It was almost 50 years ago that Vanguard founder Jack Bogle launched the first publicly available index fund, the Vanguard 500 Index Fund, to US retail investors, but it wasn’t until 1998 that the retail index fund market hit Aussie shores.
A lot has since changed, however, and despite the late start, indexing in Australia now makes up $760 billion or 23 per cent of investable assets under management (AUM), according to Rainmaker data. The growth is tangible given it made up only 18 per cent of investible FUM a decade ago.
The data also predicted that indexed strategies are on track to reach $1 trillion by 2026.
Duncan Burns, Vanguard’s APAC chief investment officer, is not surprised by indexing’s surge in popularity for one simple reason – it remains true to its objective.
“The thinking behind indexed strategies was to allow investors to gain broad market exposure at a low cost and this ethos has endured,” Mr Burns told InvestorDaily.
“The biggest drawcards for index investing are its low-cost nature, which makes investing more accessible and affordable for millions of Australians, as well it’s strong long-term track record when it comes to performance.”
Pointing to recent research conducted by S&P, Mr Burns highlighted that a high percentage of active managers are often underperforming passive index benchmarks, in part due to the high costs associated with active management.
Namely, the June S&P SPIVA report found that 81 per cent of active funds in Australia underperformed the A&P/ASX 200 over five years, while 79 per cent underperformed over 10 years.
“This is not isolated to Australian equity performance, the reporting shows similar results in global share and bond markets,” Mr Burns explained.
“This is not to say active fund managers can never outperform the broader market. A number of exceptional active managers do. But beating the market is harder than most people think.”
When investors go active, he said, they are much more likely to find themselves in the majority of the distribution that underperforms than the smaller percentage that outperforms.
Giving everyone a piece of the investment pie
Chief executive officer and managing director of VanEck’s APAC business, Arian Neiron, said that the “overwhelming majority” of flows into index strategies have been via exchange traded funds (ETF).
“This isn’t surprising, given ETFs provide investors with the benefits of index investing, including being cost-effective and following a clear investment strategy, while also offering additional benefits of ease of access and liquidity from being available to trade on exchanges like the ASX,” said Mr Neiron.
He explained that index investing via ETFs is fast becoming the “default investment product” for individual investors and advisers, and is increasing in popularity among institutional investors, which aligns with the adoption trajectory of ETFs globally.
“As an investment vehicle, ETFs have proven themselves time and time again, through all market cycles,” said Mr Neiron.
“There are still some myths perpetuated by some market participants that in certain market conditions, passive investing is not ideal – in a market contraction or during times of peak volatility. However, ETFs have proven themselves through numerous global financial events, including the most recent induced by COVID-19. On the other hand, the majority of active fund managers, on average, continue to be unable to beat the respective benchmarks.”
He added that ETFs have ultimately become the “true democratiser” within the investment universe, providing exposure to asset classes, international markets and investment strategies that were otherwise only accessible to institutional and sophisticated investors.
“Investors can now access an index that focuses on the world’s highest quality companies or financially sound companies with the strongest ESG credentials or gain exposure to private equity – all on ASX.
“The rise of investment apps like CommSec Pocket, Superhero, Sharesies, and Stake has further opened up a new generation to index investing via ETFs, giving investors easy access and even zero-fee trades on ETFs in some cases.”
Mr Burns agreed, adding that: “Index funds and ETFs should be a consequential piece of a core equity portfolio.
“The data shows it’s simply the most efficient way to capture long-term equity market returns.”
