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3 predictions for Australian ETF industry in 2018

Ilan Israelstam  |  01 Jan 2018Text size  Decrease  Increase  |  
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Total assets under management within the exchange-traded funds industry could rise as high as $45 billion in 2018. 

I believe a growing audience of younger investors, an increasing array of fixed income options and more new active ETF launches will drive growth in the space this year.

The Australian exchange traded product industry is set to grow significantly based on the momentum generated in 2017. The Australian ETF industry reached an all-time high of $35.5 billion in the year to November 2017, up from $25 billion in 2016.

It certainly appears as though investors are increasingly taking notice of the ease with which ETFs can be used to diversify their portfolios, as well of their cost-effectiveness and transparency benefits. As a result, we expect to see significant growth in 2018 as the array of ETF options on the market continues to increase.

Millennials will continue to be an important driver

Although investors of all types have embraced the ETF market in recent years, millennials continue to gravitate to the sector. Millennials are attracted by the low cost, simplicity and ease-of-use of ETFs, as well as their ability to provide tailored exposure to investment themes that matter in their lives. 

Within our product suite, for example, ETFs such as the Australian and Global Sustainability Leaders ETFs allow younger investors to invest according to their values, whereas products such as the Nasdaq 100 ETF or Cybersecurity ETF provide targeted exposure to companies whose products resonate with their daily lives.

Market figures appear to bear out these trends. In Australia last year, 25 per cent of all ETF trades were undertaken by millennials, according to CommSec. Many of our younger clients have told us that one of the key reasons behind this take up may well be the diversification benefits of ETFs, which makes them a great way to get started investing in the sharemarket.

Greater innovation in fixed income ETFs

Fixed income has long been acknowledged as a good way to diversify a portfolio. Yet bond markets have historically been difficult for individual investors to access. 

During 2017 in particular, there was significant innovation in this space, with rapid growth in fixed income ETFs globally. With interest rates at record lows, exchange traded products are providing opportunities for investors to gain exposure to bonds, beyond traditional fixed-rate exposure. The most recent innovation in Australia is the launch of floating-rate bond ETFs, which offer a lower volatility alternative to traditional fixed-rate bond exposures.

Floating rate bonds offer the additional advantage of having their interest payments adjust to reflect rises or falls in benchmark interest rates. This is particularly useful in a market where interest rates are rising. Floating rate bonds posted good returns over 2017, and appear well placed to continue to perform strongly given the current level of interest rates.

Beyond this particular style of fixed income investing, in 2018 more generally, we expect to see further innovation in fixed income ETFs, providing direct investors with much-needed access to lower risk, income-producing assets.

Active ETFs will grow in popularity

Last year saw a continuation of active ETF launches, giving investors more opportunity to diversify their portfolios alongside passive ETF investments. We expect to see this growth in popularity to continue in 2018. Indeed, the launch of a number of active options within this space suggest they could match the growth of more traditional passive ETFs in the near future.

While we remain a strong advocate of passive investing, there are a number of asset classes and managers who can add value via active investing. For example, the complexities of hybrid securities and relative inefficiency of the hybrids market make investing in this asset class via a professionally managed fund vehicle a better way to go for many investors.

More broadly, we believe the future of the active ETF sector of the Australian industry is bright.

The growth of the ETF industry in Australia has been phenomenal in recent years, and we predict it will continue on this strong trajectory in 2018.

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Ilan Israelstam is head of strategy and marketing at BetaShares. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 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.

Ilan Israelstam is head of strategy and marketing with BetaShares.

© 2021 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 'regulated financial advice' under New Zealand law has 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. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. 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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