There is nothing like big percentage growth figures to get commentators writing about booms.
In the case of exchange-traded funds (ETF), rapid growth is off a low base. All 34 Australian Securities Exchange (ASX)-listed ETFs together are worth $4.1 billion - less than the market capitalisation of a single top 50 stock.
However, the local ETF market should become much bigger in the next few years as more retail investors, financial advisers, self-managed superannuation funds (SMSF) and institutional investors use ETFs. The ETF market is probably where SMSFs were years ago.
New products should attract new investors and financial advisers. This year there have been launches for the Russell High Dividend Australian Shares ETF, Vanguard Australian Property Securities Index ETF and SPDR MSCI Australia Select High Dividend Yield ETF from State Street Global Advisors.
IShares has announced plans to launch four Australian equity ETFs: the iShares MSCI Australia 200, iShares S&P/ASX 20, iShares S&P/ASX High Dividend and iShares S&P/ASX Small Ordinaries.
Wealth management firm Mason Stevens has launched an Index Magnifier instalment over select Australian ETFs, specifically for SMSFs that want geared exposure over local shares.
New products and more ETF usage generally has driven the combined market capitalisation of ASX-listed ETFs up 44.8 per cent to $4.1 billion in October 2010, from $2.8 billion a year earlier, ASX data shows. ETF listings have grown from 25 to 34 over that time.
Such growth is impressive, but small in the scheme of things, and there are still significant product gaps in Australia, such as a fixed-interest ETF. What is needed most is for financial advisers to embrace ETFs even though they do not pay trailing commissions, more SMSFs to use ETFs for long-term and low-cost investment exposure, and for super funds to find new ways to use ETFs.
Care is needed in forming a view on how Australian superannuation funds use ETF, based on ASX data.
Some local super funds have used ETFs listed on other exchanges for years and ETFs have been used by super funds overseas for the best part of two decades. They are hardly new.
For some local funds, ETFs are about lowering average portfolio costs by having more index exposure. Other funds use ETFs tactically to trade directional views, rebalance portfolios and as a cash management tool.
Two factors increase the likelihood of local super funds using ETFs to complement, rather than replace, traditional investment products.
The first is cost. Fees in the superannuation industry, already under great pressure, are likely to fall further over time, thus pressuring managers to create stronger economies of scale to maintain margins. Low-cost index products such as ETFs are an option.
Second, regulatory change and review, such as the federal government's Future of Financial Advice reforms and the Cooper review, favour ETFs by encouraging funds and financial advisers to use more transparent, lower-cost products that suit clients or members, rather than always trying to chase alpha and achieve the (collective) impossibility of continually outperforming the market, at higher cost.
All of these trends suggest a bigger ETF market in coming years, more low-cost product options and a broader set of tools to achieve efficient portfolio allocation.
- Tony Featherstone is consulting editor of the iShares e-newsletter, ETFInvestor. The views expressed are his own.
