Sharesight is a portfolio tracker that is integrated into Morningstar Investor. Their data shows the top 20 trades by Morningstar users in April 2024. The top buy trade, Woodside WDS has been unchanged for three months now, showing that investors are building their positions in this materially undervalued stock, that is down 23% from its September 2023 high. The second and third buy trades were ETFs –Vanguard Australian Shares Index ETF VAS and iShares S&P 500 ETF IVV.

Telstra TLS took the fourth spot for most traded. Director of Equity Research, Brian Han, thinks it may be for a few reasons. It’s currently a four-star stock, sitting at 18% undervalued (at 1 May). It’s also reached a yield of 5%, fully franked, which appeals to many income investors.

Top 20 trades April

Here is what our equity and manager research analysts think about the top three buy trades.

Top buy trade: Woodside Energy WDS ★ ★ ★ ★ ★

Fair value: $45 (37% discount at 1 May 2024)

Moat: None

Uncertainty rating: Medium

No-moat Woodside's shares are down 24% from September 2023 highs and, at about $29, are materially undervalued, in 5-star territory. We think the share price is at odds with solid progress being made on growth projects.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 25 years—unparalleled domestic experience at a complicated and expensive task. Adding to Woodside's competitive advantages are the long-term 20-year off-take agreements with the who's who of Asia's blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should bring stability to Woodside's cash flows once projects are complete.

Woodside's development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.

In terms of dividends, our analysts do consider it somewhat high. Woodside has had an 80% payout ratio since 2013 while LNG expansion plans have been on hold. The official policy is to maintain a minimum 50% payout of underlying earnings. It is considered an appropriate capital allocation decision to distribute funds as dividends if you’re not investing in the business. However, our analysts believe that it would be better utilized to accelerate growth plans, expanding countercyclically, taking advantage of reduced capital costs. Regardless of this, Woodside have strong cashflow and a healthy balance sheet that should support ongoing dividend payments that are 100% franked.

Top buy trade: Vanguard Australian Shares ETF VAS

Morningstar Medalist Rating: Bronze

The Vanguard Australian Shares ETF VAS follows a passive strategy, aiming to replicate the S&P/ASX 300 index.

Our analysts believe that this ETF is a compelling choice for core Australian equity exposure, awarding it a Bronze medalist rating. Our ratings are based on expectations for risk-adjusted future performance comparative to a category benchmark. This contrasts with how many choose ETFs which is based on how well funds have performed in the past.

A diversified index that captures the investment opportunity set well, a highly competitive fee, and Vanguard's well-recognised index tracking and trading efficiencies are the drivers of the continued vote of confidence in the strategy.

When looking at funds, one of the biggest questions is whether to go active or passive. The low price of this strategy sets a significant hurdle for active managers in the same space when looking at net-of-fee returns over the long term. However, our analysts believe that Morningstar’s best-rated active managers can add value and cross that hurdle consistently.

One consideration when looking for broad domestic equity Australia are the unique attributes of the Australian market. BHP Group BHP makes up 9.29% of the index, and the top 10 holdings make up 46% of the index (at 29 April 2024). The Australian market is very narrow, which means that a handful of sectors and industries dominate, including financial services and mining.

The result of this is inadequate diversification. An answer to this could be an equal-weighted ETF which invests proportionately across the index constituents. The VanEck Australian Equal Weight ETF MVW achieves this across 76 holdings that represent large and mid-cap shares in Australia. The fee is significantly higher than VAS (0.07% total cost ratio) at 0.35%, but our analysts believe this is justified.

They award MVW a Silver Medalist rating and think it is a great way to get exposure to the Australian market because it is diversified.

You’re able to read more about the trade-off between market-cap and equal weighted passive ETFs in this article I have written.

Top buy trade: iShares S&P 500 ETF IVV

Morningstar Medalist rating: Silver

Many passive Australian investors are anything but. They deviate from this strategy by making active decisions to be overweight in certain sectors, themes or geographies. It is no secret that Australian investors prefer and are heavily invested in domestic markets.

However, Australian investors have started to double down on the US as well. This may be due to the US outperforming almost every other market since the GFC. It is no surprise that iShares S&P 500 ETF IVV makes the top three.

Given the breadth of coverage and the cost efficiency, iShares S&P 500 ETF IVV is a fine choice for investors seeking US-specific equity exposure. The strategy is expected to outperform its peers over the long term and remains the clear choice for investors to gain US exposure. It can be paired with other ex-US products to form a balanced global equity portfolio.

The underlying benchmark, the S&P 500, is a market-cap-weighted index of the largest 500 companies in the United States. Thus, it offers giant- to mid-cap exposure, covering about 80% of the free-float-adjusted market cap of the US equity market. This results in a well-diversified index at the stock and sector levels. As such, passive strategies that track the S&P 500 stand as above-average options in a market segment where active managers have generally struggled to outperform. Consisting of highly liquid stocks, material stock-specific valuation information is quickly incorporated into stock prices.

From an Australian perspective, IVV gives exposure to a broad portfolio of some of the world’s most noteworthy companies, including sectors that are underrepresented in Australia such as technology and healthcare. The S&P 500’s correlation to Australian equities has come down in recent years, effectively adding to diversification for Australian equities exposure. It earns a silver medalist rating.

At an annual fee of 0.04%, the fund is priced attractively compared to active and passive peers.

When we look to the index’s exposure, 32% of the index is in the top 10 holdings, 6.99% of the index is in one holding – Microsoft MSFT, 5.81% in another – Apple AAPL. The index is highly concentrated in tech, with over 30% of the index in this sector (at 29 April 2024).

