SMSFundamentals: Aussie ETFs Have $100bn In Sight

SMSFundamentals | Jun 01 2020

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Aussie ETFs Have $100bn In Sight

Market volatility has sparked a surge in ETF interest from investors as traditional funds managers suffer outflows.

-Australian ETFs have grown to $56.9bn in funds under management
-Passive ETFs are preferred over actively managed alternatives
-Precious metals led the way while oil/energy and property ETFs were the laggards
-Strong trend remains towards ethical and sustainable investing

By Angelique Thakur

When global financial markets lost their bottle in March, Exchange Traded Funds (ETFs) emerged as investors’ instruments of choice, according to a recent study released by online robo investment advisor Stockspot, in its 6th Annual Exchange Traded Funds (ETF) report.

The study estimates the Australian ETF market grew by 24% to $56.9bn over the year past; and by a factor of three since 2015.

The year past saw the addition of 23 new ETF products in Australia, taking the total number of available ETFs in Australia to 212.

Amidst high volumes in ultra-volatile March, ETF trading volumes grew to $17.8bn, thrice that of the prior month, while actively managed funds saw material outflows during the same period.

The report highlights ETFs are now more popular than Listed Investment Companies (LICs) in Australia. Stockspot expects total funds under management for ETFs in Australia to grow to $100bn by 2022.

Some of the eye-catching observations from this year’s sector update include:

Passive beats active

Passive ETFs continued to hold sway over the actively managed options. This has been corroborated by active managers underperforming across most asset classes.

Stockspot notes almost 48% of active managers could not beat their respective market indices during the March 2020 correction, putting a question mark on their claims of being able to protect investors during corrections.

iShares Global 100 ETF (underlying index – S&P Global 100, measures performance of 100 multinational companies), a passive ETF, beat 87% of actively managed global share ETFs.

This was replicated in Australia by the Vanguard Australian Shares Index ETF (underlying index – S&P/ASX 300 Index) beating 80% of active Australian share ETFs.

Broad beats niche

Money flows showed an overwhelming preference for broad market indices. The Vanguard Australian Shares Index ETF held onto its title of the largest ETF with net inflows amounting to a staggering $1.6bn, pushing funds under management up by 21% to $4.2bn.

The iShares Core S&P/ASX 200 ETF (underlying index – S&P/ASX 200 Index) which tracks Australia’s largest 200 companies saw the second-highest inflows at $871m.

Worst performers for the year past were niche products (energy, property) with active managed ETFs continuing to lag broader market ETFs.

Over the twelve months till March 31, the average passive broad Australian share market ETF returned -12.9%. This compares with the average active Australian shares ETF losing -16.6%.

Flocking towards safe havens

Investors flocking towards safer bets was one of the key themes in the year past, according to the report. Money flows into precious metals ETFs saw a material boost.

In terms of performance, palladium stole the show for the second year in a row, returning 90.2%. The total return of the palladium ETF over the last five years is a mind blowing 363%.

Gold also gleamed with physical gold ETFs surging on the back of strong performance and new inflows. Total fund under management rose to $2.3bn from $906m last year signifying gold’s importance as a strategic asset to diversify risk, notes Stockspot.

Oil and property – the buzzkills

Unsurprisingly, the carnage witnessed in the physical oil markets was reflected in the beating taken by oil and energy ETFs. Betashares Crude Oil Index ETF (underlying index – S&P GSCI Crude Oil Index) lost almost -65% year on year.

Another victim claimed by covid-19 was the property sector. Property ETFs went from being one of the best performers, returning an average 29% in 2019, to being one of the worst this time around, returning -32%.

It can be argued, listed property highlights the pitfalls of investing in ETFs on the basis of past performance alone.

Strong trend towards responsible investing remains

Investors are increasingly turning towards socially responsible investing. Sustainable ETFs saw an increase of more than 73% over the year ending March 31, preferring healthcare stocks and moving away from energy stocks.

Sustainable ETFs are by far the strongest growers, highlights the report, increasing funds by 79% per annum over the past five years compared with 26% pa growth for other ETFs.

Australian ETFs

The Australian ETF industry continues to be dominated by three major players – Vanguard, iShares and BetaShares – which control more than 75% of the market between them.

Australian investors are increasingly moving towards low fee ETFs with almost 50% of them preferring ETFs that charge less than 0.25% in fees. This has led to fee wars between players with investors gaining the most, according to Stockspot.

With a jaw dropping 1000% growth globally over the last five years, Robo advisor platforms are witnessing a tremendous surge all across the world and Australia is no exception.

Robo advisor Stockspot suggests robo advice is by now one of the fastest growing segments in asset management with investors drawn to it due to the ability to chalk up a portfolio effortlessly while being easy to use and low on costs.

Finally, the world’s first ETF was created in March 1990 in Canada, which means the sector has just celebrated its 30th anniversary.

Worldwide, some US$5.4trn is being managed through more than 7000 different ETF products. Australia, while fast growing, only represents 0.7% of that market.

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