Hamish Mills
15 minutes reading time
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Welcome to Betashares Best & Worst for August 2024, bringing you insights into our top and bottom performing funds for the month, as well as a spotlight on some funds with interesting recent performance stories.
The unwinding of the Japanese Yen carry trade was undoubtedly the most significant financial event of August. Until 31 July, Japanese interest rates remained at 0.1% – a stark contrast to many developed economies whose rates remained high to combat inflation. Investors were able to exploit this by borrowing Yen and reinvesting in higher yielding currencies at high levels of leverage, clipping a profit off the top. On 31 July this carry trade collapsed, as the Bank of Japan’s decision to raise rates was synchronised with the release of weak US labour market data sparking recessionary fears. This caused a sharp convergence in US/Japanese yields, triggering the unwinding of short Japanese Yen positions. A snowball effect ensued, with the mass covering of short positions contributing to USD/JPY volatility, causing further unwinding, and more volatility. The result was a significant strengthening of the Yen and the significant decline of not only Japan’s Nikkei 225, but other markets across Asia, Europe, the US, and Australia. Chamath De Silva, Betashares’ Head of Fixed Income delved further into the causes, effects and implications of this in The yen carry trade unwind: Separating signal from noise.
As August progressed, recessionary fears were largely quashed as markets rebounded and inflation continued to fall at a modest rate, while retail sales were strong. A number of central banks cut interest rates including the Bank of England and Reserve Bank of New Zealand, and the likelihood of cuts in the US became a near certainty, with Fed Chairman Jerome Powell declaring “the time has come” to start easing rates. The RBA meanwhile held course, indicating policy was unlikely to change until Q1 2025.
Nvidia’s much-anticipated earnings were released in the final week of the month – given the company has been the backbone of US market growth this year, contributing to more than one fifth of S&P 500 returns1 (to 30 Aug), even a small deviation from expectations had the potential to cause a significant market impact. Quarterly revenues exceeded expectations by 3.8%2, but this quarterly revenue ‘beat’ has been steadily declining over the last 5 quarters, leading to a negative investor reaction.
| Spotlight Funds (%) | 1 Month | 3 Month | 6 Month | 1 Year | 3 Year (p.a.) | 5 Year (p.a.) | Since Inception** | Inception Date |
| GGFD | 4.24 | 13.80 | 7.44 | – | – | – | 7.47 | 4/12/2023 |
| EX20 | 1.01 | 4.29 | 6.50 | 10.56 | 3.20 | 5.94 | 8.02 | 5/10/2016 |
| IIND | -2.73 | 7.04 | 5.57 | 19.89 | 7.25 | 10.71 | 10.77 | 2/08/2019 |
| Benchmarks | ||||||||
| ASX 200 | 0.47 | 5.74 | 6.97 | 14.90 | 6.73 | 8.14 | – | – |
| S&P 500 | -1.42 | 5.26 | 7.09 | 21.35 | 12.12 | 15.75 | – | – |
| MSCI World | -1.24 | 4.44 | 6.18 | 18.83 | 9.61 | 13.05 | – | – |
| AusBond Comp | 1.21 | 3.50 | 2.99 | 5.15 | -1.79 | -0.55 | – | – |
Source: Morningstar, Bloomberg. As at 31 August 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.
#: Inception date refers to the inception of the Fund’s current investment strategy. Prior to the inception date, the Fund traded under a different investment strategy, and was subject to different management costs.
Spotlight:
1. GGFD Geared Long U.S. Treasury Bond Fund – Currency Hedged (hedge fund) : By the end of August, rate cuts were a near certainty and the question had changed from “whether” to “by how much”. We now know that the Fed voted to cut rates by 50 basis points (bps), and expectations are that there will be a further 50bps of cuts this year, 100bps in 2025, and another 50bps in 2026 based on the Fed’s ‘dot plot’, which shows the Fed’s guidance of monetary policy based on their current assessment of the economic landscape3.
Looking at past rate cutting cycles over the last 40 years, 10-year yields have historically continued to fall until near the end of the cutting cycle4. If you take the view that this is likely to occur in the current cycle, GGFD can be used as a highly capital efficient tool to maximise interest rate exposure. The fund aims to provide a geared exposure of 250-300% to 10-year US treasuries by investing in cash and cash equivalents and buying 10-year US Treasury Bond Futures, giving an effective duration of 21.37 years (as at 23 Sep 2024). August provided good insight into the exposure GGFD provides, whereby rate cut expectations grew throughout the month, 10-year US Treasury Yields fell by 4.9% and GGFD provided a monthly return of 4.24%.
