How to escape the clutches of the big miners and banks
Newly launched exchange traded fund Global X Australia ex Financials & Resources ETF provides investors with access to a different range of Australian stocks.
One of the problems of index investing in Australia is that we have a couple of sectors on the Australian share market that are hugely dominant.
If you look just at the big four banks and the big miners plus Woodside (ASX: WDS), they represent a staggering 34% of the ASX 200.
They are all really big fish in a small pond, which is why investors are in danger of getting a serious overdose of banks and miners if they just buy an ASX 200 tracker such as the SPDR ASX 200 Fund (ASX: STW), iShares Core ASX 200 (ASX: IOZ) or Betashares Australia 200 (ASX: A200).
The highly popular Vanguard Australian share index fund (ASX: VAS) is a slightly different beast because it includes the top 300 stocks but it would still have a similar concentration issue.
Actively chopping the miners and banks
There are ways around this concentration using other passive and active vehicles including listed investment companies such as Australian Foundation (ASX: AFI) but a newly launched exchange traded fund called the Global X Australia ex Financials & Resources ETF (ASX: OZXX) aims to provide a very different index of 200 leading Australian shares.
By actively cutting out the miners and banks – and also real estate investment trusts (REITS) – the ETF gives quite a distinct and different flavour to the normal index tracking ETF.
Instead of stalwarts such as the Commonwealth Bank (ASX: CBA) and BHP (ASX: BHP) as leading exposures, the biggest holdings in the Global X Australia ex financials & resources are CSL (ASX: CSL), Wesfarmers (ASX: WES), Telstra (ASX: TLS), Woolworths Group (ASX: WOW), and Transurban Group (ASX: TCL).
Focus will be on smaller companies
Obviously, apart from the different top exposures, this ETF will also by definition contain smaller companies than a vanilla ASX 200 tracker, because a big chunk of very large companies have been removed.
In the very long term that might increase returns due to the higher potential for capital growth of smaller companies but during volatile periods this ETF could behave very differently to an ASX 200 tracker.
In tough times, there is always a retreat to the large, well-known companies so this is worth bearing in mind when considering cutting out the big banks and miners.
Higher fees to go active
Another thing to bear in mind is that being a more specialised ETF, fees are a bit higher at 0.25% a year, compared to just 0.04% for the Betashares 200 (ASX: A200).
With compounding, fees add up over the years.
However, the arrival of a new ETF in the form of the Global X Australia ex Financials & Resources ETF (ASX: OZXX) is a great idea because it gives investors thematic access to a very different range of Australian companies.
In the right circumstances, it could certainly be a valuable addition to the Australian equities portion of an investment portfolio.