Whilst next month marks 15 years since Australia’s first ETF listed on the ASX, what we can be grateful for over the last 5 years is that we have seen rapid change, almost by stealth, across the product landscape with some 97 products being issued. Understanding and acceptance has enhanced markedly and enabling technologies continue to improve. Issuers have stepped up significantly to provide a diverse and dynamic product landscape with which to enable the acceleration of ETF usage and, occasionally, to escalate real price competition.

In particular, we now observe multiple products providing access across asset classes, including; Emerging Markets, European Equities, Global ex-Australia, Global Infrastructure, Global Property, Domestic Corporate Bonds and Global Bonds. Hedging strategies are increasingly employed, more Global Sector funds are imminent and thankfully, different indices are being used within asset classes. An example of this is Emerging Markets where 3 ETFs track 3 different indices from MSCI, S&P and FTSE – all providing notably different investment exposures to ostensibly the “same” asset class. The notable lesson is that not all funds that sound the same are the same. Understanding the differences goes to education, research and knowledge about the underlying investment exposures that can be assessed given the feature, unique to ETFs, of constituent transparency.

We’ve seen a classic example of peer competition in full force late last year when the iShares S&P/ASX 200 ETF (IOZ) changed its benchmark to the S&P/ASX200 to match that of the SPDR S&P/ASX 200 Fund (STW). Arguably, Australia’s first real “ETF fee battle” ensued and we now consistently see how a difference of just 4 basis points impacts investment decisions. Additionally, we have observed the rapid introduction of smart beta products and, especially in relation to Australian Equities exposures, this has forced advisors to re-think product allocations within and outside of the ETF / ETP landscape.

Given the extent of product landscape change, we re-assert our view that advisors and investors need to re-think the basis of how both products and issuers are selected to provide the desired investment exposure. We continue to see the “relative convenience” of being beholden to single issuers or indeed to a limited panel of issuers. Increasingly we see advisors simply outsourcing to an ETF SMA provider or robo-advisor rather than build and maintain ETF portfolios specifically for clients and, unquestioningly, their more specific needs.

In response to all of these factors, we have actively upgraded our ETF research platform to further enable advisors to develop, maintain and report on ETF and ETP portfolios. There are now 142 ETF / ETPs (4 imminent) across 8 issuers and we argue that more informed investment decisions are needed to ensure clients’ interests and investment needs are being best served.

Now, more than ever before, there is increasing need for ETF appropriate research combined with the appropriate tools that manage selection of superior ETFs whilst enabling the process of readily constructing, managing and reporting on ETP model portfolios end to end.

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Michael Turner

With the available array of investment opportunity in the ETF landscape broadening, AltaVista Research has released more functional tools to enhance ETF selection and for advisors to more readily grasp the underlying investment exposures.

“We’ve introduced these tools to the Australian marketplace, to specifically enhance the process of selecting the most appropriate ETF for the required investment exposure.” The beauty of ETFs is the transparency of their underlying assets and as a consequence, you can and should know much more about those underlying assets and, in particular, how ETFs from the same peer groups actually compare. The new tools also assist with global asset allocation decision making.

ETF selection is not as simple as it may so readily sound. Whilst many ETFs have similar sounding names and asset sector exposures, only a handful of ETFs are track the same index. The vast majority of ETFs are most definitely not “the same”. Of the 33 pure Australian equities exposure ETFs under our coverage, only 6 use the same benchmark. Perhaps surprisingly, none from the ASX 200 peer group use the same Index. That leaves 27 ETFs that require granular examination and testing at constituent level. For Australian Fixed Income, 2 of the 10 Fixed Income ETFs and none of the 41 Global equities exposure ETFs under our research coverage mirror the same benchmark. No Emerging Market ETF uses the same benchmark.

Of note also is the development of ‘peer groups’. There are now 9 Dividend focussed ETFs and yet there are 25 ETFs under coverage alone that are expected to provide 2016E Unfranked Yield of greater than 5.0% with one as high as 6.4% Unfranked at 8.2% Franked.

“We therefore argue very strongly that as very little product replication, in its purest sense, exists in the Australian ETF market, investment decisions using ETFs require greater examination and knowledge of the resulting investment exposure. Clients deserve to benefit from greater ETF selection rigour and that’s what these tools set out to further enhance for our clients.”

The implication for advisors and Dealer Groups alike is that better investment decisions can be made. Having 1, 2 or 3 approved issuers or having a very small selection from each peer grouping or asset class is, in our view, insufficient. More effective use of ETFs will come about when advisors can select from a more diverse universe of ETFs from all issuers and where they can readily identify which ETF provides the most appropriate investment exposure for the specific needs of the client.

“We contend these tools further allow for the better testing, setting and / or re-engineering of APL’s for Dealer Groups. Often, ETF APLs are still too simplistic in nature and nowhere near broad enough to meaningfully allow ready and practical use at advisor level.”

