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Welcome to Betashares best and worst, bringing you insights into our top and bottom performing funds for the month, as well as a spotlight on some funds with interesting recent performance stories.

October was a cautious month for markets. Most of Betashares’ equity funds saw negative returns, with the only gains being seen in gold and cryptocurrencies. The major story for the month was the flare up in tensions in the Middle East, which caused a temporary jump in oil prices and led to increased inflation expectations – another reason for already uncertain investors to tilt towards defensive exposures.

It was another difficult month for ethical investments, as high interest rates and cost of living pressures continued to make new projects and purchases such as new solar and wind plants, rooftop solar and electric vehicles more expensive for businesses and consumers alike.

For the spotlight section this month, we look at three exposures from different corners of the globe that have had different experiences over the last couple of years. The Betashares Asia Technology Tigers ETF (ASX: ASIA) invests in the 50 largest technology and online retail stocks in Asia (ex-Japan), with an almost 50% allocation to China. The Betashares Australian Sustainability Leaders ETF (ASX: FAIR) aims to track the performance of an index (before fees and expenses) that includes Australian companies that have passed a series of ethical and environmental screens, with a preference for companies classified as ‘Sustainability Leaders’ based on their involvement in business activities aligned to the United Nations Sustainable Development Goals. Finally, our Betashares Nasdaq 100 ETF (ASX: NDQ) aims to track the globally renowned Nasdaq-100 Index, home to some of the most innovative technology companies in the world.

Source: Morningstar, Bloomberg. As at 31 October 2023. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Spotlight:

• Betashares Asia Technology Tigers ETF (ASX: ASIA): Asia, and especially China, is a point of contention among many investors. While many see the market of 1.4 billion people and an ever-growing middle class as an inevitable source of growth, investors can often get spooked by geopolitical tensions, opaque economic data and a government that has projected mixed attitudes towards big business. All of those forces have been on show in a roller coaster few years for the economy, with sudden and long Covid lockdowns, a collapsing real estate market and erratic conditions for big business causing large swings in the stock market, especially the tech companies that feature in the fund. In the almost two and a half years from the fund’s inception until February 2021, ASIA gained almost 140% as millions of stuck at home investors “piled into” China¹, which for much of the peak of Covid had done a much better job than most of the rest of the world at keeping infections at bay². Then, as the country remained locked down while the rest of the world began to re-open, the fund reversed all of its gains, helped downwards by the emerging property crisis amongst the country’s largest real estate developers. In late 2022, the market suddenly rallied as investors believed the government’s sudden friendliness towards big tech would allow the sector to flourish. The fund gained 40% in the 3 months to 27 January 2023, with the Chinese internet giants Alibaba, Tencent and Pinduoduo all climbing 50-80%. In the months since, the fund has generally traded sideways, with the future of the world’s second largest economy remaining uncertain.

• Betashares Australian Sustainability Leaders ETF (ASX: FAIR):  It’s been a difficult period for Australian ethical exposures, with FAIR losing over 15% since the beginning of 2022 to the end of October 2023, compared to an almost flat return for the broader S&P/ASX 200. The largest driver of underperformance was FAIR’s overexposure to the Australian real estate sector, which has seen losses of around 25% over the period. The fund had an average 19.7% allocation to the sector compared to just 6.6% in the broader benchmark, due to larger real estate companies such as Goodman Group and Dexus passing the sustainability screens. This is contrasted to the financials and materials sectors, in which many large companies have been screened out due to their direct or material indirect fossil fuels industry exposure. Real estate was hit particularly hard by the sharp increases in interest rates, which made funding new projects and affordability for end clients more difficult. Health care showed a similar story, with a 21.1% average weighting in FAIR compared to 9.8% in the S&P/ASX 200 and bearing losses of more than 23% since the beginning on 2022. As well, the selection of stock within sectors has tended to work against FAIR. While the fund has a much lower weighting to the materials sector than the S&P/ASX 200, the mostly lithium mining stocks in FAIR returned -10.80%, compared to the broader sector which was one of the strongest performers since the beginning of 2022, returning 15.79%. This is emblematic of a tough couple of years for ethical investments, which have tended to be hit hard by rising interest rates, cautious investors moving away from growth exposures and new technology, and the exclusion of the strong performing materials and energy sectors.

• Betashares Nasdaq 100 ETF (ASX: NDQ):  Although it doesn’t frequently feature in the top or bottom 5 performing funds on a month-to-month basis, NDQ’s performance over the longer term has been truly impressive. Over the 5 years to the end of October 2023, it was the single best performing long only equity fund (listed or unlisted) in Australia³, a testament to the companies that make up the Nasdaq-100 Index as well as the long-term benefits of a low-cost index strategy. The index has become synonymous globally with innovation and technology, hosting some of the companies investing the most in developing the technologies that have shaped all of our lives over the last 20 years. In fact, companies in the Nasdaq-100 Index spent 7x the amount on R&D in the 12 months to June 2023 compared to the S&P 500, with a particular current focus on AI/Big Data, the Metaverse, Robotics and the Internet Economy⁴. The ‘Magnificent 7’, that is Apple, Microsoft, NVIDIA, Tesla, Alphabet (Class A & C) and Meta, have driven around 70% of the index’s returns over the 5-year period, as each has had the scale and cash reserves to develop scalable business lines across multiple market sectors⁵ as new trends have emerged.

