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Why is the Aussie ETF market growing so fast?

The year 2018 reminded us emphatically that some of the more exciting investment products available did a lot worse than some of the conventional ones, to the extent that cash outperformed most other asset classes in Australia.

Shares? Real Estate? The list of underperformers is a long one, for a raft of reasons that all seemed to coalesce in the last quarter of the calendar year.

Our sharemarket fell partly because of the volatility in the US market and partly because the most heavily weighted sector in our market, financial stocks, sailed into a six month long squall of bad publicity thanks to the Banking Royal Commission.

And real estate values in our two biggest markets, Sydney and Melbourne, adjusted themselves downwards by around 10 per cent from clearly overheated levels, helped along by close monitoring of bank lending by regulator APRA and the Reserve Bank.

 So, what does 2019 hold? Whilst we don’t have a crystal ball, it is always best to have a diversified portfolio to weather volatility and take advantage of growth.

2019 may be a year, where markets rebound from their negativity during 2018 and equities may again prove to be a shining light. Feel free to read our 2018 year in review for more information on what occurred in global investment markets.

However 2019 also may be a year when a defensive approach to investing might pay off more than in other periods.

One growing area is the Exchange Traded Funds sector, which now holds around $36 billion of mainly retail investors’ money out of a total market capitalisation in the ASX of more than $1.5 trillion. In other words, ETFs make up just under 2.5 per cent of our market despite numbering more than 150.

Most ETFs represent a diversified holding in a specific basket of stocks, say the ASX200, which is a good way to start investing but whose values will almost inevitably rise and fall in line with the general sharemarket.

That has opened up the field to more specialised ETFs such as fixed interest ETFs, specifically designed to be owned by retail investors. Until recently it was very difficult for retail investors to get access to fixed interest, a catch-all name for the bond market.

While government bond yields are currently down there with bank term deposits at the not very exciting two per cent per annum level, the bond market also takes in higher yielding assets that regularly return more than 5 per cent a year at a risk level that’s lower than that of blue chip shares.

Fixed interest is not entirely riskless: companies can still fail, or just fail to pay distributions, but in the case of a company collapsing, holders of fixed interest securities still rank ahead of ordinary shareholders in terms of being compensated.

eInvest is soon launching a suite of cash and Fixed Interest active ETF portfolios (February 2019). To receive a fact sheet and be the first to receive a PDS for these funds, please register your interest here.

This article is the opinion of the author, Andrew Main, and is not financial advice. Speak to your financial adviser or broker for more information. I’m sure they’ll be happy to help you. Don’t forget to always read the Product Disclosure Statement (PDS) for the active ETF you are invested in. To find out more and download the PDS, please visit einvest.com.au