Not enough quality on the ASX? Betashares can name 40 companies

Think quick. True or false. There’s not enough quality on the ASX to warrant tracking this factor.

The answer, if you ask Betashares’ Tom Wickenden, is unequivocally false. He argues there are at least 40 names, starting with quality picks like Wisetech (ASX: WTC), Netwealth (ASX: NWL) and Pro Medicus (ASX: PME).

Tracking quality names might sound like a challenge for those who use passive investments. After all, the traditional form of passive investing involves tracking a broad-based index weighted by market cap. However, the key is to look for more modern iterations, like smart-beta investing, which can offer a more tailored approach such as investing for quality.

“Smart beta investing is an index that weights or selects companies by anything other than size or market cap,” says Wickenden.

In the current environment of uncertainty, it’s not surprising that investors would be looking for means of doing things a bit differently. Factors like quality appeal given strong performance in recent years (and the wisdom of holding high-quality across market cycles) while market concentration can encourage investors to consider smart-beta applications like equal-weighted indices.

In the following Rapid Fire, Wickenden explores smart-beta investing, quality on the ASX, and managing the concentration risk in the S&P500.

Note: This interview was filmed on Wednesday 25 September 2024.

Edited transcript:

Sara Allen: Hello, I'm Sara Allen. You're watching Livewire’s RapidFire and I'm here today with Betashares’ Tom Wickenden. Tom, to begin with, can you share in a few sentences what is smart-beta investing?

Tom Wickenden: So smart-beta investing is an index that weights or selects companies by anything other than size or market cap.

Sara Allen: What's a compelling piece of research that supports the use of smart beta?

Tom Wickenden: I'll give a shout out to Research Affiliates. They are some guys based in the US, they've got lots of good research around smart-beta.

Sara Allen: Which factors are popular right now and why?

Tom Wickenden: Quality. Quality is popular because, in the past five to 10 years, it's performed so well.

Sara Allen: True or false, there aren't enough quality companies in the ASX to warrant tracking this factor.

Tom Wickenden: It's false. Just look at Betashares AQLT.

Sara Allen: AQLT tracks 40 high-quality companies on the ASX, which have the biggest overweight compared to the ASX 200.

Tom Wickenden: At the moment. You'd be looking at Wisetech, Netwealth and Pro Medicus.

Sara Allen: Why would investors choose an equal-weight strategy?

Tom Wickenden: To reduce concentration, improve diversification, and also potential for short and long-term outperformance.

Sara Allen: Where is there a compelling case to use an equal weight strategy?

Tom Wickenden: Right now in the US. In the US, the top five names are 25% of the S&P 500. So equal weight makes a bit of sense.

Sara Allen: Can you bring it to life and share an example of how an equal weight strategy differs from the broader index?

Tom Wickenden: Yeah, of course. Right now in the S&P 500, the top five names are 25%. The bottom 400 names are 25% weight. In the S&P 500 equal weight index, the top five names are 1%, and the bottom 400 names, 80%. Huge difference.

ETF

Betashares Australian Quality ETF (AQLT)

Australian Shares

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