5 Surprising Ways ETFs Can Tactically Improve Your Portfolio

To wrap up day one of our 2025 November investor webinar, we are delighted to have Mark Joachim, Senior Product and Investment Strategist at GlobalX.

Mark joined GlobalX in 2023 and is a key contributor to the product strategy and research teams, with responsibilities that include investment research and ETF analysis.

Today, Mark will tell us about five surprising ways that ETFs can tactically improve your portfolio.

Welcome, Mark.

Thank you, Darren.

And thank you everyone for tuning in today.

I'm incredibly proud to be speaking on a topic I'm very passionate about on exchange traded funds or ETFs.

I'm sure a lot of you use them in portfolios, but what I want to take you through as part of today's session is a few ways that could actually be used from a tactical perspective that can improve portfolio outcomes in terms of returns, but also the all important risk component as well.

Before I start, it wouldn't be a presentation without a mandatory disclaimer to say that anything I say is general in nature, and I haven't taken into account any personal circumstances.

If you want any information about anything I speak about our funds, you can jump onto our website.

A little bit about GlobalEx.

We've got a great intro there from Darren about my role GlobalEx, but we are a leading premier ETF manager here in Australia, but more broadly and more globally focused, we have offices all over the world.

So we were founded in the US, but we've got offices in Latin America, Japan, and other parts of Asia.

And we are backed by Mirai Asset Management, who is a global powerhouse when it comes to investment management capabilities.

Here in Australia, which a lot of people might know us for, we're managing just north of $14 billion in assets under management.

As of the date of this recording, we've got 47 strategies.

A lot of people know us for our commodity suite.

We were the first ETF issue that launched a gold ETF in the world and back in 2003.

But now we've got ETFs spanning a whole range of different categories.

And I'll start introducing a few of them into this session that I've got with you, but we're doing a lot more on the core base, the income focused solution, and also the thematic growth side.

So here's the agenda for today's session.

It's going to be jam packed.

I'm going to move quite quickly, but I want to go through it through detail as well.

The five things I want to talk about is around income, global investment opportunities, how to monetize volatility management.

And the last two is more around cost savings or fee savings and the all important tax optimization and efficiency piece.

So let's start off with income enhancement.

I think there's no doubt that today is a very challenging income environment for a lot of Australian investors.

It's one of the few times that you have the Australian dividend yield, the Australian government bond yield, and also other things like residential property yields and term deposits all yielding under 4%.

So that 4% is going to be a magic target that people need to hit, especially if inflation stays a little bit stickier.

And even though we didn't get an RBA rate cut more recently from the RBA, there is definitely a little bit more of a slower dovish tone, which means that rates are projected to decline, but it'll probably be a little bit more gradual.

That being said, the direction may be down.

So investors need to start thinking about how they can get an income uplift in their portfolios, because and the chart on the right hand side shows on your screen, the dividend yield here in Australia is at one of the lowest periods we've seen over the last few years.

So when you've got a normally a 20 year average around four and a half percent, the Australian market is now yielding around about three and a half percent overall.

I mentioned before, but you have term deposit rates are falling.

They got ahead of the RBA interest rate announcements in terms of starting to compress their yields earlier on.

And you'd be pretty lucky to find a term deposit with a four handle in front of it.

Remember that all important 4% figure.

Inflation, which is currently hovering around those early 3% mark is now gonna be as the RBA potentially forecasted a little bit higher, real returns are gonna be incredibly important as in the yield you get after the cost of inflation.

So where can people turn to?

Well, term deposits aren't going to cut it.

One area we're seeing a lot of interest at the moment is in the idea of investing in banking credit.

Now, you've got some of the world's most expensive banks here in Australia, in the in the big four, but a lot of people don't know that you can actually invest in the debt side of their balance sheet as well.

So by investing in banking bonds, you can get yields that are infinitely more attractive than their dividend yields.

But also, and the chart on the right hand screen shows the yield enhancement you can get from a basic one year term deposit and you get the liquidity profile, which is incredibly important with an ETF.

You get monthly distributions plus the liquidity to be able to buy and sell without incurring any potential penalty fees for breaking that like you would with a term deposit.

So a few ideas that I wanted to introduce to all of you today.

One is around high yield Australian shares, which is our ZYAU ETF.

