Australian ETF market records its highest ever annual growth in 2013.

The Australian exchange traded fund (ETF) market recorded its highest ever annual growth in 2013, with funds under management increasing by $3.5 billion (55%) to end the year at a new record high of $10 billion.

Over the course of 2013, ETFs took in approximately $2.4 billion of new money, up 180% on 2012’s net inflows. By comparison, retail managed funds achieved just an 18% increase in net inflows in the 12 months to end September 2013[1].

Inflows were concentrated between three product issuers in the industry. iShares, Vanguard and BetaShares together accounted for 97% of the total net inflows over 2013.

Alex Vynokur, Managing Director of BetaShares said: “2013 was a hallmark year for the ETF industry, with funds under management continuing to reach new record highs.”

International equities emerged as the key trend for the year, with approximately $1 billion flowing towards funds offering exposure to developed equities markets. US equities funds were overwhelmingly the best performing products of 2013, with the top performing fund returning 66%.

“The US equities markets continued to test record highs while the Australian currency weakened against the US dollar, leading to strong performance of currency unhedged equity ETFs tracking US markets,” said Mr Vynokur. Small and mid-cap funds did particularly well, with three of the top five performing products being focused on US small and mid-cap stock exposures.”

The other prevalent theme for the year was the continued search for yield as $500 million of new money flowed into high yield products and another $200 million was allocated to the Australian High Interest Cash ETF.

“Despite the ASX rising sharply during 2013 and recording double digit capital growth, investors continued to remain focussed on yield for their portfolios, a trend we expect to continue into 2014,” he said.

Commenting on the outlook for the ETF industry in 2014, Mr Vynokur said he expected sustained industry growth as all types of investors continued to embrace ETFs. “We saw investors and advisers continue to adopt ETFs as portfolio construction and trading tools as they become increasingly mainstream. We believe the industry is poised to maintain its fast momentum this year, and expect to see total funds under management at $14 billion with over 100 exchange traded funds on the ASX by the end of 2014.”

A powerful finish to 2013

Despite December being a traditionally quiet month, the ETF industry still managed to achieve solid growth, with around $235 million of new money flowing into the market.

“As the year drew to a close we saw a continuation of November’s trend towards domestic equities, with three of the top five products by inflows offering Australian share exposure,” said Mr Vynokur. “This suggests investors are remaining bullish on domestic and international equities and executing risk-on trades.”

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Client investments implemented through the sophisticated application of ETFs

ETFs help advisers simply asset allocation.

A growing number of advisers are turning to ETFs as a tool to deliver simplification and scale to their business. However, according to BlackRock’s leading ETF business, iShares, it is the way that ETFs are being applied in clients’ portfolios that heralds an underlying shift for ETF usage.

“Interestingly, despite the relatively young market in Australia, we are now also seeing increased sophistication of ETF use among advisers,” said Jonathan Howie, Director and iShares Specialist at BlackRock.

“ETFs are now being used to their full potential, because they are no longer viewed as just a core exposure instrument, but are increasingly being applied at a more granular or thematic level.

“Similar to experiences in other markets, ETFs are also being increasingly used by advisers in a range of ways – as a rapid access tool for dynamic asset allocation; blended together with stocks, other ETFs and with active funds to deliver a robust portfolio outcome for clients and to reinforce the advisers’ value proposition.

“A benefit of including ETFs in a wider portfolio today is that advisers are able to truly express a broader range of views for their clients, for example in looking at particular segments of a given market or the globe, all the while offering greater flexibility and often lower cost. This ultimately means that advisers have the means to demonstrate greater value to clients.”

According to Mr Howie, advisers are leading the charge in Australia for the adoption of ETFs and this has helped deliver a year of strong growth.

“It has been a big year for ETFs, with the ASX ETF industry seeing over $A1.4bn in new client money flows for 2013 year-to-date, which is higher than any prior full calendar year. And it looks as if this growth is set to continue with advisers at the wheel.

“Asset flows this year certainly show a preference for international equity exposures, as advisers and their clients recognise that investment opportunities are truly global. With ETFs, investors now have a toolkit to match the global nature of markets. They can easily and quickly access exposures in the investment themes they want and can mix-and-match these to create a truly tailored client portfolio.

According to iShares data, investors seeking access to international markets have been a key driver of the increase in ETF use by advisers.

“As an industry, the main theme based on ETF net flows this year has been international equities, which equated for 57 per cent of new money; and also Aussie equity income which saw 24 per cent of new money flows,” he said.

Mr Howie went on to say that as the ETF journey enters an age of more sophisticated use, advisers can note these instruments have to date done what they have been designed to do through market gyrations.

“As a result, ETFs have earned even greater trust and this in turn has helped to drive growth,” he said.

Mr Howie concluded: “With greater understanding of the opportunities that ETFs present as part of the broader investment toolkit, we expect to see greater use of ETFs to complement active funds and individual stocks, as investors build more efficient and flexible portfolios.”

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This includes model portfolios that contain iShares’ market-leading range of ASX-listed ETFs, which will now be accessible to the SelfWealth online investment community.

Head of iShares, Mark Oliver, explained: “In practice, this new arrangement gives self-directed investors and their service providers, such as accountants, the rare ability to see what other like-minded investors are doing. Having a peer-to-peer benchmark is not only unique it also makes sense in terms of its relevance and appeal. They can view league ladders of the best performers and choose the ones they’re interested in to ‘like’ or ‘follow’ – and be liked and followed in return.

“There is very strong functionality in the system – it’s like Facebook meets the Separately Managed Account (SMA). SelfWealth’s functionality means that where an investor decides that he or she wants to replicate an aspect of what one of their investment peers is doing the security trades required to replicate the model can automatically be created within the SelfWealth system. And, if the investor so chooses, he or she can then execute the trades via their own broker without leaving the system.”

Mr Oliver went on to explain that the arrangement with SelfWealth is strongly aligned with iShares’ core aims of making investing easier for all and helping investors build diversified, liquid and flexible portfolios.  

“We know that building portfolios that incorporate the breadth and diversity of global opportunities is of great interest to individual investors. However many investors find this difficult to implement.  Now, through this exclusive arrangement they can access a framework which helps them consider those opportunities and readily implement their own views with a few clicks.

“This is not about technology for its own sake; it’s about examining what investors and their service providers really need and coming up with elegant ways to deliver that for them,” Mr Oliver said.

The three iShares model portfolios, which can be viewed and followed by SelfWealth subscribers, include Australian Equity Income; Multi-Asset Balanced Diversified; and an International Equities portfolio.

“We are really pleased to be able to offer the SelfWealth community access to an Australian first. We expect the International Equity portfolio to be particularly appealing, as it offers a flexible framework that enables investors to blend our market leading range of ASX-listed ETFs to suit their desired investment outcomes,” Mr Oliver said.

Speaking about the exclusive ETF arrangement on behalf of SelfWealth, Managing Director Andrew Ward said:
“From a SelfWealth perspective, this arrangement adds real value because it provides an easy mechanism for our investment community to take action on the information they share.

“One of the real issues that self-directed investors have to deal with is information overload. SelfWealth not only ensures the information they receive is relevant to them, it also provides both the option for action and the means to achieve it.

“We are committed to a long-term partnership with iShares and are excited about the possibilities this opens up to our subscribers.”

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