With assets under management at an all-time high, and increasingly more widespread use of Exchange Traded Funds (ETFs), the Australian ETF industry came of age in 2016, and continues to follow in the footsteps of more mature markets around the globe.
The ETF industry in Australia continues to evolve, as new waves of investors demand more sophisticated types of products. In 2017, we predict this more mature version of the local ETF industry will be expressed in at least three clearly defined trends:
a growing audience of younger, users the proliferation of active exchange traded managed funds and 3) a broader range of smart-beta options.
Millennials an important driver of growth of industry
Accounting for almost a third of the global population, the millennial generation (those born between 1980 – 2000) are entering into their prime earning years and will soon be the largest client-base in the financial markets. According to the Deloitte report ‘Millennials and wealth management’, millennials prefer self-directed options, and they expect seamless technologies that allow them to access investments quickly and easily throughout the investment cycle.
In more mature markets, like the US, the figures prove that millennials are driving industry growth. According to Schwab’s 2015 ‘ETF Investor Study’, younger investors in the US are more likely than older ones to use ETFs: 41% of millennials use ETFs, compared with 25% of Gen Xers and only 17% of baby boomers. Furthermore, 70% of millennials see ETFs as the core investment type in their portfolio in the future.
We are confident this trend will translate to Australia too, as we are already seeing an increase in the number of product enquiries from millennials. The trend in the US of ETF providers developing ETF model portfolios with automated distribution solutions could also play out in Australia – which would continue to empower millennials with innovative wealth management tools.
Active exchange traded managed funds will proliferate
At BetaShares, we foresee that the number of active exchange traded managed funds will grow substantially in 2017, as both investors and fund managers recognise the benefit of the exchange traded product structure.
Despite only accounting for 9% of the industry’s funds under management, the active exchange traded managed funds sector has generated strong flows with just under $1 billion invested as at the end of 2016.
More ‘smart beta’ products
ETFs have evolved from market capitalisation index trackers to investment solutions that answer a broad range of investor needs. Smart beta products, or those not market cap weighted, will be a product segment to watch in 2017 as more investors and advisers alike recognise the potential for these products to offer active-like returns for index-like costs.
A number of smart-beta products have performed exceptionally well in recent times, with many achieving returns significantly above both market-cap indices while also placed amongst top quartile active managers. With an increased focus on ‘value for money’ in investment products, we believe smart-beta is very well positioned to continue delivering new products this coming year.
Across all predictions, growth remains a consistent theme
The growth of the ETF industry in Australia has been phenomenal in recent years, and we predict it will continue on this strong trajectory in 2017, ending the year with $32 – $35 billion funds under management and approximately 250 exchange traded products.