ETFs surge 6% in May

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Our update on the Australian ETF market as at June 2016.

Highlights

  • ASX listed ETFs grew by $1.35 billion for the month as confidence returned to share markets after a surprise interest rate cut and expectations of low interest rates remaining.
  • Monthly FUM growth was 6%, from $21,905M in April to $23,162M by the end of May 2016.
  • Broad market and sector ETFs were the best performers both locally and internationally.
  • Australian property ETFs continue to lead on 12 month performance due to falling interest rates.
  • The BetaShares Cash ETF (AAA) saw a rare month of outflows due to a surprise cut in interest rates.
  • MarketVectors rebranded to its parent company name – VanEck to become VanEck Vectors.
  • BetaShares launched 2 ETFs in a partnership with major USA-based issuer WisdomTree.

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How does anchoring bias affect your investing?

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In many walks of life we have a tendency to use anchors or reference points to make decisions, and sometimes these lead us astray. Nowhere is this more dangerous than when investing.

What is anchoring?

Anchoring is our tendency to grab hold of irrelevant and often subliminal information in the face of uncertainty to make decisions.

Since anchoring occurs in so many situations, no single theory has conclusively explained why we do it. However the modern favourite theory for explaining the effect of anchoring comes from several groundbreaking studies that were conducted in the fields of decision science and performed by Kahneman and Tversky in the 1970s.

Kahneman and Tversky were interested in how people formed judgements when they were unsure of the facts. They found that when people are uncertain about the correct answer, we take a guess using the most recent number we’ve heard as a starting point.
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What is your risk profile & how does it help your investment strategy?

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Having an up-to-date investment profile is important when making any investment decision because it helps match you to the best investment strategy to meet your goals.

Your investment profile defines what type of investor you are and is made up of 2 parts:

  1. Your investment timeframe

  2. Your risk profile

Asking questions about these 2 areas helps to ensure that your investment strategy is suitable and that you don’t take on too much risk.
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The ETF boom continues in 2016

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The ETF boom has continued in Australia with the market growing 20% over the year to $21.3 billion in funds under management (FUM).

ETF trends for 2015/16

Global share ETFs maintained their position as the largest ETF sector, with $7.9 billion, up 18% for the year and there were 13 global ETFs launched.

Fixed income and cash ETFs continued to grow in popularity as investors looked to diversify and access higher yields than the low interest rates available in savings accounts. The sectors’ FUM grew 40% to $2.2 billion.
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Stockspot portfolios: 2 years on…

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Thanks to the thousands of clients who have been on the journey with us since Stockspot launched to the public in May 2014, exactly 2 years ago. Back in 2014, automated investing, robo advice and fintech weren’t as well understood as they are today so we appreciate the support of our clients who have trusted us to help manage their savings.

Despite the recent share market volatility, the Stockspot model portfolios generated 4% to 4.5% p.a. in total returns over the 2 years to 30th April 2016.

The performance was more than double the 1.5% p.a. return from indexed Australian shares over the same period. Distributions and dividends made up most of the performance since it was a subdued period for capital returns.

Stockspot model portfolios: 2 year performance after fees

  Total return p.a. Distributions p.a.
Topaz 4.13% 3.36%
Emerald 3.99% 3.33%
Turquoise 4.20% 3.07%
Sapphire 4.34% 2.78%
Amethyst 4.56% 2.52%

Total return after ETF and management fees (1st May 2014 – 30th April 2016)

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Property or shares? What is the best investment?

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What is the best investment? Property and shares are the 2 most common ways of building wealth in Australia outside of superannuation.

The topic of whether to invest in property, shares (or both) often leads to heated debate. The 67% of Australians who own the house they live in are usually passionate about they believe is their best investment decision.

Shares and real estate have both generated reliable income and capital returns for Australians over the long-term.

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Source: Corelogic, Housing Market and Economic Update March 2016
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Bond ETFs grow in popularity

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Our update on the Australian ETF market as at April 2016.

