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ETF boom to drive market cap $200bn

By Michael Karpathios
3 minute read

Exchange-traded funds (ETFs) are to remain the go-to product for retail investors, with the industry in Australia set to grow to $200 billion in the next two years, according to a recent study.

VanEck’s latest research has revealed that the increase of usage in ETFs is expected to boost its market capitalisation from $140 billion at the end of 2021 to $200 billion in the next couple of years, particularly as retail investors flock to the product. 

The research is based on the investment manager’s survey, said to be the largest of its kind in Australia for 2021, attracting 3,047 responses.

It found that 96 per cent of respondents now use ETFs in their portfolios, while 67 per cent said they would opt to increase their exposure to ETFs within the next six months.

A further 31 per cent stated they would at least maintain their current levels of investment in ETF products, while less than 1 per cent would look to reduce their investment.

“Self-directed or retail investors are flocking to ETFs to get access to a plethora of investment opportunities on ASX,” said Arian Neiron, VanEck Asia-Pacific chief executive and managing director.

“Self-directed Australian investors see ETFs as a portfolio construction tool for a range of wealth management outcomes.”

The Australian ETF sector broke its record for monthly inflows in July, receiving $2.8 billion from investors.

As the space continues to attract new investors, VanEck expects momentum to grow exponentially.

“Also reflecting their strong appeal, 89 per cent of respondents said they would recommend ETFs to other investors, reinforcing that ETFs are the topic du jour when talking investments,” said Mr Neiron.

“The expected increase in usage will drive further growth of the ETF market in Australia as it heads towards a market capitalisation of $140 billion by end of 2021 and $200 billion in the next two years”.

The survey found where the ETF space showed weakness was with investors who prefer to invest in managed funds or other investment products – typically these respondents did not feel they had enough knowledge to invest in ETFs successfully.

“Most of the reluctance to invest in ETFs stemmed from not knowing enough about them, with 42 per cent of respondents who don’t use them giving this as the reason why,” said Mr Neiron.

“As knowledge of ETFs grows, and their benefits, flows into the sector are expected to maintain their momentum”.

VanEck felt that in their growth, ETFs could capitalise on their ability to uniquely engage with “megatrends” such as ESG and as an easy way to diversify investment across certain industry themes, such as semiconductors.

“We have seen the range of ETFs develop from simple market capitalisation index-tracking ETFs to smart beta ETFs to active ETFs,” Mr Neiron stated.

“Popular investment themes such as ESG, clean energy and video gaming are drawing in the younger demographic and those investors who want to align their values with their portfolio.”