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Global
Regional / Country
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Currency Hedged
Cash & Fixed Income (7)
Diversified (4)
Hybrids (2)
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Active (5)The core of a portfolio is, by definition, the foundation of any investor’s portfolio.
BetaShares believes core exposures should encompass the following characteristics:
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- Meet the objectives of each asset class as determined by the Strategic Asset Allocation process
- Be able to be held for the long-run to reduce turnover and transaction costs
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- Be robust through all market cycles
- As the largest holding in the portfolio, should demonstrate compelling “Value”, usually demonstrated by strong, long-run, net-of-fee performance
- Contribute to the overall stability of the portfolio from a volatility and drawdown perspective
1. Global Equities
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Asset Class Categorisation: Growth |
Case vs Active in this asset class
‘Quality’ is recognised as an investment factor screened for by many active managers in their selection processes. QLTY delivers this factor in a cost-effective and transparent way.
Case vs Passive in this asset class
Quality companies have historically tended to display greater return and lower drawdowns over the long-run compared to passive market-cap weighted indices.
Key points:
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- Holding a portfolio of high-quality global companies in our view makes an excellent long-term core allocation in a portfolio, due to its compelling historical long-run performance, risk-return characteristics and resilience during market downturns compared to active and passive peers
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- Quality equity exposure is available via a systematic, rules-based screening approach at an attractive price point, reducing pressure on overall portfolio fee budgets and resulting in more of the returns compounding in the investor’s pocket over the long-run
“Quality is King”
If there is one investment style that should suit a long-term perspective, it is that of Quality. Quality businesses are those that demonstrate:
• High return on equity
• Low debt
• Strong cashflow generation
• Stable earnings profiles
Interestingly, these attributes sit near the top of the wish list of arguably the world’s premier long-term investor – Warren Buffet.
Not surprisingly, a quality-focused index has delivered market leading long-run returns (10 year return to 31 July 2020, net of fees) for investors when compared against both comparable passive benchmarks and top quartile active managers.
Why Should Quality Suit a Long-term Core Allocation?
• High return on equity – A key predictor of efficient use of capital and long-run returns according to academic literature
• Low debt – Indicative of stability and durability through the cycle
• Stable earnings profiles – Indicative of quality business models positioned to deliver through good times and bad
• Market leading – through the cycle historical long-run returns compared to active, passive and other quality focused managers (10 year return to 31 July 2020, net of fees)
• Track record of attractive risk-return characteristics and defensive qualities
QLTY’s Index outperformed every actively managed Australian domiciled Global Equities Fund among the funds with 10yr+ track records over the period to end July 2020.
Performance against top decile active management over the long run: as at 31/7/2020 – Returns % p.a.
Source: Morningstar Direct. Universe defined as “Australia Fund Equity World Large Blend”, “Australia Fund Equity World Large Growth“ and “Australia Fund Equity World Large Value“ Morningstar Category. Index figures in the table above for QLTY’s Index take into account the effect of QLTY’s management costs. You cannot invest directly in an index. Past performance is not an indicator of future performance of index or ETF.
As can be seen, QLTY’s index (less implied fees) would have consistently ranked in the top decile of global active managers over 3, 5 and 10 yrs.
The high level of historical performance, coupled with the consistency of that performance and a cost-effective annual fee of 35bps, in our view, supports the argument for inclusion in the long run core of a global equities allocation.
Drawdown
It is not just the performance of QLTY’s index that has been impressive. The historical drawdown analysis below shows better defensive qualities (as measured by Max. Drawdown) than the broad active and passive universe.
Fundamentals of QLTY vs MSCI World ex-Australia Index
The fundamentals of QLTY’s index also look compelling at this point in time and in an environment plagued with uncertainty, compared to broad-market benchmarks, further supporting the case for a core allocation.
Source: Bloomberg. As at 4 August 2020.
