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Australia's ETF boom to continue

Anthony Fensom  |  04 May 2016Text size  Decrease  Increase  |  

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.


The boom in Australia's exchange-traded fund (ETF) industry is here to stay, bringing increased choice and lower costs to investors, according to Morningstar research analyst Alex Prineas.

From just 19 ETFs with $1.1 billion in funds under management (FUM) in 2008, the local industry boasted 134 funds with more than $21 billion in FUM last year, boosted by structural tailwinds of asset growth, product proliferation and price competition.

With the growth of self-managed super funds and investors' desire for greater diversification, the ETF market is rapidly winning increased investment.

According to a Morningstar survey, Australian investors' preferred asset classes currently comprise Australian equities (77 per cent of those polled), global equities (41 per cent), commodities (26 per cent) and currencies and fixed income (16 per cent each).

Among those funds enjoying the biggest asset growth in 2015 were market leader SPDR S&P/ASX 200 ETF (STW), which grew by almost a third to $3.2 billion in assets, while the Vanguard Australian Shares ETF (VAS) increased its assets by more than 50 per cent to $1.35 billion.

Meanwhile, price competition heated up, with iShares and SPDR slashing fees to as low as 0.15 per cent a year on their flagship Australian equity ETFs.

"Success breeds success, as the more the industry grows, the more attractive it becomes as a result of greater liquidity, economies of scale and lower costs," Prineas says.

"Regulation such as Future of Financial Advice legislation has cracked down on the payment of commissions, and since ETFs generally don't pay a commission, that's another tailwind.

"There's also a trend in consumer preferences towards lower costs and transparency, and ETFs are incredibly low cost. For example, you can buy the iShares Core S&P 500 ETF (IVV) for just 7 basis points per annum. And they're also fairly easy to trade via a share trading account, making it a relatively easy step towards transacting ETFs."

Prineas also notes the potential tax-effectiveness of passive ETFs, which have a low portfolio turnover compared to their active counterparts.

"A typical managed fund might have portfolio turnover ranging from 20 per cent to more than 100 per cent a year, so that means you're realising capital gains all the time and may not be benefitting from the capital gains tax discount for holding stocks for more than a year. In contrast, turnover for such ETFs as STW has never exceeded 10 per cent over the past decade," he says.