TitleGeneral Manager, Australian Equities
DateSeptember 12, 2018
Exchange Traded Funds (ETFs) have become a popular way for investors to gain exposure not only to passive indices but to a range of market factors.
Smart beta ETFs, which follow rule-based strategies to provide factor exposure, are increasingly recommended by financial advisers because they provide a relatively cheap and effective way of meeting specific investment objectives or creating greater diversification.
But while the smart beta concept might seem easily commoditised, there can be significant differences in investment outcomes even among those investment products that appear to offer something very similar.
For example, the below chart shows the performance of three well-known dividend-focused ETFs, each of which seeks to generate above market income. Over the past three years, these ETFs have exhibited markedly different performance despite sharing the same income objective.
Growth of $10,000 over three years
IHD: iShares S&P/ASX Dividend Opportunities ETF
SYI: SPDR MSCI Australia Select High Dividend Yield Fund
ZYAU: ETFS S&P/ASX 300 High Yield Plus ETF
In order to understand these diverging results, investors need to get under the hood to see how individual ETFs determine their index construction rules. Differences in how fund managers determine things like the quality, liquidity, and weights of certain stocks can result in funds with very different allocations. The chart below shows the sector breakdown of each fund’s top 10 stock holdings, revealing very different compositions.
Top 10 holdings—sector breakdown
Both the ETFS and iShares products have similar exposure to Financials and Materials, but the ETFS fund has a greater allocation to defensive REITs and Utilities, while the iShares fund has diversified more across other sectors. Its top 10 holdings represent only 62% of its total portfolio value, compared to 75% for the ETFS fund. Meanwhile, the SPDR fund’s top 10 holdings are dominated by Financials, with smaller allocations across Consumer Staples and Materials, and no exposure to REITs or Utilities.
What this means is that financial advisers need to do more than simply ‘read the packet’ when selecting investment products. Financial advisers should have a thorough understanding of how individual smart beta products operate to ensure they deliver outcomes in line with their clients’ investment objectives.
IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).
Please read the following before making any investment decision about any financial product mentioned in this document.
Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.
Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.
Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.
03 9623 6373
18 Feb 2019 - Labor’s proposed changes to franking credits will result in a meaningful reduction in income for zero or low tax rate retirees invested in equity funds, ...
15 Nov 2018 - Financial advisers are now able to access investment research, encompassing clients’ whole of life needs, with the announcement by Lonsec of the inclusion of ...
15 Oct 2018 - Investors are constantly warned of an impending crisis in financial markets with the resultant damage to asset prices. Yet while a crisis can have a severe ...