A customised approach to ETFs

Christine St Anne  |  26/10/2012Text size  Decrease  Increase  |  

Christine St Anne: UBS recently launched in Australian equities exchange-traded fund, or ETF, to the Australian market. To give us an insight into how this ETF works, I'm joined by Ben Heap. Ben welcome.

Ben Heap: Thanks, Christine.

St Anne: Ben, UBS has been offering ETFs globally since 2001, why have you decided to offer ETF now into the Australian market?

Heap: This is a market that's one of the larger investment markets in the world and it's a market where UBS has been committed for a long time. With respect to asset management, we've seen the success with our ETF offshore and we've seen the steady growth of the market here, and so we think that growth will continue. We think that’s one of the things investors are looking for and our mantra is always to give investors products that meet their needs.

St Anne: There are a number of established ETF providers already in Australia. Ben, how is UBS going to distinguish itself from those other providers?

Heap: It's a very good question. I think a number of competitors, as you rightly say, have been here for a while and offering traditional passive ETF products. We had sought to do something a little bit different. We've sought to develop a product in our initial ETF, which offers a solution for investors which is a little bit better than might be available through a traditional passive ETF.

And in doing that what we've done is taken traditional market cap-weighted index and instead developed an index which takes account of quality of underlying stocks. In other words, do I hold all the stocks ASX 200, if instead you can hold a subgroup of those stocks which are likely to be better performing.

St Anne: Ben, can you tell us a little bit about the UBS preferred research index, which is what your ETF tracks?

Heap: Sure. That's right. So that is an index that the UBS Investment Bank has created and we are managing against. That index, instead of simply holding stocks in accordance with market capitalization, uses a series of filters to identify what we hope and expect will be a better performing subgroup of the overall index.

Now those filters are in part quality based, so very simply the buy recommendations that come out number one rated investment bank research type, traditionally that research has only been available to institutions, so this makes that research available to retail SMSF (self-managed superannuation fund) investors and in a series of quantitative filters as well.

So rather than simply holding in accordance with market capitalization, we use what's called a modified market capitalization. So that allows us to hold some smaller stocks that we think will be significant outperformance in a higher percentage and it means we're not obligated to simply hold the banks and the resource companies in large part.

St Anne: So what sort of companies are in that index?

Heap: It is still all stocks from ASX 200, so it's by definition large Australian well-known brand name stocks. We will always hold at least one bank. We will likely always hold stocks from the resources sector and then we'll hold industrial stocks as well. But instead of simply holding 50 per cent of our overall index in the top 10 stocks, which is roughly their percentage of market capitalization, we're able to hold a broader group of those stocks. So it will be traditional brand names and every day you can go to the UBS website and see exactly what stocks were in the index.

St Anne: Ben, you mentioned that index is more customized and uses filters. Does this mean your ETF is a bit more active than some of the other passive ETFs out there?

Heap: Yeah, I think that’s a good question. We, obviously, also have actively managed funds, which are based on the fundamental research from our teams all around the world and this ETF is not designed to replace those actively managed funds at all. That is a solution that meets a lot of our investors' needs.

For some investors a pure passive solution at a very low cost is what meets their need. For institutional investors to look at something in between and that is a cost-effective solution, which is based on an index so it provides broad exposure to the Australian equities market, but with a better return than you would otherwise be able to earn from simply investing in the index itself.

St Anne: How is that research shaped with your ETF product team, are there any processes in place?

Heap: Yeah, absolutely and there's very clear Chinese roles around these types of things in practice, the investment bank has constructed an index and that index is made available every day through our website and on that index, you can see exactly what stocks make up the index. We are in managing to that index.

So investors have absolute transparency, which is one of the strong advantages of ETFs. They know they are, through this ETF, holding the underlying stocks. It’s what's called a physical replication ETF, which is a very important principle and they’re able to take advantage of that expertise and invest in those preferred stocks in a way that we think is very cost-effective versus the alternatives in the market.

St Anne: Ben, a lot of our investors love their dividends. Does your ETF give investors these dividends?

Heap: Absolutely. So this ETF will pay semi-annual dividend based on the dividends that come from the underlying companies and therefore, the sort of dividend return will be very similar to the overall market return in terms of income. However, Christine, this is a space we certainly see appetite from investors and one of the things we are looking at going forward is developing a dividend or income skewed version of our ETF as well and that's something we'd like to offer to investors in the near future.

Video Archive...

Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 3
20/07/2017  Insights on Australia's housing market, China's effect on domestic banks, and cyber-security readiness, in the final instalment of Brian Hartzer's interview with Morningstar's David Ellis.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 2
13/07/2017  Westpac CEO Brian Hartzer joins Morningstar banking analyst David Ellis to discuss digital disruption, regulatory change and Australian banks' social license.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 1
06/07/2017  Brian Hartzer, CEO, Westpac joins Morningstar senior analyst David Ellis to discuss his role leading Australia's oldest bank, how Westpac can continue to grow value, and its commitment to sustainability.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared
How to guard against retirement threats
16/06/2017  As retirement approaches, even the best-laid plans can go awry, as Tim Steffen tells Christine Benz, Morningstar US.
PIMCO Global Credit Fund
07/06/2017  The PIMCO Global Credit strategy receives a Morningstar Analyst Rating of Silver due to its sizeable and highly capable credit research team.
PIMCO Income Fund
07/06/2017  Morningstar's Tim Wong looks at the strengths and competitive advantages of this Silver-rated strategy.
3 pockets of opportunity in fixed income
07/06/2017  The head of PIMCO Australia portfolio management explains his views on active management in fixed income and outlines where he sees most value in this space.
Trump administration biggest macro threat for investors
05/06/2017  Even as European political volatility subsides, the US Government remains a considerable threat to financial markets, says Colleen Barbeau, director of equity portfolio management, Franklin Templeton.
Antipodes Global Fund: Class P
01/06/2017  Antipodes constructs this portfolio based on three major objectives--capital preservation, inclusion of attractively priced businesses, and investment resilience.
Investors Mutual WS Future Leaders Fund
01/06/2017  Investors Mutual Future Leaders is a capable strategy focused on investing in Australian companies outside the top 50.
Why the time is right to invest in India
25/05/2017  Indian stocks rallied after the appointment of Narendra Modi as Prime Minister--but then subsequently fell. UK-based investment manager Jonathan Schiessl says now is the time to buy.
When should you pay active fund fees?
23/05/2017  When is it worth paying higher fund fees for active fund management? The single most important factor effecting a fund's relative performance is its price.