Arian Neiron

VanEck is bringing generative AI-powered stock selection to the ASX, giving investors access to a portfolio that learns, adapts and searches for international equity opportunities using computational power and investment intelligence beyond human capability.

The VanEck Dynamic International Equity ETF (ASX: GOAT) will be Australia’s first ETF that uses AI to select international stocks.

The strategy will be available on Monday 20 July, when GOAT begins tracking the Akros Enhanced World ex Australia Index. This next-generation index is built using generative reinforcement learning. Unlike conventional strategies that start with a fixed factor library or a human-defined view of what should work, the model starts from a blank slate, discovering, testing and validating investment signals across international markets.

Each month, the AI model scores approximately 1,200 of the world’s largest developed-market companies across more than 10,000 signals spanning company fundamentals, technicals and macroeconomic indicators. It then selects the 150 companies with the highest assessed probability of outperformance.

Signals that lose predictive power are retired. New signals take their place. The result is a dynamic international equity portfolio designed to learn, adapt and recalibrate as market conditions change.

Arian Neiron, CEO and Managing Director, VanEck Asia Pacific, said GOAT marks the beginning of a new era for Australian investors.

“The industrialisation of alpha is underway and it will be as consequential for asset management as indexing was in the 1970s,” said Neiron.

“AI doesn’t get anchored, it doesn’t get emotional and it doesn’t have career risk that stops it from being early. What was once the exclusive preserve of multi-billion-dollar quant shops with floors of PhDs is now accessible to every Australian with a brokerage account.

“That is not an incremental improvement. That is a structural re-ordering of who gets access to intelligence and on what terms,” said Neiron.

Since the index base date in July 2005, the simulated track record for the Akros Enhanced World ex Australia Index has delivered 12.63% per annum, compared with 9.62% per annum for the MSCI World ex Australia Index, a difference of 3.01 percentage points annually. Over the same period, the index outperformed the MSCI World ex Australia Index in 77% of rolling 12-month periods and 95% of rolling three-year periods¹.

The simulated index also produced a maximum drawdown of -28.03%, compared with -38.41% for the benchmark. Its up-capture ratio was 105 and its down-capture ratio was 85.

“What is compelling about the simulated record is not just the return premium, it is where that premium was earned,” said Neiron.

“The strategy’s strongest relative performance has come in stressed, weak-cycle conditions. An up-capture of 105 and a down-capture of 85 is a rare combination. That is what genuine dynamism looks like over a full cycle.”

The index was developed by VanEck in partnership with Akros Technologies, a Seoul-based AI and quantitative index specialist whose engine underpins 75 ETFs globally with approximately US$10 billion in index AUM.

^Notes:
[1] Data to 30 June 2026. Past performance is not indicative of future performance of the index or GOAT.

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Arian Neiron

New research has revealed ETF adoption among advisers has intensified in the last year, with over 70% reporting greater usage and 65% using two or more smart beta strategies. The depth of usage has also expanded to cover a broader range of asset classes, with Australian equities, global infrastructure, and emerging markets the most popular asset classes among advisers adopting smart beta strategies.

The 2025 VanEck Smart Beta Survey also found more than half of advisers (50.13%) had replaced market cap/passive exposures in client portfolios with smart beta (a 10.77% increase since 2022), and even more advisers (61.27%) had done the same for active funds. Two out of three respondents agreed that smart beta is going to become more prevalent in portfolios and 99% of respondents currently using smart beta ETFs expressed satisfaction.

The survey also revealed that one in four financial advisers invest in crypto as part of their personal portfolio but only 16% are currently invested or considering investing on behalf of clients. Bitcoin remains the most popular digital asset among financial professionals.

On the topic of private markets, 60% of financial advisers currently allocate, with single private market funds and listed vehicles being the most popular way to gain exposure. However, nearly two thirds of respondents are not planning on increasing their allocation to private markets over the next three years.

At least 1 in 2 respondents currently utilise an SMA/Managed Account. Of those currently considering using an SMA or Managed Account, investment track record and credibility were the two most important factors.

Arian Neiron, CEO & Managing Director, VanEck Asia Pacific, said: “One thing is clear from ten years’ worth of survey data: ETFs have become an indispensable tool for advisers targeting cost-efficient outcomes. Penetration is effectively universal at 96.41%. We see smart beta tracking the same arc, with adoption lifting from 36.81% in 2016 to 47.85% in 2025.

