To most investors exchange traded funds (ETFs) provide passive investment, which closely follows a benchmark index with performance largely following the index for a marginal fee dependent on the fund's size and complexity.
Over the past 18 months a growing number of actively managed ETFs have listed on the ASX. The first major push came from Magellan with its Global Equities Fund (MGE) in 2015. The key difference of an exchanged traded managed fund (ETMF) compared to an ETF is an ETMF is actively managed, so rather than track a rules-based index, a fund manager is actively trying to outperform. An attractive characteristic of ETMFs is the fund acts as the market maker so unlike Listed Investment Companies (LIC), they trade close to NTA.
The proliferation of ETF products available to Australian investors continues to expand at a rapid pace. The Australian ETF market has now reached another milestone, hitting $50 billion in assets under management. Most ETFs are passive, however there are now roughly 200 different ETFs listed on the Australian market. We wanted to break down some of the key themes we are considering below.
1) Technology and healthcare. Relative to world indices healthcare and technology companies are under-represented in the Australian market. At such small weightings investing in these two sectors results in investors having to take on stock-specific risk and limit the number of diversification options. A passive option to diversify into technology is to consider Betashares NASDAQ 100 ETF (ASX:NDQ). Another interesting ETF within the technology sector is Betashares Global Cybersecurity Fund (ASX:HACK). For healthcare exposure iShares Global Healthcare ETF (ASX:IXJ).
2) Infrastructure. The need for infrastructure investment is a never-ending cycle. Investment in infrastructure helps stimulate sustainable long-term economic growth, which then creates further need for infrastructure. This demand has increased the number of infrastructure-related investments available to Australian investors. Morningstar recommends between 0-5 per cent exposure to global infrastructure out of an investor's total exposure.
Infrastructure offers appealing diversification qualities compared to the broader market. The essential service nature of global listed infrastructure companies' activities and their stable, reliable and growing cash flows, mean that capital preservation is another notable characteristic.
With current low interest rate policies by central banks globally, this space is getting difficult to justify placing new capital into. Therefore we would warn against large overweight exposure towards this space at this time in the cycle. A passive way to obtain exposure towards global infrastructure is to consider VanEck FTSE Global Infrastructure ETF (ASX:IFRA). Another key consideration would be an exchange traded managed fund exposure through Magellan Infrastructure Fund (ASX:MICH).
Due to ultra low interest rate policies globally, we feel now more than ever, diversification between asset classes is critical. Equity market valuations remain stretched and measures of market volatility remain close to their all-time lows. We continue to caution investors against complacency and note that avoiding loss is just as important as achieving profits in the current market.
- Boh BurimaFinancial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410