Australia's Exchange Traded Funds (ETF) market is booming, fuelled by cost-conscious investors striving for better returns in an era of low interest rates, and pension fund managers looking to diversify their portfolios.
ETF funds under management have more than doubled since 2014, reaching a record AUD 29.4 billion at the end of June 2017, with over 200 exchange traded products available.1
This strong record of growth is increasingly challenging Australia's active fund Managers, which charge higher fees but have struggled to beat their index benchmarks, as reflected by data for the 10-year period ending December 31, 2016.2
Pension funds sparking ETF demand
Demand for ETFs is partly driven by pension funds in Australia's AUD 2.2 trillion (USD 1.7 trillion) retirement savings market as investors seek to boost income and spread risk, according to industry experts. “Income continues to be a very relevant theme with the low rates environment that Australia is experiencing," Betashares managing director Alex Vynokur said in comments published by Bloomberg.3 “The ability for Australians to generate income and at the same time manage risk and not suffer drawdowns when markets become volatile is important."
ETF investors are also getting younger. According to Betashares' research, millennials are becoming a more dominant force in the market as they build their retirement portfolios.4
Millennials are becoming a more dominant force in the market as they build their retirement portfolios
"They get the instant gratification through convenience, which is one trade, low-cost diversification to a range of investment opportunities. There are so many ETFs out there they can invest how they want or how their peers invest," VanEck Australia managing director Arian Neiron told the Australian Financial Review.5
Surge in self-managed superannuation funds
While most Australian pensions are managed by large, established funds, a growing number of investors are managing their own. Self-managed superannuation funds (SMSFs) now hold AUD 654 billion, almost a third of the country's pension savings, according to data from the Self-Managed Superannuation Fund Association (SMSFA).6
The growth in SMSFs is another demand driver for ETFs
Already taking a bigger share of the national pension pot than retail super funds (AUD 570 billion) and industry super funds, (AUD 500 billion), SMSFs, which number about 580,000 are expected to double within the next 15 years, the SMSFA said.
The growth in SMSFs is another demand driver for ETFs, which appeal to trustees who value ETFs' lower fees and their ability to provide portfolio diversification. SMSFs have enthusiastically embraced ETFs. According to BetaShares, the number holding ETF products reached 100,000 as at September 2016, nearly tripling since 2013. Some 38 percent of Australia's ETF investors do so via their SMSFs.7
SMSFs have proven loyal to trustees' investment habits, with Australian equities, cash and term deposits comprising the bulk of a typical portfolio. However, there is evidence trustees are becoming more willing to embrace risk. The share of cash in average SMSF portfolios has fallen slightly over the past five years from 28 percent to 26 percent, while investments other than equities, property and fixed income have taken a greater share.8
The right time to invest in ETFs?
The surge in ETF investing has raised a number of concerns, particularly at a time when indexes are riding high. Large pension funds may boast investment management teams, whereas SMSFs are often run by trustees with fewer resources at their disposal.
“We're concerned about ETFs because they represent broader market indexes - both the good and the bad," Matthew Walker, Sydney-based director of wealth advisory group, WLM Financial Services Pty said in comments published by Bloomberg. “There are a lot of risks in the system with indexes at all time highs."
The Australian Securities and Investments Commission has also expressed concerns about derivative ETF products as posing risks to unsophisticated investors.9
If you can't beat them, join them
With ETFs expected to take a greater share of portfolios at the expense of mutual funds, local asset managers are producing their own hybrid ETF products that target investors who want lower costs but also a level of active management. A number of so- called Exchange Traded Managed Funds (ETMFs) were listed on the Australian Stock Exchange in 2016 by traditional active fund managers, including Magellan Financial Group's Global Equity Fund.
Local asset managers are producing their own hybrid ETF products
Other funds are hedging their bets by teaming up with ETF specialists, including AMP Capital, a prominent active manager which entered into a partnership with BetaShares last year to produce a range of ETMFs.
The full impact of the burgeoning ETF market is yet to become clear in Australia, but the rising tide of passive investing is likely to spark more innovation from active funds looking to increase revenues and protect market share.
Sources
- BetaShares (July 12, 2017) Australian ETF Review – Half Year 2017
- S&P Dow Jones Indices (February 20, 2017) SPIVA Australia Scorecard Year-End 2016
- Bloomberg (March 15, 2017) Australian $1.7 Trillion Pension Pot Spurs Record ETF Demand
- BetaShares/Investment Trends (December, 2016) 2016 Exchange Traded Funds Summary Report
- Australian Financial Review (March 13, 2017) Millennial investment products powered by ETFs
- The Australian (April 4, 2017) Superannuation rule changes add to lure of SMSF route
- BetaShares/Investment Trends (December, 2016) 2016 Exchange Traded Funds Summary Report
- Self Managed Superannuation Fund Association (November 1, 2016) Media release
- ABC (April 4, 2016) Exchange traded funds surge in popularity as investment option