Exchange-traded funds (ETF) are set to become more popular with financial planners in coming years as the advice industry moves away from commissions, according to panelists at the IFA ETF Strategy Day.
Morningstar’s co-head of fund research, Tim Murphy, said he expected the ETF industry’s strong growth to continue as advisers sought to simplify the way they invested clients’ capital and keep costs down amid the shift to fee-for-service.
“We have had close to $1 billion in ETF asset growth year-to-date and ETF assets in Australia have nearly quadrupled to $4.1 billion in the last two years. We really think we’re in the first innings of this game in ETFs here,” he said.
ETFs offered benefits including diversification, transparency, low fees, intraday pricing and unlike LICs, traded at close to their underlying worth because of the way they are set up, he said.
But Murphy also pointed out that there were drawbacks to using ETFs.
“If you are drip-feeding regular small amounts [into ETFs] then brokerage fees can materially add up over time and potentially in that circumstance an ETF is not the best investment tool to use for a client who wants a regular savings plan or to make ongoing super contributions,” he said.
Given their index-tracking nature, ETFs also won’t outperform a benchmark, he said.
iShares Australia director Tom Keenan said he expected advisers and also institutional investors to use the products as a cash-equitisation tool.
“You might get a new client and you might be choosing some active fund managers, or a model portfolio of direct securities but you are not ready to make those decisions yet,” he said.
“So you could buy an Australian equities ETF instead of futures contracts and put that money to work and capture the income, capture the franking credits and then sell out of that ETF and buy your individual stocks and managed funds for that client’s long-term exposure.”
Vanguard’s ETF product manager Robyn Laidlaw said that while the market was still in its awareness phase, a growing number of investors and their advisers are appreciating the benefits of indexing and the flexibility ETFs offer.