2. Emerging Markets
| Asset Class Categorisation: Growth Asset Class: Global Equities Indicative % of Growth Investor Portfolio (70/30): 5-10% ETF / Active ETF: ASIA |
Case vs Active in this asset class
Many active EM managers have an overweight to the Asian technology & consumer thematic. ASIA delivers this longer term growth thematic in a cost-effective and transparent way.
Case vs Passive in this asset class
The composition of Emerging Markets has changed materially over recent years from “resources centric” to “technology and consumer centric”. ASIA encapsulates “New EM” cost-effectively and without the “Old World EM” drag. It has significantly outperformed popular EM indices over both shorter and longer time frames to 31 July 2020.
Key points:
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1
Long-term secular growth trends have likely driven a permanent change in Emerging Markets (EM), requiring meaningful EM allocations for investors seeking true exposure to the global economy
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2
3 of the 10 largest companies in the world are now Emerging Market businesses (Alibaba, Tencent & Taiwan Semiconductor)
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3
The composition of Emerging Markets has shifted dramatically over recent years from an exposure based heavily on Resources to one based around Information Technology and Consumer Discretionary, with resources companies like Petrobas, Gazprom and Vale being overtaken by Alibaba, Tencent and Taiwan Semiconductor
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4
The core drivers of EM returns can be accessed in a cost-effective and targeted manner via transparent ETF exposure, easing pressure on fee budgets and resulting in more of the returns compounding in the investor’s pocket over the long-run
Changing Composition of Emerging Markets
Emerging Markets used to be the domain of Resources, which accounted for ~30% of MSCI EM index exposure going back 10 years, but has now declined to ~10%.
The growth of the Asian consumer and adoption of technology has dramatically altered the composition of Emerging Markets exposure, with IT/Communication Services and Consumer Discretionary now totalling a combined ~50% of the index.
This changing composition over time brings an exposure like the BetaShares Asia Technology Tigers ETF (ASX: ASIA) to the forefront of the conversation as a core Emerging Markets holding in portfolios:
- The top 5 stocks in ASIA are the same as the top 5 stocks in MSCI EM
- The top 4 country exposures in ASIA are the same as the top 4 countries in MSCI EM
- The top 3 sector exposures in ASIA are 3 of the 4 largest sectors in MSCI EM
- The Asian geographic region makes up over 80% of the MSCI EM universe
Note: Based on Index comparisons as at 20 August 2020.
Why ASIA for your EM Core?
Simply stated, ASIA represents not only what we believe to be the best of EM, but is intricately linked to the secular growth trends that are re-defining the composition of the emerging market indices towards technology and consumer discretionary.
- The top 5 stocks in ASIA have contributed over 170% of MSCI EM index’s total return over the last 2 years*
- The growth of EM businesses into some of the largest in the world could spur further rotation and flow into this asset class
- ASIA provides direct exposure to the parts of EM that are likely to benefit from such rotation and fund flows
- ASIA represents a higher quality factor exposure to EM
* Source: Bloomberg. Performance to 16 July 2020. Past performance is not indicative of future performance.
Returns of ASIA relative to MSCI Emerging Markets
ASIA’s returns have demonstrated significant outperformance net of fees relative to a broad MSCI EM exposure over all time periods shown below.
Historical returns
Source: Morningstar Direct. Shows performance of ASIA’s index adjusted for ASIA’s management costs prior to ASIA inception (18/9/18), blended with live fund performance post inception. Past performance is not indicative of future performance of index or ETF. Returns longer than 1 year are annualised.
Diversification benefits of ASIA for Australian investors
Rather than adding EM exposure in sectors already well represented in Australian equity portfolios, such as financials and materials, ASIA offers complementary exposure to key sectors that should enhance investors’ overall portfolio diversification outcomes.
Source: S&P Dow Jones Indices, BetaShares. As at 31 August 2020.
