ANZ, the first of the big four banks to step in to the fast-growing market for exchange-traded funds, sees big opportunities to grow the market for the low-cost, index-matching funds beyond their current narrow base.
Exchange-traded funds listed on the ASX have grown at an extraordinary 57 per cent pace over the year to June but have yet to gain the critical mass they enjoy in other markets such as the US, UK and Canada.
Part of the reason is that institutional investors in Australia have been slower than their counterparts in other parts of the world to incorporate ETFs into their portfolios.
In the US, a recent study by Greenwich Associates found some 21 per cent of institutions use ETFs in their portfolios, rising to 40 per cent for US endowments and 33 per cent for large public pension funds.
“ETFs have evolved into a standard instrument in the toolboxes of institutional investors,” the study found.
ETFs are a small part of the local market at less than 1 per cent of the managed funds industry, compared with 24 per cent of funds under management or $US2 trillion in the US.
In Australia, most of the growth in the ETF market has come from ordinary mum-and-dad investors, either directly through SMSFs or through financial advisers.
Both ETFs and listed investment companies have surged in popularity in the past two years, partly because self-managed super funds are looking for low-fee investment options, but also because the Future of Financial Advice reforms have levelled the playing field.
Financial planners no longer get commissions on managed funds, so are increasingly including passive and low-cost funds in their clients’ portfolios.
The size of the ETF market on the ASX has grown from $11.8 billion to $18.5bn in a scant 12 months, while the LIC market has grown by 10 per cent, boosted by several IPOs. By comparison Canada, with a similar sized stockmarket, has $US70bn in ETFs.
ETFs, which trade like shares, track the performance of a particular index or asset class and charge much lower fees than actively managed funds. The products were one of the earliest disruptors in the wealth industry and challenge high-cost managed investments that often don’t outperform their benchmark index.
ANZ launched its joint venture with ETF Securities, a London-based pioneer of exchange-traded products, with six new funds in June and has plans to expand its offering before the end of the year.
Danny Laidler, the co-head of the ANZ ETFS joint venture, says ANZ is reaching out to asset consultants, brokers and fund managers as part of an education campaign, as well as using ANZ’s wealth management division to leverage distribution to two million existing clients.
“Self-directed investors here have been much quicker to embrace ETFs,” he notes.
There are more than 120 different ETF products listed on the ASX, offering options to diversify across specific equity sectors, commodities, bonds, currencies and international equities.
ETFs are becoming more targeted at niche investment ideas now that broad sectors and themes have been covered. UBS launched six ethical ETFs in the local market this year that track MSCI indices that exclude tobacco companies, makers of “controversial” weapons and others, and has attracted some industry super funds to its products.
“Investors will increasingly choose to mix and match” their ETF products to diversify across asset classes and trading ideas, Laidler says.
He points to the ANZ ETFS S&P 500 high-yield low-volatility fund, which screens Wall Street stocks for the highest-yielding companies with a conservative bias. The fund has historically outperformed the S&P 500 and also gives local investors currency exposure, which will boost returns while the Aussie dollar remains weak.
Broad-based Australian equity ETFs account for 29.1 per cent of ETF assets on the ASX, compared with 10.4 per cent in local strategy-based and 6.0 per cent in sector funds, according to ASX data. International broad-based funds account for another 37.3 per cent.
The model the ANZ has chosen — to incubate a new ETF business — is unusual among the major banks, which have generally preferred to expand via acquisition in new markets. The ETF joint venture is currently a tiny part of the ANZ wealth business, but if its growth matches the market it will become one of its fastest-growing units.