Performance and costs regarded as important factors, writes Pedro van Gaalen
Performance and costs are regarded as important factors
Global growth in exchange-traded funds (ETFs) continues unabated. Following a strong 2017 performance, when $662bn was invested in passive equity funds globally according to Morningstar Inc’s 2017 Global Asset Flows Report, expectations were high that 2018 would deliver even greater capital inflows.
“Favourable market conditions across the globe in 2017 attracted the greatest flows in more than a decade,” said Kevin McDevitt, a senior analyst at Morningstar Inc.
“Rallying equity markets, subdued volatility and stable interest rates appear to have lifted investor confidence worldwide.”
Figures for Q1 2018, released in the ETFGI Global ETF and ETP industry insights report, affirmed the growing dominance of ETFs in the portfolios of global investors. ETFGI reported that a record $4.92trillion was invested in 7,389 ETFs and other exchange-traded products listed globally during this period.
This represents growth in assets under management of 1.74% over the quarter, and equates to $137bn in net inflows. Statistics from ICI Global corroborate the upward trend, showing that from August 2017 to August 2018, global equity ETF assets rose by $74.19bn.
Graeme Wellsted, executive director at local stock exchange ZAR X, says the continued popularity of ETFs hinges on costs and performance.
“In general, ETFs tend to offer a lower total expense ratio than actively managed funds and unit trusts, which makes them a more cost-effective mechanism to gain exposure to equities.”
Nilan Morar, VP of Trading at Purple Group, agrees, saying that accessing equities through an ETF creates economies of scale that cannot be matched when buying shares individually, due to the burdensome administrative requirements.
“Historically, retail investors required significant capital to open a trading account, which meant the barriers to entry into equity investing were restrictive,” he says. “However, online trading platforms and ETFs now offer a more efficient and accessible means to gain broad exposure to the best-performing global stocks, all with one cost-effective fee.”
However, Nerina Visser, a CFA charter holder and director at etfSA.co.za, cautions investors against obsessing over the cost benefit. She says: “Investors often haggle over five or 10 basis points on their asset management fees, but there are often more onerous costs associated with investing, such as debit-order fees. When investors calculate the total costs associated with investing, a comprehensive analysis should consider the entire value chain, including admin costs, management and performance fees, transaction charges and whether dividends are being reinvested.
“Fixating on single charges will fail to uncover the areas where investors can create cost efficiencies based on how, where, when and how often they invest.”
More significantly, Wellsted believes it is the inability of many active fund managers to beat benchmark returns from ETFs that is driving growth in these investment products.
The performance of ETFs has brought into focus the value investors get in the market, which is why active fund managers now need to justify their performance fees.
Visser says there are additional factors behind the con- tinued rise in ETF popularity. “The collapse of Steinhoff … sent many fund managers and investors scrambling to accurately assess their exposure, which brought the issue of investment transparency into popular investor discourse.”
She says ETFs offer a degree of transparency that a growing number of investors are after, particularly amid a rise in investor activism. “It is simple for investors to determine exactly what they are invested in within an ETF, whereas the composition of other types of funds can be more complex.”
In addition, the National Treasury’s investment framework, which aims to drive greater inclusion, is helping to promote a shift towards passive investments like indextracking ETF options. ETFs have had significant growth in recent years due to the need to diversify market risk in a single vehicle, as they offer access to a growing range of products that deliver exposure to underlying assets and global markets.
This market evolution has brought about a new generation of ETFs, which Visser believes will continue to fuel growth. “A growing number of investors are looking to leverage factor-based or smart beta ETFs, for example, which have proven to provide good returns in different market cycles. This offers investors more targeted exposure through ETFs, where they can hunt for market-beating returns against traditional cap-weighted index-linked strategies.”
Given the strength of the fundamental drivers at play, the market remains bullish on ETFs. Some commentators predict that assets under management in ETFs will reach $25-trillion globally by 2025.
Nilan Morar … economies of scale
Graeme Wellsted … ETFs cost-effective