Zenith ETF Sector Review reveals strong growth with downward pressure on fees


Dugald Higgins

Zenith Investment Partners’ 2017 Exchange Trade Funds Sector Review has resulted in 59 ETFs being rated Approved or higher, with four funds being rated Highly Recommended.  There was only change in the Highly Recommended category, with Magellan Infrastructure Fund, one of the increasing number of active ETFs in the marketplace, being upgraded and now rated alongside two Magellan global equity offerings as well as Betashares’ Australian High Interest Cash ETF.

In line with previous years, the 2017 Sector Review highlighted the continued expansion of the ETF market in Australia, with the market capitalisation of the sector increasing 23% to $30.7 billion in the year to August. Product diversity has also continued to increase, with the number of ASX-listed ETFs rising from 145 to 165.

The Sector Review also reveals that the market continues to mature, with the proliferation of more complex strategies, especially those in the alternative beta and active space. This compares to the more traditional passive ETFs that follow market capitalisation indices.

While growth of choice is generally positive, it does bring new challenges to advisers and their investing clients.

Senior Investment Analyst and author of the Zenith Review, Dugald Higgins said “the growth in the number of ETFs has been concentrated at the sophisticated end. With that brings a greater need for understanding precisely how the ETF is constructed, managed and how it intends to meet the expectations of the investor. The market has matured to such an extent that the line between passive and active increasingly blurs, and choosing the right ETF is no longer just a fee-driven proposition.”

Despite the increase in the number of more complex offerings, the market remains dominated by simple strategies is highly concentrated, with the top 10 ETFs (all simple strategies) representing almost 50% of total assets under management.

Another key theme emerging from the Sector Review is the downward pressure on fees, which will benefit investors and advisers seeking new cost-effective ways to implement portfolio decisions. On an asset-weighted basis, ETF fees have fallen over the last five years from 0.32% to 0.28% per annum, despite the introduction of new ETFs with a higher fee that lift the ‘nominal’ average. Zenith believes the lower weighted fee reflects increased competition overall and resilient demand for simple structured ETFs that are consistent with the lower price point.

Higgins noted that “We are at an inflection point in the ETF cycle where an array of the more complex and innovative strategies which have come to market are yet to be taken up on a significant scale. It will be interesting to see to the extent to which the investing public embrace more complex strategies. What remains paramount is the increasing need for quality, rigorous research that can peel back the layers of each product and provide advisers with the tools they need to make an informed decision for their clients.

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