Navigating the bloody battle of 2016


This year has played out much like an intense episode of Games of Thrones – the downfall of political dynasties, old-age alliances broken (Brexit), claims of currency manipulation and corruption. Not surprisingly markets have panicked this year and investors have been left pondering whether "Winter is Coming"

Many epic battles have been fought on Game of Thrones but what has been demonstrated time and time again is that having the largest army doesn't mean you'll win the war. The rulers of various kingdoms have had to come up with some out-of-the-box strategies to make sure they emerge triumphant. This year, three ETFs in particular have provided strategies that have helped investors play the game.

Macro play: VanEck Vectors Gold Miners ETF (ASX: GDX)

Gold has been a standout performer in 2016. Gold thrives when investors are feeling uncertain about the global economy. The price of gold bullion peaked above US$1,300 per ounce after the Brexit vote in June and has since hovered around US$1,200 per ounce.

There are several ways investors can get exposure to gold including buying gold bullion. Another way is investing in gold mining companies. Gold miners have historically outperformed gold bullion when the gold price rises, as it has in 2016.

VanEck's Gold Miners ETF (ASX: GDX), which tracks the NYSE Arca Gold Miners Index, gives investors instant access to a diversified portfolio of 53 global gold mining companies in a single trade on the ASX. GDX is one of the best performing ETFs on the ASX retuning 49% p.a. over the past twelve months1.

The outlook for gold remains strong as we move into 2017 supported by a number of factors. In particular, the global economy remains weak and is in no condition to withstand higher policy rates. A December Fed rate hike could work against gold initially but over the longer term it is likely to be seen as a misstep that could increase financial stress. Uncertainty around Trump's foreign and domestic policies is also likely to support the price of gold in 2017.

US equities play: VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

The size of a castle's moat is important in Game of Thrones because it is often the decider between life or a bloody death. The North is ruled by Winterfell, the largest castle in the Seven Kingdoms, which is surrounded by a wide moat.

Morningstar® developed an ‘economic moat™' concept and assigned it to companies. This concept is analogous to a castle's ‘moat' - the wider the moat the better protected the company.

Companies with a Morningstar ‘wide moat' rating have the structural competitive advantages that enable them to earn above average returns on capital over a sustained period of 20+ years and which conversely prevents those returns from quickly eroding.

Less than 250 companies worldwide have a wide moat rating. In Australia, there are only seven. In the US just 1402.

Morningstar has constructed an index which includes at least 40 US wide moat companies with the most compelling valuations. The index is called the Morningstar Wide Moat Focus Index™ (MOAT Index).

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT) tracks the MOAT Index. For the calendar year to 30 November 2016 MOAT Index has returned 19.32% compared to the S&P 500 Index which returned 8.11% over the same period.  On a trailing basis, the MOAT Index has outperformed the market over one, three and five year periods.

Market fluctuations in response to uncertainty around Trump's foreign and domestic policies and other geopolitical and economic events will likely continue to be a regular occurrence next year.   To manage market volatility investors should consider US companies with strong competitive advantages. MOAT provides simple and convenient access to a portfolio of these companies in a single trade, during Australian business hours, in Australian dollars, on ASX.

Australian Equities play: VanEck Vectors Australian Equal Weight ETF (ASX: MVW)

Until this year you could argue that the big four banks have ruled The Iron Throne3. Recently Australia's big four banks posted their first collective fall in cash earnings since the global financial crisis.  The major banks are struggling in the current weak economic environment with slowing revenue growth, continued downward pressure on margins and higher liquidity and capital requirements.

The standard benchmark, the S&P/ASX 200 Accumulation Index (S&P/ASX 200), is dominated by the 10 largest companies which comprise over 50% of the index, including the big four banks.  When performance of Australia's largest stocks takes a dive, so too does the performance of the S&P/ASX 200.

VanEck's Australian Equal Weight ETF (ASX: MVW) is a portfolio of 81 of the largest and most liquid Australian equities which are equally weighted at 1.23% each. The impact of an equal weight strategy is that it significantly reduces the concentration risk prevalent in many Australian investment portfolios which are overexposed to the mega caps (stocks >$100bn market cap) including the big banks. Many Australian investors are unknowingly exposed to concentration risk.

MVW has outperformed the S&P/ASX 200 by 4.95% p.a. over the past twelve months returning 14.98% compared to 10.03%. Since its inception it has outperformed by 4.22% per annum.1

The banks face a number of headwinds in 2017. Net margins are declining as a result of lower rates and increased competition. Net margins have fallen from an average of 2.26% in 2010 to 2.02% in 2016. There are also fears that the Australian ‘housing bubble' could burst which would significantly impact bank performance. Declining bank dividend payout ratios are also a significant headwind for banks.

Now, more than ever, an appropriately diversified core Australian equities portfolio is important for investors.

The finish line is close

As we surge towards the finish line of 2016, many are reflecting on a year that has taken many unpredictable twists and turns. Amid all the market chaos, ETFs have emerged as an important strategy for investors.

In November, the US ETF industry experienced the second highest inflows on record of US$47 billion YTD, compared to the record of US$51.7 billion in September 20084. Locally, Australia's ETF industry continues to grow impressively reaching a record of A$24 billion5. Investors are attracted to ETFs because they provide transparent, liquid and targeted outcomes, all while charging lower management fees than actively managed funds.

As we move into 2017, it is likely that geopolitical and financial risks will be ongoing and valuation concerns across bonds and equities will continue. Hoping that the Mother of Dragons will descend from the heavens and save the world is wishful thinking. Just as we don't know how Game of Thrones will end, we don't know what's in store for 2017 - but what's certain is that ETFs will continue to help investors play the game.

1VanEck performance: As at 30 November 2016

2As at 7 December 2016

3The Iron Throne is a metonym for the fictional monarchy of Westeros as well as being the physical throne of its monarch in the A Song of Ice and Fire series of fantasy novels by George R. R. Martin.

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Published: 09 August 2018