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Netwealth portfolio construction series - Why are ETFs gaining in popularity and how they can be used in a portfolio

Part of Netwealth's portfolio construction webinar series - Vinnie Wadhera from BetaShares presented to an audience on 14th September 2016 about Exchange Traded Funds (ETFs) and strategies on how ETFs can be used in a portfolio.

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Netwealth portfolio construction series - Why are ETFs gaining in popularity and how they can be used in a portfolio

  1. 1. Netwealth educational webinar series September 2016 How you can use ETFs to improve investment returns
  2. 2. Housekeeping • Enter your questions in the question box We will get to them during at the end of the webinar. • This webinar is being recorded Slides will be sent to you after the webinar. • Posting to social? Make sure to use #netwealthinvest or tweet @netwealthInvest.
  3. 3. Disclaimer This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.
  4. 4. Meet today’s speaker Vinnie Wadhera Director of Institutional Business & National Accounts BetaShares
  5. 5. Join the ETF revolution How exchange traded funds are changing the way we invest
  6. 6. Disclaimer The information contained in this document is general information only and does not constitute personal financial advice. It does not take into account any person’s financial objectives, situation or needs. It has been prepared with all reasonable care by BetaShares Capital Limited (ABN 78 139 566 868, Australian Financial Services Licence No. 341181) (“BetaShares”). The information is provided for information purposes only and should not be construed as an offer or solicitation. BetaShares assumes no responsibilities for errors, inaccuracies or omissions in this document. Performance and statistical results noted are unaudited. Past performance is not indicative of future performance. Investments in BetaShares Funds are subject to investment risk and investors may not get back the full amount originally invested. Any person wishing to invest in BetaShares Funds should obtain a copy of the relevant PDS from www.betashares.com.au and obtain financial advice in light of their individual circumstances. 6
  7. 7. 1. About BetaShares 2. What are ETFs / growth story 3. Applications of ETFs in Portfolios – Index/price – Strategy or outcomes based Contents 7Confidential – may not be distributed without the consent of BetaShares Capital
  8. 8. About BetaShares • A leading manager of fund products that are traded on the Australian Securities Exchange • Objective is to expand the universe of investment possibilities open to investors • Provide Funds that empower investors to implement investment strategies with ease • Products designed with the interests of Australian investors in mind • A member of the Mirae Asset Global Investment Group, one of the largest asset management firms in Asia. • Mirae currently manage approx. US$90b 8Confidential – may not be distributed without the consent of BetaShares Capital
  9. 9. BetaShares: Where are we now? • Consistently #1 exchange traded fund manager in Australia for value traded • #2 issuer for inflows during 2016 with 40% share of market inflows to April ‘16 • ~$2.9B AUM • One of the largest dedicated teams in Australia $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 9Confidential – may not be distributed without the consent of BetaShares Capital
  10. 10. 1. About BetaShares 2. What are ETFs / growth story 3. Applications of ETFs in Portfolios – Index/price – Strategy or outcomes based Contents 10Confidential – may not be distributed without the consent of BetaShares Capital
  11. 11. Evolution: Cheaper, Faster, Better 11Confidential – may not be distributed without the consent of BetaShares Capital
  12. 12. What are Exchange Traded Funds? • An exchange traded fund is an investment fund that is traded on the stock exchange. • Investors can buy or sell units in the ETF in the same way as buying conventional shares • Investors money in the ETF is pooled and used to by a basket of assets, based on the funds overriding strategy. • The value of the units closely tracks the underlying value of the investments in the fund and is updated throughout the day. • ETFs can employ a range of active and passive strategies LOW COST HIGH TAX EFFICIENCY TRANSPARENTACCESS LIQUID DIVERSIFICATION 12Confidential – may not be distributed without the consent of BetaShares Capital
