Financial planners in Australia are beginning to shift away from using traditional actively-managed funds towards exchange-traded funds (ETF) for the core of their clients’ equity allocation, according to industry experts.
Independent advisers were the early adopters of ETFs in Australia and some used a combination of funds to build global equity portfolios, iShares Australia director Tom Keenan said.
“We are seeing advisers build portfolios using various ETFs and allocating quite actively,” Keenan said.
“They will move away from traditional global equity benchmarks, a common one being the MSCI World Index, and overweighting emerging markets or overweighting China and different parts of the world, and I think that is the flexibility and control that ETFs can bring to advisers’ existing portfolio management or portfolio construction process.”
Funds under management for the local ETF industry soared 150 per cent to $3.28 billion in the year to March, according to Australian Securities Exchange (ASX) data.
ETFs generally track an index and can be bought and sold just like individual stocks. Keenan said advisers were also using strategies such as implementing ETFs for clients based on the Australian dollar’s value compared to its long-term average.
“There is no doubt that we are seeing people buying the iShares S&P 500 on the ASX at the moment and they are saying that the long-term average of the Australian dollar is far below where it is at its present level,” he said.
“And so they may have a threshold where they might move to an unhedged position, and then if the dollar drops like we saw it drop very dramatically a couple of years ago, they might move to a more hedged position.”
Dealer group Financial Choice director Russell Medcraft develops model portfolios consisting of cash, term deposits, hybrids and ASX-listed ETFs for his clients.
“We like ETFs because they are transparent, they are tradable and obviously the funds management industry underwent a massive shock in regards to funds freeze and disclosure,” Medcraft said.
“Really what the client basically wants to know is if they are on track for what their long-term objectives are, and ETFs are fantastic for that because you can set and forget.
“You can build a core and satellite approach. You can then run your little satellites around it to achieve a little bit of alpha over and above that and more importantly give you and your practice some flavour of individuality.”
State Street Global Advisors senior managing director Robert Goodlad said ETFs were a fully administered one-stop package that even institutions were now actively using.
Vanguard Investments Australia ETF product manager Robyn Laidlaw said although advisers liked ETFs for reasons including low cost, transparency and their ability to be transacted via the exchange, education needed to improve.
