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Record year for ETPs could see market top $100 billion in 2021

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2020 was a strong year for flows into Australian exchange traded products (ETPs) despite the COVID-19 pandemic and market volatility. The main drivers of the move to ETFs were the desire to reduce portfolio costs, while smart beta ETFs were sought by investors and advisers who are not impressed with the broad-based underperformance by active fund managers.

Over the 12 months to November 30, 2020, the Australian ETP industry jumped in size by 29% to a record $73.61 billion. ASX ETP net flows for November struck hit a fresh high of $2.67 billion, a jump from $1.79 billion a year earlier. Markets experienced an especially strong end to the year, with US share markets striking record highs.

Several factors fed the record level of inflows in recent months. Many investors turned to Australian equity income ETPs to build their portfolios after the March 2020 sell-off. Others sought international equity exchange traded funds (ETFs) primarily for exposure to the tech heavy US share market as stocks - briefly - traded at cheaper prices. ETFs make up around 90% of the Australian ETP market.

etfs record year 2020

All of this drove record net flows into the ETP market over the year to 30 November of $18.10 billion, well ahead of 2019 net flows over the same period of $11.98 billion. Net flows into Australian equity market ETPs struck $6.51 billion over the year to November 30, compared to $6.19 billion into international equity ETPs. Investors directed more money into Australian sustainable ETFs, with flows totaling $478.8 million, after assets under management (AUM) topped $1 billion in October.

Another sector that soared due to the global recession and unprecedented central bank intervention was gold and gold miner ETPs, with AUM rising to $2.73 billion, up 90% from a year earlier.

Also popular last year were fixed income ETFs, as interest rates fell to historic lows as central banks worldwide undertook quantitative easing to keep their economies afloat during the COVID-19 pandemic. Investors poured $2.1 billion into fixed income ETPs. This highlights an important point - ETPs are being used by investors not only to grow their exposure to growth assets such as shares, but also to build the defensive and income allocations of their portfolios as interest rates stay lower for longer.

More innovative products on offer

With an expanding diversity of assets being offered by ETPs, we believe even more funds will flow into the ETP market this year, which could take it to a market capitalisation of over $100 billion. ETPs offer diversification - in assets, sectors, and geographies, through a single ASX trade.

The ETP market is characterised by innovation in products. Investors can now, for example:

  • Invest in the video gaming and eSports industry;
  • Invest in global healthcare companies offering the best potential for growth at a reasonable price; and
  • Invest in relatively high-yielding emerging market bonds.
     

In an Australian first, VanEck last year launched a VanEck Vectors Video Gaming and eSports ETF (ASX: ESPO), which is the only ASX ETF focused on investing in large video gaming and eSports companies globally. This innovative ETF allows investors to tap into the mega growth trend of technology but diversify away from the FAANGS. Retail interest has been strong as investors can now back the companies producing the games such as Fortnite that many of them play.

Flows to smart beta still growing

As the industry has grown, the range of ETPs has increased from simple market capitalisation index-tracking ETFs to more complex managed funds, including smart beta ETFs and so-called 'active ETFs', which allow investors to access the capabilities of active investment managers on ASX. Active ETFs do not track an index and are not required to publish their full holdings at any time. By contrast, most pure (not 'active') ETFs track an index, and provide full transparency of their holdings on a daily basis.

Smart beta ETFs track non-market capitalisation weighted indexes designed with investment outcomes in mind that can include active strategy approaches like 'factors''. Smart beta ETFs thereby combine the best of active and passive investing, with the potential for outperformance while being rules-based and cost efficient.

Reflecting their appeal, flows to smart beta ETFs were strong last year, totalling $3.0 billion over the year to 30 November 2020, accounting for around 16.5% of all ETP inflows. Smart beta FUM totaled $12.33 billion as at November 30. Smart beta market share is likely to continue to grow in 2021 as many active managers faced a struggle with underperformance and pressure to justify their high fees.

Research from S&P Dow Jones Indices, the SPIVA Australia Scorecard has found that during the first half of 2020, the majority of actively managed funds in all categories (apart from Australian real estate investment trusts, or A-REITs) suffered worse drawdowns versus their respective benchmark indices. This Scorecard captures the COVID-19 volatility in March, highlighting that most active managers did not even match market returns, let alone outperform. This is a trend evident over the longer term too.

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Arian Neiron is managing director and head of Asia Pacific at VanEck.
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