Alex Vynokur
The Australian ETF industry in 2017 broke virtually all records available, reaching a new record high of funds under management (FuM) of $36 billion, up a substantial $10.2B on 2016, and representing 40% year on year growth, according to the BetaShares Australian ETF Review – End of Year Review 2017.
Most of the year’s growth (76%) came from net inflows, with $7.8B flowing into the industry during 2017, breaking the record for annual net inflows into the Australian market by almost $2B. The remaining 24% came from net asset value appreciation, aided by a strong market performance in most regions.
ETF trading activity levels also reached record highs, with trading value increasing 41% versus 2016, and over $32B of value traded.
Growth in Australian ETF activity mirrored the global ETF industry, which also recorded significant growth in 2017. The global ETF industry received its highest ever level of net inflows on record (US$633bn), with a growth rate of 18% year on year.
BetaShares Managing Director, Alex Vynokur, said, “It has been a stellar year for the Australian ETF market. Growth has been very strong, we’ve seen a raft of products launched, covering more and more gaps in the market, and significant inflows to existing funds across all asset classes.
“As the industry grows, product options are increasing for all types of investors. ETFs provide a cost-effective and accessible solution with intra-day liquidity that sets these products apart.”
Industry flows continued to be concentrated, with the majority of the industry’s net inflows captured by the top three ranking issuers by inflows: Vanguard, iShares and BetaShares, who together attracted 72% of the industry’s net inflows.
Passive products still winning investors over
Passive products captured the bulk of inflows, with a 92% share of flows, up from 2016 by 3%. That notwithstanding, Active ETFs continued to grow, with $610m of inflows recorded, versus $400m in 2016.
Within passive products, index-tracking funds dominated, with 79% of flows. This was at the expense of smart beta products, whose share of flows dropped to 13% from 21% in 2016.
“We think that this composition of flows represents the significant growth of ETF Model Portfolios, which tend to seek out plain vanilla index-tracking funds to fill out asset allocation categories,” said Mr Vynokur.
“We expect both Active ETFs and the smart beta ETFs to continue to grow in popularity as new products are launched and the industry matures,” he added.
Trading activity levels reach record highs; product development slows
The ETF industry substantially surpassed 2016 trading activity values, reaching a record high, with trading value increasing 41% versus 2016, and over $32B of value traded.
“These higher trading numbers show us that exchange traded funds are now well and truly being used for a variety of purposes beyond buy-and-hold investing,” commented Mr Vynokur.
In terms of new product development, while there were 31 new products launched during 2017, the pace of product development has clearly slowed compared to the 40 products launched in 2016, and the 38 launched in 2015.
“Whilst surprising at first glance, it is actually rather unsurprising that product development in 2017 slowed – it is an indication of a maturing market. That said, we believe that development will continue strongly in 2018, with both new passive and active exposures likely to be brought to the market”, added Mr Vynokur.
Equities leading the charge
For the third year in a row, international equities products ranked number one for inflows, with $3.2B of net inflows. This was followed by Australian equities at $2.7B. Ranking third in terms of asset category growth was fixed income, which continued to grow at a rapid pace picking up $1.1B in net inflows, up from $700m in 2016.
The best performing product of 2017 was the BetaShares Geared US Equities Fund – Currency Hedged (hedge fund) (ASX: GGUS), which provided investors with 45% annual return as a result of the leveraged exposure this product provided to the overall strength of the US market. Next best performing exposures were Asian and Emerging Markets equities ETFs.
“Continued inflows into equities, both international and domestic, and strong growth in fixed income, shows that investors are using exchange traded funds across a number of asset classes to diversify their portfolios.
Outlook for 2017
“2017 ended with a very strong result. We believe that the industry will continue its rapid rise in 2018, and forecast total industry FuM at end 2018 to be in the range of $47 – $49B, with approximately 260 funds trading by year end,” said Mr Vynokur.
