Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


ETP sector's $42bn edges past LICs

Anthony Fensom  |  31 Jan 2019Text size  Decrease  Increase  |  
Email to Friend


ETP funds under management pushed past the more mature LIC sector last year

Australian exchange-traded products held more than $42 billion by December last year, edging out listed investment companies total FUM for the first time.

More than 60 years their junior, Australia’s exchange-traded product sector has for the first time overtaken the value of listed investment companies. Even more gains are expected this year as ETPs show little sign of slowing, according to industry analysts.

The 18-year-old ETP sector marked a new milestone in 2018, with the sector’s market capitalisation of $42.29 billion overtaking the 80-year-old LIC sector’s $42.23 billion, as of 30 September.

For the year to November 2018, the ETP sector grew by nearly 16 per cent, ending the month at $41.1 billion, up from $35.5 billion a year earlier.

Structural tailwinds of low cost, control, convenience and transparency have aided the sector’s continued growth relative to other asset classes, says Morningstar’s associate director of passive products, Alex Prineas.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

“LICs are active funds and primarily Australian share funds, whereas the ETF market has many more global equity offerings," he says.

"Aussie investors still have a big home bias in their portfolios, but they have been making much more use of international equity products and are more likely to do that using funds."

Transparency push

ETPs are becoming more diverse too, with 247 now listed on the ASX, including those focused on international equities, fixed income, gold and property. Cybersecurity, healthcare and other thematics are also represented.

November saw the launch of one of the first bond active exchange-traded fund, the BetaShares Legg Mason Australian Bond Fund (ASX:BNDS), which aims to provide investors with access to an actively managed and diversified portfolio of Australian fixed income securities.

“One of the most interesting aspects about it is it’s the first fully transparent active ETF. In the past, active ETFs have usually disclosed their portfolios on a lagged basis, such as two months after the quarter end,” Prineas says.

“However, this new product discloses its portfolio regularly without a time lag, meaning it has external independent market makers. It will be interesting to see if this move encourages our market to move more towards greater transparency”.

For investors, Prineas believes increased transparency should reduce the potential for ETFs to trade at significant premiums or discounts to their underlying asset value.

Targeted for termination

Although the number of ETPs has continued to grow, Prineas highlights the relatively high instance of terminations within the space - 25 have been wrapped up since 2013. This also includes ETPs offered by well-known managers such as iShares and Russell Investments, covering a range of investment strategies.

Prineas says these terminations are generally inconvenient rather than disastrous for investors, providing there’s no fraud or gross mismanagement,

"Investors generally get their money back. But it can be inconvenient since you need to reinvest the funds, so there’s potential capital gains and transaction costs,” he says.

Investors seeking to avoid the “terminator” should consider the fund’s size, age, investment strategy and its general appeal.

“It’s a scale game – the bigger you are, the more likely you are to be successful. But even the biggest have shut products down, so you need to pick and choose an ETF based on your own risk-return requirements, also considering whether it has broad appeal,” says Prineas.

“Something might be appealing to you for a flurry, but ETFs need broad appeal to ensure they stick around for the long run”.

While Prineas sees a place for ETPs with “niche” investment strategies, he suggests investors treat them with caution and focus on those with a long-term perspective.

“If investors are going to use satellite holdings to complement that, we recommend carefully considering whether a product suits their investment strategy and risk profile,” he says.

Greater choice drives down prices

Fortunately for Australian ETP investors, increased choice has also spurred lower costs.

Two of the cheapest are the iShares S&P 500 ETF (ASX:IVV) and Vanguard US Total Market Shares ETF (ASX:VTS), both with annual fees of 0.04 per cent, while for the local bourse, the BetaShares Australia 200 ETF (ASX:A200) charges 0.07 per cent.

BetaShares’ Ilan Israelstam predicts increased adoption of model portfolios, along with further growth in fixed income products and thematic investing.

According to Morningstar’s Prineas, further growth in FUM is likely on the back of the sector’s structural tailwinds, particularly following the Hayne royal commission and its push for greater financial product transparency.

“The only caveat is all bets are off if we get a big market correction, as that can prompt investors to withdraw. But certainly over the medium term, the ETF market should be bigger than it is today."

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. 

© 2022 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.

Email To Friend