Navigating the ETF Landscape: Active vs Passive and Top Picks for 2024
The active versus passive investing debate is a perennial topic, but as market conditions shift, so too does the optimal balance for a portfolio. In a recent discussion, financial advisers Andrew Violent of DP Wealth Advisory and Adam Doors of Shore and Partners argued that a blended approach is often the most prudent strategy, while also highlighting specific exchange-traded funds (ETFs) they favour across various asset classes.
The Active vs Passive Debate: A Nuanced View
Both experts agree that the dichotomy between active and passive management is not a binary choice. Instead, the current environment calls for a strategic blend, with each approach serving a distinct purpose.
Key arguments for active management include:
- Inefficient Markets: Certain areas, like Australian small caps and bonds, are less efficiently priced, creating opportunities for skilled managers to add alpha.
- Stock Picker’s Market: With major indices near all-time highs and valuations stretched, active managers can potentially avoid overvalued names and capitalise on specific opportunities.
- Risk Management: Active strategies, particularly those employing long/short techniques, can better navigate market downturns and protect capital.
Key arguments for passive management include:
- Cost Efficiency: Low-cost passive ETFs provide broad market exposure, which is ideal for core portfolio holdings and investors with smaller balances.
- Guaranteed Market Return: Passive investing ensures you capture the full return of the index, including the performance of mega-cap winners that active managers may be underweight.
The discussion highlighted that passive investing “cuts both ways,” providing upside from stocks like Commonwealth Bank (ASX: CBA) but also exposing investors to significant single-stock risk, as seen with the recent sell-off in CSL Ltd (ASX: CSL).
Top ETF Picks Across Asset Classes
The advisers provided actionable ideas for investors looking to bolster their portfolios, covering income, global growth, thematic trends, and alternative assets.
1. Income-Focussed ETFs
For reliable, low-cost income from Australian equities, Andrew Violent recommends the Vanguard Australian Shares High Yield ETF (ASX: VHY).
- Strategy: Tracks an index of ASX-listed companies with high forecast dividend yield.
- Key Stats: ~$5 billion FUM, 0.25% management fee, 4.6% dividend yield.
- Holdings: Diversified across ~75 names, including major banks, though it is underweight CBA relative to the index.
For investors seeking higher, monthly income with international diversification, Adam Doors suggests the JPMorgan Global Income ETF (ASX: JPIN).
- Strategy: An international equity income fund that uses an options overlay to enhance yield.
- Key Stats: ~6% yield, pays monthly, management fee of ~0.40%.
- Note: The options strategy adds complexity and risk, making thorough due diligence essential.
2. Global Growth Exposure
To capture global equity growth with active risk management, Adam Doors favours the Plato Alpha Global Fund (ASX: PGA1).
- Strategy: A long/short global equity fund that can profit from both rising and falling markets.
- Performance: Delivered ~38% in the last year, significantly outperforming its benchmark.
- Portfolio: Holds ~90 long and ~60 short positions, with a concentration in the US market.
Andrew Violent highlighted the Monash Concentrated Global Growth ETF (ASX: MCG) for concentrated, high-conviction active growth.
- Strategy: Focuses on 20-40 high-quality global growth companies in themes like digitalisation, climate, and advanced computing.
- Performance: Up ~20% per annum since listing, holding giants like Nvidia, Microsoft, and Amazon.
- Fees: Management fee of ~0.70% plus a performance fee, justified by strong historical returns.
3. Thematic ETFs
Thematic ETFs can offer high growth potential but require nimbleness and should typically be sized as satellite holdings. Andrew Violent recommends the VanEck Defense ETF (ASX: DFND).
- Thesis: Geopolitical tensions globally are driving sustained defence spending. This ETF provides exposure to global defence contractors.
- Performance: The underlying index is up 50% per annum over three years, and the ETF is up 47% in the last six months.
- Risks: Performance is heavily linked to geopolitical events; a de-escalation of conflicts could negatively impact the theme.
For a more speculative thematic idea, Adam Doors pointed to the Global X Humanoid Robotics ETF (NYSE: HU MN).
- Thesis: The humanoid robotics industry is forecast for exponential growth, from 1.2 million units by 2035 to 300 million by 2050, servicing roles in aged care and beyond.
- Holdings: Includes Tesla (~12% weighting) and other companies developing humanoid robots.
- Note: This is a high-risk, US-listed thematic bet on a long-term structural trend.
4. Alternative Assets
For a classic defensive alternative, Adam Doors advocates for a core holding in physical gold via an ETF like ETFS Physical Gold (ASX: GOLD).
- Thesis: Gold acts as a hedge against geopolitical uncertainty and currency debasement. Many institutions are upgrading their gold price forecasts.
- Strategy: The ETF is backed by physical gold bars held in vaults.
- Allocation: Suggests a minimum 5% portfolio weighting for most investors.
For a sophisticated alternative strategy, Andrew Violent uses the L1 Long Short Fund (ASX: LSF) in his own portfolio.
- Strategy: An active long/short equity fund that can take positions on both rising and falling share prices (e.g., shorting expensive banks, going long on a lithium turnaround).
- Performance: Has delivered ~22% per annum over five years, significantly outperforming the index.
- Fees: A higher management fee (1.44%) is justified by its strong track record of generating alpha.
Putting It Into Practice: Key Takeaways
- Blend Your Approach: Use low-cost passive ETFs for core market exposure and allocate to active managers in inefficient markets or for specific strategies.
- Assess Risk & Complexity: Understand the underlying strategy of any ETF, especially those using derivatives (like JPIN) or thematic concepts (like DFND or HUM.N).
- Size Appropriately: Treat higher-risk thematic and alternative ETFs as satellite holdings, not core portfolio components.
- Focus on People & Process: With active ETFs, the fund manager’s track record and investment philosophy are critical to future success.