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ETFs poised for expansive growth globally and in Australia

By Jessica Penny
3 minute read

ETFs are poised for expansive growth across various asset classes, vehicles, and portfolios in the coming years, according to a new report.

While the global ETF market’s assets under management (AUM) could grow by as much as 25 per cent in 2024, new State Street analysis has indicated that Australia’s market could surpass this rate of growth.

“We expect the assets under management of Australian ETFs to grow around 30 per cent this year,” State Street’s Australian head, Tim Helyar, highlighted.

Based on discussion with local ETF issuers, the firm forecasts that most local growth will stem from equity and fixed income passive ETFs – the core strategies in adviser, retail, and institutional investor portfolios.

Noting the growing popularity of index tracking ETFs, which Helyar said have essentially become building blocks for investor accounts, State Street didn’t rule out future growth for active ETFs in the local market, after they reeled in US$6.3 billion in flows in 2023 – four times the sum in 2022.

Looking ahead, this segment of the market is expected to continue its growth streak, with the entry of 10 new issuers leveraging the dual registry/share class model.

Helyar explained: “The emergence of active ETFs through the dual registry model will enable investors to select funds, managers and strategies which they believe will create alpha.”

“This creates additional choice in the marketplace, but in order for these strategies to gain traction, the issuers will need to develop ETF expertise.”

He added that this will require building capital markets and sales teams that understand liquidity and the suitability of particular ETF products for individual investors.

“Additionally, fee rationalisation is needed,” he added, noting that investors who purchase ETFs are generally fee-sensitive and are only willing to pay more if there is value.

Active ETFs gain traction around the globe

Looking at the global ETF market, 2023 was a “banner year”, according to State Street.

Namely, last year ended with US$11.6 trillion in assets, recording the second-largest flows on record and exceeding 2022 by almost 15 per cent.

As was the key theme in 2022, active ETFs continued to punch above their weight, setting a new record with US$183 billion in flows.

However, State Street pointed out that much of the new flows to active ETFs did not come solely at the expense of active mutual funds, but also from smart beta ETFs, which made up only 6 per cent of 2023 flows.

“This makes sense considering many active managers launched their first ETF using a rule-based approach in leveraging investment factors (value, quality, momentum, size, low volatility, etc.),” the firm wrote in its latest ETF outlook.

“Many of these active managers have now launched ‘full active’ as the regulatory environment improved and managers have grown more comfortable with the daily transparency requirement for certain strategies.”

Meanwhile, Asia-Pacific (excluding Japan) was the regional winner for 2023, with record ETF flows of US$169 billion, more than a 35 per cent increase year-on-year.

New highs for net inflows also occurred in China, South Korea, and Taiwan.

Looking ahead, as part of the report, BlackRock’s head of global client business, Mark Wiedman, said ETFs are poised for expansive growth across various asset classes, vehicles, and portfolios in the coming years. The scalability and efficiency of ETFs, coupled with network effects as they grow, suggest a trajectory towards trillion-dollar ETFs and potentially reaching US$20 trillion to US$30 trillion over the long term, he noted.