“Changing of the guard” – a record year for ETF growth as unlisted funds falter
- The Australian ETF industry recorded its highest annual funds under management (FUM) increase in 2023.
- In total, the Australian ETF industry received $15.0B of net inflows, in a year where the unlisted funds industry sustained net outflows of -$36.9B, marking the worst year on record for Australian managed funds[1].
- As the chart below illustrates, with the exception of 2021, ETFs have received higher flows than unlisted funds in 4 of the last 5 years.
- Most strikingly of all, looking across a longer period – since the launch of the Australian ETF industry in 2001, cumulative net flows in the Australian unlisted managed funds industry are now negative[2]. This clear investor preference for ETFs, plus the increasing ‘conversion’ activity we’re seeing of unlisted managed funds into Active ETFs, represents a significant ‘changing of the guard’ in the Australian asset management industry.
FUM: The Australian ETF industry ended the year at an all-time high, with total industry market capitalisation as at end 2023 of $177.5B, representing 33% year on year growth. The industry grew $43.7B in 2023 – an industry record in terms of $ annual growth. 2/3 of this growth came from market appreciation with the remainder deriving from investor inflows and unlisted fund conversion activity.
Net Flows: ETF industry flows were strong, with net new money for the year of $15.0B, 12% higher than the $13.5B of net flows received in 2022.
Investors: Consistent with the positive net flow activity, we continued to see good growth in the number of Australian ETF investors, with our recently released BetaShares/Investment Trends ETF Report noting that there are now over 2 million Australians investing in ETFs, representing investor growth of 7% v. the year before.
Trading: The Australian ETF industry continued to experience strong trading values, with annual ASX ETF trading value remaining stable after a record year in 2022. In total $115B of ETF value was traded on the ASX (compared to $117B in 2022, the current record)
Issuer Flows: There have never been more participants in the Australian ETF industry, but the flows remain concentrated. Betashares was the #1 issuer for net flows this year, recording ~$5.6B in net inflows. Collectively the top 4 issuers this year (Betashares, Vanguard, Van Eck and iShares) accounted for over 100% of the industry’s flows. There are currently 47 issuers of ETFs in Australia, with 8 new issuers joining the market in 2023, all of which were Active Managers.
Product Launches: In terms of product launches, 2023 was the biggest year on record, with 56 new exchange traded funds launched on Australian exchanges in 2023 (v. 52 in 2022) and ‘net product growth’ of 48 funds. In what is certainly an accelerating trend, a large proportion of the new launches in 2023 were Active ETFs (46% or 26 funds), with the majority of these launches being via the creation of traded classes of existing unlisted funds (which we call “conversions”).
Active ETFs: There are now 94 Active ETFs trading on Australian exchanges with a total of ~$35B of FUM, however the vast majority of these assets comes from existing FUM that has been ‘converted’ to the exchange via the ‘open class’ structure with only $9.5B currently held on CHESS. We expect continued growth of this category but to date we haven’t seen true widespread adoption ‘on exchange’ of Active ETFs.
Active/Passive flows: In terms of product types, this year was all about passive investing, with ~$1B in outflows recorded in Active ETFs, meaning more than 100% of the flows came from passive products. This trend is particularly striking given the large number of Active ETF launches, with the actual flow activity seemingly not dissuading managers from launching Active ETF classes of their unlisted funds. Market-cap index-tracking funds once again dominated over smart-beta alternatives, although the smart beta category received 15% of total flows.
Flows by Category: With investors seeking out a more defensive stance in their asset allocations, together with elevated income/yield opportunities, Fixed Income ETFs were the number one broad category for inflows in 2023, marking the first time this has occurred over the course of a year since this report has been published. Australian Shares ETFs were the second most popular category. International Equities once again took 3rd place (as it did in 2022) – we expect this to change in 2024 as the rate environment changes, and we would fully expect investors to adopt more meaningfully growth oriented exposures typically found in global equities ETFs going forward:
- Fixed Income ETFs received the largest amount of net flows, with $5.3B received. (v. $3.6B in 2022)
- Australian Equities ETFs came in 2nd in 2023 with $5.2B in flows (v. $4.4B in 2022)
- International equities ETFs had a very quiet year receiving $2.9B of net inflows (v. $3.3B in 2022)
- Performance: After a particularly strong second half it was growth exposures that topped the performance tables in the ETF industry in 2023. Betashares Crypto Innovators ETF (ASX: CRYP) took the number one slot for performance, with total return of ~215% for the year. This was followed by other crypto and technology exposures.
- Industry Forecast: In our year-end report for 2022, following a year where industry market capitalisation fell, I wrote, regarding 2023: “we believe that market conditions will continue to act as a hinderance to industry growth but expect net inflows to remain consistently positive and ultimately that the industry will return to a growth footing. As such, we forecast total industry FuM at end 2023 to exceed $150B in assets”. While I was correct regarding positive inflows, I did not predict that ultimately market conditions would be nearly as positive as they were and thus under-estimated by quite some margin, total industry size.
In terms of 2024, we believe that the industry will continue to benefit from increased investor adoption and inflows combined with positive markets. As such, we forecast total industry FuM at end 2024 to exceed $200B and could reach as high as $220B depending on market conditions
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