ETF usage to surge to $6bn in AUM in 2011, Russell says

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  • Three new issuers and 15 new ETFs could come to market
  • Exchange mergers could be game changers for local ETF market

The Australian Exchange Traded Fund (ETF) market is expected to grow to more than A$6bn in assets under management (AUM) in 2011 Russell Investments said in an analysis of ETF market trends released today. According to Russell, the surge will be driven by providers taking advantage of broader investor community understanding of ETFs and more flexible regulatory conditions.

Since their first appearance in Australia in 2001, ETFs have really begun to experience strong growth in the past year, with almost A$4bn in AUM as of December 2010 (see figure 1 in attached document).

Up to 15 new ETFs and at least three new providers are predicted to hit the market in 2011, Russell said. There will also be more asset classes available and more customised options.

“A year ago ETFs were still regarded as a new product, but we are now seeing a lot of interest from a range of users,” said Amanda Skelly, director ETF product development at Russell Investments. “In addition to their continued popularity in the core market of SMSFs, ETFs are likely to win more acceptance from advisers and investment platforms in 2011, and also make inroads into institutions.”

A more focused approach

Russell believes the trend for ETF in 2011 will be for more focused, targeted products. For example ETFs will continue to expand across different assets such as bonds and currency.

ETFs based on equities will continue to target exposures to specific sectors and sub-sectors. There should also be new implementation methods for ETFs, such as derivatives-based approaches, where a greater portion of the ETF is invested in instruments such as futures, forwards and swaps. Whether Australian investors embrace this type of ETF will be something to watch. While derivative based ETFs have seen strong growth in Europe, growth has slowed in the U.S. More customised approaches will also be popular, for example the use of ETFs in income-based strategies which became popular last year, the first of which was the Russell High Dividend Australian Shares ETF.

“The market is evolving quickly, there is not only a wide range of ETFs but ETFs are increasingly being used to implement more sophisticated strategies,” said Ms Skelly.

Potential global entrants to the Australian ETF market are likely to be assisted by more flexible rules allowing them to enter the local market.

“The success of newcomers will be driven by their ability to leverage existing capabilities and develop relevant solutions for Australian investors,” said Ms Skelly.

Meanwhile within the top 15 existing ETFs, secondary market liquidity is likely to improve.

Asian exchange mergers could be game changer

ETF providers will also be watching developments with regards to proposed exchange mergers, which Russell believes will have a positive effect on the local market, by delivering secondary market liquidity and product diversification as well as cost and operational efficiencies.

“If the proposed Singapore Stock Exchange (SGX) takeover of the Australian Securities Exchange (ASX) succeeds it will be an absolute game-changer for the ETF market,” said Ms Skelly.

“However if the takeover does not go ahead, Asian-based exchanges will continue to expand their ETF capabilities, attracting larger institutional investors which may potentially limit the longer term growth of ETF assets in Australia.”

“In the year ahead, we are likely to see a lot of activity in the ETF space and the increased variety and competition will hopefully broaden the appeal of ETFs,” Ms Skelly concluded. “Russell is planning to capitalise on this activity and is actively investigating how to build on the success of our first ETF to bring more products to market.”

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