ETFs In Volatile Markets

Given the intense sharemarket volatility, few investors would be surprised that the market capitalisation of Australian-listed exchange traded products dipped a little in August, slipping by about three per cent.

Indeed, the way that exchange traded products – comprising Exchange Traded Funds (ETFs) and Exchange Traded Commodities – are dealing with the latest bout of volatility underlines their growing support throughout changing market conditions.

Recent ASX research shows that the market capitalisation of Australian-listed exchange traded products grew by 51 per cent to $19.2 billion over the 12 months to the end of August.

And the market capitalisation of locally-listed exchange traded products increased by 118 per cent or by $10.4 billion over the past two years. (The vast majority of exchange traded products are index-tracking ETFs.) These two-year statistics put the latest market capitalisation figures for ETFs into some perspective.

London-based specialist researcher ETFGI records that the total market value of exchange traded products listed on 63 global exchanges in 51 countries reached US$2.86 trillion by the end of August. (It should be emphasised that there are significant differences between some types of ETFs available overseas and in Australia.)

The prevailing sharemarket volatility highlights the attributes of ETFs as a low-cost and straightforward means for investors to spread their risks and opportunities with appropriately-diversified portfolios.

Further, the current volatility may encourage more investors to consider how ETFs can be used to efficiently and inexpensively rebalance their portfolios back to their long-term strategic or target asset allocation.

The significance of a portfolio’s asset allocation – the proportions of its total assets that are invested in different asset classes of mainly local shares, international shares, property, fixed interest and cash – should not be underrated.

Repeated research over the years highlights the critical role of a portfolio’s long-term asset allocation in determining an investor’s success.

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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