MoneyTalks: ASX ETFs are becoming popular, but here’s what you need to consider before you get started
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MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now. In this edition we’re looking at investing in ETFs on the ASX.
When COVID-19 first broke out there was an uptick in retail investment in the stock exchange. While not all of this went to ETFs immediately, the money has been gradually flowing through in recent months.
“It has been good to read the research or data recently that – after the original surge of new retail investors – a big portion of those investors are now using ETFs as opposed to meme stocks and those other things,” Garrett said.
“The ETF market in Australia is finally doing what it did overseas years ago, which is expand rapidly – and with it comes thematics and ETF structures that are actually doing some active screening where investors need to do their homework as they always would.
“Just because it’s an ETF it’s not without risk.”
Garrett notes many of the most popular ASX ETFs people are investing in are thematics – in other words focused on a particular investing theme.
“The thematic ETFs are an interesting one because industries or sectors get hot or popular for a variety of reasons and frequently the ETFs follow the popularity,” he said.
“Following the herd mentality is dangerous with stocks but can also be dangerous with ETFs, particularly thematics ETFs.”
Nevertheless Garrett says these can still work well for medium to long term portfolio construction even with short term fluctuations.
“They’ll have volatility obviously but work well over medium to long term.”
“I think of it as walking into Crown and there’s a first room you walk into where it’s relatively low stakes but you’re not going to lose your shirt and then you can go into a next room and it’s a slightly different kettle of fish.”
“We recommend diversified portfolios across asset classes and dial up exposure to growth vs defensive depending on what we think is suitable.
“As a rule of thumb we focus less on trying to get specific themes or sectors; we don’t pick specific other than broad-based because our most important philosophy is to get your asset allocation right. We’re not out trying to actively select themes or sectors on a regular basis.”
Nevertheless, Garrett noted one area of ASX ETFs that saw a strong increase in demand were ETFs with an ESG focus.
“There has been a strong increase in the demand from retail investors for the ability to invest in line with one’s values,” he said.
“So the number of what I’d call ethical, sustainable or green – there’s lots of different labels – ETFs, it’s grown accordingly. The issuers see these demand trends and they do a good job of creating products to meet those.”
Six Park launched a sustainable tilt offering and Garrett says one in three new Six Park clients choose it.
But as it goes without saying, everyone has different views on what is ethical and what is not, and so do different ASX listed ESG ETFs. Meaning, before investing you need to consider the fund’s specific ESG filters.
Six Park settled on this ASX ETF for Australian shares exposure with an ESG ‘lens’.
“We assessed the ETFs on the ESG front through the lens of what kind of filter was applied with ethical or sustainable lens and to what extent does the ETF still retain the risk-reward profile of Australian shares as asset class,” Garrett said.
“Where we landed was State St E200 because it does have what we believe to be a reasonable filter and rating.
“These ESG ETFs have different focuses, different ratings from ESG rating organisations and we were viewing all the ETFs in the market.
“And what we thought was E200 offered the best combination – a legitimate screen while retaining an index that is meant to align as much as possible with the ASX 200.”
Garrett says his firm took a similar approach in relation to international equities opting for exposure to both hedged and unhedged options.
“[The] only real hedged international portfolio on this front was the BetaShares Sustainable Leaders Hedged Global Equities [ETF] and it passed our test of ‘is this a reasonably priced ETF with right filter?’
“So we swapped out HETH where we had exposure and then the Vanguard Ethically Conscious International Fund (ASX:VESG).”
Garrett continued by stressing no ESG ETF on the ASX did things perfectly, although demand for them would continue to rise.
“We are clear with clients that we are not trying to provide the perfect ESG solution because again it’s a balance of trying to preserve the expected returns but give people choice to have that tilt,” he said.
“That’s been an interesting one to see play out in the market because the only thing I can say with certainty is everyone has different answers and there really isn’t a right or wrong on that front.
“So we tried to do the best we could and you combine with the bonds, the cash yield and the other classes and that was probably one of the bigger themes we’ve seen in the last year or two – the shift in funds towards sustainable ETFs or ETF-driven portfolios, which is what we do.
“And I would expect that to continue, especially as the next generation of investors who probably have a more of a values-based approach to investing get more active in the space.”
Garrett concluded by saying people investing in ASX ETFs (or wanting to get started in them) should remember they are just one asset class available to investors.
Furthermore, he says the primarily lens to consider which asset classes to invest in was their personal growth vs defensive profile.
“I just think if I were to provide some general guidance for investors I’d start with fundamentals that relate to not only being diversified in an asset class which is what ETFs help you do – if broad or thematic – but diversified across asset classes,” he says.
“Before people think ‘Do I want this ETF?’ have a step back and think a couple of things.
“‘What’s my growth vs defensive profile? Is my horizon one or two years or 20-30 years?
“And – this is the most valuable thing they could do in terms of research – ‘What are the common behavioural mistakes for investors I should be aware of?'”
Garrett named “following a herd mentality” as a key mistake, which can be either panicking if markets go down in the short term or getting into an ETF when it has reached its peak.
“There’s never an easy win to be made and what the allure of thematics can be, is because they have edge or a tilt there’s some easy money to be made – that’s rarely the case,” he said.
“It’s combining the fundamentals with what’s your interest as an investor and there’s nothing wrong with having an active investment philosophy and trying to pick sectors but should be overlays around allocation and risk management because investing is hard.
“If you don’t want to be active in your investment thematics, thematic ETFs is probably not that person’s domain.
“But if you want to be thinking of a crypto ETF, a healthcare ETF, an Asian ETF, if you really want to take some more specific views that is fine – investing is risk management.
“People think of investing as shares but its bonds, infrastructure, property, emerging markets; it’s all those things because of ETFs now, and it’s how you combine those to get the right risk profile for your situation.”
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.