2. EX20 Australian Ex-20 Portfolio Diversifier ETF : Last month’s Best & Worst highlighted the increasing concentration present in the US market (namely the S&P 500 index), with the top 5 stocks now representing a record high of over 25% thanks to the significant growth of the likes of Nvidia. The high exposure to the top handful of stocks, or concentration risk, is not unique to the US market – Australia has long had a similar problem to a greater extent, with the top 20 stocks representing 63% of the S&P/ASX 200 Index5 (as at 31 Aug 2024).
While the top 20 have outperformed the rest of the index over the last financial year, earnings releases have shown how 90% of gains from these 20 companies have come from expansions in price to earnings multiples (P/E), rather than improving fundamentals6 – covered in further detail in Investing beyond the top 20: Opportunities in EX20.
The index EX20 aims to track provides exposure to stocks 21-180, in order of market cap. It can therefore be used as an effective tool to reduce concentration risk to the top 20 – providing two key benefits: firstly, as down-side protection in case the inflated P/Es of the top 20 compress; and secondly, for excess returns potential in the instance of mean reversion where the companies held by EX20 outperform the top 20, ending the current period of top 20 dominance.
3. IIND India Quality ETF : Emerging market investors have struggled to capture returns for years now using a broad market index – MSCI’s Emerging Markets Index has only outperformed the MSCI World Index in one calendar year out of the last six, with its 24% exposure to China7 dragging down performance since Covid, with the country’s near-stagnant economy and falling property market8.
However, not all emerging market economies tell the same story. India’s economy grew by 8.2% for the fiscal year and has the highest projected growth out of any major developed or developing economy. The Indian infrastructure network including transport, electricity and internet had rapidly improved, and the population is young and technologically competent. To give two examples, internet penetration has risen from just 25% to 93% since 2014, and the median population is 10 years younger than that of the US or China at 28 years old.
To gain exposure to this growing economy, IIND uses a smart indexing approach, targeting high quality companies i.e. those with high profitability, low financial leverage, and high earnings stability – all helping to bring volatility below that of the Nifty 50 Index in an emerging markets sector that has historically experienced 20% higher volatility than the developed markets9.
| Best* (%) | 1 Month | 3 Month | 6 Month | 1 Year | 3 Year (p.a.) | 5 Year (p.a.) | Since Inception** | Fund Inception Date |
| ATEC | 5.85 | 9.35 | 9.53 | 30.04 | 2.32 | 15.64 | 4/03/2020 | |
| DRUG | 4.59 | 9.47 | 11.15 | 19.17 | 6.37 | 11.12 | 9.55 | 4/08/2016 |
| QAU | 4.11 | 7.02 | 22.81 | 26.82 | 8.89 | 7.89 | 3.13 | 5/05/2011 |
| HQLT | 2.71 | 6.00 | 6.97 | 24.71 | 5.15 | 12.22 | 5/06/2020 | |
| FAIR | 2.54 | 8.50 | 6.25 | 13.83 | 2.55 | 5.57 | 7.72 | 27/11/2017 |
Source: Morningstar, Bloomberg. As at 31 August 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.
Best:
1. ATEC S&P/ASX Australian Technology ETF : When looking for exposure to high growth technology stocks, investors’ first thought might typically be the Nasdaq-100, home of the magnificent seven. However, closer to home the Australian technology sector has actually outperformed the Nasdaq, with a number of companies including Xero, Wisetech and Carsales cementing their place in the largest 50 ASX-listed stocks10 and ATEC returning over 30% in the last 12 months compared to 21% for the Nasdaq-100 Index11. Earnings season for the 2024 financial year further highlighted the overall strength of the domestic technology sector, with ATEC topping the ‘best’ last month with total returns of 5.85%12.
Supply chain software developer Wisetech Global, founded by AC/DC guitarist Richard White, announced revenue growth of 28% year-on-year to over $1 billion, with their shares jumping 18% following the announcement. All-in, Wisetech returned over 25% for August, contributing 2.54% to ATEC’s returns for the month13.
Nuix, an investigative and analytics software company are also back in (the) black this year after a string of controversies in 2021 post-IPO saw the stock fall by 60%14. More recently, upgrades to revenue and earnings performance have led to gains of over 180% over the past 12 months following the launch Nuix Neo last year – an end-to-end data privacy, investigation and legal processing platform. Nuix have since landed 23 large-scale customers for Neo, contributing $12 million to Nuix’s annualised contract value in the first year15.
