Key points

• Looking for something to spice up your portfolio, then the third generation of ETFs has an array of new and different asset classes and approaches to consider.
• Some, such as the BetaShares FTSE RAFI Australia 200 ETF, focus on quality. The RAFI ETF uses four fundamental measures of company size.
• Others, like the Market Vectors Morningstar Wide Moat ETF (MOAT) are designed to invest in companies with a “wide moat” – a sustainable competitive advantages that enables a company to fend off competition.

From a standing start in 2001-02 with the $48 million listing by State Street Global Advisors of three funds tracking the S&P/ASX 50 index, the S&P/ASX 200 index and the S&P/ASX 200 Listed Property Trust index, exchange-traded funds (ETFs) have surged to a capitalisation of $18.6 billion in Australia, and there is a population of almost 130 of them.

Investors have been receptive because ETFs have opened up simple, cheap and transparent access to a wide range of asset classes, all through one listed stock.

From first-generation ETFs, which give access to the recognised mainstream market-cap indices, product development has moved through second-generation ETFs, which cover single-countries and sectors, into third-generation ETFs, which encapsulate in a stock exposure to fundamental or factor-based or ‘style-based’ strategies.

Here are five of the newer ETFs that are definitely worth considering for more targeted exposure to Australian shares and international shares – to act as a low-cost complement, or alternative, to existing investments with active fund managers.

1) BetaShares FTSE RAFI Australia 200 ETF (ASX Code:QOZ)

Funds under management: $57 million
Annual management fee: 0.30%

Launched in July 2013 by ETF issuer BetaShares, the QOZ was the first “fundamental” ETF on the ASX. Instead of using stocks’ market capitalisation to determine their weighting in the index, the BetaShares FTSE RAFI Australia 200 ETF uses four fundamental measures of company size. These four factors, developed by Research Affiliates Fundamental Indices (RAFI), are cash dividends, sales, cash flow and “book” value. Using this approach, BetaShares says QOZ avoids overweighting stocks that are overvalued, and underweighting stocks that are undervalued, and weights the portfolio to better reflect its constituent stocks’ economic footprint, instead of their market capitalisation. In the year to March 2015, QOZ earned a total return of 14.82%, versus the S&P/ASX 200 Index’s return of 14.1%.

Source: Yahoo!7 Finance, 6 July 2015

2) Market Vectors MSCI World ex-Australia Quality ETF (ASX Code: QUAL)

Funds under management: $47.6 million
Annual management fee: 0.75%

Launched in October 2014, QUAL is the first “international quality” ETF on the Australian market. It seeks to track the MSCI World ex-Australia Quality Index, an index that contains about 300 international companies selected for what MSCI calls its “quality factor.” This portfolio is selected on the basis of three main fundamental criteria: the stocks must show a high return on equity (ROE), stable year-on-year earnings growth and low financial leverage. At present the top ten holdings are Apple, Microsoft, Exxon Mobil, Johnson & Johnson, Roche, Gilead Sciences, Walt Disney Company, Intel, Home Depot and Pepsico. At 31 May 2015, QUAL’s six-month return, at 14.84%, was running 0.3% behind its index.

Source: Yahoo!7 Finance, 6 July 2015

3) BetaShares Australian Dividend Harvester Fund (ASX Code: HVST)

Funds under management: $101.3 million
Annual management fee: 0.65%

Also issued in October 2014, HVST tries to provide investors with exposure to large-capitalisation Australian shares that pay the best regular franked dividend income, so that HVST can offer a yield that is at least double the annual income yield of the broad Australian sharemarket. BetaShares says the fund was specifically designed for the needs of self-managed super funds (SMSFs) and retirees. BetaShares says HVST uses a risk management strategy that aims to reduce the volatility of share investment returns, and defend the portfolio against the risk of significant losses. At present the top ten holdings are Transurban Holdings, Stockland, Sydney Airport, Commonwealth Bank, Westpac, BHP Billiton, ANZ Bank, National Australia Bank, Telstra and Wesfarmers. At 30 June 2015, HVST was showing a return since inception of –1.84%, but holders had received $1.33 in distributions.

Source: Yahoo!7 Finance, 6 July 2015

4) The Market Vectors Morningstar Wide Moat ETF (ASX Code: MOAT)

Funds under management: $1.1 billion (NYSE + ASX)
Annual management fee: 0.49%

The famous Morningstar concept of a “wide moat” – that is, the sustainable competitive advantages that enable a company to fend off competition, increase earnings, earn high returns on capital and compound intrinsic value over the long term – is encapsulated in the MOAT ETF, which is designed to track the overall performance of the 20 most attractively priced US companies with sustainable competitive advantages according to Morningstar’s equity research team. At 30 June 2015 the top ten holdings are Williams Companies (energy), Blackbaud (fundraising software for not-for-profits), Harley-Davidson, Polaris Industries (snowmobile, all-terrain and electric vehicle maker) Oneok (energy), Discovery Communications (entertainment), VF Corporation (branded clothing), 21st Century Fox, Amgen (bio-pharmaceuticals) and Varian Medical Systems (medical and imaging devices and software.) MOAT was only opened for trading on ASX last month.

^US Performance

Source: Yahoo!7 Finance, 6 July 2015

5) Market Vectors Australian Equal Weight ETF (ASX Code: MVW)

Funds under management: $37.4 million
Annual management fee: 0.35%

Launched in March 2014 by Market Vectors, the ETF business of US-based investment manager Van Eck Global, this ETF was designed to obviate the high level of concentration at the top end of the Australian market, which causes most of the ETFs that track the most common Australian indices, for example the S&P/ASX 200, to be overweight the big four banks, the big miners and Telstra. The MVW portfolio holds 73 liquid ASX-listed securities, which each have an equal weighting, which is designed to limit both stock and sector concentration, and capture for investors the true performance of the Australian stock market. In its first full year, MVW returned 18.16%, outperforming the S&P/ASX 200 Accumulation Index (which counts capital gain plus dividends) by 3.6%. That made MVW the best performing ASX-listed broad-based equity ETF for the 12 months ending 31 March 2015.

Source: Yahoo!7 Finance, 6 July 2015

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.