Welcome to our third Australian ETF report which aims to help investors understand and compare ASX listed ETFs. We want to provide investors with an objective, independent view of the ETF landscape.
The ETF market in Australia grew from $21.3 billion to $27.2 billion over the past year. This represents an increase in funds under management (FUM) of 28% over the year to April 2017. The size of the ETF market has more than doubled in Australia since 2014.
ETFs have become increasingly popular with individual investors, advisers and Self Managed Super Fund (SMSF) trustees due to their low-cost, transparency and diversification benefits.
We analysed over 150 ETFs and gave them a rating out of 5 which takes into account factors including fees, performance, size and activity. We also look at recent ETF market trends including the wide gap between the performance of different sector and styles, and the demand for bond and cash ETFs.
Each ETF sector saw double digit percentage growth in FUM over the last year. The largest inflows coming into global share ETFs, Australian share ETFs and fixed income and cash ETFs.
Over 5 years the average global share ETF returned 13%, compared to a 8% return from the average Australian share ETF. The underperformance of the local market since 2010 has led many Australian investors to look at adding global ETFs into their portfolios.
Investors continued to diversify their portfolios into fixed income ETFs, as worldwide volatility in share markets remained a theme with multiple unexpected political events occurring in 2016 including Brexit and the US Presidential Election. Notwithstanding, most bond ETFs had a lacklustre year of performance compared to the recent past, returning 1% to 3% over the year compared to much larger share market returns.
This group of ETFs track broad Australian share market indices such as the S&P/ASX300, including small and mid-cap indices.
Australian share ETFs added $1,514 million of FUM for the year with 31% of that money finding its way into either SPDR's STW and 24% into Vanguard's VAS. Together with iShares' IOZ they accounted for 69% of all inflows, as investors continued to gravitate towards the largest ETFs with high trading volumes and low fees.
This group of ETFs track the movements of various sectors of the Australian share market. At this stage there are sector ETFs covering the resources, financials and property sectors.
Performance between sector ETFs varied greatly over the year with property ETFs returning 6-9% while financials, resources and mining ETFs had exceptional returns of 26% to 40%. The average total return of 25% is the highest among all ETF groupings.
These ETFs only include some Australian stocks rather than the entire index. In Strategy based ETFs, stocks are selected according to certain rules-based factors like dividend yield or research rating.
This group also includes Hedge Funds - which have gearing and Managed Funds - which include 'active' funds management and typically have higher fees. Some of the strategy ETFs also seek to address concentration issues within the broad market indices by limiting sector and stock exposure limits. For instance Vanguard's VHY ETF restricts any one industry to 40% and one company to 10% of the index.
High yield and dividend themed ETFs captured most of the new flows into this group again as the theme remains very popular in Australia. BetaShares' HVST managed fund more than doubled its FUM by receiving almost $270 million in new funds. The Vanguard (VHY) is still the largest ETF by far with around 28% of all FUM in this category.
This group of ETFs track global markets and share indices including the S&P500 and various region and country markets including Europe, Asia, Japan, Hong Kong, China, Taiwan and South Korea.
It maintained its position as the largest ETF group and saw 9 new ETFs created during the year. This group had slightly lower returns compared to Australian shares for the first time in many years.
The majority of new inflows were captured by broad US shares and global funds as investors chased the large, highly-liquid global indices with well-known constituent businesses. Global dividend yields still remain lower on average (2%) compared to Australian shares (4%).
This small group includes ETFs that capture the performance of global stocks in specific market sectors.
FUM grew by 51% over the year and it had the highest number of new ETFs. There are 11 new unique options for Australian investors to gain access to specific global market sectors, particularly those that are under-represented within the Australian indices.
These ETFs offer exposure to fixed income and cash from Australia and overseas to investors.
A rally in the stock market has resulted in the rapid growth of this sector slowing as investors confidence returned to growth focused ETFs. However, fixed income still remained popular as it provides an important portfolio diversifier, especially for self managed super funds, and retained its place as the third largest sector by FUM.
