Morningstar analyst Ksenia Zaychuk

Exchange traded funds are finding it much tougher to crack the sustainable investment sector than their active counterparts, according to new research from Morningstar, with a range of factors contributing to the slow take-up.

According to Morningstar analyst Ksenia Zaychuk, while there has been an “enormous appetite” for Australian ETFs over the last decade – including a 52 per cent growth in assets in 2019 alone – the push towards sustainability has not been a factor.

“Sustainability-focused products were not as successful in capturing broader investor interest as their active counterparts,” Zaychuk noted in an investor report. “After UBS launched six region-focused ethical ETFs in 2015, only nine new products have been launched since and they’ve only accumulated AUD $1.6 billion in total assets.”

“This mild take-up,” she continued, “could be due to the lower penetration of environmental, social and governance strategies into portfolios, a lack of familiarity with the product set, their relatively short performance histories and fee levels higher than their passive peers.”

Speaking to Professional Planner, Zaychuk notes that investors are just now getting interested in sustainability products. In some ways, the products themselves need to catch up with the needs of the market, she explains.

“When you look at the product set that is available in the market, what sustainability means to you might not be the same as what it means for me,” Zaychuk says. “That makes it difficult for investors.”

She believes advisers have a role to play in selling the story of sustainable investing and acting as conduits to connect consumers with the appropriate products. Active investment products often come pre-loaded with a cohesive story, but sustainability-focused exchange traded funds might need more of an education focus to get consumers involved.

“The story’s important, but in terms of sustainability specifically it’s also about education,” she says.

There are positive signs for sustainability-focused passive investing, she says, with “more and more” advisers trying to gain a better understanding of sustainability products. The recent bushfire crisis has only mobilised this concern, she adds.

The ETF market as a whole in Australia reached $61 billion in 2019, Morningstar reports, with the number of domestic ETFs rising from 191 to 213.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
Leave a comment