2020 hasn’t been as solid for Exchange Traded Funds (ETFs) as 2019, but there are some bright spots.

The average ASX ETF is down 5 per cent on a year to date percentage basis. Yet a handful have not only netted returns but done better than the market.

As an investment strategy Morningstar senior analyst Matthew Wilkinson thinks they’re a good way to invest because of the broad exposure they offer investors.

“You get a whole lot of diversification through ETFs,” he told Stockhead.

“You won’t get blown up by one stock that falls 80 per cent or something like that – and it’s important for a long term investor you get that diversification.

“So ETFs from that perspective, broadly are a good investment.”

Nevertheless Wilkinson says ETFs need to be looked at differently from individual companies.

“With a stock you’re looking at company fundamentals, you’re looking at growth trajectory, you’re looking at cost management and things like that,” he said.

“Whereas for an ETFs, they buy a range of companies so it’s the ‘rules’ on which those purchases and sales are made that we judge ETFs on.”

 

Gold ETFs – they’re not all equal

One category of ETFs that have done particularly well in 2020 is gold focused ETFs.

One example is the BetaShares Gold Miners ETF (ASX:MNRS) which is up over 40 per cent in 2020. Another is VanEck’s Vectors Gold Miners ETF (ASX:GDX) which is up by over 30 per cent.

MNRS & GDX share price chart

 

Wilkinson warns not all gold ETFs are equal in performance and in their specific asset exposure.

And despite gold’s hot run, such ETFs’ close exposure to the commodity may be a detriment when market sentiment turns.

“It’s one of those asset classes that’s very hard to assign a value to,” he said.

“We’re seeing some gold ETFs perform very well but its not consistently so – some of them invest in miners, and some of them buy futures.

“The price of gold had risen strongly heading into the beginning 2020 so for anyone who said it had another 20 per cent upside to it, you’d argue its probably a fanciful prediction – but that’s what it’s done virtually. It’s up 25 per cent – it’s quite handy.

“But where does that go? ‘How much of it is driven by any kind of fundamental versus market sentiment?’ is probably what we’d argue.

“And it’s hard to predict when market sentiment will turn and when it does – if you’re on the wrong side of things – it can be quite damaging to your portfolio.”

 

‘Growth strategies’ living up to their name

Wilkinson is a fan of ETFs with exposure to growth strategies.

“What’s performed well has been the growth stocks in particular and, to a lesser extent, the quality [strategy],” he said.

“That investment style will pick up companies that have higher earnings margins, a history of growth rates, very low debt to equity levels and things like that.”

Many of these companies fell during the COVID-19 February, March sell off but have rebounded quite strongly since then.

One ETF Wilkinson named was the VanEck Vectors MSCI World ex-Australia Quality ETF (ASX:QUAL).

It invests in quality international companies listed on developed market exchanges except Australia. Van Eck says it judges quality on three factors: high return on equity, stable year-on-year earnings growth, and low financial leverage.

“That’s a strategy that we like. It gives you a diversified exposure, it has exposure to over 300 holdings, it’s got a long tail,” he said.

“It’s giving you a lot of diversification, your largest holdings are a little like the index but it tilts those index weights to more of the stocks that have better quality aspects as measured by the index which it follows.”

“It’s certainly performed well; the top holdings are Microsoft, Apple, Johnson and Johnson [which are] all household names but it gives you a lot of diversity across sectors as well – although it is very skewed to the US at this point in time.”

This ETF is up 8 per cent in 2020 and 19 per cent in a 12 month basis.

VanEck Vectors MSCI World ex-Australia Quality ETF (ASX:QUAL) share price chart

 

‘Best return with lowest fee’

Among other ETFs Wilkinson noted had done well were those with exposure to electric car maker Tesla.

But overall Wilkinson recommends the best strategy is a long-term focus that is diversified.

“That’s the is the only way you have the higher chance of getting the market returns and outperforming the market – buying those strategies you think can do as well as the market or better at the lowest possible fee,” he told Stockhead.

“Diversification is the key and that’s what we encourage with the ETFs that we like.”

He also advised against ETFs being the sole asset class to park your money in.

“It should be a small piece of a wider puzzle,” he said.

 

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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