Top themes for 2023, and 4 ETFs to play them

Glenn Freeman

Livewire Markets

Unless you’ve been living under a rock, you’ll know 2022 was a tough year for investors. Professional and amateur stock pickers alike struggled to keep their returns in the black – or less mired in the red – amid rising inflation and hiking interest rates, a war in Eastern Europe, surging infections in a persistently zero-COVID China, and myriad other challenges.

Equities sold off almost across the board – with the possible exception of those in materials and energy – at various times throughout last year. Some of the worst hit were the local technology, listed real estate, and consumer discretionary sectors, which saw share price returns decline between 30% and 20% in 2022 (without considering the effect of any dividends).

Given the above, it’s unsurprising that share trading volumes on platforms such as nabtrade and Commsec declined in 2022 and there was an emphasis on selling positions or buying cash. Active fund managers struggled and, as my colleague Sara Allen wrote late last year, so did exchange-traded funds, which saw assets under management decline by 4% in 2022 in year-on-year terms. And yet, more than 32 new ETFs launched on the ASX during the year.

One of these newcomers is among those discussed below, and another was launched only around 12 months earlier. Two of them are also closely entwined with a thematic we’ve heard so much about in recent years – decarbonisation – which is shaping to be as hot as ever in 2023. 

With varying emphases on companies leveraged to the net-zero transition, global large-cap, mid-cap and even small-cap Quality, the ETFs discussed below are a mixed offering.

In the following, we reveal the top ETF picks for the year ahead, as named by four ETF providers:

  • Cameron Gleeson, Senior Investment Strategist, BetaShares
  • Blair Hannon, Head of Investment Strategy, Global X ETFs Australia
  • Kathleen Gallagher, Head of SPDR ETFs Australia, State Street Global Advisors
  • Russel Chesler, Head of Investments and Capital Markets, VanEck ETFs.

NoteBy publishing this list, we are sharing information from Livewire contributors, with the aim of inspiring ideas for further research. This information is not, nor is it intended to be, a set of recommendations. Please do your own research and seek advice from a professional.


Cameron Gleeson, BetaShares

BetaShares Energy Transition Metals ETF

Quick facts

  • Ticker XMET
  • Management fee 0.69% p.a.
  • Net assets $9.97 million
  • Inception date 28 October 2022
  • Tracking index Nasdaq Sprott Energy Transition Materials Select Index (METALANR)
  • What it does Tracks the performance of the index (net of fees and expenses) that provides exposure to global energy transition materials companies, which are considered essential to the transition toward lower carbon intensity.

Top 10 holdings

  1. Antofagasta plc (LSE: ANTO)
  2. Wheaton Precious Metals (NYSE: WPM)
  3. Southern Copper Corp (NYSE: SCCO)
  4. Freeport-McMoRan Inc (NYSE: FCX)
  5. Pilbara Minerals (ASX: PLS)
  6. IGO Limited (ASX: IGO)
  7. Boliden AB (NASDAQ Stockholm: BOL)
  8. Sumitomo Metal Mining Co (TYO: 8053)
  9. Oz Minerals (ASX: OZL)
  10. First Quantum Minerals (TSE: FM)

"There will be winners and losers"

BetaShares’ Gleeson suggests investors will be shocked by the speed at which the world continues to shift towards a net-zero emissions future in 2023.

“The transition continues to create a number of winners and losers across the existing mix of products and technologies, one winner being the energy transition metals space,” he says.

He notes this transition is driving growth across multiple disruptive products and processes, including:

  • renewable energy generation,
  • battery storage solutions, and
  • electric vehicles.

Each of these relies heavily on a core group of energy transition metals (ETM) – a blanket term that refers to source materials that include copper, lithium, nickel, cobalt, graphite, manganese, silver, and rare earth metals.

Gleeson points to the following charts to demonstrate the scale of the rising demand for key ETM metals:

Projected increase in demand for selected energy transition materials

Source: International Energy Agency, May 2021. Demand from non-energy sector usage was assessed using historical consumption, relevant activity drivers and the derived material intensity. *Neodymium demand is used as indicative for rare earth elements. 

Forecast refined copper primary production scenarios versus demand

In addition to producers of the metals named above, other companies involved in the discovery, development, and manufacture of these ETMs will benefit from several long-term structural tailwinds, explains Gleeson.

“These include increased demand driven by the shift to a low-carbon global economy, constrained global supply, and a lack of viable substitutes for these materials,” he says.

“Reflecting this situation, many global companies are adding exposure to this sector with the aim of securing the supply of these critical components.”

As one example, he points to BHP's (ASX: BHP) ongoing acquisition of Australian copper miner Oz Minerals (ASX: OZL), as the “big Australian” looks to increase exposure to the energy transition metals space.

Why is this ETF your top pick for 2023?

Gleeson justifies his selection by highlighting its intersection with several key megatrends, “namely, efforts to address climate change and technological innovation.”

He also emphasises this product’s focus on the “upstream” or production side of these trends, rather than the downstream beneficiaries that are more common exposures.

