Assets under management (AUM) surged by around 15 per cent over the first half of 2024, with the total value expected to reach $500 billion by June 2029. This year's influx of international players, including Claremont and Dimensional Fund Advisors launching products on the ASX, and Lazard and Monochrome listing their offerings on Cboe Australia, has significantly fuelled the market's growth.
Established players like Vanguard and BlackRock have long dominated the market, and the broader adoption of ETFs, particularly active and dual-access ETFs, has only recently gained traction. New providers are introducing cutting-edge funds, such as the first Australian Bitcoin-based ETF, Monochrome Bitcoin ETF (IBTC), which reached $11.44 million in AUM by June 2024.
Despite the industry's renewed vigour, it remains highly concentrated, with the top three firms - Vanguard, Betashares, and iShares - holding roughly 65 per cent of the market according to EY. In the June quarter alone, these three firms captured 82.8 per cent of the net flows, totalling $5.2 billion. However, as new asset managers enter the market, assets are expected to become less concentrated, broadening investor choice and prompting more asset servicers to develop ETF capabilities. This growing diversity of issuers and servicers will drive demand for more efficient, agile processes to support an increasingly dynamic ETF landscape.
As the industry evolves, the primary market mechanisms that sufficed in its early stages will now be tested. The competitive pressure and appetite for more complex, internationalised ETFs necessitate more efficient, agile, and automated processes for creating and servicing these products, as well as keeping up with global servicing standards.
What lessons can Australia learn from the primary market structure of other developed ETF markets? And what do they mean for the future – for both issuers and servicers – of the industry?
Europe vs Australia: insights from the ETF growth story
The models and processes used to create and service ETFs vary globally, because as each market matures, the roles, processes and tools that bring ETFs to market become more specialised, sophisticated and precise.
Europe, the current leader in ETF automation and standardisation, provides valuable insights. Unlike Australia, where issuers manage multiple roles in the ETF workflow, the European model has dedicated ETF asset servicers supporting the full servicing lifecycle.
In Australia, it is not uncommon for issuers to play multiple roles in the ETF workflow.
- Order intake from authorised participants (APs): Issuers in Australia directly manage the receipt and approval of creation/redemption requests from APs – a task typically handled by dedicated service providers in Europe.
- Basket creation and monitoring: Australian issuers are responsible for creating and managing the ETF basket and monitoring settlements to ensure accuracy. In Europe, issuers rely on asset servicers to automate these processes, reducing manual intervention and operational risks.
- Trade settlements: Issuers in Australia must coordinate trade settlements with brokers and custodians, instructing the necessary trades to create or redeem ETF units – a largely automated process in Europe.
This results in additional complexities, operational issues and costs for Australian issuers, especially smaller firms, who rely on a patchwork of spreadsheets and point-to-point solutions to balance their workload.
At a time when interest in, and sophistication of, ETFs is growing, this creates a hurdle for scalability. Growing volumes and complexity are putting pressure on registries, many of which are already struggling to support ETF-specific needs.
The back-office challenge
Australia’s market mirrors Europe’s position two decades ago, where the dominant models for ETF creation and redemption were the "in-specie" and "cash NAV+" models. While these mechanisms are straightforward, they are somewhat inefficient.
The NAV + mechanism requires APs to pay a fixed spread around the day’s closing net asset value (NAV), with a buffer set by the fund manager to ensure there’s enough cash for trades. As a result, APs often overpay for creation or receive less on redemption than the actual transaction costs.
The in-specie mechanism required the AP to source the underlying ETF basket and deliver to the fund “free of Payment”, this lengthens the primary market timeline and adds additional credit risk.
More sophisticated mechanisms like ‘actual cash’ offer a more efficient solution. Here, APs pay the exact cost of the fund manager buying or selling the basket of securities, eliminating excess costs from the NAV+ buffer and reducing settlement time and risk compared to the in-specie mechanism.
While the more basic mechanisms have served up to now, the industry is facing real pressure to innovate. Increasing regulatory demands, like those from CPS 230, which takes effect in July 2025, will push for greater standardisation, efficiency, and acceleration across ETF creation processes, with strict standards for operational risk and third-party management.
In short, maintaining multiple touchpoints and non-standard processes will make launching and sustaining ETFs more costly and difficult for smaller issuers, and drag down margins for larger players, leaving the market wide open to players who offer a better, more efficient service.
The key to this innovation lies in the often-overlooked primary market support functions, where some of the most exciting capital markets opportunities arise. It is here where integrated approaches to operational efficiency, compliance and automation can drive significant reductions in costs, improve speed, and enhance market agility.
Technology and market evolution
While the dominance of global issuers poses a barrier for smaller newer entrants trying to gain a foothold in the market, it also presents an opportunity for disruption. Small and medium-sized issuers have the advantage of agility, allowing them to adopt faster, more innovative approaches grounded in automation and connectivity.
In our work with leading issuers in Europe and the US, we’ve identified three key pillars for market evolution:
- Automation drives scale: As more complex and higher-volume ETFs become the norm, automating order-taking processes, contract note processing, and settlement tasks enables more cost-effective, agile product creation.
- Real-time processing and APIs connectivity: To move beyond in-specie and NAV+, APs, market makers, and asset managers need greater speed and visibility over their orders to monitor and manage their transactions more effectively and align cash flows and settlement processes. This requires systems that share reliable data at scale to enable real-time decision-making and improve transaction monitoring.
- Standardisation for efficient growth: Collaboration based on common approaches eliminates multi-touch processes and divergent data formats, streamlining the end-to-end value chain.
Charting a unique path forward
While Australia’s ETF market shares similarities with past models in Europe and the US, it doesn’t need to follow the same path. Unique market dynamics in Australia, combined with the global evolution of the ETF industry, present a golden opportunity. In an increasingly global and fast-moving ETF market, technology will remain the lingua franca of efficient trading. Issuers in Australia have a unique chance to build automated, standardised processes based on best practices and avoid the mistakes of their predecessors.
Australia’s ETF industry is on the cusp of a pivotal era, where strategic technology investments will determine which issuers lead in this high-growth environment.
Marsha Lee, managing director Australia and New Zealand, Calastone
