The Morningstar Global Investor Experience Study: Fees and Expenses, released on 17 September, noted that while managed funds still dominate the landscape of Australian finance, advisers are increasingly recommending ETFs and ETF usage is becoming more popular with self-directed retail investors due to the proliferation of ETF products and large financial inflows.
“Usage of locally listed exchange-traded funds is low when compared with Australia’s total assets under management of around [$1.62 trillion] as of 31 December 2018,” the report said.
“ETFs account for around 2.5 per cent of this figure, which is lower than most developed markets in North America and Europe. However, it is important to note that ETF usage in Australia is generally skewed toward retail investors and is growing rapidly, with more ETF products coming [online] and substantial inflows to ETFs.”
The report noted that Australia has a large pool of savings relative to the size of its economy because of its compulsory superannuation system, which is mostly managed by institutional investors.
“In the case of self-directed retail investors, ETF usage is much higher than 2.5 per cent. Advisers are increasingly recommending ETFs, although managed (mutual) fund recommendations still dominate,” the report said.
The report noted that the varying levels of ETF usage among individual investors in different markets can be attributed to a number of factors. These include market maturity, ease of access to the funds, differences in advice models, and tax considerations, among other factors.
“Generally speaking, ETF usage among retail investors is low across most markets we studied,” it said.
“In Asia, where fund distribution is dominated by local banks that do not have an incentive to sell ETFs to individual investors, we noted a low level of ETF usage across the region.”
Morningstar found that ETF usage is generally highest in mature markets with large populations of engaged retail investors, where independent, fee-based advice models are flourishing.
ETF adoption is the highest among individual investors in the US where ETFs have become the vehicle of choice of many self-directed investors and digital advice providers. The report noted that ETFs also tend to be more tax-efficient relative to open-end mutual funds for US investors.
“Meanwhile, the European markets can serve as interesting case studies to examine the interplay of these different factors. Individual investors in Europe can, in theory, access the same ETF menu, thanks to the UCITS framework. But the usage of ETFs varies from low to high across markets based on differences in accessibility, advice models, and more,” the report said.
Australian ETFs reached $54.1 billion worth of assets under management in August, according to a report from Stockspot, which also predicted ETF assets in Australia will almost double to $100 billion in 2022.
