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SMSFundamentals: ETF Investment Enters The Mainstream

SMSFundamentals | Mar 22 2018

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ETF Investment Enters The Mainstream

A recent survey suggests investment in Australian exchange traded funds continues to grow a-pace and a wider range of investors is now turning to ETF investment.

-Value of ETF investment growing at over 30% per annum
-Diversification of investment options driving growth
-Younger investors now turning to ETFs

By Greg Peel

The value of exchange traded fund (ETF) assets under management and the number of Australian investors in ETFs continue to grow strongly as the industry shifts further into the mainstream market, as evident in the BetaShares/Investment Trends Annual ETF Report 2017.

ETFs provide the opportunity for investment in a basket of stocks as if that basket were one individual stock listed on the ASX. Such baskets may be passive index-tracking, such as ETFs on the ASX200, or strategy-specific, such as baskets of “growth” stocks, “high yield” stocks or other variations.

The benefit from the investor's point of view is that the sponsors of ETFs – BetaShares being one – manage the basket portfolios on an ongoing basis, adjust capital weightings and so forth, relieving investors of the need to constantly monitor such matters themselves. Sponsors also guarantee a sell price and a buy price in the secondary market so an investor cannot be “caught” holding an ETF position.

ETFs listed on the ASX also extend beyond Australian stocks to international stocks, and other asset classes including fixed income, cash, currencies and commodities. The ASX groups these variations under the label exchange traded products (ETP) but the market tends to use “ETF” as the catch-all, just in case anyone is confused.

The 2017 ETF Report received survey responses from around 6000 investors and 500 financial advisors. The investor cohort includes both SMSF investors and non-SMSF, typical retail investors. The number of Australians investing in ETFs reached 314,000 in 2017, up 18% on 2016.

From the listing of the first Australian ETF in July 2004 to February 2018, the value of Australian listed ETFs has grown at a compound annual rate of 31%.

The ETF market has now become highly liquid and survey respondents cite liquidity as one reason to choose ETFs. A strong secondary market means investors are not beholden to a sponsor’s bid/ask spread. Convenience is another obvious reason cited, but the top three reasons in the 2017 survey were diversification, low cost (brokerage similar to share investment) and access to overseas markets.

To the latter point, the next graph shows 2017 was a year in which investment in international equity ETFs exceeded investment in Australian equity ETFs. If we consider that the US stock market rose 20% in the year compared to Australia’s 7%, we may understand why.

A Broader Range of Investor

The number of SMSF investors holding ETFs increased by 5% in 2017 to 105,000, suggesting one in every six SMSFs now holds ETFs in their portfolios. However, the proportion of SMSFs as a total of all ETF investors declined to 33% from 38% in 2016.

The decline reflects the addition of 44,000 new investors outside of SMSF funds, such as regular retail investors.

The first ETFs arrived on the ASX around the same time many older Australians turned to self-management of their super, having been left frustrated by the fees extracted by mainstream fund managers. It is thus no surprise SMSFs quickly became the early adopters of ETF investment. Only five years ago the average age of ETF investors was 56. Last year it was 42.

This implies the fastest growing cohort of new ETF investors are the so-called “Millennials”.

For the record, the definition of “Millennial” is rather vague, just as no one can agree at what point “Baby Boomer” gave way to “Generation X” or exactly when Generation X morphed into “Generation Y”. To add to the confusion, “Millennial” has actually replaced Generation Y, not Generation Z as might seem logical, such that it is a label for those born at some time in the 1980s up to 2000, and not after 2000 as the label might suggest.

The 2017 ETF Report found one third of “next wave” investors, defined as those planning to invest in ETFs in the next twelve months, are Millennials. The break-down of those currently investing in, or intending to invest in ETFs in the next twelve months, is 38% Millennial, 32% Gen X and 27% Baby Boomer.

One might surmise that Baby Boomers never worried too much, at the time, about planning for retirement, when buying a home was easy by today’s standards. Gen X-ers were making too much money and having too much fun to care less, but Millennials struggle to afford a home in today’s market and are constantly reminded that the average Australian will not have enough money for retirement.

Notes BetaShares CEO Alex Vynokur, “This generation [Millennials] of investors is redefining ‘blue chips’, with traditional market darlings giving way to global technology, healthcare and sustainability leaders."

In other words, Baby Boomers are still stuck on buying BHP, the banks and Telstra while Millennials are embracing the new world mostly only they understand. How many bought international ETFs as a way of investing in Apple, Amazon and Facebook, perhaps?

The combination of the historically low interest rate environment in Australia and low levels of affordability for residential housing is causing millennial investors to think in new ways about investment and wealth creation,” Vynokur suggests. “Low cost, small minimum investment size, diversification and convenience are the key factors behind the popularity of ETFs in that market segment.

Financial Planners

Approximately 60% of financial planners surveyed are currently recommending ETFs or intending to do so in the next twelve months, the Report found. The reasons cited echo those of investors – low cost, diversification, liquidity, access to offshore markets and access to specific types of investment or asset classes.

Planners who currently recommend ETFs are putting an average of 17% of new client money into them and are expressing an interest to increase this allocation over time.

Yet only one in four of investors surveyed cited advice from their financial planner as the reason they invested in ETFs, suggesting the carts are leading the horses.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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