The Exchange Traded Funds (ETFs) industry in Australia continues to evolve, as new waves of investors demand more sophisticated types of products.
With a new range of currency-hedged international funds and risk managed strategies, asset levels at an all-time high and more widespread, the Australian ETF industry came of age in 2016. It continues to follow in the footsteps of more mature markets around the globe, and ETFs now exceed $25 billion in Australia.
In 2017, we believe this more mature version of the local industry will be expressed in at least three clearly defined trends: 1) a growing audience of younger users; 2) the proliferation of active exchange traded managed funds; and 3) a broader range of smart-beta options.
These are our predictions to watch:
Prediction one: Millennials an important driver of growth of industry
Accounting for almost a third of the global population, the millennial generation (those born between 1980–2000) are entering into their prime earning years and will soon be the largest client-base in the financial markets. According to the Deloitte report Millennials and wealth management, millennials prefer self-directed options, and they expect seamless technologies that allow them to access investments quickly and easily throughout the investment cycle.
ETFs fit this segment. They are cost effective and allow investors to back their views across a number of asset classes and investment strategies.
In more mature markets, like the US, the figures prove that millennials are driving industry growth. According to the Schwab’s 2015 ETF Investor Study, younger investors in the US are more likely than older ones to use ETFs: 41% of millennials use ETFs, compared with 25% of Gen Xers and only 17% of Baby Boomers. Furthermore, 70% of millennials see ETFs as the core investment type in their portfolio in the future.
The trend in the US of ETF providers developing ETF model portfolios with automated distribution solutions could also play out in Australia, which would continue to empower millennials with innovative wealth management tools.
Prediction two: Active exchange traded managed funds will proliferate
Active exchange traded managed funds became more common in Australia in 2016 and they will grow substantially in 2017, as both investors and fund managers recognise the benefit of the exchange traded product structure.
Despite representing only 9% of the industry’s funds under management, the active exchange traded managed funds sector has generated strong flows with just under $1 billion invested to date.
Prediction three: More ‘smart beta’ products
ETFs have evolved from market capitalisation index trackers to investment solutions that answer a broad range of investor needs. Smart beta products –or those not market cap weighted– will be a product segment to watch in 2017 as more investors and advisers recognise the potential for these products to offer active-like returns for index-like costs.
A number of smart-beta products have performed exceptionally well in recent times, with many offering returns significantly above both market-cap indices while also placed amongst top quartile active managers.
Across all predictions, growth remains a consistent theme
The growth of the ETF industry in Australia has been phenomenal in recent years, and we predict it will continue on this strong trajectory in 2017, ending the year with $30-$33 billion funds under management and approximately 250 exchange traded products.
Alex Vynokur is Managing Director of BetaShares Capital Limited. BetaShares is a sponsor of Cuffelinks. BetaShares recently introduced another new ETF , the Global Sustainability Leaders (ASX:ETHI).