaster strike? What happens to ETFs in times of crisis? -- 15/03/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1811 mailto: ?subject=What happens to ETFs in times of crisis?&body=http://www.morningstar.com.au/video/story/1811 Find out more about ETFs
14/03/2011 Morningstar and ASX have teamed up to deliver a number of seminars about ETFs and their role in a portfolio. Find out more about ETFs Christine St Anne 14/03/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1810 mailto: ?subject=Find out more about ETFs&body=http://www.morningstar.com.au/video/story/1810 The ins and outs of counterparty risk
10/03/2011 What is counterparty risk and how it can affect your investment? The ins and outs of counterparty risk Zac Wallis 10/03/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1806 mailto: ?subject=The ins and outs of counterparty risk&body=http://www.morningstar.com.au/video/story/1806 An inside look at a high dividend ETF
03/03/2011 What type of stocks are producing strong dividend earnings to investors? An inside look at a high dividend ETF Christine St Anne 03/03/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1800 mailto: ?subject=An inside look at a high dividend ETF&body=http://www.morningstar.com.au/video/story/1800 Navigating the ETF product landscape
02/02/2011 What can investors expect from new ETF products. Navigating the ETF product landscape Chrsitine St Anne 02/02/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1779 mailto: ?subject=Navigating the ETF product landscape&body=http://www.morningstar.com.au/video/story/1779 What could pop the gold bubble?
-- Morningstar US' Scott Burns discusses the state of precious metal ETFs and what could bring the price of gold down. What could pop the gold bubble? Jeremy Glaser -- http://video.morningstar.com/aus/video/ -- /video/transcript/1762 mailto: ?subject=What could pop the gold bubble?&body=http://www.morningstar.com.au/video/story/1762 The inside line on indices
25/11/2010 Exploring the construction of market indices with MSCI Executive Director, Michael Anderson. The inside line on indices Darin Tyson-Chan 25/11/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1719 mailto: ?subject=The inside line on indices&body=http://www.morningstar.com.au/video/story/1719 Burns: Your ETF won't fail
17/11/2010 Morningstar US takes a critical eye to recent reports on the dangers of ETFs. Burns: Your ETF won't fail Jeremy Glaser 17/11/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1715 mailto: ?subject=Burns: Your ETF won't fail&body=http://www.morningstar.com.au/video/story/1715 Navigating through ETF products
13/10/2010 What do the range of ETF products mean for investors? Navigating through ETF products Christine St Anne 13/10/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1688 mailto: ?subject=Navigating through ETF products&body=http://www.morningstar.com.au/video/story/1688 Morningstar launches ETF research
13/09/2010 Research universe in Australasia expands to include this popular investment vehicle. Morningstar launches ETF research -- 13/09/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1660 mailto: ?subject=Morningstar launches ETF research&body=http://www.morningstar.com.au/video/story/1660 ETFs: Taking ownership
-- An ETF is bought on the ASX like any listed investment but is it that simple? ETFs: Taking ownership Julia Newbould -- http://video.morningstar.com/aus/video/ -- /video/transcript/1586 mailto: ?subject=ETFs: Taking ownership&body=http://www.morningstar.com.au/video/story/1586 ETFs: Effectively using ETFs in your portfolio
-- We know what they are and how to buy them, but how do we incorporate them in a portfolio? ETFs: Effectively using ETFs in your portfolio Julia Newbould -- http://video.morningstar.com/aus/video/ -- /video/transcript/1592 mailto: ?subject=ETFs: Effectively using ETFs in your portfolio&body=http://www.morningstar.com.au/video/story/1592 ETFs: What's under the bonnet
-- What makes up an ETF, how it's put together and how you can own one. ETFs: What's under the bonnet -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1576 mailto: ?subject=ETFs: What's under the bonnet&body=http://www.morningstar.com.au/video/story/1576 How to avoid ETF bloopers
-- Do you really know what lies beneath your ETF? Find out how to avoid the pitfalls. How to avoid ETF bloopers -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1526 mailto: ?subject=How to avoid ETF bloopers&body=http://www.morningstar.com.au/video/story/1526 ETFs for easy diversification: pioneer
-- ETF pioneer Jim Ross of State Street Global Advisers explains why these products are gaining popularity. ETFs for easy diversification: pioneer Tim Murphy -- http://video.morningstar.com/aus/video/ -- /video/transcript/1516 mailto: ?subject=ETFs for easy diversification: pioneer&body=http://www.morningstar.com.au/video/story/1516 ETFs ready for takeoff
-- They're cheap, they're transparent, but are ETFs getting the inflows they deserve? ETFs ready for takeoff -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1480 mailto: ?subject=ETFs ready for takeoff&body=http://www.morningstar.com.au/video/story/1480 Could ETFs benefit your super?
-- What you need to know about Exchange Traded Funds and retirement savings Could ETFs benefit your super? Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1386 mailto: ?subject=Could ETFs benefit your super?&body=http://www.morningstar.com.au/video/story/1386 ETF basics
-- Exchange Traded Funds are becoming more fashionable, but what do newcomers need to know? ETF basics Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1398 mailto: ?subject=ETF basics&body=http://www.morningstar.com.au/video/story/1398 What you need to know about ETFs
-- Morningstar's Tim Murphy discusses what investors need to know about Exchange Traded Funds What you need to know about ETFs Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1404 mailto: ?subject=What you need to know about ETFs&body=http://www.morningstar.com.au/video/story/1404