Betashares Best & Worst – July 2024

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Welcome to Betashares Best & Worst for July 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.

July saw the beginning of what has been dubbed ‘the great rotation’, as the large cap US tech stocks that have powered global equity market returns for the first half of 2024 finally gave way to a surge in small caps and a factor rotation from growth to value. The cause for this rotation was two-fold. Firstly, a softer than expected US CPI print changed the economic narrative to one in which inflation is finally coming under control, spurring investors’ expectations of a September rate cut. This was a boon for small caps, who are much more likely to carry floating rate debt than their large cap counterparts, who were largely able to issue long-term fixed rate debt while interest rates were still low. At the same time, disappointing earning from some large cap tech stocks led investors to question when the payoff from the billions of dollars that the firms have invested into AI might occur¹.

Similarly to the US, in Australia small caps and Financials were the best performing market segments, while overseas markets such as Europe and Japan proved lethargic. In fixed income, duration enjoyed gains on the back of the renewed rate cut expectations, while in FX markets the Australian dollar weakened in the second half of the month thanks to a combination of stronger than expected US GDP data and concerns over a slowdown in the Chinese economy and associated pressure on commodity prices².

As the long running market narrative changes, investors are looking for ways to play the rotation trade. For the spotlight section this month we’ll focus on 3 funds that take a different approach to the large cap, market cap weighted exposures through either alternative weighting or selection of smaller stocks.

Source: Morningstar, Bloomberg. As at 31 July 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:

• QUS S&P 500 Equal Weight ETF : The S&P 500 Index is one of the best-known equity benchmarks in the world, known for its diversification and coverage of the largest US listed companies. However, thanks to its pure market cap weighting, it can at times suffer from concentration risk as the largest stocks begin to take up an outsized weighting in the index. Since 1970, the concentration of the S&P 500, as measured by the weight of the 5 largest constituents, has fluctuated from a low of just over 10% in the mid-1990s to a record high over 25% in 2024. This has the effect of decreasing portfolio diversification and increasing risk, especially given the top names are all tech-related. The S&P 500 Equal Weight Index, which QUS aims to track, looks to mitigate these concerns by assigning an equal weight of 0.2% to each of the 500 constituents at each quarterly rebalance. This gives a much larger total weighting to the small-cap portion of the index, which as well as helping to diversify across a much larger number of stocks, also provides the long-term growth benefit that smaller companies have tended to exhibit on average over the long run. And intuitively, the S&P 500 Equal Weighted Index has historically outperformed its market cap weighted counterpart during periods where concentration has fallen³. While QUS has underperformed the S&P 500 Index since its inception in December 2020, this has coincided with a period of returns driven by the top end of the equity market. For investors who believe that the recent surge in smaller stocks will be a lasting trend, QUS is an effective way to express that view while still holding the same stocks that comprise the S&P 500.
• JNDQ Nasdaq Next Gen 100 ETF : The Nasdaq Next Generation 100^TM Index (NGX), which JNDQ aims to track, is designed as a mid-cap focused complement to the more well-known Nasdaq-100 Index. It follows very similar rules to the Nasdaq-100, except it holds the next largest 100 companies, or approximately the 101^st-200^th largest non-financial companies listed on the Nasdaq exchange. This allows investors to gain exposure to the ‘rising stars’ of the Nasdaq at an earlier stage of their growth journey. On average over the last 15 years, 6 companies have ‘graduated’ each year from the NGX to the Nasdaq-100 (backtested prior to NGX’s August 2020 inception). Notable graduates have included Netflix, Tesla and AstraZeneca. Looking at the full history of graduates, the 12 months prior to making it into the Nasdaq-100 Index proves to be a crucial period in their growth journey, with the stocks returning an average of 82.3% during this period⁴. Additionally, the top stocks in NGX tend to have weights of around 2-3% (with a hard cap at 4%), compared to as low as 0.10% when they initially graduate into the Nasdaq-100. This gives investors in JNDQ the potential to benefit from holding these companies at a relatively large weighting during a pivotal point in their history. Aside from size, NGX exhibits a lot of similar traits to the Nasdaq-100, such as a focus on the top 3 ‘new economy’ sectors (Tech, Consumer Discretionary + Health Care) and high levels of R&D spending and patent filings compared to similar benchmarks⁴. This makes it a useful exposure for investors looking to rotate from large to mid-caps while still maintaining a similar sector exposure to the Nasdaq-100.
• SMLL Australian Small Companies Select Fund (managed fund) : While the Australian and US markets are very different in many ways, one area in which they have been similar in recent years has been that returns have been largely driven by the largest part of the market, with small caps often lagging. Despite not being as exposed to AI as their US counterparts, Australian large caps have many of the same features which have driven recent returns. Particularly, they have been much less exposed to rising interest rates thanks to their ability to issue long term fixed rate debt. While it looks like Australia may take longer to start lowering short term rates than the US according to current market pricing, we are still priced in for rate cuts to begin in 2025, providing relief to the bottom line of many small cap companies. As well, for investors who may be hesitant to invest near the market’s record highs, small caps may offer an attractive exposure that has been relatively neglected over the past market cycle⁵. SMLL offers exposure to the Australian small cap market, while attempting to mitigate some of the traditional drawbacks of small cap stocks. It achieves this using screens that aim to identify companies with positive earnings and a strong ability to service their debt, as well as filtering out companies with unfavourable value, momentum or liquidity metrics. This is designed to avoid low quality, unprofitable companies that can be a drag on small cap indexes, with the aim of outperforming the S&P/ASX Small Ordinaries Accumulation Index over the medium to long term after fees and expenses. Since inception on 07/04/2014, SMLL has returned 6.90% p.a. (up to 31/07/24), outperforming the benchmark return of 6.24% with all of the outperformance attributable to superior security selection rather than sector tilts.

