Buy Hold Sell: 4 winning ETFs and the worst of FY21
It's been a cracker of a year for Australia's ETFs, with funds under management swelling by 79% to reach $102 billion.
Over the past financial year, 27 new ETFs were listed on the ASX, taking the total number of products available to investors to 220.
In fact, Stockspot has found that ETFs saved Australians a whopping $500 million in fees, compared to if they had invested with fund managers - what more could you want?
So what were the best and worst-performing ETFs of the past financial year, and which ETFs do the experts think will outperform over the coming 12 months? I'm glad you asked.
To get into the nitty-gritty of the good, the bad, and the ugly of the ASX's listed ETFs, Livewire's Bella Kidman was joined by Medallion Financial's Michael Wayne and Shaw and Partners' Adam Dawes to answer these very questions. Plus, they'll share their #1 ETF pick for the year ahead.
Note: This episode was filmed using Zencastr on the 7th of July 2021. You can watch, listen or read an edited transcript below.
Bella Kidman: Welcome to Buy Hold Sell brought to you by Livewire Markets. My name is Bella Kidman, and today we're going to be celebrating the end of the financial year. And what a financial year it's been. The ASX All Ords is up around 26%, something we haven't seen since the 1980s. But it hasn't just been Aussie equities having all the fun, ETFs were some of the strongest performers in FY21. So to analyse the good, the bad and maybe even the ugly, I'm joined by Michael Wayne from Medallion and Adam Dawes from Shaw and Partners.
Adam, I'll start with you. The best performer for FY21 was ACDC, ETF Securities Battery Technology and Lithium ETF, up around 63%. Buy hold or sell?
ETFS Battery Tech & Lithium ETF (ASX:ACDC)
Adam Dawes (BUY): Look, for me, it's a buy. I think this one's a fantastic one. I really love this ETF. It has the fantastic hallmarks of lithium. It has the fantastic hallmarks of growth, and this is what this whole ETF is about, it's about the growth side of things. They do have some GE electric in there. They do have some Pilbara Minerals, which is always very good. That's a good lithium project as well. But then a lot of international ETF stock names in there as well. So look, I really like this one, it's a buy from me.
Bella Kidman: Michael, ACDC's share price has been what some would call electric if you excuse the pun. It's had a really good run, it powers companies like Tesla, really playing into that EV phenomenon. Buy, hold, or sell?
Michael Wayne (BUY): Yeah look, it's one that we've got for clients as well. So I'll have to give it a buy for that reason. The sector's certainly been electric in the last 12 months. It had a bit of a false start going back a couple of years, that whole electric vehicles theme. But it's really starting to take shape globally, with the electrification of the whole transport industry. Good quality names. And what we really like about this one is it's actually equal-weighted. So each position in the portfolio has a maximum weight I think of about 5%. This means that you get a good breadth of different companies. This means that over time if one or two of them shoot up it gives you good exposure to those as well. For some of the smaller names, because as we know with some of these infant more emerging industries, it's very difficult to pick who the winners are going to be. But if you hold an ETF such as this, it gives you that broad-based exposure. This means that over time, should the broad sector do well, the ETF should do incredibly well as well. So it's a buy from us.
BetaShares S&P/ASX Australian Technology ETF (ASX:ATEC)
Bella Kidman: Okay, next up we've got ATEC, which is the BetaShares Australian Technology ATF. So this ETF has names like Afterpay and REA Group, which has really helped its performance over the last 12 months. But it's also got names like Appen which has detracted from that performance. Buy, hold, or sell?
Adam Dawes (BUY): I think it's certainly a buy from my side of things. I think that is one of those ones that you look at it and you think, well, I'd like to get that technology exposure. One of the things that you need to look for when you're looking at an ETF is the underlying holdings. And the first underlying holding is Afterpay and it's about 17% of the actual portfolio. So it is quite high. So be warned, if you do hold some Afterpay outside of that or Xero, I think that's up around 13% or 14%. So if you hold those two stocks outside of that, you might be going a little bit overweight. So just be a little bit careful, but some of those tech names are fantastic. As well as that, we've had some takeovers in that space as well, so that's helped lift its performance. So look, it's a really good broad brushstroke, but just be careful of the underlying holdings in that. And certainly, it's a buy from me.
Bella Kidman: Michael, ATEC was another fantastic performer over the last 12 months, it was up around 28%. But it has come off a bit recently with investors wondering where growth and technology fits into their portfolio. So buy, hold or sell?
