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A golden opportunity for ETF investors

Glenn Freeman  |  24 Aug 2016Text size  Decrease  Increase  |  

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Gold and US markets are among top picks for Australian ETF investors, says Kris Walesby, head of ETFS, ANZ.



Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm joined today by Kris Walesby, Head of ANZ ETFs.

Kris, thanks for joining us.

Kris Walesby: Thanks Glenn.

Freeman: Now, Kris, ETFs are just one way for individual investors to access international markets. What are some of the advantages these have over some of the other alternatives that are out there?

Walesby: The key advantage that ETFs have for the international market is that if an investor doesn't really know particularly much about the region, say for example, the U.S., they are not particularly aware of the individual companies and what their earnings are and all those things that an active manager would do with a managed fund or someone who has a direct stock account into the U.S. would know, then ETFs give a very, very efficient way to make sure that they still have that regional exposure in a very, very cheap form. But it means that they don't put themselves in a position where they are having to guess at the company level or the manager level as to what is exactly going to happen in that region.

Freeman: Kris, in your view, what are some of the most attractive ETF sectors for retail investors in the current environment?

Walesby: Currently, I think that the U.S. is still one of the most attractive areas and it has been for Australian investors for some time because generally it's understood that the US is probably the strongest engine room of growth for the next 5 to 10 years as the world's dominant economy.

But what I also like is--well, our products that track commodities, especially gold, gold is particularly underused by Australian investors ironically because it's the land of gold.

Australian investors don't really seem to include gold in their portfolios whereas physically backed gold is one of the best hedges that an investor can have in their portfolio. Simply, if gold is doing badly in their portfolio most investors are delighted because it means that the rest of their portfolio is doing really well.

Freeman: What are some of the things that ETF investors need to be mindful of when selecting an ETF product for their portfolio?

Walesby: The main thing that investors need to know about with each ETF is what the ETF is doing. So, ETFs, they have a name, which is normally in simple form, to make sure that investors know approximately what the ETF is doing and most of time, especially in Australia, that is the case.

So, an ETF that says Standard & Poor's 500 probably tracks the S&P 500 which is an American index. But there are some ETFs that have more sophisticated rules. Investors shouldn't be scared of those rules. They just need to understand what those rules are doing and what type of outcome is likely from them.

Freeman: Now, do you believe that there are enough Australian ETFs available for domestic investors?

Walesby: I think domestically except for certain areas of fixed income, pretty much the Australian market for the domestic exposure is enough. There could be some further exposures like potentially ASX MidCap, so not including the big mega stocks could work, but on a whole, I think there's enough ETFs there.

On the international side, no, I think there is room for many, many more ETFs because right now most of the ETFs are either global ex-Australia or they are predominantly American-based.

So, Australian investors, as they get more sophisticated would want to be able to be more precise about how they allocate their portfolios.

So, they'll want Europe, there are a couple of European ETFs but soon they'll want Europe with dividends, they'll want Asia Pacific with dividends, they'll want Europe Small Cap, et cetera, et cetera. None of these really exist. So, even some basic extrapolations suggest that there's not enough ETFs yet to do exactly what many investors in Australia will want to do over time.

Freeman: Just finally, what do you see is the next big area of development in ETFs?

Walesby: The key area that I think will really grow soon in Australia because actually it's already a big part of the ETF community in Europe and the U.S. is actually using ETFs for tactical usage.

So, right now, most ETFs are used to buy and hold. So, they are used in a portfolio. They may be trimmed down, sold a little bit. But on the whole, that's the main usage of ETFs. Whereas when you start to see ETFs for their full capabilities, not just buy and hold but also to take a tactical position.

For example, you may think that in the next three months gold is going to go up. In the next three months you might think the Australian dollar is going to go down against the U.S. dollar.

You can take these tactical positions and it doesn't even need to be three months, Glenn. Sometimes it can be a day, two days, three days. So, you have this great tool that's essentially made to buy and hold, but has this other effect where you can actually trade it in the market for short-term tactical trades as well.

Freeman: Thanks for joining us, Kris.

Walesby: Thanks Glenn.

Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.