This week we sent out to the media our annual ETF predictions for the year ahead after another fascinating year in the industry.
At a high level, Australia’s ETF industry is predicted to continue its rapid growth trajectory in 2019, driven by investor demand, product innovation and the evolving requirements of advice models used by financial planners.
This year to November, the Australian ETF industry continued its growth trajectory, finishing the month at $41.1 billion, up from $35.5 billion as at 30 November 2017 and in line with BetaShares’ 2018 predictions made in late 2017. More investors appear to be recognising the benefits of ETFs, including the ability to diversify portfolios, lower costs and access opportunities in international sectors which have historically been hard for Australians to access.
For more detailed data and highlights of the 2018 year, keep an eye out for my 2018 year end review sometime in January, which I’ll post once we have all the data collected. For now let’s focus on some predictions! For the upcoming year, we’re highlighting ETF model portfolios, increased allocations to fixed income ETFs and global growth thematics as themes.
Prediction one: Adoption of ETF model portfolios
Adoption of ETF model portfolios is predicted to increase, as advisers seek to create efficiencies in their businesses and lower costs for clients, and as more ETF strategists, investment consultants, portfolio construction specialists and robo advisers enter the market.
2018 has seen a strong rise in the number of advisers and investors seeking to implement expert portfolios via models, and we ourselves have seen significant growth in advisers using our ETF Model Portfolio service offered to them. This demand is primarily coming from groups who are seeking to use such services to offer efficient and cost-effective access to diversified investment portfolios, at much lower costs for clients than had been previously available.
It is becoming increasingly understood in the Australian market that the combination of low-cost index building blocks and active asset allocation can result in a compelling investment solution that delivers value for both the end client and the adviser, and so we predict this theme to grow strongly.
Prediction two: Fixed income exchange traded products growing in popularity
Last year our second prediction was for greater innovation in fixed income exchange traded products and there is no doubt that prediction has come true, with a number of innovative solutions offered to the market in 2019.
We believe the adoption of ASX-traded fixed income funds will rise significantly in 2019, both due to increased product choice but also signalling changing sentiment from investors looking to position portfolios more defensively.
Australian investors typically hold an underweight exposure to fixed income, although, with growing market volatility, investors are starting to increase allocations to fixed income as a defensive shield for their portfolios. We’ve already seen this start to happen with the Fixed Income category continuing to be amongst the top 3 for asset flows each month.
In addition, the growing number of Australians reaching retirement age means that defensive asset classes such as fixed income will likely continue to benefit from increased allocations.
Product innovation is also predicted to continue, after this year’s significant growth in existing bond solutions including our Australian Bank Senior Floating Rate Bond ETF (QPON) and our Australian Investment Grade Corporate Bond ETF (CRED) which, combined, currently sit with over $450M in assets.
We also saw the recent launch of Australia’s first fixed income Active ETF, the BetaShares Legg Mason Australian Bond Fund (managed fund) (BNDS), which offers investors access to an actively managed bonds portfolio via the ASX.
Fixed income has long been an overlooked allocation, primarily due to access issues. ETFs are reducing barriers to adoption across a variety of different asset classes, including fixed income.
Prediction three: Thematic investing will continue to grow
A record number of thematic ETFs were launched during 2018 and have experienced strong take-up to date. This trend is predicted to continue into 2019.
We continue to see strong demand for funds offering access to a range of global growth themes, including global cybersecurity (HACK), global healthcare (DRUG) and global robotics and artificial intelligence (RBTZ).
At the same time, the bellwether Nasdaq 100 ETF, NDQ, has seen a record year of inflows in 2018. Indeed together, the technology range has combined assets of over half a billion dollars as at 30 November.
In terms of a newer exposure that is quickly gaining popularity, more recently, valuations in the Asian technology sector have become more attractive. This has underpinned a strong period of growth in the adoption of the Asian Technology Tigers ETF (ASX: ASIA), which allows investors to access a portfolio of the largest Asian tech companies in a single trade.
Overall, Australia’s ETF industry is headed into another strong year for growth.
The growth of the ETF industry in Australia has been impressive in recent years, and we predict it will continue on this trajectory in 2019. We predict the ETF industry to end 2019 at $55-60 billion, vs. $41B as at November 2018.