Now, why I think high yield Australian shares might be quite important over the next year, particularly is most of the growth that you actually have seen over the last year in Australian shares has come from multiple expansions or PEs rising.

If PE starts to compress, especially with Australian banks coming down, and we've just seen results from the likes of NAB, Westpac and CBA more recently, and there's been a bit of volatility in share prices, I think income is going to be doing a lot of the heavy lifting.

So if you can get a yield of around about four and a half to five percent from high yielding Australian shares without taking too much risk in terms of sector diversification, I think that's really attractive.

Bank, I mentioned, banking credit could be really, really attractive at the moment, especially for people rolling off hybrid securities.

The bank ETF actually holds hybrid securities, but also senior bonds and subordinated bonds.

So all these different fixed income securities I think could be incredibly relevant for Australian investors.

And then finally, don't forget about the US.

A lot of people are drifting away from treasuries and diversifying into other assets, but they're still paying pretty decent yields and are seen as a risk-off asset.

Especially if people flock to safety and interest rates remain a little bit higher in the US.

That's where things like US TB or US treasuries ETF can form a nice little basis for global fixed income portfolios.

And this is where I think ETFs provide a really, really good base of in of looking across different asset classes to find income solutions for you that are either distributed on a monthly or quarterly basis.

So that's income.

Next is around global investment opportunities.

A lot of people know that you shouldn't really be investing in your backyard, but when you look at the Australian market, it's only less than 2% of the broad global market.

So there's a massive global opportunity set that a lot of Australian investors don't gravitate towards because they have a home country bias.

And if you look on the chart on the right hand side of your screen, you'll see that the actual earnings of Australian companies have trailed the broader global index.

Remember, earnings are the long term direction of where share prices tend to go, where short term is a bit more about fear and greed.

So if you're looking to maximise share prices, obviously, it's important to look at which companies are generating high earnings.

And unfortunately, Australia has a very stagnant and a very mature market in that sense.

The other thing is around country is sector allocation within countries.

A lot of people know that a lot of the market in fact, almost half of the Australian market is from both the financials and the big and the material sector.

But if you want to access industries that are growing, everyone is talking about the

AI revolution, particularly within technology companies.

And that's the color chart on the right hand side of your screen, which shows how much earnings growth are expected over the next two years.

You can see that financials, whereas where Australia plays, relatively stagnant.

Where a lot of people want to be is in information technology.

You can see I've highlighted in bold, 27% EPS growth next year, and then 14% year after.

So double digit growth.

And that's what everyone keeps saying.

Well, you know, potentially these companies are overvalued, but people want earnings growth.

And in Australia, only 3% of the market is made up of technology stocks.

So again, don't just think in Australia, think outside, think Europe, think US, think India, think China.

It's important for investors to use that and you can actually access global investment opportunities with ETFs.

I mentioned around artificial intelligence.

I think accessing ETFs to monetize AI is a fantastic way to do it.

And global X is a leader in providing AI thematic solutions, whether you want to be on the physical hardware side and look at things like semiconductors with the likes of AMD, Nvidia and Broadcom.

Or I'm really bullish on the idea of AI more broadly and particularly around AI infrastructure.

Everyone's talking about how much capex these big hyperscalers are spending into the hundreds of billions of dollars.

There's going to be one group of companies that benefit from this.

And that's the AI infrastructure plays, the data center plays.

the cooling and heating systems, the power that the companies that actually power the energy around uranium, nuclear, copper mining.

These are a lot of different areas that people want to get exposure to.

And you can get exposure to that with the likes of an ETF.

So we believe that we have a ETF in terms of every stage of AI, if you're looking to play it.

So for those who are looking for tactical opportunities, I feel like ETFs can really try and help monetize that AI revolution to potentially profit from over the coming decade.

The next thing is maybe not as exciting, but an incredibly important part of portfolio management around volatility reduction and monetizing that volatility.

Volatility is one of the knowns when coming to investing, but it's all about investors' risk tolerance and also the capacity to take on risk and manage that volatility profile.

Remember, risk and volatility sometimes are synonymous, but are quite different as well.

And one thing that we have seen more recently, even though every day we don't know what Trump's going to do, we don't know what's happening with trade wars, volatility has been relatively muted.

But if we do see a spike in volatility, I think a lot of investors are going to look to turn to ways for how can they actually generate income from that volatile profile.

