Unpopular ETFs surge ahead

2017 Australian ETF Report
 
It’s that time of year when Stockspot releases its annual Australian Exchange Traded Funds (ETF) Report which analyses and compares over 150 ASX-listed ETFs.

The report is now in its third year and each time it grows as more ETFs are launched on the ASX. We think that’s a great thing as it means more people are embracing index investing for their portfolios and superannuation.

The ETFs we’ve carefully chosen for the Stockspot portfolios and themes continue to do well. We recently celebrated our third anniversary and you can read how our portfolios have performed here.

If you’re interested in reading about the different ETFs available we recommend you download the full report. Here are some of the main findings from this year’s report.

Australian ETF market grows

The Australian ETF market grew 28% over the year to $27.2 billion in funds under management (FUM) more than doubling in size since 2014 as ETFs have become more popular with individual investors, independent financial advisers and self managed super fund (SMSF) trustees. The largest inflows coming into global shares ETFs ($2B) and Australian share ETFs ($1.5B).

We analysed and rated the ASX-listed ETFs based on fees, performance, size and activity. This year 36 earned the highest rating of 4 or 5 ‘spots’ and 37 received the lowest rating of 0 or 1 ‘spot’

Despite only 36 ETFs earning our highest rating of 5 spots, the reality is that many more of them are likely to outperform the average actively managed funds across the cycle due to their lower cost.

Australian ETF groupings

Over 5 years the average broad market global share ETF returned 13% compared to a more modest 8% per year return on Australian share ETFs. The underperformance of the local market prompting many Australian investors to add global ETFs to their portfolios.

Worldwide volatility around unexpected political events in 2016 including Brexit and the US presidential election saw the continued trend of investors diversifying into fixed income ETFs. Despite this, most bond ETFs had a lacklustre year returning 1%-3%, only marginally outperforming cash.

ETFs in some of the most unpopular sectors, resources and Asian shares, saw some strong gains with the resource sector rallying 40% after 5 years of poor performance. Asian shares rebounded 24% outpacing returns in on-trend markets and sectors that had more modest gains like US shares (+17%) and Australian property (+7%). Reinforcing that unpopular investments can perform better than popular assets due to mean reversion.

ETF growth by sector
Source: ASX

ETF issuers

Vanguard had another standout year with a 42% increase in FUM and a dollar growth almost double the next largest issuer at $2 billion to now account for over a quarter of the Australian ETF market. Vanguard also retained the lowest average fees at 0.24%.

BetaShares had another year of high growth and again added the second largest amount in new FUM with $1.1 billion. BetaShares have successfully focused on niche offerings, which typically have a structured element, such as gearing, and have launched the highest number of new ETFs this year. The majority of new funds again flowed into their cash ETF (AAA), US dollar ETF (USD) and their dividend focused managed fund (HVST).

ETF growth by issuer
Source: ASX

Smart-beta funds also gained momentum this year. However we believe it’s important investors understand that smart beta ETFs take active bets on certain market factors beating others. Smart beta funds that promote strong back-tested performance typically select a time period that best supports their product, and over the long-run higher fees may erode any extra returns.

The less you pay in fees, the more is leftover for you. The good news is that ETFs are estimated to save investors $20 billion in fees each year.
 

For the full report: www.stockspot.com.au/etf

 

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Chris Brycki

Stockspot Founder and CEO