Exchange Traded Funds (ETFs) are an increasingly popular way for investors to gain exposure to a wide variety of investments at a relatively low cost.
ETFs generally hold a particular type of shares, bonds, commodities, currencies, cryptocurrencies or futures contracts and usually reflect the price movement of their holdings.
This enables investors to get exposure to particular industries (such as a financial services ETF), an index (such as the ASX200 ETF), international markets (such as a Korean shares ETF), bonds (through a bond ETF), etc.
There are approximately 258 ETFs trading on the ASX through financial services providers such as BetaShares, BlackRock, ETFS Management (AUS) Limited, State Street Global Advisors, Australia Services Limited, VanEck Investments Limited, and Vanguard Investments Australia Ltd.
The following ten could be very interesting for the remainder of 2022 and early 2023:
- iShares China Large Cap ETF (CETF)
- BetaShares Crude Oil Index ETF – Currency Hedged (OOO)
- BetaShares Australian Government Bond ETF (AGVT)
- iShares Government Inflation ETF (ILB)
- Global X EURO STOXX 50 ETF (ESTX)
- BetaShares Gold Bullion ETF (AU$ Hedged) (QAU)
- BetaShares British Pound ETF (POU)
- Vanguard Australian Property Securities Index ETF (VAP)
- iShares S&P Asia 50 ETF (IAA)
- SPDR S&P World ex-Australia Carbon Control Fund (WXOZ)
All values are correct as of 28 November 2022
1. VanEck FTSE China A50 ETF (CETF)
The Chinese economy is slowing down largely as a result of ongoing Covid lockdowns, a collapsing construction sector, and the government closing down some sectors of the economy.
VanEck Vectors ETF Trust – VanEck Vectors ChinaAMC CSI 300 ETF holds shares in the largest 50 companies listed in China and is designed to represent the performance of these companies in the Chinese market.
Over the first nine months of 2022, CETF fell 25%, reflecting the fall in the Chinese stock exchanges.
If the Chinese government continues to impose harsh lockdowns and persecute businessmen such as Alibaba’s Jack Ma, CETF could continue to fall.
In addition, China is the only major economy that is lowering interest rates. Having lower interest rates than the US could put downwards pressure on the exchange rate, which could cause CETF to fall further.
2. BetaShares Crude Oil Index ETF – Currency Hedged (OOO)
This BetaShares Crude Oil Index ETF – Currency Hedged Synthetic tracks the rise and fall in the price of oil against the US dollar and is hedged against currency movements so that a change in the value of the Australian dollar will have a limited impact on the price.
Over the near term, there could be a significant impact on the demand/supply balance.
On 31 March 2022, President Biden ordered the US Strategic Petroleum Reserve – the world’s largest emergency oil storage – to sell a million barrels a day for the next 180 days. Given the delay between the announcement, purchase, and physical delivery, the final ten million barrels of oil will be delivered in November 2022.
A million barrels a day in extra supply – slightly more than Australia consumed each day in 2021 – could be depressing the global oil price. However, sales are coming to an end and with the last deliveries in November, there may be upward pressure on oil prices both from the sudden drop in supply and possible purchases to refill the strategic reserve.
If this sudden fall in supply does push up crude oil prices, then a bet on OOO rising could make a decent return.
3. BetaShares Australian Government Bond ETF (AGVT)
There are four government bond ETFs on the ASX: IAF, BOND, VAF, and AGVT. Of the four, Betashares Australian Government Bond Etf has the longest modified duration of 7.85 years, which makes it more sensitive to interest rate changes. A modified duration of 7.85 means that its underlying value will fall by 7.85% for each 1% rise in interest rates.
Over the past 12 months, AGVT has lost 18.3% as interest rates rose. Further interest rates are widely expected and may be priced into the value of the underlying bonds.
However, as inflation in the US appears to remain well above the Federal Reserve’s target rate of 3%, the Federal Reserve may raise interest rates further than the market expects.
This in turn could lead to the Reserve Bank of Australia also raising rates further than the market expects.
If the RBA does raise rates and this sends long-term bond rates higher, then a bet on AGVT falling could be a profitable strategy.
4. iShares Government Inflation ETF (ILB)
The Australian government issues Treasury Indexed Bonds which pay interest the same way that normal bonds do, but also have both their nominal value and coupon amounts adjusted up or down each quarter according to the Consumer Price Index.
