ETFs trump managed funds in 2016

ETF Update - Quarter 4, 2016
 
Our quarterly update on the Australian ETF market as at December 2016 and performance of the Stockspot portfolios.

ETF market highlights

  • Quarterly FUM growth was +7%, from $23,971 million at the end of September to $25,291 million at the end of December 2016.
  • Total ETF FUM has now reached the $25 billion milstone, including adding almost $4.3 billion in 2016.
  • The top 5 ETFs for the past 12 months have all been resources focused, reversing a 5 year period of underperformance since 2010.
  • After some US election volatility, Australian and global share ETFs showed steady inflows during November and December.
  • Overall we have seen another positive quarter for ETF FUM growth and returns, continuing the steady drive forward of the Australian ETF market.
  • Globally investors have put more money into ETFs than actively managed funds in 2016 for the 10th straight year.


Flows into ETFs from active managed funds
Source: Investment Company Institute, Simfund, Credit Suisse

Stockspot performance highlights

  • Over the calendar year the 5 Stockspot model portfolios delivered returns of between 6.0% and 9.0% after fees. All of the portfolios generated a combination of capital return and dividend income.
  • Stockspot’s careful ETF selection and broad asset diversification helped to smooth out short-term market movements and deliver another year of high quality returns.
  • All of the Stockspot strategies comfortably withstood the Brexit and US election market jitters.

Sectors

FUM growth was positive for all sectors apart from commodities and currency ETFs. Global share ETFs had the greatest inflows due to rebound in the US sharemarket, while Australian factor based ETF also led to strong inflows.

Sector Total FUM Sep 2016 ($M) Total FUM Dec 2016 ($M) Quarterly change in FUM (%)
Global shares (broad market) 8,658 9,401 +9%
Australian shares (broad market) 6,718 7,095 +6%
Fixed Income & cash 2,442 2,568 +6%
Australian shares (strategies) 2,413 2,681 +10%
Australian shares (sectors) 1,546 1,643 +6%
Global shares (sectors) 840 900 +6%
Commodity 771 722 -6%
Currency 585 581 0%
Total 23,971 25,591 +7%

Source: ASX

The FUM fall from the commodity sector is largely due to a slowing in physical gold inflows after a strong first half of the year. In the currency sector, the decline was largely accounted for by outflows from BetaShares USD ETF.

Quarterly ETF FUM since Oct 2014
Source: ASX

Issuers

The ETF issuers largely showed increasing FUM from inflows and the share market rally. Total growth was 7% this quarter, which was the same rate as last quarter. Of the majors, Vanguard and BetaShares continue to gain ground at the expense of SPDR and to a lesser extent iShares who have seen slower growth.

Small issuers, such as Magellan, VanEck Vectors and ANZ continued their high growth rates, whilst K2 continues to lose ground. The negative results for ETF Securities and Aurora, along with a very small increase for Perth Mint, reveals the slowdown in gold inflows over the past quarter. UBS’ outflows were largely from its IQ Morningstar Australia Quality ETF, which has had a dismal year after changing its reference index following significant underperformance.

Issuer Total FUM
Sep 2016 ($M)
Total FUM
Dec 2016 ($M)
Quarterly change in FUM
iShares 7,351 7,746 +5%
Vanguard 5,982 6,632 +11%
SPDR 4,887 4,964 +2%
BetaShares 2,908 3,269 +12%
Russell 552 586 +6%
ETF Securities 541 497 -8%
Magellan 715 806 +13%
VanEck Vectors 523 610 +17%
UBS 262 217 -17%
Perth Mint 109 110 +1%
K2 60 56 -6%
ANZ 70 87 +24%
Aurora 13 11 -17%
Total 23,971 25,591 +7%

FUM Growth by Issuer
Source: ASX

Best and worst performers

The Gold Miners ETF retained the top position for 12 month performance from last quarter. The recent resurgence in commodity prices has also helped BetaShares and SPDR resources ETFs joining the VanEck Vectors resources ETF in the top 5 this quarter. The top 5 performing ETFs for the calendar year were all commodity sector related ETFs – demonstrating the impact of mean reversion after a 5-year period of lacklustre returns.

The 2 worst performers held their positions from last quarter, showing that the positive performances of the US and Australian share markets continued to negate the benefits of bear (inverse return) funds. BetaShares’ third bear fund (BEAR) also entered this category this quarter. As we have said in the past, we don’t believe these ‘bear’ products are sensible long term investments and are not ETFs we consider in our portfolios. The uncertainty following Brexit meant that the Pound ETF has again had a negative quarter.

ASX code ETF name Total FUM
Dec 2016 ($M)
1-year total return
Positive performance
GDX VanEck Vectors Gold Miners ETF 53 62%
MVR VanEck Vectors Australian Resources ETF 10 42%
QRE BetaShares S&P/ASX 200 Resources Sector ETF 14 42%
OZR SPDR S&P/ASX 200 Resource Fund 28 41%
ETPMPD ETFS Physical Palladium 2 30%
Negative performance
BBUS BetaShares US Equities Strong Bear Currency Hedged (Hedge Fund) 47 -28%
BBOZ BetaShares Australian Strong Bear (Hedge Fund) 84 -26%
CETF VanEck Vectors China AMC A-Share ETF 2 -18%
POU BetaShares British Pound ETF 36 -17%
BEAR BetaShares Australian Equities Bear (Hedge Fund) 56 -11%

Source: ASX

Increases and decreases in FUM

The top 5 ETFs by FUM growth were all amongst the largest ETFs by FUM including 4 that are part of the Stockspot model portfolios or themes. We continue to support the large, liquid ETFs ahead of their smaller less liquid counterparts.

