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Australian ETP sector continues to balloon

Anthony Fensom  |  26 Mar 2018Text size  Decrease  Increase  |  
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Active exchange-traded products were the fastest growing segment in another record-beating year for index trackers in 2017.

Morningstar’s 31 January ETFInvestor report highlights the continued growth of Australia’s ETP sector. Assets in Australian ETPs grew by an “astounding” 39 per cent last year to reach $35.4 billion, amid predictions that the market could reach $45 billion in assets this year. In 2011, the entire market had less than $5 billion in funds under management.

Active ETPs posted a 73 per cent gain in assets in 2017, albeit off a small base, along with the rise of strategic beta and passive ETPs. Unlike passive ETPs that typically track a particular index, active funds seek to outperform an index or achieve another investment objective through active management, while strategic or smart beta products aim to enhance returns or minimise risk relative to a benchmark.

Last year saw 21 ETP launches, including Australia’s first passive multi-asset products launched in November 2017, comprising the Vanguard Conservative Index ETF (VDCO), Vanguard Balanced Index ETF (VDBA), the Vanguard Growth Index ETF (VDGR) and the Vanguard High Growth Index ETF (VDHG). The four new exchange-traded funds (ETFs) invest in Australian and international equities and bonds, comprising listed share-classes of existing Vanguard funds.

Other new products included the BetaShares Active Australian Hybrids Fd (HBRD), the first ETP to invest in hybrids, for a fee of 0.55 per cent, along with the first strategic beta bond ETF, the VanEck Vectors Australian Corp Bd + ETF (PLUS), at a cost of 0.32 per cent.

Morningstar’s associate director of passive strategies, Alex Prineas, also pointed to the launch of two new active ETPs that were replicas of highly rated Platinum unlisted funds. These comprised Platinum International (Quoted Mngd Hdg) (PIXX) and Platinum Asia (Quoted Managed Hdg) (PAXX) that cross-invest directly into the equivalent Platinum unlisted funds, “meaning the returns should be similar”.

The active ETP segment has seen some new entrants already in 2018, including the BetaShares Legg Mason Equity Income Fund (EINC) and the BetaShares Legg Mason Real Income Fund (RINC).

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Managed by Martin Currie Australia, EINC invests in an actively managed diversified portfolio of income-oriented Australian shares, seeking to provide investors with a sustainable income stream. In contrast, RINC invests in an actively managed portfolio of listed companies with “hard” physical assets such as infrastructure and property.

“There’s been some big winners in this space, such as managers like Magellan, but there have also been some funds that have languished, such as K2, which has a number of active ETPs but the assets have languished,” Prineas says.

“If you look at other markets, there have even been product terminations. For example, iShares closed its first ever active ETP launched in the US some four years after they opened it.

“So while there are some big winners, there are some products that don’t cut it or reach critical mass. We think this is a good area for investors, it’s adding investment choice and making it cheaper and easier to access funds, but while the market is growing overall it doesn’t mean that every ETP is going to be a winner”.

Market shakeout

The market correction suffered early in 2018 saw geared and trend-following managed funds lose as much as 15 per cent, while cash and fixed-income funds remained in positive territory, according to the Australian Financial Review.

Among the biggest losers from 31 January to 9 February were the BetaShares Geared US Equity (GGUS)--down 16.8 per cent)--the CFS Aspect Diversified Futures--down 15.2 per centand the CFS FirstChoice Geared Global Property Securities--down 15 per cent.

In contrast, the BetaShares US Equity Strong Bear (BBUS) gained 15.5 per cent, while the BetaShares Australian Equities Strong Bear (BBOZ) rose by 8.3 per cent. U.S. dollar and other defensive funds also managed to post positive returns during the period, based on FE data.

“The market correction had an impact – it’s made investors look twice at some of the more highly complex ETPs, and we think that’s entirely appropriate,” Prineas said.

“Morningstar typically doesn’t cover the most extreme financial engineering-style ETPs, and there were a couple in the US that were short the VIX index and lost nearly all their capital value.

“This shows the importance of investors understanding the strategy they’re investing in. 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”.

Barring a major correction this year, Prineas expects further growth in the ETP market in 2018, including active products.

“I’d expect several more active ETP launches this year, just based on the fact that it’s proved a popular and successful way of offering active management. People seem to like the convenience – they already have their listed equity brokerage account, so it’s relatively easy to go from that to buying active funds on the exchange,” he says.

Overall, Prineas suggested the structural tailwinds favouring ETPs including tax efficiency, convenience and low cost would drive further market growth.

“Relative to other markets we’re still very much underpenetrated in terms of the number and variety of ETPs, so the market will keep growing. The only caveat is if we do get a big market correction or bear market, then obviously people will be less willing to invest, but in the long run I expect the ETP market to be much larger than it is now,” he says.

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Anthony Fensom is a Morningstar contributor. 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. The author does not have an interest in the securities disclosed in this report.

© 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.

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