Retail investors cannot invest directly in Treasury Indexed Bonds, however, iShares Government Inflation ETF enables investors to gain exposure to a range of different maturities of these bonds.
ILB has a modified duration of 8.15, which means it falls by 8.15% for each percentage point rise in long-term interest rates.
Over the past year as the RBA has raised interest rates, ILB has fallen 7.8%, despite rising inflation. This is clearly not the ETF to invest in while interest rates are rising.
However, many economists are predicting that the RBA will stop raising interest rates early next year. If interest rates peak and inflation remains at a steady clip, going long on ILB could be a good bet.
5. Global X EURO STOXX 50 ETF (ESTX)
There are three important challenges facing Europe, which could send European stocks downwards:
● Energy prices
● Rising inflation
● Rising interest rates
Energy prices are soaring in Europe
Even before Russia invaded Ukraine, European energy prices were climbing. Germany, the economic backbone of Europe, closed all but three of its nuclear power stations and will close two more this year. In addition, it is phasing out coal-fired power stations to meet its greenhouse gas emissions targets.
These were replaced with higher-cost natural gas from Russia and imported electricity from the Netherlands and France.
Now that both Nord Stream gas pipelines from Russia have been damaged – possibly permanently – natural gas and electricity prices in Germany are likely to be raised for several months, or even years. High electricity prices and natural gas prices negatively impact the economy.
Inflation is rising
Inflation is rising in Europe even faster than in the US, hitting 10.6% in October, up from 9.9% in September.
Inflation is a major problem for companies when their costs of doing business rise faster than they can raise their sales prices.
Interest rates are rising
As with the US and Australia, the European Central Bank is raising interest rates to combat inflation. So far, the ECB has only raised rates by 2.0% this year, compared to 3.75% in the US and 2.95% in Australia.
To protect the currency, the ECB may need to raise rates by a further 1.75%.
Higher interest rates hurt companies because it makes it more expensive to borrow money and reduces their ability to invest in new facilities.
With these headwinds affecting European companies and the European economy, the stock markets may fall significantly. If they do and ETFS Euro Stoxx 50 ETF tracks them accordingly, a bet on ESTX falling could turn a profit.
6. BetaShares Gold Bullion ETF (AU$ Hedged) (QAU)
There are three gold ETFs listed on the ASX: Perth Mint Gold PMGOLD-AU, ETFS Metal Securities Australia Ltd – ETFS Physical Gold and BetaShares Gold Bullion ETF – Currency Hedged.
PMGOLD and GOLD track the price of gold in Australian dollars while QAU hedges the AUD/USD currency exposure. This is significant because AUD tends to rise and fall with the price of gold. Gold priced in AUD, therefore, tends to have less volatility (and therefore less opportunity for trading profits).
For example, for the six months to 30 September, gold fell by 14% in USD, which could have yielded a decent profit for an investor betting on a falling gold price. However, over the same period, the AUD also fell by 14% , so there would have been almost no benefit.
While gold is viewed as a protection from inflation over the long term, over the short to medium term gold prices tend to track US 10-year treasury bonds.
Right now, it appears that US treasury bond yields are continuing to rise, which could imply that gold prices have further to fall from here – at least until the Federal Reserve stops raising interest rates.
If treasury bond yields continue to rise and gold prices fall, a bet on QAU falling could turn a profit.
7. BetaShares British Pound ETF (POU)
The UK is in much the same energy crisis as the rest of Europe, with electricity prices soaring.
The UK Electricity Spot Price hit GBP562 per megawatt-hour (MWh) in April and just over GBP500/MWh as of 14 August. That’s up 10-fold from 2019 when it averaged around GBP50/MWh. For businesses that use electricity, this is simply unsustainable.
According to a survey conducted by Make UK, an industry group representing British manufacturers, energy bills are now ‘business threatening’ for almost 6 in 10 factories.
This makes it very difficult for the Bank of England to raise interest rates and protect the currency from further devaluation.
The problem for the GBP is that since 2000, the UK has gone from a net energy exporter to a net energy importer. This means that while natural gas and oil prices are high, the GBP will be under pressure.