“The smart beta switch has been reflected in net flows. In 2023, only two months cleared $500m. Last year, this surged to nine months, with four months crossing the $1 billion threshold for the first time. This year has been softer with the broader markets pullback, however six out of eight months still topped $500m, and July set a new all-time high of $1.1 billion,” said Neiron.

Smart beta ETFs go beyond tracking a market capitalisation index offering investors access to smarter strategies and targeted outcomes, typically for a fraction of the cost of active strategies.

The annual VanEck Australian Smart Beta Survey is the largest survey of its kind in the world, capturing investment trends in the Australian market. This year, marking its 10 year anniversary, the survey attracted 556 responses from financial advisers and brokers working in Australia.

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International equity was the stand out, making up more than half the net flows in September. Australian equity had a muted month, with the largest market cap passive ETF seeing uncharacteristic outflow. Fixed income experienced a wide dispersion of flows as investors sold out of short duration floating rate note strategies to longer maturity Australian government bond strategies or the broader benchmark.

Performance-wise, Chinese equities were the Cinderella story for September, going from one of the worst performing equity markets to finishing the month on a high. China’s equity market benchmark soared by 21.1% for the month in the space of a few days, marking its strongest move since 2014. This performance was reflected in VanEck’s two China ETFs, which experienced their biggest five-day volumes since listing.

VanEck ETF Industry Pulse September 2024

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Notes:
[1] ASX data reports $219 billion. Official CBOE data not available yet but estimated to be $7 billion

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Good ESG governance leads to improved financial performance.

Research from academics, asset managers and index providers has found a link between good ESG governance and improved financial performance, largely through risk reduction. Targeting high ESG performers can therefore pay real dividends to investors.

On the other hand, not implementing ESG can ‘cost’ companies and investors better returns and even mean losses, as anyone who had invested in Volkswagen before its diesel deception would have realised; VW shares have never recovered after it admitted to cheating emissions tests in the US in 2015.

Dr. Philipp Krueger, an Assistant Professor of Responsible Finance at the University of Geneva, has recently studied the relation between ESG characteristics and investment performance and says ESG reaps risk reduction for companies. Krueger says in a 2017 study he co-authored:

We provided evidence that investors with better sustainability footprints exhibit higher risk-adjusted investment performance. Our analysis suggests that the main mechanism through which better sustainability translates into better investment performance is not return enhancement but rather risk reduction. As such, we find that many standard risk measures are significantly lower for institutions with better sustainability footprints. It thus seems that integrating ESG considerations into investment decisions can contribute to better performance through improved risk management.[1]

In their 2015 research paper, Finding Alpha in ESG[2], Credit Suisse finds that all five portfolios that it constructed based on ESG data added alpha over a seven-year time horizon. Credit Suisse examined the opportunity to capture alpha using data from each of the three ESG pillars and concludes:

“For the Environment pillar data we conclude that strong management of environmental issues “pays” and weak management of environmental issues “costs” at the portfolio level. We found similar results using the Governance pillar data, i.e., strong governance “pays” and weak governance “costs” at the portfolio level. For Social pillar data, we find that companies which have overall the weakest management capabilities and highest exposure to social issues significantly underperform all other companies, i.e., poor social performance “costs” at the portfolio level.”

Credit Suisse found that integrating ESG factors can enhance portfolio performance through both lower exposure to negative risks related to ESG factors and higher exposure to related opportunities, which can lead to material cost advantages, improved efficiencies and/or new revenue sources.

ESG ratings are, in addition, a possible lead indicator of management quality in that companies which are better managers of ESG factors may also be better managers of shareholder capital, Credit Suisse said.

Link between ESG and profitability

A new white paper from leading global index provider MSCI, Foundations of ESG Investing, evaluates how ESG characteristics can enhance portfolio performance.

MSCI is a leading global ESG researcher, with a team of over 170 analysts worldwide assessing all of the stocks in its global universe on a ‘AAA’ to ‘CCC’ scale according to their exposure to industry specific ESG risks and their ability to manage those risks relative to their peers.

In Part 2 of the white paper, Integrating ESG into Benchmarks, MSCI finds that two of its key ESG indices: MSCI ESG Leaders Index and the MSCI ESG Universal Index; enhanced risk reduction and led to better risk-adjusted returns compared to their parent index the MSCI All Country World Index (ACWI).

