Christine St Anne: New exchange-traded funds or ETFs continue to come into the market. To make sense of these new products, I'm joined by Morningstar's Alex Prineas. Alex, welcome.
Alex Prineas: Thanks, Christine. Good to be here.
St Anne: Alex, we have had big named fund managers with new ETFs, and now a major bank, ANZ has come into the market. What are the drivers behind this trend?
Prineas: I guess, the key driver of any product launch is to gather assets, and the ETF market has been doing well more generally in that regard. It's been growing at about 50 per cent per annum for the last few years. So that's going to be the key driver behind any product launch, but underneath that why are investors favoring ETFs, why are they attracted to ETFs. It appears that they are attracted to features like the low cost, the transparency, the tax efficiency and the ease of execution. We've even seen some active managers recognize the appeal of the listed structure with some new listed investment company launches from the likes of PM Capital and Investors Mutual and even a listed managed fund launch from Magellan.
So what's important to remember though is that there are benefits to the listed structure, but there are also some drawbacks and that not every strategy will offer all the benefits. So you really need to drill down to the individual product and the strategy to understand what you're getting.
St Anne: Alex, some of the products like the Market Vectors Small-Cap ETF and BetaShares' first NASDAQ ETF seem to be quite niche products. So what are the portfolio implications?
Prineas: Well, it typically suggest most investors would construct a portfolio with a bias to products that broadly represent the large asset classes, so Australian shares, global equities and the bonds. There is room for smaller allocations to some of these more niche products or satellite holdings.
In the case of small-cap Australian equities, that's typically an area where our best ratings have been reserved for active managers. They have been able to pick winners within the sector and, more importantly, avoid the losers. So whether it be unprofitable mining stocks during the mining boom or speculative tech companies back in the tech boom, they have been successful at that.
In the case of something like the NASDAQ product, what you've got to remember there is that you may already have some exposure to that through your global equity portfolio. So, for example, two of the biggest global equity managers in Australia, Magellan and Platinum, they already have or have held at times exposure to stocks like Intel, eBay, Microsoft, which are NASDAQ stocks. But BetaShares product does present a useful tool for investors who may want a shorter term allocation or who may want to time their entry in or out of the technology or over the NASDAQ area, or for investors who want a more targeted exposure for a lower cost than an active fund.
St Anne: Alex, Vanguard has now announced that it will add China A shares to its emerging markets' ETF. Firstly, what are China A shares? And again, what are the implications for investors?
Prineas: China A shares are essentially Chinese companies listed on either the Shenzhen or Shanghai Exchange. So, historically, foreign investors couldn't invest directly in China. They could invest via companies listed in Hong Kong. So Vanguard's product, for example, has about 28 per cent exposure to China through companies listed in Hong Kong. So MSCI, one of the biggest index providers has basically announced that they plan to include A shares in their index methodology, recognizing the fact that foreign investors are increasingly being allowed to invest directly into A shares. So what does that mean for portfolios? We've already got about a 28 per cent exposure within say the Vanguard Emerging Markets ETF. You've got 28 per cent exposure to China. With the addition of A shares, you'll get another 6 per cent exposure. So it's significant, but it's not a huge change in strategy. What it does mean, is a little bit more diversified exposure to China, because you have some companies that are further down the market cap spectrum. And also a lot more access to the faster growth within China, whether or not that's good or bad growth, is debatable, that there's been about 100 IPOs in China, just in the first four or five months of 2015. There has also been quite a run up in share prices in A shares …