ETFS on way to $150bn

Bye to active managers as trackers rule

AUSTRALIA’S booming exchange-traded fund industry could set a record $150bn in funds under management by the end of the year, as investors ditch active managers in favour of the low-cost, easy-touse index trackers.

A third of Australian investors now use exchange-traded funds as the core of their portfolio, up from just 4 per cent in 2019, according to local ETF provider Betashares.

And the latest annual Mercer Investment tables released this week might explain why, with the median active fund returning just 0.1 per cent for the year ended December 2022, before management fees.

Even long-short hedge funds only managed to eke out a 1 per cent return, again before fees.

The ASX 200 benchmark fared slightly worse, with a negative 1.1 per cent return, which is the kind of return you would have got from an ETF tracking the top 200 listed companies.

But when you factor in the much higher fees charged by active funds – the so-called smart money – there’s little incentive to choose active over passive.

Betashares, the second largest ETF provider in the country, had $4.4bn flow into Australian equities ETFS through 2022, which was well above the $3.3bn that went into international equities.

This marked a big turnaround from 2021, when Australian investors pumped $11.8bn into global equity ETFS and $5.5bn into Aussie shares.

All up, the local ETF industry received $13.5bn of net inflows last year, right as the unlisted funds sector suffered its worst year on record with $26.8bn of net outflows.

Vanguard’s Australian and international equities ETFS were the most popular among investors, followed by Betashares’ top 200 Aussie ETF and Vaneck’s QUAL, which invests in quality global companies, excluding Australia.

But thematic ETFS are increasingly capturing investors’ attention, providing exposure to sectors such as technology, food and climaterelated investments.

Some of 2022’s most popular thematics, including battery technology and cybersecurity, stand a good chance of gaining further momentum this year.

For others, such as cryptolinked equities, the outlook is much less clear.

Crypto ETFS were among both the best and worst last year; while they proved popular with thematic investors, driving strong net inflows through 2022, the digital currencies themselves – and the linked ETFS – plunged in value.

“ETFS continue to tear away from the traditional unlisted managed funds as a vehicle of choice,” Betashares founder and chief executive Alex Vynokur said. “We have seen that in both strong market conditions and in the move over the course of 2022.

“They’re also becoming the preferred way for financial advisers to invest when looking after client money.

“That is very clear.”

For Rory Tobin, head of State Street Global Advisors’ Global SPDR ETF Business, the big appeal of ETFS is their ability to democratise investing, “giving investors large and small access to institutionalgrade solutions that offer efficient, cost-effective exposures to all corners of the global investment market.”