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Evan Reedman: Australian ETFs from slow burn to rapid fire

Evan Reedman is Head of Product and Portfolio Review Department at Vanguard Australia. Globally, with $9 trillion in assets under management as at 30 September 2020, including about $2 trillion in Exchange-Traded Funds (ETFs), Vanguard is one of the worlds largest global investment managers.

 

GH: How would you describe the usage and acceptance of ETFs in Australia now versus five or 10 years ago, in both retail and institutional markets?

ER: Initially, we had a slow and steady burn, but in the last few years, investors have become comfortable with ETFs as an investing vehicle. Initially, support came from financial advisers, but increasingly, individuals are using ETFs for themselves. This year has seen record inflows in what was supposed to be a difficult market, with Australian ETFs rising about $5 billion in November 2020 with net inflows a record $2.5 billion. There is now $92 billion invested in ETFs in Australia. Investors now accept that ETFs are ideal for broad market exposure in a single trade for a relatively low cost, and that’s what most ETF strategies provide.

GH: What have been the best two or three funds for inflows within the Vanguard range, and which haven’t done much?

ER: Unsurprisingly, as we see in every market, the home bias funds do the best, which for us is the Vanguard Australian Shares ETF (ASX:VAS). It continues, year in year out, to be the most popular ETF that we offer, and is now sitting at about $7 billion. The others that have done well are the Diversified ETFs. People are looking for portfolio solutions and the diversified funds are a pre-packaged asset allocation solution.

The least popular are harder to identify as we have launched some new ETFs which still have small balances, but that does not mean they are out of favour. They are still finding their feet.

GH: Next year is Vanguard’s 25th in Australia. For many years, your products were all unlisted managed funds with no ETFs but now I'm guessing ETFs receive the most flows. Is that correct?

ER: It's really been in the last two to three years that ETF flows have exceeded managed funds, for a couple of reasons. One, investors are now comfortable with the structure. And two, many of the businesses that we partner with in the industry, particularly financial advisers and platforms, have evolved their technology to suit holding ETFs as their preferred vehicle.

GH: How do you manage the different price points facing investors when they invest in Vanguard through a managed fund or ETF?

ER: Some of the price differences reflect the manufacturing and distribution costs of those products, and the mechanics of how they work, such as payments for registries or to index providers. So while we strive to offer the most competitive price points in the respective products, there are some price differences. We leave it to the adviser and the client to make the choice based on what suits them, depending on the platforms or systems they use.

One example is that a platform might facilitate a regular savings programme more efficiently than buying small amounts of ETFs and paying brokerage each time. We’re agnostic, it’s up to the client.

GH: Part of your title is ‘Portfolio Review Department’. What does that do?

ER: It’s Vanguard’s eyes and ears to the market. We focus on what we call ‘fund health’. It's not a matter of just putting a fund on the shelf and leaving it, but ensuring the products are operating efficiently including reporting to the Vanguard Board and the Global Investment Committee. We try to take a dispassionate and factual assessment on how they are performing. You might think of it as an ‘in-house asset consultant’.

GH: Vanguard has a global reputation for index or passive ETFs but you also offer active funds. How do you reconcile the two?

EV: In Australia, we have two active equity products with sub-advisers Baillie Gifford and Wellington. We bring what we consider the best capabilities to the market and Vanguard has been working with some of these external managers for 40 years or more. The fund might be called the Vanguard Active Global Growth Fund or the Vanguard Active Emerging Markets Fund, for example, but we make it clear that there is a sub-adviser.

GH: Why does Vanguard focus its ETFs on broad market exposures rather than thematics or niche products?

ER: We need to have an economic reason for a product that meets a long-term investor outcome. The investment case must be strong and enduring for the needs and preferences of our primarily retail and intermediary clients. So we ask, ‘What problems are investors trying to solve?’ And we focus on their retirement goals or having income to spend in retirement. It’s a different approach to some in the market which means we launch fewer products but it also ensures longevity in our product suite as well.

GH: Would you avoid a product which looks like it will generate good flows and be fashionable for a year or two but maybe not in five years?

ER: That’s the sort of thing we do. We err on the side of saying that we're okay if others want to play in that space or offer a product but if there is any doubt about the longevity of the fund or even how it might be used by particular clients, we stay away.