2. DRUG Global Healthcare ETF - Currency Hedged : At its core, healthcare is typically viewed as a defensive sector due to the constant need for basic medical supplies, regardless of the current macroeconomic landscape. This reputation stood strong at the start of August when a compression in Japanese and US yields led to the unwinding of the Yen carry trade and extreme global market volatility – over the first week of August, DRUG was limited to a 3.5% drawdown compared to 7.0% for the broad global market (MSCI world ex Australia AUD Hedged).
More recently though, the healthcare sector has also exhibited strong growth potential on the back of medicinal advancements and regulatory approval. Eli Lilly and Novo Nordisk – both of which are in DRUG’s top 3 holdings – are at the forefront, having developed weight-loss medication which has recently gained approval in the US16 and Australia. Over 40 million adults now have access to obesity drugs, and Morgan Stanley Research predict that the obesity market could grow from $2.4 billion in 2022 to $77 billion by 203017.
Eli Lilly shares saw a near 20% jump in August after their Q2 earnings exceeded expectations, with sales of $11.3 billion and adjusted earnings of $3.92 per share, compared to the consensus estimates of $9.9 billion and $2.6018. The sales of their weight loss drug Mounjaro was cited as a major contributor as the use of such drugs becomes widely accepted. In Australia, the Therapeutic Goods Administration has now approved GPs to prescribe the drug as a treatment for obesity (it was previously only permitted for those with type 2 diabetes)19. Eli Lilly said its global production of Moujaro in the second half of 2024 will be increasing by at least 150% compared to the second half of 202320.
3. QAU Gold Bullion ETF - Currency Hedged : Gold prices hit new highs in August, finishing 2.35% up at the end of the month at $2503 per troy oz21. Soft labour market and inflation data in the US led to (now confirmed) predictions that rates would almost certainly be cut at the next Fed meeting in September. Given the past six US easing cycles have resulted in gold prices rising, it comes as no surprise that investors flocked to it after the economic data was released, adding to already inflated prices due to large central bank purchases22. What’s more, given gold is a non-yielding asset, its relative attractiveness has also begun to rise as real yields fall, further adding to its demand.
The other side of the coin is the currency hedging applied to QAU – historically, the AUD/USD has had the same inverse relationship to US real yields as gold, so hedging returns back to AUD is likely to increase the potential upside at this stage of the cycle as rates are cut and yields fall. Taking the August figures, US Treasury 10-year yields fell by 4.9%, the AUD/USD rose by 3.3%23 and as previously mentioned, spot gold prices increased by 2.35%. The result was that QAU returned 4.11% for the month, while an unhedged physical gold ETF had negative returns of -0.34%24 due to its exposure to the weakening USD as the rate cutting cycle begins.
| Worst* (%) | 1 Month | 3 Month | 6 Month | 1 Year | 3 Year (p.a.) | 5 Year (p.a.) | Since Inception** | Fund Inception Date |
| CRYP | -15.30 | -5.37 | -7.05 | 49.29 | – | – | -26.45 | 2/11/2021 |
| URNM | -13.62 | -27.76 | -17.68 | 7.41 | – | – | 10.24 | 8/06/2022 |
| XMET | -5.20 | -13.49 | 4.98 | -10.58 | – | – | -5.25 | 26/10/2022 |
| TANN | -4.93 | -12.38 | -8.45 | -29.12 | – | – | -18.68 | 8/06/2022 |
| DRIV | -4.12 | -5.54 | -9.12 | -15.27 | – | – | -12.74 | 13/12/2021 |
Source: Morningstar, Bloomberg. As at 31 August 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.
Worst:
1. CRYP Crypto Innovators ETF : The two major currencies in the crypto space – Bitcoin and Ethereum – both fell in August by 24% and 11% respectively25. The decline in each of these predominantly occurred at the start of the month when weak US labour market data and high market volatility led to an extreme risk-off scenario which sent both currencies tumbling – Ethereum fell by over 30% in the first 5 days of August.
While CRYP does not directly hold these (or any other) cryptocurrencies, the companies it does hold, which includes miners, mining equipment companies, and exchanges, are highly sensitive to the price of the coins, as reflected in the 15% drop in CRYP in August – the majority of which occurred in the first week, similarly to the currencies themselves.
Mining companies are perhaps the most exposed, and as a result the two largest detractors from CRYP’s returns were Cleanspark and Riot Platforms, both bitcoin mining companies who lost 30% and 25% from their stock price in that first week of August.
