The major theme for the Australian ETF industry in 2018 will be more of the same – growth. This year Australian ETFs reached over $35.5 billion FUM, but that is just 1% of the total super and investable assets pie in Australia. ETFs still have a long way to go – too many Australians still pay through the nose for underperforming active management or take more risk than they should be buying individual stocks. Globally ETFs manage over US$4.5 T so Australia is less than 1%.
From retail investors I expect to see more ETF investments from older Australians and SMSFs who are taking note of the diversification and low cost benefits of ETFs. Millennial investors have readily embraced ETFs and robo-advice, they’re a generation unencumbered by the legacy of the active stock picking addiction. At some point in the coming years we’ll see the balance tip towards more millennials in index investment strategies than active.
Stockspot’s best performing ‘Theme ETF’ (ETFs Stockspot offer in addition to our five core portfolios) was the Asian shares ETF, it returned 61% over 18 months. I expect we’ll see investors chasing market that have performed well, particularly Asian, European and US shares. We would not be surprised if US shares disappoint in 2018 given the extreme levels of optimism at the moment and likelihood of further monetary tightening and QE unwinding.
2018 will also see more institutional investors turn to ETFs as asset allocators capitulate on underperforming active managers.
Finally, I won’t be surprised to see ETFs (wrongly) blamed by the active funds management community if volatility returns to markets.
There are now 174 ETFs listed on the Australian Stock Exchange allowing investors to build truly diversified portfolios. The number of ETFs could exceed 200 in 2018. Product issuers are showing greater innovation with the expansion of smart beta, the introduction of floating rate notes in fixed income and greater competition with four cash ETFs on exchange.
The greatest demand is still for ‘core’ ETFs i.e. low cost and high quality. YTD inflows into core ETFs have been $2.2bn across all issuers and there are now 8 ETFs in Australia with over $1bn AUM.
We expect the ETF market to be north of $45bn next year. Institutional investors are becoming frequent traders. Smart beta ETFs have proven that they can either outperform or reduce risk. We expect smart beta to be one of the fastest growing segments and challenge some active managers.
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. In 2018 more generally, we expect to see further innovation in fixed income ETFs, providing direct investors with much-needed access to lower risk, income-producing assets.
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. Indeed, active ETFs have the potential to match the growth of passive ETFs, with the launch of a number of funds offering access to active management strategies. While we remain 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.
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