3. Fixed Income
| Asset Class Categorisation: Defensive Asset Class: Fixed Income Indicative % of Growth Investor Portfolio (70/30): 15-20% ETF / Active ETF: BNDS (Core Broad), AGVT + CRED + QPON (Core Tailored: Building block blend) |
Case vs Active in this asset class
Core Broad
Managed by the only active manager to have both outperformed the benchmark, net of fee, over the last 5 yrs to 31 July 2020 according to Morningstar Direct data and remained in the top quartile vs active funds for each of the 5 yrs to 31 December 2019 according to the SPIVA Report.
Core Tailored: Building block blend
Building block approach – Allows advisers to tailor a fixed income allocation to meet the needs of a portfolio more precisely, and without relying on the inconsistent return and equity diversification outcomes of many active managers.
Case vs Passive in this asset class
Core Broad
Simple, broad market active solution that has outperformed the benchmark from both a risk and return perspective, net of fees, over the last 10 yrs to 31 July 2020.
Core Tailored: Building block blend
Building Block Approach – Allows fixed income portfolios to be constructed at low cost which can either be tailored to investor needs or designed with the aim of replicating broad benchmark outcomes with superior risk and or return outcomes. Seeks to overcome the limitations of traditional bond indices, i.e. issuer weighted, unstable duration profiles, segment creep and little/no roll yield.
Key points:
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- Broad Fixed Income indices have changed over time in terms of both duration profile and sector composition, and are becoming increasingly inefficient
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- Low interest rates have not only pushed returns in fixed income lower, they have arguably reduced the ability of some fixed income exposures to offset equity risk in multi-asset portfolios
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- Investors need to account for these factors when considering the construction of their fixed income
core to ensure future results from this asset class meet the generally accepted expectations of Fixed
Income investments, being:- consistent and stable income
– high level of capital value stability
– diversification away from equity risk in a multi-asset portfolio
- Investors need to account for these factors when considering the construction of their fixed income
The Inefficiency in Broad Fixed Income Indices
Indices such as the Bloomberg AusBond Composite Index have seen much of their issuance dominated by Government Bond exposure (and especially short duration Government Bond exposure) over recent years as Federal Budget deficits have driven increased bond issuance. This trend is likely to continue as a result of extensive COVID-19 stimulus measures. This poses 2 potential problems for investors using such indices:
- Shorter duration government bond exposures provide little offset of equity risk and pay little (if anything) over cash returns. Who, in such a low interest rate environment, can afford to have their meagre returns impacted by such inefficiencies?
- In the not too distant future, the Bloomberg Ausbond Composite Index (“composite” implying it should provide exposure to a range of Government and Corporate bonds) is likely to, for all intents and purposes, resemble a pure government bond exposure
This leads to the next, and arguably most significant, inefficiency within the AusBond Composite Index currently.
How well can the AusBond Composite Index defend against equity risk in a multi-asset portfolio?
RBA liquidity and yield curve control have effectively capped government bond yields in Australia out to 3 years at ~0.25% p.a., with the 5 year yield not much higher, currently 0.39% p.a. (as at 27 August 2020).
With the AusBond Composite Index having an average duration of only ~6 years, this means that a significant proportion of the holdings of this index is earning 0.25% p.a. or less! This is shown in the bond curve below:
Source: Bloomberg. As at 27 August 2020. Past performance is not an indication of future performance.
Putting aside the impact on income for bond holders, the real concern is that, unless the RBA is prepared to use policy to push rates deeply negative, in the event of another equity sell-off the AusBond Composite Index would have very limited ability to diversify away equity risk in portfolios – not something many investors would have considered.
So the inefficiency of broad fixed income benchmarks such as AusBond Composite is apparent:
- Lack of ability to provide any meaningful income above cash
- Diminishing ability to defend against equity losses in future sell-offs
What are the solutions to this dilemma?
Next Generation Fixed Income
What approach can advisers take in this new low-rate era to ensure their fixed income meets their objective?
