ETF monthly wrap-up

Christine St Anne  |  02/02/2012Text size  Decrease  Increase  |  

Christine St Anne: Today we speak with Morningstar's Tim Murphy about the latest changes to the ETF market, and what investors can expect for 2012.

Tim, welcome.

Tim Murphy: Thanks, Christine.

St Anne: Tim, so what were the top performing ETFs?

Murphy: So, top of the pops in December for ETFs was the agricultural side of things. So as tends to be the case, when you've a bit of volatility in markets, last month you saw, I mean, the beta shares - one of the beta shares hedged agricultural ETFs at the top of the market, so that was a strong performer for December.

St Anne: With agricultural ETFs, are they more susceptible to extreme price movements?

Murphy: Well, like any commodity, they're cyclical - highly cyclical, and often speculative sort of sectors. So as I said, they're sorts of niche exposures just tend to be at either the top or bottom of any performance list on a given short-term basis.

When you get concentrated niche ideas like that, that's the very nature of them. So, whereas the more probably broader diversified types of ETFs, which should form the core of most portfolios, all - most of the time tend to be in the middle of performance tables, the more volatile concentrated niche sectors, like single commodities will tend to be top or bottom on any short term basis.

St Anne: So, Tim, what were the ETFs that didn't perform as well as expected?

Murphy: On the flipside, so other commodity ETFs, some of the precious metals, things like silver and gold instead have been - particularly gold being very popular themes, but in that environment, in the back end of 2011, really suffered from sharp outflows and weakening sentiment driving prices down there. So as tends to be the case, at either end of the - both the top and the bottom on short term basis, you tend to see the more concentrated volatile sectors dominating those areas, and the end of 2011 was no exception to that.

St Anne: There's also been a lot of discussion about fixed income ETFs, do you expect any product launches shortly?

Murphy: Yes. It's certainly been a while coming, and ASIC and ASX have finally gotten their act together, and given the final regulatory tick of approval to allow fixed interest ETFs to now be listed and launched in Australia in 2012. And we certainly expect to see that being the big trend in 2012 ETF product launches. All of the key product providers that we talk to have got fixed interest ETFs in the pipeline. So, by the mid-year, expect to see all of the large ETF offerers: iShares, Russell, Vanguard, State Street, expect to see all of them having ETFs or fixed interest ETFs available in the market.

St Anne: Tim, so it's 2012, what are your thoughts of some of the major trends that will happen in the ETF market this year?

Murphy: It's interesting, I mean, 2011 turned out - had been sharp growth in the years leading up to that, tended to - it was a solid rise year. I think that was a function of market flows and sentiment more generally. Most investors were parking their money in the bank, flows into things like term deposits were very strong. Flows into any sort of risk assets, whether it was equity markets, funds, ETFs were stagnant and non-existent. So, you saw the market track sideways last year.

This year with the increase of product availability in ETFs with fixed interest, we certainly expect to see that drive an increase in investor interest, and subsequently assets. But also too we would expect to see the growth trend in ETFs pick up and become more in line with that sort of long-term growth trend we expect to see in the Australian ETF market, which continues to be a long way behind ETF developments in the rest of the world.

St Anne: Tim, thanks for sharing your insights with us today.

Murphy: Thanks, Christine.

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