The boom in Exchange Traded Funds (ETFs) in Australia is addressing a longstanding problem for Self-Managed Superannuation Funds (SMSFs): gaining portfolio exposure to emerging megatrends through offshore investing.
Accessing transformative trends such as the internet-of-things, autonomous vehicles, energy storage, cybersecurity, artificial intelligence and robots, should be easy by now. It’s not.
Financial service and material stocks still dominate the Australian Securities Exchange by market capitalisation. Although the volume of ASX-listed tech companies is expanding quickly, most are small and not a direct play on themes mentioned above.
Australian investors must buy overseas shares directly if they want exposure to the big players in the internet-of-things trend, where billions of connected devices talk to each other. Giant United States semiconductor stocks, such as Intel Corporation, are an example.
Online broker platforms here have made it easier to buy offshore stocks, but it is still a more convoluted process, with extra risks, compared to investing in this market. Currency, different tax rules and more time to monitor stocks are recurring challenges with global investing.
An alternative is using a managed fund for exposure. But most Australian funds focus on an asset class, region or established sectors such as infrastructure and property. Unit trusts that pinpoint exposure to energy-storage companies, for example, are rare.
Listed investment companies have similar challenges. They, too, are growing strongly in volume, value and investment options. Yet they mostly provide exposure to asset classes and geographies rather than specific investment themes.
That is a shame. Products that provide exposure to global megatrends are an obvious fit with Australia’s giant SMSF sector. Trustees with a 10- 20- or 30-year horizon could do worse than invest in products that provide exposure to trends that will take decades to play out and have huge growth curves ahead.
ETFs are starting to fill this void. It’s early days; only a handful of index products are aimed at megatrends but I expect many more to emerge on ASX in the next two years. The structure of ETFs is well suited to megatrend investing for SMSFs on several fronts.
An index approach to investing in artificial intelligence or robotics companies makes sense. One doesn’t need to pick one or two big winners to make money if the trend drives several stocks in the sector higher in time.
Second, ETFs, like managed funds, provide diversified exposure. Megatrends, such as cybersecurity, have great promise and equally great risk. Owning a basket of companies, across different geographies and aspects of a megatrend, reduces risks.
The third reason is cost. Sharply lower fees in ETFs compared to actively managed unit trusts can make a big difference to long-term net returns. Just beware that some thematic ETFs come with higher fees than basic ETFs because of complexities in the underlying index.
Convenience is another factor. The ability to gain exposure to the world’s best robotics companies via an ASX-quoted ETF, in the same way one would buy or sell shares, is a huge advantage over unlisted products that often take days to buy or redeem.
I have written favourably on a few thematic ETFs for The Bull over the years. The iShares Global Healthcare ETF has been a long-term favourite because of the appeal in investing in the largest healthcare population as the world’s population ages and medical demand rises.
The iShares Healthcare ETF has an annualised return of 20.6 per cent over five years to August 2017, although returns have slowed in recent years, in part due to our rising currency.
Chart 1: iShares Global Healthcare ETFSource: The Bull
I have also written favourably on the BetaShares Global Cybersecurity ETF (HACK) this year, principally because investment in cybersecurity is one of the great emerging megatrends as more data is captured and stored – and vulnerable to attack from cyber criminals.
HACK has returned 8.3 per cent over one year, slightly less than its underlying index. Again, a higher Australian dollar has weighed on returns for the unhedged ETF. But it has good long-term prospects as companies worldwide spend more on cybersecurity defences.
Chart 2: BetaShares Global Cybersecurity ETFSource: The Bull
The ETFS ROBO Global Robotics and Automation ETF (ROBO), launched on ASX last month, caught my eye. Issued by ETF Securities, ROBO tracks an index comprising artificial intelligence, automation and robotics companies worldwide.
The index is spread across industry sectors, but most companies within it would not be familiar to Australian investors. By size, many stocks in the index are mid-caps by Australian standards, meaning the ETF has higher risk, which is expected given the emerging nature of robotics.
ROBO’s annual management fee is 69 basis points. Back-testing of the index shows strong returns since 2007. However, investors should never extrapolate past performance to the future. Most ETF backtesting analyses present a rosy picture of performance; much depends on timeframes chosen.
ROBO appeals. ETF Securities is a quality issuer and the ROBO Global Index, on which the ETF is based, is among the more established of its kind. Like most international ETFs, ROBO is not hedged for currency movements, meaning investors need to have a view on the Australian dollar’s direction. A hedged version of this product in future would appeal.
One can envisage SMSF trustees in the growth phase allocating a tiny proportion of their portfolio to emerging technologies, such as artificial intelligence and robotics. It should be done selectively, cautiously and with a multi-year timeframe in mind.
Chart 3 ETFS ROBO Global Robotics and Automation ETFSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness and accuracy of the information, with regard to your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at October 3, 2016