Question 1: I usually invest in the share market through ETFs (exchange traded funds). I have been hearing some favourable comments about equal-weighted ETFs. Do you think it is better to invest in a market cap weighted ETF such as STW or IOZ, or an equally weighted ETF like MVW?
Answer: Most index ETFs in Australia are market cap weighted ETFs. That is, each stock is weighted according to its market capitalisation. For example, with STW or IOZ that track the S&P/ASX 200 index, the biggest stock, CBA, has a weight or around 10%, while the smallest stock’s weighting is less than 0.1%.
In an equally weighted ETF, such as the VanEck Australian Equal Weight ETF (MVW), each stock has the same weighting. MVW has about 73 stocks, each weighted around 1.4%.
Over the last five years, MVW has underperformed compared to the index and STW or IOZ. In fact, it has underperformed over the last 12 months to the end of December, last 3 years and last 5 years. However, it has outperformed over the last 10 years and longer timeframes.
To some extent, equal weighted ETFs rely on sector and stock rotation to perform well. When one major sector does really well (such as Australian banks over the last two years), they will underperform because they are substantially underweight banks.
I think the jury is out on equal-weighted ETFs, particularly in an Australian market context. They are arguably higher risk than a market cap weighted ETF.
Question 2: I’d be interested in your views on Centuria Office REIT (ASX: COF). We purchased a number of these shares via our SMSF during 2015/16/17 for an average price of $2.19 and enjoyed a couple of good years of return and capital stability. COF is now trading around $1.12, thanks to Covid and the introduction of work-from-home policies by many companies. I expect income from COF to drop further this year as office vacancies appear to have become the norm with advances in technology making it easier to manage staff remotely. Is it time to realise our losses and reinvest elsewhere?
Answer: I’m no fan of commercial office funds (particularly those with second tier and third tier assets), but the sector has been hit pretty hard and Centuria Office REIT (COF) is no exception. The brokers are more sanguine. According to FN Arena, there are 3 “neutral” recommendations and 1 “sell” recommendation (no “buys”). Target price upside is $1.24, about 10% higher than the last ASX price.
On a yield basis, the prospective yield of about 9.3% looks pretty good. There is obviously some risk to this going forward.
I guess if I’d worn the pain from circa $2.19 to about $1.12, I’d be inclined to hang on, but I wouldn’t be expecting any material improvement in the share price in the short term. Interest rate cuts will help the sector and so will more companies encouraging/requiring their employees to work from the office.
Question 3: I see that JB Hi-Fi (JBH) has topped $100. What do the major brokers think?
Answer: Overall, the major brokers feel that the stock is overpriced. However, target prices have been creeping up, and this week Citi raised its target to $110, citing upside risk in earnings. JB Hi-Fi is their preferred stock for retail exposure.
Overall, the consensus target price is $81.44, about 19.1% lower than the last ASX price of $100.64.
Question 4: We set up our Binding Death Benefit Nomination (BDN) and Reversionary Pension Nomination when our SMSF was under Individual Trustees. We converted our SMSF to a Corporate Trustees a few years ago. Should we re-do our BDN and Reversionary Pension Nomination (there is no change to beneficiaries)?
Answer: It will depend on how the conversion was done and whether there was any change to the trust deed. Probably no, but it may be safer to re-do them. For the binding death benefit nomination, your signature must be witnessed by two adults, neither of whom is a beneficiary.