The sector is still dominated by the BetaShares Australian High Interest Cash ETF (AAA), the only cash ETF, which invests in short-term deposits and returned 2% for the year. Vanguard's fixed interest ETF (VAF) grew by $250 million. Its FUM grew to just over 30% of the group total, whilst BetaShares' AAA has slipped to just under 40% in the past year. Vanguard also launched one new ETF tracking an Australian corporate fixed interest index (VACF).
This group's ETFs are all focused on the natural resources and commodity sectors.
This ETF group has experienced a significant recovery after a period of negative performance. ETF Securities held its dominant position with 70% of FUM and the rest being almost equally spread between Perth Mint Gold and BetaShares.
The majority of funds under management are managed by the largest 4 ETF issuers with iShares, Vanguard, SPDR and BetaShares accounting for 88% of funds in order of size. These issuers are the businesses that build and issue the ETFs to the public.
iShares (owned by BlackRock) is still the leading issuer in Australia with $1,034 million in new FUM coming into their ETFs in the last year. It launched 6 new ETFs, providing an global and Australian focused or Australian Dollar hedged version for three market segments. They track the iShares Core MSCI World All Cap (IWLD and IHWL), a Multifactor index (AUMF and WDMF) and the others have a minimum volatility focus (MVOL and WVOL).
Vanguard had another standout year, increasing FUM by 42% and with a dollar growth of almost double iShares at $2,094 million to now account for over a quarter of the market. It maintained the lowest average fees at 0.24% across its broad market exposure ETFs. In particular its Australian ETFs focused on the broad market, property, dividends and fixed interest grew rapidly.
SPDR again saw more subdued growth in a repeat of last year, seeing a total of $683 million new FUM, a 15% increase. A large inflow of funds into its stalwart SPDR S&qmp;P/ASX 200 ETF (STW) in March 2017 had a major impact on its annual AUM growth.
BetaShares had another year of high growth and again added the second largest amount in new FUM with $1,084 million. BetaShares have successfully focused on niche offerings, which typically have a structured element, such as gearing, and have launched the highest number of new ETFs this year. The majority of new funds again flowed into their cash ETF (AAA), US dollar ETF (USD) and their dividend focused managed fund (HVST).
Magellan has become the fifth largest issuer by FUM with a 71% increase to $873 million to continue its success. Its original managed fund (MGE) has again attracted high inflows and its new ETP, an infrastructure managed fund (MICH) has also grown quickly.
Van Eck Vectors, previously known as Market Vectors, rebranded under its international name in May 2016. It had rapid growth in FUM from a low base, overtaking Russell and ETF Securities in terms of FUM managed. It launched 2 new ETFs, one focusing on dividends (FDIV) and one infrastructure (IFRA)
Russell saw a decreased of $49 million in FUM this year to fall behind Magellan and Russell, with large outflows from its government bond (RGB) and semi-government bond (RSM) ETFs. Its corporate bond and 2 of its Australian strategy based ETFs gained funds under management.
EFT Securities gained FUM this year as its large GOLD ETF has remained popular despite gold trading sideways.
UBS continued steady growth with an increase of $59 million across its strategy and ethically focused ETFs. The fees for Australian 'Quality' (ETF) and dividend yield strategy (DIV) were reduced from 0.70% to 0.30% after the fund changed its tracking index to the MorningStar Australia Moat Focus Index.
ANZ showed very rapid growth from a low base by gaining 4 times the amount of its initial FUM over the year. It reduced fees for its US dollar ETF (ZUSD) from 0.45% to 0.30% and it also reduced fees for its Reminbi (ZCNH) ETF from 0.57% to 0.30%. Its large cap Australian shares ETF (ZOZI) also proved popular and a new ETF covering European Shares was launched (ESTX).
Switzer listed its first managed fund ETF (SWTZ) focusing on dividend shares in February 2017 with a starting asset value of $52 million.
K2 had another decline in its FUM for its two managed funds.
AMP Capital issued its first managed fund ETPs together with BetaShares focusing on global infrastructure (GLIN) and property securities (RENT). It also launched an active ETF (DMKT) global hedge fund product.
Schroders listed its first managed fund ETF (GROW) in 2016.
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