Savvy investors have been able to protect themselves against the market carnage by adopting tactical asset allocation strategies using exchange-traded funds (ETF), according to Alex Vynokur, the CEO of BetaShares, which manages ~$10 billion in assets.

With volatile markets driving investors to consider new ways of hedging portfolios, Alex shared his observations on how ETF users are responding to changing market conditions so that Livewire Markets readers can get some fresh ideas on ways to navigate the current environment.

Read on to learn about some of the 5 big ETF trends which Alex expects to continue for the foreseeable future, and why he thinks it could be a “phenomenal” time to build up long-term strategic exposures as well.

Caption: Alex Vynokur, CEO, BetaShares

1. Bearish investors emerge from hibernation

The biggest trend Alex has noticed for BetaShares is a surge in the use of bear market or ‘short’ exposure exchange-traded products, which are designed to rise when markets fall (and vice versa).

“We’ve seen significant shifts in portfolio positioning and a level of demand that we’ve never experienced before for the Bear funds. Investors are strengthening their defences by buying bear market funds to protect against, or profit from market falls."

To quantify, BetaShares offers three short funds which trade on the ASX which are designed to rise 0.9%-1.1% (Bear fund) or 2%-2.75% (Strong Bear Funds) for every 1% fall in the Aussie or U.S. equities markets. Daily volumes on these ETFs have soared around 30-fold against pre-crisis averages and assets under management have spiked to over $650 million, with over $250 million of that growth coming in the past month.

He expects these funds will remain popular so long as wild market moves continue.

2. Gold glitters as central banks turn up the printers

Governments and central banks are throwing in their kitchen sinks to combat the Covid-19 financial virus, announcing or proposing trillions in welfare payments, loan guarantees, bailouts, rate cuts and quantitative easing packages.

Against the backdrop of short-term volatility and the longer-term consequences of more money printing, Vynokur is seeing an influx of capital into gold ETFs including the BetaShares Gold Bullion ETF – Currency Hedged (ASX:QAU).

“Investors are digesting the stimulus measures and money printing atmosphere which is creating an interesting environment for gold given there is a finite amount of it. We’re seeing institutional investors, retail advisers and investors alike boost their allocation to this asset class."

3. Technology as a defensive play

Interestingly, Vynokur says investors are flocking to international technology shares given 1) Covid-19 has upended the way we work, with remote work the new normal and 2) the sheer balance sheet strength of titans like Alphabet, Apple, Amazon, Facebook and Microsoft.

“Our NASDAQ 100 ETF, NDQ, for example has seen inflows even though equity values have been falling. There’s a view among investors that technology stocks are more defensive given lockdowns are increasing the level of technology adoption."

4. Diminishing prospects for Europe and Japan

The already-challenged and relatively slow-growth markets of Europe and Japan can’t entice investors to stay despite cheap valuations on offer, notes Vynokur. Instead, the outflow of capital is flowing into other areas expected to outperform in the medium to long-term.

“We’re seeing selling of European and Japanese exposures. Europe in particular was already a challenged market before the coronavirus-induced recession that we can expect, but even more so after."

5. Positioning for growth in the ASX ex-20

But where investors are strategically positioning themselves for growth is in the mid-and large-cap part of the Australian sharemarket, excluding the ‘blue chips’ (known as ex-20 stocks). 

With the RBA adopting quantitative easing (QE) and bank profits being hit by low interest rates and an expected surge in bad debts, some investors are looking past the cycle and positioning themselves for eventual growth by allocating towards ETFs such as the BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20).

“We think there are negative implications for the profitability of the banking sector, which would feel most of the ‘bad’ effects of lower interest rates and enjoy few of the benefits. The beneficiaries are likely to be mid- and large-cap stocks offering the potential for growth. Companies that source earnings from overseas also should benefit from the weakness in the AUD that is a likely consequence of lower interest rates."

ETFs are working as they should

Trends aside, Vynokur says ETFs as a structure are delivering on their promises of providing reliable access to liquidity, transparency and certainty, despite recent criticism.

For example on 13 March 2020 when the ASX staged a stunning 13.7% turnaround from a mid-session low to end +4.4% at the close, ASX 200 ETFs did exactly what they were designed to do: track the performance of the market.

On fixed income ETFs, there has been some criticism that some bond products are trading at a discount to their net asset value, which isn’t supposed to be the case for this structure.

But Vynokur says the commentary should be about bond funds overall, which have seen heavy redemptions amid the market crisis. And as many underlying bonds are illiquid and trade over-the-counter, what is being reflected in the ETF price is a “stand-off between buyers and sellers” and not a malfunctioning ETF market.

“It’s important to remember that ETFs reflect the liquidity of the underlying market which is largely traded over-the-counter. The funds simply reflect the intentions of buyers and sellers and in fact you could say that ETF pricing is a lead indicator in this case of where the net asset value will ultimately converge." 

“Phenomenal” opportunities on hand

As a finishing point, Vynokur says while very large portions of the investment community are understandably fearful, it’s important to remember that the dislocations wrought by Covid-19 will pass.

“We believe the current dislocation in the economy is temporary. Times will be tough in the Australian economy and globally, but given the unprecedented measures central banks are taking to contain the damage, the opportunities on the other end of this are phenomenal, especially for those who can start focussing on building out some of their core, long- term investment exposures."

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