Betashares’ best and worst for September

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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.

September was a tough month for markets, with only 11 Betashares funds seeing positive returns*. The major theme of the month was rising oil prices, with crude oil rising close to 10% as OPEC+ continued production cuts. Energy stocks were the major winner from this, as well as benefitting from the uncertainty around energy supply amid continued global tensions. Central banks mostly held interest rates steady, although the narrative of “higher for longer” continued to gain traction, contributing to the selloff in risky assets. However, the higher for longer approach also hurt fixed income, with US 20-year treasury yields climbing around 50 basis points to nearly 5%.

For the Spotlight section this month, we’ve focused on three strategies that we’ve seen investors pursuing this year to help navigate a difficult period in markets, with varied results. The first of these strategies is quality investing, which seeks to purchase companies with strong, stable earnings and manageable debt levels. The second is equal weighting, which tracks the performance of the “average stock” in the index, and the third is a buy-write strategy, which aims to generate a higher level of income from a portfolio of underlying equities using an active options-based strategy.

Source: Morningstar, Bloomberg. As at 30 September 2023. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Spotlight:

• AQLT Australian Quality ETF  Australian quality has outperformed its broad market cap weighted benchmark over the last 12 months, with the fund returning 17.62% compared to 13.46% for the ASX 200 over the period. The stocks within the fund are chosen and weighted based on a composite quality score calculated using Return on Equity, Debt/Equity ratio and 5-year earnings stability as inputs, resulting in a portfolio of stocks that aims to generate consistent profits without undue leverage over time. Despite having a lower weighting to Materials overall, the selection of stocks within the sector provided 2.83% outperformance against the ASX 200 over the year. As an example, copper miner Sandfire Resources, which has “Deliver safe, consistent and predictable performance” as one of its main strategy pillars¹, had a weight of 1.53% in AQLT compared to 0.11% in the ASX 200 and returned 70.14% over 12 months, compared to a 19.13% return for the Materials sector of the broader ASX 200. The story was also pronounced within the Health Care sector, with Pro Medicus Ltd returning 66.90% over 12 months with a 2.84% weight in AQLT, compared to 0.14% in the ASX 200.

• QUS S&P 500 Equal Weight ETF In the first half of this year, the S&P 500 rallied 14.3%, which was almost entirely driven by gains in the “Magnificent 7” tech stocks as excitement around generative AI gripped markets. The concentration of the market cap weighted S&P 500, that is the combined weighting of the top 5 stocks, soared to record highs of nearly 25%, leading Betashares to note that historically, the S&P 500 Equal Weight has outperformed as concentration has mean reverted². This trend has yet to repeat in the 3 months since then, with QUS losing 2.06% compared to the S&P 500’s -0.24% return (both in AUD). Interestingly, this has occurred as the S&P 500’s concentration did in fact decline to under 22% and the largest two stocks, Apple and Microsoft, both saw losses. In general, however, the S&P 500 has continued to be carried by its large cap holdings, with Alphabet (+12.75%/12.41% Class A/C), Nvidia Corp (+6.07%) and Eli Lilly and Co (+12.41%) leading the way. The ‘average stock’, as proxied by the equal weight index, has struggled in the face of increased borrowing costs and falling consumer buying power, which suggests the broader US market is perhaps not proving quite as resilient to current economic conditions as the S&P 500 would suggest.

• YMAX Australian Top 20 Equity Yield Maximiser Fund (managed fund) Equity income funds have seen renewed interest in the last year as higher interest rates and compressing equity risk premiums encouraged investors to look for higher yields in their equity portfolio using income-seeking strategies (such as in YMAX). The fund utilises a buy-write strategy, investing in a portfolio of the 20 largest Australian companies and then selling call options over those same stocks. The result is that the fund generates extra income from the option premiums in exchange for giving away some potential upside in a rising market. The fund employs a delta targeting strategy which results in the options being written further above the current stock price (“out of the money” or “OTM”) when market volatility is high, allowing the fund to maintain a steady level of income even during choppy markets such as those in the last 12 months. The options are generally written 3-7% OTM, which allows the fund to partake in market gains up to a point. As a result, even though the ASX 200 gained 13.46% over the year, the option premiums generated outweighed any forgone capital increases, allowing YMAX to outperform the ASX 200 by 1.34% over 1 year on a total returns basis while generating a 12-month distribution yield of 8.8%, rising to 11.0% if you include full franking benefits.