And one way you can do that is with the use of these yield enhancement strategies known as covered calls.

This is where you own the underlying stocks, but also go to the options market and sell an option to receive a premium.

And one thing that is very noticeable with the chart on the left hand side of your screen is that every time volatility rises, the premiums you can receive also rise as well.

So if investors looking to get an income enhancement or an income lift, when volatility rises, you can monetize that volatility by selling those call options.

And also you can actually reduce your overall profile because whilst you don't get the overall upside in a covered call strategy, you also cap your downside as well because the premium acts as a little bit of a cushion for you.

So again, I mentioned before, Australian shares in terms of forecasts aren't particularly going to grow a lot from an earnings perspective.

We might see muted share price growth.

So if income is going to be doing the heavy lifting and markets head a little bit sideways, covered calls a great strategy that can outperform the broader index in that environment.

So GlobalEx has a leading suite of covered call ETFs.

The one that we've been seeing a lot of interest from clients is the Australian covered call ETF, which is currently yielding around about 10%.

And why that's relevant is I mentioned that earnings profile, but if you are looking to get US covered call exposure, we do have one that looks after the NASDAQ 100 and the S&P 500.

Importantly, you can get both quarterly and monthly income.

And it's also from a covered call perspective, particularly in Australia, you're diversifying your income sources across three main areas.

One is you get the dividends from the underlying shares, you get the franking credits, but then thirdly is you get those all important premiums.

And I think it's really important in today's environment when interest rates are uncertain, volatility is uncertain to diversify your income base and have multiple income producing assets in your portfolio.

Next up, we want to talk about fee savings.

Now, fee savings is one where ETFs are synonymous with low cost, but not every ETF is a low cost ETF as well.

However, ETFs have democratized investing and has allowed investors to be able to save costs by using very similar investment vehicles, but in a more transparent, liquid and cost effective way.

And we've done some research that actually shows that investors could save around about $4 billion by moving from expensive actively managed unlisted funds into low cost ETFs.

Unfortunately, here in Australia, ETFs are still really small part of the market.

They only account for around about 6% of the total managed funds market, but they are growing.

And for a lot of people who traditionally use managed funds, maybe they were on platforms.

I think one of the ETFs superpower in itself, and hence why to tactically improve portfolios is to reduce your overall cost.

Because I always say that fees are like termites.

They nibble at your returns every single day.

And if you can exterminate those termites, you can keep more in your back pocket and in your client's back pocket by just looking at a low cost ETF.

particularly around areas where active management has struggled to outperform.

Now, not to say that every active manager doesn't outperform, but even though only 10 to 20% can outperform over a given year, only 1 to 2% of those can do it over a sustained period.

And one of the key reasons for that is they charge high fees.

The average Australian Equity Mutual Fund in Australia charges over 1% in fees, whereas from an ETF perspective,

I mean, we've launched a low cost Australian 300 ETF that charges just four basis points.

So you can get a 25th of the cost of a broad based active managed fund in an ETF wrapper.

And Australian investors are resonating with this low cost.

A lot of people talk about active versus passive.

I don't like that particular dilemma between the two.

It's really about high cost and low cost.

And you can see the chart on the right hand side of your screen shows that even though new ETFs coming to the market, which are the blue bars, tend to be those that might be a little bit more expensive because we are seeing more active ETFs come to the market.

Look at where the flows are going in the orange bar.

two thirds are going into low cost ETFs.

And I think Australians are quite fee conscious and fee obsessed when it comes to investing in lower cost solutions.

Because if you are just getting market beta, and if the markets are pretty efficient, it's best to control for things like your behavior, but also the all important fee component.

Interestingly, we've seen super funds are starting to lift their game, where we have seen the failure rates around the my super your future, your future or super results actually improve over the last couple of years.

And I think that's either due to companies, super funds potentially closing down changing strategies, or a lot of them are actually benchmarking close to what they prescribe in terms of APRA's

guidelines of their benchmarks.

And you can, you can get these indexes by an ETF, which is a fantastic way to reduce the all important tracking error.

So I do probably suspect that more of these results are going to align with more pass rates and failure rates, but it is going to be a lot of index hugging as well.

So if you want to invest like the super funds, why not use a superpower, which is the ETFs, which provide you that access to that index.

