Market Update: June 2017

"Curve ball and ETFs..."

By Alan Hull, June 2017

This commentary is in part or entirely created using extracts and comments from my weekly Blue Chip Report. For more information about the Blue Chip Report, including subscription details and a recent sample report, go to Blue Chip Report

At the end of last month I wrote...

Anyway, the upshot of all this is that I don't see any clear direction in the bigger picture right now and being mindful of the month of May (sell in May and go away, as the saying goes) I am erring on the side of caution. So I have been taking profit for the past few weeks and now I'm sitting on my hands until markets make up their collective mind.

But just to be really difficult, during May the U.S. and European markets went up while our local market went down...

And then we had the May Budget curve ball...the interbank lending levy. Now given that four of our five big banks went exdividend in May (yes, now there's five big banks because when your imposing a levy on them...the more the merrier), the bank levy was a double whammy. Not much fun for any Australian investors who own any of our five big banks. And that's just about every adult Australian I think.

Of course the levy is yet to pass both houses of Federal Parliament but in response to most things unknown, investors will inevitably sell. In particular, foreign investors are already wary of our unstable regulatory environment and this little episode only reinforced these concerns. But I think the banks will rebound, although I did notice that the sell-off wasn't on very strong volume. And it has been a similar case when other blue chip stocks have had a fall from grace in recent times.

When I check trading volumes during recent sell-offs, there is nothing out of the ordinary. And I can only surmise the reason for a price sell-off that is not driven by volume, is a lack of buyers. And I'm not the first one to comment on this, as my fellow chartist Daryl Guppy has been pointing the finger for some time at Exchange Traded Funds (ETFs) as the reason for the growing lack of support for individual stocks. The expansion of ETFs in Australia means we now buy themes (like yield or ethical investments) or whole indexes or industry sectors.

And this means blanket buying, which means less focussed buying, which means greater price volatility in individual stocks. So what do you do? You join them. And that's exactly what I've done because index ETFs are less volatile than individual stocks or sectors and are matching many of them in terms of overall returns. Thus if you can achieve the same return with less volatility then why expose yourself to added risk. And some ETF providers are doing really clever things such as tweaking the index weightings, like BetaShares FTSE RAFI Australia 200 ETF, QOZ.

This ETF is currently outperforming the standard index ETFs like STW and IOZ in terms of total return...being price growth + distributions + franking credits. Of course this won't always be the case and there are stocks that still comfortably outperform all of these ETFs. But given our Stockmarket's narrow advance in recent times, ETFs are a very useful tool. Of course this segues nicely into this month's sales pitch....my new ETF Top 10 Portfolio service will be available from next week.

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