Industry Updates

Australia set to see more thematic and actively managed ETFs

Alexandra Cain


Australia's ETF industry is set for another growth spurt this year, with a rush of bond, actively managed and thematic exchange traded funds all slated to list.

There are already plenty of passive ETFs that put spins on famous shares indices. But new funds that are more exotic, niche, and cover a wide variety of asset classes are scheduled to come to market in 2020.

AMP Capital is one issuer that has plans to list more ETFs. Paul Saliba, senior manager at AMP Research, says investors are hungry for ETFs that buy fixed interest assets.

"Interest in and availability of fixed interest ETFs is growing, but they are mostly passive products. There are few active, fixed-interest ETFs available. We would think that providers with favourable track records in their managed fund solution would have a place in the ETF market."

Saliba notes there are already many passive and smart beta ETFs available. “But the universe of ETFs based on market-leading active strategies is very small across all the asset classes.”

Similarly, he points out there are no actively managed, large cap, Aussie equities ETFs available in Australia yet. This may also be an opportunity for AMP Capital and others in the market. AMP Capital already has three active ETFs, which it has developed in partnership with BetaShares.

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Thematic ETFs that give exposure to new sectors - like robotics and cybersecurity - have already picked up a following and are set to see more listings.

Says Saliba: “There are global technology ETFs that may be better than investing directly in selected stocks such as Apple and Google because a more diversified approach can be taken.”

He believes, however, that thematic ETFs will tend to play second violin in investor’s portfolios as they need to be blended in with more ordinary investments. “They are interesting products, but there’s limited scope to use these, as they would only ever be a small part of a balanced portfolio.”

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David Lane, director at Pitcher Partners Wealth Management, a Brisbane-based financial advisor, agrees there is scope for more exotic ETFs. He says that Australian fund managers have been surprisingly conservative in their choice of funds.

“Cannabis and bitcoin-related ETFs are themes from overseas markets that have yet to hit our shores. It remains to be seen if there is investor demand for these ETFs.”

He adds that the conservative approach extends to environmental, social and governance (ESG) ETFs. He believes there is room for funds that take a more ambitious approach to ethically-aware money management.

“Although there are some ETFs that are already available, these largely use negative screens and screen out exposure to guns, tobacco, alcohol rather than implementing positive screens. A market exists for ETFs that employ active management or rules not only to screen out bad behaviour, but to favour positive ESG behaviour.”

Lane notes ETF providers in Australia have been very active in issuing new products to take advantage of market trends or themes.

“We have witnessed many smart beta or factor ETFs come to market as well as sector-specific ETFs such as cyber security, robotics, and AI. Emerging markets have also been an area where issuance has increased in recent years, in both active and passive forms.”

Investors are likely to increasingly allocate funds to a range of different ETF products as their knowledge of them rises and as the ETF market becomes more sophisticated in Australia.

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