Tailwinds of change
More investors are expected to turn to low-fee funds that provide diversification, convenience and transparency
The royal commission into misconduct in the banking, superannuation and financial services industry has focused investors’ attention on high fees and transparency. “There still seems to be a lack of low-cost investment solutions,” says Christian Obrist, head of this year’s winning ETF provider, iShares Australia.
He says ETFs tick the boxes for low fees, high diversification, convenience and transparency, showing the underlying investments.
Obrist says it is too early to say what impact the royal commission will have on the ETF market but he expects it to be a “soft tailwind” rather than prompt a quick switch from high-fee to low-fee products.
Certainly the take-up of ETFs accelerated after the Future of Financial Advice (FOFA) reforms of 2013, he says. Closer scrutiny of fees and the ban on conflicted remuneration helped ETF assets grow from $10 billion five years ago to $42 billion. ETFs are not only popular with retail DIY investors and self-managed super funds but also some financial advisers, robo advisers and increasingly institutions have embraced them. iShares has $12 billion in ASX-listed ETFs, which is small compared with its $2.5 trillion worldwide assets spread among 900 ETFs (of the 6000 ETFs listed globally).
iShares’ ETFs were judged by three ratings houses, Lonsec, Morningstar and Zenith, coming first in three categories this year: Australian shares, international shares and fixed-income ETFs. Seven iShares funds were among the winners.
Obrist, who was appointed head of BlackRock’s iShares Australian ETF operation in June 2018, oversees 34 funds listed on the ASX.
It has been a busy year for iShares, even though it didn’t list any new ETFs in Australia in 2018, although Obrist says it has plans for more listings in 2019. Instead it has been enhancing its ETF platform and consolidating what it offers.
Housekeeping chores included transferring 14 of its cross-listed global share ETFs to the Australian market, removing the need for investors to complete the US tax form W-8BEN. It also closed down five ETFs: US small caps, Hong Kong, Singapore, BRICs and telecoms.
One of the big trends in 2018 was investors’ diversification into international ETFs on the back of the soaring US sharemarket. iShares has a variety of global ETFs that track well-established indices such as the S&P 500 as well as funds for Japan, Taiwan, South Korea and Europe. In the September quarter, global equity ETFs attracted 58% ($2.5 billion) of ETF inflows.
While iShares offers long-only ETFs for most asset classes, enabling investors to build a diversified, low-cost portfolio, it also has four value, smart beta ETFs that take a particular investment factor: the MSCI Australia Multifactor ETF, MSCI World Multifactor, MSCI Australia Minimum Volatility and MSCI World Minimum Volatility.
Educating investors about ETFs has been a focus over the past year, says Obrist. Look out for iShares seminars that explain that there are many elements that go into the performance of ETFs. Some ETFs, such as the one that tracks the S&P 500 with long-only shares, are easy to understand. But once you go into fixed interest or smart beta, it is important to understand the portfolio and the strategy. “An ETF is an avenue to transact risk,” says Obrist. “It is important for investors to understand the ETFs they are buying.”
Looking at 2019, Obrist says BlackRock’s economists believe the US sharemarket will still be in favour despite trade tensions with China and rising interest rates. The US has strong earnings which, together with corporate tax cuts, are positive. At the top of its favourites is the technology sector.
BlackRock is less enthusiastic about European equities because of muted earnings, weak economic momentum and political risks. It is keen about emerging markets, especially in Asia, because of economic reforms and robust earnings growth, but is negative about fixed income.