“XMET gives investors the ability to add exposure to more upstream parts of global efforts to address climate change and the technologies that are reshaping the world,” Gleeson says.

“Many of these materials are used in the production of electric vehicles, batteries and other technologies that are assisting the shift to a low-carbon global economy – and as a result, will likely see continued strong and growing demand.”

Access to both producers and recyclers

Gleeson also calls out XMET’s combination of convenience and cost-effectiveness in accessing global companies in the ETM industry – including Australian names Pilbara Minerals and IGO and offshore companies Freeport-McMoRan and MP Materials.

“XMET offers access to primarily ‘pure play’ ETMs producers, as well as other companies such as diversified producers and recyclers of ETMs,” he says.

“The investment methodology underpinning XMET also includes a number of ESG screens to remove companies that receive material revenue from certain business activities, such as oil and gas production as well as thermal coal extraction.”

ETF
BetaShares Energy Transition Metals ETF
Global Shares
Blair Hannon, Global X

GLOBAL X COPPER MINERS ETF

Quick Facts

  • Antofagasta plc (LSE: ANTO)
  • Zijin Mining plc (HKSE: 2899)
  • KGHM Polska Miedz SA (WSE: KGH)
  • Freeport-McMoRan Inc (NYSE: FCX)
  • Ivanhoe Mines (TSE: IVN)
  • BHP Group (ASX: BHP)
  • Southern Copper Corp (NYSE: SCCO)
  • Lundin Mining Corp (TSE: LUN)
  • Sumitomo Metal Mining Co (TYO: 8053)
  • Glencore plc (LSE: GLEN)

“The trajectory will continue upward”

The Global X ETFs pick mirrors many of the same attributes as the ETF selected by BetaShares. Indeed, even some of the largest holdings overlap – for example, UK-listed Chilean copper miner Antofagasta, US miner Freeport-McMoRan and Japan’s Sumitomo Metal Mining are common holdings. That’s because they’re both built around the decarbonisation theme, which Global X ETFs’ Blair Hannon and his team are firmly backing for 2023 and beyond.

“We’ve already seen renewable energy make its mark where, according to the Clean Energy Council, Australia is currently producing around one-third of energy through renewable sources like wind or solar,” Hannon says.

“The trajectory will continue upward from here as well, with the world set to add as much renewable power in the next five years as it did in the past 20, according to the IEA.”

He emphasises the role of copper within this push toward a renewable energy future, as one of the “green metals” vital to the construction of wind turbines and solar panels. Metals such as lithium (for batteries and EV technology), zinc and aluminium (for energy infrastructure) are also crucial.

“Companies with exposure to copper stand to benefit significantly as both renewables and electrification heavily rely on copper,” Hannon says.

“Copper demand will soar alongside EV adoption because they require three to four times the amount of copper compared to a traditional car and wind and solar required between two to six times as much copper as traditional fossil fuels like coal and gas-fired power plants.”

Copper market supply and demand

Source: International Copper Study Group; The World Copper Factbook 2020, 30 December 2020 (2019 data), MT stands for metric tons.

The bright outlook for global players in the space is further emphasised by the prospect of copper supply deficits toward the end of the decade, as demand skyrockets, explains Hannon.

“This long-term story has seen the likes of BHP and RIO make moves now by acquiring copper miners Oz Minerals and Turquoise Hill, respectively,” he says.

ETF
Global X Copper Miners ETF AUD Inc
Global Shares
Kathleen Gallagher, SSGA

SPDR® MSCI World Quality Mix Fund

Quick facts

  • Ticker QMIX
  • Management fee 0.4%
  • Net assets $34.09 million
  • Inception date 11 September 2015
  • Tracking index MSCI World Factor Mix A-Series
  • What it does Provides exposure to large- and mid-cap stocks across 23 Developed Market countries, with the aim of replicating the performance of quality, value, and low volatility factor strategies.

Top 10 holdings

  1. Microsoft Corp (NASDAQ: MSFT)
  2. Apple Inc (NASDAQ: AAPL)
  3. Johnson & Johnson (NYSE: JNJ)
  4. Unitedhealth Group (NYSE: UNH)
  5. Home Depot (NYSE: HD)
  6. Nestle (SWX: NESN)
  7. Visa (NYSE: V)
  8. Merck & Co (NASDAQ: MRK)
  9. Alphabet Class A (NASDAQ: GOOGL)
  10. Roche Holdings (SWX: ROG)

Veering slightly from the energy transition theme (though it still rates a mention), the effect of unprecedented monetary policy tightening on the global economy is a key underpinning of the ETF selected by SSGA’s Kathleen Gallagher.

Gallagher describes last year as one where central banks played “catchup.” This is because most were fighting surging inflation driven by COVID-related supply chain challenges, even as the war in Ukraine threw further inflationary fuel on the fire.

