2 global themes that are finding favour among ETF investors

Glenn Freeman  |  15/11/2016Text size  Decrease  Increase  |  

Glenn Freeman: I'm Glenn Freeman from Morningstar and I'm joined today by Alex Vynokur, Managing Director of Betashares.

Alex, thanks for joining us.

Alex Vynokur: Great to be with you, Glenn.

Freeman: Alex, just firstly, do you believe that there is more understanding and awareness of ETFs now versus four to five years ago?

Vynokur: Look, ETFs have been around in the Australian market for well over a decade now. And the early days of the evolution of the ETF market have certainly been around asking the basic questions. What is an ETF? How does it work? How do I buy an ETF? How do I sell?

We feel at this point in time there has certainly been a significant evolution in the level of awareness of ETFs. Globally, ETFs now account for a very meaningful percentage. We're talking about 30 per cent, 40 per cent of all trading on the New York Stock Exchange, and at the same time, ETFs are accounting for more than $0.50 in every $1 that gets invested in a managed funds industry.

So, globally, ETFs have become a very important, almost a key part of the growth of the investment industry and Australia is well on its way. So, the growth has been significant. The level of awareness has evolved significantly, but there's still some way to go in the Australian market.

What we are finding is that the SMSF investors in particular are attracted to ETFs in Australia for their core benefits of diversification, low cost and ability to access certain investment themes or certain investment exposures which otherwise are difficult or costly to access.

Freeman: And what are some of the latest figures on the scale of the ETF market here in Australia and also globally?

Vynokur: Look, in the Australian landscape, ETFs currently represent about $24 billion worth of invested assets. The rate of growth in Australia has been quite significant.

We've been seeing over 40 per cent year-on-year growth over the past decade. So, the rate of growth is significant.

And the numbers that we're now talking about are quite meaningful. We are seeing that self-directed investors, SMSFs, are investing an increasing proportion of their portfolios into ETFs and yet, at the same time, a larger number of SMSF investors are adopting ETFs every year. So, the market is growing quite fast.

Globally, ETFs, as I was mentioning previously, are representing a very meaningful part of the global investment landscape and the market is now measured in trillions of dollars as opposed to millions or billions.

Freeman: And Alex, can investors use ETFs to capture different investment themes?

Vynokur: Look, that's a really good question, Glenn. We have seen the phase one in the evolution of ETF adoption in Australia has really been around buying broadly diversified index exposures and using them as core of the portfolio. So, there could be an index such as the ASX 200; it could be an index which is a smart beta index such as the FTSE RAFI 200, which underlies our QOZ fund, or it could be a broad international exposure, such as MSCI World or S&P 500.

What we've seen more recently and in the past few years in particular is that investors are moving further away from stock picking and they are moving closer to allocating their portfolios in line with core exposures but then adopting some global thematic exposures. So, if you look at the examples very recently with the US election, we've seen some sectors on the global scale are emerging as winners and some sectors are emerging as less favorable.

So, if I use a couple of examples, the global healthcare sector was being sold off quite significantly by investors around the world in anticipation of democrats winning the election and effectively pursuing a course of controlling the pricing of healthcare services and drugs. Now that the result of the election is Trump win, we've seen a very significant rally emerging in global healthcare stocks.

Now, in Australia, investors have an opportunity with the global healthcare ETF drug, that's the ASX ticker, as easily as one trade get exposure to a diversified portfolio of 60 global leaders in healthcare. That's a sort of example of Australians being able to utilise an ETF to provide them with that tactical exposure.

Another example is global banks. Once again, another recent sort of agenda item post-election has been deregulation of banks and allowing them pursue sort of their business a little bit more freely. What we've seen in response to that is the global banking sector has responded quite strongly in terms of price appreciation and a lot of commentators are starting to come out and saying that global banks could really be a key beneficiary.

So, once again, an ETF in Australia BNKS can provide investors as easily as a simple trade on the ASX exposure with those – sort of to that portfolio of global banks which interestingly would provide Australian investors with a lot more exposure to that theme than purely buying the Australian banks, CBA and NAB, et cetera, because they are not as affected – that would not have been as affected by those laws in the first place. So, tactical investing is definitely emerging as a really interesting additional element of ETF usage.

Freeman: And lastly, what are your thoughts on the resilience of ETFs and how well they perform in stressed market conditions?

Vynokur: Look, ETFs have been around for decades on a global scale. In the Australian market they have been around for sort of through the GFC and through other bouts of volatility. The most recent times we've seen it in Australian market have been January of this year of 2016 when China was going through some fairly turbulent times and the market was being shut several days in a row because of the volatility.

ETFs have passed with flying colors both in the global financial crisis and during the more recent stressed market environments. What we are seeing in fact is that investors are being drawn towards ETFs even more than on average during times of stress, during times of crisis and we're seeing that the proportion of the market turnover that ETFs represent in terms of volatility or in terms of crisis actually increases.

