Betashares Best & Worst – June 2024

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Welcome to Betashares Best & Worst for June 2024, 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.

The focus in June was once again on economic data, with soft US inflation, retail sales and unemployment numbers adding fuel to investor’s hopes for an imminent US Fed rate cut¹. The news cycle was dominated by politics, with a left-wing election victory in the UK, right wing victories in the European parliament and neither US presidential candidate detailing any plans to curb spending despite promising to bring down inflation. In the end the result of all this was a continuation of many of the dominant stories of the year, with US technology stocks leading performance, especially those associated with AI. Japan and Asian emerging markets also performed strongly, largely due to their AI exposure, while European equities struggled and Australia was relatively flat.

Given the first half of the year has been dominated by stories of US tech stocks and rebounding Japanese equities, for the spotlight section this month we’ll focus on three Australian equity exposures that investors can use to gain exposure to our home market beyond allocating to a broad market cap weighted fund.

Source: Morningstar, Bloomberg. As at 30 June 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Spotlight:

• QFN Australian Financials Sector ETF : The financial sector has been a staple for Australian investors for over 100 years, with its share of total market capitalisation rising steadily since the 1980s. Over that time the sector has also become more diversified, with insurance companies and diversified financial companies growing in size relative to the major banks². In the first half of 2024 the financials sector has been enjoying a strong run led by the Big 4 banks, with NAB returning more than 20% since the start of January and CBA soaring to new highs of over $120/share . Much of this growth can be attributed to the banks raising a lot of money during covid in anticipation of rising defaults which never materialised, which has since been returned to shareholders³. In addition, Australian mortgage holders have fared better than expected, with the banks enjoying a widening net interest margin (the spread between money earnt on loans and paid on deposits) without suffering from the heavily theorised ‘mortgage cliff’. While the big 4 now have valuations beyond their historic average, strength in the economy (particularly the housing market) is continuing to provide tailwinds, and strengthening competition from the broader financial sector including strong market share gains from Macquarie will encourage the industry to continue to develop and innovate⁴.
• QOZ FTSE RAFI Australia 200 ETF : While market cap weighting is considered an efficient method of gaining exposure to an equity market, it does have certain drawbacks which we can attempt to mitigate through alternate indexing methodologies. QOZ tracks the FTSE RAFI Australia 200 Index, which contains the top 200 stocks on the ASX and weights them based on a range of fundamental factors such as sales, cash flow, dividends and book value, the goal of which is to weight companies by their ‘economic size’ rather than simple market cap. While market cap can be heavily influenced by short term swings in market sentiment, the fundamental factors utilised by QOZ are based on real world indicators of value. This means at each quarterly rebalance, the fund will generally sell stocks that have substantially increased in price by more than their economic value and buy those that have become comparatively ‘undervalued’, creating a “buy low sell high” effect⁴. This has helped QOZ to outperform the S&P/ASX 200 Index over the 1, 3, 5 and 10 year periods to 30 June 2024#. Over FY24, on a sector level the fund’s ~5% overweight to the financials sector was the largest contributor, while on a stock level QOZ benefited the most from underweights in underperforming materials companies such as Pilbara Minerals Ltd (-34.55%) and Liontown Resources (-68.02%).
• G200 Betashares Wealth Builder Australia 200 Geared (30-40% LVR) Complex ETF : Leverage has long been a way for institutional investors and fund managers to boost their equity market returns, but high interest rates and the risk of margin calls have made it difficult for individual investors to successfully implement. The rise of leveraged ETFs such as GEAR Geared Australian Equities Complex ETF  made it easy for investors to access gearing, but with leverage ratios upwards of 2x they are usually not intended as core portfolio building blocks, but rather a tactical tilt or satellite allocation⁵. The Betashares Wealth Builder ETFs employ an Australia-first ‘moderately geared’ strategy that’s aimed at wealth accumulation for investors who have a long enough time horizon to be comfortable enduring the risks associated with gearing. G200 holds the Betashares A200 Australia 200 ETF and employs a 30-40% loan-to-valuation ratio (LVR), meaning at any point in time, between 30-40% of the fund’s total assets will be borrowed funds, equating to a target daily return of between ~1.43x to ~1.67x the return of A200. Of course, the fund’s returns will be magnified on the downside as well as the upside, however this can potentially be turned into a benefit for investors by utilising a dollar cost averaging (DCA) strategy, in which a consistent dollar value is invested in regular time intervals, taking advantage of market downturns. This can make G200 especially handy when used as part of an SMSF, especially when considering the additional franking credits that an investor would receive compared to an equivalent ungeared portfolio⁶.

