The fact that the Exchange Traded Funds (ETF) market has growth is common knowledge in investment circles. But where has that growth been experienced? What are the recent ETF trends?
At eInvest we specialise in Active ETFs so we know this area pretty well. According to the ASX, ETFs have exploded in the last 12 months (to July 2020), with average transaction volume up 180% and average transaction value up 111%.
This is in line with research expectations from the start of the year which predicted 135k new Australians would start investing in ETFs in 2020.
Currently, the exchange traded product market, which includes ETFs, Active ETFs, mFunds and LICs has a market capitalisation of $66bn. But what is interesting is that growth has been uneven. Most of that growth has been experienced by ETFs and Active ETFs with some LICs experiencing net outflows. This is due to changes to investor preferences, as LICs can trade at a discount or premium to NAV while Active ETFs are open ended and can have their unit price hug the NAV as they have a market maker facilitating liquidity.
Growth in the ETF space has also included in the expansion of the market players with Chi-X joining the exchange market late last year launching Active Fixed income ETFs, including our very own suite of the codes ECAS, ECOR and EMAX. We really like seeing this increasing innovation in fixed income investing as it allows our investment managers a full toolkit to invest with without any restrictions.
Another interesting expansion of market players is new entrants on the market making side. Market making is an important component of Active ETFs as the market maker sits between the buyer or seller and the ETF provider, facilitating liquidity. As more market makers have joined, we have seen material reductions in spreads. We think this trend will continue. And as a side note, a quick myth busting here when it comes to liquidity and ETFs. Most people look at the liquidity of the ETF itself but in Active ETFs the market maker facilitates the liquidity, meaning investors should probably focus on the underlying liquidity of the instruments held in the ETF.
What have been the trends in ETFs since COVID happened?
COVID has impacted everything, including the ETF trends and market. The data suggests that during COVID certain ETFs have been more popular for investors than others:
- Commodity ETFs have grown a whopping 179% in the last year – driven by increased valuation and flow into gold ETFs
- Technology ETFs – Nasdaq has performed exceptionally well as it is overweight the Tesla’s and Amazons of the world. While these stories are sexy and grab headlines, there are really valid questions about valuations.
- Sustainability is increasingly in the forefront of investors’ minds and here active management really makes sense as sustainable investing really relies on investment managers actively managing their positions and engaging with companies. We listed the Future Impact Small Caps Fund (Managed Fund) (ASX: IMPQ) in May last year and it has outperformed the small ordinaries benchmark by 8.3% since inception, net fees, as at 31 August 2020.
- Hedged ETFs – During July alone 5 new ETFs were launched and all of them were hedged. We think this reflects growing uncertainty around currency valuations.
- “Robinhood traders” – These are the first-time traders influenced by social media killing time betting the stock market while in lockdown. This short-term trading mentality has had flows flocking to a few “buzzy” names but we think there are risks with this behaviour and will be watching closely how this impacts the markets more broadly.
So where are ETF trends likely heading in the future?
There are a couple of ETF trends we see accelerating in the future.
- Fixed Income – We know term deposit rates are increasingly unattractive and we expect investors will look elsewhere for income. Just this month, reports suggest that the Future Fund is taking profits off the table and is now holding 17% in cash. A very large allocation. Our fixed income ETFs, ECOR and EMAX proved mostly resilient during the COVID shock and continued distributing monthly. Fixed income globally is a market three times larger than the share market but it doesn’t get nearly the amount of airtime. We think that investing in fixed income indexes themselves is not so attractive, due to flaws in those indexes, but now that Active ETFs are around, investors can get help navigating this space which has previously been accessed only by institutional and HNW investors. We think there is a large number of investors that want liquidity and yield and when compared with equity markets, fixed income markets do not receive the same amount of attention from retail investors, making this a growth area.
- And lastly, we expect to see more activity in Active ETFs. We believe that coming out of a downturn is when active management really pays. In a bull market, when everything is going well, investors are happy to invest in an index for market return. But should the “market return” no longer be attractive or investors may become more outcome focused as opposed to just riding the index.
Disclaimer: Please note that these are the views of the writer, Jodi Pettersen, Investor Relations at eInvest and is not financial advice. To find out how to invest in our active ETFs, visit here. The product disclosure statement and more can be found at www.einvest.com.au. If you’d like to keep learning further, please feel free to follow any of our socials listed below.