Online trading platform, Bell Direct, has warned investors to avoid the ‘ETF trap’, as the move to passive strategies gains substantial pace and inflows reach all-time highs.
While Australia lags the United States in terms of ETF uptake, passive allocation by local investors show no signs of abating, reaching AUD30 billion in funds under management last month.
Bell Direct CEO Arnie Selvarajah says that for many investors passive was ‘the new black’ and represented the broader dramatic shift in customer demand for simplicity and low cost.
“In the sense of accessibility, liquidity and price, it’s easy to see why ETFs have become so popular with investors in the current market. However, investors should be warned against blind overallocation and recognise that not all index-driven products are created equal,” says Selvarajah.
“An issue we are now seeing emerge is an overexposure to overtly-similar passive strategies, leaving investors’ poorly-diversified and their portfolio performance at risk. For every eight stocks a self-directed investor owns, at least one of these stocks are an ETF if not more.
“For the ill-informed investor, unquestioned allocation to ETFs is a common trap. Attention must be given to the different styles and exposures of various ETF products, and investors should understand that passive alone will not deliver the desired return outcomes,” he says.
To educate and match investor needs to suitable products, Bell Direct have launched an ETF Filter to traders, complementing the existing mFund Filter. The functionally enables investors to simply compare performance, fees, asset class, sector, issuer and Indirect Cost Ratio (ICR).
“Before we launched the ETF Filter, there were no tools in market to help investors discern the differences between various products available,” Selvarajah says.
“There are now over 200 exchange traded products trading on the ASX which is an unrealistic number for the average retail investor to compare. The Filter eliminates a pain-point for investors and supports portfolio diversification.
“The trend towards actively-managed and smart-beta ETFs is just another reason why investors need tools to simply compare products. The world of investing is continually innovating and changing, and today’s investor needs to be able to make smarter investment decisions,” says Selvarajah.