MSCI found that there was a clear reduction in all relevant risk measures for both of its ESG index methodologies, including: total risk or volatility; expected shortfalls; and maximum drawdowns, compared to the MSCI ACWI.

Other research backs these findings. In its study, A Quantitative Perspective of how ESG can Enhance your Portfolio, JP Morgan says the evolution within ESG investing means it now offers investors a measurement system to manage reputational and operational risk that companies face, which may impact on their long-term profitability. JP Morgan concludes:

ESG can enhance your portfolio by reducing volatility, increasing Sharpe ratios and limiting drawdowns … Our research highlights that the key attributes of ESG Investing lie within portfolio construction. While the return profile may not be the selling point, not having ESG factors in your portfolio significantly increases volatility, lowers potential Sharpe ratios and leads to a higher probability of suffering larger drawdowns during times of market stress” [3]

Indices and ETFs make it easy

MSCI is the world’s largest provider of ESG indices across both equities and fixed income with over US$170 billion benchmarked to MSCI ESG indices [4].

Swiss Re, one of the world’s largest reinsurers, shifted its entire investment portfolio worth around US$130 billion to MSCI’s ESG index family in 2017, choosing benchmarks that systematically integrate ESG criteria rather than traditional market benchmarks.

Guido Fürer, Group Chief Investment Officer at Swiss Re, explained his decision:

These benchmarks represent a suitable tool to achieve the desired investment behavior (sic) and set the right measurement both from a performance and ESG perspective… MSCI is a leader in providing ESG indices for institutional investors, helping them with their ESG integration needs. [5]

One of the world’s largest pension funds, The Government Pension Investment Fund for Japan (GPIF), also selected MSCI indices as benchmarks for their ESG investment strategy in 2017. [6]

In Australia, institutional investors have been at the forefront of sustainable or responsible investing. It is estimated that around $622 billion in assets under management (AUM) was invested through some form of responsible investment strategy in Australia as at 31 December 2016. This was up 9 per cent from $569 billion in 2015, representing around half of all assets professionally managed in Australia (44 per cent), according to the Responsible Investment Benchmark Report 2017 from the Responsible Investment Association Australasia (RIAA). [7]

According to the report, “the comparison of responsible investment funds against mainstream equivalent funds and their benchmark index indicates outperformance across the majority of time periods”. [8]

Investors committed to ESG and who want to align their investments to their ethics and values can therefore have confidence that their investment choices can improve their portfolio returns. On the other hand, ignoring ESG factors can cost investors real dollars, not just missed opportunities.

VanEck’s MSCI International Sustainable Equity ETF (ASX: ESGI) has recently been certified as an ‘Ethical’ investment product by the RIAA. Launched on ASX in March 2018, ESGI provides investors with access to a portfolio of around 174 true-to-label sustainable international companies in a single trade. The smart beta ETF tracks the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index which screens companies based on fossil fuel ownership and revenues, socially responsible activities, environmental, social or governance (ESG) performance and carbon emissions.

1. P1 R. Gibson&P. Krueger (2017). The Sustainability Footprint of Institutional Investors. Swiss Finance Institute Research Working Paper No. 17-05, available at http://goo.gl/qzhvSC”.
2. Credit Suisse 2015, ‘Finding Alpha in ESG’.
3. JP Morgan 2016, ‘A Quantitative Perspective of how ESG can Enhance your Portfolio’
4. https://www.msci.com/documents/10199/df843280-e7ac-4876-a769-a1a53140546a
5. http://www.swissre.com/media/news_releases/nr20170706_MSCI_ESG_investing.html
6. https://www.msci.com/documents/10199/60420eeb-5c4e-4293-b378-feab6a2bf77f
7. P6, Responsible Investment Benchmark Report 2017 Australia.
8. P8, Responsible Investment Benchmark Report 2017 Australia, from the Responsible Investment Association Australasia.

