Australian ETF growth drives greater market efficiency for investors

Vanguard | 31 July 2018


Australians now have nearly $40 billion of their savings invested in exchange traded funds (ETFs), according to Vanguard's June Quarter 2018 ETF Report, with growth in the market fuelling additional investor benefits.

Over the year to the end of June 2018, ASX listed ETFs saw a $10 billion increase in assets under management, as investors continue to embrace their lower relative cost and flexible attributes.

As the industry matures this growth is driving greater trading efficiency, with higher volumes of trade tightening the spread costs of ETFs.

Commenting on the analysis, Damien Sherman, Vanguard's Head of ETF Capital Markets said “The speed and extent of the growth of ETFs has led some commentators to suggest that ETFs are having a negative impact on investment markets, however we have seen no evidence of them causing disruptions to the underlying securities markets nor having an impact on price discovery.

What we have seen is ETFs serving to democratise investing, allowing investors access to markets and sectors previously out of reach, and, as the market has grown, competition amongst issuers and increasing trading volumes has driven down the cost to invest, allowing investors to keep more of the returns they earn.”

“Increases in trading volume encourages market makers to provide more liquidity for ETFs. Greater volumes also increase the chances that individual buyers and sellers will transact with each other which increases competition for ETFs and leads to a reduction in trading spreads*. 

“Ultimately what this means for investors is further savings when it comes to transaction and trade execution costs.”

The below charts highlight how increased trading volume has contributed to reduced spreads in two of Vanguard's ETFs - the Vanguard US Total Market Shares Index ETF (VTS) , and the Vanguard MSCI Index International Shares ETF.

Source: ASX ETF Monthly Report. Based on three month rolling spreads.

Quarterly Report

Vanguard ETF quarterly report - 2Q 2018

The Australian ETF industry attracted $1.1 billion in new cash flow during the June quarter, with funds under management growing by $2.5 billion as the market now approaches $40 billion.

The June quarter was a positive one for investors, with most of the major asset classes delivering healthy returns.

Across the industry investors continued to diversify into global equity ETFs, with the asset class attracting more than half of all ETF cash flows over the quarter. Fixed income products collected around 25% of total cash flows over the quarter.

Vanguard continued to see strong cash flows, attracting some 40% of total ETF cash flows year to date.

Vanguard's Australian ETFs have now surpassed $11 billion in AUM, increasing by nearly $1 billion over the quarter.

 “We view cash flow as an outcome of doing the right thing by our investors and delivering on our fundamental value proposition of offering low-cost, diversified funds that give investors the best chance of investment success,” Mr Sherman said.

Cash flow by asset class

Quarterly Cash flow and AUM by Issuer

* Spread costs are the difference between the ‘bid’ price a dealer is willing to pay for an ETF share and the ‘ask’ price the dealer will accept to sell that ETF share.