Aussie ETF leaders go head-to-head on stage
Senior figures from two of Australia's largest exchange-traded fund shops have engaged in a robust exchange of views at Morningstar Investment Conference 2018.
Senior figures from two of Australia's largest exchange-traded fund shops have engaged in a robust exchange of views at Morningstar Investment Conference 2018.
Morningstar Australia's director of passive strategies, Alex Prineas, played devil's advocate in asking both panellists for their responses to some of the criticisms levelled at ETFs, particularly the suggestion they are adding further instability to already volatile markets.
Jonathan Howie, head of BlackRock iShares, says the critics in this regard are missing the point and are attacking what is essentially a delivery method for shares. Because ETFs have seen their broadest adoption in just the past few years, there are some misperceptions that have risen about how they work and the roles they play in the marketplace.
ETFs transact in both the underlying market and on a stock exchange. In a downturn, when the ETF price declines sufficiently, market participants may buy the ETF shares while selling the underlying assets, aiming to capture price discrepancies – an “arbitrage” process that typically slows the price decline of the ETF’s shares until they are back in line with the value of the underlying assets.
ETFs aren't all passive
Addressing the rise of active ETFs, Howie notes the existing structure available to listing them on the ASX doesn’t suit their needs. BlackRock doesn't currently offer active ETFs in Australia, but favours the model currently adopted in Canada.
"We will most likely launch active products in Australia in the near future," he says.
BetaShares' Alex Vynokur says it has to work with the guidelines that are available, and does currently provide active ETFs to its clients. It has partnered with asset manager Legg Mason in launching two active ETFs, and also offers fixed income ETFs.
What about activism?
A lack of shareholder activism by a proliferation of passive products is another criticism often cited in this context. The rising acknowledgement of environment, social and governance (ESG) considerations among investors - both individuals and institutions - is played out in activist shareholders voting with their feet.
While some commentators suggest passive investing is bad for governance, this isn't necessarily so.
Howie notes that although its ETFs can't drop coverage of a specific company if they disagree with something it is doing, "we have 31 people who are engaging with companies on governance issues…a very large focus on being activist".
"We're a shareholder they can't get rid of," he says.
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Glenn Freeman is senior editor at Morningstar Australia.
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