The ETF market in Australia has grown rapidly from a slow start, doubling to some A$21bn over the last two years.This is largely due to greater interest from retail investors, both advised and especially from self-directed. We identify six trends that are driving the growth of Australian direct ETF investors and look at how fund providers should position in order to capitalise on the future growth opportunities.
“If the investor doesn’t have enough time and skill to investigate individual stocks or enough money to diversify a portfolio, the right thing to do is to invest in exchange-traded funds that give you exposure to asset classes. It does make sense for the individual investor to think in terms of holding individual asset classes.” – Harry Markowitz
1) Growth of SMSFs
Part of the increase in Australian direct ETF investors is simply a reflection of the continued strong growth of the Australian SMSF market.
Data released by APRA1, confirmed that almost 570,000 SMSFs hold approximately A$600bn as at 31 December 2015.
Advised investors have invested more in ETFs as regulatory changes have loosened the link between product choice and advisor remuneration.
Direct investors value the flexibility to adopt a more active investment style; the high liquidity and low trading costs of ETFs are well suited to such an approach.
Investors are increasingly recognising the concentration risk associated with traditional Australian investment strategies that focus on banking and mining shares, property and bank deposits. This leaves their portfolios mis-aligned from their investment pain points.
An investor’s risk-reward profile can be better optimised simply by moving closer to the efficient portfolio frontier – the so-called free lunch of diversification.
Alex Vynokur, Managing Director at BetaShares, confirmed that: “the benefits of diversification, flexibility and the ease of building a diversified portfolio using ETFs now resonate strongly with investors”.
There are currently in excess of 100 ETFs listed on the ASX2 managed by eight ETF providers – ANZ, BetaShares, Blackrock’s iShares, Russell, State Street Global Advisors, Van Eck Global’s Market Vectors, Vanguard and UBS.
3) Low fees
ETFs have traditionally offered investors a very cost-effective way to access beta or market growth. However as more funds enter the market, competitive pressures are bearing down even further on management fees.
At the end of last year State Street Global Advisors reduced the fee from 0.286 per cent per annum down to 0.190 per cent per annum on its flagship ASX200 Australian Equity SPDR product, (Money Management).3
Investors’ ability to achieve market returns so cheaply has led to a greater numbers of Australian retail investors incorporating ETFs into their investment strategies.
According to Alex Vynokur at BetaShares: “More and more investors want to be more active in managing and trading their funds.” The low-cost of trading ETFs on the ASX using on-line discount stockbrokers makes this possible for investors across the wealth spectrum.
Competitive pressure and growing fund volumes are likely to lead to further fee reductions. The recent EY Global ETF Survey4 found that some 82% of ETF providers expect to reduce their fees.
This has led to wafer-thin margins for ETF providers as volume is prioritised ahead of earnings in what remains very much a growth phase for the sector. In the medium-term this is likely to be corrected through a combination of rising volumes, fund range consolidations/reductions and the use of digital media to develop brand recognition and improve the user experience at scale.
4) Investment macro environment
Australian investors are seeking to take advantage of the increasingly understood assumption that portfolio returns are driven primarily not by company-level earnings but by macro events.
Hence it is asset allocation decisions rather than stock-picking that will determine long-term investment outcomes.
Therefore diversification at minimum cost is the objective that guides many Australian direct ETF investors.
5) Australian direct ETF investors embrace product innovation
Australian providers are diversifying their product ranges with innovative funds in order to capture market share and also in search of pricing power.
ETF product ranges have now developed way beyond traditional market cap-weighted blue-chip equity funds to include sector funds, small cap, fixed income, credit, property, commodities, currency and cash funds.
A range of products that seeks to isolate factors such as earnings, dividends, cash flow or reduced volatility have been launched. The demand for such alternative products is likely to power the next stage of the growth in the ETF market. Often described as ‘smart beta’ this will be examined in greater detail in a forthcoming blog post.
6) The investment industry adapts to the direct investor
The rise of the self-directed investor represents an opportunity for ETF product providers to connect directly with end-investors.
Trends that are re-shaping the investment environment towards direct investment include:
- Regulatory change that makes planner costs more transparent
- Dissatisfaction with the high cost and generic advice of the planning process
- The hunt for yield beyond traditional Australian investments
- Deeper social connectivity
- Improved broadband technology
- The availability of high quality digital content
- The generational shift to “finding my own solution whilst appreciating a helping hand”
BetaShares have taken the opportunity to engage with direct investors via its blog-site by educating investors about products and sharing insight on the macro economic outlook.
The EY Global ETF Survey6 found that: “90% view digital channels as an area of opportunity, and 89% expect robo-advisors to accelerate the growth of the industry.”
The ETF market has been slower to develop in Australia than in other developed savings markets.
However it is now growing rapidly, as the volume of self-directed SMSF investors expands along with associated funds under management.
The continued investor focus on diversification and the cost of management fees supports the expectations of rapid growth in volumes from Australian direct ETF investors.
Nonetheless the flow of funds is unlikely to be uniform. Success is likely to accrue to those providers who can:
- Evolve products that deliver investment outcomes that genuinely align with investors’ long-term savings goals
- Develop direct relationships with investors through sharing insights tailored to individuals’ pain points
- Control cost by focussing on funds that attract high volumes and by leveraging technology to deliver a satisfying customer experience at scale
What factors do you think will determine flows from the growing band of Australian direct ETF investors?
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1 Superguide, 2016, http://www.superguide.com.au/smsfs/smsfs-lead-the-super-pack-again
3 Money Management, 2015, http://www.moneymanagement.com.au/news/funds-management/stw-‘cornerstone-etf-industry’-sees-fee-reduction?mkt_tok=3RkMMJWWfF9wsRokv6nPZKXonjHpfsX%2F4u0kX6WxlMI%2F0ER3fOvrPUfGjI4CTMpnI%2BSLDwEYGJlv6SgFSLHMMbNn0LgLXhg%3D
4 Ernst and Young, 2015, “Global ETF Survey 2015”, p18, http://www.ey.com/Publication/vwLUAssets/ey-global-etf-survey-2015-etfs-a-positive-force-for-disruption/$FILE/ey-global-etf-survey-2015-etfs-a-positive-force-for-disruption.pdf
5 Ernst and Young, 2015, “Global ETF Survey 2015”, p6, http://www.ey.com/Publication/vwLUAssets/ey-global-etf-survey-2015-etfs-a-positive-force-for-disruption/$FILE/ey-global-etf-survey-2015-etfs-a-positive-force-for-disruption.pdf
6 Ernst and Young, 2015, “Global ETF Survey 2015”, p16, http://www.ey.com/Publication/vwLUAssets/ey-global-etf-survey-2015-etfs-a-positive-force-for-disruption/$FILE/ey-global-etf-survey-2015-etfs-a-positive-force-for-disruption.pdf