Bank levy highlights S&P/ASX 200 concentration risk

Last week Treasurer Scott Morrison announced a 0.06% annual levy over the next four years that will affect banks with liabilities (debts) above $100 million which include the big four banks and Macquarie. The new tax will be levied on various types of borrowing that banks use to fund their lending.  Based on Treasury estimates, the levy will raise approximately $6.2 billion over four years which is expected to take off about 4-5% of earnings from the major banks.   

In the aftermath of the announcement bank share prices were hit, driving the S&P/ASX 200 down. Most Australian equity portfolios have a significant exposure to the big four banks and Macquarie which represent 32% of the S&P/ASX 200 Accumulation Index.

The below two charts illustrate the weighting of the big four banks relative to the S&P/ASX 200. The big four banks represents over a quarter of the Australian equity market by market capitalisation.

To address the concentration risk in the S&P/ASX 200, VanEck Vectors Australian Equal Weight ETF (ASX: MVW) is a diversified portfolio that is underweight the big four banks and Macquarie compared to a market-cap weighted portfolio. During the week of the Treasurer’s announcement, MVW returned 1.37%, while the S&P/ASX 200 returned only 0.16%.

MVW equally weights the largest and most liquid stocks on the ASX (84 stocks @ 1.19% each). Relative to the S&P/ASX 200, the resulting portfolio:

 - reduces banks’ exposure by ~23%; and

 - reduces ASX top 10 exposure by ~40%

Equal weighting is a strategy that has been around for quite some time with many academic institutions including London’s Cass Business School, Goethe University and even Australia’s own CSIRO Monash Superannuation Research Cluster studying the approach. VanEck’s own findings are published here:

Equal Weight: Outperforming three years on 

The unequalled power of equal weight investing 

Strong Foundations Have Equal Footings

With persistent headwinds facing banks (see: Much ado about banks) investors need to consider an alternative approach to Australian equity investing. For more information on MVW  click here.

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