In recent years, a combination of factors have led the wealth management industry to adopt ‘goals-based’ or ‘outcome-based’ investment strategies.
Factors include longer lifespans, record low interest rates and an increasing number of retirees taking superannuation out as an income stream, with lump sums reserved for discretionary expenses. Rather than focusing solely on overall risk-adjusted return, these strategies attempt to address both sequence and longevity risk, as well as specific spending goals clients may have throughout their retirement. Complementing this approach is a new suite of exchange-traded products, commonly referred to as strategy-based ETFs. Where most ETFs are designed to track a specific market index or provide exposure to a particular asset, these are targeted at meeting broader portfolio outcomes.
In a September '16 Netwealth webinar, Vinnie Wadhera, BetaShares Director of Institutional Business and National Accounts explained how ETFs can be used not only to augment existing investment portfolios with different asset exposures, but also as an integral portfolio construction tool.
As an example, Wadhera discussed the BetaShares Australian Equities Bear Hedge Fund (ASX code: BEAR), which aims for a negative correlation with the S&P/ASX 200 index, “If the market moves down one percent, the value of the fund goes up one percent.” This protects investors against volatility in the Australian share component of their portfolio.
There are also products that address the income element of goals-based strategies. Wadhera highlighted the BetaShares Australian Dividend Harvester Fund (managed fund) (ASX code: HVST) as an example of this strategy. The Dividend Harvester product is based on two key processes. The first, Wadhera said, was that it “simply holds a basket of stocks in the ASX 50 over their dividend payout periods,” and second, they are ranked based on their gross yield – that is, not their historical yield, “but what has been declared or a consensus estimate of what will be paid out.”
The roughly 14-stock portfolio is rebalanced every two months, so that “your dollar is rotating into the dividend-payers throughout the year.” This isn’t a new approach, but it’s a systematic implementation of it accessible through a highly liquid and inexpensive investment vehicle.
ETFs like these demonstrate a different way to approach the sector – as an essential part of a client’s goals-based retirement portfolio. As the market for strategy-based ETFs grows, it’s likely there will be a wider range of exchange-traded products designed to meet specific investment goals for clients, all of which can be accessed cheaply and consolidated with any other investments held on the ASX.