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Betashares Australian Ex-20 ETF (EX20) helps overcome diversification issues in index

ETF Watch - Oct 10, 2016

If there’s one common theme that comes through in the argument against index investing in Australia, it’s the high weighting of the flagship S&P/ASX200 index to just a few companies, specifically banks and miners, limiting the usefulness of index investing for diversification benefits. This means whilst invested in the top 200 Australian companies, investor’s returns are highly correlated to the fortunes of a few companies whose own performances are highly correlated to each other.

To see the extent of the index weighting the below table shows the top 20 companies on the ASX 200 by Market Capitalisation:

Ticker Company Index Weighting Sector
CBA Commonwealth Bank 8.25% Financials
WBC Westpac Banking Corp 6.61% Financials
ANZ ANZ Banking Group Ltd 5.31% Financials
NAB National Aust. Bank 4.82% Financials
BHP BHP Billiton Ltd 4.82% Mining
TLS Telstra Corporation 3.98% Telecommunications
WES Wesfarmers Ltd 3.29% Consumer Goods
CSL CSL Ltd 3.12% Healthcare
WOW Woolworths Ltd 1.97% Consumer Goods
MQG Macquarie Group Ltd 1.83% Financials
WPL Woodside Petroleum 1.61% Mining
SCG Scentre Group Stapled Securities 1.54% Property
RIO RIO Tinto Ltd 1.42% Mining
TCL Transurban Group Ordinary Shares/Units FP Triple Stapled 1.39% Utilities
BXB Brambles Ltd 1.25% Logistics
WFD Westfield Corp Stapled Securities 1.25% Property
AMC Amcor Ltd 1.15% Packaging
SUN Suncorp Group Ltd 1.04% Financials
RHC Ramsay Health Care 1.04% Healthcare
AMP AMP Ltd 1.03% Financials
  Total 56.74%  

The above table shows a phenomenal 57% of the S&P/ASX200 index is made up with the top 20 companies, with 29% of that being Financial Stocks. Of course the risks of Australia’s biggest 4 companies, CBA, Westpac, ANZ and NAB are highly correlated to each other, meaning a whopping 25% of the ASX 200’s fortunes are tied to the success of our big banks. If that doesn’t convince you of the concentration to the top end of town, the below chart shows the makeup of the top 200 companies of the index by market capitalisation.

Betashares Australian Ex-20 Portfolio Diversifier ETF (EX20) helps to solve this problem

Betashares, possibly buoyed by poor performance of large caps in recent times (hence weighting down index returns) have recently launched the ETF Betashares Australian Ex-20 Portfolio Diversifier ETF (EX20) aimed at overcoming this inherent issue of the makeup of the ASX 200 by excluding the top 20 companies. The result is a fund with much lower weightings to the Finance Sector and a more balanced weighting across the remaining 180 companies in the index. The chart below shows the relative weights of the S&P/ASX200 index and the index excluding the top 20 stocks.

It can be seen that the allocation across the remaining 180 stocks in the index is much more evenly spread, with the biggest fund making up just 2.38% of the 180 index, compared to CBA making up 8.25% of the S&P/ASX200 index. Of course the disadvantage for investors is the lack of exposure to Australia’s biggest companies, including our biggest banks and miners.

What other options are available to investors in this space?

The new fund offered by Betashares is the first of its kind to specifically exclude the top 20 companies of the S&P/ASX200 index. However, for investors who are looking for a more balanced exposure to the Australian share market, an alternative exists. The Vaneck Vectors Australian Equal Weight ETF (MVW) provides exposure to  Australia’s largest and most liquid companies in an equal weighted manner, meaning investors have equal exposure to the largest and 50th largest company in the index. This helps to overcome the skew of the S&P/ASX200 to the largest companies. Investors should be aware that this fund does not hold all companies in the S&P/ASX200 index, and includes other criteria such as liquidity and country of earnings.

Betashares Australian Ex-20 Portfolio Diversifier ETF is an interesting addition to Australia’s ETF Market and we're keen to see how successful this fund is. The fund has management fees of 0.20% pa. This post should not be considered as investment advice and we recommend investors perform their own research before investing.

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