  13. 13. Global Growth of the ETF Industry $428 $598 $851 $772 $1,156 $1,483 $1,525 $1,944 $2,396 $2,797 $2,959 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Global ETF Industry AUM(1) (US$b) ETF Products (#) 525 884 1,542 2,211 2,683 3,526 4,221 05 – 15 CAGR 21% 5,0244,221 5,431 5,449 Source: Blackrock 13Confidential – may not be distributed without the consent of BetaShares Capital
  14. 14. Australian ETF Market Cap: July 04 – June 16 $0 $5,000 $10,000 $15,000 $20,000 $25,000 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Market Cap (A$m) 04 – 16YTD CAGR 31% 7 9 8 5 19 30 37 57 82 81 17592 Jun-16 139ETF Products (#) Source: BetaShares 14Confidential – may not be distributed without the consent of BetaShares Capital
  15. 15. Confidential – may not be distributed without the consent of BetaShares Capital 15 SMSFs have been early (and heavy) adopters of ETFs
  16. 16. Confidential – may not be distributed without the consent of BetaShares C ap ital 16 ETFs offer lots of investment choice! Domestic Equity Broad Small Cap Large Cap Financials Resources REIT Other sectors Cash & Fixed Income Commodities High Interest Cash Corporate Bond Government Bond Semi-Government Inflation Linked Gold (A$ Hedged) Gold (Unhedged) Silver Platinum & Palladium Crude Oil Agriculture Copper Diversified Basket Domestic Equity International Strategy US Dollar British Pound Euro Broad World & Region Country Specific Emerging Markets Global Sector High Dividend Equity Income* Value Bear Series* Geared* Risk Managed* *Managed funds
  17. 17. ‘On Screen’ liquidity ‘On screen’ liquidity ~$3.3m Underlying liquidity (ADTV 3 months) ALZ AU EQUITY $2,922,873 AWE AU EQUITY $3,539,238 BOQ AU EQUITY $14,880,230 BPT AU EQUITY $7,415,991 BEN AU EQUITY $16,690,150 CAB AU EQUITY $1,479,753 ALQ AU EQUITY $11,644,450 DJS AU EQUITY $9,536,007 DOW AU EQUITY $11,361,770 EWC AU EQUITY $1,086,306 ENV AU EQUITY $3,480,533 FKP AU EQUITY $1,357,197 FWD AU EQUITY $1,603,167 FLT AU EQUITY $29,591,250 GUD AU EQUITY $1,750,309 GWA AU EQUITY $2,136,288 HIL AU EQUITY $770,488 CRH AU EQUITY $401,495 IRE AU EQUITY $3,959,745 KCN AU EQUITY $4,315,712 MAH AU EQUITY $482,520 MRM AU EQUITY $2,179,253 MTS AU EQUITY $24,818,560 MND AU EQUITY $9,646,594 NUF AU EQUITY $3,258,588 ARI AU EQUITY $12,978,750 PRY AU EQUITY $9,239,243 RHC AU EQUITY $15,971,930 RSG AU EQUITY $4,996,496 ROC AU EQUITY $477,220 SGM AU EQUITY $8,760,581 SMX AU EQUITY $1,525,218 TAP AU EQUITY $186,120 TSE AU EQUITY $3,590,952 UGL AU EQUITY $7,827,746 ERA AU EQUITY $836,766 GNC AU EQUITY $12,182,660 BWP AU EQUITY $3,816,066 CPA AU EQUITY $15,629,900 CGF AU EQUITY $12,745,810 AAD AU EQUITY $2,430,743 SYD AU EQUITY $30,209,250 APA AU EQUITY $19,956,770 CQR AU EQUITY $5,396,971 AWC AU EQUITY $14,230,520 MCR AU EQUITY $172,474 ABP AU EQUITY $1,787,431 TPM AU EQUITY $4,696,518 UXC AU EQUITY $618,564 WOR AU EQUITY $24,820,550 ASL AU EQUITY $6,804,122 IIN AU EQUITY $6,420,844 COF AU EQUITY $109,453 FBU AU EQUITY $10,790,130 IVC AU EQUITY $4,265,928 IFL AU EQUITY $4,933,232 JBH AU EQUITY $16,255,410 “Actual” liquidity ~$4.3B ETFs and Liquidity Source: Bloomberg, Comsec – 2 October 2013 17Confidential – may not be distributed without the consent of BetaShares Capital
  18. 18. 1. About BetaShares 2. What are ETFs / growth story 3. Applications of ETFs in Portfolios – Asset class exposure – Strategy or outcomes based Contents 18Confidential – may not be distributed without the consent of BetaShares Capital
  19. 19. 1. Asset Class Exposure • Use ETFs as way to get low-cost, liquid exposure to asset classes (e.g. cash, gold, currencies, commodities and alternatives) 2. Index Exposure • With one trade get exposure to all the components of an index (e.g. Nasdaq 100, S&P/ASX 200, MSCI World Index) 3. Strategy Exposure • Eg High Income, Short, Geared Applications of ETFs in investment portfolios 19Confidential – may not be distributed without the consent of BetaShares Capital