 

Sharesight is a portfolio tracker that is integrated into Morningstar Investor. Their data shows the top 20 trades by Morningstar users in April 2024. The top buy trade, Woodside has been unchanged for three months now, showing that investors are building their positions in this materially undervalued stock, that is down 23% from its September 2023 high. The second and third buy trades were ETFs –Vanguard Australian Shares Index ETF VAS and iShares S&P 500 ETF IVV.

Telstra took the fourth spot for most traded. Director of Equity Research, Brian Han, thinks it may be for a few reasons. It’s currently a four-star stock, sitting at 18% undervalued (at 1 May). It’s also reached a yield of 5%, fully franked, which appeals to many income investors.

Here is what our equity and manager research analysts think about the top three buy trades.

Top buy trade: Woodside Energy (ASX: WDS) ★★★ ★ ★

Fair value: $45 (37% discount at 1 May 2024)

Moat: None

Uncertainty rating: Medium

No-moat Woodside's shares are down 24% from September 2023 highs and, at about AUD 29, are materially undervalued, in 5-star territory. We think the share price is at odds with solid progress being made on growth projects.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 25 years—unparalleled domestic experience at a complicated and expensive task. Adding to Woodside's competitive advantages are the long-term 20-year off-take agreements with the who's who of Asia's blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should bring stability to Woodside's cash flows once projects are complete.

Woodside's development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.

In terms of dividends, our analysts do consider it somewhat high. Woodside has had an 80% payout ratio since 2013 while LNG expansion plans have been on hold. The official policy is to maintain a minimum 50% payout of underlying earnings. It is considered an appropriate capital allocation decision to distribute funds as dividends if you’re not investing in the business. However, our analysts believe that it would be better utilized to accelerate growth plans, expanding countercyclically, taking advantage of reduced capital costs. Regardless of this, Woodside have strong cashflow and a healthy balance sheet that should support ongoing dividend payments that are 100% franked.

Top buy trade: Vanguard Australian Shares ETF VAS

Morningstar Medalist Rating: Bronze

The Vanguard Australian Shares ETF VAS follows a passive strategy, aiming to replicate the S&P/ASX 300 index.

Our analysts believe that this ETF is a compelling choice for core Australian equity exposure, awarding it a Bronze medalist rating. Our ratings are based on expectations for risk-adjusted future performance comparative to a category benchmark. This contrasts with how many choose ETFs which is based on how well funds have performed in the past.

A diversified index that captures the investment opportunity set well, a highly competitive fee, and Vanguard's well-recognised index tracking and trading efficiencies are the drivers of the continued vote of confidence in the strategy.

When looking at funds, one of the biggest questions is whether to go active or passive. The low price of this strategy sets a significant hurdle for active managers in the same space when looking at net-of-fee returns over the long term. However, our analysts believe that Morningstar’s best-rated active managers can add value and cross that hurdle consistently.

One consideration when looking for broad domestic equity Australia are the unique attributes of the Australian market. BHP Group BHP makes up 9.29% of the index, and the top 10 holdings make up 46% of the index (at 29 April 2024). The Australian market is very narrow, which means that a handful of sectors and industries dominate, including financial services and mining.

The result of this is inadequate diversification. An answer to this could be an equal-weighted ETF which invests proportionately across the index constituents. The VanEck Australian Equal Weight ETF MVW achieves this across 76 holdings that represent large and mid-cap shares in Australia. The fee is significantly higher than VAS (0.07% total cost ratio) at 0.35%, but our analysts believe this is justified.

They award MVW a Silver Medalist rating and think it is a great way to get exposure to the Australian market because it is diversified.

You’re able to read more about the trade-off between market-cap and equal weighted passive ETFs in this article I have written.

Top buy trade: iShares S&P 500 ETF IVV

Morningstar Medalist rating: Silver

Many passive Australian investors are anything but. They deviate from this strategy by making active decisions to be overweight in certain sectors, themes or geographies. It is no secret that Australian investors prefer and are heavily invested in domestic markets.

However, Australian investors have started to double down on the US as well. This may be due to the US outperforming almost every other market since the GFC. It is no surprise that iShares S&P 500 ETF IVV makes the top three.

Given the breadth of coverage and the cost efficiency, iShares S&P 500 ETF IVV is a fine choice for investors seeking US-specific equity exposure. The strategy is expected to outperform its peers over the long term and remains the clear choice for investors to gain US exposure. It can be paired with other ex-US products to form a balanced global equity portfolio.

The underlying benchmark, the S&P 500, is a market-cap-weighted index of the largest 500 companies in the United States. Thus, it offers giant- to mid-cap exposure, covering about 80% of the free-float-adjusted market cap of the US equity market. This results in a well-diversified index at the stock and sector levels. As such, passive strategies that track the S&P 500 stand as above-average options in a market segment where active managers have generally struggled to outperform. Consisting of highly liquid stocks, material stock-specific valuation information is quickly incorporated into stock prices.

From an Australian perspective, IVV gives exposure to a broad portfolio of some of the world’s most noteworthy companies, including sectors that are underrepresented in Australia such as technology and healthcare. The S&P 500’s correlation to Australian equities has come down in recent years, effectively adding to diversification for Australian equities exposure. It earns a silver medalist rating.

At an annual fee of 0.04%, the fund is priced attractively compared to active and passive peers.

When we look to the index’s exposure, 32% of the index is in the top 10 holdings, 6.99% of the index is in one holding – Microsoft MSFT, 5.81% in another – Apple AAPL. The index is highly concentrated in tech, with over 30% of the index in this sector (at 29 April 2024).