Where does the Australian ETF market go from here? | BetaShares

Where does the Australian ETF market go from here?

BY Justin Arzadon | 30 June 2015

There has been significant recent growth in the Australian ETF market, going from just under $4 billion in funds under management (FUM) in 2011 to more than $18.5 billion FUM by June 2015.

While the growth rate is undeniably impressive the amount of actual FUM is still a fraction of the Canadian ETF market (where I cut my teeth!), which has a similar stock market cap to Australia, but whose ETF industry currently sits at about $68 billion in FUM, over three times the size of Australia’s.

While Australia now offers a number of ETFs covering different sectors, commodities and currencies, and it was also the first market in the world that I am aware of to offer an all cash ETF, I thought it would be interesting to take a look at what other markets are doing differently and, therefore, where the Australian market may be heading.

I’ve compiled a list of 5 types of strategies that are offered around the world in exchange traded form but are either just getting started, or are unavailable, here (these are just my own views, not the views of my firm).

1. Actively Managed – Exchange Traded Products are usually seen as a passive investment, which aims to track an underlying index, commodity or currency. The Australian market has already begun to see a move towards actively managed exchange traded products with rules based funds, including BetaShares Australian Dividend Harvester Fund (managed fund) (HVST) and the Yield Maximiser managed fund series (YMAX & UMAX) which do not track an underlying index. In addition, a more traditional type of “fully active” managed fund has recently been launched on the ASX, with other active managers no doubt considering launching more in the future. In Australia, this move towards fully active products is expected to gain pace. Actively managed ETFs now account for over $17 billion of the U.S. market. These ETFs are required to disclose their holdings on a daily basis. Currently in the U.S there is a proposal waiting to be approved for ETF structures to be allowed to conceal daily trading activities from their rivals. If this were to occur, it would open the door to more US-listed actively managed equity ETFs.

2. Volatility – Volatility is a major concern for investors, especially since, historically, volatility spikes have typically been associated with downward trending markets. A popular measure of implied volatility is the VIX, which is an index that provides an insight into investor sentiment and expected levels of market volatility. Through various ETFs globally, investors have ability to access long or short exposures to the VIX index, which allows investors to take advantage of volatility. Although there currently are no VIX ETFs available in the Australian market, one creative solution in managing volatility has been through the BetaShares Australian Harvester Fund. The fund, which employs a dividend harvesting or rotation strategy, also employs a professional risk management strategy to monitor volatility levels within the fund. Using this strategy, if volatility spikes above average levels, the manager will short SPI futures to reduce portfolio exposure and bring the level of volatility back down to the average levels. In the event of a market pullback, all things being equal, this strategy should result in the fund falling less than the market as a whole. For individual investors who may find managing volatility on their own too complicated, this is an innovative introduction to volatility management within the Australian exchange traded product market.

3. Corporate Class – No one enjoys paying tax. Although tax will always have to eventually be paid, to be able to defer taxes as long as possible can be part of an individual’s investment strategy. One firm based in Canada has created a structure within their ETF offerings to allow investors the ability to switch between their “Corporate Class” ETFs without triggering immediate tax consequences. A structure like this would be a boon to any investor’s portfolio, as you can defer tax on investment income and capital gains, allowing for increased compound growth over a longer period, with a taxable disposition only occurring when you redeem from the “Corporate Class” structure.

4. Adviser Class – North American financial planners and advisers have in the past benefited from on-going fee arrangements such as trailing commissions when (some) managed funds are sold. One of the hurdles that global ETF fund managers are faced with is the adviser’s preference to recommend an unlisted managed fund over an ETF because of the trailing commissions. One structure an ETF manager introduced is the “Adviser Class” ETF as a result of this issue. This structure allowed an adviser to continue to receive trailing commissions on ETFs recommended and prevented the manager’s ETFs from being disadvantaged over managed funds. With the recent Future of Financial Advice (FOFA) regulations in Australia, this most likely won’t be too much of a concern for Australian ETF managers, but was a good idea to create a level playing field between the managers of unlisted funds and ETFs.

5. Geared & Short – Whilst the Australian market now has one geared and two short exchange traded products on the ASX, I believe this is a segment that will continue to grow over time, with additional geared products on both the long and short side being made available. While not suited to all investor risk profiles, such products may allow investors to efficiently use their capital through gearing, and be able to take advantage of downward trending markets or to hedge portfolios.

The Australian market has massive growth potential, not only for funds under management, but also for the different types of strategies that can be offered. Some of the structures listed above may eventually be brought to market, but some structures may just not be suited to the Australian landscape, so it’ll be fascinating to see what eventuates.

Till next time – Happy trading!

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