The Australian Exchange Traded Funds (ETF) market is growing quickly, up 33 per cent in a year to a combined capitalisation of almost $40 billion, ASX data shows.
I have identified several promising ETFs for The Bull in cybersecurity and artificial intellgience, or as a risk mitigation tool around volatility.
Here are eight interesting ETFs that are filling gaps in sectors, assets or investment strategies. Each was launched in the past 12 months.
1. VanEck Vectors MSCI Multifactor Emerging Markets Equity ETF (EMKT)
Growth portfolios need exposure to emerging markets, but gaining it through traditional market-weighted ETFs is challenging. High volatility can leave investors with heavy losses when emerging markets tank.
EMKT includes large-cap and mid-cap stocks in emerging markets that are chosen on four factors: value, momentum, quality and size. This “smart-beta” ETF is designed to include well-known companies in technology, healthcare and other growth sectors.
EMKT’s goal is to outperform the MSCI Emerging Markets Index while having a similar risk profile. Backtesting of the EMKT’s underlying index shows it outperformed the MSCI Emerging Markets Index consistently over 10 years. If the strategy works in the future, investors should gain slightly higher returns from the emerging markets component of their portfolio.
2. BetaShares Active Australia Hybrids Fund (HBRD)
HBRD is among the more innovative issues on ASX in recent years. The active managed fund provides exposure to a portfolio of hybrid securities, bonds and cash. Coolabah Capital Institutional Investments manages the portfolio.
HBRD is the market’s first active ETF in hybrids, an ASX-listed security that combines elements of debt and equity instruments and has potential for higher returns and risk.
HBRD’s portfolio approach provides better diversification than holding a few hybrids directly and it can move funds to cash if it considers hybrids are expensive. The fund is a useful way to gain exposure to a complex part the market that can provide attractive yield.
3. ETFS ROBO Global Robotics and Automation ETF (ROBO)
ROBO provides exposure to global robotics, automation and artificial intelligence (AI) stocks. Few such companies are listed on ASX.
SMSFs that want long-term exposure to robotics and other emerging technologies will find ROBO useful. The ETF is not without risks: most of the 88 securities in its underlying index are mid-cap or small-cap companies and an annual fee of 69 basis points is high by international ETF standards.
Other technology thematic ETFs include the BetaShares NASDAQ 100 ETF; ETFS Morningstar Global Technology ETF; and BetaShares Global Cybersecurity ETF. The latter has performed strongly, up 32 per cent over one year.
4. iShares Enhanced Cash ETF (ISEC)
The cash component of portfolios should be a key consideration as global equity markets rally. Several assets managers have this year signalled they are lifting the cash weighting in their portfolio to preserve capital and reduce risk.
The iShares Enhanced Cash ETF is a diversified portfolio of higher-yield, short-term money market instruments, including floating-rate notes. The ETF aims to outperform the S&P/ASX Bank Bill Index and provide better liquidity compared to bank term deposits.
The ETF delivered 2.1 per cent over 12 months but its portfolio inclusion is more about risk than return. The ETF is smaller than the market-leading BetaShares Australian High Interest Cash ETF but has a comparable return over one year. The UBS IQ Cash ETF is another newcomer in this space.
The cash ETFs will appeal to investors who want to preserve capital and a return on their cash investment that broadly matches inflation, without using term deposits.
5. VanEck Vectors MSCI Sustainable Equity ETF (ESGI) ESGI is one of several ETFs that provide low-cost exposure to ethical investment strategies or those incorporating environmental, social and governance (ESG) filters into portfolios.
ESGI has an innovative design: it excludes fossil fuel companies, high carbon emitters and those whose activities are not socially responsible; and includes companies with high ESG ratings.
ESGI’s additional screening will appeal to investors who do not want their capital used in harmful sectors, or in companies that are ESG laggards. The screening comes at a price: an annual fee of 55 basis points is high by ETF standards, but well below unlisted ethical funds.
6. Platinum International Fund (PIXX)
Launched in September 2017, the Platinum International Fund is among the market’s highest-profile exchange-traded managed funds. PIXX is an ASX-quoted version of the asset manager’s unlisted flagship fund, the Platinum International Fund.
Like other exchange-traded managed funds, PIXX is actively managed, bought and sold on ASX like a share and does not have the paperwork of an unlisted managed fund. PIXX’s annual management fee of 1.1 per cent (plus 15 per cent performance fee for excess returns) is higher than most ETFs but it seeks to outperform the market rather than provide an index return.
Magellan Financial Group, Montgomery Investment Management, AMP and Legg Mason are other asset managers with exchange-traded managed funds.
7. BetaShares Australian Investment Grade Corporate Bond ETF (CRED)
Launched in June, CRED is part of an expanding group of fixed-interest ETFs on ASX. It provides exposure to a portfolio of investment-grade fixed-interest Australian corporate bonds issued by Macquarie Group, Telstra Corporation, Vodafone and others.
The portfolio’s average credit rating is A- and the running yield is 4.1 per cent. CRED is designed to outperform government bonds, provide lower-risk yield and aid diversification. Fixed-rate investment-grade Australian corporate bonds typically rise in value when shares falls.
The ETF selects bonds based on expected return rather than debt outstanding, thus overcoming a limitation of traditional debt-weighted fixed-interest indices.
8. Vanguard Global Minimum Volatility Active ETF (VMIN)
Launched in April, VMIN was Vanguard’s first actively managed ETF in Australia. The ETF is part of a new breed of “factor-based” ETFs on ASX that select stocks based on value, size, momentum, volatility, quality or other factors that are believed to enhance returns.
Unlike most international equity ETFs, VMIN is designed to produce returns with lower volatility than its benchmark index (FTSE Global All-Cap Index). The ETF includes 224 securities that are chosen for risk and diversification characteristics. Currency risks are removed.
If VMIN performs as expected, investors will receive comparable global equity returns at lower risk – an attractive trait in a jittery global equities market.
• 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. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding 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 August 23, 2018.