Taking some eggs out of the basket: A case study on EX20

BY Alistair Mills | 24 October 2017
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Whilst a number of Australian investors derive the majority of income from their share portfolios from the 20 largest companies on the ASX, there can be significant benefits to diversifying away from these shares and looking at the remaining 180 companies that make up the S&P/ASX 200 Index. Indeed, recent reductions in dividends and the sector concentration of those companies in the top 20, have left some investors asking where the opportunities are outside the largest 20 stocks.

Diversifying away from the top 20 Australian shares can now be completed simply and easily with the BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20). And, as an indication of how such diversification can at times benefit portfolios, for the nine months to September 2017, EX20 has outperformed the S&P/ASX 20 Index by over 7.3%.

Source Bloomberg. Data as of 28th September 2017. Past performance is not indicative of future returns. You cannot invest directly in an index.

As we all know, the ASX top 20 is predominantly weighted toward financials, with a small scattering across basic materials, consumer defensive and a few other sectors. By comparison, the BetaShares Australian Ex-20 Portfolio Diversifier ETF holds stocks 21-200, which instantly reduces some sector concentration risk across a portfolio by providing access to a broader range of industries and sectors.

Highlighted in the table below are the comparative sector weightings of the BetaShares EX20 ETF versus the S&P/ASX 20 Index and their contribution to EX20’s outperformance over this nine month period.

Sector EX20 S&P/ASX 20 Index Difference in weight +/- Contribution to outperformance – Calendar YTD September 2017
Basic Materials 19.42% 11.68% 7.74% 1.21%
Communication Services 1.94% 5.83% -3.89% 1.59%
Consumer Cyclical 9.33% 0.00% 9.33% -0.30%
Consumer Defensive 4.50% 8.85% -4.35% 0.56%
Energy 6.44% 2.45% 3.99% 0.66%
Financial Services 12.58% 56.50% -43.92% 0.76%
Healthcare 10.25% 6.13% 4.12% -1.44%
Industrials 14.06% 4.31% 9.74% 2.29%
Real Estate 11.23% 4.25% 6.98% 1.28%
Technology 6.21% 0.00% 6.21% 0.93%
Utilities 4.04% 0.00% 4.04% 0.66%

Source: Morningstar. Average portfolio weights. Data from 30th December 2016 – 28th September 2017. Past performance is not indicative of future returns.

As the above table illustrates, whilst only two sectors weightings in EX20 underperformed the S&P/ASX 20 Index over the period, there were a number of sector allocations which outperformed, including:

  • EX20’s overweight positions in Industrials, Real Estate and Basic Materials
  • EX20’s underweight positions in Communication Services, Financial Services and Consumer Defensive

Looking ahead…

Aside from the potential for outperformance, thereby spreading the sources of a portfolio’s investment returns, there may be other benefits to looking outside the top 20 stocks for Australian investors:

Sustainable dividends

It has been well publicised recently that a number of Australia’s largest and most commonly held high yield paying stocks have been forced to cut dividends.

In fact, the 12 month net dividends for top 20 stocks have actually fallen by 6.77%, whilst the average weighted dividends of EX20’s stocks have remained stable, with actual growth of 0.015%*.

*Source: Bloomberg. Data as of 26th September 2017. Not indicative of future returns.

Attractive earnings growth potential

The underlying stocks in EX20 are forecast to have earnings per share (EPS) growth around 3 times higher than the top 20 stocks alone.

  Long Term EPS Growth
EX20’s Stocks 9.67%
S&P/ASX 20 Index 3.49%

Source: Bloomberg, based on consensus broker esimates. Data as of 26th September 2017. Not indicative of future returns.

Investors looking to gain diversification in a single trade can do so easily on the ASX through the BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX Code EX20).

Full details of the fund along with a variety of resources can be found on the fund webpage here.

4 Comments

  1. Gary Brockman  |  October 25, 2017

    Looking to invest in the Japanese stocks. Which ETF would you recommend?

    1. Ele de Vere  |  October 25, 2017

      Hi Gary,
      Whilst we are unable to make specific recommendations to individuals, among other ETFs available on the ASX offering Japanese equity exposure, we do offer the BetaShares WisdomTree Japan ETF – Currency Hedged (ASX: HJPN). You can find more information on the fund here: https://www.betashares.com.au/fund/japan-etf-currency-hedged-wisdomtree/.
      This information is general in nature, for specific investment advice, please speak to a registered financial advisor.

  2. John Watson  |  October 25, 2017

    In publishing returns on Beta ETF’s, do you present gross figures or net yield after deduction of management fees, etc?

    1. Ele de Vere  |  October 25, 2017

      Hi John,
      Fund performance and yield figures published on our website and marketing materials are net of management fees and expenses unless stated otherwise. Please feel free to contact our Client Services team if you require any more information 1300 487 577.

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