And the only tracking area you're going to get is the underlying fee, which as I mentioned is low cost.

The fifth and final superpower or a surprising way that I feel that investors can help improve portfolios is tax efficiency.

A lot of people don't think about tax.

It's more of an after return objective that a lot of people look at, but it's incredibly important.

And the reason for that is because if you actually look at the tax advantages of an ETF, because of the creation redemption mechanism and how shares can just be created or destroyed,

a lot of the actual capital gains embedded in an ETF is not distributed to the outside shareholders.

It's in fact streamed to the individual counterparties we work with in market makers.

And if you look at the number of funds and number of ETFs, number of funds in the orange bar in the left hand side of your screen and ETFs in the blue, you can see the percent of funds that distributed a capital gain.

So if you think about it, there's a lot of turnover happening in portfolios.

If someone needs to redeem their cash in a mutual fund, that fund has to go and sell those underlying securities and all the shareholders have to then deal with that capital gain implication.

Doesn't happen with an ETF.

You can see that ETFs only have single digit percentages of funds that have actually distributed capital gains.

And the chart on the right hand side of your screen is an international study done by a US research house that showed the difference that you can get by investing in an ETF versus the mutual fund equivalent.

You can see fee savings, or at least the differences of around 33 basis points, which doesn't sound like a lot, but it is really important.

So I feel that for investors who are looking to minimize their their tracking error or minimize that tax drag, really think about the after tax benefits of ETFs.

They're incredibly tax efficient.

They are transparent.

They've got a inbuilt mechanism to ensure that they don't trade at a discount to their net asset value.

And a lot of people don't think about it, but really think about those after tax returns.

And I feel that's a really, really key way that you can tactically improve your portfolio by looking for low cost tax effective ETFs.

So that's a bit of a run through on some of the five key ways that ETFs can tactically improve your portfolios.

One, income, use the power of income, use the power of diversification.

There's a lot of income enhanced ETFs that can be out there.

Two, think about that all important geographic diversification and the international opportunity that you can get with accessing a lot of these areas.

And remember Australia is a quite a concentrated market.

Then around volatility, minimization, and volatility management, use ETFs to balance those volatile periods, whether it's investing in assets like gold or using covered calls to monetize that volatility.

And the two final superpowers is around tax efficiency and low cost.

Together, I believe these five ways, these five components are ways that you can use ETFs in your portfolios to achieve better outcomes, not just from a long-term perspective, but also in a more medium-term tactical way as well.

So with that, I'll hand it back to Darren to go through questions.

And thank you very much all for your time.

Thanks, Mark.

That's certainly food for thought for the audience.

Five superpowers.

I like that.

It should be considerations for every investor to have a think about how that works for their portfolio.

You may have tipped your hand a little bit earlier on with the focus on investor flows into sort of the low cost

ETFs.

Which of those are you seeing investors really direct their funds into?

Which have been the most popular over the last 12 months or so?

Yeah, it's a great question, Darren, I think to start off with 2025 is going to be a record breaking year for ETF flows, not just in Australia, but also globally as well.

So to give you some context, last year was a record year for ETF flows, which was 31 billion that came from Australian investors into ETFs this year were on pace to hit 50 billion.

So there's definitely this migration to low cost.

I think to answer your question, a lot of investors are going towards those low cost vanilla ETFs.

We're seeing a lot of flows going into areas such as broad-based Australian shares, broad-based global shares, people looking for regional diversification.

That's one area I'm starting to see a little bit more interest, particularly over the last few months.

We're starting to see Japan become a bit more of a favored destination, particularly because they've come out of a deflationary environment.

There's a bit of a shareholder activism focus as well.

And then on your other point, I'm definitely starting to see other areas such as commodities become quite an interesting space.

The price of gold has obviously run up in a parabolic fashion, which doesn't really happen, but gold ETFs and commodity ETFs have recorded their best year to date flows in over a billion dollars has come into commodity ETFs.

So instead of lighting up, as you might see in modern place, you can actually get exposure to commodities through things like gold, through things like silver or a broad basket, uh, through ETFs overall.

And then the final one, Darren, I will say, and I mentioned it before is around a fixed income.

Uh, it's going to be an incredibly important part of portfolios, particularly in a risk off environment.

And we've seen a demand from investors, uh, for Australian credit.

