Key changes from our recent ETF reconstitution

At the end of March Russell Investments’ two Australian Equity ETFs, the Russell Investments High Dividend Australian Shares ETF (RDV) and the Russell Investments Australian Responsible Investment ETF (RARI), undertook their semi-annual reconstitutions. Below is a summary of the major changes for each ETF.

RDV reconstitution

The most significant change to RDV’s positioning was a buy of Materials stocks, funded by a sell in the Real Estate sector. The Materials underweight position was reduced from over 6% to under 3%, whilst the Real Estate overweight was trimmed to a small underweight position.

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Source: Russell Investments as at 31 March 2022

RDV is designed to provide investors with above-market dividend yields, and therefore changes in the portfolio reflect the changing dividend characteristics in the market at a stock and sector level over time. The recent strength in commodity prices has driven Materials stocks higher on the back of increased expectations for earnings, cash flows, and subsequently dividends.

The ASX200 Materials sector now trades on an expected dividend yield of 6.4%, well above the ASX200 expected yield of 4.1%. At the reconstitution RDV increased exposure to Alumina and BHP, with expected dividend yields of 10% and 9% respectively.

Conversely, the ASX200 Property sector is now expected to yield less than the market over the next 12 months at 3.8%1, and is therefore less attractive to investors seeking income. RDV’s reduced exposure in this sector was driven by the sale of Dexus, GPT Group, Scentre Group, and Vicinity Centres.

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Source: Bloomberg as at 11 April 2022

RARI reconstitution

In our recent blog ‘Do Environmental, Social, and Governance (ESG) factors influence stock prices?’, we discussed the importance of focusing on ESG issues that are material to a company’s financial performance, and how it can add value over the medium-term. At RARI’s reconstitution, we adopted this methodology and began to use our proprietary Material ESG Scores.

RARI has dual objectives - to provide investors with an above-market dividend yield with the same methodology as RDV, whilst investing in companies with superior ESG characteristics to those of the broader market. The recent changes to the underlying portfolio reflect the changing dividend characteristics in the market, but also incorporate our updated Material ESG Scores.

The largest changes at a sector level, were a reduction in Materials exposure and increases in the exposure to the Consumer Discretionary, Health Care, and IT sectors. Whilst the underweight to Materials (which was driven by the exclusion of BHP and Rio Tinto from the investable universe) was increased as part of the reconstitution, specific stocks such as IGO Limited were added within the sector. IGO Limited scored well on our Material ESG Score – an above-average 6 out of 10, due to its focus on renewable energy-based metals as part of the energy transition away from fossil fuels.

As at the end of March 2022, RARI’s aggregate Material ESG Score was 20% higher than that of the ASX200 Index, with a Carbon Footprint 60% lower than the ASX200 Index. Full details of the reconstitution are shown below.

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Source: Russell Investments as at 31 March 2022

1 Bloomberg

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