Full steam ahead for ETF sector

Australian investors are set to channel record amounts of capital into exchange-traded funds this year, taking the total value of holdings in locally listed ETF products above $30 billion for the first time.
By · 14 Feb 2017
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14 Feb 2017
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Indeed, if 2016 is anything to go by, inflows into ETF products will continue to surge.

What’s very clear is that a rapidly growing band of self-managed investors are recognising the advantages of being able to readily buy into funds on the ASX that have holdings in hundreds of underlying listed companies. ETFs have become the most popular investment vehicle for getting into the sharemarket.

In a single market transaction, investors can buy one ETF security that covers a whole share index such as the S&P/ASX 200, the US’s S&P 500, Britain’s FTSE, and hundreds of others.

Moreover, there are ETFs on the market that hold parcels of stocks in companies and securities providing exposure to specific sectors such as property and infrastructure, and to asset classes such as fixed interest and cash.

The Australian ETFs market broke new ground during 2016, with strong investor demand driving a 22 per cent increase in total ETF assets to $25.7bn. A total of 40 new ETFs were launched during the year, bringing the total number of fund products on the market at year-end to 196.

Just a few weeks into 2017 and several new ETF products have already been listed, taking the full tally to 200. Expect to see further growth this year in the number of ETFs investing into fixed-interest securities such as bonds.

Research by ANZ ETFs unit ­reveals that Australian equities-focused ETFs continue to dominate the products marketplace, with this segment recording growth of 31 per cent last year as investors focused on a mix of different strategies to diversify their portfolios. The largest inflows continue to be into broadbased Australian equity funds.

According to ETFs Watch, another research firm, the end-of-year sharemarket rally saw 79 per cent of funds with positive returns in 2016, well up from 46 per cent the year before. “A continual rebound in resources saw the leaderboard full of companies that focus on that sector, with China, Asia and some poorly performing LICs bringing up the rear of the field.”

Advisers lead charge

A report released in January by US-based financial research firm Cerulli Associates found that US financial advisers expect to increase their allocations to ETFs by 25 per cent over the next two years as they reconsider the costs of their investment management.

The Boston-based firm said advisers believe that, as lower-cost investment products, ETFs effectively translate to less business risk. As a result, 45 per cent of advisers plan to increase their ETFs use and to increase client allocations to passive investment products. The majority of ETFs on the market are considered passive in that rather than using fund managers to try to outperform a particular index, they buy all the stocks in the index and weight their holdings according to the companies’ market cap.

Expect a similar trend to occur in the Australian market too, with licensed financial advisers more likely to tap into low-cost managed products, such as separately managed accounts, that can give their clients access to a basket of different ETFs at once. These products are designed to replicate specific investment strategies, investing into multiple ETFs that, for example, aim to deliver high growth, growth, income or balanced returns.

Alex Vynokur, managing director Australian ETF products ­issuer BetaShares, says 2016 was another year of spectacular growth in the industry.

“What we’re seeing on one hand is more and more investors being drawn towards exchange-traded funds, and the rate of adoption among new investors is continuing to grow,” he notes.

“But, at the same time, what we’re finding is that the number of investors who have made their first investment into ETFs tend to have a very good experience; and a very significant number intend to reinvest more assets into ETFs.

“So the latest stats we’ve seen for 2016 shows us that approximately 80 per cent of ETF investors are intending to increase their investment into exchange-traded funds.”

Vynokur adds that while the early adopters of ETFs were SMSF investors wanting to diversify their portfolios and access markets that are otherwise difficult to access, such as international markets or other asset classes, a significant portion of new investors are millennials.

“Those are people who don’t have significant amounts of money yet to invest but they’re attracted to exchange-traded funds by the low-cost nature of the offering, and by the fact that they can build a diversified portfolio without needing to have a significant amount of money to invest.”

For many, an indirect ETFs exposure through a licensed fund manager is increasingly the method of choice because they will invariably avoid taking positions in funds with high management expense ratios as well as smaller ETFs that have limited capital to invest across an index. That makes good investment sense.

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Tony Kaye
Tony Kaye
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