The Australian ETP industry is set to grow significantly based on the momentum generated in 2017, according to ETF manager BetaShares.
A growing audience of younger investors, an increasing array of fixed income options, and a move toward model portfolios using ETFs, will drive growth in 2018, the firm says.
This year to November, the Australian ETF industry reached an all-time high of AUD35.5 billion, up from AUD25 billion in 2016.
“2017 has seen huge growth in the adoption of ETFs, with the Australian ETF industry reaching an all-time high of AUD35.5 billion in funds under management (FuM) by November,” says BetaShares Managing Director, Alex Vynokur (pictured).
“Investors are increasingly taking notice of the ease with which ETFs can be used to diversify their portfolios, as well of their cost-effectiveness and transparency benefits.
“We expect to see significant growth in 2018 as the array of ETF options on the market continues to increase.”
Prediction one: Millennials will continue to be an important driver of growth
Although investors of all types have embraced the ETF market in recent years, millennials continue to gravitate to the sector.
“Millennials are attracted by the low cost, simplicity and ease of use of ETFs, as well as their ability to provide tailored exposure to investment themes that matter in their lives,” says Vynokur.
“For example, ETFs such as the Australian and Global Sustainability Leaders ETFs (ASX: FAIR & ETHI) allow younger investors to invest according to their values, whereas products such as the Nasdaq 100 ETF (ASX: NDQ) or our Cybersecurity ETF (ASX: HACK), allow them to be exposed to companies whose products resonate with their daily lives, which can be a strong motivator for investing.”
In Australia this year, according to CommSec, 25 per cent of all ETF trades were done by millennials.
“Amongst other things, the diversification benefits of ETFs make them a great way to get started investing in the sharemarket, which many of our younger clients have told us brought them to start looking into ETFs”, says Vynokur.
Prediction two: Greater innovation in fixed income ETFs
Fixed income has long been acknowledged as a good way to diversify a portfolio. Yet bond markets have historically been difficult for individual investors to access.
In the last year in particular, there has been significant innovation in this space, with rapid growth in fixed income ETFs globally. With interest rates at record lows, exchange traded products are giving investors vehicles to gain exposure to bonds that goes beyond traditional fixed-rate exposure. The most recent innovation in Australia is the launch of floating-rate bond ETFs, with products such as BetaShares’ QPON ETF, which offers a lower volatility alternative to traditional fixed-rate bond exposures, and has raised approximately AUD170 million in six months.
“Floating rate bonds offer the additional advantage of having their interest payments adjust to reflect rises or falls in benchmark interest rates. This is particularly useful in a market where interest rates are rising,” says Vynokur. “Floating rate bonds posted good returns over the past year, and appear well placed to continue to perform strongly given the current level of interest rates.”
“In 2018, we expect to see further innovation in fixed income ETFs, providing direct investors with much-needed access to lower risk, income-producing assets.”
Prediction three: A move toward model portfolios
2017 has seen a rise in the number of advisers and individual investors interested in investing via ETF model portfolios, including via robo-advisers. ETF model portfolios give investors a cost-effective and efficient way to obtain diversified, risk-controlled investment portfolios all implemented via ASX-traded ETFs.
“We have seen particular growth in ETF model portfolios from financial advisers, who are attracted to the ease by which they can now offer clients diversified portfolios which use sophisticated asset allocation techniques. We are increasingly seeing such portfolios now offered directly via SMA or investment platforms, with the take-up in this type of activity expected to continue to grow strongly into 2018”, says Vynokur.
“BetaShares has developed ETF model portfolios which are currently being used by many financial advisers for their clients”.
Prediction four: Active ETFs will grow in popularity
This last year has seen the continuation of Active ETF launches, giving investors more opportunity to diversify their portfolios alongside the passive ETF investments.
“We expect to see Active ETFs growing in popularity in 2018. They have the potential to match the growth of passive ETFs due to adviser interest, with the launch of a number of funds offering access to active management strategies,” says Vynokur.
“Innovations in the local market now make it possible for fund managers to offer their active strategies in a convenient exchange-traded form while still protecting their intellectual property. We believe the sector has a bright future,” Vynokur says. As an example, BetaShares recently launched HBRD, the first Active ETF which provides exposure to a professionally managed portfolio of Australian hybrids.
“While BetaShares remains a strong advocate of passive investing there are a number of asset classes and managers who can add value via active investing. For example, the complexities of hybrid securities and relative inefficiency of the hybrids market make investing in this asset class via a professionally managed fund vehicle a better way to go for many investors.”
Across all predictions, growth remains the consistent theme
“The growth of the ETF industry in Australia has been phenomenal in recent years, and we predict it will continue on this strong trajectory in 2018. The industry size by end December will likely be AUD36 billion and we expect the ETF industry to end 2018 at AUD40-45 billion”, says Vynokur.