  20. 20. Asset class exposures Confidential – may not be distributed without the consent of BetaShares Capital
  21. 21. Confidential – may not be distributed without the consent of BetaShares Capital 21 Asset Class Exposures : Cash Interest Rate Comparison BetaShares High Interest Cash ETF (AAA) Avg. 1 year term deposit(1) Avg. 1 month term deposit(1) Wrap – Cash Savings Account(2) Avg. Online Savings Account Rate(1) RBA Cash Rate/ 11AM Accounts Avg. Online Broker Cash Account(3) 2.03% (net) 2.34% 1.76% 1.57% 1.53% 1.25% 0.58% Interest Rate Comparison – As at 11 August 2016 Rate earned on AAA’s bank account deposits. Includes AAA’s management costs. Rate is variable. Current rate available at www.betashares.com.au (1) Average rate offered by major Australian banks (2) Average of current rate offered by three major providers(3) Average of rate offered by Comsec and E*Trade Source: Bank websites, wrap websites ASX: AAA
  22. 22. Confidential – may not be distributed without the consent of BetaShares Capital 22 Asset Class Exposures: Currency ETFs ASX: USD ASX: EEU ASX: POU
  23. 23. Asset Class Exposures : Gold and Crude Oil Crude Oil ETF (ASX Ticker: OOO) Gold Bullion ETF – Currency Hedged (ASX Ticker: QAU) 23Confidential – may not be distributed without the consent of BetaShares Capital
  24. 24. Confidential – may not be distributed without the consent of BetaShares Capital 24 Gold has been historically correlated with the A$ Gold Spot Price (US$) v $US per $A: January 2006- June 2016 Source: Bloomberg. Past performance is not an indication of future performance
  25. 25. Confidential – may not be distributed without the consent of BetaShares Capital Index Exposures
  26. 26. Core Exposures : FTSE RAFI Australia 200 Index • RAFI = Research Affiliates Fundamental Indexation • Factors best reflect a company’s ‘economic footprint’ and are not price related • Factors are equally weighted • Average of five years of historical data used for all measures except book value • Methodology is transparent, repeatable and based on measures which have historically proved to be successful in delivering attractive performance outcomes compared to market-cap weighted indices Cash FlowSales Book Value Dividends RAFI Fundamental Factors ASX: QOZ 26Confidential – may not be distributed without the consent of BetaShares Capital
  27. 27. Confidential – may not be distributed without the consent of BetaShares Capital 27 FTSE RAFI Australia 200 Index has outperformed S&P/ASX 200 Index since inception FTSE RAFI Australia 200 Index v S&P/ASX 200 Index: May 1992 – June 2016 (Growth of $100) Graph shows performance of underlying index relative to S&P/ASX 200 index, not ETF performance and does not take into account ETF management costs. You cannot invest directly in an index. Returns for periods longer than one year are annualised. Past performance is not an indicator of future performance of index or ETF. The FTSE RAFI Australia 200 Index was launched on 10/8/2009. Index returns prior to launch are simulated based on Research Affiliates’ patented non-capitalisation weighted indexing system, method and computer program product. Actual investment results may differ from simulated results. Source: Bloomberg, FTSE Value add since inception: 2.0% p.a TOTAL RETURN FTSE RAFI AUSTRALIA 200 S&P/ASX 200 3M 3.5% 3.9% 6M 1.0% 1.1% 1 YR -2.1% 0.6% 3 YR (p.a) 7.2% 7.7% 5 YR (p.a) 8.4% 7.4% 10 YR (p.a) 6.7% 4.9% 20 YR (p.a) 11.1% 8.9% Incept (p.a) 11.2% 9.2% Volatility (p.a) 12.9% 13.2% Risk - adujsted return 0.867 0.696 Ending value of 100 $ $ 1,287.92 $ 825.44 50 250 450 650 850 1,050 1,250 1,450 1,650 May-92 May-94 May-96 May-98 May-00 May-02 May-04 May-06 May-08 May-10 May-12 May-14 May-16 FTSE RAFI Australia 200 TR Index (index BetaShares FTSE RAFI Australia 200 ETF seeks to track) S&P/ ASX 200 TR Index ASX: QOZ
