Approximately $11 billion is currently held in active ETFs in Australia, and this number is expected to rise as more strategies enter the market, a senior manager at the Australian Securities Exchange (ASX) has said.
According to Rory Cunningham, senior manager, investment products at the ASX, the ETF market both in Australia and globally “continues to go from strength to strength”.
“In Australia, we’re actually close to $200 billion in market cap or funds under management held in ETFs that are available on the ASX,” he said at the ASX Adviser Day 2024 last month.
“Over the last five years, that market has grown at a 30 per cent compound annual growth rate, and even if we achieve half of that growth rate going forward over the next five years, it means we hit $300 billion in funds under management by around 2028.”
This is not dissimilar to the growth rates being observed globally, he added, as investors and financial advisers adopt ETFs en masse.
Looking at the calendar year 2023, in terms of fund flows on the ASX’s settlement clearing system CHESS, Cunningham said index ETFs like the Vanguard Australian Shares Index ETF (VAS), Betashares Australia 200 ETF (A200), and iShares Core S&P/ASX 200 ETF (IOZ) saw some of the highest flows.
“For the most part, when we look at last year, you can see that most investors were using the ETF structure to get broad market access, whereby they’re investing in predominantly index-tracking strategies,” he said.
However, in recent years, investors have increasingly adopted active and alternative strategies, such as factor-based or specific sector-based approaches.
“We’re increasingly seeing more interest in active ETFs, a trend not only prevalent in Australia but also overseas,” he said.
“Over the last number of years, almost 50 per cent of new ETFs admitted to the ASX were active in nature.
“Today, as we stand here, there’s now over 89 active ETFs available on the ASX out of a total of 300+ ETFs, and there’s about $11 billion in funds under management held on CHESS in those strategies.”
Among the active offerings launched in the last few months are four new ETFs from Fidelity International, two systematic active ETFs from Macquarie Asset Management, and Russell Investments’ first multi-strategy ETF in Australia.
To help put the local appetite for active strategies in perspective, Cunningham highlighted that, in the US last year, active inflows represented 16 per cent of total inflows into the ETF market.
“[This] is an incredible result given that active ETFs only account for around 5 per cent of ETFs in that market,” he said.
“The results are even more positive in the Canadian market, where 50 per cent of inflows went into active ETFs which is relative to 20 per cent of FUM held in ETFs in Canada.”
Looking ahead, the executive forecasts several tailwinds for ETF adoption over the next five years. These include a growing base of retail investors, increased usage by advisers, and a rise in active ETF offerings on the market.
“From our perspective, the first thing is the growing retail investor base that’s adopting ETFs. Twenty per cent of Australian investors, or 2 million investors, hold ETFs and we expect that trend to continue,” he said.
“What will be interesting to see is adoption of active ETFs as we get more active strategies admitted to the ASX. Research from AdviserRatings [also] shows that 80 per cent of advisers intend to use active strategies, so they’re going to be the main adopters of active ETFs.”
Presently, near 2 million investors in Australia hold ETFs, Cunningham observed. Turning to the ASX Investor Study last year, he said ETFs were revealed to be the fourth most popular investment strategy for investors (20 per cent), below directly-held Australian shares (58 per cent), residential investment property (35 per cent), and term deposits (28 per cent).
“The results from our 2023 study showed just how fast the ETF market is growing,” he said.
‘The future is active’
Earlier this year, Dan Watkins, CEO of Asia-Pacific, JP Morgan Asset Management, voiced that the trajectory of the ETF market moving forward is “undoubtedly active”.
Speaking at the Morningstar Investment Conference 2024 in May, he, too, noted that new launches of active ETFs have outpaced those of passive ETFs every year since 2020.
“Inflows into active ETFs are projected to grow at a compound annual growth rate (CAGR) of 37 per cent over the next five years, outpacing the 15 per cent growth for passive indices,” he said. This trend is supported by the fact that 72 per cent of ETF buyers plan to increase their allocation to active ETFs over the next two to three years.
Currently, active ETFs make up only 4 per cent of the total APAC ETF market, but this segment is growing year by year. Watkins emphasised, “We believe the future of ETFs is undoubtedly active, and active is the revolution happening within the ETF and the asset management industry more broadly.”
The projected growth of active ETFs highlights a significant shift in investor preferences, reflecting a broader trend towards more dynamic and actively managed investment strategies. As the ETF market continues to evolve, active ETFs are expected to play a crucial role in shaping the future of investment portfolios, offering investors more tailored and potentially higher-performing options.
