Sharesight is a portfolio tracker that is integrated into Morningstar Investor. Their data shows the top 20 trades by Morningstar users in June 2024. June was a peculiar month. We have been putting together articles on Morningstar’s top monthly trades for a while now. This is the first month where the top 4 trades have been ETFs. 9 out of our 20 top trades were for ETFs, all heavily weighted to the buy side.

 

Morningstar/Sharesight trades

Figure: Morningstar's top trades for June, 2024. Source: Morningstar Investor/Sharesight

Here is what our manager research analysts think about our all-ETF top three buy trades.

Top buy trade: Vanguard Australian Shares ETF VAS

Morningstar Medalist Rating: Bronze

The Vanguard Australian Shares ETF VAS follows a passive strategy, aiming to replicate the S&P/ASX 300 index.

Our analysts believe that this ETF is a compelling choice for core Australian equity exposure, awarding it a Bronze medalist rating. Our ratings are based on expectations for risk-adjusted future performance comparative to a category benchmark. This contrasts with how many choose ETFs which is based on how well funds have performed in the past.

A diversified index that captures the investment opportunity set well, a highly competitive fee, and Vanguard's well-recognised index tracking and trading efficiencies are the drivers of the continued vote of confidence in the strategy.

A diversified index that captures the investment opportunity set well, a highly competitive fee, and Vanguard's well-recognised index tracking and trading efficiencies are the drivers of the continued vote of confidence in the strategy.

When looking at funds, one of the biggest questions is whether to go active or passive. The low price of this strategy sets a significant hurdle for active managers in the same space when looking at net-of-fee returns over the long term. However, our analysts believe that Morningstar’s best-rated active managers can add value and cross that hurdle consistently.

One consideration when looking for broad domestic equity Australia are the unique attributes of the Australian market. BHP Group BHP makes up 9.57% of the index, and the top 10 holdings make up 46% of the index (at 31 May 2024). The Australian market is very narrow, which means that a handful of sectors and industries dominate, including financial services and mining.

The result of this is inadequate diversification. An answer to this could be an equal-weighted ETF which invests proportionately across the index constituents. The VanEck Australian Equal Weight ETF MVW achieves this across 76 holdings that represent large and mid-cap shares in Australia. The fee is significantly higher than VAS (0.07% total cost ratio) at 0.35%, but our analysts believe this is justified.

They award MVW a Silver Medalist rating and think it is a great way to get exposure to the Australian market because it is diversified.

You’re able to read more about the trade-off between market-cap and equal weighted passive ETFs in this article I have written.

Top buy trade: Vanguard MSCI Index International Shares ETF VGS

Morningstar Medalist rating: Gold

Vanguard MSCI Index International Shares ETF provides Australian investors with an affordable and efficient gateway to the global equity markets. This exchange-traded fund (VGS) and its AUD-hedged version (VGAD) mirror the MSCI World ex Australia Index (and AUD Hedged version for the hedged class), incorporating net dividends reinvested, setting a challenging benchmark for active fund managers to surpass. With its low expense ratio and Vanguard's expanding scale, the strategy presents a formidable challenge for active managers to beat.

The underlying index has universal appeal for constructing a diversified portfolio that spans 22 developed economies represented by approximately 1,500 holdings. The index is skewed toward the United States (a common feature across most global indexes) but given the majority of its holdings are multinationals earning sizable revenue from international markets, concentration is not a notable risk here.

The strategy will wax and wane with the index and is chained to its notable biases. Of late, it has faced intense competition from skillful active managers who, with their enhanced risk-management skills, can weather the market volatility better to beat the index. However, in terms of long-term performance, Vanguard edges past most managers in the cohort. The vehicle may receive currency diversification benefits from investing internationally as the currency is not hedged to AUD, but for those who are currency risk-averse, the AUD-hedged version is also available at a modestly higher price.

In summary, Vanguard MSCI Index International Shares ETF stands out as a best choice for Australian investors seeking global market exposure. Its cost efficiency (0.18% Total Cost Ratio), broad diversification across multiple developed markets, and solid performance record, especially in a competitive landscape with skilled active managers, highlight its appeal.

Top buy trade: iShares S&P 500 ETF IVV

Morningstar Medalist rating: Silver

Many passive Australian investors are anything but. They deviate from this strategy by making active decisions to be overweight in certain sectors, themes or geographies. It is no secret that Australian investors prefer and are heavily invested in domestic markets.

However, Australian investors have started to double down on the US as well. This may be due to the US outperforming almost every other market since the GFC. It is no surprise that iShares S&P 500 ETF IVV makes the top three.

Given the breadth of coverage and the cost efficiency, iShares S&P 500 ETF IVV is a fine choice for investors seeking US-specific equity exposure. The strategy is expected to outperform its peers over the long term and remains the clear choice for investors to gain US exposure. It can be paired with other ex-US products to form a balanced global equity portfolio.

The underlying benchmark, the S&P 500, is a market-cap-weighted index of the largest 500 companies in the United States. Thus, it offers giant- to mid-cap exposure, covering about 80% of the free-float-adjusted market cap of the US equity market. This results in a well-diversified index at the stock and sector levels. As such, passive strategies that track the S&P 500 stand as above-average options in a market segment where active managers have generally struggled to outperform. Consisting of highly liquid stocks, material stock-specific valuation information is quickly incorporated into stock prices.

From an Australian perspective, IVV gives exposure to a broad portfolio of some of the world’s most noteworthy companies, including sectors that are underrepresented in Australia such as technology and healthcare. The S&P 500’s correlation to Australian equities has come down in recent years, effectively adding to diversification for Australian equities exposure. It earns a silver medalist rating.

At an annual fee of 0.04%, the fund is priced attractively compared to active and passive peers.

When we look to the index’s exposure, 36% of the index is in the top 10 holdings, 7.28% of the index is in one holding – Microsoft MSFT, 6.74% in NVIDIA Corp NVDA and 6.55% in Apple AAPL. The index is highly concentrated in tech, with over 33% of the index in this sector (at 25 June 2024).