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Buy the world in a couple of trades

Glenn Freeman  |  01 Sep 2016Text size  Decrease  Increase  |  

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As the popularity of ETFs continues to skyrocket in Australia, Morningstar asks Jon Howie, head of iShares Australia how ongoing market volatility affects investors in this space.



Glenn Freeman: I'm Glenn Freeman for Morningstar in the offices of BlackRock Australia. I'm joined today by Jon Howie, Head of iShares, for his views on ETFs and his outlook for the rest of this year.

Glenn Freeman: What are the biggest areas of discussion for Australian ETF investors today?

Jon Howie: The biggest areas that we are talking to retail investors about, there's a few of those areas. One is the constant need for diversification. So, I think ETF investors or investors generally have realised that ETFs are a really simple way for them to significantly improve the diversification of their portfolios.

In just one or two trades you can buy an entire world of global equities, for example, on the ASX. So, that's the big one; diversification is one.

Simplicity is another. ETF investors, and investors generally, are realising that ETFs are a great way to improve the simplicity of their portfolios rather than picking individual companies or trawling through lists of managed funds. Again, with a number of ETFs you can buy the whole world in a couple of trades and keep a really simple approach to building a globally diversified portfolio.

And the last area specifically is income. We've seen a lot of investors who are looking to generate income in their portfolios. And what we've seen recently over the past year or so is that there has been a number of options come to the market in ETF form which are specifically designed to help investors generate income. One of those areas is global bond ETFs or global fixed income ETFs. We've got three of those fixed income ETFs launched on the ASX and a couple of them are yielding over 5 per cent, and that's been a real area of interest for many investors as they look to generate income in portfolios and do it in a diversified and low-cost way.

Glenn Freeman: What effect do you expect Australia’s currency trends to have on ETF investor sentiment and fundamentals?

Jon Howie: I think if we look at what happened historically over the past two or three years, we know that the Aussie dollar has weakened considerably against another basket of currencies and specifically, against the U.S. dollar and what that has done has encouraged investors to move more and more into international investments.

The weakening Aussie dollar means that the price of international assets goes up. So, that's been a real benefit for investors, who saw that that was likely to occur and were smart enough to actually invest internationally as the Aussie dollar started to weaken.

I think our general view is that the Aussie dollar, perhaps not as much as it has done in the past, but it will probably continue to weaken to some extent over the next few months or perhaps over the next year or so.

So that probably continues to provide some support for investors who are looking to diversify internationally, and so we would expect that international ETFs, those ETFs that give investors access to overseas markets, are probably going to continue to be one of the biggest areas of growth for the ETF market locally on the ASX.

Glenn Freeman: What’s your view on hedged versus unhedged ETFs, especially in times of volatility?

Jon Howie: I think it's fair to say that certainly BlackRock has many views inside from the portfolio managers that manage international portfolio. So, I don't think there's one specific or firm view on exactly how to manage currency volatility.

I think, generally, my personal view is that in the short term, currencies can be very volatile. And when we say short term, we mean less than a few years, three to five years and less than that.

Currencies can be very volatile and that volatility can actually cause heartache for some investors who perhaps have a slightly shorter-term view of their investments.

Over the long term, however, generally I think the view is that currency movements tend to wash out. That is that they net out to something approaching zero over the long term.

So, I think our view is that if the investor has a relative horizon, say, less than five years for their investments then removing currency volatility from the portfolio may be something that they are keen to do.

Or if they have a long-term view, it's possible that currency hedging is something that maybe won't be additive to their portfolio over the long term.

One of the benefits of the ETF structure is that there is now a number of currency-hedged ETFs available on the ASX and the difference between the unhedged version and the hedged version in terms of cost is very, very small, as small as three basis points.

So, for investors who are looking to remove currency risks from their portfolios, they can do that for a very, very low cost.

Glenn Freeman: What were the trends in Australian ETFs vs Global ETFs over the last fiscal year?

Jon Howie: Well, we certainly saw a lot of interest in global ETFs, probably in 2014 and 2015. As I said, as the Aussie dollar started to weaken then was a huge interest in diversifying offshore.

Over the past 12 months we've actually seen strong interest back into Aussie investments, both Aussie equities and also Aussie fixed income. So, I think the general trend has been back towards a more local investments theme in terms of where investors are putting their money in ETFs.

I think what we'll over the next year or so is that the international market continues to represent a much bigger opportunity for investors generally.

So, notwithstanding some short-term opportunities in the Australian or Aussie companies and Aussie bonds, for example, over the long term, we continue to see a lot of growth in international markets as the ETF, as a tool, investors use that to access the opportunities overseas which are overall much bigger than the opportunities locally in Australia.

Glenn Freeman: Just finally, given ETFs recent growth, are they more of a trend rather than a long-term investment?

Jon Howie: Our view is that the ETF really is a fundamental shift in the way that investors access investment markets.

We know that there are a number of really fundamental benefits of the ETF structure.

That is that they are very easy to use.

They are bought and sold like a stock.

They are generally easier to buy and sell than managed funds.

We know that they are a really simple way for investors to gain instant diversification in their portfolios.

We also know that they are very, very low cost.

Our core range of ETFs, for example, is around one-sixth the cost of your average managed fund in Australia. So, they are significantly less expensive than other ways to invest.

So, I think, what we're seeing in Australia is a growth in the ETF market which is similar to the growth that we saw in other developed markets around the world, five or even 10 years ago.

The US ETF market went through a very, very rapid growth cycle in the early part of this century.

The European ETF market went through a very, very rapid growth cycle about five or six years ago, and I think what we're seeing in Australia is that that growth cycle is occurring now.

So, my expectation is that the ETF market in Australia will continue to grow incredibly rapidly for the next few years. But then as the market matures, obviously, you would expect that growth to slow down, but I don't think that's going to happen in the short term.

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Glenn Freeman is Morningstar's senior editor.

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