Fee-for-service could spark ETF boom

State Street to expand product range

By Wouter Klijn
Thu 25 Mar 2010

A move to fee-for-service advice would drive ETF growth in Australia, State Street says.

The transition of the financial planning industry from commissions to fee-for-service could spark a rapid growth of the exchange-traded fund (ETF) market in Australia, according to State Street Global Advisors.

When financial planners in the United States moved to a fee-for-service model in 2001, a similar development took place.

"That transition from a commission, product standpoint to a fee-for-service, wrap fee-type program was probably the single largest trend to help grow ETFs in the US," State Street senior managing director James Ross said.

"When I look at where the US was then and where Australia is today, I see significant parallels," he said.

Ross saw further parallels in the investment climate during which these changes took place.

In the US the growth of the sector was helped by the bursting of the internet bubble, which sparked discussions about the height of managed fund fees.

In Australia, a similar discussion was started after the global financial crisis set in.

Ross is a veteran of the ETF industry and was involved in the development of the first ETF to see the light of day in the US, the Standard and Poor's Deposit Receipt (SPDR), in 1992.

This ETF gave investors the ability to track the S&P 500 and it is the most liquid equity in the market today.

Ross has seen the industry grow from nil to US$740 billion in assets under management (AUM) as at the end of last year.

"The range of ETFs in the US expanded rapidly - maybe too rapidly because there is a significant amount of product that doesn't have critical mass," he said. "I think a third of the US ETFs have less than $50 million in them."
 
"From the Australian standpoint, there is certainly room for expansion but you want to do it in a very pragmatic way."

Ross did not want to say what type of new ETFs State Street is looking to add to its range in Australia.

But an obvious gap in the market is a fixed income ETF. Ross said these types of ETFs were very successful in the US last year.

"Fixed income ETFs in the US last year had a banner year - their AUM was up almost 80 per cent," Ross said.

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