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Aussie ETF leaders go head-to-head on stage

Glenn Freeman  |  24 May 2018Text size  Decrease  Increase  |  
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Senior figures from two of Australia's largest exchange-traded fund shops have engaged in a robust exchange of views at Morningstar Investment Conference 2018.

Morningstar Australia's director of passive strategies, Alex Prineas, played devil's advocate in asking both panellists for their responses to some of the criticisms levelled at ETFs, particularly the suggestion they are adding further instability to already volatile markets.

Jonathan Howie, head of BlackRock iShares, says the critics in this regard are missing the point and are attacking what is essentially a delivery method for shares. Because ETFs have seen their broadest adoption in just the past few years, there are some misperceptions that have risen about how they work and the roles they play in the marketplace.

ETFs transact in both the underlying market and on a stock exchange. In a downturn, when the ETF price declines sufficiently, market participants may buy the ETF shares while selling the underlying assets, aiming to capture price discrepancies – an “arbitrage” process that typically slows the price decline of the ETF’s shares until they are back in line with the value of the underlying assets.

ETFs aren't all passive

Addressing the rise of active ETFs, Howie notes the existing structure available to listing them on the ASX doesn’t suit their needs. BlackRock doesn't currently offer active ETFs in Australia, but favours the model currently adopted in Canada.

"We will most likely launch active products in Australia in the near future," he says.
BetaShares' Alex Vynokur says it has to work with the guidelines that are available, and does currently provide active ETFs to its clients. It has partnered with asset manager Legg Mason in launching two active ETFs, and also offers fixed income ETFs.

What about activism?

A lack of shareholder activism by a proliferation of passive products is another criticism often cited in this context. The rising acknowledgement of environment, social and governance (ESG) considerations among investors - both individuals and institutions - is played out in activist shareholders voting with their feet.

While some commentators suggest passive investing is bad for governance, this isn't necessarily so.

Howie notes that although its ETFs can't drop coverage of a specific company if they disagree with something it is doing, "we have 31 people who are engaging with companies on governance issues…a very large focus on being activist".
"We're a shareholder they can't get rid of," he says.

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Glenn Freeman is senior editor at Morningstar Australia.

© 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

© 2020 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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