The answers will be driven primarily by the sophistication of the portfolio:
- Portfolios requiring a simple approach may look to an active manager to address the inefficiencies of broad composite indices
- Portfolios requiring a more bespoke approach, or with more specific objectives in mind, may adopt a “building block” approach to augment portfolio outcomes or construct portfolios for specific objectives from scratch
Core (Broad): Portfolios requiring a simple approach
Many portfolios will look to active management to try to manage the inefficiencies of broad composite benchmarks. And whilst such an approach is valid, it relies heavily on the manager’s skill to deliver desired outcomes. The active management path has lead to disappointing results for many investors time and again. According to the latest SPIVA data:
- 81.4% of active fixed income funds have underperformed the AusBond Composite Benchmark (net of fee) over the last 5 years*
- Only 1 manager in the analysis has managed to remain in the top quartile every year for the last 5 years*
- That Manager is Western Asset and their strategy is available in Active ETF format via the BetaShares Legg Mason Australian Bond Fund (managed fund)
*Source: SPIVA Report as at 31 Dec 2019. Past performance is not indicative of future performance.
Core (Tailored): Portfolios requiring customisation
Investors are increasingly building bespoke Fixed Income portfolios by blending ETFs targeting specific parts of the fixed income spectrum (credit, duration) together to achieve outcomes tailored to an investor’s specific needs or other specific portfolio objectives (eg. maximum offset of equity risk).
A good example of this could be to blend a long duration government bond ETF, a corporate bond ETF and a floating rate bond ETF to mimic the duration and segment profile (credit/govt etc) of the Ausbond Composite Index. Doing so can create, at similar cost to AusBond Composite tracking funds, either:
- A portfolio with similar yield to Ausbond Composite but greater equity diversification properties; or
- A portfolio with similar equity diversification properties to AusBond Composite but yielding substantially more
How is this possible?
Such a building block approach can avoid holding the inefficient parts of the AusBond Composite Index, for example, short-duration government paper that yields little more than cash and provides minimal potential for equity diversification. The performance and risk characteristics of such a portfolio are shown below against AusBond Composite to demonstrate this outcome.
The below chart shows performance of the specified blend of AGVT, CRED and QPON Indices adjusted for management costs prior to inception, blended with live fund performance post inception.
Cumulative growth: Common inception (3 March 2008) – 30 June 2020
Source: Morningstar Direct, as at 30 June 2020. Past performance is not an indication of future performance.
Another option that is increasingly popular is to hold exposure to a building block such as a high quality corporate bond ETF to augment portfolio returns at a time when such exposure is gradually being pushed out of the broad composite index.
A final example could be to increase the defensive quality of your fixed income portfolio via the addition of a long-duration government bond ETF at a time when the defensive qualities of broad composite benchmarks are being questioned due to the low interest rate environment.
Your BetaShares account manager can run portfolio analytics on a hypothetical portfolio you create to show the effect of such an approach relative to your existing Fixed Income allocations.
4. Australian Equities
| Asset Class Categorisation: Growth Asset Class: Australian Equities Indicative % of Growth Investor Portfolio (70/30): 30-35% ETF / Active ETF: A200 (Core Broad), EX20 (Core Growth), EINC (Core Income) |
Case vs Active in this asset class
Core Broad
~81% of active funds have underperformed the benchmark over the last 5 yrs to 31 Dec 2019, and none of the top quartile managers from 2015 maintained top quartile performance through to 31 Dec 2019. This highlights just how hard it is to build a portfolio core with an active approach. A200 (at 7bps mgmt. fee) offers a broad exposure which reduces pressure on fee budgets and with compelling historical performance vs. active management.
Core Growth
Cost-effective exposure to the growth, performance and diversification that an EX20 equity strategy provides. Has outperformed many popular broad-market active managers over the long-term.
Core Income
Has generated market-like performance over the long-run with a rigorous and forward looking focus on sustainable income.
Case vs Passive in this asset class
Core Broad
At 7bps p.a., A200 is the lowest cost broad-market ETF in Australia. Lower fees allow more of the return to compound over the long-run, a critical consideration for a long run core.
