Why are we passionate about ETF’s and passive investing?

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Honestly – the number of articles we read where people have been fleeced of their savings, or articles where financial advisors (registered and unregistered) have defrauded clients, finally the power that saving and investing gives to anyone who chooses to allocate some time and money to it.

 

Of all the real and perceived risks that exist in the share market, ETF’s mitigate or remove them – you instantly get a diversified portfolio of shares across an industry, country or even across the entire world market and they are generally incredibly transparent.

 

I want to buy a bank stock but don’t know which one

 

We hear this question from time to time, or variations of it at least. The appetite for Australian bank stocks seems to be never ending and the dividends they pay are the envy of other world markets. In this article we explore a few different ways to get exposure to the banking sector. The writer wanted to pick one of the big 4 to concentrate so flipped a coin twice and landed on CBA.

 

Lets imagine you have $10,000 to invest in bank stocks, everyone knows they pay massive dividends and the biggest is CBA, so obviously you should out the whole 10k into CBA right?

 

Lets assume you did 3 years ago: on the 1st of October 2016 you would have purchased 136 shares at $73.57 (an actual price from this day), plus brokerage of $20 for a total consideration of $10,025.52 A year later on 01/10/2017 they were up to  $77.93, AND you also would have collected dividends throughout the year of $590.34 Another 2 years on and at the close of business 01/10/2019 they were down to $78.61, you also collected dividends of $1,486 during 2018 and 2019. At this point you need the money and decide to sell – the price is now $77.68 per share and your initial investment of $10,025.52 now pays you back $10,690.96 – a profit of $645.44 after brokerage. After adding back in your dividends you are actually up $2,721.89 . Interestingly, if you had bought on April fools day in 2017 when CBA peaked, you would be down about ten dollars per share!

 

Chart showing CBA weekly prices from Oct ’16 – Oct ’19:

 

 

Did ANZ, NAB or WBC fare any better? Well yes and no – CBA generally performed the best of these four banks as shown in the chart below.

 

Chart showing all four banks percentage gain, loss from Oct ‘16 to Oct ‘19:

 

 

So how could ETFs have helped in this scenario – well an ETF representing the ASX 200 and 300 would have been heavily invested in the banks along with mining, technology and consumer stocks etc. However industry specific ETF’s allow you to pinpoint a specific area of investment (in this case financial stocks).

 

QFN is one such ETF, it holds 29 shares ranging from the Big 4 and Macquarie bank, to insurers like IAG and QBE, to fund managers like Platinum and Magellan. The ETF invests based on the market capitalisation of the 29 shares, our only concern with this approach is that close to 80% of the fund is invested in the five biggest banks – with 25% invested in Commonwealth Bank alone! Well run businesses like Bendigo Bank and BOQ are represented in small amounts only (less than 1% of the fund invests in these banks).

 

So while QFN gives you great exposure throughout the finance sector, it is heavily weighted towards the traditional banks and Macquarie group. Lets see how it fared when we put QFN against the big 4 in the same timeline as outlined above:

 

 

Now that we know that CBA makes up around 25% of QFN you can assume that the two charts should track each other quite well, and they generally do. Using the same scenario lets assume that you invested $10,000 in QFN on 1/10/2016, you would have taken on 916 shares at $10.92 for a total consideration of 1022.72 (including brokerage), selling 3 years later for $11.49 per share or $10,524.84, and $504.84 in profit. Add in your dividends of $1,319.04 and you would be up around $1,823.33 versus the stand alone CBA investment of $2,721.89. So now that we know which would have been the better investment (CBA by almost $900) in pure money terms, but what about risk? Would you have had any sleepless nights by being exposed to one stock only? Would you have overcome by a cold sweat during the royal commission in 2018 when CBA admitted to errors? How about when AUSTRAC handed down a record 700 million dollar fine to CBA in June 2018?

 

Remember that at the start of the article we flipped a coin to pick CBA? CBA happened to be the best performing bank over the last 3 years. If that coin had come up on Westpac you would have earned less than QFN. WBC is actually down $1.50 per share over the last 3 years, ANZ is effectively trading at the same price and NAB is up $1.50. While CBA showed just one side with a healthy price increase, its certainly not indicative of the Big 4 as a whole. Which Bank indeed!

 

Your risk profile would determine if the extra $900 you earned through investing in CBA was worth it. Personally the concentration risk is far too great to allocate so much to a single stock – in this way QFN creates an interesting entry point for exposure across the whole industry.

 

Industry specific funds can give you broad exposure in a concentrated area. While the team at Untiz believe that whole market ETFs are the easiest and safest way to invest, we love exploring and backtesting different shares and ETF products.

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