The exchange-traded fund (ETF) industry will see continued innovation and development as the products grow in popularity with investors, according to providers.
“You are going to see the core of each asset class being built out,” iShares Australia director Tom Keenan told delegates at the Morningstar Investment Conference last week.
“At the moment, it’s been global equities and Australian equities and we are likely to see fixed income, that’s a big opportunity for the Australian market.”
“The development of a bond ETF will have significant implications as it would allow investors to build diversified multi-sector portfolios,” he said.
“I think pretty soon you will have the ability to implement an entire portfolio should you choose to do so through an ETF,” he said.
“You might start to see dealer groups create multi-asset class balanced portfolios. We have seen that in the United States, you have seen organisations start to charge fees for that asset allocation – there is real value in that.”
“The fixed income component of the ETF industry in Australia will be a significant development because it creates so much more flexibility in how portfolios are designed and structured,” he said.
Keenan said that the need for investors to do their due diligence on ETFs would also become increasingly important as manufacturers launched products that tracked niche sectors.
State Street Global Advisors Australia vice-president Graham Smith said that large ETF providers are also likely to launch more customised offerings.
“You might see value-based ETFs or ETFs that are constructed on custom benchmarks,” he said.
“So yield, value, growth – custom-beta exposure with different metrics to select a portfolio, those ETFs will come with the demand and rising demand will lead to that customisation.”
Keenan did not expect to see many actively managed ETFs being launched in the Australian market.
“There is a lot of talk about active ETFs globally,” Keenan said.
“I think that the jury is well and truly out on these because of the requirement of transparency. For an ETF to work the ETF provider has to broadcast out the underlying constituents of their portfolio each morning to institutional stockbrokers.”
“I don’t know how many active managers would be comfortable broadcasting out their positions each day.”
“I don’t know how you would get past these issues,” he said.