Michael Wayne (HOLD): Look, for us I'll give it a hold, we actually hold many of the underlying companies directly. You mentioned sort of Xero there, there are things like Seek, realestate.com, NextDC, Altium. So we like those businesses. So for that reason, we do like this ETF. However, what puts us off a little bit is that extreme overweight position in Afterpay. You do have to have a positive view on Afterpay if you're going to hold something like this. So we also like to pick our own weightings in the tech space, particularly with some of those better quality names, which make up this ETF. But if you were just building a portfolio from scratch and wanted some broad-based exposure to Australian tech, this is definitely the way to go. It has been a wonderful performing sector, probably in the top one or two sectors over the last five years; technology. The question is going forward with inflation and bond yields, if bond yields do start to pick up, you can probably expect this tech sector to come under pressure. But in terms of a passive exposure to tech, it's a very good quality one. So a hold from me only because we prefer to buy some of these names directly.
ETFS Physical Gold (ASX:GOLD)
Bella Kidman: Okay. We've spoken about the good, now it's time to move into some of the worst performers for FY21. So, Michael, I'll start with you. First up we have GOLD, which is the BetaShares Physical Gold ETF. Buy, hold, or sell?
Michael Wayne (HOLD): Look, it's a hold if you want exposure to gold. The thing is we prefer to play the gold space by holding the commodity producers or all the gold producers. The fact is the gold price hasn't been doing too badly of late, but if the gold price does do well yeah sure, GOLD ETF will do well. But in many cases, the underlying producers will do a lot better. You're going to have more leveraged exposure to gold. So for that reason, the gold ETF isn't a bad way to get that pure exposure. But I think you'd get more bang for your buck in a positive outcome for gold in some of those high quality Australian gold producers.
Bella Kidman: Adam, everybody's talking about inflation. It's the biggest thing in the market. And gold has traditionally been a hedge against inflation. So is this the way that investors should be getting exposure to this? Buy, hold or sell?
Adam Dawes (BUY): Yeah, absolutely Bella. I think it is a great way to get a hedge against inflation. I'm going to go the other side to Michael. I think it's a buy. Every client should have 5% of their portfolio in GOLD. It is just a straight commodity. It is something that is going to hedge against inflation. It is something that you can pretty much hang your hat on. Yes, it has been a bad year for GOLD, but the problem is that everyone's been going for growth. That growth won't last. And that's why I think it's a really good defensive position to have in your portfolio. 5% weighting in there. I think it's a buy.
Betashares Euro ETF (ASX:EEU)
Bella Kidman: Very high conviction. Well, another ETF that's in negative territory for FY21 is EEU, which is the BetaShares Euro ETF. And unfortunately for European investors, the soccer is a lot more exciting than their returns would have been at the moment. Buy, hold, or sell Adam?
Adam Dawes (SELL): It's a sell for me. If you're going to do currency there's plenty of other ways to do currency other than an ETF. The other side of it is, is that I'd buy the USD or the US dollar, not the Euro. USD will definitely have a better uplift. But really for me, it's something that I'm not that interested in. Also, when you're looking at an ETF you must always look at what their market cap is. And this market cap's about $8 million now. That's unprofitable for BetaShares to continue to run that ETF. I won't go out too much on a limb, but I will say that they need to get some more money in there or in the next six to 12 months they'll probably close that one down. So I don't think you need to be there. It's a sell for me.
Bella Kidman: Michael, the Europeans have really been struggling with the pandemic. But they are back open for business. The travel bubble has resumed. Are we in the midst of a European recovery? Buy, hold or sell?
Michael Wayne (SELL): Yeah. Look, currency is always so difficult to predict one way or another. I mean in order to do well off this particular ETF either you need the Aussie dollar to fall away and depreciate versus the Euro or you need a lot of strength to come into the Euro. Over time currencies are very volatile. They tend to revert back to their mean. So I would say over a five to 10-year period you're unlikely to do too well either way unless you can pick the cycle perfectly. Obviously, interest rates are very, very low at the moment. So you're not making really anything in terms of yield off this position. I mean you have to take a macro view if you think that long-term this particular currency is going to do well. And that's not really for the everyday retail investor. I can see some uses for this particular ETF. I mean if you've got a big overseas holiday or once upon a time when we could go to Europe, you might want to sort of hedge yourself and then put aside your money into the ETF. Or if you're planning to move overseas or if you've got a child who's looking to study overseas, you can use this as a bit of a hedging vehicle. But other than that I don't see very many uses for it. And as Adam pointed out there are other ways to play currency if you want to go down that path. So I'm going to go a sell as well.
Fundies' outlook for the new financial year
Bella Kidman: Okay. Michael, we're right at the beginning of the financial year, first week almost. So tell me, looking out into the horizon for the next 12 months, are you a bull, a bear, perhaps somewhere in the middle, another animal of some description?
Michael Wayne: I think you've got to be optimistic. You're looking at the markets at the moment, what you're seeing is there is a lot of earnings revisions going on across the board from all the different investment banks and institutional brokers. So you've actually got a situation where earnings are being revised higher than the market, despite the market running. So you're actually getting valuations and PE ratios coming down.