By Arian Neiron, Managing Director

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• With Unibail-Rodamco’s $32 billion takeover approved, Westfield security holders will shortly receive a combination of cash and stapled securities in the new French-owned group
• As the new securities are not shares in an A-REIT, but CDIs (CHESS Depository Interests) in a foreign entity, they will have different tax and performance characteristics compared to A-REIT securities
• There is much speculation about what will happen as market pundits try to predict whether investors will retain their Unibail-Rodamco CDIs or whether they will reallocate towards other A-REITs to retain the favourable tax treatment applicable to a portion of an A-REITs’ income
• Passive funds tracking the S&P/ASX 200 A-REIT Index, which is heavily skewed towards the retail sector at ~45%, are likely to be impacted by these changes
• The VanEck Vectors Australian Property ETF (MVA) is better diversified than the S&P/ASX 200 A-REIT Index. The index MVA tracks has boasted a cumulative performance differential of 16.6% since its inception on 31 January 2007
• MVA offers investors pure A-REIT exposure without Unibail-Rodamco as it is not an A-REIT and therefore it is not eligible for inclusion in the index that MVA tracks MVA’s dividend yield is 4.97%^[1].
• Investors looking to maintain diversified A-REIT exposure for income, without over-exposure to the retail sector should consider MVA

Takeover changes A-REIT landscape

Unibail-Rodamco’s $32 billion takeover of Westfield and the subsequent creation of a new foreign company listing on ASX to replace Westfield will transform the Australian listed property landscape. According to research from Macquarie the new listing will make up 10.65% of the S&P/ASX 200 A-REIT Index.

However, the new foreign entity will not enjoy the income tax advantages that investors in Westfield including funds that passively track the S&P/ASX 200 A-REIT Index have traditionally enjoyed. Some of the tax differences in holding Unibail-Rodamco in place of Westfield are:

• French withholding tax of 15% will be deducted from dividends
• Tax deferred and tax exempt income components will no longer be available
• Discounted capital gains tax will no longer be available on the sale of underlying assets

The new foreign entity will not qualify for inclusion in the MVIS Australia A-REITs Index (MVA Index) because the new foreign listing is not an A-REIT. So when Westfield shareholders receive their cash and CDIs in the new ASX listing, MVA, which tracks the MVA Index, will still have a portfolio with all the benefits of 100% exposure to A-REITs without CDIs.

A diversified exposure: VanEck Vectors Australian Property ETF (MVA)

The MVA Index, and therefore MVA, includes only the largest and most liquid ASX-listed REITs with a maximum individual holding at each review date of 10%.
With its capped exposure to larger property securities, MVA can help former Westfield security holders significantly reduce retail concentration risk and get a more diversified exposure to the listed Australian property market while retaining the tax benefits A-REITs offer relative to a CDI in a French company.

Potential tax benefits

• Compared to other funds that would continue to hold the Unibail-Rodamco securities following the takeover, MVA offers investors:
• No French withholding tax deducted from dividends
• Greater tax deferred and tax exempt income opportunities
• Discounted capital gains tax on the sale of A-REITs’ underlying assets
• The index MVA tracks boasts a 16.6% cumulative absolute differential
• The MVA Index has demonstrated long term outperformance against the S&P/ASX 200 A-REIT Index since it was launched in January 2007.

Results are calculated to the last business day of the month and assume immediate reinvestment of all dividends and exclude costs associated with investing in MVA. You cannot invest directly in an index. Past performance of MVA’s Index is not a reliable indicator of future performance of MVA.

Key benefits for clients:

• MVA is the only smart beta Australian property ETF on ASX with 100% exposure to A-REITs, providing tax benefits for investors
• MVA is better diversified across securities and sub-sectors than the S&P/ASX 200 A-REIT Index with reduced concentration risk in the retail sector
  The index MVA tracks boasts a cumulative absolute performance difference of 16.6% above the S&P/ASX 200 A-REIT Index since the MVA Index was launched in January 2007
• MVA has a trailing dividend yield of 4.97%^[1].

[1] At 30 April 2018. Dividend yield is the weighted average of each portfolio security’s distributed income during the prior 12 months before management costs.

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Powered by Lonsec

VanEck ETF Model Portfolios are powered by Lonsec drawing on their established research and portfolio construction expertise to provide recommended strategic asset allocations tailored to three risk/return profiles: Balanced, Growth and High Growth.

Lonsec employs a disciplined and proven portfolio construction process that leverages their strategic asset allocation framework. All ETFs included in the models must have a minimum ‘Lonsec Recommended rating’ and the model portfolio may include ETFs not issued by VanEck. Lonsec will be performing ongoing independent oversight of the models and will be providing quarterly performance reporting.

Using ETFs for Strategic Asset Allocation

Asset allocation is a critical element of any investment strategy. It forms the basis of a prudent investment policy and drives the bulk of an investor’s risk and return outcome. VanEck ETF Model Portfolios are designed to help you build cost effective portfolios for your clients to meet their investment needs. Each model portfolio has been developed to meet the needs of a range of investor risk profiles and investment objectives.

