Assets under management (AUM) and the number of people using exchange-traded funds are growing exponentially, a new study by research firm Investment Trends has found.
There are now 455,000 Australians who use ETFs, with this figure set to rise to 521,000 people in the coming 12 months.
At a recent briefing, Michael Blomfield, CEO of Investment Trends, told the gathering that ETF providers are, “having the best Christmas parties” of anyone in the asset management industry.
He added that younger investors are now embracing these popular investment tools too. “We are making the industry younger as we go,” he said, with more women also now allocating funds to ETFs.
More women are buying ETFs
Source: Investment Trends
According to the study, over the last two years, ETF investors’ average age has dropped to 42 from 56. The percentage of female investors has grown from 11% to 24% over that time while millennials in the market have jumped from 12% to 43%.
Interestingly, SMSF investors now make up a much smaller part of the market, dropping from 41% of all ETF investors more than five years ago to just 14% of ETF investors over the last two years.
Active ETFs are becoming more popular with the percentage of people who say they intend to invest in these vehicles rising from 33% in 2018 to 46% this year.
The research, which surveyed 3456 investors and 815 financial planners, found the top three reasons people invest in ETFs are diversification, low cost and to access global investments. There is now $57.2 billion invested in ETFs in Australia, a 40% rise over 12 months.
Alex Vynokur, CEO of BetaShares, credits tougher regulation of financial advisors with helping ETFs grow.
Prior to the 2018 Financial Services Royal Commission and the 2013 Future of Financial Advice (FoFA) regime, financial advisers were paid like investment salesmen, thanks to the commissions they received from fund managers and platforms, he argues. This meant many advisers recommended actively managed funds, which paid fat commissions. ETFs, by contrast, do not pay commissions.
“There is now a more level playing field and this is driving change,” said Vynokur.
More self-licensed planners are now providing advice on ETFs, at the expense of managed funds and direct shares. The study found more planners expect to allocate a greater share of new money to ETFs in the medium-term.
More financial advisers recommending ETFs is only one reason they are becoming more popular. They are also being taken up by self-directed millennial investors.
“Self-directed investors want investment solutions that are low-cost, simple and that have low minimums,” Vynokur said, adding that ETFs are, “democratising investing,” as they have no minimum balance requirements.
ETF uptake also signals that asset allocation – where investors choose whether to buy stocks, bonds, cash, or commodities – is replacing stock picking as paramount in investors’ minds, he argues.
“Let’s focus on getting the big picture right… in every market, asset allocation makes up 90% of returns.”
Fixed Income ETFs most popular in 2018
Source: Investment Trends
The research also shows how investors are changing the way they allocate assets with ETFs.
In 2017, 34% of inflows into ETFs were directed to Australian equities, with this figure dropping to 22% this year. In contrast, 41% of ETF inflows went towards international shares in 2017, versus just 25% this year. But fixed interest has been the real winner, with just 15% of ETF inflows allocated to this asset class in 2017 versus 30% now.
Despite their strong growth, ETFs represent just 1.5% of the investment and funds management industry. They have also only been adopted by 58% of advisers – compared with 88% of advisers in the US.