Highlights

  • Growth in funds under management (FUM) across all ASX listed ETFs was 3% for the month, from $20,585M in February 2016 to $21,299M by the end of March 2016.
  • Australian shares regained some popularity relative to international share ETFs after the Australian dollar rose strongly – reducing some of the short term appeal of global stocks.
  • After two strong months, flows into Gold ETFs slowed as the metal took a breather. Bond and cash ETFs attracted the majority of defensive flows over the month.
  • Perceived defensive sectors including property and consumer staples continue to outperform resources and attract the majority of sector-specific interest.

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The Paradox of Skill: Why active funds underperform

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The latest data for active funds returns does not bode well for traditional active fund managers. Standard & Poor’s (S&P) SPIVA report for 2015 is the clearest indictment yet for traditional active management, revealing that close to 90% of fund managers have underperformed over 10 years after fees.

More recently, 2015 proved to be one of the worst years on record for active managers, who failed to cushion the effects of the stock market’s dip over the second half of the year.

Those who mention top-performing managers as evidence that indexing isn’t sensible are doing retail investors a terrible disservice. Although each year some active fund managers beat the indices, very few have consistently done so over the long term. Those who do well over 1 and 3 years usually do poorly over longer periods as their styles and the market factors that have served them well (value, growth etc) mean-revert.
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Share market ETFs begin to bounce back

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Our update on the Australian ETF market as at March 2016.

Highlights

  • Monthly FUM growth was 1%, from $20.4 billion in January to $20.6 billion by the end of February 2016.
  • Fixed income and cash is now the third largest ETF sector by FUM, inching ahead of Australian Shares (strategies) as ‘smart beta’ strategies continue to underperform and see outflows. We wrote in January that just 3 smart beta ETFs outperformed the market over 12 months compared to 10 which generated inferior performance.
  • The recent market weakness has started to reverse with fund inflows and positive returns across most sectors for the month.
  • Investors are starting to rotate out of some defensive ETFs including high yield and US Dollar ETFs.

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Defensive ETFs take the spotlight as fees fall further

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Our update on the Australian ETF market as at February 2016.

Highlights

  • Monthly FUM growth was negative for the first time since August 2015. Funds invested in ASX listed ETFs fell -4%, from $21,335M in December 2015 to $20,403 at the end of January 2016. Most of the impact came from market falls since the majority of ETFs still attracted new inflows for the month.
  • Vanguard became the second largest ETF issuer by FUM in Australia, inching ahead of SPDR.
  • Several ETF reduced their Management Expense Ratios (MERs) including a Stockspot portfolio inclusion – the iShares Composite Bond ETF (IAF) from 0.24% to 0.20%.
  • iShares has now reduced fees for 14 of its ETFs in the past 2 months while SPDR reduced fees for international ETFs WXHG & WXOZ by over 0.1%. Blackrock and SPDR both appear to be feeling fee pressure from Vanguard which has grown its footprint rapidly over the past 12 months.
  • After several years of underperforming the broader Australian market, UBS changed the reference index on two ETF from UBS research-based indices to Morningstar indices. Selective backtesting and the willingness to switch reference index were two of the key risks we recently highlighted in our article on smart beta ETFs.

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Lessons I learned from The Big Short

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There have been a few books and documentaries that have tried to capture the Global Financial Crisis but probably none more entertaining than The Big Short. For those who haven’t read (or seen) it, The Big Short is the story of a few eccentric traders who anticipated the US housing bubble and worked out a way to profit from it.

The book was written by Michael Lewis who you may recognise from some other top-sellers like Moneyball and The Blind Side. Before those two, he also wrote ‘Liar’s Poker’ in 1989 which was a semi-autobiographical memoir about his time on the bond trading floors of the late 1980s. Fittingly, The Big Short continues where Liar’s poker left off – at the peak of the US housing bubble which owes much of its existence to the junk-bond days of the 80s.
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Global share ETF growth exploded in 2015

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Our update on the Australian ETF market as at January 2016.

Highlights

  • Global share ETFs attracted the lions’ share of new funds & growth – over $3 billion in 2015.
  • Vanguard and BetaShares closed the gap on market leaders SPDR and iShares – highlighting that consumers are most focused on ETF pricing and unique product innovation.
  • Generally ‘smart beta’ ETFs underperformed the broad market ETFs – including 6 that underperformed by more than 5% over the 12 months.
  • UBS and Market Vectors were the only issuers whose Australian ‘smart beta’ ETFs beat the general market. As a result, both were able to grow FUM strongly over the year.
  • Magellan attracted over $400m into Australia’s first active exchange traded managed fund (ETMF). K2 have followed the lead set by Magellan by launching their own ETMF.
  • Global equity ETFs achieved the best annual returns of all sectors and have performed strongly over 1, 3 and 5 years. 1 year fund flows exhibit a strong correlation with trailing 5 year returns.