Source: Morningstar, Bloomberg. As at 30 September 2023. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Best:

• URNM Global Uranium ETF Uranium stocks continue to be one of the stand out performers of 2023, with a confluence of short term macroeconomic events and longer term trends providing the perfect environment for the sector. Supply worries continue thanks to ongoing unrest in Niger, as well as mounting worries that Kazakhstani producer Kazatomprom, which is responsible for over 40% of the world’s uranium supply, may begin to increasingly cater to Russia and China. The long-term thesis for Uranium demand continues to be supported, with more countries looking to utilise nuclear energy to meet growing demands for clean, reliable electricity generation. Nuclear power generation grew just 8% in the 22 years up to 2022, but is forecast to grow 108% by 2040³. These factors have contributed to the spot price of Uranium gaining 52% in the last 12 months, and 21.03% in September alone³. Kazatomprom led the contributions to URNM’s performance with a 43.38% return, with Chinese miner CGN Mining Co Ltd (+67.10%) and Sprott Physical Uranium Trust (+17.27%) the next biggest contributors.

• OOO Crude Oil Index ETF – Currency Hedged (Synthetic) : Oil prices continued to surge in September as Russia and Saudi Arabia extended production cuts until the end of the year and the US added 1.6 million barrels to its strategic reserve, with supply expected to struggle to keep up with demand for the foreseeable future⁴. This has made global central banks’ jobs harder, as higher oil prices have flowed through into the prices of goods and services. However, with central banks reiterating their commitment to seeing inflation fall, as well as the US dollar hitting a 10-month high, some analysts are predicting that demand may soon begin to taper⁴.

• FUEL Global Energy Companies ETF – Currency Hedged Energy companies were the obvious beneficiary of rising oil prices in September, with major integrated oil producers gaining the most. Exxon Mobil (+8.54%) was the largest contributor the fund’s performance, announcing in September that it expects its motor fuels and chemicals earnings to increase by a third to $16 billion by 2027 on the back of expanded refining capacity⁵. The company predicts peak gasoline demand to occur late this decade, a longer timeframe than many other forecasters. The International Energy Agency expects oil for transportation to decline after 2026, while the US likely peaked in 2018. French producer TotalEnergies SE (+6.28%) went in the other direction by announcing a tender call for 500,000 tonnes per year of green hydrogen to power its refineries in a bid to cut its emissions by 40% by 2030 compared to 2015⁶, while Chevron (+5.03%) made news in Australia when it reported an outage at an LNG plant in Western Australia that accounts for 5% of global LNG supplies, as workers at the plant continued strike actions in a dispute over wages and conditions⁷.

Source: Morningstar, Bloomberg. As at 30 September 2023. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Worst:

• CRYP Crypto Innovators ETF After ending September in the red, bitcoin capped off its first negative quarter of the year, losing about 11% since June. The major cryptocurrency traded in an unusually narrow range during Q3, as investors were left uncertain about the macroeconomic outlook. Particularly, the Federal Reserve’s hawkish signals that rates could be higher for longer worried investors, who withdrew nearly half a billion dollars from cryptocurrency products in the 9 weeks to mid-September⁸. Crypto miners were the worst hit over the month, with Marathon Digital (-32.14%), Riot Platforms (-17.51%) and Bitdeer Technologies (-25.72%) leading the detractors.

• TANN Solar ETF September marks the third straight month that TANN has made an appearance in the bottom 5 funds in the Best & Worst, as the solar industry continues to struggle with the impact of higher interest rates, supply chain challenges and policy shifts. The downturn has been particularly painful in the residential solar sector, as higher interest rates make installation less affordable for retail customers. This has been compounded by the rolling back of rooftop solar incentives in California, the biggest solar market in the US. However, some analysts are hoping that a build-up in industry inventories may spur consumer demand⁹. In addition, a leasing model which can make solar more affordable for households in a high interest rate environment is becoming more prevalent⁹. The largest detractors to the fund’s performance were US manufacturers First Solar Inc (-14.26%), Sunrun Inc (-19.36%) and SolarEdge Technologies (-20.06%)

• ERTH Climate Change Innovation ETF  The solar industry isn’t the only green industry struggling with current macroeconomic conditions, as ERTH experienced losses spread across different industries. Lithium-ion battery producer Samsung SDI (-18.04%) led the losses, despite announcing it will invest $2bn to build a second battery plant in the US, alongside Dutch electric vehicle manufacturer Stellantis. Once the plant is up and running it will produce enough batteries per year to power 1 million electric vehicles¹⁰. US based lithium miner Albermarle Corp (-15.28%) made a $6.6bn takeover bid for Perth-based miner Liontown Resources, a deal which has since collapsed after Gina Rinehart built up a significant stake in Liontown¹¹. American Water Works Co Inc was the third largest detractor after losing 10.44%.

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

*Excludes short and geared funds
**Annualised for funds with more than 1 year’s performance history.
^ No forward P/E estimate available

1. Sandfire Resources
2. Betashares
3. Sprott

4. Reuters
5. Reuters
6. Upstream
7. Seattle Times
8. Bloomberg
9. Reuters
10. Korea Economic Daily
11. Bloomberg