Source: Morningstar, Bloomberg. As at 30 June 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Best:

• OOO Crude Oil Index Currency Hedged Complex ETF : The global oil market rebounded in June despite weak fundamentals, as global oil demand continued to decelerate, with Q2 2024 growth posting the slowest quarterly increase since Q4 2022. The slowdown in consumption growth was led by China, which has historically been the engine for global oil demand but which now sees growth slowing as the post-pandemic rebound loses steam. At the same time supply trended higher, led by the United States and other non-OPEC+ countries such as Canada, Guyana and Brazil. OPEC+ production has stayed stagnant due to existing voluntary cuts, however the bloc provided a roadmap in June to unwind the supply reductions between Q4 2024 and Q3 2025. Despite all this the price of oil managed to have a fairly strong month, with prices rising 3% in a day after OPEC+ announced their intention to restore supply in what some are seeing as a “buy the dip” trade, as well as expectations of strong summer demand in the backdrop of the Federal Reserve Rate decision mid-month. Rates were kept on hold, but investor short covering and renewed Middle east tensions helped oil prices continue to rise over the course of the month⁷.
• CRYP Crypto Innovators ETF : Crypto miners had a strong month in June thanks to a flurry of M&A activity, despite losses in significant cryptocurrencies. Bitcoin started the month off in the green thanks to strong inflows into spot bitcoin ETFs, but quickly fell off and ended the month down 11.05% in AUD terms after strong US employment numbers reduced hopes of an upcoming rate cut and Bitcoin ETF flows turned around, losing over $900m in a week⁸. This didn’t seem to matter to bitcoin miners, which after underperforming bitcoin itself over the last few months, now appear undervalued according to Wall Street analysts and are increasingly becoming M&A targets⁹. The analysts noted that bitcoin miners with established infrastructure are likely targets for cloud and AI companies looking to shore up their power infrastructure, and that the recent bitcoin halving would put pressure on smaller miners. Core Scientific (+94.91%) shot up after announcing it had rejected an all-cash offer from CoreWeave, a specialist cloud-computing provider backed by Nvidia. This was despite the two companies also signing contracts for Core Scientific to provide CoreWeave with ~200 MW of infrastructure to power its cloud services on the same day. Galaxy Digital Holdings (+13.93%) was the second largest contributor, with zero-carbon mining company TeraWulf Inc (+103.21%) rounding out the top 3 after releasing positive monthly production updates¹⁰.
• ASIA Asia Technology Tigers ETF : Outside of US tech, Asian equities have arguably been the greatest beneficiaries of the AI craze, led by the dominant chip-making industries of Taiwan and South Korea. Taiwan Semiconductor Co (+14.92%), which was the largest contributor for the month, is the biggest of the chip manufacturers with a ~60% market share, ahead of Intel and Samsung. Nvidia will account for around 10% of TSMC’s 2024 revenues, and with Nvidia’s CEO Jensen Huang stating that he expects them to raise prices and that he’s “…happy to see them succeed”, it seems likely that they will continue to enjoy strong pricing power¹¹. SK Hynix (+25.40%), the semiconductor arm of SK Group, South Korea’s second largest conglomerate after Samsung, plans to invest $75 billion over the next 4 years in high-bandwidth memory chips which will be optimised for use with Nvidia’s AI accelerators¹². Taiwanese electronics manufacturer Hon Hai Precision Industries (Known as Foxconn internationally) gained 23.98% over the month after forecasting its overall revenue would swell about 13.64% over the next two years thanks to a surge in demand for its AI servers¹³.

