Long-term thematic trends, increasing demand for exposure to the technology sector, sustainable investing, and the rise of ‘smart beta’ investing, have largely driven the release of three new BetaShares funds.

Investing in companies at the forefront of tackling climate change

Global warming is one of the defining challenges of the 21st century, and research from BetaShares and Investment Trends has found climate change is among the top environmental, social and governance (ESG) concerns for Australian investors, with 42% of survey respondents listing it as their primary concern[1].

The scale of the challenge the world faces means that a focus on renewable energy is essential, but, by itself, not enough.

A broad range of solutions that directly enable the reduction or avoidance of carbon emissions is needed, including clean energy, electric vehicles, energy efficiency technologies, sustainable food, water efficiency and pollution control.

From an investment perspective, exposure across a comprehensive range of sectors which are expected to benefit as the global economy transitions to a more sustainable model should provide greater diversification benefits than a portfolio concentrated in fewer stocks focused solely on a particular sector.

To tap into the long-term growth potential of the climate change theme, BetaShares has launched the Climate Change Innovation ETF (ERTH).

ERTH’s portfolio comprises up to 100 leading global companies that derive at least 50% of their revenues from products and services that help to address climate change and other environmental problems through the reduction or avoidance of CO2 emissions.

ERTH can be used as a component of a portfolio constructed to be consistent with ethical and sustainable objectives, or may be implemented as a focused exposure to the climate change thematic.

Going sky high with cloud computing

The standout global sector of recent years from an investment perspective has undoubtedly been technology.

Cloud-based computing services has been one of the fastest-growing segments within the global technology sector in recent years, and that growth is tipped to continue, with revenues grow by 17.5% p.a. to US$832 billion by 2025[2].

The shift from on-premises to cloud-based computing services has been an important innovation, offering both consumers and business added flexibility and cost-savings in managing their activities in the digital age.

The benefits of cloud-based computing have become especially evident in the past year due to the COVID-19 related need to facilitate remote ‘working from home’, online shopping and media consumption.

Due to scale economies and network effects, cloud-based service companies have enjoyed relatively high profitability and ‘sticky’ recurring revenue streams – which in turn have delivered strong returns to investors to date.

The BetaShares Cloud Computing ETF (CLDD) aims to access the growth potential of this sector, by tracking an index of leading listed cloud computing companies, across both developed and emerging markets.

From inception in November 2013 to end February 2021, the index CLDD which aims to track, returned 34.4% p.a., compared to 12.4% p.a. for the MSCI World Index, and 24.8% p.a. for the NASDAQ-100 Index[3].

CLDD can be used in an investment portfolio as a complement to a broad-based technology exposure or as a tactical allocation to the cloud computing thematic.

Achieving a better balance for your portfolio

Since the launch of the first index funds in the 1970s and ETFs in the 1990s, the most popular form of passive investment benchmarks are those where constituent stocks are weighted according to their size (market capitalisation).

However, critics of market capitalisation-weighted indices highlight the fact that investors using such indices ultimately buy more of the overpriced stocks and less of the underpriced.

Equal weighting provides an alternative approach, in which each stock in an index is allocated an equal weighting, regardless of the company’s size. It is an example of a ‘smart beta’ strategy, which basically means any rules-based approach that is not based on market capitalisation.

The BetaShares S&P 500 Equal Weight ETF (QUS) aims to track the performance of the S&P 500 Equal Weight Index, which is the equal weight version of the widely-used market cap-weighted S&P 500 Index. The two indices include the same constituents, but in the equal weight version, each company is allocated a fixed, equal weight at each quarterly rebalance.

An equal weight exposure can provide your portfolio with increased sector and size (away from mega-caps) diversification compared to a market capitalisation approach. Equal-weighting seeks to benefit by avoiding the susceptibility of market cap-weighting approaches to occasionally become overly concentrated in large stocks that have enjoyed strong price momentum for some time – as is currently the case in the US where the mega-cap tech stocks have performed strongly in recent years.

Historically, an equal-weighted approach has generally tended to outperform a market cap-weighted approach when there has been a return to lower market concentration in large stocks.

The S&P 500 EW Index has outperformed the S&P 500 Index by more than 2% p.a. over the last 20 years to end February 2021.[4]

That said, over the shorter run, the equal weighted index has gone through periods of underperformance – when larger cap stocks have had periods of outperformance.

QUS provides investors seeking US equity exposure with diversification benefits and a less concentrated US equities portfolio, along with the potential performance benefits of an equal weighted approach.

Note: This article is for general information purposes only and products listed are not recommendations.

[1] BetaShares/Investment Trends ETF Report 2020.
[2] Source: Research and Markets, “Cloud Computing Market by Service Model (Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS)), Deployment Model (Public and Private), Organization Size, Vertical, and Region – Global Forecast to 2025″, August, 2020. Actual outcomes may differ materially from forecasts.
[3] Source: Bloomberg, 8 November 2013 to 28 February  2021. Past performance is not an indicator of future performance of the Index or CLDD. Does not take into account CLDD’s fees and costs. You cannot invest directly in an index. CLDD’s returns can be expected to be more volatile (i.e. vary up and down) than a broad global shares exposure, given its concentrated sector exposure.
[4] Source: Bloomberg, as at 28 February 2021. Past performance is not an indicator of future performance of the Index or QUS. Does not take into account QUS’s fees and costs. You cannot invest directly in an index.