For the year ahead, Gallagher hopes that US inflation has peaked, and a recession will be avoided, despite slashed economic growth forecasts. And she’s buoyed by the situation closer to home: “In Australia, inflation, growth and jobs data all show significant momentum in the economy.”

Gallagher also notes that the energy transition will also be high on the agenda for markets this year.

Why is this ETF your top pick for 2023?

Gallagher emphasises that QMIX won’t necessarily deliver the highest return for the year, “but is, in our view, the best given the above thematic and macro developments.”

Recognising the complex, time-consuming process of effectively diversifying a portfolio across sectors and countries, she holds up the QMIX product as a potential solution.

“Exposure to events such as unexpected increases to inflation or interest rate hikes can be reduced via diversification,” Gallagher says.

“QMIX features global diversification and potentially reduced volatility. It tracks the MSCI World Factor Mix A-Series Index, which contains more than 1,600 large- and mid-cap stocks across 24 developed countries, weighted towards stocks that display Quality, Value and Low Volatility characteristics or ‘factors.’”

A three-pronged advantage

The factors mentioned above are among the distinguishing features of the SPDR® MSCI® World Quality Mix Fund. As Gallagher explains, it is an equally weighted combination of three factor indexes:

  • MSCI World Value Weighted Index – This overweights companies with attractive fundamentals including price-to-book, price-to-earnings, price-to-cash flow, and dividend yield.
  • MSCI World Minimum Volatility Index - The lowest risk portfolio MSCI can build, MSCI assesses the risks of each individual company and the risk of different combinations of companies in designing the index.
  • MSCI World Quality Index - Quality companies are those with high and stable profitability and low leverage.
ETF
SPDR® MSCI World Quality Mix Fund
Global Shares
Russel Chesler, VanEck

The VanEck MSCI International Small Companies Quality ETF

Quick facts

  • Ticker QSML
  • Management fee 0.59%
  • Net assets $38.9 million
  • Inception date 8 March 2021
  • Tracking index MSCI World ex Australia Small Cap Index
  • What it does Provides access to a portfolio of 150 international developed market small-cap quality growth stocks, with the aim of providing investment returns (net of fees and other costs) in line with the index.

Top 10 holdings

  1. Builders FirstSource Inc (NYSE: BLDR)
  2. Graco Inc (NASDAQ: GGG)
  3. Reliance Steel & Aluminium Co (NYSE: RS)
  4. Hubbell Inc (NYSE: HUBB)
  5. The Toro Co (NYSE: TTC)
  6. United Therapeutics Corp (NYSE: UTHR)
  7. Deckers Outdoor Corp (NYSE: DECK)
  8. Darling Ingredients Inc (NYSE: DAR)
  9. Manhattan Associates Inc (ASX: MHC)
  10. East West Bancorp Inc (NASDAQ: EWBC)

While also focusing on companies that meet the Quality criteria, the VanEck ETFs’ product zeroes in on the small-cap end of the global spectrum. As Russel Chesler explains, the macro-outlook for the US in 2023 is likely to be “problematic for risk assets.”

With the growing likelihood of a pivot in the US Federal Reserve’s monetary policy – or at least a pause in rate hikes, Chesler says: “Historically, most of the decline in a bear market occurred after the Fed pivots, therefore more pain could come for equities.”

Building and consumer sentiment is low

Source: Bloomberg, VanEck

Global small companies, big opportunities

“While there have been exceptions, in the US, small companies, as represented by the Russell 2000, tend to underperform the S&P 500 during recessions and outperform in expansions,” Chesler says.

“Historically, smaller companies have been hit harder than their large-cap counterparts. There is a reason many small companies have been sold off in 2022. Many are growth companies, highly leveraged, with weak balance sheets.”

Small companies tend to outperform in recoveries

Source: Bloomberg, Indices used Small companies: RTY Index – Russell 2000, Large companies: SPX Index – S&P 500. Past performance is not a reliable indicator of future performance. You cannot invest directly in an index.

Alongside the above risks, the sheer scale of the global small-cap ex-Australia universe of companies is another challenge, with around 4,000 companies to choose from.

“Representing around 21 times the opportunity set of the S&P/ASX Small Ords index, not all of these are attractive from an investment point of view,” Chesler says.

He emphasises the value of sifting this universe by focusing on Quality – companies with stronger balance sheets, higher return on equity and stable earnings.

Global small companies' earnings yield

Source: MSCI, VanEck. Past performance is not a reliable indicator of future performance. You cannot invest directly in an index.

“The VanEck MSCI International Small Companies Quality ETF (ASX: QSML) is a diversified, international portfolio of Quality small companies. Currently, QSML’s earnings yield is nearing 2008 highs and these companies, collectively represent better value than the broad global small companies index, as represented by the MSCI World ex Australia Small Cap Index.”

ETF
VanEck MSCI International Small Companies Quality ETF
Global Shares

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Glenn Freeman
Content Editor
Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has almost 20 years’ experience in financial services writing and editing. Glenn’s journalistic experience also spans energy and automotive, in both Australia and abroad – including the...

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