Using ETFs in asset allocation models offers a range of advantages including instant diversification, ease of trading, transparency, liquidity, tax benefits and cost effectiveness.

VanEck and Lonsec believe that a diversified approach to portfolio construction is critical to achieving investment objectives. Each VanEck ETF Model Portfolio provides broad market exposure across asset classes including Australian equities, global equities, property, Australian fixed income and international fixed income.

Over the past ten years the investment industry has experienced a rapidly changing environment with turbulent markets, changes in regulation and evolving technology. As a result, clients are scrutinising their investments more closely in search of performance, value and transparency in an increasingly cost conscious world. VanEck ETF Model Portfolios are designed to address each of these factors while providing effective building blocks to help provide a strong foundation for your clients.

VanEck ETF Model Portfolios

* Performance is calculated from 30 November 2014 using actual returns of the ETFs in the VanEck ETF Model Portfolios. Returns are net of management fees and costs and assume immediate reinvestment of any distributions but do not include brokerage costs of investing in the underlying ETFs on ASX. Past performance is not indicative of future performance.

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In 2013 the CSIRO-Monash Superannuation Research Cluster released a paper Is fundamental indexation able to time the market? Evidence from the Dow Jones Industrial Average, concluded that equal weighting is the “highest performing” structure for a portfolio, better than market capitalisation and better than fundamental indexation.

The paper tested United States data for the years 1962 to 2009. United States data is used because this is the largest reliable data set available. The results are that investing $1 in 1962 would grow to:

• $100.86 in an equally weighted portfolio;
• $87.28 in a fundamental indexation portfolio; and only
• $59.04 in a market capitalisation portfolio.

Sophisticated models developed by such finance luminaries as Nobel Prize winning economist Eugene Fama and Robert Merton were used to determine the source of this outperformance. The conclusion is that equally weighting a portfolio outperforms market capitalisation because of three factors:

• higher exposure to smaller stocks rather than to bigger stocks;
• higher exposure to so-called ‘value stocks’, meaning those stocks with a high book-to-market ratio; and
  better market timing.
• What the paper means by market timing is that equal weighting extracts more return when markets are rising and loses less when markets are falling.

Intrigued by the results, the research cluster tested its finding further in a 2015 study, The Viability of Alternative Indexation when Including All Costs. The new paper assessed the viability of the same indexing methods as the previous study but took into account all transaction costs using different rebalancing frequencies, trade sizes and fund sizes. Different fund sizes were considered as execution shortfalls can result in performance issues. These are known as capacity constraints. For each of the three fund sizes – $500 million fund (small), $1 billion (medium) and $10 billion fund (large) – the equal weight strategy was the best performer in terms of geometric returns and Sharpe ratios.

The authors however did find that equal weight indexing was capacity constrained due to liquidity constraints. This criticism can be overcome with effective index design. The design of an equal weight index should apply liquidity and size filters so as to increase the capacity at which it can be traded.

Australia’s first and only Australian equity equal weight ETF, VanEck Vectors Australian Equal Weight ETF ( MVW) tracks the MVIS Australia Equal Weight Index. It includes only the largest and most traded ASX securities thereby avoiding capacity constraints.

MVW has recently had its third anniversary and consistent with the research it has outperformed the market capitalisation based S&P/ASX 200 Accumulation Index. It did so by an average of 3.86% p.a. over the three years to 31 March 2017 returning 11.39% p.a. compared to 7.53% p.a.

In the highly concentrated Australian equities market, equally weighting a portfolio has delivered investors significantly improved diversification and reduced stock and sector concentration.

MVW has proven equal weighting is well suited to the highly concentrated Australian equities market, with passive outperformance that cannot be ignored.

———-

IMPORTANT NOTICE: This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity and issuer of the VanEck Vectors Australian Equal Weight ETF (‘Fund’). This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at http://www.vaneck.com.au or by calling 1300 68 38 37. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from the Fund. MVIS Australia Equal Weight Index (‘MVIS Index’) is the exclusive property of MV Index Solutions GmbH based in Frankfurt, Germany (‘MVIS’). MVIS makes no representation regarding the advisability of investing in the Fund. MVIS has contracted with Solactive AG to maintain and calculate the MVIS Index. Solactive uses its best efforts to ensure that the MVIS Index is calculated correctly. Irrespective of its obligations towards MVIS, Solactive has no obligation to point out errors in the MVIS Index to third parties.

