Pre­cious me­tal ad­just­ments

The trends of the past month say a lot about how in­vestors are see­ing the mar­ket

Financial Mail - Investors Monthly - - Analysis: Exchange-traded Funds -

s a fi­nan­cial jour­nal­ist, I al­ways keep half an eye on Sens, the JSE’s news ser­vice, for com­pany an­nounce­ments, re­sults and the like.

In be­tween the flurry of no­tices posted by Curro and AdvTech last month, as the fi­asco be­tween the two pri­vate schools groups played out, I no­ticed that a trend emerg­ing in the ETF space. Re­demp­tions of gold deben­tures and ad­di­tional list­ings of plat­inum, pref­er­ence share and prop­erty ETFs.

Be­cause is­suers of ETFs have to hold the un­der­ly­ing as­set (whether that’s eq­uity in a com­pany or phys­i­cal me­tal in the case of gold and plat­inum) and be­cause the mar­ket maker has to carry in­ven­tory on its books so that it can make prices to the mar­ket, any swings in in­vestor de­mand will af­fect is­suance.

The trends of the past month re­veal a lot about how in­vestors are see­ing the mar­ket at the mo­ment in terms of both op­por­tu­ni­ties and risk.

Wayne Den­nehy, who heads ETFs and pas­sive in­vest­ments at Absa, says there has been a lot of ro­ta­tion be­tween the NewGold and NewPlat ETFs from in­vestors, who may be see­ing more value in plat­inum than in gold for the fu­ture.

While the dol­lar prices of both met­als have come off sharply this year, plat­inum broke back be­low gold again in Jan­uary and has widened its dis­count.

Though the mar­ket maker — Absa in this case — is not the only mar­ket maker, as any­one can post prices, glob­ally gold ETF re­demp­tions have in­creased. Con­sul­tancy GFMS’s sec­ond-quar­ter sta­tis­tics for the gold sec­tor show that af­ter a 37 t rise in ETF gold hold­ings in the first three months of the year, there was a 1 t de­cline in the sec­ond quar­ter, with fur­ther draw­downs re­ported last month.

It’s quite a su­per­cy­cle of for­tunes be­tween the two pre­cious met­als, Den­nehy says.

De­mand for the plat­inum fund aside, Den­nehy says Absa’s fastest grow­ing ETF re­mains the Govi, which has tripled in size over the past year. This ETF cov­ers South African gov­ern­ment fixed-in­come bonds. In an en­vi­ron­ment where in­fla­tion and in­ter­est rates are on the rise, you might have thought that in­vestors would be more in­clined to buy in­fla­tion-linked bond ETFs, such as Absa’s Ilbi (in­fla­tion-linked bond in­dex) or RMB’s In­fla­tion-X, but the ris­ing in­ter­est rate cy­cle will only hurt fixed in­come as­sets and the Govi to the ex­tent that the rate hik­ing cy­cle ex­ceeds what the mar­ket is al­ready pric­ing in.

The mar­ket and the bond curve are ex­pect­ing fur­ther rate hikes, which are al­ready in the bond prices — that is, at least 1%-1,5% in the next two years.

If there’s a shock and rates go up by more than is al­ready priced in, yields will rise sharply and the Govi will un­der­per­form cash.

Absa’s is also the only Govi ETF in the mar­ket, and as fund of funds and plat­forms put to­gether diver­si­fied port­fo­lios for their clients, they need fixed in­come as­sets to set up a well diver­si­fied port­fo­lio and there is not much choice in the ETF land­scape. This as­set class has held up well, with a one-year re­turn of about 7,2% by late July against eq­ui­ties (Swix) at a to­tal re­turn of 3%.

Stay­ing with the in­ter­est rate theme, af­ter a poor cou­ple of years the pref­er­ence share mar­ket has also seen some in­ter­est, and CoreShares’ Pre­fTrax has grown nicely with that (de­spite it be­ing a rather niche as­set class).

CoreShares head Gareth Sto­bie says this can def­i­nitely be at­trib­uted to a de­fen­sive hedge against volatile mar­kets as well as ris­ing in­ter­est rates. The yield is linked to prime, which means that if in­ter­est rates shift up, your coupon and yield im­prove. So while in­vestors tend to fo­cus on price, a yield of over 8% on Pre­fTrax gives a nice un­der­pin.

Clearly, though, the star per­form­ers have been some of the smart beta strate­gies and the prop­erty ETFs.

CoreShares’ Div­i­dend Aris­to­crats ETF has also been do­ing well, al­beit off a low base as it is still a rel­a­tively new prod­uct. Sto­bie at­tributes this to a few things: ex­cel­lent one-year per­for­mance, “qual­ity” fil­tered stocks and over­all bet­ter ed­u­ca­tion around div­i­dend-yield­ing strate­gies and CoreShares’ ETF of­fer­ing.

How­ever, if it’s volatile mar­kets you’re wor­ried about, in terms of tac­ti­cal al­lo­ca­tions he po­si­tions the LowVoltrax ETF as a good hedge.

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