ETF investments are mushrooming, at all three levels of investors – institutional, advised and individuals – but how and why they are being used is changing. We appear to be entering a new phase of the development of the ETF market.
According to Jon Howie, head of BlackRock’s iShares Australia, which is the biggest player in this market, “core” ETFs are increasingly being used to replace what used to be considered “core” active managers – those with relatively low tracking errors.
And institutional investors are increasingly using ETFs, instead of derivatives, for both short-term tilts to equatise the cashflows that most big super funds enjoy, and in terms of longer-term efficient exposures in certain well-defined markets, such as global small caps.
The total market for Australian-listed ETFs has grown by 43 per cent a year for the past three years, hitting $20.65 billion at March 31 this year.
Howie said at a recent launch of a strategy the firm calls ‘iShares Core’ that: “ETFs are coming of age in Australia. What started as a tool for institutions has now been adopted by a broad spectrum of investors. We are seeing a shift in usage as passive investments increasingly move to the core of client portfolios and investors use them to build low cost and diversified solutions for the long term.”
The iShares ‘Core’ comprises three equity ETFs and two fixed income ETFs that can be combined to provide global multi asset class exposure.
They include the newly launched exposures to the MSCI World Investable Market Index, which captures large, mid and small-cap companies across 23 developed markets. With approximately 5,940 constituents, this index is comprehensive, covering approximately 99 per cent of the free float-adjusted market capitalisation in each country.
The new iShares ETFs, offer investors the option of a hedged or unhedged product: iShares Core MSCI World All Cap ETF (IWLD) and iShares Core MSCI World All Cap (AUD Hedged) ETF (IHWL). The other equity option is the iShares Core S&P / ASX 200 ETF (IOZ) which recently had its price reduced from 0.19% to 0.15%.
The iShares ‘Core’ fixed income ETFs provide Australian exposure through the iShares Core Composite Bond ETF (IAF) and global exposure to over 3,000 investment grade corporate bonds through the recently launched iShares Core Global Corporate Bond (AUD Hedged) ETF (IHCB).
Howie said that some big institutions also use ETFs for their tactical a dynamic asset allocation tilts. For instance, there had been considerable flows into emerging markets ETFs, previously out of favour, in the past two months.
BlackRock has initially targeted new investors to the ETF market with its ‘Core’ series launch, although the advised and professional market obviously also avail themselves of the individual ETFs, which are among the lowest-priced available in Australia.
The ‘Core’ is designed as building blocks for a standard core portfolio, which is increasingly the way cost-conscious investors are thinking to augment their active portfolios and direct investments.
“Most advisers are trying to simplify the investments piece,” Howie said. “Those who are trying to build scale see it as a real win.”
Evidence from the UK, which has a similar funds management market structure to Australia, is that a lot of advisers are downweighting the value of fund selection and upweighting asset allocation, coaching and higher-level advice to clients throughout a cycle. “They are seeing a big shift to ETFs,” he said.
Technological advances, such as the growth in robo-advice has also meant greater ETF usage, as many ‘free’ robo-advice platforms will recommend allocations to balanced portfolios consisting of a mix of individual ETFs.
The ETF phenomenon has become so significant in the US that BlackRock even holds a big conference each year, now, for fund managers who specialise in the use of ETFs for all sorts of strategies. It seems that there is no stopping the ETF trend.
* Greg Bright is publisher of Investor Strategy News (Australia)