6 trading strategies and how to use ETPs to implement them

BY Justin Arzadon | 5 September 2017
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Exchange traded funds (ETPs) are an excellent option for those new to investing, due to a number of key advantages over other instruments:

• Low cost
• Liquidity
• Potential for diversification
• Low minimum investment amount
• Wide range of investment choices available

These advantages also make ETPs attractive vehicles for various trading and investing strategies. I’ll show examples of some of these in this note, along with some BetaShares funds that may be used to employ these strategies.

1. Asset Allocation

This is the process of dividing your investment portfolio across various asset classes like equities, fixed income and cash as a means to diversify your overall investments and reduce risk.

Looking at BetaShares ETPs, you have options such as our broad market FTSE RAFI Australia 200 ETF (ASX: QOZ) for the Australian equities part of your portfolio, and the Nasdaq 100 ETF (NDQ) for international equity exposure.

The Australian Bank Floating Rate Bond ETF (QPON) can be used as a complement to cash holdings or as part of the fixed income allocation.

For an allocation to commodities, the Commodities Basket ETF – (QCB) gives exposure to a diversified broad basket of commodities.

2. Sector Rotation

Due to the cyclical nature of financial markets, sector performance tends to depend on where the market is in the economic cycle. As such, investors may profit by using a trading strategy which involves selecting sectors of the market experiencing favourable conditions and staying out of sectors that are less favourable, based on the investor’s view on the current point of the economic cycle.

Early in the cycle, stocks of smaller companies have historically outperformed large caps. This is likely due to small caps being more economically sensitive and more reliant on financing conditions. You can get exposure to small caps through the Australian Small Companies Select Fund (managed fund) (SMLL).

Later in the economic cycle where economic growth is slowing and appears overheated, inflation is climbing higher and stock prices begin to look expensive compared to earnings, sectors such as healthcare and energy tend to perform well.

BetaShares offers a range of Global Sector funds with the majority of them also being currency hedged. You can find more info on the Global Healthcare ETF (DRUG) and the Global Energy Companies ETF (FUEL) by following the links.

3. Dollar Cost Averaging and Distribution reinvestment

Market timing is viewed by many investors as being futile, so by following a set schedule and purchasing an equal dollar amount of units regardless of the price, you can protect yourself against market fluctuations and downside risk. You also take the emotion and fear out of your purchases. This is known as ‘dollar cost averaging’. You can also accomplish the same objective by using a distribution reinvestment strategy.

Most BetaShares funds offer a Distribution Reinvestment Plan (DRP) but the Australian Dividend Harvester Fund (managed fund) (HVST), being a high income fund, has an added feature that allows you to select the percentage of the distribution you would like reinvested. So if you prefer to take 50% of the distribution in cash, and re-invest the other 50%, you can choose to do so.

4. Hedging

If you are suspecting a drawdown to occur in the market, you may wish to hedge or protect from downside risk, or you may wish to maintain exposure to the market but with less volatility.

BetaShares Bear Suite of funds (ASX: BEAR, BBOZ and BBUS) can be used as a hedge to your portfolio of shares.

For those investors seeking a more dynamic hedging style of product, the Managed Risk Australian Share Fund (managed fund) (AUST) gives you exposure to the broad Australian sharemarket, but has a hedging feature built into the fund so you don’t have to manage it yourself. AUST’s risk management overlay is based on volatility within the sharemarket and is adjusted up and down accordingly. This overlay aims to provide investors with lower drawdowns in declining markets and a less volatile, or “smoother”, ride.

5. Seasonal trends

Seasonal investing refers to particular time frames usually with a defined start and end date, influenced by recurring trends and patterns that have historically shown price strength or weakness for the chosen equity, sector, index or commodity.

We’ve all heard the saying “Sell in May and go away” which refers to the seasonality trade of purchasing US equities in November and remaining long till the end of April. This period has historically provided stronger stock market growth on average than other months. Since 1926, annualised total returns for the S&P 500 Index during the “Sell in May” weak phase of May-October are about half (6.8%) of the seasonally strong Nov-April period at 13.4%.
The FTSE RAFI U.S. 1000 ETF (ASX: QUS) provides exposure to a diversified portfolio of US equities.