The second half of the month was more promising for the crypto market, as quarterly reports indicated that there has been a 27% increase in institutional buying since the prior quarter, suggesting continued confidence in bitcoin, despite weak quarterly price performance26.
2. URNM Global Uranium ETF : URNM has featured in the ‘worst’ for 3 consecutive months as uranium prices continue their downward trend, falling 6.2% in August27. As has been the case throughout the year, this price movement was driven by a loosening supply chain – this month, the world’s largest uranium producer, Kazatomprom, revised its production guidance for 2024, expecting to produce between 22,500 and 23,500 tonnes of uranium in 2024, up from between 21,000 and 22,500 tonnes previously28.
The US ban on Russian uranium also came into effect on 11th August (although waivers can apply until 2028), unlocking $2.72 billion in federal funding to build out the US nuclear fuel supply chain and support new and existing nuclear power plant operators. The US Energy Information Administration also released domestic production figures for Q1, with production for the first quarter already 64% higher than the total figure for 2023, indicating that onshoring of uranium mining in the US had already begun to take place, even prior to the Russian import ban29.
After announcing a fall in net profits last month, Hong Kong-listed CGN Mining was URNM’s worst performer for the second month in a row, with a 29% fall in the share price, and a 3.15% rise in the Hong Kong Dollar vs AUD30 detracting from returns further. The company has now lost almost half from their share price since the peak in June, although demand in China is set to increase substantially as the country has the most nuclear power plants under construction out of any country at 2631.
3. XMET Energy Transition Metals ETF : Out of the major four metals that XMET provides exposure to, Lithium was the only one to experience a notable downturn in August falling 8%, while copper, nickel and silver ended the month within 1% of their starting price32. Increased supply of lithium has been driving down prices throughout 2024, with increased production from China and Indonesia creating a surplus. Arcadium Lithium has made the decision to defer two of its four expansion projects as a result, with President and CEO Paul Graves stating “the industry does not need to add supply at the same pace as previously expected”33.
Looking to copper, Goldman Sachs researchers are still anticipating prices to rise over the long-term, but they have now delayed their expected timing the peak until post-2025 due to demand from China remaining stronger than expected and inventories building. This, in combination with the property sector weakness has meant that inventory depletion will be slower than expected, pushing back the expected demand timeline34.
In terms of individual holdings in XMET, the worst performer of the month was Endeavour Silver whose Q2 earnings came in behind estimates reporting losses of $0.061 per share, with revenues 11% below expectations35. To compound this a failure at its largest mining site, Guanecevi Mine in Mexico, put the entire site out of action for a week while a temporary fix was made. Even with this fix in place, production is at less than half the typical levels, resulting in Endeavour decreasing their 2024 silver-equivalent production estimates by around 10%36.
*Excludes short and geared funds, aside from currency.**Annualised for funds with more than 1 year’s performance history.^ Represented by BGBL Global Shares ETF
Sources:
1: Morningstar Direct
2: Betashares, Bloomberg
3: Betashares
4: Bloomberg
5: Bloomberg
6: Goldman Sachs Investment Research
7: MSCI
8: Morningstar
9: Morningstar Direct. From 01/01/2001 to 31/08/2024. MSCI Emerging Markets vs MSCI World.
10: ASX
11: Betashares
12: Betashares
13: Startupdaily
14: AFR
15: AFR
16: NIDDK
17: Morgan Stanley
18: Forbes
19: EBS
20: RACGP
22: Mining.com
23: Bloomberg
24: Morningstar Direct
25: Crypto.com
26: Betashares
28: Mining.com
29: S&P Global
30: Google
31: Powermag
34: Goldman Sachs
35: EDR Silver
36: Mining.com
Betashares Capital Limited (ABN 78 139 566 868, AFSL 341181) (Betashares) is the issuer of the Betashares Funds. This information is general only, is not personal financial advice, and is not a recommendation to invest in any financial product or to adopt any particular investment strategy. You should make your own assessment of the suitability of this information. It does not take into account any person’s financial objectives, situation or needs. Past performance is not indicative of future performance. Investments in Betashares Funds are subject to investment risk and investors may not get back the full amount originally invested. No assurance is given that any of the companies mentioned above will remain in the relevant fund’s portfolio or will be profitable investments. Any person wishing to invest in a Betashares Fund should obtain a copy of the relevant Product Disclosure Statement and Target Market Determination from www.betashares.com.au and obtain financial and tax advice in light of their individual circumstances.
Future results are inherently uncertain. This information may include opinions, views, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. To the extent permitted by law Betashares accepts no liability for any loss from reliance on this information.
