The global market for exchange-traded funds (ETFs) will soon top $US3 trillion ($3.7 trillion), having exceeded $US2.9 trillion at the end of the first quarter, 2015. While this is overwhelmingly concentrated in North America – some $US2 trillion resides in the US – almost $US120 billion of this total is held in the Asia-Pacific region.
ETFs have rapidly grown in popularity since the first one was launched in the early 2000s. In Australia, the sector lags behind other types of funds, with about $20 billion in assets under management (AUM), compared to about $1.3 trillion in AUM across all funds as at December 2014.
However, the ETF sector has roughly tripled in size between 2010 and 2014, while AUM for unlisted managed funds have grown by about 41 per cent.
“There’s a number of structural drivers behind it; things like the Future of Financial Advice (FoFA) legislation, with more onus being put on cost and transparency,”
says Alex Prineas, senior research analyst, Morningstar.
“ETFs do offer lower cost and are very transparent as far as portfolio disclosure goes. And there also seems to be a preference among the self-managed super fund (SMSF) market to invest directly –
so a large chunk of asset allocation is
either in direct equities, cash, and increasingly ETFs.”
There are several large players in the ETF sector, which is very much a game of scale. The same players that dominate globally also dominate the Australian
ETF market.
The three largest in Australia are iShares, State Street and Vanguard, with $6.6 billion, $4.3 billion and $3.4 billion in AUM. According to Prineas, iShares accounts for some 38 per cent of the market, both globally and in Australia. iShares is managed by international asset manager BlackRock. The next tier in the Australian ETF sector is BetaShares, which is partly owned by Mirae Asset, a large global group.
What’s the appeal?
Prineas says the popularity of ETFs revolves largely around their ability to “even the playing field between institutional and retail investors”.
“You pay the same price in an ETF regardless, whereas that’s not necessarily the case with managed funds or other types of investments,” he says.
“The transparency is appealing; you know exactly what you’re investing in, portfolios are disclosed at least monthly and often more regularly than that. You can also execute [an order] any time the ASX is trading.”
Damien Sherman, senior product manager at Vanguard, describes the key advantage as the opportunity for advisers and retail investors to access ETFs at the same wholesale rates as institutional investors.
“This year, the trend is very much upwards. They’re very attractive to planners, their clients and self-directed SMSFs. That’s where we see the growth coming from predominantly, both advised and non-advised SMSF trustees,” Sherman says.
He says Vanguard has observed an increase in calls to its ETF helpline and trade assistance desk from advisers
asking for explanations of aspects they
are unfamiliar with.
“They’re very interested in liquidity. There can be a perception in the market that ETFs are not liquid, but in fact they are. We spend a lot of time with advisers explaining that,” Sherman says.
More time educating
The increased interest in ETFs also means more time spent educating financial planners and individual investors about how to use Vanguard’s systems
and processes.
“We spend a lot of time explaining to these advisers what they’re seeing on the screen…the dynamics of the market, and getting them more familiar with how that part of the market works,” Sherman says.
In terms of product development, increased international exposure is a trend he has observed.
“We launched our international shares – hedged and unhedged ETFs at the end
of last year,” he says.
“We’ve seen good growth in those products. The rest of the market has
been focused on that trend as well.
“We’re increasing the options for investors…who may move away from a domestic bias to pick up more global exposure.”
