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Australian ETFs: end of year reviews 2018

BetaShares: Shaken, not stirred!

  • Notwithstanding dramatic sharemarket volatility in the final few months of the year, the Global ETF industry recorded significant growth in 2018, receiving its 2nd highest ever level of net inflows (US$516B). In total the global industry ended the year at US$4.8T [ETFGI]. Total asset growth however was held back by significant asset value depreciation leading Global ETF assets under management to end up at approximately the same level as at end 2017.

  • Comparatively, the local ETF industry’s net flows were actually higher than the declines in asset values, leading the ETF industry to grow by 13%, (~$5B). In our view, given the prevailing environment, this is a very strong result and indicates the continued interest in the ETF product structure by investors even in the face of very volatile markets.

  • The Australian ETF industry’s funds under management ended the year at ~$41B, a touch below the record high of $42B set in September, (2017 year-end AuM, $36B)

  • As a result of sharp market falls at year’s end, 100% of the year’s industry growth came from net inflows, with $6.2B flowing into the industry over the course of the year. In a similar result to the global industry, this represents the 2nd highest annual flows on record (the highest being $7.8B, in 2017). Importantly, this strong ‘unit’ growth means that if and when asset prices recover, we will see some “bumper” growth months in the year ahead.

  • While asset growth and inflows were below record levels, the industry did break a meaningful record in 2018, with ETF Trading activity levels reaching a fresh record high, with trading value increasing 14% compared to 2017, and over $36B of value traded. We expect trading values to continue to trend upwards as ETFs become an increasingly mainstream way to express investment views.

  • Flows by ETF manager continued to be concentrated, and more so than last year, with the top two players (Vanguard and BetaShares) receiving 62% of the industry’s flow combined (compared to 56% for the top 2 players in 2017)

  • In terms of product launches, 2018 produced the 2nd highest number of new product launches on record, with 38 funds launched – compared to 31 new products launched in 2017 and 40 new products launched in 2016.

  • 7 products were closed in 2018, which is still a relatively small figure by global ETF standards. ETF issuers closing products were iShares and ETF Securities.

  • By inflows, passive products captured the bulk of flows with 88% share, however the Active ETF sector continued to grow its relative share with 12% of flows vs. 8% in 20171.

  • Within the passive category vanilla index-tracking funds once again dominated, with their share of flows remaining stable (78% of flows in 2018 v. 79% of flows in 2017), as did the share of flows in ‘smart-beta’ products (9% vs. 8% in 2017)2.

  • That notwithstanding, we expect both Active ETFs and ‘smart-beta’ exchange traded funds to continue to grow in popularity as new products are launched and the industry matures.

  • The categories of ETFs capturing the largest amounts of new money over the course of 2018 were relatively stable compared to last year. For the 4th year in a row, international equities products ranked #1 for inflows, with $2.9B of net inflows, followed by Australian equities at ~$1.5B. The fixed income category continued to grow at a rapid pace, with record flows to this category in 2018, picking up $1.3B in net flows (vs. $1.1B in 2017) and ranking 3rd in terms of asset category inflows. We believe it’s very possible that we could see this category grow to the #2 most popular category in 2019, given increased product innovation and a greater investor understanding of the role that fixed income can play in portfolios. Outflows were limited, with only two categories receiving net outflows, and both due to profit taking by investors given market conditions (U.S Currency ETFs and Short Funds)

  • The best performing products of 2018 were the Palladium ETF, followed by the Strong U.S. Dollar Hedge Fund (ASX: YANK) and Technology Equities oriented ETFs.

  • The declines in asset prices muted the growth of the industry and therefore the 2018 industry forecast we made in our end-year 2017 review was not reached (forecast of $47-$49B, actual ~$41B). That said, fundamental unit growth will continue to support the industry’s rise, with extraordinary growth possible should asset values recover.

  • We believe the industry will continue to grow strongly in 2019 – and forecast total industry FuM at end 2019 to be in the range of $50-$55B.

A copy of the BetaShares Australian ETF Review – End of Year Review 2018 is linked here.

 

Vanguard: Australian ETF market grows amid challenging investment environment

Australians have over $40 billion of their savings invested in exchange traded funds (ETFs) according to the latest figures released by the Australian Stock Exchange (ASX).

While volatile markets resulted in a slight decrease in total ETF funds under management through the fourth quarter of 2018, inflows across the calendar year saw the market grow by $4.7 billion, an increase of 13.2 per cent from 2017.

Industry wide cash flow was $6.44 billion for 2018. While this figure is down from $8.08 billion in 2017, ETF assets have grown at a compound annual growth rate of 32 per cent over the past five years.

Damien Sherman, Head of ETF Capital Markets said: “Continuing the trend of recent years, investors sought out ETFs that provided exposure to international equities, with the asset class attracting nearly half (49 per cent) of net cash flows in 2018.

“Despite the challenging investment conditions in 2018 investors continue to embrace the benefits of ETFs, spurring growth in the market, increased competition among issuers and rising trading volumes that have in turn driven down the cost to invest, allowing investors to keep more of the returns they earn.”

In 2018 Vanguard became Australia’s leading ETF issuer with $12.07 billion in funds under management at 31 December. It was the fourth consecutive year that Vanguard led the industry for net new cash flow representing 41.5 per cent of all ETF flows in 2018.

“Investors faced challenging conditions across global equity markets in 2018, highlighting the importance of diversification across asset classes and the enduring role that fixed income plays- especially as a ballast during periods of equity market volatility,” Sherman said.

It was a year of strong growth for Vanguard’s range of Diversified ETFs that broke new ground in the Australian ETF market by offering investors the ability to buy a well-diversified, low-cost product that rebalances automatically across a range of asset classes. The four diversified ETFs (Conservative, Balanced, Growth and High Growth) ended 2018 with $277 million in combined assets under management.

Vanguard’s range of Australian and International Fixed Income ETFs saw combined net cash flows in excess of $276 million across the year.

In 2018 Vanguard listed six new ETFs in Australia, including ESG and active offerings, bringing its total number of exchange-traded products to 28.

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