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Russel Chesler

The gold price has surged back above US$1,200 per ounce as investors have poured back into the safe haven asset to protect themselves against uncertainty from Trump’s failure to provide clear details on how he plans to make America great again, according to Russel Chesler, Director, Investments & Portfolio Strategy, VanEck Australia.

Gold ended 2016 at US$1,146 and has since risen above US$1,200 per ounce. Gold mining stocks, which provide leverage to the gold price, have enjoyed a surge in January with the VanEck Vectors Gold Miners ETF (ASX code: GDX) gaining 8.79% for the month.

“Prior to Trump being sworn in the market had ridden a wave of euphoria. Equity markets were focusing on Trump’s planned stimulus however his proposal to have Mexico ‘pay’ for the wall via a tax on Mexican imports and the implementation of his immigration policy have caused markets to reassess what a Trump presidency may actually mean,” Mr Chesler said.

“So far Trump’s policies have caused uncertainty. The question now is will the current gold run last?” Mr Chesler said. According to Chesler, gold is not just responding to political uncertainty but also due to fears of inflation. “Gold has traditionally been used by investors as a hedge against rising inflation and fiscal stimulus could support the rise of inflation in the US. Infrastructure spending, tax cuts and deregulation could still occur with Republicans in control of the White House and both houses of Congress. All of these policies could encourage spending and put pressure on prices,” Mr Chesler said.

“Furthermore if you look back historically since Nixon abandoned the gold standard in 1971, there have been seven new US presidents inaugurated to the White House prior to Trump. In the year following each of those inaugurations gold has outperformed equities five out of seven times.

“With rising inflationary pressures and significant concern regarding the stability of Trump’s leadership, gold is well positioned to rally in 2017,” Mr Chesler said.

Australian investors can access global gold miners by investing in GDX which is the world’s largest ETF of its kind and gives investors instant access to a diversified gold portfolio in a single trade on ASX.

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Arian Neiron

Smart beta ETFs gained significant traction in the Australian market in 2016 as an alternative to active management and market capitalisation-weighted index funds, according to Arian Neiron, Managing Director, VanEck.

Total flows into smart beta ETFs reached A$563 million accounting for almost 20% of the total Australian ETP[1] flows of $3.06 billion[2] in the 12 months to December 2016. Smart beta ETFs attracted the majority (60%) of total ETP inflows in December alone.

“Smart beta strategies provide an alternative passive approach to traditional market capitalisation indices. There was considerable market volatility in 2016 and smart beta strategies, such as equal weight, quality, value and fundamental weighting, provided investors with the opportunity to achieve targeted outcomes and higher risk-adjusted returns,” Mr Neiron said.

At the end of the November 2016 total investment in smart beta equity ETFs/ETPs globally reached a new record of US$497 billion[3], across 1,179 smart beta equity ETFs/ETPs. Locally, smart beta ETFs account for 20% of the total ASX-listed ETPs.

“Globally smart beta is the fastest growing segment of the investment management industry. While still in its infancy, we expect Australia’s smart beta ETF industry to grow significantly in 2017 as investors understand the benefits of achieving targeted investment outcomes within a passive investment management framework. The number of smart beta ETPs will expand across a range of asset classes this year,” Mr Neiron said.

Overall, Australia’s ETP industry reached a record high at the end of 2016 of A$25.6 billion[4], a 20% growth from 2015. Total inflows into Australian equity ETPs in 2016 surpassed international equity ETP investment for the first time in several years. In the 12 months to December 2016 Australian equity ETP inflows reached A$1.04 billion exceeding international equity ETP inflows of A$967 million.

“Speculation leading up to the US election and ongoing market volatility particularly encouraged investors’ love affair with Australian equites in 2016. Investment into fixed income ETFs also picked up in 2016, attracting A$563 million (almost 20%) of total overall ETP flows, a significant increase from A$410 million in 2014. The search for defensive assets has been a dominant theme in 2016. Duration risk is top of mind for investors who have started shifting out of long-term bonds to short-term bonds in anticipation of rising interest rates in the US,” Mr Neiron said.

Gold miners ETFs and bullion ETPs also benefitted from uncertainty in 2016 attracting in excess of $100 million in the 12 months to December 2016. However, post the US election gold tapered off slightly as the Trump honeymoon led stock markets to full bloom.

