CPD: The ETF landscape of the future

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Australia looks set to continues to follow the lead of global markets – continued growth in ETFs and other ETPs.

Australian investors continue to pour money into ETFs, with September breaking yet more records in terms of inflows and total ETF market cap. In this article, OpenMarkets examines the stellar rise of ETFs since humble beginnings, and looks at some of the next generation ETFs emerging in Australia and overseas.

Financial advisers, brokers and investors continue to direct money into exchange traded products (ETPs), a sector that includes exchange traded funds (ETFs), exchange traded managed funds (ETMFs) and exchange traded corporate bonds (XTBs). September broke yet another record, with more than one billion dollars flowing into the sector, taking its total market cap to $32 billion. This represents growth of 3.5% in a month, and follows another record month which saw 2.2% growth with $842 added to the ETP sector.

While the month-on-month numbers are impressive, since State Street Global Advisors listed Australia’s first ETFs on 27 August 2001, the sector has grown enormously; as illustrated in figure one, much of this growth occurred post the Global Financial Crisis (GFC).

 

 

Where’s the money going…and why?

The majority of funds flow into ETPs have gone into Australian and global equities as illustrated in figure two. The proportion of funds under management in global equity ETPs has remained stable since September 2016, but the Australian equity number has dropped 5% in favour of fixed income. These asset classes have consistently experienced the highest value traded over the past 12 months.

 

 

ETFs have a number of features that make them attractive to advisers and investors, which have contributed to this continued growth trajectory:

  • Diversification – ETFs provide low cost, diversified market exposure to an underlying index or asset class
  • Transparency – most ETF issuers publish holdings daily
  • Flexibility – ETFs trade on an exchange and can be bought and sold like shares, with investors able to place limit and stop orders
  • Breadth – ETFs are available for traditional asset classes, as well as a range of sector and niche investments
  • Tax efficiency – ETFs generally have lower levels of portfolio turnover and investors aren’t subject to capital gains tax triggered by the action of other investors, as is the case with most unit trust structures
  • Cost efficiency – ETFs can be a cost-effective way to gain exposure to a diversified portfolio of securities. The direct costs associated with ETFs are generally lower than those associated with investment in an equivalent actively managed fund or from trading multiple securities
  • Liquidity – with primary and secondary markets available to investors, as well as the actions of market makers, ETFs can be easily bought and sold.

As with all investments, there are risks. ETFs generally mirror a specific index and the same rules apply to ETFs as all other investments – a decline in value generally requires a significant gain to get back to square one.

Next gen ETFs

Product innovation ensures there’s a steady stream of ETFs and ETMFs coming onto the market. In fact, there were 217 ETPs at 30 September 2017, an increase of 67% from the same time in 2016.

ETMFs

Exchange traded managed funds are an Australian innovation; a listed, actively managed portfolio with access to live market pricing and the ability to buy and sell the Fund’s units in the secondary market as easily as any other ASX-listed security. ETMFs are generally comparable to their unlisted counterparts, with the same investment strategy, investment portfolio and management costs.

The opportunity to benefit from an ETF that is actively managed has captured the imagination of many advisers and investors, and an increasing number of products are available this way.

An ETMF provides:

  • The ability to buy and sell units on the ASX and settle via CHESS – no lengthy application forms
  • Live and transparent market pricing rather than having to wait for that day’s unit price to become available
  • Access to a fund manager’s investment strategy, research and expertise
  • Active management, unlike ETFs that are generally passively managed around an index
  • A tight price range around the Fund’s net asset value, unlike a Listed Investment Company (LIC) that can trade at a discount or premium to net asset value, depending on what investors are willing to pay.

ETF innovation in 2017

As well as several funds tracking traditional asset classes, a range of niche products have been launched into the domestic market in 2017. Some of these include:

ETHI

One of the first launches of 2017, BetaShares’ Global Sustainability Leaders ETF (ETHI) listed in January. It invests in 100 global stocks (ex-Australia) that are climate change leaders and not involved in activities inconsistent with responsible investment principles.

Climate leaders are selected based on relative carbon efficiency, and the additional screens for responsible investment include those generally avoided by ethical funds – gambling, tobacco, armaments and nuclear energy. It also excludes companies involved in pornography, animal cruelty, human rights concerns and those involved in the mandatory detention of asylum seekers.

