With the end of the year drawing near, we thought it was an opportune time to discuss the year to come for the ETF industry. In this post, we outline our top 3 predictions for the ETF industry in 2018. In our view, a growing audience of younger investors, an increasing array of fixed income options, and continued growth in Active ETFs,will drive growth in 2018. Read on to find out more.
The Australian exchange traded product industry is set to grow significantly based on the momentum generated in 2017. This year to November, the Australian ETF industry reached an all-time high of $35.5 billion, up from $25 billion in 2016. It certainly appears as though investors are increasingly taking notice of the ease with which ETFs can be used to diversify their portfolios, as well of their cost-effectiveness and transparency benefits. As a result, we expect to see significant growth in 2018 as the array of ETF options on the market continues to increase. Here’s our predictions:
Prediction one: Millennials will continue to be an important driver of growth
Although investors of all types have embraced the ETF market in recent years, millennials continue to gravitate to the sector. Millennials are attracted by the low cost, simplicity and ease of use of ETFs, as well as their ability to provide tailored exposure to investment themes that matter in their lives. In the BetaShares product suite, for example, ETFs such as the Australian and Global Sustainability Leaders ETFs (ASX: FAIR & ETHI) allow younger investors to invest according to their values, whereas products such as the Nasdaq 100 ETF (ASX: NDQ) or our Cybersecurity ETF (ASX: HACK), allow them to be exposed to companies whose products resonate with their daily lives.
Market figures appear to bear out these trends – in Australia this year, according to CommSec, 25% of all ETF trades were done by millennials. Many of our younger clients have told us that one of the key reasons behind this take up may well be the the diversification benefits of ETFs, which makes them a great way to get started investing in the sharemarket.
Prediction two: Greater innovation in fixed income ETFs
Fixed income has long been acknowledged as a good way to diversify a portfolio. Yet bond markets have historically been difficult for individual investors to access. In the last year in particular, there has been significant innovation in this space, with rapid growth in fixed income ETFs globally. With interest rates at record lows, exchange traded products are giving investors vehicles to gain exposure to bonds that goes beyond traditional fixed-rate exposure. The most recent innovation in Australia is the launch of floating-rate bond ETFs, with products such as our QPON ETF, which offers a lower volatility alternative to traditional fixed-rate bond exposures.
Floating rate bonds offer the additional advantage of having their interest payments adjust to reflect rises or falls in benchmark interest rates. This is particularly useful in a market where interest rates are rising. Floating rate bonds posted good returns over the past year, and appear well placed to continue to perform strongly given the current level of interest rates.
Beyond this particular style of fixed income investing, in 2018 more generally, we expect to see further innovation in fixed income ETFs, providing direct investors with much-needed access to lower risk, income-producing assets.
Prediction three: Active ETFs will grow in popularity
This last year has seen the continuation of Active ETF launches, giving investors more opportunity to diversify their portfolios alongside the passive ETF investments. We expect to see Active ETFs growing in popularity in 2018. Indeed, Active ETFs have the potential to match the growth of passive ETFs, with the launch of a number of funds offering access to active management strategies.
As an example, BetaShares recently launched HBRD, the first Active ETF which provides exposure to a professionally managed portfolio of Australian hybrids.
While we remain a strong advocate of passive investing there are a number of asset classes and managers who can add value via active investing. For example, the complexities of hybrid securities and relative inefficiency of the hybrids market make investing in this asset class via a professionally managed fund vehicle a better way to go for many investors.
More broadly, we believe the future of the Active ETF sector of the Australian industry is bright.
Across all predictions, growth remains the 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 2018. More specifically, we expect the ETF industry to end 2018 at $40-45B.