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Five strategies popular with active share traders

While the sharemarket continues to attract record numbers of new investors, seasoned traders are looking to specific strategies to grow or protect their portfolios in volatile times. This article looks at some of the strategies they are using at the moment.

1. Buying financials especially banks

Banks have been a significant drag on Australian stockmarket returns over the last five years, with the value of the XFJ (S&P ASX200 Financials Index) flat while the broader S&P/ASX200 is up 35% over the same period. Retail investors have been largely willing to wear the share price decline in exchange for strong fully franked dividends, and therefore suffered twice during COVID as bank share prices collapsed and dividends were cut or postponed. As a result, financials have fallen from approximately 35% of the average nabtrade portfolio to under 28%.

While many high net worth investors took the opportunity to top up their bank holdings during COVID, recent economic strength and the prospect of a return to higher dividends has resulted in strong buying across the banks in early 2021. While all of the big four are finding favour, Westpac has attracted strong attention, with some feeling that it had fallen further than its peers and has a greater chance of returning to favour during reporting season.

2. Resources for dividends

Traditionally viewed as cyclical and capital intensive, with little potential for yield, the resources sector is attracting investors seeking income. The big miners have rewarded investors over recent years with both strong share price growth and high dividends.

Fortescue (FMG) remains hugely popular with a small but wealthy proportion of the nabtrade investor base. FMG topped trading numbers four weeks in a row despite an elevated share price, lifted by record iron ore prices. Many investors continued to pick up the stock in advance of reporting season, anticipating a strong result and an attractive dividend.

3. Positive gearing in a low rate environment

With interest rates at record lows, housing finance has recently surged to exceed pre COVID levels, and data suggests borrowing is also increasing in other sectors.

For many investors with substantial assets, the attraction of borrowing is to generate a positive yield after interest payments. This involves modest loan-to-valuation ratios and investing in assets that generate average or above average yields. Investors with existing borrowings who may have been motivated to pay down their borrowings are now more likely to maintain them at existing levels.

4. Purchasing portfolio protection

One of the more surprising products that surged in popularity during the sharemarket turmoil of 2020 was BBOZ, an ETF that allows investors to profit in a falling market. Many large investors bought or traded BBOZ as a way to minimise volatility in their overall portfolio value, or to take a position on where they expected the market to trend.

The popularity of BBOZ waned over recent months as volatility has fallen and economic news improved. But signs of market weakness or a return of volatility typified by the wild swings in GameStop sees activity resurface.

5. The ‘silver squeeze’

It was impossible to ignore the dramatic tug-of-war between hedge funds and Reddit-inspired retail investors over GameStop and AMC in the US. Many speculated that silver was the next big ‘squeeze’, resulting in an 8% rally in the silver price overnight, and a spike in buying across silver miners, ETFs, futures and more.

Nabtrade saw elevated buying of the ETF Securities Physical Silver ETF, of which a substantial proportion was from high net worth investors. Far from new to the silver trade, or trying to execute a squeeze, many have been accumulating silver over recent months.

Two of the fundamental theories behind this trade are the rising demand for silver as a component in solar technology, supported by a wave of ‘green legislation’ under a Biden presidency, and a growing discrepancy between the gold and silver price. Gold has traditionally sold at around 50x the silver price, but with levels recently reaching more than 70x, some investors concluded that a reversion to the long run average was likely.

 

These strategies are used by experienced investors for their own circumstances or views. As with all investment strategies, it’s important to determine whether it is appropriate for your personal goals and circumstances.

 

Gemma Dale is Director of SMSF and Investor Behaviour at nabtrade, a sponsor of Firstlinks. This material has been prepared as general information only, without reference to your objectives, financial situation or needs.

For more articles and papers from nabtrade, please click here.

 

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