“We believe the Trump administration has the potential to implement policies that promote growth. However, it seems the market is ignoring many potential risks the new administration may face. These include attempting to change trade treaties, immigration policies, the national debt and Fed tightening. Potential moves by China or Russia, disarray in the EU and strife in the Middle East could also impact the administration’s efforts. We believe many of these risks will surface in 2017, reversing the positive sentiment in the stock market and US dollar to gold’s benefit,” Mr Neiron said.

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Joe Foster

Our positive view on the long-term prospects for gold remain unchanged. The U.S. elections are over, and markets will likely take time to reflect the full impact of a Trump victory.

Gold immediately rose above USD$1,300 per ounce after the news of Trump’s win, but has since settled back to USD$1,230. Price volatility in the short run is not surprising.

Trump presidency may increase financial risk

With the contentious presidential election finally over, we can now assess the impact that the Trump victory will have on the country and more importantly, how it potentially increases risk to the financial system.

Although Trump emerged successful in the election, there remains tremendous uncertainty surrounding his morals, temperament, and judgment. Internationally, high levels of trepidation around his foreign policies are not likely to subside quickly, and his anti-trade stance could damage economic growth. In our opinion, Trump’s aggressive immigration policy was no doubt one of the key drivers of his appeal but could lead to potential civil unrest, extreme costs, and logistical challenges once implemented. If Trump is able to implement some of what he promoted during the campaign trail, infrastructure spending could push the national debt to unsustainable levels and deficit spending should continue. While the risks of a Trump presidency are substantial, the potential for pro-growth tax and regulatory reforms may partially mitigate risks.

Independent of policy specifics, there exists a growing chance our newly elected president will likely preside over the next recession. After eight years of expansion, there are signs that the economy has entered the “late cycle” phase. The Fed’s efforts to tighten policy could create a further drag on growth. A recession layered onto the existing risks we see in a Trump presidency, in our view, makes a systemic financial crisis more likely.

Fed comments on December rate hike break gold’s upward move

The strong price movements that followed the U.K. Brexit vote on June 23 had set gold on a new positive trend, breaking the downtrend that had been established during the 2013-2015 gold bear market. On October 4, however, gold fell $44 per ounce, a 3.4% drop for the day, and gold closed below $1,300 per ounce for the first time since June 24. As it had for most of the year, the downward pressure followed comments by some Federal Reserve (the “Fed”) members that were interpreted by the market as increasing the likelihood of a Fed interest rate hike occurring in December. In addition, and importantly, Chinese markets were closed the first week of October for the Golden Week holidays. With gold’s biggest buyer out on vacation, gold was left very vulnerable, which we believe emboldened short sellers. Gold closed as low as $1,251 per ounce on October 14 but bounced back modestly to end the month at $1,277.30 per ounce, down $38.45 or 2.9% for the month.

A rate increase has been priced into gold and U.S. dollar

At the beginning of November, markets attached about a 78% probability to a December Fed rate hike, as implied by the federal funds futures markets. This probability stood at 59% at the end of September, despite U.S. macro data releases that were very mixed, as has been the case throughout the post-crisis recovery. There were certainly some positive economic surprises in October: PMI (Purchasing Managers’ Index) readings from both the ISM (Institute of Supply Management) and Markit Group in the manufacturing, non-manufacturing, and services sectors showed some expansion and an increase in August factory orders for U.S. goods.[1]

In contrast, however, weak data were reported for U.S. employment, the preliminary University of Michigan Consumer Sentiment Index,[2] the Empire State Manufacturing Index,[3] housing starts, and the U.S. Consumer Confidence Index.[4] While 3Q gross domestic product (GDP) headline growth was above consensus, personal consumption missed expectations by a wide margin. By mid-October, regional Fed growth forecasts were being downgraded. The Federal Reserve Bank of New York’s 4Q 2016 GDP Nowcasting Report, for example, shows 1.4% growth as of October 20 versus 2% growth in late August. In this environment, a rate hike does not appear to us as the obvious next move by the Fed, but the market is pricing it in, and both gold and the U.S. dollar reflected this in October. While gold was down 3%, the U.S. Dollar Index (DXY)[5] was up 3% during the month.

