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...

How Greek mythology can make you a better investor
07/12/2016  Don't be over confident or follow the herd, and like Odysseus, learn to have yourself "tied to the mast" when it comes to long-term investing.
Supermarket headwinds prompt fair value cut for majors
06/12/2016  Growing competitive pressures and a declining revenue outlook for Australia's two grocery giants now look to be part of a longer-term, structural shift.
What returns should you expect from markets?
01/12/2016  As market risks rise, investors must adjust their profit expectations--gone are the days of 8 per cent returns. But there are still growth opportunities out there if you know where to look.
Why healthcare stocks got a bump from Trump
28/11/2016  Australian healthcare and pharmaceutical companies continue to enjoy a purple patch, and for various reasons including the recent US election result, explains Morningstar's healthcare equities analyst Chris Kallos.
Equity and hybrid investors react as bond prices tumble
24/11/2016  The negative correlation between bonds and equities is reasserting itself following the US election of Donald Trump, according to John Likos, Morningstar's senior credit analyst.
2 global themes that are finding favour among ETF investors
15/11/2016  Australian retail investors are increasingly turning to ETFs for specific tactical exposures to global themes, particularly in the context of large-scale market events such as US election 2016.
Maintain discipline and stick to fundamentals when selecting stocks
14/11/2016  Steer clear of fads, maintain a disciplined approach and focus on company fundamentals in building and maintaining your investment portfolio, says Anton Tagliaferro, investment director, Investors Mutual
How Trump could impact economic growth
10/11/2016  Slowdowns in trade and immigration could hold back the US, and infrastructure spending could boost GDP, but it's too early to make any major changes to our economic forecast, says Morningstar's Bob Johnson.
President Trump: What should you do?
10/11/2016  Donald Trump has beaten Hillary Clinton to become the 45th US president. What should investors do?
Software companies worth watching amid tech deployment phase
08/11/2016  Kate Howitt, portfolio manager at Fidelity International discusses some of the core phases in technological disruption and identifies software companies among those currently presenting opportunities.
Kerr Neilson hot, cold and tepid on Europe, US and China
07/11/2016  Platinum co-founder and CEO Kerr Neilson explains his views on the major global markets and outlines where he sees opportunities--and where he doesn't.
Is Inghams a moat-worthy investment?
02/11/2016  Morningstar's Ravi Reddy discusses the upcoming float of poultry product producer Inghams, and whether it's in investors' interests to subscribe for shares in the IPO.
3 best ideas in healthcare
26/10/2016  Morningstar's Chris Kallos looks at some of the most compelling ideas in Australian healthcare, while also reaffirming the importance of the uncertainty rating and how it pertains to the sector.
Exercise caution and let some cash build
24/10/2016  Morningstar's Peter Warnes provides a near-term outlook for equities markets, while also sharing his thoughts on the upcoming Ingham's IPO.
Bogle forecasts low stock and bond market returns
21/10/2016  Warning of "much lower market returns" ahead, Vanguard founder Jack Bogle urges investors to seek low-cost investment products. From Morningstar US.
Finding the right flavour ETF amid expanding ETP menu
13/10/2016  From a relatively vanilla selection of exchange-traded funds (ETFs) on offer in the early 2000s, Australian investors can now choose from a wide range of exchange-traded products to suit various tastes.
Bright outlook for Aussie banks despite parliamentary committee and looming Basel IV regulations
12/10/2016  Australia’s ‘big four’ banks’ share prices have held up after their CEOs recently fronted a parliamentary committee, and have already absorbed the potential impact of more stringent capital requirements
Dividend, cashflow challenges hit investors but yield opportunities remain
06/10/2016  Technology, healthcare and telecoms hold opportunities for global equity investors even as utilities and energy stocks disappoint, says Jane Shoemake, director for global equity, Henderson
No place for set-and-forget asset allocation
04/10/2016  A 2016 company reporting season overview and explanation of why dynamic asset allocation is so important, from Dr Shane Oliver, chief economist and director of investment strategy, AMP Capital.
The search for bond yields
27/09/2016  Morningstar's Hybrid Handbook: Navigating the Australian Hybrid Market pulls back the curtain on corporate and bank hybrids, as John Likos, Morningstar's senior credit analyst, explains.