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ETP inflows may benefit from financial adviser backlash

Glenn Freeman  |  03 May 2018Text size  Decrease  Increase  |  
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Two Australian exchange-traded product (ETP) providers believe they will see further inflows as a partial response to the Royal Commission into financial services.

Even before the most recent findings against AMP and a potential shareholder class action, the Asia Pacific head of VanEck, Arian Neiron, last month suggested the wealth advice sector would see big changes as a result.

"The interests of the shareholders in the big wealth managers, not the clients, have been put first. We expect a regulatory overhaul following Commissioner Hayne’s findings, if not before then," he said.

"Community expectations have changed. The industry is predicated on trust and a fiduciary obligation. We anticipate a high degree of financial product scepticism and our view is that ETFs [exchange-traded funds], being low cost and transparent will enable advisers to earn their clients’ trust," Neiron said.

He believes "clients and indeed legislators will no longer stand for the high fees" financial institutions charge for access to actively-managed funds. "Clients will be asking their advisers, if they are not in low-cost ETFs, why not?"

Though past performance is no guarantee of future returns, about two-thirds of Australian equity fund managers were outperformed by the S&P/ASX 200 over 12 months to December 2017.

"Over longer time periods, it is far more pronounced, with almost 74 per cent and 77 per cent of active managers being outperformed by the benchmark over 10- and 15-year periods, respectively," Neiron says.

Cost advantages

Neiron also refers to the lower-cost characteristics of ETFs in the context of their overall investment returns versus actively managed structures, as does Ilan Israelstam, BetaShares' head of strategy.

"Perhaps one of the most meaningful impacts of using an ETF as a core holding is a reduction in fees...as one of the few things that are in our control as investors," Israelstam says.

He cites the same comparison between Australian active managers and the S&P/ASX 200 benchmark.

"If we therefore assume that most investors using an active manager would, at best, be able to only obtain returns similar to the actual benchmark, it stands to reason that getting such access at the lowest cost would be likely to improve the returns on their investment portfolios."

Not all ETPs are equal

While acknowledging ETFs hold a key place inside diversified investment portfolios, Morningstar's associate director of passive strategies, Alex Prineas, notes some are unsuitable for long-term investors.

This is a view shared by Morningstar's head of equity research, Peter Warnes. He suggests investing via some of the thematic-based ETFs currently available is more consistent with short-term or day-trading philosophies, "getting immediate exposure to the market and driven more by the fear of missing out".

"The ETP market here is broadening out and becoming more complex, but we certainly don't have any volatility-linked Inverse VIX ETNs … there are some more complex ETPs available here, though nothing on that scale," Warnes says.

In the US, the VelocityShares Daily Inverse VIX Short-Term ETN lost almost its entire US$1.9 billion holdings in a single week.

“Morningstar typically doesn’t cover the most extreme financial engineering-style ETPs," says Prineas. The extreme example of the volatility-linked products in the US shows the importance of investors understanding the strategy in which they’re investing.

"One of the points we make is that traditionally, ETFs were all about low cost, tax efficiency, passive investments with low portfolio turnover, but that’s not necessarily the case with some of these new financial engineering-type products."

More from Morningstar

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Glenn Freeman is a Morningstar senior editor.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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