How ETFs Spread The Low-Cost Message
In dollar terms alone, Exchange Traded Funds (ETFs) hardly rank among the heavy-hitters of Australian investment.
Locally-listed exchange traded products – most being index-tracking Exchange Traded Funds (ETFs) – had a total market capitalisation of just under $24 billion at the end of October. This compares to the $4 trillion-plus that Australians hold in super and non-super personal investments (including their direct investment properties*).
However, a recent investment commentary by actuaries Rice Warner – headed The growing influence of ETFs – makes the point that the influence of ETFs among Australian investors is much wider than "sheer dollars suggest".
Rice Warner comments: "ETFs and traditional index funds are making investors more aware of the impact of high investment management costs on their real returns and have contributed to the reduction of investment management fees over recent years."
A determination of many investors to minimise their investment management costs when investment returns were "subdued and more uncertain in this low-interest era" was a major factor in the rising popularity of ETFs.
Consider the strong growth of exchange traded products over the last few, as shown by years as shown by ASX statistics: October 2010 (market cap $4.1 billion), October 2011 ($5.28 billion), October 2012 ($6.14 billion), October 2013 ($9.45 billion), October 2014 ($13.58 billion), October 2015 ($20.66 billion) and October 2016 ($23.95 billion).
Rice Warner expects this rapid popularity of recent years to "gather pace" as more individual investors use ETFs and traditional index funds to provide a diversified, low-cost base or core to portfolios. "This should provide more time to focus on individual investment selection, on appropriate asset allocations and on efficient wealth management."
It's clear that ETFs – despite their relatively modest market capitalisation to date – are playing a significant role in fostering sound investment practices among super and non-super investors.
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia.
As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.