The popularity of exchange-traded products is rising, but the level of adviser understanding on the asset class is low, according to industry experts.
Tim Bradbury, principal at ETF Consulting, and senior investment analyst at Zenith Investment Partners, Dugald Higgins, said financial advisers still did not fully understand how these products work, particularly the new form of indexation referred to as smart beta strategies.
Bradbury, who predicts that smart beta exchange-traded funds (ETFs) will become increasingly common in Australia as they are in other parts of the world, said product issuers and research houses had an important role to play in educating investors and advisers. He added that it wouldn’t take long for advisers to get up to speed.
“These [smart beta] products will become bigger, but the problem right now is that they’re new, so no-one is doing much education and also they need to have a longer term track record before advisers will be allowed to buy them,” he said.
“These funds can make sense to a mass audience, provided people understand the construction of the underlying index, and it won’t take a lot of time and training for advisers to understand them.”
This week Zenith Investment Partners released its inaugural Exchange Traded Products Sector Report, which looked at a universe of 86 products including ASX-listed ETFs, managed funds, structured products and smart beta strategies.
The report concluded that smart beta strategies, when applied in conjunction with the cost and accessibility benefits of an exchange-traded product (ETP) structure, can provide investors with a cost-efficient and easily accessible way of achieving particular outcomes.
The report’s author, Dugald Higgins, said all of the three smart beta funds currently available to Australian investors revolved around Australian equities with a high dividend focus.
He said these investment options increasingly blurred the lines between the traditional passive nature of ETPs and full active management, with smart beta funds charging significantly less than active managers.
“Such investment options can potentially be a source of value-add to cost-sensitive investors who wish to maintain an exposure to active management,” Higgins said, citing their popularity among self-managed superannuation funds.
“ETPs are an easy way for people to diversify their portfolios without having to worry about choosing the right active managers. Active managers can be excellent, but the majority don’t outperform their benchmark over the long term, so choosing passive ETF strategies removes that decision,” he said.
Smart beta fees straddle the average cost of an Australian equities managed fund, which has an MER of around 0.9 per cent, and a passive ETF, which has a fee of around 0.55 per cent.
“The cost varies depending on the fund, but the fee can be anywhere between 0.3 per cent and 0.7 per cent,” Higgins said.