Which Bank? Why Not All of Them?


Previously here at the Grey Nomad we have talked about ETFs as a means to balance your portfolio. Too often we get caught up trying to offset our risk by bringing in a blue chip. Small time investors like you and myself are however heavily exposed when the market crashes as it has over the past quarter.

In the If You Can’t Beat Them, Join Them post, we spoke more about broad market ETFs, that track the overall index, or in some cases the more elite top 20, 50, 100 etc. Today however I want to talk a little more about a sector based ETF. In Australia we are constantly amazed at the profits of the banks, all four of them. Time and time again they reach new heights of greed and exploitation, while we all sit wishing we could have a piece of it.

The problem is, we sit here with only a little capital, not too sure where to put it. So we pick one bank. You might even pick the one you bank with. This is okay, chances are they will deliver a good dividend, grow and use all that overpriced credit card debt to make you money. The problem of this strategy is that you are exposed to one company, and a lot can happen to just one company.

Take ANZ (Unfortunately, we could not get stock quote ASX:ANZ this time.) for example. The past 6 months have been pretty average. Having to go back to the market to raise capital to satisfy new legislation imposed on the financial industry the bank’s value tanked. During this period the share price has fallen sharply by 19.3%. Depending how exposed you are to your ‘blue chip’ stock, this can have a dramatic impact on your portfolio.

But what I want to talk about today is finding that financial blue chip stock that covers the need to diversify but gives a good chunk of that corporate greed that affords you that Jet Ski. Betashares S&P/ASX 200 Financials Sector ETF (Unfortunately, we could not get stock quote ASX:QFN this time.) offers this (but does not guarantee the Jet Ski). What they do is manage a fund which tracks the financial based companies like the big four banks that feature in the exclusive ASX200 club.

Like many other ETFs this mob feature the big four banks quite prominently. In fact 75% of the fund is big four banks. Now we know that all of these banks have tanked over the past 6 months following changes in legislation and other economic factors, but some more than others. As a result, those that invested in ASX:QFN have lost 13.4%. Not great but if you had $5000 the difference between ANZ and QFN in that period was $293.

I know, not quite a Jet Ski. But let’s look at a longer period. Over the last 5 years our good friends at ASX:ANZ delivered a capital return of 23.28%. Celebrate I know, that is great news. However in that same period, the arguably more diversified yet less famous QFN returned 38.04%. Meaning that same $5000 this time saw you make an extra $738. To be honest I don’t know how much a Jet Ski costs but presumably you could at least get a second hand one for that.

So the moral of this story? Well I like to offset the risk in my portfolio with ETFs. This is a solid strategy when you don’t have the capital to be investing in 30+ companies yourself. And remember when we wrote about the avalanche effect here? That seemingly small difference can compound into massive growth over the long term, if you play the smart game.