The tools made available provide greater clarity around stock overlap between ETFs and identify individual stock exposures. Alternate funds based on investment exposures and readily identifiable as are key valuation metrics across global markets.

“It’s all about having greater knowledge and flexibility of that knowledge of the underlying investment exposure. That drives better client outcomes – a goal we certainly aim for.”

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Australian property ETFs are expected to deliver the high yields in 2014: AltaVista

Australian property exchange traded funds (ETFs) are expected to deliver the highest yields in 2014, with income returns approaching 6 per cent, according to independent ETF research house AltaVista, which has welcomed four newly listed ETFs from Market Vectors Australia.

Michael Turner, Head of Sales & Corporate Development from AltaVista, said in a review of the new ETFs from Market Vectors Australia: “In relation to yield, the Australian ETF marketplace offers some broad alternatives. Property ETFs, on average, are forecast to deliver the highest yield in 2014, followed by financial sector ETFs and then the high-yield funds.”

AltaVista said the consensus constituent forecast yield for the three property ETFs on the Australian Securities Exchange (ASX) for 2014 is 5.63 per cent. In comparison, the three ETFs focused on the ASX200 are forecast to deliver a yield of just 4.47 per cent while four listed high-yield ETFs are forecast to deliver 5.15 per cent.

Market Vectors ETFs, which listed on the ASX last month, are based on indices specifically developed by Market Vectors Index Solutions (MVIS), the index company of Van Eck Global, which is the parent company of Market Vectors Australia.

Market Vectors Australian Property ETF (MVA) offers a simple way of gaining exposure to the Australian Real Estate Investment Trust (A-REIT) sector. The ETF tracks the Market Vectors A-REIT Index which provides exposure to a minimum of 10 A-REITs and an individual cap weighting of 10 per cent. This provides for greater diversification and reducing large capitalisation biases to companies such as Westfield Group and Westfield Retail found in traditional market capitalisation weighted indices.

“The Market Vectors new ETFs are quite differentiated in that they track purpose-built indices provided by Frankfurt-based MVIS. Ultimately, this creates greater real investment choice as we can expect the funds to deliver different investment outcomes across the spectrum of analysis,” Mr Turner said.

“The new funds deliver both price and ‘peer fund’ competition – arguably a needed impetus for the Australian ETF marketplace and investors alike,” Mr Turner said.

In addition to the Market Vectors Australian Property ETF (MVA), other ETFs recently listed by Market Vectors on the ASX include Market Vectors Australian Banks ETF (MVB) – the first ASX-listed ETF to offer direct access to the banking sector, Market Vectors Australian Resources ETF (MVR) and Market Vectors Australian Emerging Resources ETF (MVE), which offer diversified exposure to the resources sector.

Arian Neiron, Managing Director of Market Vectors Australia, said: “Our purpose-built ETFs provide investors with targeted and innovative investment opportunities. They intelligently capture a desired market exposure, offering Australians greater investment choice. We are very pleased this has been acknowledged by AltaVista.

“Indeed, our products compare well to their peers, based on the superior diversification opportunities they offer and their competitive pricing. The launch of our Australian Property ETF is well timed, with strong yields predicted in 2014 and the ETF offering balanced exposure to Australia’s blue-chip property market,” said Mr Neiron.

“MVA displays solid comparative fundamentals, being marginally superior in our score of investment merit,” Mr Turner said.

“MVB delivers immediate banking sector only diversification. On a comparative basis, MVB has strong investment fundamentals across all metrics, is competitively priced even though it only holds seven stocks and provides greater bank stock diversification and exposure than alternate funds,” Mr Turner said.

“MVR and MVE deliver additional investment options and choice for investors seeking to gain broader resources stock exposure. Due to the fund’s [underlying] index, MVR’s underlying constituents are markedly different from its peer funds. Case in point is BHP Billiton: MVR holds 8.4 per cent of BHP versus in excess of 40 per cent held by peer funds. Rio and Woodside are other examples, though not as divergent. Our research indicates strong investment fundamentals,” Mr Turner said.

Market Vectors ETF business was first launched in the US in 2006. The business now offers over 50 exchange traded products (ETPs) spanning international markets, commodities, emerging markets, global equities, fixed income and currency sectors. The Market Vectors family totalled US$23 billion in assets under management, making it the seventh largest ETP family in the US and tenth largest worldwide as of 30 September, 2013. Market Vectors Australia is a wholly owned subsidiary of Van Eck Global.

AltaVista employs quantitative research, which delivers comprehensive fundamental investment analysis that incorporates historical, current and expected metrics for equities and fixed interest ETFs. The practicality of the research is that it identifies superior ETFs amongst peer fund groups. It allows advisors to select funds based on the investment criteria most relevant to the client’s investment criteria and objectives.

AltaVista’s “best of breed offering comprises its proprietary quantitative research on 51 equities-based and 10 fixed interest-based ETFs on the ASX and their suite of embedded SAA Model Portfolios. On a global basis, AltaVista covers over 790 equities-based ETFs listed on the NYSE.

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