ETFInvestor Year in Review 2021
The industry received record net inflows as investors demonstrated a growing appetite for theme-based, active and environmental, social, and governance factor-based ETFs.
The growing popularity of exchange-traded funds among retail investors continues to drive growth in this sector. The industry received record net inflows into existing ETFs and a number of successful new launches in 2021. Investors have shown a growing appetite for theme-based ETFs while maintaining similar enthusiasm for active and environmental, social, and governance factor-based ETFs. Fees have remained steady, but the direction of fund flows reveals investors' clear preference for low-cost products where available.
Looking forward, rapid industry growth has opened up multiple avenues for investors to invest according to their style, philosophy, and outlook. But the surge in ETF demand has led to product proliferation. To stay relevant and address investors' ever-changing preferences, product innovation has been directed toward the niche and narrow segments of the market, which are often newly explored, under-researched, and may be focused on just one specific theme. As such, investors may often get exposure via an obscure rules-based index from a little-known index provider. As product innovation is perceived to remain theme-based, investors should be wary of the risk/return imbalance that such products exhibit.
So, what should be an investor's approach? For starters, careful due diligence before investing has become more critical than ever. Many strategies focus on specific themes that often only capture the fleeting interest of investors. At Morningstar, we see that 'investment merit' is of key importance. We suggest that investors should try to avoid fads and focus on long-term, well-diversified options at the cheapest possible price. This remains, in our view, a core principle of ETF investing.
Now, let's look back at the Australian ETF industry in 2021.Â
 Download the reportAsset size and net flow
Australian ETFs recorded sizable growth in 2021. Assets surged 23.9% to $117.0 billion. The strong domestic-equity market (the Morningstar Australia Index posted gains of 18% for the year) was a sentiment booster as investors pumped in $20.8 billion into local equity ETFs, marking a 12.1% increase in net inflows relative to 2020. This growth, however, paled in comparison to 2020 when Australian equity ETFs' net flow grew by 50.4%.
Australia ETF asset growth
Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021
Historically, the local ETF industry has been concentrated with a handful of larger players managing the lion's share of the assets. There was no change in that trend in 2021. Vanguard, iShares, and BetaShares continued to occupy the top three positions in terms of funds under management (FUM). As of 31 Dec 2021, the trio together managed close to two-thirds (73.6%) of the total ETF assets in Australia.
Vanguard retained its market leadership across the board with a 48.4% jump in FUM relative to 2020. The firm attracted the highest net inflows in 2021. As of 31 Dec 2021, Vanguard managed 32.7% of the total ETF FUM in Australia, followed by iShares (21.7%) and BetaShares (19.2%). Interestingly, State Street has managed to hold its position among the top five providers despite seeing a sharp fall in net flows compared with 2020.
Top 5 ETF providers in Australia
Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021.
In terms of net flows, Vanguard, BetaShares, and iShares continued their dominance, capturing more than three fourths (77.7%) of the total net inflows. Vanguard retained the crown as the most popular ETF provider amassing AUD7.1 billion in net inflows or over one third (34.4%) of the total net inflows into the Australian ETF market.
The Australian large-cap blend Morningstar Category remained the top choice among the investors for ETF exposure, receiving $4.3 billion of net inflows in 2021 (although this was lower than last year). But investors' bias away from home was evident in the asset flow pattern in 2021. The cumulative net flows into global equities (the world large blend, North America, and world other categories) were $2.2 billion higher than the net flows into the Australian large-cap blend category. European exposure experienced a turnaround with the net inflow into the equity Europe category spiking up to $347 million in 2021, reversing 2020's net outflow of $55.6 million.
The global trend of ESG-focused investing continues to be embraced locally. This enthusiasm was reflected in the doubling of 2020's net inflows with $2.8 billion going into the sustainable ETF cohort in 2021. This was 13.5% of all net flows into the Australia-domiciled ETFs. BetaShares and Vanguard were at the forefront of investors' surging demand for ESG strategies. BetaShares Global Sustainability Leaders ETF, BetaShares Australian Sustainability Leaders ETF, and Vanguard Ethically Conscious International Shares ETF received the highest inflows among the sustainable ETFs currently in the market.
Interestingly, the year-on-year asset growth rates for ESG strategies roared past passive products and strategic-beta vehicles, admittedly, however, it was off a small base. Net flow growth in active and sustainable ETFs was at the expense of flows into pure passive ETFs. Following a dip in 2020, strategic-beta ETFs had a modest gain in 2021. Quality factor ETFs dwarfed other strategic-beta products in gathering approximately 61% of the total strategic-beta net flows.
Assets growth in ETF cohort
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Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021.
Net flow growth in ETF cohort
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Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021.
Investors' exuberance toward specialised offerings like Australia large-cap geared decelerated in 2021 as investors withdrew $16.6 miilion out of the category. The year was marked by the rise in growth and inflation concerns, especially toward the latter half of the year. As such, there was a rotation away from local growth-focused strategies, with the Australia equity large-growth category experiencing a marginal net outflow of $17.7 million.
New launches
BetaShares and VanEck tapped into the trend for specialty and narrowly focused ETFs with a number of successful launches in 2021. The popular areas for growth have been ESG and disruptive technologies. Four of the strategies introduced last year have crossed AUD100 million in assets, notably the BetaShares crypto product, which was only launched in November. The sustainable and active ETF launch pipeline remained strong as 12 new ETFs (sustainable and active) were introduced to the market in 2021.
New launches 2021
Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021. *Data not available (Click to enlarge)
Fees
Investors are increasingly becoming price-sensitive with significant inflows going into products with low fees. It is unsurprising that the average new dollar is going into low-cost ETFs. A drop in the net flow weighted average fee of ETFs* over the trailing three years is a testimony to this. This is especially the case for equity products (as shown in Exhibit 7). The net flow weighted average cost of equity ETFs has dropped from 0.45% per year to 0.37% per year (approximately) over the past three calendar years. Interestingly, fixed-income ETFs have dodged the trend, as money moved to more expensive products.
Fees comparison for ETF cohort
Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021. *Net flow weighted average cost of ETF = sum of (fees x net flows) / total net flow into ETFs
Net flow adjusted average cost
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Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021.
Equity strategies' fee range (in basis points), net flow distribution 2021 vs 2018
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Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021.
Performance
As the domestic and global equity markets delivered higher double-digit returns, leveraged products and international-equity ETFs had a terrific 2021. As most major global economies have opened up following the protracted and brutal coronavirus-induced lockdown, economic activities picked up last year, and sectors like global real estate and infrastructure rebounded strongly. On the flip side, the impending rise in interest rates and inflation weighed on the fixed-interest ETFs' performance last year.
Category performance
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Source: Morningstar Direct, Morningstar Research. Data as of 31 Dec 2021.
