ASX

ETP funds under management pushed past the more mature LIC sector last year

Australian exchange-traded products held more than $42 billion by December last year, edging out listed investment companies total FUM for the first time.

More than 60 years their junior, Australia’s exchange-traded product sector has for the first time overtaken the value of listed investment companies. Even more gains are expected this year as ETPs show little sign of slowing, according to industry analysts.

The 18-year-old ETP sector marked a new milestone in 2018, with the sector’s market capitalisation of $42.29 billion overtaking the 80-year-old LIC sector’s $42.23 billion, as of 30 September.

For the year to November 2018, the ETP sector grew by nearly 16 per cent, ending the month at $41.1 billion, up from $35.5 billion a year earlier.

Structural tailwinds of low cost, control, convenience and transparency have aided the sector’s continued growth relative to other asset classes, says Morningstar’s associate director of passive products, Alex Prineas.

“LICs are active funds and primarily Australian share funds, whereas the ETF market has many more global equity offerings," he says.

"Aussie investors still have a big home bias in their portfolios, but they have been making much more use of international equity products and are more likely to do that using funds."

Transparency push

ETPs are becoming more diverse too, with 247 now listed on the ASX, including those focused on international equities, fixed income, gold and property. Cybersecurity, healthcare and other thematics are also represented.

November saw the launch of one of the first bond active exchange-traded fund, the BetaShares Legg Mason Australian Bond Fund (ASX:BNDS), which aims to provide investors with access to an actively managed and diversified portfolio of Australian fixed income securities.

“One of the most interesting aspects about it is it’s the first fully transparent active ETF. In the past, active ETFs have usually disclosed their portfolios on a lagged basis, such as two months after the quarter end,” Prineas says.

“However, this new product discloses its portfolio regularly without a time lag, meaning it has external independent market makers. It will be interesting to see if this move encourages our market to move more towards greater transparency”.

For investors, Prineas believes increased transparency should reduce the potential for ETFs to trade at significant premiums or discounts to their underlying asset value.

Targeted for termination

Although the number of ETPs has continued to grow, Prineas highlights the relatively high instance of terminations within the space - 25 have been wrapped up since 2013. This also includes ETPs offered by well-known managers such as iShares and Russell Investments, covering a range of investment strategies.

Prineas says these terminations are generally inconvenient rather than disastrous for investors, providing there’s no fraud or gross mismanagement,

"Investors generally get their money back. But it can be inconvenient since you need to reinvest the funds, so there’s potential capital gains and transaction costs,” he says.

Investors seeking to avoid the “terminator” should consider the fund’s size, age, investment strategy and its general appeal.

“It’s a scale game – the bigger you are, the more likely you are to be successful. But even the biggest have shut products down, so you need to pick and choose an ETF based on your own risk-return requirements, also considering whether it has broad appeal,” says Prineas.

“Something might be appealing to you for a flurry, but ETFs need broad appeal to ensure they stick around for the long run”.

While Prineas sees a place for ETPs with “niche” investment strategies, he suggests investors treat them with caution and focus on those with a long-term perspective.

“If investors are going to use satellite holdings to complement that, we recommend carefully considering whether a product suits their investment strategy and risk profile,” he says.

Greater choice drives down prices

Fortunately for Australian ETP investors, increased choice has also spurred lower costs.

Two of the cheapest are the iShares S&P 500 ETF (ASX:IVV) and Vanguard US Total Market Shares ETF (ASX:VTS), both with annual fees of 0.04 per cent, while for the local bourse, the BetaShares Australia 200 ETF (ASX:A200) charges 0.07 per cent.

BetaShares’ Ilan Israelstam predicts increased adoption of model portfolios, along with further growth in fixed income products and thematic investing.

According to Morningstar’s Prineas, further growth in FUM is likely on the back of the sector’s structural tailwinds, particularly following the Hayne royal commission and its push for greater financial product transparency.

“The only caveat is all bets are off if we get a big market correction, as that can prompt investors to withdraw. But certainly over the medium term, the ETF market should be bigger than it is today."