Advisers who fail to embrace ETFs risk missing out on booming consumer demand, reports Lisa Pennell.
More than half of all investors currently using exchange-traded funds (ETFs) did not consult financial advisers, according to the recently-released Investment Trends December 2009 Exchange-Traded Funds Report. Another 7 per cent of ETF investors said they had actually stopped using advisers in the past 12 months. This consumer trend towards self-directed investment could well be reason for concern, as the ETF market in Australia is literally exploding. Figures from the ASX show ETF market capitalisation increased by 185 per cent to $2917 million during the calendar year ending December 2009 – incredible growth, especially compared to the year ending December 2008, when the increase in ETF market capitalisation was just 10 per cent.
There can be little doubt that in the aftermath of the global financial crisis (GFC), consumers are finding ETFs a compelling alternative to other higher-risk, higher-cost investments. The Investment Trends report showed the actual number of ETF investors doubled between November 2008 and December 2009 from 19,000 to 38,000. Perhaps providing a glimpse of this year’s likely growth, a further 64,000 investors were not currently invested but were considering an ETF investment in December 2009. But it seems some advisers might not be matching their clients’ level of interest in ETFs. The Investment Trends report revealed the role of an adviser in recent ETF investments was limited, with four out of five investors whose most recent alternative investment was in an ETF saying advisers had not played a role in that investment decision.
It’s not all bad news though; there is clearly a demand for planner advice on ETFs. The report indicated one in five investors who had used alternative investments said they’d like to receive more advice than they currently were. Interestingly, among those who said they weren’t receiving enough advice on ETF, 20 per cent were using financial planners. There’s no doubt that some fee-for-service advisers have leapt on board the EFT movement, but there is clearly an even stronger pull directly from consumers themselves towards the product. And the results of the Investment Trends report could be a wake-up call for advisers who up until now have ignored what could be deemed the “ETF revolution”. In simple terms, ETFs are securities that track an index, a commodity, or a basket of assets like an index fund. They provide all the advantages of a traditional index fund but at a potentially lower cost and with the added flexibility of being listed and traded on a stock exchange.
The benefits of ETFs include a lower cost structure than managed funds, the ability to be bought and sold at any time during the trading day, tax efficiency, easy market diversification, transparency and liquidity. As with other equities, they can be purchased on margin or sold short and can be used with hedging strategies, stop orders and limit orders. State Street Global Advisors (SSgA) were the first to launch a local ETF range of three products in 2001, followed by 19 ETF offerings by iShares, a division of Barclays Global Investors (BGI), which was sold to BlackRock in 2009. Vanguard is a relatively new entrant to the Australian ETF market, launching three products in May 2009. In less than one year, they have exceeded $100 million under management.
Robyn Laidlaw, Vanguard’s ETF manager, says a fast-growing consumer awareness of ETFs has been reflected by a spike in the Vanguard web statistics and overall performance.
“ETFs are an established investment category in the US and other overseas markets. Experienced investors have been pleased to see their arrival here in Australia,” Laidlaw says.
All three providers are among the biggest global ETF providers, accounting for 87 per cent of ETF assets under management in the US. Between them, Australian investors currently have access to 25 ETFs with a range of different exposures to domestic and overseas markets. Another notable provider in the ETF space is ETF Securities, with five offerings (which they have renamed Electronically Traded Commodities, or ETCs) which track commodities, enabling investors to gain exposure to precious metals without trading futures or taking physical delivery.
The most popular offering is ETFS Physical Gold (GOLD), which was originally listed in Australia in 2003, becoming the world’s first ETF backed by physical bullion. The company now has more than $700 million under management in Australian funds. Comparing the domestic ETF market to the global ETF market, it seems clear there’s plenty of room for growth in Australia going forward. In December 2009, global ETF assets surpassed $1 trillion, with 1097 ETFs on offer, from 103 providers, listed on 39 exchanges around the world. Even with last year’s rapid growth, the market capitalisation of ETFs accounts for just 0.2 per cent of the ASX. In the US, ETFs represent more than 5 per cent of total market capitalisation, while in the European market, ETFs account for around 3.5 per cent.
The head of Australia and New Zealand ETF Securities, Nigel Phelan, agrees that globally, ETFs are far ahead of the Australian market. He says that on any given day on the NYSE, a Gold ETF will be among the top two equities traded. Further, out of the top ten most heavily traded stocks, the top six are ETF structures. Phelan believes gold and a variety of other ETFs have become more popular in the past 18 months as consumers have become more wary.