Volatility isn't slowing ETF inflows

Summary: Australian investors have channelled more than $1.2 billion into ASX-listed ETFs over the past two months, despite strong market volatility.

Key take-out: ETFs are increasingly being used as products that can be quickly bought and sold, signalling the maturation of the Australian industry.

The marked increase in volatility on global markets over recent months, including the ASX, has failed to curtail retail investor inflows into exchange-traded fund products.

Data obtained by Eureka Report shows inflows into Australian-listed ETFs so far this month have totalled $466 million, with Australian equity index products and fixed income products capturing the lion’s share of new retail investments.

At the same time, over this month there have been total outflows of just over $100 million, although industry insiders point to an increasing trend where investors are using ETFs to trade in and out of the market, especially during times of market volatility.

“We are starting to see a trend emerging, much like the more mature and developed US ETF industry, of Australian investors utilising the liquidity benefits of ETFs during times of market volatility, with ETFs being effective and easy ways to express investment views in such times,” says BetaShares chief executive, Alex Vynokur.

Total ETF funds under management in the Australian market remain above $40 billion, despite a drop in listed asset values this month and last in line with the sharp falls on global markets.

But the ETFs sector is still tracking ahead, and last month surpassed the value of Australia’s 80-year-old listed investments company industry for the first time. Expectations are that the ETFs sector will continue to surge past LICs in total funds under management as more investors spread their holdings across multiple ETFs offering broader diversification.

More new products hit the ASX

November has also been a prolific month for new ETF product issuance, with seven launched from issuers including Vanguard, BetaShares, ETF Securities, VanEck, and managed funds groups Fidelity International and Antipodes Partners.

To date these products have a combined market capitalisation of around $55 million, and include an actively managed global stocks product from Antipodes, an actively managed bond fund from BetaShares in conjunction with asset managers Legg Mason, a global emerging markets fund from Fidelity, and an international small companies fund from Vanguard.

BetaShares also launched a global quality leaders ETF, its 50^th ASX-traded fund, which is invested into 150 global stocks based on high return on equity, high profitability, low leverage and earnings stability.

Also this month, ETF Securities launched its CURE ETF, providing Australian investors with broad-based exposure to a portfolio of global healthcare biotechnology companies.

Outlining the product to Eureka Report, Kris Walesby, Head of ETF Securities Australia, notes that CURE was part of its growing portfolio of thematic products, joining its robotics ETF ROBO, and its recently launched battery storage and lithium ETF ACDC.

“The index tracks many of the US healthcare biotechnology enterprises that are developing the intellectual property for the breakthroughs of the future,” Walesby says.

“The Australian equities market simply cannot provide a comparable universe of investible stocks by either size or variety. In fact, there are probably only two listed Aussie companies that could make it into the US index if they were listed there.

“This is the first time an Australian investor can obtain a pure-play exposure to biotechnology developers in the US healthcare industry while also retaining all the protections that diversification brings.”

Andrew Findlay, Managing Director of Antipodes Partners, says “ETFs are coming of age” , with the number of global ETFs and active ETFs on the ASX having grown at a compounded annual growth rate of 23 per cent.

“What we’re noticing is that an increasing number of investors are tending to prefer investing via listed funds,” Findlay says.

Launched earlier in November, the Antipodes Global Shares ETF (AGX1) is seeking to generate absolute returns above the MSCI All Country World Index by focusing on “under-appreciated companies in the midst of structural change”.

“The Antipodes Global Shares active ETF is another way to provide our existing investment funds to a broader spectrum of investors, both here in Australia and overseas.”

ETFs are more than equities

October inflows into Australian ETFs, at around $760 million, are likely to be stronger than the inflows achieved this month, although BetaShares’ head of strategy Ilan Israelstam says he expects a solid run-up in ETF inflows to the end of 2018 and beyond.

He puts this down to the fact that there are now more than 200 ETF products on the Australian market offering investors exposure to a huge range of asset classes, from international and domestic equities to fixed income, cash, commodities, currencies and other thematics.

“The first thing is, it’s not only equities anymore when we’re talking about ETFs but also cash and fixed income,” he says. “There’s a whole variety of products available, and people still need to invest at the end of the day.

“This year has primarily been about international ETFs, but now we’re seeing good inflows into Australian ETFs and fixed income products such as floating rate bonds.”

Israelstam says another key trend is the strong growth in thematic investing, rather than sector investing, with investors warming to trends such as robotics, artificial intelligence and biotechnology.

“We definitely feel that it’s all going to plan. It will be another good year for ETFs.”