Education Piece: Understanding our Morning Wrap ETFs

Our Morning Wrap features a unique way of tracking overnight performance via a list of US-listed sub-sector Exchange Traded Funds (ETFs).

Investors typically check three things when they wake up in the morning:

• Major US benchmarks (S&P 500, Nasdaq and Dow)

• ASX futures

• Commodity price

But even with a strong US lead, some stocks might fail to follow through. This is where sector specific ETFs can provide a more accurate view of what to expect in the upcoming session.

The ETF list

The ETFs are all US-listed (so we can see how they performed overnight).

You can view the full name, ticker and links to the respective ETF sites here. The spreadsheet also includes a list of tickers that TradingView users can copy and paste.

These ETFs invest in some of the largest and most dominant companies in their respective sectors. The tech ones tend to be very US oriented. While the commodity-related ones feature local heavyweights like BHP (ASX: BHP) and Pilbara Minerals (ASX: PLS).

Here are a few examples and their top 5 holdings.

VanEck Rare Earths/Strategic Metals (as at 6 June 2023):

• Pilbara Minerals: 8.52%

• Zhejiang Huayou Cobalt: 7.62%

• China Northern Rare Earths: 6.85%

• Allkem: 6.84%

• Liontown Resources: 5.83%

iShares Biotechnology (as at 23 June 2023):

• Vertex Pharmaceuticals: 8.38%

• Amgen: 8.14%

• Gilead Sciences: 7.96%

• Regeneron Pharmaceuticals: 7.70%

• Biogen: 3.85%

US Global Jets (as at 6 June 2023):

• Delta Airlines: 10.67%

• Southwest Airlines 10.52%

• American Airlines: 10.20%

• Qantas Airways: 0.94% (#27 largest holding)

How do these ETFs provide better insights?

If you have a portfolio of lithium stocks, it would make more sense to check the performance of something like the VanEck Rare Earth/Strategic Metals ETF (REMX) or the Global X Lithium & Battery Tech ETF. The correlation is of course, very tight. The below chart takes a look at Core Lithium versus the Rare Earths/Strategic Metals ETF.

Core Lithium (Blue) vs. VanEck Rare Earths/Strategic Metals ETF (Orange) (Source: TradingView)

Here are a few hypothetical examples for why the ETF's performance might come in handy:

• The US market was flat but Chinese lithium prices surge overnight and the REMX ETF is up 2.3%. This could be a positive tailwind for local names

• The US market was higher but China posted EV sales figures that missed analyst expectations. This was also followed by downbeat broker notes and the REMX ETF fell 2%. This could flag some downward pressure for local lithium names

• The REMX ETF undercuts a key area of support and hits a fresh 52-week low. Since the ETF reflects the performance of a basket of leading battery metal stocks, this could be a red flag for sector performance

The ETF more accurately reflects the performance of the lithium sector and its over/under performance can provide cues as to what's happening in the sector. From a technical perspective, its also help to know whether or not the broader sector is in an uptrend, downtrend, range bound etc.

Recent Changes

The current ETF watchlist includes two Bloomberg Exchange Traded Notes (ETNs) for nickel and aluminium. They basically track the performance of various futures contracts. These ETFs no longer exist so we're planning to replace them with:

• Invesco DB Agriculture Fund (since our ETF list has no soft commodities)

• Invesco Dynamic Building & Construction

This Agriculture ETF can be helpful for gauging stocks like:

• Australian beef company Australian Agricultural Co (ASX: AAC)

• Horticulture and fresh produce supplier Costa Group (ASX: CGC)

• Agribusiness company Elders (ASX: ELD)

While the Building & Construction ETF can be helpful for:

• Fibre cement siding and backerboard manufacturer James Hardie (ASX: JHX)

• International building products and construction materials group Boral (ASX: BLD)

We've also swapped our a Physical Gold ETF for the VanEck Gold Miners ETF.