After years of remarkable growth, what's ahead for ETFs?

The ETF market is hitting its stride, having grown exponentially in the last 20 years. And the best may be yet to come.

Close to one million Australians already own ETFs according to the 2020 ASX Investor Survey, and Minh Tieu, Vanguard's Head of ETF Capital Markets for Asia-Pacific, doesn't see investors losing their appetite for ETFs any time soon.

"The Australian ETF market has experienced remarkable growth in the last few years," he says." And we expect this to continue as more investors recognise the benefits of ETFs."

Rising demand will inevitably attract more ETF issuers to the market.

Tieu notes, "As ETF uptake increases, the variety of ETFs on offer will also expand to satisfy investor preferences, allowing more investors the opportunity to invest in an ETF that suits their goals and priorities.

Alongside this, Tieu says the growing number of online brokering platforms is making it easier for investors to access ETFs at lower fees than ever before.

Younger investors, SMSFs and advisers to drive the market

ETFs have especially resonated with younger investors. Research by BetaShares and Investment Trends shows Millennials make up 43% of new ETF investors, up from 12% more than five years ago. The ASX survey found 45% of next generation investors aged 18-24 plan to get into ETFs.

Financial adviser Helen Baker, says, "Many people who want to invest may only start with a small amount. ETFs allow them to diversify away from an individual share, and into a range of companies with what seems to be low cost."

Tieu agrees that ETFs can be "an excellent entry point for those just starting their investment journey." But it's not just millennials who will underpin demand for ETFs.

"We also expect financial advisers and self-managed super funds (SMSFs) to drive future growth," says Tieu. "ETFs have always been popular with advisers, and there's an increasing number who are choosing ETFs for their client portfolios because of their low fees and exposure to different asset classes and markets."

As evidence of this trend, BetaShares found 58% of advisers surveyed advised on ETFs in 2019, double the figure of a decade ago.

International ETFs gather interest

As vaccination rates rise across the globe and economies reopen, Australians are looking for ways to capitalise on international growth opportunities. ETFs can offer an affordable and hassle-free pathway.

According to Vanguard, global equity ETFs were the asset class of choice for Australian investors in the first half of 2021, attracting inflows worth $4.9 billion in the first six months of the year. By comparison, domestic share-based ETFs drew a total of A$1.5 billion over the same period - 69% less than global equities.

As confirmation of investor interest in overseas markets, of the 21 new exchange traded products that came onto the ASX in the 2020/21 financial year, 17 involved global equities.

Will global equities be part of a longer term movement? Tieu explains, "We expect this trend to continue in the near future, particularly as global economic recovery continues."

The rise of themed ETFs

In the financial world there is no shortage of market indices, and this is supporting the rise of so-called 'themed' or specialised ETFs. These allow investors to invest in global mega trends, anything from sustainability to robotics.

As a guide, in 2020 Van Eck launched its Video Gaming and Esports ETF, which give investors exposure to some of the world's largest companies involved in video game development by tracking the MVIS Global Video Gaming and eSports Index.

ETF Securities has several themed funds including the Battery Tech and Lithium ETF, which tracks the energy storage and production mega trend, as well as the ROBO Global Robotics and Automation ETF, which lets investors tap into the robotics and artificial intelligence revolution.

What's interesting about these themed ETFs is that they track niche markets. That's quite a departure from the broad diversification on which ETFs have built their appeal.

Recent research from the Swiss Finance Institute found themed ETFs don't always create as much value for investors as broad-based ETFs.

That's because these specialised ETFs may be launched just after the peak of excitement around popular investment themes, by which time the underlying stocks may be overvalued. Time will tell if themed ETFs continue to be part of a longer term trend.

Active rather than managed ETFs

When ETFs first launched in Australia back in 2001, the market was dominated by passively managed index funds. Today, a growing number of ETFs are actively managed. In the first half of 2021 alone, seven of the 15 newly listed ETFs were actively managed.

Vanguard's Minh Tieu, explains this trend saying, "An increasing number of active managers have seen how popular ETFs have become, and are now embracing the structure as a way to provide their services more accessibly."

He adds, "Investors are also embracing the opportunity to access actively management funds without the high fees and investment minimums usually associated with active management."

Nonetheless, Tieu believes index ETFs will continue to be popular as "they will still likely be lower in cost than actively managed ETFs".

Importantly, he points out the choice between actively managed and index ETFs is not mutually exclusive, adding, "Vanguard has long recommended a core-satellite investment approach, whereby investors use index funds as the core of their portfolio, and actively managed funds to complement them."

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