Exchange-traded funds (ETF) under management in Australia grew 33% over the past year to $36.2 billion, according to the annual ETF Report by robo-advice fintech Stockspot.
The best performer was UBS IQ MSCI Asia APEX 50 Ethical ETF, which generated a return of 30.1%.
The biggest loser was BetaShares Australian Dividend Harvester Fund which lost 16.2%. This fund invests in large ASX shares that are about to pay dividends while also selling futures contracts as a form of hedging to reduce risk.
Chris Brycki, CEO and founder of Stockspot, says this year’s findings signal the ongoing disruption to the asset management industry by ETFs and indexing.
“The investment industry is amid a seismic shift as ETF use grows at a phenomenal rate at the expense of active funds and direct share investing,” says Brycki.
“The mainstream take-up of ETFs shows they are fast becoming the go-to investment choice for Australians who have a growing awareness of the impact of costs in a low return environment. They are turning to ETFs for better returns than cash or term deposits but with lower risk than actively managed funds or direct shares.
“It’s important to note that investors have flocked to global ETFs for greater diversification. The fact that Australian shares only represent around 1.7% of the world’s total share market value highlights the need for global shares in a diversified portfolio. The growing suite of fixed income ETFs is filling another diversification gap in many portfolios.”
Over the past year 23 new ETFs have been listed on the ASX, with a significant increase in the number of global share ETFs and fixed income funds.
The broad Australian sharemarket ETFs remains popular with Vanguard Australian Shares Index ETF and iShares Core S&P/ASX 200 ETF taking the top two places, despite relatively low returns compared to global shares this year.
However, Australian share ETFs had a relatively low average return of 2.1% after fees for the year including a 4% to 5% dividend yield.
Stockspot says this continued popularity of Australian share market ETFs is likely coming from switching out of direct shares and underperforming active funds.
The highest fund inflows this year were into the large, broad market ETFs.
The ETF Report analysed 175 ETFs by looking at factors such as fees, performance, size and activity.
“With greater choice comes the need for investors to be more discerning when selecting ETFs for their portfolio,” says Brycki.
“Many of the new products that have launched recently tempt investors to ‘chase’ returns in sectors, markets or strategies that have performed well over the recent past.
“Be very careful when reading marketing materials that show that a product has ‘outperformed’ over a period of time.
“Not only are time periods carefully selected by product issuers to paint a product in the best light, but performance also tends to ‘mean revert’ over the long run so outperformance is almost always only temporary.”