Australian Equal Weight: The proof is in the pudding

VanEck Vectors Australian Equal Weight ETF (ASX code: MVW) is one of the top performing Australian equity strategies when compared to the Morningstar Australian equity peer group. MVW outperformed the S&P/ASX 200 Accumulation Index by 0.82% in August, with YTD outperformance of 2.21%.

In August, the sectors that contributed the most to MVW’s outperformance were the underweight positions in financial ex A-REITs and overweight positions in energy compared to the S&P/ASX 200 Index.

At a stock level, the underweight positions in Commonwealth Bank (which was down 7%), Telstra (-7%) and Westpac (-2%) and the overweight positions held in Whitehaven Coal (+18%) and IOOF (+13%), drove MVW’s outperformance for the month.

The proof of the pudding is in the eating

A number of academic and commercial studies have concluded that equal weighting as an index approach achieves a superior total return outcome[i].  The reasons identified by academics for the outperformance include:

• Higher relative exposure to smaller stocks, which have greater potential for growth, rather than over-researched large stocks, which have limited opportunities for growth;

• A value bias; and

• Inherent contrarian trading strategy.

Contrarian trading:

Each quarter MVW is rebalanced to match the index it tracks, the MVIS Australia Equal Weight Index. All stocks are ‘reset’ to be equally weighted.  This process involves an inherent contrarian trading strategy as it requires MVW to sell stocks that have risen above the average since last rebalance and buy stocks that have fallen below the average since the last rebalance.  For example, during the second quarter of 2017, Whitehaven Coal (WHC) fell significantly from its April highs, which meant that during the June rebalance MVW bought more WHC.  Last month WHC returned 18% in August and was one of the biggest contributors to MVW’s outperformance in August. The attribution effect was 0.13% in June and 0.21% in August.

Higher exposure to smaller stocks and lower exposure to larger stocks:

In addition to being overweight small stocks such as WHC, MVW is underweight the larger stocks on the ASX.  Last month’s underweight positions in Commonwealth Bank (which fell 6.9%), Telstra (down 6.6%) and Westpac (down 1.7%) contributed to MVW’s relative outperformance

Long term performance of MVW

Since inception in March 2014, MVW has outperformed the S&P/ASX 200 by 4.26% p.a.

MVW’s long term performance is not just about being underweight financials

The attribution data since inception (below) shows the underweight allocation to the financial sector, relative to the S&P/ASX 200, has only added a small contribution to relative outperformance. But attribution from having different individual stock weights than the S&P/ASX 200 within that sector, by being overweight smaller financials and underweight larger companies, has added 1.06% per annum to relative performance. For example, being overweight Challenger relative to the market index and being underweight ANZ and Westpac, added significantly to MVW’s outperformance of the benchmark index.

Within materials, positions that have added the most to relative outperformance since inception include being underweight large miner BHP Billiton and being overweight Fortescue Metals Group. Being relatively overweight Newcrest Mining compared to the S&P/ASX 200 also added to MVW’s outperformance.

In the industrials sector, MVW has almost double the percentage weight compared to the S&P/ASX 200.  This overweight allocation has added 0.79% to MVWs relative outperformance.  Within industrials, from having different stock weights than the S&P/ASX 200 within that sector added 0.74% to relative performance with the overweight allocation to Qantas accounting for 0.50% of MVW’s relative outperformance alone since inception.

Using MVW

Financial advisers, brokers and their clients are continuing to replace traditional benchmark strategies with MVW as their core Australian equities position. The reasons for this are compelling:

1. Cost – MVW’s cost is 0.35% p.a. which is much lower than active managers, allowing investors to reduce portfolio costs.
2. Diversification – MVW is close to three times more diversified than the S&P/ASX 200, as measured by the Herfindahl Index.
3. Performance – MVW is a proven strategy that has outperformed the S&P/ASX 200 by an average of more than 4.2% p.a. over the past two and three years.
4. Style – The equal weight ETF is unique and blends well with other high conviction stock/manager satellite positions, without creating overlap.
5. Consistency – This is a rules based strategy. No manager views, no single stock bets, you know exactly what you’re going to get and the strategy will always be the same.
   
   

^{IMPORTANT NOTICE:}

^{This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity of the VanEck Vectors Australian Equal Weight ETF (MVW) (‘Fund’). This is general information only and not financial advice. It is intended for use by financial services professionals only. It does not take into account any person’s individual objectives, financial situation nor needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser and consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the Fund.}

^{MVIS Australia Equal Weight Index (‘MVIS Index’) is the exclusive property of MV Index Solutions GmbH based in Frankfurt, Germany (‘MVIS’). MVIS makes no representation regarding the advisability of investing in the Fund. MVIS has contracted with Solactive AG to maintain and calculate the MVIS Index. Solactive uses its best efforts to ensure that the MVIS Index is calculated correctly. Irrespective of its obligations towards MVIS, Solactive has no obligation to point out errors in the MVIS Index to third parties.}

^{[i] CSIRO and Monash Superannuation Research Cluster support equal weighting here} 

^{London University's Cass Business school's findings are here}

^{EDHEC Risk Institute findings are here}

^{These all support our own research here}