Russell Investments has reweighted both its Australian high dividend and high value indexes more heavily towards banking stocks due to anticipated share buybacks and attractive valuations.
The semi-annual reconstitution of Russell’s exchange-traded fund indexes – which form the basis of the Russell High Dividend Australian Shares ETF and the Russell Australian Value ETF – has seen Russell rebalance its weighting of stocks incorporating the latest reporting season data in preparation for the expected return of capital, Russell stated.
Russell portfolio manager Scott Bennett said that with banks looking to strip excess tier 1 cash reserves from their balance sheets, the most likely outcome would be a number of share buybacks, which would benefit Russell’s high dividend share fund and its exposure to banks.
Russell’s high value index has also shown a preference for bank stocks, which Russell stated continued to look appealing despite the recent strength of the banks.
The index has also reduced its position on resources as a whole, selling its Rio Tinto holding from 5 per cent to 1 per cent, according to Russell.
In regards to Russell’s high value index, Bennett said it is currently positioned from the "more defensive names and provides investors with potentially greater sensitivity to market moves".
Bennett added that despite the attractiveness of potential income on offer, investors who purchased a few bank stocks directly would be exposing themselves to higher risk from a lack of portfolio diversification.