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Why bonds belong in your portfolio

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As part of our detailed series on each of the assets in the Stockspot portfolios, we’ve already taken a look at two of our portfolio investments – Australian shares and gold. Now we looked at why fixed interest, also known as bonds, forms an integral part of our portfolios.

What are bonds?

A bond is a piece of debt sold to investors usually by a company or the government. Bondholders “lend” money to the bond issuer for an agreed period (until “maturity”) and in return for that, they are paid a regular income in the form of interest.

Investors in bonds can earn a return in 2 ways:

  • From the income received through the bond interest payments.

  • By selling the bond. If you hold a bond to maturity, you will get face value of the bond back, which is usually $100. However it is possible get more (or less) back by selling a bond before it matures. This is because bonds, like shares, trade on a secondary market and their prices are always changing.

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Should you buy into smart beta ETFs?

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Smart beta is latest investment trend, marketed as a new way to diversify and reduce risk. But is smart beta really the best way to achieve your investment goals? Here we look at smart beta ETFs in Australia – what they are, how they are built and how they’ve performed.

It’s nearly impossible to read the financial news or an investment newsletter these days without coming across the term “smart beta”.

Smart beta – also known as strategic beta, alternative beta, fundamental beta, advanced beta, enhanced beta, and probably a few other names – aims to combine elements of passive index investing and active fund management to deliver the best of both worlds: transparency, broad diversification, and market-beating returns – all at low cost. What more could you ask for?

But before you throw all of your savings into the latest smart beta product, it’s worth digging a bit deeper into what smart beta really is.

Smart beta is all about index construction which refers to which stocks (or other assets) make up an index and their relative size within that index…

So what exactly is an index?
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Investment traps you can avoid

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As the saying goes “experience is the name we give our mistakes”. Too often though, investment lessons come with a large price tag and cause financial distress for individuals and families when they are made with vital savings.

Many common mistakes can be avoided by having a basic appreciation of risk, return, the importance of time in the market and understanding some of the behavioural biases likely to get in the way of smart investment decisions.
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Is your Super in a Fat Cat Fund?

Stockspot has been actively campaigning to raise awareness of poor fund performance since 2013 when we published our first report into 496 of Australia’s largest managed funds, finding that 45% of returns were paid away in fees between 2008-2013.

Our Fat Cat Funds Report aims to shine a spotlight on those funds that are amongst the worst performers and recognise funds that have performed well. This year’s report compared over 3,000 funds including retail and industry super funds.

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Do women make better investors?

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Search the internet for “World’s most successful investors” and you’ll quickly notice a clear trend – very few women mentioned. But a growing body of research has found that women are in fact better suited to becoming successful long-term investors than men.

In 2013, a study found that hedge funds run by women returned 9.8% compared to 6.1% by men that year. A different US study of 750,000 portfolios in 2014 also found women earned higher median returns than men.

Plenty of stereotypes are used to explain this trend of superior performance by women – from men’s testosterone clouding their judgement to women being more calm under pressure. To get to the bottom of this, we looked at our data to work out why women and men really invest their money differently and how this could lead to different results.
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What not to do when markets fall (or rise)

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A question we’ve been getting quite a bit lately from our clients is ‘Should I move to a lower-risk portfolio or go to cash until markets calm down?’. Not surprisingly, questions around switching portfolios and sitting on the sidelines come up most often when markets have fallen or risen fast.

Our gut instinct naturally makes us want to increase our risk tolerance when markets are up and decrease it when markets are down. But like most things when investing, the right thing to do is probably counter-intuitive.

There are certainly some good reasons to update your risk profile but there are also bad reasons to change your portfolio risk that you should be careful to avoid.
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Our favourite ETFs – Australian shares

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Our Stockspot portfolios invest in low-fee Exchange Traded Funds (ETFs) across various assets and we are constantly reviewing the investment choices to ensure that our clients have access to the best possible return and diversification opportunities.

