Morningstar Investor users sign in here.

Video

ETFs are democratising investing, says Vanguard

As exchange-traded funds that take country tilts, invest in fixed income and even provide exposure to unlisted assets take hold, there are new ways to hold a core allocation to ETFs without being overly concentrated, explains Vanguard's Axel Lomholt.

Mentioned: Platinum International Fund (4505), Telstra Group Ltd (TLS), Vanguard Australian Shares ETF (VAS)


Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm talking today exchange-traded funds with Vanguard's Head of ETFs International Axel Lomholt.

Axel, thanks very much for your time today.

Axel Lomholt: Thanks for having me.

Freeman: Well, jumping straight into it, in the current market environment we seem to be on the cusp of a fairly serious downturn. How are exchange-traded funds expected to perform during this market? I mean, I guess, they will follow whatever happens, but what types of ETFs may weather the storm better?

Lomholt: Yeah. Good question. I think the good thing for investors is that they have a broad suite of ETFs they can build their portfolios in accordance with their risk profile and risk appetite, but we would sort of generally advise people should stay broadly diversified across both, equities and fixed income.

Freeman: Yeah. It's that point I guess that they are a complementary product set rather than being an all or nothing proposition.

Lomholt: Yeah, absolutely. I mean, we think one of the more recent innovations within ETFs are fixed income ETFs and they generally serve as a great diversifier in any market scenario. And we've seen great technology supporting new fixed income ETFs. So, it's a great development.

Freeman: Now, in terms of trends within the way exchange-traded funds are constructed, it's been something of a trend in more recent times of – so traditionally ETFs have been global – they will take a global index. We've seen some of it is more region-specific. Say, some people might want to get Japanese small-caps and buy US large-caps, for instance. Is that a trend that's going to develop further and to build?

Lomholt: Yeah, it's a good question. I would say from all the clients that we engage with and talk to, there's a couple of things that's happening. The first one is that they really understand now how important low cost is in building portfolios. And they use ETFs as core holdings. So, they are probably the more broad-based fixed income ETFs. But what we've seen over the past few years is that they are now adopting ETFs more satellite exposures like the exposure that you just talked about. So, together they are sort of building low cost portfolios.

Freeman: And in Australia, in more recent times – and it's something that has, I believe, happening in other markets, too – financial advice has come into the spotlight and for the wrong reasons. Is that something that plays into the strengths of ETFs and makes them more popular? Or has it perhaps worked differently?

Lomholt: I mean, at Vanguard we think so. We think that ETFs have had a very positive impact on the financial industry, certainly in the couple of areas. They have globally disrupted distribution models. I mean, as you know, most financial (process) over the commission outside of the US And ETFs have been a wedge into these markets because they can be bought straight over the exchange. So, that's great for advisors and direct retailer clients. ETFs are democratized investing. So, people like me can buy exactly the same exposure as institutional investors. And finally, they have just lowered the costs of portfolio management overall. So, there's been a lot of benefits coming out of the recent regulatory tailwinds for sure.

Freeman: That's an interesting way of describing it as democratized assets. It was probably basically relevant here. We even got an election about – federal election next week on the weekend. But what are some of the other key areas that you see within exchange-traded funds? You alluded earlier to fixed income ETFs. Active ETFs, we've also seen at least in the Australian market coming off quite a low base, but they've been probably one of the – I think the fastest-growing segment of ETFs. Are there others?

Lomholt: Yeah, there are. So, fixed income, I'd say, is arguably the biggest innovation within ETFs at the moment. There's a couple of other things playing out. As you said, active and there's this interplay between factors and how they can sort of cheaply replicate some active exposures. There's a lot going on in thematic investing around ESG and SRI. So, we've seen a number of product launches globally in that area. Target-based investing is another theme that's playing out. And the other one is alternatives and ETFs moving into, sort of, alternatives (indiscernible) replicate some of this exposure. So, there's certainly a lot happening. We would still say that keep it diversified across all of these areas.

Freeman: When you're talking there about alternatives, what type? Are we talking private equity ETFs? Or which segments there?

Lomholt: No. I mean, there are some factors that could be replicated. It's still relatively new. But it's pretty clear that what investors are looking for is, how do I generate more return. It's a low-return environment and most of the clients that we speak to don't believe that's going to change in the foreseeable future. So, how can you build exposures that has sort of unlisted returns into a portfolio. So, we think there's a great innovation, but it would take time.

Freeman: Great. Thanks very much for your time today, Axel.

Lomholt: Thanks for having me.



© 2024 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 report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. 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 financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

More from Morningstar
ANZ Group and Suncorp
Video
ANZ Group and Suncorp
Our view of the potential acquisition of Suncorp’s banking arm by ANZ.
Our view of CBA earnings
Video
Our view of CBA earnings
Results were strong but are they enough to make the shares attractive? 
Earnings season wrap for retailers
Video
Earnings season wrap for retailers
Two retailers look expensive to our analysts. 
Why we like this misunderstood ASX retailer
Video
Why we like this misunderstood ASX retailer
Most of Bapcor’s earnings aren’t exposed to slowing discretionary spending.
What’s in store for ASX retail stocks in 2024?
Video
What’s in store for ASX retail stocks in 2024?
Morningstar’s Director of Equity Research, Johannes Faul, outlines his views.
Opportunities among ASX miners
Video
Opportunities among ASX miners
Morningstar has updated its commodity price forecasts and stock recommendations.