Despite dramatic sharemarket volatility in the last quarter of 2018, the Australian ETF industry grew 13 per cent in the year, ending the year at AUD41 billion in FUM, up AUD5 billion from AUD36 billion in 2017, according to the BetaShares Australian ETF Review – End of Year Review 2018.
As a result of sharp market falls at year’s end, all the year’s industry growth came from net inflows, with AUD6.2 billion flowing into the industry – representing the second highest annual flows on record.
To put this result into context, the Global ETF industry also recorded its second highest year of inflows, receiving USD516 billion. However, significant asset value depreciation caused total global ETF funds under management to end the year at USD4.8 trillion, approximately the same level as 2017.
BetaShares’ CEO, Alex Vynokur, says: “In the year that just concluded, there has been a strong correlation between what we’ve seen happen in the local ETF market and globally, particularly as relates to net inflows.’’
In addition, the Australian industry did break a meaningful record in 2018, namely, annual trading values, with trading activity levels increasing 14 per cent from 2017 to over AUD36 billion.
“The liquidity benefits of ETFs are being increasingly appreciated by Australian investors. We expect trading values to continue growing as ETFs become an increasingly mainstream way to express investment views, both long term and tactical,” adds Vynokur.
For the fourth year in a row, international equities ranked as the number one category for inflows, attracting AUD2.9B of net inflows during 2018. Australian equities followed with AUD1.5 billion, with fixed income closely behind with AUD1.3 billion of net inflows.
“Using ETFs for international exposure really illustrates many of their key benefits, for example, allowing investors to easily diversify portfolios, lower portfolio costs and access opportunities in sectors which have historically been hard for Australians to access,” says Vynokur.
In addition, with the growing number of Australians reaching retirement age, it is likely that defensive asset classes such as fixed income will continue to benefit from increased allocations during 2019.
“Australian investors typically hold an underweight exposure to fixed income, although more are starting to increase allocations to this asset class as a defensive shield for their portfolios,” says Vynokur. “Given current product innovation, we believe that it’s very possible that fixed income ETFs could surpass Australian Equities products to become the second most popular category in 2019.”
Product development was a defining feature of 2018, with 38 funds launched across the industry – the second highest number recorded, increasing from 31 in 2017.
2018 also saw a total of seven product closures from ETF providers iShares and ETF Securities, bringing the total number of exchange traded products trading on the ASX to 247.
When looking at flows by style of exchange traded product, passive products captured the lion’s share of net inflows with 88 per cent (AUD5.4B), with vanilla index-tracking products remaining the dominant category at 78 per cent of net flows in 2018. ‘Smart-beta’ products received 9 per cent (AUD578m) during the year.
Interestingly, in 2018 smart-beta products were outsold by Active ETFs, which received 12 per cent of net inflows. The Active ETF sector continued its growth trajectory with AUD770m of net inflows recorded during the year, up from AUD610 million in 2017.
“As predicted in our 2017 review, Active ETFs have continued to grow in popularity with nine new products launched during the year. We expect further growth and more Active ETF products to be launched throughout 2019,” says Vynokur. “While the decline in asset prices muted the growth of the ETF industry in Australia during 2018, the strong unit growth means that as asset prices recover, we should see a bumper growth period ahead. As such, we expect the ETF industry to end 2019 at approximately AUD50 billion.”
