The launch of Australia’s first exchange-traded funds (ETFs) on the Australia Stock Exchange (ASX) paved the way for a new investment category: the broader Exchange Traded Product (ETP) market. Today, the Australian ETP market has grown to $113 billion in assets under management (AUM)1 and includes indexed and actively managed products that can be bought and sold on the exchange.
Source: ASX, State Street Global Advisors, as at 30 June 2021.
The growth of the ETP market is a true success story. With a history of innovation, State Street Global Advisors launched its first two ETFs in Australia, now known as the SPDR® S&P®/ASX 200 Fund (STW) and the SPDR® S&P®/ASX 50 Fund (SFY) in 2001. Today, the market has expanded to include over 26 issuers with a combined listing of 223 ETPs.1
As we see in the chart above, ETF momentum gathered pace in the wake of the global financial crisis (GFC). They became a popular vehicle to gain exposure to the broad-based market recovery.
ETFs have moved from the margins into the investment mainstream and, for many investors, are now a core building block for portfolio construction and asset allocation. The attractions of ETFs are manifold, but two keys benefits have helped drive market growth:
1. Diverse and true-to-label exposure.
Not only do ETFs offer diverse exposure to the market but they also achieve this with a single trade. For instance, a single trade in the SPDR® S&P®/ASX 200 Fund, which tracks the ASX 200 Index, gives investors access to all 200 companies listed in the index – with a single transaction.
Although equity-based products still make up 77% of listed ETPs, the range of options has grown. Investors can now invest in large and small companies across domestic and international markets. They can also target specific sectors and smart-beta factors.1 What’s more, real estate and infrastructure are now represented along with commodities which alone make up 3% of the market.1 And, as we see overseas, the fixed income sector has been expanding and now accounts for 10% of the market.1
Amid this product proliferation, it’s important to look beyond the ETF name – both the long and short of it. While its title may give you a window into the fund’s exposure, there can also be a lot of ambiguity. Investors should look at the portfolio construction methodology of the specific ETF to ensure they understand where it invests.
2. Cost-effective solutions.
Investors are increasingly aware of how fees can impact their investment goals. ETFs costs are typically lower than traditional managed funds and substantially less than individual investments in an ETF’s underlying securities.
However, before investing in an ETF, it’s worth looking at the total cost of ownership (TCO). Two components make up the TCO of an ETF: tracking return difference and investor trading costs. Tracking return difference covers the expense ratio, portfolio management efficiency in matching the index returns, and the positive offset of any income derived from lending out the ETF’s underlying securities. Given ETFs are bought and sold on an exchange – like stocks – any trading costs include commission and the bid-ask spread.
The user case for ETFs is also evolving. As mentioned, a large part of the ETF base in Australia comprises of advisers and self-directed investors. This is partly driven by legislation, as advisers increasingly move away from outperformance-focused propositions to more client-centric and objective-based ones. At the core of this is asset allocation and portfolio construction – by delivering low-cost portfolio strategies, ETFs are increasingly seen as an easy and convenient way for investors to achieve their long-term objectives.
Twenty years ago, the launch of ETFs in Australia was something of a gamble. As such, it is hugely encouraging to see how the market has evolved. Today, ETFs provide investors with the core tools to build innovative portfolios.
We already have core and satellite holdings, alternative asset classes, ESG funds, and model portfolios – it will be exciting to see what the next twenty years bring.
1 ASX Investment Products Report, June 2021.