For investors seeking patterns in gold prices, over the past 20 years, the gold price has historically been strong in September, and on average bullion had returns of over 3% for that month, being the best performing month for the shiny metal. The reason for this could be that September marks the start of India’s gold gifting season which runs till mid-November.

Our Gold Bullion ETF (QAU) gives you a pure exposure to gold bullion and is currency hedged, which means investors do not have to take into account the effect of currency fluctuations on their investment returns.

6. Swing trading

Swing trading is  a shorter term trading strategy that can be used for equities, commodities and currencies when technical indicators suggest an upward or downward trend in the near future. These trades usually last for a few days or only up to a few weeks.

If your interest is playing the USD/AUD relationship, you can obtain geared exposure to both sides of the trade using Strong US Dollar Fund (hedge fund) (YANK) and Strong Australian Dollar Fund (hedge fund) (AUDS).

Going long or short Australian equities with a bit of leverage can be done easily by using the Geared Australian Equity Fund (hedge fund) (GEAR) and Australian Equities Strong Bear Hedge Fund (BBOZ).
I hope these 6 trading and investment strategies – that can easily be implemented using ETPs – have given you food for thought. Happy Trading!

Note: This blog is provided for general information only, and is not personal investment advice. It does not take into account any person’s financial situation or needs. It is not a recommendation to make any investment or adopt any particular investment strategy. Investment involves risk and historical performance is not a guide to future performance of any strategy.

4 Comments

  1. Tom Hamilton  |  September 10, 2017

    Hi, I have invested in your EFT called Harvest (HVST) and so far have had very poor results!!! Why would I invest in another of your products?

    1. Ele de Vere  |  September 15, 2017

      Hi Tom,

      Thanks for your enquiry about HVST. We have recently published a document which explains the Funds strategy and performance. You can access it by copying and pasting the link into your browser.

      https://www.betashares.com.au/wp-content/uploads/2017/06/Revisting_HVST_Strategy_final.pdf

      At present HVST has been affected by a number of market issues that we do not expect to necessarily persist over time. This has included an overweight position to the banks at the time the bank levy was announced, and then an underweight position to the banks at the time the market rallied. In addition it has been long utilities and A-REITS at times when those stocks have been performing poorly. Investors in HVST need to understand that it does not track a benchmark and, as such, it can be expected to both under and overperform the broad market at various times.

      If you have any further questions or queries please do not hesitate to contact us on 1300 487 577

  2. Lesley Gelson  |  September 10, 2017

    Can you please explain why HSVT has dropped so much?
    I am concerned .

    1. Ele de Vere  |  September 15, 2017

      Hi Lesley,

      Thank you for your enquiry. We recently released a document which helps explains the funds’ strategy and its recent performance. You can access the PDF by copying the link below and pasting it into your browser.

      https://www.betashares.com.au/wp-content/uploads/2017/06/Revisting_HVST_Strategy_final.pdf

      The unit price of HVST has declined because the total return of the fund has not equalled the yield. The yield of HVST has been roughly 10% to 11% per year while the Australian sharemarket’s long term return has been approximately 7% to 8% per year. Namely, this gap of 3% to 4% explains why the unit price is reasonably expected to decrease annually by this amount. It is also important to note that the fund does not track an index specifically, rather it rules based, working on a 60 day dividend rotation strategy which picks the 14 highest gross dividend paying stocks from the ASX50.

      At present, this has meant the fund was overweight position to the banks at the time the bank levy was announced, and then an underweight position to the banks at the time the market rallied. In addition, it has been long utilities and A-REITS at times when those stocks have been performing poorly. We do not expect these market factors to necessarily affect the fund overtime but since HVST does not track a benchmark it can be expected to both under and over perform the broad market at various times. Reflective of this is that the basket of stocks outperformed the ASX 50 by roughly 6% last year.

      The risk management strategy the fund employs, to protect against declines in the sharemarket, also has the potential to hinder the fund’s performance because it applies a handbrake should volatility levels exceed 12%. A key example of this was towards the back end of last year during Trump’s post-election victory, when the risk management strategy generated a drag of -4.2%, relative to the Index. The benefits of the strategy have yielded positive results as well though, as during the period 31 July 2015 – 31 January 2016 the strategy provided a cushion which generated approximately 4.2% outperformance relative to the Index.

      If you have any further questions please feel free to contact us directly on 1300 487 577.

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