Demand for gold withstood recent selloff

Despite the drop in the gold price in October, demand for gold bullion-backed exchange traded products (ETPs) held firm. Inflows have no doubt slowed down compared to earlier in the year (0.4% increase in holdings in October compared to 12% and 6% increases in February and June respectively), but demand continued during the recent selloff. We believe this is positive since investments in gold bullion ETPs typically represent longer-term, strategic investment demand. In contrast, the latest Commitment of Traders report shows a significant decline in COMEX[6] net long positions, which reached record levels this year. We think COMEX positioning reflects more speculative and shorter-term demand for gold, and the recent decline suggests perhaps some of those weaker players liquidated positions during the October selloff.

Election uncertainty and Asian demand should support gold

The gold price is on a slightly different track now compared to our previous expectations. A correction was not surprising, given gold’s outstanding performance this year. But we thought that the $1,300 level might hold and gold would continue on the new trend established this year, potentially exiting 2016 around the $1,400 level. Although our shorter-term outlook has been curbed by the recent price action and we now think that gold may not reach $1,400 in 2016, we believe strong seasonal demand out of Asia and continued uncertainty following the results of the U.S. presidential election could lend support to gold in the near term. In the first week of November, gold managed to rally back above $1,300. The Fed decided to keep rates unchanged at its November 2 Federal Open Market Committee (FOMC) meeting, but this was widely expected, so we estimate the positive move was most likely driven by market concern over the outcome of the U.S. elections. Market views quickly shifted, once again, and on November 8, Election Day in the U.S., gold closed at $1,277. Following Trump’s stunning victory, gold rose back above the $1,300 price level on the morning of November 9.

Higher rates not always negative for gold

A Fed rate hike in December appears almost fully priced-in already. The common argument is that higher rates are negative for gold given that it is a non-yielding asset. Yet, following the first rate hike of the current tightening cycle in December 2015, gold has advanced more than 20% so far this year. In fact, Scotiabank analyzed the previous six tightening cycles since 1982 (when a suitable gold index became available) and it found that gold prices advanced in the year following the first rate increase in half of the cycles, whereas gold declined in the other half.

Scotiabank points out that the only other point at which the Fed raised rates in a low-inflation environment was in 1986 when rates were increased to help defend a sharply depreciating U.S. dollar. It was one of the rate-rising periods when gold performed well. This is shaping up to be a similar period demonstrated by gold’s already strong performance after the first rate increase in December 2015. The economic and financial backdrop of the current rate cycle is unlike any other in recent history, and we expect gold to continue to perform well. In our opinion, the stress that rising rates have the potential to place on the global economy and financial system are very bullish for gold.

Long-term outlook remains positive for gold bull market

Our view on the long-term gold price is unchanged. We see the recent weakness as a consolidation phase within what we believe is the early stages of the next bull market for gold. We continue to believe dislocations created by the unconventional policies being implemented by central banks around the world are likely to increase global financial risks. We believe that investors will continue to be driven to gold as a safe haven given the further loss of confidence in central banks on a global scale and perhaps domestically, and the uncertainty following Trump’s presidential victory.[9]

By Joe Foster, Portfolio Manager and Strategist, VanEck

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[1] Purchasing Managers’ Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The two principal producers of PMIs are the Institute for Supply Management (ISM), which originated the manufacturing and non-manufacturing metrics and which produces them for the United States, and the Markit Group, which produces metrics based on ISM’s work for over 30 countries worldwide. ISM and Markit Group separately compile Purchasing Managers’ Index (PMI) surveys on a monthly basis by polling businesses which represent the makeup of the respective business sector. ISM’s surveys cover all NAICS categories. The Markit survey covers private sector companies, but not the public sector
[2] The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in December 1964. Each month at least 500 telephone interviews are conducted of a continental United States sample.
[3] The Empire State Manufacturing Index is based on the monthly survey of manufacturers in New York State and conducted by the Federal Reserve Bank of New York. The index is based on survey responses to a questionnaire sent out on the first day of each month to an unchanged pool of about 200 top manufacturing executives, generally the president or CEO. The questionnaire seeks their opinion on the change in a number of business indicators from the previous month, and also the likely direction of these indicators six months into the future.
[4] The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
[5] The U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc.
[6] COMEX is the primary market for trading metals such as gold, silver, copper and aluminum. Formerly known as the Commodity Exchange Inc., the COMEX merged with the New York Mercantile exchange in 1994 and became the division responsible for metals trading.
[7] NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.
[8] MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
[9] Safe haven is an investment that is expected to retain its value or even increase its value in times of market turbulence.

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