Hardly a day seems to pass without the media publishing articles about how many more investors are turning to index funds to gain low-cost diversification for their portfolios.
And often these articles make the point that the majority of actively-managed funds have underperformed the market over the medium-to-long term, particularly once their typically higher fees are taken into account.
A look at the local growth in the popularity and market capitalisation of market-tracking Exchanged Traded Funds (ETFs) provides a telling illustration of how the low-cost diversification message is catching on among Australian investors.
Recent ASX research shows that the market capitalisation of Australian-listed exchange traded products, most being index ETFs, rose by 53 per cent over the past two years to reach almost $27.25 billion by the end of March. Much of this growth has been over just the past five years – up by $22 billion or more than 400 per cent over that time.
Globally, London-based ETF researcher ETFGI reports that the market capitalisation of the 6771 exchange traded products (again including ETFs) listed on 67 exchanges in 55 countries reached a record US$3.913 trillion by the end of March. (Key differences exist between the style of some ETFs listed in Australia and overseas.)
As surveys by specialist researcher Investment Trends continue to highlight, self-managed super funds have long been among the biggest users of ETFs. When asked to name the benefits of ETFs, surveyed SMSF specialist advisers using ETFs place low cost, diversification and access to international markets at the top of their lists.
In a low-interest investment environment with expectations for subdued returns over the medium-to-long term from diversified portfolios, keeping investment management costs to a minimum is even more critical for investors. This is the case whether investing in index funds, actively-managed funds or a combination of both (maybe using index funds, including ETFs, as a portfolio’s core).
Perhaps consider talking with an adviser about how ETFs may reduce your portfolio’s overall costs while increasing its diversity. Much, of course, will depend upon an investor’s circumstances.
