ETFs: a bright future?

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In this session, Janus Henderson Investors’ (JHI) Head of Exchange Traded Products Nick Cherney and JHI’s Head of Australia Matt Gaden discussed the trends they see taking shape in the ETF landscape, tackled questions around ETFs experiencing liquidity issues and provided a glimpse into the future of the Australian ETF landscape based on the parallels with the US market.

Nick and Matt opened the session by discussing their views of the growth of the SMSF sector in Australia, with the potential of being a significant driver for ETFs, and whether financial advice has a role to play in this sector’s growth.

Matt commented that it applies to both channels for example independent financial advisers and direct channels. He said he found it interesting that 20% of the Australian SMSF space have received advice from a financial planner, and it is exciting that they are dealing with the remaining 80% of the $800BN market which is a target market as it is a direct channel.

Nick added: “It’s interesting as I see some parallels to the early days of the ETF industry in the US. What was realised then is that people still needed advice despite having access. ETFs became an incredible tool, particularly for independent advisers in the US to compete alongside big wirehouses. ETFs may be filling that same role by helping advisers build really robust global mutli-asset portfolios for their individual investors in a cost-effective way in Australia.”

According to Nick, ETFs have also evolved from a vehicle used to build passive portfolios to, in many cases, being an efficient means of implementing a dynamic asset allocation in active investment strategies in the US market and he sees it playing out in a similar fashion in Australia and the APAC market. This is evident in how ETFs are being used on insurance companies’ balance sheets and how asset managers, like Janus Henderson Investors, are using ETFs to manage money where appropriate.

Both agreed that more institutional investors are selecting ETFs, particularly in fixed income space, due to the lower cost, greater transparency and tax efficiency.

Nick added “there’s a confluence of many factors in the growth in both active and fixed income ETFs globally. It has to do with the fact that ETFs have proven themselves through a number of crisis, most recently in March, as a viable tool in amid the COVID-19 pandemic crisis. Investors are not just looking for easy access vehicles, they are looking for problems to their solutions.

“A lot of problems investors are facing right now are in the fixed income markets. Fixed income is supposed to be a balanced portfolio offering stability and in the current low-interest rate environment, there are significant challenges such as the effects of a low interest rate on long-term bond yields which will intensify the retirement savings challenge for investors. Investors are looking for high quality income solutions that addresses the myriad of risks facing them in fixed income market and it turns out ETFs are a pretty good vehicle to do that.”

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