The Australian ETF industry has grown by more than $26 billion during the past 12 months, buoyed by strong interest in cash and fixed income ETFs.
However, when it comes to the size of the local ETF industry, Stockspot founder and chief executive officer Chris Brycki has argued that Australia lags behind some of its global counterparts.
“The industry has really come a long way since I set up my business 10 years ago, when there was only about $10 billion in ETFs,” he told InvestorDaily.
“They’ve grown from $10 billion to $150 billion, which feels like a huge jump. Still, I think we punch below our weight compared to other similar countries around the world like Canada or the US or Europe, where ETFs are much larger as a proportion of overall money managed or the size of their share market.”
Mr Brycki noted that, at around $150 billion in funds under management (FUM), Australian ETFs account for approximately 10 per cent of the local share market.
“In the US, ETFs are well over 20 per cent, I think closer to 25 per cent, of their market size now, and passive investing generally just ticked over 50 per cent,” he continued.
“I think the trend is certainly positive. But we’re still a long way behind.”
One of the biggest inhibitors to the growth of ETFs in Australia, Mr Brycki said, has historically been distribution, given that traditional financial advisers have previously recommended active funds or hybrids or other products over ETFs.
“The changes that came about due to the Royal Commission around providing advice and acting in the best interests of clients and not being able to receive commissions or payments from products has also been a huge boost for ETF,” he said.
“I think that will continue to support ETFs because, certainly the advisers I speak to these days, a lot more of them recommend ETFs today than five or 10 years ago and I think that trend will continue.”
The rise of cash ETFs
The rise of cash ETFs was identified as a major theme in the latest Stockspot ETF report. According to the firm, cash ETFs attracted approximately $1.6 billion in net inflows during the past year and now collectively hold more than $4 billion in FUM.
“There’s two main reasons there’s been a lot of interest. One is just generally interest rates have been rising and are a lot higher than they were a few years ago. So cash as a broader asset class has started to become more popular as it actually gives a bit of a return again,” said Mr Brycki.
“The other one, which is quite interesting I think, is that cash ETFs are now paying a much higher yield than typical bank savings accounts, because banks haven’t passed on much of the interest rate hikes and at the moment.”
Over the past year, the strongest inflows continued to be seen in broad diversified ETFs including the Vanguard Australia Share Index ETF (VAS), which grew by $1.9 billion, and the Vanguard MSCI Index International Shares ETF (VGS), which grew by $1.7 billion.
“Then on a year-to-year basis, there’s always a bit of money that chases the ones that have been returning the best as well. So over the last year, these semiconductor and more tech-focused ETFs that have investments in companies that have some AI investments or relationships have been doing well and attracting funds,” Mr Brycki said.
“The other interesting area has been uranium. It’s been one of the better-performing materials over the last year, and those ETFs have been seeing some money come in.”
But despite their recent strong performance, Mr Brycki warned against simply jumping on the bandwagon of existing thematic trends.
“Generally, for our clients, we suggest not to get too excited about these things that have been the top performers year to year, because there tends to be a level of mean reversion where the one that did the best last year does the worst the next year, and vice versa,” he said.
“It’s hard to hang on to them through the good times and bad. So you’re better off just staying with the broad diversified funds.”
According to Mr Brycki, the growing interest in thematic ETFs from investors appears to have come as a replacement for buying direct shares.
“I think that will continue, so the trend of thematic ETFs taking the place of direct shares, but then the more broad-based ETFs are taking the place of truly traditional active funds and managed funds. You’ve kind of got both ends of the spectrum growing but for different reasons,” he added.
In its report, Stockspot also noted that active ETFs experienced some of the sharpest falls in assets over the past year, driven by net outflows from investors.
