Too many active managers in Australia, says ETF pioneer
Australian ETFs account for only about 4 per cent of total trading volumes, with huge room for growth, says ETF Securities founder Graham Tuckwell.
Australian ETFs account for only about 4 per cent of total trading volumes, with huge room for growth, says ETF Securities founder Graham Tuckwell.
He created the first gold-tracking exchange-traded fund (ETF), which launched offshore back in 2003. At the time, the US was the only market receptive to the products, which was followed by Europe and then Australia.
"Clients in the US understood what ETFs were; Europe was consistently seven years behind the US in terms of its understanding and adoption of ETFs, and Australia was seven years behind Europe," Tuckwell says.
Graham Tuckwell is responsible for launching the first gold ETF
The EFTPOS guy
He says part of the problem was related to the abbreviation for exchange-traded funds – ETF – which was often confused with EFT – the abbreviation of "electronic funds transfer".
"[The investing industry] also seemed to be very tightly held amongst the advisers, and they had a strong interest in pushing people into the higher margin products," Tuckwell says.
While he lauds the introduction of compulsory superannuation in Australia in the early 1990s, Tuckwell notes there was for a long time no low-cost way for Australians to get access to the equities market, and "a huge vested interest in stopping ETFs".
"In a nutshell, they're simply a lower-cost way of people getting a spread of investments…they're no more complicated than that," he says.
Tuckwell believes ETFs have been helping to bridge this gap.
Active versus passive
Tuckwell believes there are far too many active managers plying their trade in Australia.
"I'm not saying there isn't a role for very clever active fund managers, in fact you need those people out there doing the stock picking, in order to price one security against the other.
"But you don't need 80 per cent of the market doing that, particularly when they're underperforming," he says.
"The majority of money should be invested in the passive stuff, and the pricing of individual securities should be done by the active guys, which should be 10 to 20 per cent of the market.
"And guess what? They will outperform the market…because there will be far fewer of them, and those that are left will actually be doing a good job, and that's where the world's moving to."
The danger of synthetic ETFs
As volatility returned to markets earlier this year, the financial press widely reported the shut-down of a few exchange-traded notes in the US that were short-selling the volatility index (VIX). These are known as "synthetic" products, which make use of derivatives.
"That was one tiny example…and I'm not sure that investors ended up losing any money. You've got billions of dollars of certificates invested in Germany, for example…this is a product that wasn't particularly suited to ETFs, that in my opinion, should've been sold more over the counter.
"It's one product that shouldn't have been put in the ETF wrapper, and to say that the other $5 trillion that was invested is just not the right approach…investors need to open the prospectus and see how it's put together," says Tuckwell.
He believes the use of these "swap-based" vehicles are useful for certain products, such as futures, for others it can be overly risky for less sophisticated investors.
"Just read what the product is, and if you're dealing with a decent issuer, they should explain in plain English.
"To me, unless the buyer is educated, they shouldn't be going anywhere near it. Where you have a short and leveraged platform, it's more complicated, and should be something held over for more sophisticated investors. For me, the bigger issue is one of classification and education," Tuckwell says.
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Glenn Freeman is a senior editor, Morningstar Australia.
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