Yovich & Co. Market Update - 1 August 2016
Aug 1, 2016 | Commentary
- The NZ market has found new vigour with the gross index shooting through the 7,000 level and reaching all time highs for the past five weeks running.
- With the CPI running at a meagre 0.5% rate for the past quarter, the RBNZ indicated that there could be further moves downwards in interest rates.
- Mining stocks continued to recover from recent lows and have helped the All Ords out perform the NZ market over the past month.
- The Federal Reserve met for the first time since the BREXIT vote and reiterated their stance to raise rates in the autumn.
- Possible interest rate cuts in NZ saw weakness in the Kiwi as traders try to unwind their carry trade.
BetaShares Exchange Traded Funds
A few weeks back I attended an informational session on Exchange Traded Funds (ETFs) managed by BetaShares. It was an interesting discussion as the ETF market is starting to move toward providing strategy specific funds and not just index trackers. BetaShares are the market leaders in the Australian ETF market and below are a few funds that I am now starting to recommend to clients for their portfolios:
BetaShares Australian Dividend Harvester Fund (managed fund) (HVST.axw)
The objective of this fund is to provide investors with exposure to large capitalisation Australian shares along with regular dividend income, (paid monthly) which is at least double the annual income yield of the broad Australian share market. In addition, the Fund aims to reduce the volatility of equity investment returns and cushion downside risk. For NZ investors there might be tax benefits, as this investment is a FIF and under the fair dividend rule, you will only pay tax on 5% of the income. The current 12 month Distribution Yield for HVST is 11.80% so that could mean that you are not paying tax on 6.80% of the income distributed by the ETF. The net income return under these rules would equate to 10.15% and the gross return of 15.15%. There is no magic here so the outcome is that the capital value of the fund would be expected to fall over time unless the share market is going up. However, the total return (Capital Gains + Income) for HSVT has outperformed the ASX 50 since the fund started in November 2015.
BetaShares FTSE RAFI U.S. 1000 ETF (QUS.axw), and
BetaShares FTSE RAFI Australia 200 ETF (QOZ.axw)
The objective of these funds is to provide an investment return that tracks the performance of the FTSE RAFI U.S. 1000 Index or the FTSE RAFI Australia 200 Index, before fees and expenses. RAFI stands for Research Affiliates Fundamental Index and the concept behind “fundamental values” is a very compelling, quantitative way to improve the weights in an index. RAFI weights stocks in the index based on less volatile value metrics compared to weighting on market capitalisation alone which can be quite volatile. These metrics include sales, cash flow, dividends and book value. In a market capitalisation index, the weighting of a particular stock will increase as the value of the company goes up, and goes down as the value falls. This results in the fund buying high and selling low, which is obviously not the best trading strategy. The RAFI methodology tries to smooth these re-weightings by also considering these other fundamental metrics to determine the weightings of each stock in the index. When back tested, the RAFI Australia 200 index would have outperformed the market cap index 16 times over the past 23 years and improved the return by an average rate of 2.1% p.a.
BetaShares NASDAQ 100 ETF (NDQ.axw)
The objective of this fund is to track the performance of the NASDAQ-100 Index, before fees and expenses. The Index provides investors with exposure to the performance of the 100 largest non-financial securities listed on the NASDAQ stock market, by market capitalisation. The Index contains category defining companies across major industry groups such as technology, telecommunications and retail. This ETF is great for portfolios wanting exposure to the high growth tech companies like Google, Facebook, Apple, Microsoft, Tesla, amazon, Netflix, eBay and Yahoo. With equity markets performing exceptionally well and most of these companies trading at all time highs you could be mistaken to assume that they are expensive, but from a historical P/E ratio perspective they are trading at a discount to the long run average. The NASDAQ 100 has had a historical average P/E of 29.3 times and the current P/E ratio for the index is 19.15 times.
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