While exchange-traded funds (ETFs) are gaining momentum with Australian investors, VanEck Australia has outlined diverging outlooks for active and passive funds.
The Australian ETF market hit record-highs at the end of June, surpassing $200 billion assets under management and is poised to hit a new milestone of around $230 billion by the end of the year.
Unpacking this trend, the fund manager’s chief executive and managing director for the Asia-Pacific region, Arian Neiron, noted Australian investors are increasingly allocating more of their wealth to ETFs.
With this, they are “benefiting from a product that is cost-efficient, easy to trade, transparent and provides access to almost every market, sector and style of investing”, he said.
However, index-tracking ETFs and active ETFs appear to be telling two very different stories, he observed, with the former seeing “unbated growth from new investors and existing investors increasing their allocations”.
In contrast, active ETFs appear to be facing an uphill battle with inflows. The 18 active ETFs listed so far in 2024 have collectively taken in just 0.3 per cent of total industry net flows year-to-date, standing at some $36 million net flows, Neiron explained.
“Many of these replicate already available unlisted funds,” he said.
Additionally, despite active ETFs accounting for a third of the total Australian ETF market, he noted they only hold 21 per cent of funds under management and are also facing the threat of increasing fund closures.
“This paints a pretty grim picture of active ETFs,” Neiron said.
“It is understandable that many active fund managers have seen the growth in the ETP industry and think that simply participating will result in flows rather than assessing the sustainability of their strategies in light of persistency of performance, lack of transparency, and higher fees.
“Nonetheless, there are many more active ETFs, which will be simply ASX listings of existing unlisted approaches, due to list across both ASX and Cboe for the remainder of the year but equally, there is a growing likelihood of potential de-listings as many active ETFs remain at unviable FUM from lack of flows.”
For investors and advisers, this outlook means they must re-evaluate the “survivorship” of strategies, Neiron said.
Some 64 of the 119 active ETFs listed in Australia have less than $50 million in funds under management, he pointed out, while around 20 active ETFs “have not traded at all this year”.
Last month, Marc Jocum, product and investment strategist at Global X, also noted that “deal-loving” Australians have been slow to warm up to active offerings.
In its latest ETF report in July, Global X found four out of the five least popular products over the year were active in nature.
“I think Australian investors still have this perception, rightly so, in our opinion, that a lot of the simple arithmetic of the share market and some of the statistics behind it is that active managers still are struggling to outperform their benchmark, and to outperform a broader ETF, like a low-cost vanilla ETF,” Jocum told InvestorDaily.
“So, that’s where you’re seeing a lot more money going into just your very broad-based, low-cost products. Because, naturally, that’s where a lot of people are thinking, ‘If I can get exposure to a certain asset class, why not control one of the areas that investors can control’, which is the fees they pay.”
‘The future is active’
Meanwhile, earlier this year, a number of investment executives outlined a far more optimistic outlook for active offerings.
Speaking at the ASX Adviser Day 2024 in May, Rory Cunningham, senior manager, investment products at the ASX, said the exchange is “increasingly seeing more interest in active ETFs, a trend not only prevalent in Australia but also overseas”.
The same month, Dan Watkins, CEO of Asia-Pacific at JP Morgan Asset Management, also voiced that the trajectory of the ETF market is “undoubtedly active”.
“Inflows into active ETFs are projected to grow at a compound annual growth rate (CAGR) of 37 per cent over the next five years, outpacing the 15 per cent growth for passive indices,” he told audience members at the Morningstar Investment Conference 2024.
“This trend is supported by the fact that 72 per cent of ETF buyers plan to increase their allocation to active ETFs over the next two to three years.”
Currently, active ETFs make up only 4 per cent of the total APAC ETF market, but this segment is growing year by year.
Watkins emphasised: “We believe the future of ETFs is undoubtedly active, and active is the revolution happening within the ETF and the asset management industry more broadly.”