Source: Morningstar, Bloomberg. As at 30 June 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Worst:

• TANN Solar ETF : High interest rates and inflation have had a significant impact on solar companies’ ability to finance projects over the last year, while domestic spending on solar energy is struggling to keep up with surging production in China¹⁴. An increased likelihood of a Trump victory is also being priced in, given the impact this is likely to have on federal grants and spending on renewable energy. An exceptional month of May for First Solar led TANN to the top of our ‘best’ monthly performance list after a 50% monthly gain for the stock on the back of a UBS upgrade¹⁵. In June however, the macro and political headwinds have pulled TANN back into negative territory and resulted in negative returns for the majority of holdings. Of particular note is Solar Edge Technologies which detracted 2.54% from the fund’s performance, with the stock falling 48.65% over the month having announced that PM&M Electric, a client that owes the company $11.4 million, has filed for bankruptcy¹⁶. First Solar also announced a $300 million offering of convertible senior notes to refinance existing debt and fund general expenses which is seen as a drag on the stock because of the dilution effect once the notes are converted to equity. First Solar also made an announcement in January that they would be laying off 900 employees and have recently announced that this will increase by another 400 staff¹⁷.
• URNM Global Uranium ETF : The 12% fall in URNM in June was largely caused by a 3.3% slump in physical uranium prices, resulting in negative returns for the majority of the fund’s holdings. Miners are typically leveraged to the underlying commodity price, so this modest movement in spot uranium had a relatively large impact on the companies held by URNM. In mid-May, the US signed a bill banning imports of Russian uranium, effective 12 August 2024 – in the face of this and given the US currently import around 90% of uranium from Russia, Canada and Kazakhstan, they are looking to re-shore and resume mining domestically¹⁸, putting downward pressure on suppliers. With 43% of URNM’s exposure coming from Canada and Kazakhstan, this announcement had a negative effect on the fund’s returns. Despite this, longer-term sentiment remains positive with COP28 in December emphasising the critical role of nuclear power in reaching climate targets. There are also strong ambitions coming from China who have 36 new reactors under development¹⁹, as well as Sweden who are considering lifting their ban on uranium mining and hold 80% of the EU’s uranium deposits²⁰. Looking more stock-specific, Paladin Energy fell by over 20% for the month, resulting in a negative contribution of 1.33% to URNM. Most of this fall was prior to their announcement that they would be acquiring Canada-based Fission Uranium²¹, with the news steadying prices going into July.
• XMET Energy Transition Metals ETF : Copper, lithium and nickel – three of XMET’s top exposures – all fell in June, leading to negative returns for the month. For each of these metals, price retreats were influenced by weak economic data from China, with low growth in industrial output impacting demand from the world’s highest consumer of these three metals. Rising global inventories also impacted prices: for copper, this is expected to be a shorter-term impact with Chinese copper production approaching government mandated production caps²², while lithium has been on a steady decline since 2022 with expanding supply in both Australia and China, as well as contributions from emerging players such as Argentina and Zimbabwe, pushing the market into a surplus. Lithium demand is expected to continue however, led by the ongoing growth of the EV market where lithium usage is expected to increase by about 14% in 2024 and 2025²³. Regarding nickel, the Indonesian Nickel Miners Association confirmed there are extensive reserves left untapped. More locally, and while not one of XMET’s holdings, BHP evidenced the nickel oversupply by announcing that they will suspend the Nickel West operations and West Musgrave project in Western Australia from October 2024²⁴. The increasing popularity of lithium-iron-phosphate (or LFP) batteries that do not require nickel in the cathode are also becoming increasingly popular in the EV market²⁵, further contributing to the downward pressure on prices.

For trailing performance of all Betashares funds please see: Betashares Monthly Performance – June 2024

*Excludes short and geared funds.**Annualised for funds with more than 1 year’s performance history.^Note: CRYP does not invest in crypto assets directly, and does not track price movements of any crypto assets.^# Please refer to the ‘Fund returns after fees (%)’ section on the QOZ fund page for performance figures over all time periods: https://www.betashares.com.au/fund/ftse-rafi-australia-etf/. Past performance is not an indicator of future performance.

Sources:

1. Reuters

2. RBA

3. ABC

4. Betashares

5. Betashares – GEAR Target Market Determination

6. Betashares

7. IEA

8. Betashares – Off the Chain (13/6 & 25/6)

9. Coindesk

10. Investing.com

11. Forbes

12. Bloomberg

13. Taipei Times

14. Reuters

15. Barrons.com

16. Barrons.com

17. Investors.com

18. Carbon Credits

19. Bloomberg News

20. AFR

21. Paladin

22. Mining.com

23. Mining.com

24. BHP

25. Stockhead