  28. 28. Confidential – may not be distributed without the consent of BetaShares Capital 28 FTSE RAFI Australia 200 Index has outperformed S&P/ASX 200 Index most years since inception FTSE RAFI Australia 200 Index v S&P/ASX 200 Index Total Returns by Calendar Year Table shows performance of underlying index relative to S&P/ASX 200 index, not ETF performance and does not take into account ETF management costs. You cannot invest directly in an index. Past performance is not an indicator of future performance of index or ETF. The FTSE RAFI Australia 200 Index was launched on 10/8/2009. Index returns prior to launch are simulated based on Research Affiliates' patented non-capitalisation weighted indexing system, method and computer program product. Actual investment results may differ from simulated results. Source: Bloomberg, FTSE Total Return FTSE RAFI 200 S&P/ASX 200 Difference 2015 0.4% 2.6% -2.1% 2014 5.6% 5.6% 0.0% 2013 25.5% 20.2% 5.3% 2012 21.9% 20.3% 1.7% 2011 -9.4% -10.5% 1.1% 2010 0.6% 1.6% -1.0% 2009 48.6% 37.0% 11.5% 2008 -36.9% -38.4% 1.5% 2007 20.1% 16.1% 4.0% 2006 21.8% 24.2% -2.4% 2005 23.1% 22.8% 0.3% 2004 26.5% 28.0% -1.5% 2003 14.4% 14.6% -0.2% 2002 -3.0% -8.8% 5.8% 2001 17.4% 10.4% 7.0% 2000 7.8% 6.4% 1.4% 1999 19.1% 18.7% 0.4% 1998 20.0% 9.8% 10.2% 1997 13.2% 12.7% 0.5% 1996 16.4% 14.4% 2.0% 1995 20.4% 21.1% -0.7% 1994 -7.9% -8.8% 0.8% 1993 48.7% 40.0% 8.6%
  29. 29. Confidential – may not be distributed without the consent of BetaShares Capital 29 Holdings comparison – FTSE RAFI Australia 200 June 2016 Source: Research Affiliates, FTSE, Bloomberg
  30. 30. ASX: NDQ Core Exposures : NASDAQ 100 Index 30Confidential – may not be distributed without the consent of BetaShares Capital
  31. 31. Confidential – may not be distributed without the consent of BetaShares Capital 31 Nasdaq 100 – Historical P/E Ratio 0 10 20 30 40 50 60 70 80 90 100 1/01/1985 1/09/1985 1/05/1986 1/01/1987 1/09/1987 1/05/1988 1/01/1989 1/09/1989 1/05/1990 1/01/1991 1/09/1991 1/05/1992 1/01/1993 1/09/1993 1/05/1994 1/01/1995 1/09/1995 1/05/1996 1/01/1997 1/09/1997 1/05/1998 1/01/1999 1/09/1999 1/05/2000 1/01/2001 1/09/2001 1/05/2002 1/01/2003 1/09/2003 1/05/2004 1/01/2005 1/09/2005 1/05/2006 1/01/2007 1/09/2007 1/05/2008 1/01/2009 1/09/2009 1/05/2010 1/01/2011 1/09/2011 1/05/2012 1/01/2013 1/09/2013 1/05/2014 1/01/2015 1/09/2015 Price to Earnings Ratio (P/E) - NDX Index - 1 January 1985 - 29 January 2016 P/E Average Average P/E = 29.3 Current P/E = 19.15 35% discount to average Source: Bloomberg, Thomson Reuters Past performance is not an indicator of future performance
  32. 32. BetaShares Global Sector Series BetaShares Global Sector Series is currently the most extensive family of global sector products available on ASX 32Confidential – may not be distributed without the consent of BetaShares Capital
  33. 33. Confidential – may not be distributed without the consent of BetaShares Capital 33 BetaShares Global Energy Companies ETF (ASX: FUEL)
  34. 34. BetaShares Global Healthcare ETF (ASX: DRUG) 34Confidential – may not be distributed without the consent of BetaShares Capital
  35. 35. Strategy or outcome based strategies Confidential – may not be distributed without the consent of BetaShares Capital
  36. 36. Strategy & Outcome Based ETFs Growth in ETF industry has led to development of funds that follow a set of rules to provide a particular outcome, such as: • Ability to “Short” the market • Enhanced dividend Income • Managed Volatility • Options to gear or leverage 36Confidential – may not be distributed without the consent of BetaShares Capital
  37. 37. The Case for HVST BetaShares Australian Dividend Harvester Fund (managed fund) (HVST) has been specifically designed to meet the investment challenges of SMSFs and retirees, offering the potential for: ASX: HVST Tailor-Made for SMSFs & Retirees Tax-effective income Reducing volatility risk 37Confidential – may not be distributed without the consent of BetaShares Capital
  38. 38. Confidential – may not be distributed without the consent of BetaShares Capital 38 The Dividend Harvester Strategy ASX 50 UNIVERSE
  39. 39. Confidential – may not be distributed without the consent of BetaShares Capital 39 The Dividend Harvester Strategy Stocks paying dividends this period
  40. 40. Confidential – may not be distributed without the consent of BetaShares Capital 40 The Dividend Harvester Strategy Dividend paying stocks by highest grossing yield
  41. 41. Confidential – may not be distributed without the consent of BetaShares Capital 41 The Dividend Harvester Strategy 14 Stock Portfolio
