Diversifying Australian Equities Exposure Without Banks, Miners and Energy
Investors looking at Australian shares ETFs often wonder which road to take. While the obvious choice may be to buy a low-cost S&P/ASX 200 index fund, this approach has limitations – especially for investors that already own shares in the banks and miners, or for those with aversions to fossil fuels.
From Global X’s perspective, a helpful way to invest in Australian shares is to use a low-cost index fund – but one that makes important exclusions, especially around the stocks many Australians already own. In this way, Australians can help decarbonise their portfolios while avoiding doubling down on existing exposures. We unpack our reasoning below.
- Many Australians already own stocks in the banks, mining, and energy companies – with trading data suggesting they are some of the most popular stocks with direct investors.
- Australians can use core equity ETFs that excludes these sectors to help complete a portfolio.
- Removing these stocks has also aided performance in recent years as it provides a tilt towards growth sectors like healthcare and technology.
Australians Already Own Shares in the Big Banks and Miners
When building portfolios, investors need to monitor how often and where they are doubling down on stocks. Often without realising it, investors can buy the same shares repeatedly. Doing so can add risk and can damage performance. For this reason, investors should always check to what degree an ETF’s holdings overlap with their existing positions. And indeed, a key benefit of ETFs is that their transparency allows investors to carefully monitor what stocks they hold.
To give an example of this process with our own funds, the Global X FANG+ ETF (FANG) gets 20% of its weight from semiconductor giants Nvidia and AMD at each rebalance. FANG investors must therefore keep this in mind when considering other technology or thematic ETFs – like robotics or video games – as these two stocks appear prominently in funds like these as well.
In a similar way, many Australians already own shares in the big banks. According to Morgan Stanley, Australian retail investors own roughly 48% of the big four’s float (Commonwealth Bank, NAB, Westpac and ANZ) as of late-2022.1 And the Australian proclivity for buying miners is well known. Miners made up the majority of the top 10 most purchased shares on CommSec and CMC – the two largest retail brokerage platforms by market share – over the past 12 months. This is shown in the tables above.
This widespread ownership, and common trading of the banks and miners suggests some Australians may find value in index funds that exclude these sectors. Excluding these sectors prevents duplication of holdings and gives investors the freedom to express views on miners. And as the S&P/ASX 200 gets almost half of its weight from the financials (banks) and materials (miners) sectors, the latitude afforded by these exclusions is significant.
Sector Diversification and Potential Growth Tilt
After financials (including REITs), materials and energy sectors are removed from a broad based Australian index, there is a greater emphasis on other sectors which may be underrepresented in a portfolio such as healthcare, information technology, as well as consumer discretionary and staples. Tellingly, the top ten holdings of OZXX looks vastly different to a S&P/ASX 200 or 300 fund. As shown in the below table, seven of the top ten stocks in the ASX 200 are removed in OZXX.
Company weightings are also notably different in a fund which removes these major players. BHP on its own, makes up more than 11% and the top 20 stocks constitute approximately 62.5% of the ASX 200. This can be further illustrated by looking at the market capitalisation of the respective top 10 stocks where the S&P/ASX 200 top 10 is more than twice the size at $1 trillion, compared to OZXX which equals $442.2 billion. Similarly, comparing the average market cap across each index we see the ASX 200 averages $12.8 billion, whilst OZXX $8.6 billion. Overall, this allows mid-cap companies to be proportionately more influential on the result of the index – in turn, creating a greater exposure to growth potential.
S&P/ASX 200 But With Less Carbon and More Growth
Australian investors are growing increasingly climate conscious, with many concerned about fossil fuel investment. Whilst OZXX is not an ESG or green fund, it does exclude companies from the materials and energy sectors, hence removing a large portion of major fossil fuel producers. Most fossil fuel producers are either classified as mining companies (such as Whitehaven Coal) or energy companies (such as Woodside and Santos).
According to data from MSCI, the S&P/ASX 200 has one of the highest fossil fuel intensities of any developed country benchmark. This is reflected in the high percentage of revenue derived from fossil fuels (and low percentage from green energy). But also in the carbon dioxide output, the average ASX 200 company requires to produce $1 million of revenue.
As such, OZXX draws significantly less revenue from fossil fuel production compared with the S&P/ASX 200. The deduction on this is to say OZXX can be regarded as a lower carbon investment than the broad Australian share market.
However, the fund includes utilities companies such as AGL and Origin that are major consumers of fossil fuels. As such we, again, do not classify OZXX as being an ESG or green ETF. Furthermore, the Solactive Australia Ex Financials Materials And Energy Capped Index – the index tracked by OZXX – does not include any explicit ESG filters in its methodology. As such, stocks are neither screened nor weighted based on any type of ESG criteria.
Index funds tracking the S&P/ASX 200 provide an important service. They give investors a way to cheaply capture the average share market return. And with best evidence suggesting that low-cost index funds outperform the majority of active money managers long term,2 low-cost index funds have been a crucial force for fee compression and accountability in the funds management industry.3
However, S&P/ASX 200 index funds are not for everyone. Many investors already own many of the major holdings – especially the banks and miners. For those that may fall into these categories, the Global X Australia ex Financials and Resources ETF (OZXX) may have something to offer. Particularly those looking to complete their portfolio and access greater sector diversification.
OZXX: For investors wishing to gain efficient diversification in the Australian market, the Global X Australia ex Financials and Resources ETF (OZXX) offers a solution. Gain diversification by investing in Australia’s top 100 companies, excluding those in the financial (including REITs), basic material and energy sectors.
Click the fund name above to view the fund’s current holdings. Holdings are subject to change. Current and future holdings are subject to risk.