In an annual sector report, Zenith Investment Partners found that over the past three financial years, the market share of Australian equities has reduced – down from 50 per cent to 30 per cent as at 30 June 2015.
“The sector now provides a significantly greater product suite across the mainstream asset classes and portfolio strategies,” the report said.
The report found that alternative beta sector is quickly evolving within the ETF market. According to Zenith, alternative beta strategies have been developed to mitigate the risks associated with traditional weighted indices.
“This is most common where markets become overly concentrated in particular sectors or stocks. This is of course highly evident in the Australian market with its exposure to financials and (albeit recently reduced), mining.”
The report argued that despite the attractiveness of an alternative, there are specific risks associated with alternative beta strategies.
These include tax drags as a result of the regular turnover of stocks required by an alternative beta strategy. Various exposures or “tilts” will also be beneficial or otherwise at certain points in the market cycle, the report said.
“These traits are not always negative. However they do need to be adequately examined and if necessary, compensated for.
“This is to ensure they are appropriate to the level of risk tolerance acceptable to investors, and their expectations on achievable return premiums,” the report said.
The report also pointed out that as a group, ETFs have shown greater capital variability, particularly in the 2015 financial year due to market volatility.
“It can perhaps be argued that the lower level of stock discretion has hampered some of these strategies as they are less responsive to market shifts due to fixed rebalancing dates.
“Ultimately, as a yield-orientated product, Zenith believes ETFs and managed funds both have their merits," the report said.
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