Core Growth
Provides a more growth-focused and diversified sector exposure than the broad-market. Has shown better historical performance since inception to 31 July 2020, diversification and lower fees compared to similar diversification strategies such as Equal Weight. Has also shown better historical performance since inception vs the broad-market.
Core Income
Forward looking and actively managed income strategy may be advantageous relative to systematic passive equivalents.
Key points:
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1
The sector concentration of the Australian Equity market has been brought to the fore recently. Favourable economic conditions in Australia lead to 26 years without a recession, until the COVID-19 Crisis
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2
This record-breaking period enabled Australian banks to deliver unprecedented runs of share price appreciation and dividend growth that may never be seen again and masked the true cyclical nature of this industry
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3
Continued growth challenges for the Australian market (from its heavy cyclical weightings) shine a spotlight on the importance of diversification and fees in portfolios. Money saved on fees can compound returns left in the investor’s pocket
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4
Low interest rates and on-going dividend cuts/dividend suspensions are placing income-seeking investors under extreme pressure
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5
Astute selection of Australian Equity exposure may help address these issues for investors
A Broad Passive Approach: When looking at broad exposure, it’s all about fees
The recently released SPIVA (S&P Index vs. Active) report highlighted that 80.79% of Australian active funds underperformed their benchmark in the 5yrs to 31 Dec 2019.
Additionally, the SPIVA Australian Persistence Scorecard shows that active managers who have experienced strong past performance are very unlikely to re-produce this outperformance into the future. Of top quartile actively managed funds for the year ending Dec 2015:
- None of the 107 Australian Equities funds remained top quartile for each of the next 4 years
- In fact, less than 20% of these 2015 top quartile Australian Equities funds even remained in the top quartile the following year
So picking a good active manager for the long term is difficult, as is relying on an active manager to perform at the core of your portfolio for the long-run, according to the data.
Even in the March 2020 sell-off more than half the active funds underperformed the benchmark according to the SPIVA Q1 2020 report, debunking the myth that active managers will shine in down markets.
Additionally, blending multiple active managers of different factors/styles may run the risk of ending up with a combined allocation that looks not dissimilar to the broad passive market, but at much higher fee.
And fees matter. There has been an inverse relationship between management fees and investment returns – historically, funds with higher management fees have generally suffered from poorer long-term performance.
Funds categorised by Morningstar as: Australian Equities, Large Blend
Source: Morningstar Direct, 5yrs to 31/5/20. Past performance is not indicative of future performance.
We have tested this relationship across several Morningstar fund categories and found it to be statistically significant (at a 99% confidence level) – so choosing a lower cost investment exposure should improve your after-fee long term performance.
The BetaShares Australia 200 ETF (ASX: A200) is the lowest fee broad-Australian market ETF in the Australian market providing diversified exposure to the asset class at just 7bps p.a.
A Growth-Focused Passive Approach: Growth and diversification at low cost
For those preferring a growth-focused passive approach, the BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20) has a track record of outperformance over the long-term and can significantly address the concentration issues of the Australian market.
- The Fund employs a market-cap weighting methodology to hold stocks 21-200 of the Australian market and thus avoiding the heavy concentration to Financials and Resource giants in the S&P/ ASX 200 top 20 companies
- Holding EX20 as a core exposure can help reduce exposure to many of the cyclical companies in the top 20 and, at the same time, skew exposure positively to many of the companies experiencing structural growth which sit outside of the top 20
- This higher exposure to the EX20 part of the market has seen EX20 (7.78% p.a.) outperform the Australian broad-market (7.18% p.a.) and similar concentration reducing strategies such as Equal Weight (7.33% p.a.) since common inception on 5 Oct 2016 to 31 July 2020
- The sector diversification of a holding like EX20 demonstrates its attraction as the core of a portfolio relative to a broad-market equities portfolio
- EX20’s low fee of 25bps p.a. means more of the performance benefits of this strategy remain in the hands of the investor and can compound over time
- Whilst not specifically an income seeking strategy, EX20 can add significant diversification of the income stream for Australian equities away from the banks. With a current forward looking yield of 3.1% p.a. (as at 31 July 2020), EX20 is similar to the Australian broad-market at 3.3% p.a. but with greater income diversification
An Income-Focused Approach: Quality, Income and reduced concentration – Your Core needs all in one
The actively-managed BetaShares Legg Mason Equity Income Fund (managed fund) (ASX: EINC) looks well placed to solve these issues for Australian investors.
