SMSFundamentals | Dec 16 2019
SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.
For an introduction and story archive please visit FNArena's SMSFundamentals website.
ETFs Attract The Young And The Restless
Recent data show an increasing interest in exchange-traded fund investment from millennials, while defensive ETFs have risen in popularity, along with international offerings.
-ETF market continues to grow
-ETF investors getting younger
-Defensive ETFs draw investors
-International ETFs offer diversification
By Greg Peel
The Australian exchange-traded fund industry has continued its rapid rise this year, as noted by the BetaShares/Investment Trends ETF Report for 2019. Adoption is at record highs among investors, SMSFs and financial advisers.
According to the Report, ETF investor numbers reached 455,000, up 18% from 2018. Projections suggest that number will reach 521,000 over the next twelve months.
Financial advisers are increasingly recommending ETF investment to clients, with 58% now providing advice on ETFs, up from 53% in 2018 and 27% in 2010. In the wake of the banking Royal Commission, around a quarter of all financial advisers are now self-licenced and thus independent of the mainstream fund managers.
Interestingly, 14% of new inflows from self-licenced adviser clients found their way into ETFs this year compared to only 7% from their aligned peers. That 14% figure is expected to rise to 19% over the next three years.
Advisers now find themselves under unprecedented regulatory scrutiny, and one way to ease some of that responsibility is to recommend instruments managed by a third party (ETF sponsor). ETFs can also alleviate the need for an adviser to spend a lot of effort in constructing client portfolios.
ETF investors continue to get younger, the data confirm. Five years ago the average age of an ETF investor was 56, reflecting that cohort looking ahead to retirement in the not too distant future. That average has now fallen to 42. Of all new entrants into the EFT market in the last two years, 43% are in the millennial age bracket, compared to 12% five years ago.
For the confused, "millennials" are Gen Y, born between 1981 and 1996 and typically the children of Baby Boomers. Those born in the actual new millennium are Gen Z.
The rise of the young investor means the proportion of self-managed super funds investing in ETFs has remained flat at 30% in 2019 from 31% in 2018, despite the number of SMSFs investing in ETFs rising 6% in 2019.
Presumably the youngsters are investing for growth rather than capital preservation at this early stage, but across the full spectrum of ETF investors, 2019 saw a decided shift towards a more defensive stance. While around half of those invested in ETFs made no significant changes to their portfolios in 2019, 40% made changes to increase defensive positioning.
To end-October, 2019 had seen $2.8bn of inflows into the Fixed Income & Cash categories of ETFs, making it the most popular category to that point. Since 2012, the annual growth rate for Fixed Income ETFs has been 79.2%.
"We have seen significant growth in our cash and fixed income offerings," said EFT sponsor BetaShares, "with investors seeking out income-oriented exposures with defensive and diversification benefits, which have been particularly relevant in the current low interest rate environment".
Get it India
On the subject of diversification, ETF investors are also looking outside of Australia for investment alternatives, with a focus on fast-growing Asian economies. What stands out this year, notes independent ETF manager ETF Securities Australia, is the increased number of ETFs launched that provide exposure to international markets.
In June, ETF Securities partnered with a major Indian fund manager to launch the first Indian equity ETF on the ASX, the ETFS Reliance Nifty 50 ETF ((NDIA)). In August, a second Indian equity ETF was launched, joining three Chinese equity ETFs and one each for Taiwan and South Korea.
The Indian Nifty 50 index, representing around 65% of the market cap of listed Indian companies, has increased eleven-fold since its launch in 1995 and has become one of the world's most traded indices. The World Bank forecasts 7.5% GDP growth for India in both FY20 and FY21.
Yet while flows into fixed income and international ETFs were outstripping those into Australian ETFs earlier in 2019, domestic equity ETFs have made a bit of a comeback in later months. ETF sponsor VanEck puts this down to an easing of trade war fears.
To end-November, flows into Australian equity ETFs totalled $3.70bn, VanEck reports, compared to $3.55bn for international equity ETFs. Flows into fixed income ETFs (both domestic and international) totalled $3.33bn, but that's a new record.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On