The rise and rise of the ETF

Australian investors are very fond of investing in domestic equity markets with overseas investments seen as expensive, confusing or simply too hard to access.

As cash rates remain at historical lows, making traditional investments less attractive than ever, investors (particularly retirees and self-managed super funds) looking to add some dimension to their income streams are increasingly turning to exchange-traded funds (ETFs).

" ETFs are becoming one of the most popular investment vehicles for institutional and individual investors."
Danny Laidler, Co-Head of ANZ ETFS and Head of Distribution at ANZ ETFS

In simple terms, ETFs are funds listed and traded on the stock exchange. ETFs allow investors to diversify their investment portfolios through a range of traditionally harder-to-reach investment classes, including global equities, commodities and foreign currency. ETFs can also provide a relatively low-cost diversification as investors can get exposure to hundreds of companies with a single trade.

Globally, ETF growth shows the popularity of this investment, with more than $US2.6 trillion invested in over 5,000 ETFs worldwide, according to research and consultancy firm ETFGI.

At ANZ we have watched this trend develop and it has become clear we should have products fitting this demand which is why we have launched six ETF products through a new joint venture.

We'll initially offer three equity ETFs, a physical gold ETF and two foreign currency ETFs (US Dollar and Chinese Renminbi), products we believe will resonate with local investors.

This will be the first time Australians can invest in ETFs issued by a big-four Australian bank and we think it will further help to bring ETFs into the mainstream by making them more accessible for the retail investor both in terms of product access and industry education.

Our thinking is this: in less than 20 years, ETFs have become one of the world's most popular investment vehicles for both institutional and individual investors, amid claims they offer investors tax-efficient, easy access to a variety of 'harder-to-reach' asset classes at a relatively low cost.

When the first ETF was launched in the US in 1993, no one quite anticipated how exponentially ETFs would grow over the years to come. At first, ETFs were primarily marketed to institutional investors for hedging, transition management and tax-loss harvesting. However by 2008 US retail investors accounted for nearly half of the total assets held in ETFs. This 'alternative investment' had entered the mainstream.

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In Australia, signs are pointing to a growing popularity. The funds, which have been around since the early 1980s overseas, first arrived in the Australian market in the early 2000s. The first ETF to hit Australia was the SPDR S&P/ASX200 Fund, which listed in August 2001.

Growth and take up of ETFs in the past decade has been slow compared to overseas, primarily due to Australian investors' love affair with managed funds and shares.

Historically, there has been lack of education around ETFs which appear confusing or complicated to investors. As a result, financial advisers found it difficult to encourage their clients to include ETFs in their investment portfolio mix, even with the promise of a lower cost.

But the remarkable growth of the Australian Exchange Traded Fund market over the last 12 months – 62 per cent to $A18.75 billion in the year to May 2015, according to ASX data - is a clear indication things are changing.

Retail demand in Australia is largely driven by self-managed super fund investors seeking to take more control over their investments, and diversify beyond traditional income sources like shares and bonds.

Changes to Freedom of Financial Advice (FOFA) laws have also made the funds a popular choice for advisers as their business models shift from a commissions focus to fee-for-service products.

All signs indicate ETFs will continue to grow in popularity in Australia with the ease of access and cost considerations making them a popular choice. Low interest rates should also encourage traditional investors to seek investments beyond cash and equities in order to diversify their investment portfolios with income producing ETFs.

What's an ETF?

An ETF is a type of managed-investment scheme traded on a stock exchange, such as the Australian Securities Exchange (ASX).

An ETF holds a portfolio of shares, commodity, or currency that closely mirrors its benchmark or index. There is no minimum number of units required for investment, as investors can buy or sell as little as one ETF unit.

Typically the aim of an ETF is to provide the same return as a specified benchmark or asset, with the liquidity of a share.

In Australia ETFs are regulated by the Australian Securities and Investments Commission (ASIC) as 'managed investment schemes', with safeguards in place to ensure investors' rights are protected. As with any investment vehicle, there are some risks associated with ETFs.

As ETFs aim to replicate the price movements of their underlying benchmark or asset, their performance is dependent on the performance of the underlying asset and the value of the fund can rise and fall daily.

If the ETF tracks overseas assets, changes in the value of the Australian dollar may affect the value of the investment. Some ETFs may offer a leveraged exposure and provide greater returns for investors, but can also lead to increased losses.

Investors should obtain tax advice and read the product disclosure statement for a full list of the associated risks to decide whether the product is right for them before investing.

The increase in popularity in ETFs will lead to greater exposure becoming available and continued product innovation. As products become more complex, it is important the industry continues to educate advisers and investors on the risks within these products and how they can be used in an investment portfolio.

Danny Laidler is Co-Head of ANZ ETFS and Head of Distribution at ANZ ETFS.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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