I wouldn't expect that we would have as good a year as we had last financial year going forward. But when looking at the ASX overall, yes we've recovered to above pre-pandemic levels, but we can certainly go on with I think with the amount of stimulus in the system, global economic activity has been pretty buoyant. So I'm pretty optimistic. As well as the fact that I think all-time highs in many cases through history begets further all-time highs as momentum builds. So we've got a situation where the economy is growing strongly, earnings are being revised higher. So I wouldn't be surprised to see another year of say 10%-15% gains. But in saying that, trying to pick index returns is a bit of a mug's game at times.
Bella Kidman: 10% to 15% sounds pretty bullish to me. So when you look out into the next 12 months, is it a case of sticking with the market? Are you investing in indexes like in ASX 200 index, or are you looking to hone in on some specific areas of the market?
Michael Wayne: We do use ETFs to gain exposure to overseas markets and to certain thematics, such as we touched upon earlier, such as ACDC. But I do think you've got to look at different parts of the market that have maybe been a little bit unloved. So obviously you can look at the banks, they've had a tremendous recovery over the past 12 months. The miners have been very, very strong as well. So perhaps the best part of the gains in those parts of the market behind us. Whereas there might be parts of the market that have been COVID losers that are yet to bounce back. So Sydney Airport for instance is one that we hold for clients, that had a good little bounce the other day. Things like Auckland International Airport, some of those sectors and areas of the market that have been unloved, that you can expect to normalise as we return to a pre-COVID environment, if that ever happens.
Bella Kidman: Adam, as Michael said if FY22 was anything like FY21, everyone would be a bull. But of course, not everything is so predictable. So tell me, are you a bull or a bear for the next 12 months ahead?
Adam Dawes: Well, I'm really bullish on this market. I think that overall this is one of the ones where we've seen a reset over COVID from March 2020 last year. I think that we're ready to go again. This market has been really fantastic to us and I think it will continue on. We're still seeing stimulus coming through. We are hearing talks of tapering. We are hearing talks of higher inflation and wage growth, but really we're not seeing that anywhere at the moment. And I still think we've got another couple of years of good market returns before interest rates start to rise. And then it gets a little bit murkier.
Bella Kidman: Michael gave us 10% to 15%, can you give us a number?
Adam Dawes: I won't go on record. I'll say that at least the market will return a good one plus some dividends. So yeah, maybe a 6% to 8% I'd be happy with that.
Bella Kidman: Fair enough. Well, where exactly if the market is going up, where do you want to be in the ETF space? As I said to Michael, is it a matter of standing by the market investing in the index or are you looking for specific exposure in certain areas?
Adam Dawes: I think a lot of the easy money in the index space has already been done. So I'd been looking for some more active managers inside the ETF space and there are some really good ones out there. So I think you need to be a little bit more nimble. You can't just rely on the index. So I'd be looking for more active managers inside an ETF.
Bella Kidman: Okay Adam, here's your chance. What is the one ETF that you're betting on this financial year?
BetaShares Global Sustainability Leaders ETF (ASX:ETHI)
Adam Dawes: Yeah, it was a hard question really. Really, really hard question. I definitely deliberated over this one for a while, but the one that I'm picking for the next year and probably continuing for the next 10 years is Ethical investments. And that's ETHI. It's a BetaShares ethical international ETF. It has the top companies that are scored ethically. But look at that wall of money, you cannot argue with the wall of money that is coming down the pipeline of ESG and that no matter how much you try and fight it, it is going to be there. I think you start joining the train, get on the road. ETHI is a fantastic one going forward for that.
WCM Quality Global Growth (ASX:WCMQ)
Bella Kidman: Michael, it's hard to beat an ETF that Adam would hold for 10 years, but have you got one that's going to kick goals in FY22?
Michael Wayne: Look, I'm going to cheat a little bit here in that it's not a straight out passive ETF. It's an actively managed ETF by the fund managers WCM, the code's WCMQ. So it's an ETMF. Essentially they're California-based US fund managers. They've had a terrific track record over a long period of time now. They managed to do well in all different types of market conditions. Their downside capture is very, very low. They managed to outperform consistently over a long period of time. So it gives you exposure to the US market, which is primarily a growth market. So for us, that would be a go-to and it's pretty much a core holding across all our clients to gain exposure to the international markets. So that's the one I'll go with, WCMQ.
Bella Kidman: Well, we've got two very strong bulls here, but who knows what FY22 will bring? Whatever the next 12 months have in store for us it may be just time to start sprinkling your portfolio with some gold and adding some ETFs. If you enjoyed this episode of Buy Hold Sell, make sure you subscribe to Livewire's YouTube channel for more.
What ETF are you backing for the months ahead?
Michael picked MCMQ and Adam is backing ETHI, but we would love to know what you think. Let us know your ETF pick for the new financial year in the comments section below.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.