Australia is in the opposite situation. As a net energy exporter, the AUD benefits from high coal, oil, and natural gas prices. For the nine months to 29 November 2022, the GBP fell by 5.3% against the AUD. BetaShares British Pound ETF, which is designed to track the performance of the British pound against the Australian dollar has fallen 4.0% over the same period.
If high energy prices remain high and the British pound continues to fall against the Aussie dollar, a bet on POU falling could be profitable.
8. Vanguard Australian Property Securities Index ETF (VAP)
Vanguard Australian Property Securities Index ETF seeks to track the return of the S&P/ASX300 A-REIT Index before fees and expenses.
Holdings in Real Estate Investment Trusts usually do badly during a period of rising interest rates. VAP is no exception. Over the first nine months of 2022, VAP fell by 31.5% – significantly underperforming the All Ordinaries, which fell by 15.8% over the same period.
However, as the stock market is generally forward-looking, the remaining interest rate rises that are widely expected for the rest of 2022 and early 2023 are likely priced into the current share price.
Should the RBA decide to raise interest rates further than expected, then VAP could fall further. But if the RBA just raises rates as expected, VAP could bounce in line with its holdings.
Its top five holdings, which comprise 58.6% of its total as of 31 October are:
1. Goodman Group, a diversified real estate services company
2. Scentre Group, the owner of 42 Westfield shopping centres, trading at a 21% discount to book
3. Dexus, a commercial real estate manager and owner, trading at a 38% discount to book
4. Stockland, a diversified real estate developer, owner, and manager, trading at a 13% discount to book
5. Mirvac Group, a diversified property developer, trading at a 22% discount to book
Should these underlying company share prices recover, a long bet on VAP could be profitable.
9. iShares S&P Asia 50 ETF (IAA)
The expression used to be ‘When America sneezes, the rest of the world catches a cold.’ From Asia’s perspective, however, when China threatens Taiwan, money rushes out of Asia.
With a slowing economy and the construction industry – around a third of the economy – slowing abruptly, China’s outlook is very uncertain. The World Bank lowered its 2022 GDP growth forecast for Asia on 27 September to 3.2% from 5% in April.
The economy is only part of the problem, however.
The Chinese Communist Party has become more aggressive and belligerent towards Taiwan, which the party claims as a renegade province.
Reuniting Taiwan with the rest of China is a part of the CCP’s platform and some China experts believe it is only a matter of time.
A war between Taiwan and China could have negative consequences for Asia-Pacific trade and Asian economies. The threat of war and possible economic fallout in the region could influence investors to lower their exposure to the region – especially Hong Kong, Taiwan, China, Macau and China. Large-scale international investors withdrawing money from stock markets tends to send their indices down.
The iShares Asia 50 ETF (AU) consists of the 50 leading companies listed in China, Hong Kong, Macau, Singapore, South Korea and Taiwan.
If investors do lower their exposure to the region and stock markets fall, a bet on IAA also falling could reap a profit.
10. SPDR S&P World ex-Australia Carbon Control Fund (WXOZ)
SPDR S&P World ex Australia Fund seeks to closely track the S&P Developed Ex-Australia Large midCap Carbon Control Index. Put simply, WXOZ holds shares in companies mainly in the US that have the lowest carbon emissions per unit of revenue.
The top holdings are Apple, Microsoft, Amazon and Alphabet (Google).
The reason WXOZ makes the list is that it has diversified holdings of the largest companies least affected by high energy prices.
While chemical and fertiliser companies in Europe are struggling under the burden of high energy prices, tech and finance companies are largely unaffected.
Apple alone made a USD94.7 billion profit in 2021, almost doubling its USD57.4 billion in 2020. Microsoft, Amazon and Google all increased their profits during the pandemic.
As of 29 November, WXOZ is down 23.2% since the start of the year, largely in line with the general selloff in the NASDAQ.
While the US Federal Reserve continues to raise interest rates, the stock market may have trouble getting out of bear territory. However, once interest rates have stabilised and the economy adjusts to what could be a new normal of high-cost energy, WXOZ could bounce back and reward traders who pick the right time.
How to trade or invest in Australian ETFs
Gain exposure to a number of assets in a single trade with Australia ETFs from just $5 commission if you trade more than three trades in the previous month and $0 commission on US ETFs* on a share trading account. Find out more about ETF trading or open an account to trade now.
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