- The fund provides investors with tax-effective income, with a 12 month forecast cash yield of 4.7% and 6.2% including franking, some ~40% higher than the current yield of the S&P/ASX 200 Index (as at 28/7/20)*
- As an actively managed exposure, the portfolio is constructed using a quality screen and forward looking earnings and dividend projections, a robust stock selection process in challenging market conditions
- It has single stock and sector diversification to qualify as a Core holding in a portfolio
- It has delivered market-like returns (net of fee) with these returns tilted towards income earning
- It has a Lonsec “Highly Recommended” rating**
*Yield forecast is calculated using the weighted average of broker consensus forecasts of each portfolio holding and research conducted by Legg Mason Australia, and excludes the Fund’s fees and costs. Franking credit benefit assumes a zero tax rate. It is not to be interpreted as the offset achieved by unitholders during this period. Actual yield may differ due to various factors, including changes in the prices of the underlying securities and the number of units on issue. Neither the yield forecast nor past performance is a guarantee of future results. Not all investors will be able to benefit from the full value of franking credits.
**The rating issued for (BetaShares Legg Mason Equity Income Fund (managed fund) (ASX: EINC) – assigned February 2018) presented in this document is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Ratings are general advice only, and have been prepared without taking account of your objectives, financial situation or needs. Consider your personal circumstances, read the product disclosure statement and seek independent financial advice before investing. The rating is not a recommendation to purchase, sell or hold any product. Past performance information is not indicative of future performance. Ratings are subject to change without notice and Lonsec assumes no obligation to update. Lonsec uses objective criteria and receives a fee from the Fund Manager. Visit lonsec.com.au for ratings information and to access the full report. © 2020 Lonsec. All rights reserved.
5. Small Cap Australian Equities
| Asset Class Categorisation: Growth Asset Class: Australian Equities Indicative % of Growth Investor Portfolio (70/30): 5-10% ETF / Active ETF: SMLL |
Case vs Active in this asset class
We believe outperformance in the small caps sector can be achieved over the long-term by identifying and avoiding companies with undesirable investment characteristics. This can be targeted with sensible (yet extensively tested) screens, and delivered in a cost-effective way.
Case vs Passive in this asset class
Rules-based strategy screens to remove many undesirable companies that are included in the broad small cap index. Removes those that are unprofitable or excessively leveraged.
Key points:
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- Small Cap equities have long formed part of the asset allocation for investors looking for higher long-run growth profiles and broader exposure at the core of their portfolios
- This segment of the market is not well represented in traditional benchmarks
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- A systematic rules-based approach has potential to deliver compelling outcomes relative to active and passive peers
- Lowering cost via a rules-based approach can reduce pressure on fee budgets and results in a greater proportion of market returns remaining in the investor’s pocket to compound over the long-run
The investment rationale for the BetaShares Australian Small Companies Select Fund (managed fund) (ASX: SMLL) is based on the observation that a large part of the alpha in the small caps sector can be targeted by identifying and avoiding companies with undesirable investment characteristics. We believe this can be done with some sensible (yet extensively tested) screens, and delivered in a cost-effective way.
This chart is for financial intermediary/wholesale client use only. It must not be given to any retail clients. *SMLL strategy is simulated. Simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading, are based on certain assumptions, and are produced with the benefit of hindsight. Also, since the trades have not actually been executed, the results may have under or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. No representation is being made that the Fund will achieve results similar to those shown. Past performance, simulated or actual, is not an indication of future performance. Source: BetaShares, Nasdaq.
