VanEck Australia Director of Investments Russel Chesler explains the benefits of equal weighted ETFs, the company's track record and the markets where equal weighting can be expected to outperform.
Jessica Amir: Hi I’m Jessica Amir for the Finance News Network. Joining me from VanEck Australia (ASX:MVW) is its Director of Investments, Russel Chesler. Hi Russel, welcome to the Network.
Russel Chesler: Hi Jessica, great to be here today.
Jessica Amir: Thanks for coming. First up, just tell us about VanEck Australia and the Australian Equal Weight ETF?
Russel Chesler: VanEck is a global asset manager and we’ve been around since 1955. We’re one of the largest providers globally of exchange traded funds, or they’re commonly referred to as ETFs. We currently offer over 75 exchange traded funds including 15, which are listed on the ASX. The VanEck Vectors Australian Equal Weight ETF, which is listed under the code MVW, is our core equity strategy and has over $400 million in assets.
It is the first of its kind in Australia and this year, won Money Magazine’s best Australian equity ETF. MVW weights the largest and most liquid stocks on the ASX equally, and provides investors with access to a portfolio, which represents the broad Australian economy. And not just the top 10 companies in the ASX. We currently have 81 companies in the ETF and they’re each equally weighted at 1.25 per cent.
Jessica Amir: Can you just tell us, what is the concept behind having an equal weighted ETF?
Russel Chesler: If we start off looking at the current market where ETFs have historically been, they’ve generally tracked a market capitalisation index like the ASX 200. Now part of the problem with an index like the ASX 200 is that it weights each stock by size. And this can result in unintended and significant concentration risk, both at a sector level and at a stock level. If we take the ASX 200, the top 10 companies in the index make up 45 per cent of that index. That includes the banks and the likes of BHP Billiton (ASX:BHP), they ASX 40 per cent in financials.
Now if we come to equal weights strategy, which is fairly easy to understand, it mitigates that stock and sector concentration risk. So the CBA (ASX:CBA), we only have about 1.25 per cent invested in CBA, compared to the ASX 200, which is over eight per cent. Financials, we’re down to about 16/17 per cent, compared to 35 per cent overall. So you’re getting a much more diversified portfolio. Equal weighting not only improves the diversification and reduces concentration risk, but also produces better performance results.
Jessica Amir: How has the fund performed over the past 12 months?
Russel Chesler: For the fund over the last 12 months, it achieved a return of 13.60 per cent, that’s to the 28th of February. And that’s 3.5 per cent ahead of the ASX 200. The fund pays distributions twice a year and the investors receive the franking credits, from the underlying stocks as well.
Jessica Amir: How often is the fund re-weighted to account for price movement?
Russel Chesler: The fund is re-weighted on a quarterly basis back to equal weight. So what happens at that point is stocks that have been winners are basically sold down, the poor performance are bought up. A good example of where that contributed really positively to the performance, was Qantas Airways (ASX:QAN). It had been performing poorly, we bought it back up to equal weight and then the performance came through afterwards.
Jessica Amir: The EFT trades under the ticker code MVW. How can people get involved and what’s the liquidity like?
Russel Chesler: People can invest in MVW through their broker or through their financial planner, just like any other stock on the ASX. MVW, because it is reasonably large at $400 million, it has good liquidity and is also supported by a range of market makers, who ensure deep volume and a really tight bid ask spread.
Jessica Amir: The ETF, the Australian Equal Weight ETF is the only one of its kind in Australia. But what’s the situation like overseas?
Russel Chesler: Equal weighting is not a new concept; it has been around for a long time. VanEck was the first to launch an equal weight in the form of an ETF, in Australia. If we look to the US and Europe, which are far larger markets, equal weight ETFs have been around for nearly 15 years now. There is numerous research both locally and globally, into equal weighting.
Our own CSIRO in conjunction with Monash University, conducted extensive research and concluded that equal weight outperforms market capitalisation indices, for three key reasons. Firstly, higher exposure to smaller stocks rather than bigger stocks. Secondly, higher exposure to value stocks. And lastly, better market timing tends to perform better in rising markets and less poorly in falling markets.
Jessica Amir: What’s your parting message to investors today?
Russel Chesler: MVW provides investors with access to a diversified portfolio of equally weighted stocks, in a single trade. The fees for MVW are one third of that charged by actively managed Australian equity funds, and the returns have been impressive. It gives you exposure to the broader Australian economy, and is backed by one of the world’s largest and longest standing ETF providers, VanEck.
Jessica Amir: And well done with your outperformance. Russel Chesler, thank you so much for the update.
Russel Chesler: Thank you for having me today Jessica.