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3 equity ETFs to kick off the new financial year

Nicola Chand  |  05 Jul 2022Text size  Decrease  Increase  |  
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After one of the worst half years in decades for equity markets, investors are weighing up whether it’s time to dip a toe back into stormy waters. Exchange-traded funds (ETFs) are a diversified way to add equity exposure to markets some consider undervalued. Popular stalwarts Vanguard Australian Shares ETF (ASX: VAS) or iShares Core S&P 500 ETF (ASX: IVV) are great places to start. For investors who already own these options or those on the lookout for ETFs that take sustainability into account or exclude the currently underperforming US market, we’ve got you covered.

We’ve used the Morningstar ETF Screener to filter for:

  • Australian and international equity ETFs
  • Passive funds
  • Morningstar Analyst Rating of Gold, Silver or Bronze, meaning analyst have conviction the fund can outperform its peer group on a risk-adjusted basis
  • Average or above Morningstar Sustainability Rating, meaning the fund’s holdings are in the average or above category for managing ESG risk
  • Large-cap blended funds, meaning they own the biggest companies and balance growth and value investing styles.
  • Management fees less than 0.5% annually

Vanguard Ethically Conscious Australian Shares ETF (VETH)

VETH is a solid option for investors looking for core Australian equities exposure incorporating ESG (environmental, social, and corporate governance) risk.

VETH tracks the FTSE Australia 300 Choice Index, with all major banks and Fortescue Metals appearing in the 243 covered securities. VETH’s portfolio is ‘top heavy’ with approximately 50% of the index in the top 10 companies.

“The concentration in banks skews the fund's sector weights, with financial services forming around 34.5% of the portfolio (versus 26.8% for the category average). The basic material is the second-largest sector exposure, but it is meaningfully lower than the category index because of the ESG screening,” says Morningstar analyst Kongkon Gogoi.

VETH takes an exclusionary approach to ESG by removing companies falling under four categories: non-renewable energy, vice, weapons and serious controversies, which can include direct involvement in crimes against humanity or patterns of egregious abuses of human rights. The 60 companies excluded include local heavyweights BHP Group, Rio Tinto, Woolworths, and Coles.

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VETH’s fees rank in Morningstar’s cheapest quantile at 0.16% per year.

Morningstar awards VETH a Bronze analyst rating and Gogoi believes "this share class will be able to deliver positive alpha relative to the category benchmark index."

SPDR MSCI World Quality Mix ETF (QMIX)

Silver-rated QMIX is an option for investors looking for a twist to their global equity exposure. The fund remains one of Morningstar’s preferred strategies for global equity multi-factor exposure. Factor investing is an investment approach that targets certain asset characteristics, for example low volatility, value or growth.

Senior analyst Kongkon Gogoi believes the QMIX strategy will serve investors well in the long term.

“The ETF’s guiding investment philosophy stems from an array of academic research that underpins the hypothesis of long-term outperformance of a portfolio that combines stocks with attributes such as quality, value, and low volatility over the broad market,” says Gogoi.

The ETF consists of many large caps, with multiple FAANG’s in the top 10 holdings including Apple, Facebook-owner Meta Platforms, and Alphabet. Gogoi believes QMIX’s sensible approach to multi-factor investment, price advantage, liquidity, diversification, and a track record of effective implementation should reward long-term investors.

“QMIX did well in protecting capital better than peers when the market slid, such as in the choppy global market of 2018 when it gained 3.5% versus 1.5% and negative 0.42% for the MSCI World Ex Australia and Morningstar Category average,” he added.

With fees at 0.4%, QMIX falls into Morningstar’s cheapest quantile.

Vanguard All-World ex-US Shares ETF (VEU)

US equities dominate local international equity funds, with roughly 70% of the holdings in Vanguard MSCI International Shares (ASX: VGS) US domiciled. For those looking to manage their US exposure, Vanguard All World ex-US Shares is one option.

The fund includes large and mid-cap stocks from over 40 developed and emerging markets. Holdings include Tencent Holdings and Taiwan Semiconductor Manufacturing Co.

Morningstar senior equity analyst Zunjar Sanzgiri highlights that "Global-equity ex-US indexes initially were designed to enable US investors to diversify portfolios often dominated by American stocks.”

However, for Australian investors, VEU provides diversification from the heavyweight local banks and miners.

”The sectoral weightings provide an aspect of diversification when compared with the Australian domestic equity market. The fund carries higher exposure to technology and consumer stocks while being relatively underweight on financial services,” says Sanzgiri.

On a pricing note, VEU falls into Morningstar’s cheapest quantile, charging an 0.07% fee.

is a wealth and finance journalist with Morningstar

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