The UBS ETF lost majority of its FUM in the past month. It is one of the 2 that abandoned their research-based indices and switched over to Morningstar indices.

Gold’s popularity has turned around and investors have shifted back to focusing on equities. Similarly, the US Dollar ETF’s decrease in FUM is contrasted against the inflows into the US share market. Investors have moved their funds from SLF property fund to its competitor VAP, which has a fee that is 0.15% lower. The bear hedge fund BBOZ’s negative performance last quarter shows through the decline in FUM as a lagging indicator of performance.

ETF name code Total FUM Sep 16 ($M) Total FUM Dec 16 ($M) Quarterly change in FUM ($M)
Increases in FUM
iShares S&P 500 ETF (IVV) 1,938 2,106 168
Vanguard Australian Shares Index ETF (VAS) 1,709 1,855 145
BetaShares Australian High Interest Cash ETF (AAA) 937 1,049 112
Vanguard Australian Property Securities Index ETF (VAP) 714 812 97
BetaShares FTSE RAFI Australia 200 ETF (QOZ) 88 181 93
Decreases in FUM
UBS IQ Morningstar Australia Quality ETF (ETF) 64 10 -54
ETFS Physical Gold (GOLD) 477 436 -40.7
SPDR S&P/ASX 200 Listed Property Fund (SLF) 632 600 -32
BetaShares U.S Dollar ETF (USD) 551 529 -22
BetaShares Australian Strong Bear (Hedge Fund) (BBOZ) 104 84 -19.7

Source: ASX

New ETFs

The 5 new ETFs launched this quarter were ‘smart beta’ funds focused on multiple market factors, volatility and ex-20 shares.

New ETFs in the December quarter 2016
WDMF iShares Edge MSCI World Multifactor ETF
AUMF iShares Edge MSCI Australia Multifactor ETF
MVOL iShares Edge MSCI Australia Minimum Volatility ETF
WVOL iShares Edge MSCI World Minimum Volatility ETF
EX20 BetaShares Australian Ex-20 Portfolio Diversifier ETF

Fee changes

Several ETFs changed their fees in the past quarter. Three of them were from iShares and track the various size based market segments of the S&P index. Two gold ETFs changed fees marginally, QAU decreased fees by 0.1% to 0.39% and GOLD increased its fee by 0.01% to 0.4%.

ETF fee changes in the December quarter 2016
QAU BetaShares Gold Bullion ETF (AU$ Hedged) -0.10%
IJH iShares S&P Midcap ETF -0.05%
IJR iShares S&P Small-Cap ETF -0.05%
IVV iShares S&P 500 ETF -0.03%
GOLD ETFS Physical Gold +0.01%

Stockspot performance update

By having the right mix of assets and selecting ETFs that we believe are the best available based on our strict criteria and research, the Stockspot portfolios have generated returns of 6.6 to 9.6% p.a. since launch with realised risk (volatility) of 5.3% to 9.4% p.a. That compares to the Australian share market which has delivered an annual return of 6.2% with much higher risk of 13.7% over the same period.

Stockspot has also generated higher quality returns than many well known active funds that have a similar asset mix including the Colonial First State FirstChoice Growth Fund (Sharpe 0.53) and ANZ OA PS-OP Active Growth Fund (Sharpe 0.30).^

As discussed in our annual Fat Cat Funds Report, the high fees charged by many active funds pose a significant drag on each years returns and make it difficult for them to deliver better quality returns than their passive peers.

Glossary

S&P/ASX200: An index of Australia’s largest 200 companies by market capitalisation.

Bear hedge fund: A hedge fund designed to provide higher returns as the market falls, it may track the inverse of an index as an ETF.

Exchange trade fund (ETF): An open-ended investment fund that is traded on a stock-exchange. ETFs provide direct exposure to a wide range of investments in their asset class such as Australian shares, international shares, bonds or metals.

Broad market ETFs: Track the widest range of securities in the market that has been selected.

Sector ETFs: Track sectors within a market. (e.g. property, financials or resources)

Strategy ETFs: Only include some securities in the market. Securities are selected according to certain rule-based factors (e.g. dividend yield or research rating)

Exchange Traded Managed Fund (ETMF): These securities trade on the ASX like an ETF, but the funds are actively managed by the issuer instead of passively tracking a rules-based index.
 

^ 3 year Sharpe ratios from Morningstar as at 18/1/2017
 

Grow your savings the smart way

Stockspot is Australia’s largest digital investment adviser. We can help you build and manage a personalised portfolio tailored to your financial situation and your goals. It’s professional investment advice without the high costs of seeing a human adviser.

See what we recommend for you

 

Related posts

 

Chris Brycki

Stockspot Founder and CEO