Source: Morningstar, Bloomberg. As at 31 July 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Best:

• MNRS Global Gold Miners ETF - Currency Hedged : Miners are often seen as a leveraged play on the underlying commodity thanks to their operating leverage – therefore, with gold prices rising by around 4% in July to reach all-time highs, all bar two of the underlying companies held by the fund saw positive returns, helping to drive MNRS to the top of the ‘best’ for the month. This positive movement came primarily in the first half of the month with strong indications that the Federal Reserve will begin their easing cycle in September, bumping gold’s price as its relative attractiveness increases in (predicted) lower rate environments⁷. In addition, negative rhetoric towards China from both sides of the US presidential race added to already heightened geopolitical instability, particularly prevalent in the Middle East after a series of assassinations by Israel, including the Hamas leader Ismail Haniyeh in Iran⁸. This, in combination with July’s weak economic data has caused ‘safe haven’ demand for gold to rise amongst central banks and investors, pushing up prices and the resulting valuations of companies involved in the metal’s supply.
• ERTH Climate Change Innovation ETF : The forecasts of rate cuts have also been to the benefit of companies involved in large-scale environmental projects who often rely on borrowing to finance these ventures. EVgo and ChargePoint, two EV charging network companies based in the US gained 60% and 47% respectively for the month, assisted by further positive sentiment towards electric vehicles, and stronger-than-expected second-quarter deliveries from Tesla and Rivian⁹ whose stock each grew 20% and 25% in the month. The cool economic data and anticipated easing cycle was also reprieve for the solar sector which has been punished by the high rates – Sunrun, a solar panel and battery storage company returned 51% for the month, and the Betashares Solar ETF (ASX: TANN), was the fifth highest performing fund in the Betashares suite in July.
• INCM Global Income Leaders ETF : Utilities, financials and consumer defensives saw outperformance in July, while communication services and technology were the worst performers, benefitting INCM which has strong overweights/underweights to each of these sectors. INCM’s excess returns from these sector tilts vs the broad global market^{^} was 2.66%. The rotation into these sectors and away from the large tech stocks indicated a shift in sentiment, with investors favouring more stable income and attractive valuations, particularly in an uncertain market with central banks trying to feather the monetary throttle and ease into a soft landing. Nerves around extreme concentration in the market also likely played a part, and somewhat disappointing earnings releases from the magnificent 7 also led investors to look elsewhere for returns¹⁰, with a rotation into the lagging smaller, income-oriented stocks found within INCM’s basket providing a further 2.20% of outperformance.