So these are bonds issued by Australian companies.

We've seen five or six successive months of over $300 million per month going into Australian credit ETFs, which is like that bank ETF that I told you about.

So especially with hybrids rolling off by 2032, investors are looking to park their cash in an area that doesn't take too much duration risk in terms of interest rate risk, has a little bit more floating rate exposure.

And I feel for that you've got areas like subordinated debt, banking credit.

That is a really interesting part.

So I'm starting to see a lot more flows happening there.

And I think it's fair to say the with success mark, the 30 to 50 bill, everybody's blaming ETFs for CBA and distorting benchmarks and the market and so on.

But seriously, do you think we're in a bubble that may burst?

Is there too much money?

Is there such a thing that can flow into ETFs?

Another good question, Darren.

And I've been in this industry now for over a decade.

And every single year, I hear the same thing around too much money in passive index tracking ETFs, it's going to cause a bubble and distort market fundamentals.

My counter to that is have a look at who are the ones who are spruiking the actual rumors of the bubble.

Normally, it's from active management who are fearmongering to say that they are experiencing mass redemptions in a lot of their funds, and they need to compete.

So one way they can compete is by using headlines like ETFs are in a bubble.

But if you look at the harsh evidence, I mentioned before that only 6% of the total funds market here in Australia is in ETFs.

In the US, it's closer to about 25%.

The index versus active debate just crossed that 50-50 mark in terms of in the US.

And I don't think we're going to have a problem until we get to about 90 to 95% of index.

The thing is, most of the price discovery is still done by active managers.

index ETFs are only trading for a fraction of the overall trading volumes.

In fact, only about 10 or 20%.

And to use your example, Darren, if you think about it over the past year, so probably not so much over the last couple of months where we've seen resources come back, but probably 2024 and the start of 2025, CBA was skyrocketing overall, yet other resource companies like BHP and Rio were down in the dumps.

How could if every $1 going into an ETF could one is security be inflated and the other one be suppressed?

That's active management still going in there.

But in Australia, we are far from a bubble.

If anyone suggests we are in a bubble.

I'd ask them for conclusive evidence, both academic and empirical evidence, because I'm yet to see it.

I still think we've got a long way to go in terms of ETF penetration.

Again, I am talking from an ETF issuer, but we've got an ETF category that's growing at around about 35% per annum.

and is expected to hit a trillion dollars by the 2030s decade, I think it's active managers who are scared of ETFs coming for their jobs.

Because in the finance industry, I think active managers get way too overpaid for what they do, especially those that are storytellers.

And they are scared of losing their market share to ETFs.

So we are not in an ETF bubble.

I don't see any signs of that.

And anything that would suggest otherwise to me is just fearmongering.

And I think it's with your point there, Mark, that ETFs are 25% of the US market, and we're only six here.

That's some serious growth that still has to happen before we can match that market.

Absolutely.

And I think that the penetration of ETFs being used by advisors, being used by accountants, maybe not so much on the institutional end, I think that's still a small part that's growing.

But with the number of products coming out and available, I mean, the product proliferation that we're working here at GlobalEx is extraordinary.

You know, you've started to see the rise of things like smart beta ETFs come to market, where those used to be strategies reserved for active managers.

And about 10 years ago, that accounted for about 3% of the market.

It's quadrupled in a decade.

So you can use these factors or characterizations, things like growth, things like quality, things like value, or even combining them.

We've bought out an ETF last year for global market.

And this year in Australia called GARP, G A R P or G R P a for the Australian equivalent, where you're combining a whole bunch of different factors into one tradable security and.

at least since launching, it has actually far outperformed majority of active managers.

So to your point, Darren, the growth trajectory for ETFs are phenomenal, particularly around some of the product areas that we're innovating over here and that migration to low cost.

I think those are going to be the two key catalysts for people increasing their adoption of ETFs.

Thanks very much for your insights today, Mark.

That's been excellent.

And I think you've given our audience and some investors quite a lot of food for thought.

Thanks very much, Darren.

If anyone needs more information, feel free to jump to our website, speak to one of our sales rep, or feel free to reach out to me as well.

I'm always on LinkedIn if anyone needs anything.

But yeah, I hope it was insightful and thanks again for having me, Darren.

It was a pleasure to be here.

Thank you, Mark.