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...

Europe showing signs of life
23/04/2015  As growth concerns linger in China and the U.S., central-bank policy in Europe appears to be having its desired effect, says Morningstar's Bob Johnson.
Key takeaways from the Murray inquiry, SuperStream
23/04/2015  The SMSF Association's Graeme Colley discusses important points from both the Murray inquiry and the SuperStream initiative, while also giving trustees tips on how to avoid unwanted "gardening leave".
Avoiding a falling stock market
14/04/2015  Want to maximise portfolio returns and minimise losses? Stick to a value approach and resist the urge to be backward looking when it comes to performance
Navigating your portfolio amid volatility
09/04/2015  Westpac's David Simon talks about rebalancing a portfolio as investors continue to confront a number of risks.
Identifying stocks that will beat the market
31/03/2015  Think risk assets deliver the greatest returns? A new paper dispels this myth and instead proves that the equities that deliver the greatest profit are the unpopular ones
Protect your portfolio from losses
25/03/2015  Risk is not volatility - risk is the potential an investor has for loss, says Oaktree's Howard Marks. Recognising this is the first step in protecting your portfolio from losing money.
Revisiting the sole purpose test
19/03/2015  It’s important that trustees are reminded about their obligations under the sole purpose test – a key requirement in SMSF compliance.
Macro trinity underpinning eurozone
12/03/2015  Three key forces have ensured strong growth from most European markets so far this year, explains Morningstar's Jose Garcia Zarate, but structural flaws still need to be addressed
Taxing times for trustees?
05/03/2015  The government may have moved to address the tax concessions into super but trustees face a number of potential taxing issues.
Trustees under the spotlight
--  SMSF Association’s Andrea Slattery talks about the growing professionalism of the industry and what it means for trustees.
An insight into 4 top managers
02/03/2015  Morningstar’s Tom Whitelaw outlines the qualities behind this year’s fund manager of the year awards.
1 top stock set to open doors
27/02/2015  Morningstar's Peter Warnes shares his thoughts on results from the likes of QBE, BHP, Ramsay Health Care and Woolworths as the curtains close on the half-year earnings season.
Telstra picks right man for top job
20/02/2015  Morningstar's Peter Warnes gives his take on the most recent batch of corporate earnings, while also sharing his views on the appointment to the top job at Telstra.
2 stocks in earnings sweet spot
13/02/2015  Morningstar's Peter Warnes takes a look at the latest results from two big names in healthcare, as well as earnings from CBA and Telstra.
A further rate cut?
11/02/2015  Further rate cuts are expected while the Australian dollar will remain overvalued, according to Ibbotson’s Brad Bugg.
What's in store for listed investments?
05/02/2015  While the growth in LICs is more cyclical, ETFs continue to develop from stronger structural growth.
Key issues for SMSFs
02/02/2015  A government inquiry and tax concessions are among the key issues confronting trustees.
Emerging supermarket competitors
22/01/2015  Recent increased sales numbers from global supermarket chain Aldi continues to add competitive pressure on Australia’s big players.
Top SMSF tips for 2015
21/01/2015  Keeping up-to-date on legislative changes, avoiding excess contributions and ensuring sufficient cash flow is in place are just some of the simple things trustees can do to get a better handle on their SMSF.
Overcoming home bias
15/01/2015  Beyond Australia's borders and within the global investment universe lies a much more diverse range of opportunities across multiple sectors.