ETFs are a very flexible investment tool, and have opened up many opportunities – particularly for retail investors – to employ investment strategies that were once too complicated or expensive to be considered.
Like their counterparts abroad, Australian investors have embraced the exchange-traded fund (ETF) revolution. From a humble beginning with the listing of three ETFs worth $48 million in Australia in 2001 by one issuer, ETFs have grown to the point where the Australian Securities Exchange (ASX) Monthly Funds Report for April 2016 found that there were now 130 ETFs in the Australian market, with a total market capitalisation of $21.8 billion, from a total of 14 issuers.
An ETF (sometimes called an exchange-traded product, or ETP) is a listed stock that represents an index, market, asset class, portfolio, strategy, commodity or currency. Like equity funds, ETFs offer an individual investor a simple means of gaining exposure to a broader portfolio: they are structured to provide single-stock exposure to the ‘beta’ (market performance) of the stock portfolio.
The attraction of ETFs is cost-effective, simple, instant and liquid exposure to different markets, different asset classes and different strategies. ETFs are a very flexible investment tool, and have opened up many opportunities – particularly for retail investors – to employ investment strategies that were once too complicated or expensive to be considered.
Last May, ANZ became the first Australian bank to enter the Australian ETFs market, teaming up with London-based ETF Securities to list six securities on the ASX. The ANZ ETFS range covers the sharemarket, currencies and commodities. The individual ETFs are:
- ANZ ETFS S&P/ASX 100 ETF (ASX code: ZOZI) – aims to provide investors with a return that (before fees and expenses) tracks the performance of the S&P/ASX 100 Index of the Australian sharemarket. Management fee: 0.24 per cent a year.
- ANZ ETFS S&P/ASX 300 High-Yield Plus ETF (ZYAU) – designed to provide investors with a return that (before fees and expenses) tracks the performance of the S&P/ASX 300 Shareholder Yield Index. Management fee: 0.35 per cent a year.
- ANZ ETFS S&P 500 High-Yield Low-Volatility ETF (ZYUS) – aims to provide investors with a return that (before fees and expenses) tracks the performance of the S&P 500 Low Volatility High Dividend Index. Management fee: 0.35 per cent a year.
- ANZ ETFS Physical Gold ETF (ZGOL) – gives investors exposure to gold bullion, without having to hold and store the gold. Management fee: 0.40 per cent a year.
- ANZ ETFS Physical US Dollar ETF (ZUSD) – aims to provide investors with an exposure (before fees and expenses) to the performance of the US dollar relative to the Australian dollar. Management fee: 0.30 per cent a year.
- ANZ ETFS Physical Renminbi ETF (ZCNH) – aims to provide investors with an exposure (before fees and expenses) to the performance of the Chinese Renminbi (offshore CNH) relative to the Australian dollar. Management fee: 0.30 per cent a year.
The gold ETF is tied to physical gold bars stored at the bank’s vault in Singapore. The US dollar and Chinese renminbi ETFs are backed by currency held as deposits with the bank. The ZYAU and ZYUS ETFs are “smart-beta” style ETFs that use a systematic rules-based stock selection process to deliver specific outcomes.
ANZ ETFS head Kris Walesby says the range was designed to be an “all-weather set of products” for an investor’s asset allocation needs, irrespective of whether the sharemarkets were rising or falling.
“For the range’s core holding in Australian shares, we looked specifically at the S&P/ASX 100 index, on the basis of client feedback. A lot of advisers and stockbrokers like to ‘play’ Australia for their clients by using the S&P/ASX 100, and then picking up on small-capitalisation stocks through either using active managers, or choosing direct stocks themselves.
“If you take the S&P/ASX 200 you’ve already got a lot of those single-stock opportunities, so you’re effectively doubling up. Using the S&P/ASX 100 works against that. We could also see that the biggest driver of the current growth, over the last five years, was the group of the 51st to 100th stock on the Aussie market by capitalisation – that way we captured that main driver, rather than having a S&P/ASX 50 or S&P/ASX 20 investment,” says Walesby.
The specialist twists – the high-yield Australian fund and the high-yield, low-volatility US fund – are designed to meet investor concerns about the stock market. “Clearly yield is one of the main focuses for Australian investors, so we wanted to make sure, as the first big Australian bank to launch an ETF range, that we recognised what clients had been telling us about the importance of dividends and yield. Also the ‘twist’ of having low volatility but relatively high yield in the US market works well for those investors who know they need international exposure, but would like to get it with yield if possible, and who feel that the US market is more volatile than they would like,” he says.
Holding exposure to gold is a defensive asset, says Walesby, because it normally rallies in a declining sharemarket environment. “So does the US dollar actually, it typically becomes a safe-haven asset in a negative sharemarket environment, as well. But the currency ETFs are aimed at the investor who wants to express a view on the particular country, without necessarily taking equity-market risk.
“We created the Renminbi ETF for the investor who believes that over say the next ten to thirty years, China will become the most dominant economy in the world, and consequently its currency will strengthen. That ETF is a ‘pure’ call on China without having the equity risk – it is effectively a proxy on China. It’s exactly the same principle with the US dollar ETF as well.”
The beauty of ETFs, says Walesby, is that they suit low-cost long-term core holdings, but can also be used tactically, if the investor knows what they are doing. “They really suit the ‘core/satellite’ strategy very well, where investors combine ETFs, which pick up market ‘beta,’ with active managers and/or direct shareholdings to add ‘alpha.’
“Chapter 1 of ETF use in Australia was investors – typically self-managed superannuation funds (SMSFs) – starting to use ETFs simplistically, as an instant, cost-effective way to add international exposure, and to reduce the concentration risk of Australian stocks. Chapter 2 is where SMSFs start to use them in a core/satellite way and for shorter-term tactical tilts.”
"Clearly yield is one of the main focuses for Australian investors, so we wanted to make sure, as the first big Australian bank to launch an ETF range, that we recognised what clients had been telling us about the importance of dividends and yield."
Head of ANZ ETFS , Kris Walesby.
Greater use will also come as institutions ramp up their use of the products, says Walesby. “I come from a European market where 90 per cent of the market is institutions, and it is similar in North America. Here, the institutional use is only about 4 per cent.
“Institutions use ETFs for transition management, asset allocation, portfolio tilting, and cash management/equitisation, even trading. As that usage starts to increase in Australia, which it will, SMSFs and retail investors will see the market growing in size and volume, and we think they will be prepared to trust it even more than they have done to date. SMSFs want simple options, they like direct investments, they want to keep tight control on their investment costs, and ETFs do all of that,” he says.