Source: Morningstar, Bloomberg. As at 31 July 2024. Past performance is not an indicator of future performance of any index or fund. All performance figures quoted in AUD.

Worst:

• URNM Global Uranium ETF : Shifts in the uranium market have been linked to variations in supply as of late, while demand remains firmly intact with nuclear power tagged as an essential part of a net zero future. The biggest news was the announcement of increased tax on uranium mining in Kazakhstan, comfortably the biggest supplier in the world. The tax will increase by half from 6% to 9% starting in January, then in 2026, a graduated structure based on output would see the tax rate increase to 18% for more than 4,000 tonnes of uranium concentrate U3O8 produced and as little as 4% for less than 500 tonnes¹¹. The two largest holdings of URNM – Kazakhstan based Kazatomprom, and Cameco, a Canadian firm who have a 40% stake in a Kazakh mine – detracted a combined 1.38% from the fund’s return following the announcement¹². Hong Kong listed CGM Mining was the single biggest detractor though with a -1.03% contribution to fund returns in July. After announcing a fall in net profits, the company cited the “increasingly challenging tax environment in Kazakhstan and the tightening of the tax policy standards in practice in 2024”¹³. Uranium prices fell by a relatively modest 1.52% over the month which will also have been a slight headwind, but this was seen as “a natural correction within the broader context of a bullish market cycle” by Sprott ETF product manager Jacob White¹⁴.
• AUDS Strong Australian Dollar Fund (hedge fund) : Over the course of 2024, US growth expectations have gradually been increasing. As a result, Fed policy expectations have become more hawkish – In January, predictions were that rates would be below 4% by December; this has moved up by around 1% to now sit at ~5% as at July 2024¹⁵. Promising growth prospects and ‘higher for longer’ rate expectations have both been good for the USD, strengthening the US Dollar Index (a measure of average USD strength relative to a basket of major currencies). Conversely, July brought softer US economic data¹⁶ and while the U.S. Dollar Index dipped slightly¹⁷, the USD strengthened by 2% vs the AUD¹⁸, inferring that it was Australian Dollar weakness (rather than USD strength) which brought negative returns to AUDS. Driving this was Australian CPI coming in close to RBA forecasts, which was enough to snuff out suggestions of RBA rate hikes this year following a hot CPI print in June¹⁹. The cyclical nature of the Australian economy and sensitivity of the Australian Dollar to global growth brought about a sharp fall in the AUD, exacerbated by the gearing of AUDS and leading to a total return of -3.94% for the fund.
• OOO Crude Oil Index ETF - Currency Hedged (Synthetic) : The combination of decreasing demand prospects and a bump in realised and expected supply saw oil prices decline in July. Crude oil imports to China fell to their lowest level since the 2022 lockdowns with their economy continuing to slow²⁰, and the weaker than expected US data¹⁶ further pushed prices down. World supply rose slightly by 230 kb/d in July driven by an OPEC+ (Organization of the Petroleum Exporting Countries) increase²¹ – although the group are still curtailing output in order to stabilise the market in the face of low demand. From here though, expectations are that the organisation’s next move will be to relieve restrictions, bringing a bearish outlook on oil. Even if the OPEC+ supply cuts remain in place, production from non-OPEC+ countries is set to increase, bolstering reserves and putting further downward pressure on prices²⁰.

For trailing performance of all Betashares funds please see: Betashares Monthly Performance – July 2024

*Excludes short and geared funds, aside from currency.**Annualised for funds with more than 1 year’s performance history.^{^} Represented by Betashares Global Shares ETF (ASX: BGBL)

Sources:

1. Investopedia

2. IG

3. Betashares

4. Betashares

5. Motley Fool

6. Bloomberg, Betashares

7. Reuters

8. ABC News (US)

9. Barron’s

10. Betashares

11. Mining.com

12. Morningstar Direct

13. CGNMC

14. NT News

15. Morgan Stanley

16. Betashares

17. Bloomberg

18. RBA

19. WATC

20. Trading Economics

21. IEA