Ask an investor who holds an exchange-traded fund what they like most about ETFs and there’s a good chance they’ll mention diversification. Afterall, with one trade ETFs can provide investors with one of the simplest ways to achieve instant access to a wide range of companies, industries and geographies.
ETFs have experienced exponential growth in Australia since State Street Global Advisors introduced them into the market in 2001. In fact, this year ETFs have grown to $37.49 billion in funds under management in Australia. To be clear, these are ETF figures alone, a subset of the broader Exchange Traded Product (ETP) figures.
ETFs have been well received by institutional and retail investors in Australia alike. They are a low cost, transparent and easy to use investment tool. However, it could be said that one of the key driving forces behind the continued rise of the ETF is the benefit of diversification.
Whether it’s about capturing the diverse gains of the entire S&P/ ASX 200, emerging markets or the world’s leading real estate investment trusts in a single trade, ETFs allow investors to cast the net wide and reach new heights when it comes to their investment goals.
The benefits of casting the net wide are easy to see. Having investments spread across sectors means that investors are less susceptible to a poor performance by a single or several leading stocks, while having investments spread across markets means that investors are less susceptible to an unexpected downturn in just one market.
Diversification and global income strategies for Australian investors
Local investors are starting to take note of these benefits, but numbers are still low. According to the ASX 2017 Investor Study, 8 percent of the adult population of Australia say that they hold shares listed on an international financial exchange, up from 5 percent in 2014.
Unsettled by market volatility in recent years, Australian investors are showing a growing preference for global equity income investing and a strong appetite for yield-oriented investments.
In a low-interest rate environment, these investment objectives have become harder for Australian investors to achieve onshore. Instead investors are looking abroad for reliable and diversified high-yield opportunities, and ETFs are helping them get there. In fact, the ASX Study also notes that cost is prohibitive factor when it comes to Australian’s holding shares listed on an international financial exchange, with many local investors opting for ETFs instead.
With the Australian equity market representing less than 2.4 percent of the global stock market capitalization , there are significant opportunities for Australian investors to look offshore. Global income ETFs provide an easy and accessible way to tap into the stable and high-yield earnings of some of the world’s best performing companies and sectors.
Looking offshore can not only offer Australian investors access to new income opportunities but can also help them reduce risk through more effective diversification, resolve concentration risk, benefit from attractive equity valuations in undervalued markets, and benefit from wider structural trends across the entire global economy.
International sector diversification with ETFs
One sector where local investors are finding diversified opportunities through ETFs is in global real estate. With many Australian investors heavily exposed to domestic property, some are finding it prudent to look for attractive opportunities offshore.
Companies in this space often present high-yield income opportunities for investors. With global real estate, investors are achieving greater exposure across both geography and sectors. Not only can investors put their money across markets, but they can also gain exposure to sectors including retail, industrial/ office and self-storage.
Investors in Australia can achieve this tactical mix of global and sector diversification through ETFs. For example, the SPDR Dow Jones Global Real Estate Fund (DJRE) offers local investors targeted exposure to a basket of international real estate investment trusts (REITs), providing wide and varied sources of income and potential growth opportunities.
Investors tell us that investing in an international ETF to diversify their portfolios provides them with more income opportunities and reduced inflation risk – all with the ease of a single trade on the ASX. But most importantly, they tell us that ETFs are helping them gain access to new sectors and countries that may otherwise be difficult for retail investors to invest in directly from Australia.
Meaghan Victor, head of SPDR ETFs, Australia
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