Darroch says: “If you went into an unlisted fund you would be paying a lot more in fees.”
“We have moved into an era where we’re looking at what the actual return to the pocket of the investor is,” she says.
“Fees are important in that analysis. ETFs can deliver on fees. And ETFs can deliver on after-tax returns, because their turnover is low. Where there is a capital gain in the portfolio, it’s going to have lower realisation of capital gains than an active-type portfolio will.”
Darroch says financial planners in Australia are alive to the possibilities that ETFs present for implementing investment strategies for clients.
“I don’t think they’re waiting,” she says.
“I think there are a couple of dynamics that are changing. Fee-for-service [advice] is one of the dynamics that’s helping ETFs grow in popularity now.”
Laidlaw says an important consideration in the growth of the ETF market is the changing nature of the financial planning industry.
“An important consideration for all issuers with these products is that they have typically been suited to the fee-for-service [financial planning] market, because they are not commission-paying products,” she says.
“And Vanguard, like other managers, sees the self-managed superannuation fund [SMSF] market as a potential buyer of the product – and a lot of these [SMSFs] are clients of financial planners.”
Darroch says that over time, familiarity and hence comfort with ETFs has increased, and that research houses are now looking at the funds more closely.
“It was about getting everyone in the market aware that they are here, they are good, and they’re here to stay,” Darroch says.
ETFs share another characteristic of index funds: It’s fairly pointless owning more than one if they track the same index. Any fund that tracks a given index is pretty much exactly the same as any other fund that tracks the same index. Unlike actively-managed funds, where using two managers with different styles can help reduce risk, no such benefit exists in combining ETF managers.
In the Australian market, ETF promoters seem to acknowledge this fact, if not explicitly. For example, State Street offers ETFs based on the S&P/ASX 200, S&P/ASX 50 and S&P/ ASX A-REIT indices. Vanguard offers an ETF based on the S&P/ASX 300 index. Vanguard also offers overseas ETFs, based on the MSCI Broad Market Index and the FTSE All World ex-US Index.
And these offshore ETFs do not directly overlap with the 19 ASX-listed products offered by iShares. That is more than coincidence – partly for marketing reasons, and partly, says Deborah Fuhr, global head of ETF research and implementation strategy for BGI, because “that decision is often made by the manager of the index offering exclusive licences to indices”.
Darroch says it remains to be seen if that demarcation remains.
“So far in the Austrlian market there has not been that doubleing up,” she says.
“I guess we will wait and see what happens going forward, but I think that the ETFs that have been [issued] have been different enough.”
Laidlaw says that while Vanguard “has some products that are similar or the same as iShares overseas”, so far the issuers in Australia do seem to have avoided direct product competition. When competing ETF issuers offer funds that track the same index, there’s usually a good reason. Fuhr says that in Europe, for example, the Undertakings for Collective Investments in Transferable Securities (UCITS) III legislation (which governs how funds are marketed to retail investors) says one fund may invest no more than 20 per cent of its assets into any other single fund.
If a fund required, for example, 40 per cent exposure to a given market index, it would need to invest 20 per cent of its assets in each of two ETFs tracking the same index. Laidlaw says the market for ETFs in Australia is on the verge of taking off, a fact that acted as a catalyst in Vanguard launching its ETF range in May this year.
“A lot of our decision to be in this market was around what we’ve seen in terms of the use of ETFs and the growth of them in other markets, including the experience of our parent company in the US,” Laidlaw says.
“ETFs as a product have been phenomenally successful because of their versatility.
“This is another way of indexing; in Australia we’re indexing specialists and we think ETFs are very much part of what our core proposition is to clients.”
Vanguard has launched three ETFs as a start, and Laidlaw expects at least one more will be launched before the end of the year. Laidlaw says ETFs are attractive to investors who both accept the philosophy of index funds management, and who also are attracted to the trading options presented by the products’ ASX listing.
“For investors in Australia – and this is the same as for investors overseas – a key feature is being able to buy the fund investment on the exchange,” Laidlaw says. ETFs combine some of the key features of products already available – most obviously unlisted index funds and listed investment companies (LICs).
Like unlisted index funds, ETFs offer a lowcost, tax-efficient way to gain good diversification; they offer the liquidity and trading opportunities associated with LICs. But unlike LICs, ETFs are not likely to ever trade at a significant premium or discount to net asset value (NAV) – the mechanics of the primary market see to that. The activities of the authorised participants and market makers mean such arbitrage opportunities very quickly evaporate – if they arise at all.