  42. 42. Confidential – may not be distributed without the consent of BetaShares Capital 42 HVST: Income and Volatility BetaShares Australian Dividend Harvester Fund v S&P/ASX 50: Income and volatility to 31 July 2016 *S&P/ASX 50 based on 12 month trailing data Source: BetaShares, Bloomberg 11.5% 4.8% 3.4% 1.7% 14.9% 6.5% 0% 2% 4% 6% 8% 10% 12% 14% 16% HVST S&P/ASX 50* Cash Yield Franking Fund Inception Date (29 Oct 2014) HVST S&P/ASX 50* Difference 12 Month Net Yield* 11.5% 4.8% 6.7% 12 Month Gross Yield (Est.)* 14.9% 6.5% 8.4% 12 Month Annual Volatility* 8.7% 18.6% 53.3%
  43. 43. Confidential – may not be distributed without the consent of BetaShares Capital 43 HVST performance since inception BetaShares Australian Dividend Harvester (HVST) v S&P/ASX 50 Index: Since Inception to 31 July 2016 Past performance is not an indicator of future performance. Source: Bloomberg, BetaShares Sell Off “U Shape” “Outperform” Sideways “Underperform” Sideways Increasing Vol “In line” Sell off High Vol “Outperform” Sideways Increasing Vol “In line” Sell Off/ Sideways “Outperform” Rally “Underperform” HVST Strategy S&P ASX50 Index Annual Return (%) 3.3% 3.5% Volatility (%, p.a.) 8.8% 17.3% 80 85 90 95 100 105 110 115 29-Oct-14 29-Jan-15 29-Apr-15 29-Jul-15 29-Oct-15 29-Jan-16 29-Apr-16 29-Jul-16 HVST S&P/ASX50 TR Index
  44. 44. S&P/ASX 200 Index (1992-2013): Cumulative equity return and volatility Source: Milliman Financial Risk Management LLC, 31/12/1991-31/12/2013. The chart above is historical and for illustrative purposes only. It does not represent actual performance of any investment. Past performance is no guarantee of future results. Selected periods when increased market volatility was associated with market declines Volatility is frequently associated with sharply falling markets ASX: HVST 44Confidential – may not be distributed without the consent of BetaShares Capital
  45. 45. GEARED EXCHANGE TRADED FUND MARGIN LOANS LISTED WARRANTS GEARING LEVELS 50-65% - set by Fund Customisable by investor Set by issuer – typically between 50-90% ACCESS Bought and sold like a share Requires loan agreement, credit checks Requires client agreement form DOWNSIDE RISK Limited to capital invested Unlimited – recourse to client Limited to capital invested DIVERSIFICATION High – broadly diversified share portfolio Varies depending on underlying exposure Varies depending on underlying exposure MARGIN CALLS No margin calls for investors Yes – investors can experience margin calls No margin calls for investors BORROWING COST Access to wholesale funding rates Retail funding rates Retail funding rates POTENTIAL FOR INTEREST DEDUCTIONS Yes – interest costs reduce taxable distributions to investors Yes Yes INVESTOR ABILITY TO PRE-PAY INTEREST No Yes Yes – included in purchase price ISSUER CREDIT RISK No No Exposed to full counterparty risk of issuer SUPER FUND/ SMSF ELIGIBLE Yes Generally not Yes Confidential – may not be distributed without the consent of BetaShares Capital 45 Comparison of ASX-traded ways to obtain geared exposure
  46. 46. 1. Asset Class Exposure • Use ETFs as way to get low-cost, liquid exposure to asset classes (e.g. cash, gold, commodities and alternatives) 2. Index Exposure • With one trade get exposure to all the components of an index (e.g. Nasdaq 100, S&P/ASX 200, MSCI World Index) 3. Strategy Exposure • Eg High Income, Short, Geared Summary: Applications of ETFs in investment portfolios 46Confidential – may not be distributed without the consent of BetaShares Capital
  47. 47. Australian Equities Global Equities Equity Income Managed Risk/ Defensive Equity Cash QOZ QFN QRE NDQ UMAX QUS FUEL FOOD BNKS HEUR HJPN MNRS DRUG HVST YMAX AUST WRLD AAA Short Geared Currency Commodities Active BEAR BBOZ BBUS GEAR GGUS USD POU EEU QAU OOO QCB GLIN RENT DMKT BetaShares Product Range 47Confidential – may not be distributed without the consent of BetaShares Capital
  48. 48. Questions? Subscribe to our blog for economic insight and ETF trading ideas – www.betasharesblog.com.au 48Confidential – may not be distributed without the consent of BetaShares Capital
  49. 49. Disclaimer This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

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