2 global themes that are finding favour among ETF investors

Glenn Freeman | 15/11/2016

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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.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

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