Plenty To Celebrate On An ETF Anniversary

The impressive growth in the popularity and assets of Exchange Traded Funds (ETFs) confirms that many more investors are recognising the importance of widely diversifying their portfolios while minimising their investment costs. It can make a formidable investment combination.

Recent ASX research shows that the market capitalisation of Australian-listed exchange traded products – Exchange Traded Funds (ETFs) and Exchange Traded Commodities – grew by more than 60 per cent to $16.98 billion over the 12 months to February 28.

The growth in the capitalisation of Australian-listed ETFs in recent years has been from a relatively low base.

Overseas, ETFs have been available to investors much longer and their total market capitalisation is huge. (It should be emphasised that there are significant differences between some types of ETFs available overseas and in Australia.)

London-based specialist researcher ETFGI notes that March 9 marks the 25th anniversary of the world’s first ETF, which was listed on the Toronto exchange. The first Australian-listed ETF followed 11 years later.

ETFGI records that the total market value of exchange traded products listed on 63 global exchanges in 51 countries reached US$2.919 trillion by the end of February. "We expect the assets to break through the US$3 trillion milestone in the first half of 2015," the researcher adds.

Self-managed super funds are behind a large share of the growth in the popularity of ETFs in Australia. Surveys by researcher Investment Trends has found that the most common reasons why SMSFs invest in ETFs include portfolio diversification, access to overseas markets, low cost and liquidity.

And global researcher ETFGI comments this month that individual investors and their advisers are increasing using ETFs to invest cash in equity markets, to diversify in accordance to their strategic portfolios and to make short-term adjustments to their asset allocations.

Further, ETFGI notes that more individual investors are using ETFs to follow a core-satellite strategy – with the core of their portfolios in indexing-tracking ETFs and the remainder in "satellites" of selected direct investments and actively-managed funds. And more investors are using ETFs as "building blocks to create entire portfolios".

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.

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