Vanguard continues to dominate ETF scene, but rivals signal price war
Investors are becoming increasingly price conscious as the ETF price war intensifies, with significant inflows going into products with low fees.
Mentioned: BetaShares Australia 200 ETF (A200), iShares Core S&P/ASX 200 ETF (IOZ), Vanguard Australian Shares ETF (VAS)
Vanguard, BetaShares and iShares have maintained their stranglehold of the Australian ETF market, collectively accounting for almost three quarters of the total ETF assets in 2022.
An annual review of the ETF sector by Morningstar shows Vanguard remains the market leader, managing 33.5% of the total ETF funds under management, with Blackrock’s iShares and local fund manager Betashares each accounting for 19.4%.
But as investors become more fee conscious, an escalating price war over the past week has driven annual fees to lows, which Morningstar senior manager research analyst Kongkon Gogoi says will likely continue among popular, large-cap offerings.
“If you’re tracing the same index or tracking the same benchmark, what is going to distinguish you is your execution and, ultimately, cost competitiveness,” he says.
Last week, Blackrock announced it would cut the fees on two of its ASX-listed ETFs, including its popular iShares Core S&P/ASX 200 ETF (IOZ). The move takes its annual fee on IOZ from 0.09% to 0.05%.
A day later, Betashares slashed the management fee on its Australia 200 ETF (A200) from 0.07% p.a. to 0.04% p.a.
The annual fee on Vanguard’s Australian Shares Index ETF (VAS) sits at 0.1%.
“Vanguard’s products remained the preferred choice among local investors when it came to their ETF investment, as the ETF provider amassed $6.7 billion in net inflows in 2022,” Gogoi says.
How the price wars influence investor flows in 2023 is yet to play out, but Gogoi says investors are increasingly viewing price as a major factor in their ETF choices.
“Investors are increasingly becoming price-sensitive, with significant inflows going into products with low fees. So, it is unsurprising that the average new dollar is going into low-cost ETFs,” he says.
VanEck and State Street rounded out the top five ETF providers in 2022.
ETF growth slows in volatile year
Overall, Australian ETFs recorded tepid growth in 2022 as rising inflation and market volatility weighed on investor sentiment.
Assets under management grew by 4.9% to $123.1 billion, with net inflows slowing to $14.5 billion — a 34.3% decline on the previous year.
Gogoi says the tepid growth was a result of wider market conditions, which pushed investors to the sidelines.
“Exchange-traded funds’ growing popularity among retail investors continued to drive growth in this sector, albeit at a slower pace in 2022. Net new flows declined compared with 2021 as investors remained cautious amid volatile global markets,” Gogoi says.
“The pipeline remained very strong and underpinned the strong flows that have been seen over the past five years up to the end of 2021, even as the worsening economy held back investors,” he added
Investors seek yield in bond ETFs
2022 was a difficult year for investors with the value of both stocks and bonds falling. But with interest rates now sharply higher, Gogoi says rising bond yields had enticed investors towards bond ETFs.
Bond ETFs were the only category to register a gain in net inflows in 2022, he adds.
“With both equities and fixed income showing negative returns, the prospect of higher yields likely drove the increase in bond ETF flows as institution clients rebalanced,” he says.
Among the funds benefitting from this shift were two new ETF launches by BetaShares and Global X. The BetaShares Australian Composite Bond ETF and Global X US Treasury Bond (Currency Hedged) ETF—respectively drew $194 million and $158 million in net flows, making them two of the most successful launches of the year.
Looking forward: ETF investing in 2023
The rapid expansion and proliferation of ETFs in recent years are evidence of their clear and continuing popularity with investors, Gogoi says.
“I see ETFs continuing to be dominant products going forward because of the cost advantage, the nimbleness of the product and their availability across different aspects of investment,” he said,
However, he flagged the rapid growth in investor demand has also brought with it access to “niche and narrow market segments”, which may heavily lean on new or under-researched themes.
With that in mind, Gogoi cautioned that investors should be wary of chasing “fad” funds with few long-term prospects.
“Our view is that investors should avoid fads and focus on long-term, well-diversified options at the lowest possible price. This, for us, remains a core principle of ETF investing.”
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