Over the coming months, we will be looking in detail across each of the 5 different broad asset classes we currently invest in, discussing why we’ve chosen the ETFs for our portfolios and looking at some of the other options. We start off with a look at Australian shares ETFs.
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The dangers of dividends

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Three of the most common questions we get about the Stockspot portfolios are "Why does Stockspot invest in gold?", "Can I access more international shares?" and "Can I focus my portfolio on high-dividend shares?".

Having discussed the first 2 questions in earlier posts, we wanted to address the third question on dividends.

The dividend theme has become increasingly popular over the past few years and we’ve noticed a growing number of investors seem to be solely focused on dividend yield without considering total return. This has been partly fuelled by the media and product issuers who have promoted high-dividend strategies as a way to cope with historically low interest rates. However, such strategies come with their own set of risks that are often ignored.
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How gold helps your portfolio

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Of all the investments in the Stockspot portfolios, gold consistently evokes the most passionate responses from our clients.

Views on gold as an investment polarise people but tend be more a matter of philosophy rather than fact. Since gold is a difficult asset to value, market commentators love to speculate what is causing the daily movements in the gold price. As a result of the fixation by most people on short-term moves, little discussion seems to go into the value of owning gold as part of a long-term portfolio.

The purpose of this article is not to discuss what factors are currently influencing the price of gold but to explain why we recommend clients own some gold in their portfolios. There are some good reasons – but first, what makes gold such an emotional topic?
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Better investing on autopilot

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Almost 6 million Australians own direct shares or Exchange Traded Funds (ETFs). As a result, one of the questions we often get is “How does Stockspot compare to managing my own investments?”.

Certainly the trend over the last 10 years has been towards more people investing themselves. The latest ASX Share Ownership Study highlighted that direct ownership of shares and ETFs has rocketed over the past decade while interest in managed funds and professional advice has fallen. This is understandable given the high costs and below-average results that many professional funds have delivered over that time. Also as information and tools have become more easily accessible online, a larger number of people are taking an interest in investing themselves.

So why use a service like Stockspot rather than manage your own portfolio? While it might not be right for everyone, there are a few ways most people can benefit from an automated investment service like ours rather than managing their own investments.
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Why Aussie shares are unloved

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The latest investor study by the Australian Securities Exchange (ASX) has found that share ownership has plummeted over the past decade as Australians have instead opted for property and bank deposits as savings vehicles.

The number of people who own shares has fallen from 8.0 million in 2004 to 6.5 million in 2014, a 20% drop over 10 years. However, despite the fall in popularity, shares remain the best-performing investment over the long-term and 2.5 million Australians would invest in shares if they knew how.
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Greece and China: 3 lessons for everyone

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The recent turmoil in global markets has been aggravated by 2 countries on opposite sides of the earth.

Greece, which makes up a minuscule portion of the global economy has destabilised world markets because of the flow-on effects that could result from an possible exit from the Eurozone. Meanwhile the Chinese share market which rose 150% in the 12 months to June, has now collapsed more than 35% from its peak, and with it brought wild gyrations in the markets of its regional partners, including Australia.

For an investor with a well-balanced portfolio, the impact of these crises has been more moderate. For example, the 3-5% falls our portfolios have experienced from their April peak are well within the normal range of moves that can be expected year-to-year since we have near zero direct exposure to Greek shares and only 1-3% in Chinese equities. Diversification across countries, currencies and assets has helped prevent much larger falls, while investments like our Global top 100 shares ETF (IOO) remain within 1% of their all-time highs.

Notwithstanding, once the dust settles there are some valuable lessons that can be learned from the situations in Greece and China, particularly on the dangers of debt and leverage.
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The best ETFs in Australia

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The exchange traded funds (ETF) market in Australia grew 66% over the past year to $17.8 billion with funds under management tripling since 2012. ETFs have become increasingly popular due to their low-cost, transparency and diversification benefits.

To give consumers with an objective independent view of the ETF landscape, we’ve released our first Australian ETF Report to provide our analysis of almost 100 ETFs listed on the Australian Securities Exchange (ASX).
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