ETF use matures for Australian investors

Vanguard | 18 May 2016


Vanguard and Tria Investment Partners have released research showing that not only are more Australian investors growing their exchange-traded fund (ETF) holdings, their use of these indexed investment vehicles has become more sophisticated.

The research, which is the only Australian ETF analysis based on share registry data, tracks ETF use among five investor categories: advised retail investors, unadvised retail investors, advised self-managed super funds (SMSFs), unadvised SMSFs and institutional investors.

The analysis of share registry data to the end of 2015 showed that the rapid 44 per cent growth of the ETF market over a two year period from 2013 was largely driven by advised SMSFs and advised retail investors.

Advised SMSFs increased their ETF holdings by 205 per cent to $2.6 billion over two years, while advised retail investors increased their ETF holdings by 91 per cent to $6.1 billion. Collectively, advised SMSFs and advised retail investors accounted for nearly half of the $18.2 billion in ETF funds under management (FUM) by the end of last year.

Despite volatility and investor uncertainty characterising markets so far in 2016, Australian ETF FUM grew by 2.2 per cent from the end of 2015 to 31 April 2016, indicating enduring investor recognition of the benefits ETFs provide throughout market cycles.

Tria Investment Partners' Oliver Hesketh said that while the analysis showed financial advisers were working with clients to grow ETF use in their portfolios, unadvised investors - in many ways the early adopters of ETFs - continued to grow their investments in ETF products.

"It's clear that advisers are helping their clients appreciate the low-cost diversification that ETFs deliver, which is also partly evidenced by the fact that 20 per cent of ETF FUM is held via platforms," Mr Hesketh said.
"Although advised investors drove the biggest growth in ETF FUM over two years, we have also seen the makeup of the market begin to shift, with institutional investors building their use of ETFs."

Institutional investors made increased use of ETFs in the 2013-2015 period, growing their share of the market by three per cent to make up around 16 per cent of ETF assets, totalling $3 billion.

Vanguard Australia head of ETF Capital Markets, Damien Sherman, said one trend driving the growth of ETF use in the institutional space was fund managers using ETFs to make broad tilts toward specific markets.

"We've recently seen fund managers looking to capture specific exposures through ETFs, which could be anything from emerging markets shares to Australian bonds, depending on their particular view," Mr Sherman said.

"Active managers often use ETFs as a way of taking a broad market position, while they focus on their areas of specialty, which could be anything from Australian small-caps to global tech shares. The advantage ETFs offer is that they can help cover active managers taking risky positions in concentrated areas, by offering diversified exposure to offset some risk.

"It's encouraging to see more Australian institutional investors getting on board with ETFs. In North America and Europe, ETFs actually started out as products aimed at the institutional investors and then evolved into a product line fund managers marketed to retail investors. To see them moving from a retail focus in Australia to including various uses for institutional investors is like ETFs coming of age."

Asset allocation

The research also showed that ETF investors are seeing more promise in global equities and less in the Australia-focused ETFs that they have traditionally been the most popular asset class for the domestic market.

By the end of 2015, just under half of all ETF investments in Australia were in global equities funds. Unadvised retail investors were the most likely to prefer global equities, with overseas shares comprising 48 per cent of their ETF holdings.

Meanwhile, advised SMSFs continue to be biased to the home market, with Australian shares ETFs making up 51 per cent of their ETF holdings. For listed property, levels were similar across different investor types, where unadvised SMSFs held the most at eight per cent of ETF holdings.

Mr Sherman said that although most investor categories still allocated around 40 per cent of their ETF holdings or more to Australian equities, the research showed that over time, investors were gaining a better appreciation of diversifying across asset classes and geographies through the options ETFs offered.

"What we're seeing is that the message about broadening investment horizons is filtering through to all types of Australian investors, and ETFs are helping them to extend beyond a local investments focus," he said.
"Australians have long had a home bias when it comes to investing in equities and that has led to portfolios often being over-concentrated. Australian equities can play an important role in all kinds of portfolios, but the fact that other asset classes are now readily available through ETFs means that investors are able to create more robust portfolios with a small number of trades, and we are seeing this behaviour reflected in this research.

"Since the second half of last year, we've been seeing increased inflows into global equities ETFs, and that trend will continue as more people recognise the opportunity that exists to invest internationally.  

"The next frontier we see ETFs helping investors navigate is global fixed income. This asset class has only recently become available through ETFs to Australian investors, and it will no doubt form a key plank of many portfolios in coming years, particularly for those looking for reliable income but are concerned about being overweight in Australian bonds."

Vanguard now has 16 ETFs available in Australia, covering all key asset classes. In 2015, it launched four ETFs which covered global fixed income and European and Asian (ex-Japanese) equities. All Vanguard's ETFs are focused on providing diversified, low-cost index solutions that gives investors the components to build an investment portfolio to meet their financial goals.