SMLL’s strategy implements a systematic screening process for stocks that includes:
- A series of screens including positive earnings and a strong ability to service debt to identify companies with favorable investment characteristics;
- Relative valuation metrics and price momentum are also evaluated as part of the stock selection process;
- Liquidity characteristics are also taken into account, with a view to selecting stocks that are more liquid relative to other small companies.
Benefits of investing in SMLL in your client portfolios
- Performance – aims to outperform the S&P/ASX Small Ordinaries Accumulation Index.
- Cost effective – the management fee (0.39% p.a.) is significantly lower than most actively managed funds that invest in Australian small companies. A performance fee is only applied if outperformance is delivered.
- Diversification – with a single trade, investors can obtain exposure to a portfolio of high quality, profitable Australian small companies, providing diversification across industry sectors and individual securities.
6. Gold Bullion and Gold Miners
| Asset Class Categorisation: Defensive Indicative % of Growth Investor Portfolio (70/30): 5-10% ETF / Active ETF: Gold Bullion: QAU, Gold Miners: MNRS* *MNRS is exposed to sharemarket risk. |
Case vs Passive in this asset class
Physically backed gold bullion (QAU) or gold miners (MNRS) with a currency hedge.
The historical long-term positive correlation between Gold prices and the AUD means currency hedged gold has traditionally outperformed unhedged gold in periods of rising gold prices.
Key points:
-
1
Negative real interest rates globally form a positive environment for Gold Bullion
-
2
Gold Bullion has historically displayed defensive characteristics and low correlation to other major asset classes, making it a potentially strong addition to a portfolio in an uncertain environment especially at a time when record low rates may reduce the diversification benefit of some bonds
-
3
In rising gold price environments, it has historically been preferable to hold Gold on a currency-hedged basis and this is even more the case when considering allocating to gold miners
How significant can currency risk be?
Consider how an Australian investor in gold bullion or a portfolio of gold miners might have benefited from the strong rise in USD gold price over the 3 months to 30 June 2020 when the AUD also strengthened:
The comparative returns shown above indicate that leaving your gold exposure unhedged can potentially be costly for Australian investors, and this is not just a short-term phenomenon. It has been a relatively consistent outcome over the last 40 years and has been particularly prevalent when gold has experienced large price gains.
Media reports of the recent gold price rally might be quite confusing for an unhedged gold investor who has seen their gains partially or entirely offset by adverse movements in exchange rates. For advisers recommending a gold exposure, the investment thesis can be simplified by removing the currency risk from the equation.
How to gain exposure to gold
You can use ETFs to gain exposure to gold:
- Direct gold price exposure, through a gold ETF physically backed by gold bullion; or
- Indirect exposure, through an ETF that holds a globally diversified portfolio of gold miners.
History suggests that a bullish view on gold or gold miners may be best expressed by removing the effects of AUD/USD exchange rates, which can be achieved by investing in a currency-hedged ETF.
BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU)
• Physically backed by gold bullion held in a segregated account with a third-party custodian – bullion bar list issued by JP Morgan is published on our website.
• The only AUD-hedged gold ETF solution available in the Australian market – i.e. exposure to pure USD gold prices.
• 1-year performance: 21.57% (to 30 June 2020).*
BetaShares Global Gold Miners ETF – Currency Hedged (ASX: MNRS)
• Provides AUD-hedged exposure to the world’s 46 largest gold mining companies (ex-Australia).
• Diversification away from concentrated Australian gold mining sector which makes up only 10% of the global gold mining market.
• 1-year performance: 58.94% (to 30 June 2020).*
*Past performance is not indicative of future performance.
About BetaShares
BetaShares is a leading manager of ETFs and other Funds that are traded on the Australian Securities Exchange (‘ASX’).