TECH

Launched in April, the ANZ ETFS Morningstar Global Technology ETF (TECH) tracks the share price of 32 companies, including the likes of Apple, Google and Microsoft, through Morningstar’s Developed Markets Technology Moat Focus Index. The index includes companies from US, Canada, Japan and Australia.

TECH aims to provide Australian investors with exposure to technology stocks; while a large sector in global markets (information technology represents 16% of the MSCI World Index) it’s under-represented in the Australian market.

MONY

UBS launched the UBS IQ Cash ETF (MONY) in May 2017 and, as with similar products, MONY provides investors with exposure to a portfolio of investments in bank deposits and bank certificates.

QPON

In June 2017, BetaShares launched an Australian first – an ETF that provides exposure to Australian Bank floating rate bonds. It invests in a portfolio of some of the largest and most liquid floating rate bonds issued by Australian banks; 20% of its assets are held in floating rate bonds issued by each the big four Australian banks.

ROBO

Launched on the ASX in September 2017, the ETF Securities ROBO Global Robotics and Automation ETF tracks the ROBO Global Robotics and Automation Index. According to ETF Securities, the robotics economy is estimated to be worth US$1.2 trillion by 2025, driven by demand for higher productivity and applications in various industries.

Product innovation abroad

Niche products abound in global ETF markets. Although most ETFs launched so far in 2017 focus on established markets and indices, the number of novel ETFs being launched continues to climb. Some of 2017’s more differentiated product launches so far include the following:

BOSS

Launched in February 2017, BOSS invests in a basket of companies where the founder is serving as CEO. The rationale for this is founders tend to have significant personal wealth tied to the companies they lead, and are therefore more likely to focus on long-term value creation. BOSS tends to be overweight tech and biotech companies.

HMMJ

Listed on the Toronto exchange in April 2017, the Horizons Medical Marijuana Life Sciences ETF invests in publicly listed life sciences companies with significant business activities in the marijuana industry.

UP and DOWN

UP is designed to produce four times the daily performance of S&P500 index futures, and DOWN four times the inverse of the daily performance of those same index futures.

In May this year the SEC approved these leveraged ETFs, after laws that had seen them previously knocked back were loosened under the Trump administration. Not long after the approval, the SEC reversed this decision, and the future of UP and DOWN is unknown. 

CALF

Launched in June 2017, the Small Cap Cash Cow ETF (CALF) is focused on small caps. It describes itself as a ‘strategy driven’ ETF that screens the S&P Small Cap600 and invests in the top 100 based on free cash flow yield.

FANZ

The ProSports Sponsors Fund, FANZ, was launched in July 2017 and tracks the ProSports Sponsors Index. This is an equally-weighted index designed to measure the performance of companies that sponsor or have broadcasting rights with the major US sports leagues – MLB, NFL, NBA and NHL.

SECT

This sector rotation ETF was launched in September 2017 and utilises a fund of funds structure to invest in sector based ETFs. It aims to outperform the S&P500 in rising markets and limit losses in falling markets through dynamic sector rotation.

BITCOIN

Driven largely by the recent rapid increase in the value of cyber currency, several ETF managers have indicated interest in launching a related product. Earlier this year, ETF manager Van Eck filed with the SEC to launch an ETF to invest in bitcoin derivatives, despite publicly acknowledging the riskiness of cryptocurrency and doubting its status as a ‘safe haven’.

Australia looks set to continues to follow the lead of global markets, and as such, continued growth in ETFs and other ETPs seems assured. Likewise, continued innovation in the local ETF sector available is set to continue, with Australian ETF providers scouring local and global markets for great ideas to add value to investor portfolios.

 

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This article provides general information only and has been prepared without taking account the objectives, financial situation or needs of individuals. The information contained in this article reflects, as of the date of publication, the views of OpenMarkets Australia Limited ABN 38 090 472 012 AFSL 246705 (OpenMarkets) and sources believed by OpenMarkets to be reliable. We do not represent that this information is accurate and com­plete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither OpenMarkets, its related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. Past performance is not a reliable indicator of future performance. Investing involves risk including loss of capital invested. ©2017 OpenMarkets Australia Limited

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