GH: So we won’t see the Vanguard Crypto Fund?

ER: It’s funny how often I am asked about crypto or gold or inverse ETFs, but you will never see those from Vanguard. I'm not making any judgment on others, it’s about product philosophies and who we are.

GH: Even with the current ETF income range, a lot of retirees are struggling for income. To what extent does Vanguard believe this can be solved by going down the risk curve, say into non-investment grade securities, or does the risk problem prevail?

ER: We still need a compelling economic rationale and we take a long-term approach to achieving outcomes. So first I’d say people should be taking financial advice. And second, investors should understand exactly what they are invested in, check the way their portfolio is constructed and ensure that what they are holding is true-to-label in order to allow them to ride out a short-term reduction in income. Unlike many active managers, we replicate a stated benchmark in our index funds and ETFs, so they would not be moving up and down the risk curve.

GH: Does Vanguard feel compelled to respond when another ETF provider launches a similar fund at a cheaper price?

ER: Our overall pricing philosophy in both managed funds and ETFs is to provide the best value to our clients with a high-quality product. But obviously we are running a business and we need to make money, so we focus on the long-term return to ensure Vanguard in Australia is a sustainable business. We watch what our competitors are doing but sometimes they may be using a different index or third-party service with different input costs. There are various price points where iShares or BetaShares have lower prices on similar products but we don't have a philosophy that says we have to be the cheapest. It’s the final net outcome to the client that matters most. Value for money does not always mean the cheapest.

GH: As Head of Product, how does your role overlap with other people in Vanguard?

ER: Two major project teams which my team is currently working closely with are our Personal Investor team on enhancing our new digital retail offer, and the team building our new superannuation offer. But naturally the Product team has close ties with all other areas of the business managing our offer to investors.

GH: It’s extraordinary that there are now more ETFs in the US than there are stocks. Are you concerned that development has gone too far, that it’s not healthy for the ETF industry to have so many funds which inevitably means many will also close each year?

ER: We don’t think we should test our product ideas on clients’ retirement savings. It’s up to us as investment professionals to ensure there are enduring reasons why we're offering a product to clients and it’s not just to make a sale. So I do get concerned and I hope we do not see a repeat of the US experience in the Australian industry where every investment idea becomes an ETF.

GH: Finally, what major trends do you identify for the future growth of ETFs?

ER: Something that's moved from the institutional space to individual investors is ESG investing. The environmental, social, governance and ethical ways ETFs are constructed continue to grow at pace. Advisers and clients are really looking for these funds now. We recently launched an Australian Ethically Conscious fund based on the ASX300 but using a FTSE methodology and not the S&P index that we use for VAS. It’s still small, obviously, but attracting good retail flows in its first couple of months of trading.

 

Graham Hand is Managing Editor of Firstlinks.

Evan Reedman is Head of Product at Vanguard Australia, a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual.

For more articles and papers from Vanguard Investments Australia, please click here.

 

4 Comments
David L Owen
December 20, 2020

I do not wish to appear to be negative, however, I am concerned that the publication of ETF business volumes is written to suggest that this proves they are a better form of investment than others such as unlisted managed fund or LICs. Surely it simply suggests that some investors are price sensitive and some prefer to buy via the listed securities process?

I would like to see a publication comparing LICs, ETFs and unlisted managed funds that is written by someone who is totally independent of these forms of investment and who can hopefully be totally objective and fair in their comparison and evaluation.

Graham Hand
December 20, 2020

Hi David, thanks for your feedback. Obviously, if we interview a provider of ETFs, they will support the product but they also make comments on unlisted managed funds.

FYI, Firstlinks has published many articles explaining LICs v ETFs v managed funds. You could use our search function to find more, but here are a few:

https://www.firstlinks.com.au/beat-market-etfs-lics-funds-structures
https://www.firstlinks.com.au/one-major-weakness-lics-managed-funds
https://www.firstlinks.com.au/active-etfs-managed-funds-differ

David L Owen
December 21, 2020

Hi Graham

Many thanks for your reply and for the links. I look forward to reviewing the material over the next day or so.

Gary M
December 17, 2020

Imagine if you had said a few years ago when LICs were double ETFs that ETFs would be double LICs by 2020.

 

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