Here are some themes likely to resonate with investors this year.
ETFs that don’t track major Aussie benchmarks
The ASX has hit all-time highs this year, thanks to growth companies like healthcare giants CSL and Cochlear trading on crazy high multiples. However, such high valuations (CSL’s trailing PE ratio is 70) sharpen the risk of a correction. This may prompt investors to consider new and different ETFs this year.
One popular ETF may be the BetaShares Australian Ex-20 Portfolio Diversifier ETF, which provides exposure to 180 stocks listed on the ASX ranked from 21 to 200, based on market capitalisation. It excludes stocks to which many investors are already heavily exposed, such as the big four banks and miners BHP and Rio Tinto. It also excludes highly valued healthcare stocks.
Low-cost, multi-asset ETFs that give investors a one bullet solution for building portfolios are also likely to be popular this year as they make life easy for everyone.
An example is Vanguard’s Diversified Balanced Index ETF (VDBA). This ETF is a “fund of funds”, that buys several other Vanguard index funds. These include Vanguard’s ASX 300 Index fund; its global shares index fund; emerging markets index fund; global bonds index fund. (As well as some others).
Ethical ETFs rise to the occasion
Momentum continues to gather for investment options that consider environmental, social and governance (ESG) factors.
Adam Verwey, managing director at Future Super, an ethical super fund, says investors are starting to think that dumping companies’ stocks are a good way to influence management.
“There’s heightened awareness companies and activities we support with our money have real-world impacts. Retail investors are increasingly aware moving money can be the single most impactful action they can take to address dangerous climate change,” Verwey says.
BetaShares’ Australian Sustainability Leaders ETF is the largest and most popular Australian socially responsible ETF on ASX. It provides exposure to a portfolio of Australian companies engaged in sustainable business pursuits and avoids companies engaged in activities deemed inconsistent with responsible investment considerations. As a result of these screens, it excludes the big four banks given they finance fossil fuel projects.
“This isn’t a guarantee companies in these indices will outperform in the long term, but an increased flow of capital into the sector can have a short-term impact of boosting prices,” Canberra-based financial planner Michael Miller says.
Gold ETFs glitter
With ongoing geopolitical tensions, safe harbour assets such as gold are becoming increasingly attractive to investors.
“Gold could be a good investment with uncertain macro events like the US military actions, and the US election this year,” Conaill Keniry, a financial adviser with What If Advice, says.
One option in this category is ETF Securities’ Physical Gold ETF, which delivers a return equal to movements in the gold spot price, minus the management fee. This ETF is unhedged.
Britannia rules the waves
With events in the UK starting to settle thanks to the imminent finalisation of Brexit, UK assets may be in for an increase in value this year.
Investors wanting exposure to UK assets may wish to consider ETFs that provide exposure to Europe. For instance, the iShares Europe ETF replicates the performance of the S&P Europe 350 index, excluding fees and charges. The index tracks the performance of 16 European markets, and just under 30% of its holdings are exposed to the UK.
Asian tigers roar once more
Asia is another market to watch this year and there are already signs eastern nations are prepared to support their economic success. For instance, China has reduced the amount of cash banks are required to hold, which should deliver an extra US$115 billion financial institutions are able to lend to businesses to help drive China’s economic growth.
State Street’s SPDR S&P Emerging Markets Fund may be an option for investors that want broad Asian exposure. While not uniquely focused on Asia, its top three countries are China, Taiwan and India.
This ETF could be one to watch through 2020, especially if the US market takes a step back.