Asset allocation drives ETF growth

Asset allocation is driving the investment landscape for advisers and sophisticated investors. Rather than debating which Aussie bank to own, the focus is moving to which countries should be invested in and in what asset classes.

Continued pressure on the Australian dollar, combined with recovering Asian and European markets, give investors opportunities to gain upside through international exposure.

Jon Howie, iShares ETF specialist at BlackRock Australia, said investors who work with their advisers to diversify their international portfolios to specific countries and regions, including United States, Europe, China, and Japan, could take full advantage of the global opportunities.

He pointed out that it’s not just about improved performance. Diversification is also about reducing risk.

“United States equities funds have been good performers in 2013, particularly for Australian investors,” Howie said. With the prospect of a weaker Australian dollar during 2014, it may be opportune to increase and diversify international exposure through investments in the United States, Europe, Japan and some Asian markets, where equity market performance has been strong.

Howie said ETF diversification opportunities also extended to domestic equities and fixed income, something many advisers were using to full advantage for their clients.

“ETFs have experienced significant growth in Australia with Australian Stock Exchange (ASX) ETF assets sitting around $9.51bn. This equates to an annual growth rate of over 60% in the past 12 months. Total industry inflows this year have been around $1.99bn, the largest annual inflow level ever,” Howie said.

“iShares have attracted just over 62% of these flows and is currently the largest Australian ETF issuer, with $3.4bn ASX-listed assets under management.

“In 2013 we have seen advisers and their clients being far more flexible and sophisticated in the ways they use ETFs. Advisers recognise the many and varied applications of ETFs in client portfolios. One of the most interesting developments of late is investors getting specific about their international allocations. This is supported by the notable increase in trading volumes in some of our single country or region funds. For example:

iShares MSCI Japan (ASX code IJP) average daily trading volumes are more than 10 times higher than 12 months agoiShares China Large Cap (ASX code IZZ) average daily trading volumes are more than three times higher than 12 months agoiShares Europe (ASX code IEU) average daily trading volumes are up more than five times on the volume of 12 months ago

“ETFs are about much more than a passive exposure.

“They are about tailoring your exposure to different markets and different asset classes by using the flexibility offered by ETFs. iShares is the only ETF provider in the market that gives advisers and their clients the ability to make such specific decisions about their portfolios: what country they invest in and whether they invest in midcaps, mega-caps or small caps etc. And they are using ETFs to provide exposure to more asset classes. Advisers have always been aware that fixed income remains a cornerstone of a well-constructed portfolio,” Howie said.

A large number of investors used ETFs for the first time during 2013 because they found they could use them in a very specific way and were able to narrow down their investment choices.

“As we move into 2014 it is clear that investors are getting much more specific about the countries and regions they are including in their portfolios.

“Working with your adviser to gain that level of insight is important. International markets have been strong in the past year, and we expect the global economy to continue on its slow path to recovery. However, that does not mean there won’t be setbacks along the way. Some countries and regions are likely to outperform in the year ahead, and being discerning about investing opportunities will be a critical factor in success.”

Howie said Australian equities continue to recover, led by solid performance from the local banks, however most investors remain heavily exposed to the local market, and the momentum was currently with international equities.

He said iShares was the only ETF issuer that provided local investors exposure to China, Japan, Korea, Taiwan, Hong Kong and Europe. Their use has increased in the past year as too has that of the most popular iShares – iShares S&P 500 (IVV), iShares Global 100 (IOO) and iShares MSCI Emerging Markets (IEM).

“As investors look to more dynamic asset allocation in 2014, we expect the use of ETFs will continue to grow.”