ETF money is the smart money.

ETF investors have cleverly used the coronavirus panic as a chance to buy Australian shares, an analysis from ETF Stream can reveal.

The number of units on issue from Australia’s biggest share ETFs grew during the darkest hours of the coronavirus sell off. This strongly suggests that more investors bought ETFs than sold them during the coronavirus panic, and Aussie ETF investors got greedy while others got scared.

The number of units on issue of Vanguard’s Australian Shares Index ETF (VAS), the country’s biggest ETF, grew 15% in March. While the number of units on issue for BetaShares’ Australian shares ETF (A200), the country’s cheapest ETF, grew 19%.

It was unclear what kinds of investor, specifically, drove the inflows.

ETFs are sometimes created by short sellers, who want to bet against the share market. The practice is known as “create to lend” and can mean that ETF growth is a misleading indicator of how popular ETFs actually are.

However, Australian short sellers use ETFs less than their American peers. ETF providers contacted by ETF Stream said there was no evidence Australian ETFs were being created by short sellers.

What is more common is Australian investors using falling markets as an excuse to exit expensive or underperforming active funds. When markets dip, investors can sell out of funds without incurring capital gains taxes. Falling markets also provide a useful pretext for breaking existing relationships with active fund managers.

For this reason, ETFs have been known to benefit when markets fall.

However, down markets can also be taken by investors as evidence that they have little talent for stock picking. With this newfound self-awareness, they can swap into ETFs and out of shares.

The heavy creation activity means that investors – and ETF providers – will profit if the share market returns to its February highs. According to ETF Stream calculations, the assets in VAS will shoot over $5.3 billion if shares return to February prices, allowing Vanguard to trouser $5.3 million a year in revenue from its flagship ETF.*

While Australian share ETFs were bought last month, many international shares ETFs were sold off.

The Magellan Global Equities Fund (MGE), run by the famous fund manager Hamish Douglass, saw the number of its ETF units on issue decline sharply.

However, Magellan indicated that the company as a whole saw more new money come in than out. This was due to institutional investors buying its other kinds of share classes and other kinds of fund.

*This revenue figure assumes Vanguard has issued no fee rebates.

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