Like most sound investment strategies, the rationale for having a low-cost, appropriately-diversified portfolio is straightforward.
Low cost means that investors keep more of their investment returns – a particularly critical factor when returns are subdued and fragile. And diversity, of course, spreads an investor’s risks and opportunities – again particularly critical in the prevailing investment environment.
One of the key ways that increasing numbers of Australian investors are inexpensively diversifying and rebalancing their core portfolios is by investing in market-tracking Exchange Traded Fund (ETFs).
Recent ASX research shows that the market capitalisation of Australian-listed exchange traded products – ETFs and Exchange Traded Commodities – grew by 42 per cent to $21.34 billion over the 12 months to the end of December. Yet in the 2015 calendar year, the S&P/ASX 300 produced a modest 2.8 per cent total return (including dividends).
In short, almost all of the impressive growth in the market capitalisation of locally-listed ETFs is attributable to new money entering the funds – not market returns. (The vast majority of locally-listed exchange traded products are index-tracking ETFs.)
And over the two years to December, the market capitalisation of Australian-listed exchange traded products increased by more than 112 per cent, or $11.3 billion.
Australian investors are increasingly turning to Australian-traded international share ETFs as a low-cost means to gain wide global diversification. This has proved rewarding in recent years for many investors. (While the MSCI World Index ex Australia produced a positive total return of just 3.8 per cent on a hedged basis in the 12 months to December, the index returned 11.8 per cent on an unhedged basis to Australian investors as the Australian dollar fell against most major currencies.)
The market capitalisation of ETFs on global markets also continues to strongly growth – almost 26 years after the world’s first ETF was listed on the Toronto exchange.
London-based ETF researcher ETFGI reports in its latest newsletter that the 6,000-plus (6,146 to be exact) exchange traded products listed on 64 global exchanges held US$2.99 trillion by the end of 2015. And significantly, exchange traded products (again most being ETFs) recorded a record US$372 billion in new net assets during the 2015 calendar year – a 10 per cent increase on 2014.
Interesting as Smart Investing has discussed in the past, the total market cap of exchange traded products listed on global markets had actually crossed the US$3 trillion mark for the first time in October.
In its latest report, ETFGI comments that "2015 was a turbulent year for the markets due to uncertainty in China which spilled over into global markets, concerns about the Middle East and a collapse in energy prices". And then the publication tellingly adds: "The record level of asset gathering in 2015 shows that more investors are using ETFs/ETPs in more ways due to the market turmoil…"
It should be emphasised that there are significant differences between some types of ETFs available overseas and in Australia.
More Australian investors are using ETFs to widely diversify within a single asset class such as Australian shares and to gain exposure to a broad range of different asset classes in Australia and overseas. The "food groups" covered by locally-listed ETFs include: Australian equities (tracking broad indices such as the S&P/ASX 300, large companies, small companies and high-yield stock), international equities (tracking broad indices, region and country-specific equities and emerging market equities), Australian and international fixed interest and property securities, among others.
The creation of broadly and appropriately diversified portfolios using ETFs is a powerful way to deal with market turbulence – at a low cost.
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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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