Source: Morningstar, Bloomberg. As at 31 October 2023. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Best:

• Betashares Gold Bullion ETF – Currency Hedged (ASX: QAU): After steadily declining from its May high of US$2050/oz down to under US$1850/oz by the start of October, the spot price of gold started to increase in the second week of October after the beginning of the Israel-Hamas war. It finished the month back up above US$2000/oz, as investors flocked to the asset traditionally viewed as a ‘safe haven’ in the face of increased geopolitical tension and uncertainty. While gold historically has tended to fall as bond yields rise, in this case the worry was that further instability could lead to an inflation shock caused by higher oil prices, leading gold to rise even as bonds sold off⁶.

• Betashares Crypto Innovators ETF (ASX: CRYP): After spending much of August and September near the US$26,000 mark, Bitcoin climbed to reach nearly US$35,000 by the end of October, its highest point since May 2022. The rally was likely caused by the buzz around crypto ETFs, as the SEC looks likely to approve the first spot crypto ETFs in the US early next year. Many commentators foresee ETFs providing a more convenient access point for investors wishing to gain exposure to the asset class, stimulating demand⁷. Microstrategy, which is the largest public holder of bitcoin, led the contributions with a 31.47% return over the month, as the firm’s unrealised gains from its bitcoin holdings surpassed US$1.1 billion. Galaxy Digital Holdings gained 25.33% in a month in which they announced a pre-tax income of US$124 million on the back of increasing crypto prices, and Riot Platforms gained 6.85% to be the third largest contributor.

• Betashares Global Gold Miners ETF – Currency Hedged (ASX: MNRS): An obvious beneficiary of rising gold prices, gold miners enjoyed widespread gains during October. Barrick Gold Corp (+11.45%) led the contributors after announcing a third straight month of 3% increased gold production, as well as that it would invest US$2 billion to expand its Lumwana mine in Zambia⁸.  Gold Fields Ltd gained 23.97% after announcing it will invest US$9.5 million into exploration of a gold-silver project in Queensland⁹, while Kinross Gold Corp was the third largest contributor to the fund’s performance after gaining 16.11%.

Source: Morningstar, Bloomberg. As at 31 October 2023. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Worst:

• Betashares Solar ETF (ASX: TANN): October continued a difficult period for the global solar industry, which has seen TANN appear in the bottom 5 funds every month since July of this year. The industry has struggled through the global interest rate hiking cycle, as the cost of financing both residential and large-scale solar projects has made the energy source less attractive. In October, the primary cause of the losses in the fund was SolarEdge Technologies (-40.22%) warning that falling demand in Europe would lead revenue, gross margins and operating income to be lower than analysts’ predictions. The stock tumbled 35% after the announcement, with losses spreading throughout the sector¹⁰. Enphase Energy (-32.48%) was the largest detractor from performance in the fund for the month, falling 26% in the week after SolarEdge’s announcement, and then another 20% late in the month after revising its own fourth quarter earnings down, again on weakening demand in Europe. Chinese manufacturer Xinyi Solar was the third largest detractor after losing 19.91% over the month.

• Betashares Climate Change Innovation ETF (ASX: ERTH):  As the solar industry has struggled in recent months, so too has the broader climate change industry. Green energy providers were the largest detractors from the fund’s performance, a climate sector which includes solar, wind and hydro. Like solar, other green energy sources require large capital investments, which have become much more expensive to finance in the current higher interest rate environment. As well, cheap electricity prices in the US have made them less competitive, and meter reform in the country’s largest power market California has hurt demand further. The next worst performing climate sector was Enabling Solutions, which covers a wide range of industries such as alternative fuels, energy storage and energy efficiency technologies. When compared to a broad benchmark such as the MSCI ACWI, ERTH’s performance looked even worse due to its exclusion of most of the ‘Magnificent 7’, which have driven a large part of the broader market’s performance in the last year¹¹. Tesla is the only ‘Magnificent 7’ stock held by ERTH, and also happened to be the third largest detractor for the month, falling 18.18% after Elon Musk issued a pessimistic third quarter earnings call in which he announced a decline in profits and attempted to temper investors’ expectations about the long-delayed Cybertruck¹². Tesla-rival Rivian also contributed to losses, falling 31.90% after announcing a plan to issue US$1.5 billion of convertible green bonds in an attempt to maintain a healthy balance sheet through the launch of a new product line¹³, while the previously mentioned solar-producer Enphase Energy was the single largest detractor from the fund’s monthly performance.

• Betashares Electric Vehicles and Future Mobility ETF (ASX: DRIV): The story around DRIV’s monthly performance was largely driven (no pun intended) by the same factors as TANN and ERTH. The previously mentioned Tesla and Rivian were the two largest detractors from the fund’s monthly performance, with Irish electric vehicle component manufacturer Aptiv PLC (-9.84%) bringing up the third spot. It’s been a difficult market for EV manufacturers, with the fund falling over 56% from its high almost exactly 2 years ago in early November 2021. Higher interest rates have had the dual effects of increasing the discount rate on future earnings of growth stocks and making it more expensive for consumers to finance new purchases. As the first wave of early, high-income technophile adopters have settled in with their new electric vehicles, it is predicted that high prices, misconceptions about range and limited charging networks will make take-up much slower among subsequent demographics¹⁴.

For trailing performance of all Betashares funds please see: Betashares Monthly Performance – October 2023

*Excludes short and geared funds

**Annualised for funds with more than 1 year’s performance history.

^ No forward P/E estimate available

Sources:
1. CNBC
2. Economist
3. Source: Morningstar. Comparison is made to all Australian domiciled Open-Ended Funds and ETFs in the Broad Global Category “Equity” with 5 year performance up to 31 October 2023.4. Betashares
5. Betashares
6. AFR
7. Betashares
8. Reuters
9. Mining Technology
10. CNBC
11. Betashares Insights
12. CNBC
13. Reuters
14. Forbes