The growth of Exchange Traded Funds has seen the value of funds under management pass US$5 trillion on a global basis, and A$40 billion within Australia. We spoke with Christian Obrist, Head of iShares in Australia, to ask what the key drivers behind this inexorable growth are.
In this transcripted video, Christian told us that: “One big trend is regulation, which you've seen unfold throughout the world, whether it's in the US, in Europe, in the UK with RDR, and in Asia as well. Of course, in Australia, you had FOFA. These regulatory shifts, they shift the behaviour of market participants”. He outlines two more drivers here, as well as some of the most important considerations investors should have in mind when choosing an ETF.
iShares has made investing in their international ETFs simpler. Find out more
Edited transcript
3 forces behind the structural growth in ETFs
It's less of a structural force but, really, we've found that active investors are becoming ETF users and using ETFs as part of their portfolio as they look to do more asset allocation, so the active ETF really becoming a very popular user.
The other big trend is regulation, which you've seen unfold throughout the world, whether it's in the US, in Europe, in the UK with RDR and in Asia as well. Of course, in Australia, you had FOFA. These regulatory shifts, they shift the behaviour of market participants, so we've seen the rise of fee-based advice, which of course then, has made the ETF an attractive investment option as a building block in a portfolio.
Another effect is just simply fee compression and that, if you're looking to invest in a market, that is a broad-based index, an ETF is a great alternative because the options are very low cost. You can buy S&P 500 for 4 basis points. That's a great option to invest into beta. But on the other hand, you still see money going into more complex opaque markets and that's where alpha makes sense, so just the real question about value for money.
Why is Australia late to the party?
I think that each jurisdiction has its own development of its financial ecosystem. When we talk about ETFs in the context of Australia, I agree with you that ETFs are fairly new here. The industry just recently just passed through A$41.5 billion. I think that's really a structural answer. I think there's been a strong home bias here. You've had a very strong equity market. You've had a lot of personal wealth going into one's house or property.
When you look at those two exposures and if you've had a bull market, where everything has typically been rising over the long-term, there's very little need to diversify and ETFs, of course, are great tools for diversification. But we've more recently seen a shift, money going offshore and the ETFs just becoming more well known and the education process around ETFs becoming more widespread.
The most important factors when choosing an ETF
Yeah, it's a really important question because 6,000 ETFs, it's a bit of a jungle out there in terms of product and not all ETFs are created equal. At BlackRock, we have a framework of due diligence that we educate investors on. That really takes you through the journey of looking at an ETF from a performance perspective, from a structural perspective, determining how is it built up. Is it physical? Is it synthetic looking? The liquidity, how do you trade ETFs? Really, taking you on the journey to give you a framework on how to judge an ETF for its suitability.
Are there any areas investors should avoid in the current market?
Look, I think that really depends on your view. It depends on your regional views, on your sector views. If you think the interest rates might rise, you probably wouldn't pick long duration fixed income ETF. If you're worried about geopolitical risk in EM, you probably would steer clear of emerging market ETFs.
But, I think, the great thing is that there are close to 6,000 different ETFs, so you have the ability to do precision investing. Even if I would pick out fixed income, you now have an industry which is almost a trillion US dollars. There are hundreds of products and you have the ability to really pinpoint your exposure, whether it be long duration or cash, cash-like, short duration credit.
The choice that you now have really gives you that exposure to manage you portfolio in a very diverse fashion.
iShares has made investing in their international ETFs simpler. Find out more