The popularity of ETFs, particularly with retail investors, is showing no signs of slowing down.
The Australian ETF industry reached $134 billion in assets under management in 2021 with cash flows of $25.9 billion, according to new data from Vanguard Australia and the ASX.
Investor flows were 28 per cent higher than 2020 with Vanguard claiming 35 per cent or $8.7 billion of total flows in a new record for the firm.
The head of Vanguard Australia’s investment strategy group and ETF capital markets for Asia-Pacific, Minh Tieu, said that new retail investors had helped accelerate the growth of the local ETF industry.
“While demand for ETFs from advisers and institutional investors remains strong, it’s the surge in retail flows that has been especially noteworthy,” he said.
“It’s encouraging to see ETFs really enter the mainstream as more and more personal investors appreciate their inherent benefits – namely that ETFs are low-cost, diversified, and easily accessible.”
According to Vanguard, the Australian ETF industry has recorded 39.5 per cent average annual AUM growth over the past five years compared to growth of 23.9 per cent for the US.
“If we compare the US and Australian ETF market, the trajectory of growth is similar,” said Mr Tieu.
“While the US market is bigger and at a different stage of adoption, Australia is certainly catching up. It’s a strong indicator that ETFs are not just an investment fad, but rather a proven long-term investment strategy worldwide.”
Global equity ETFs received $14.09 billion in flows from local investors last year and $5.66 billion flowed into Australian equity ETFs.
The Vanguard Australian Shares Index ETF (VAS) was the firm’s top ETF with $2.25 billion in flows followed by the Vanguard MSCI Index International Shares ETF with $1.09 billion.
The firm also highlighted the Vanguard Ethically Conscious International Shares Index ETF (VESG), which grew from $116 million in cash flows in 2020 to $348 million in 2021.
“Generally, ESG ETFs differ to other thematic or niche ETFs because they still retain broad diversification, which is why we see it as an enduring trend that can align to long-term investment goals,” said Mr Tieu.
“Unlike cryptocurrency-related ETFs or those tracking market subsectors like electric vehicles or artificial intelligence, ESG ETFs tend to incorporate a broader universe of securities, making them better diversified and therefore lower in risk.”
In its 2022 outlook released last month, Vanguard projected the 10-year annualised returns for global equities would reach its lowest level in the past decade.
US returns are forecast to be in the range of 1.9 and 3.9 per cent while returns for the Australian equity market are expected to be between 3.5 and 5.5 per cent.
“To be broadly diversified across asset classes, market sectors and countries is an investor’s best chance at investment success in 2022,” Mr Tieu said.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
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