The key thing with exchange-traded funds is that investment of an ETF is in a portfolio of liquid underlying securities. So, ultimately, the liquidity of an ETF will always reflect the liquidity of the underlying portfolio of securities that it invests its assets in.

Freeman: Alex, thanks very much for your time today.

Vynokur: Thank you. Thank you, Glenn.

Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.

Video Archive...

Earnings season wrap: BHP exercises good cost control
27/02/2017  As the curtains close on the 1H17 reporting season, BHP books earnings that are slightly softer than expected, while Woolies takes market share at the expense of margins.
Possible $2.5bn tailwind to drive hybrid demand in 2017
22/02/2017  Strong supply dynamics and ongoing economic stability should create significant opportunities for hybrid investors in 2017, according to John Likos, senior credit analyst, Morningstar Australia.
Earnings season wrap: Telstra feels competitive heat
17/02/2017  As the 1H17 earnings season rolls on, Wesfarmers posts a bumper profit, Newcrest restores its interim dividend, while Telstra's profit falls as it feels the heat of intense competition.
Earnings season wrap: Rio Tinto's dividend surprises
10/02/2017  Rio Tinto delivers a surprise full-year payout of US$1.70, NAB records a soft first quarter, and CIMIC posts an annual net profit in line with Morningstar's expectations.
Leveraging the opportunity of international students
07/02/2017  Co-founder and CEO of Navitas, Rod Jones, explains the firm's business model, which is built largely around international students and university partnerships.
Xero CFO gives outlook for 2017 and beyond
02/02/2017  Sankar Narayan, chief operating and financial officer of accounting software firm Xero gives his insights on the company's business model and outlook, with Morningstar analyst Gareth James adding his views
Asia growth engine not threatened by Trump, says Barings
30/01/2017  Long-term investors in China and wider Asian equities should not worry about President Trump, says Barings head of Asian equities Hjung Jin Lee.
Shifting fortunes for ANZ, more of the same for CBA in 2017
12/01/2017  Australian banks are well-positioned as they head into 2017, with ANZ moving from least profitable in 2016 to become one of the sector's top performers and CBA remaining an investor favourite.
Is Trump a threat to emerging markets?
12/01/2017  Is President Donald Trump a threat to emerging market returns? Paul Jackson from the UK-based Source ETF considers the outlook for sector and where investors can find the best opportunities.
Platinum, Aussie banks and Peter Warnes among top interviews of 2016
22/12/2016  We look back on some of our most notable interviews of the year, as Morningstar analysts and external experts helped us delve into some of the biggest events that shaped Australian and global markets in 2016.
Oil price finds sweet spot, while mining hits rock bottom
20/12/2016  The rise in oil prices should see improved performances from Australian producers in 2017, while mining services companies will continue to struggle amid weaker Chinese demand, says Morningstar equity analyst Mark Taylor.
How Greek mythology can make you a better investor
07/12/2016  Don't be over confident or follow the herd, and like Odysseus, learn to have yourself "tied to the mast" when it comes to long-term investing.
Supermarket headwinds prompt fair value cut for majors
06/12/2016  Growing competitive pressures and a declining revenue outlook for Australia's two grocery giants now look to be part of a longer-term, structural shift.
What returns should you expect from markets?
01/12/2016  As market risks rise, investors must adjust their profit expectations--gone are the days of 8 per cent returns. But there are still growth opportunities out there if you know where to look.
Why healthcare stocks got a bump from Trump
28/11/2016  Australian healthcare and pharmaceutical companies continue to enjoy a purple patch, and for various reasons including the recent US election result, explains Morningstar's healthcare equities analyst Chris Kallos.
Equity and hybrid investors react as bond prices tumble
24/11/2016  The negative correlation between bonds and equities is reasserting itself following the US election of Donald Trump, according to John Likos, Morningstar's senior credit analyst.
2 global themes that are finding favour among ETF investors
15/11/2016  Australian retail investors are increasingly turning to ETFs for specific tactical exposures to global themes, particularly in the context of large-scale market events such as US election 2016.
Maintain discipline and stick to fundamentals when selecting stocks
14/11/2016  Steer clear of fads, maintain a disciplined approach and focus on company fundamentals in building and maintaining your investment portfolio, says Anton Tagliaferro, investment director, Investors Mutual
How Trump could impact economic growth
10/11/2016  Slowdowns in trade and immigration could hold back the US, and infrastructure spending could boost GDP, but it's too early to make any major changes to our economic forecast, says Morningstar's Bob Johnson.
President Trump: What should you do?
10/11/2016  Donald Trump has beaten Hillary Clinton to become the 45th US president. What should investors do?