The rise and rise of ETFs: Why advisers should consider them
When a product, be it consumer or financial, reaches a growth rate of 18 per cent per year, it’s headed for mainstream status, or is already there.
Such is the case with ETFs, the shorthand descriptor for exchange-traded funds.
For an investment vehicle only invented in the 1990s, one that commenced life as an outgrowth of the index investing phenomenon, the growth and acceptance by the investment public of ETFs across advanced economies are truly remarkable.
Unlike some financial trends, which can hold problems down the road, the inexorable growth of ETFs would seem to be a rational evolution of investment markets to provide better, simpler, more convenient and low-cost investment opportunities with little downside.
ETFs have all the advantages of a mutual or managed fund but without the tedious application process, which can run to 20 pages, and without the need to have your tax file number handy, provided you have a broking account or relationship. You simply buy and sell as you would a listed share and this has tremendous appeal to self-directed investors.
ETFs are now so well understood and so well entrenched in the market that they now figure prominently on the radar of both self-directed investors and financial advisers. Indeed, ETF sales figures and anecdotal evidence point to an increasing trend of advisers including ETFs in the mix of investment products recommended to clients. The growing range and sophistication of available ETFs combined with their transparency and cost efficiency benefits/attributes are no doubt factors in this growth.
ETFs are now traded on virtually every major asset class, commodity and currency in the world. For example, ETFS Physical Gold (GOLD) provides investors with convenient and cost-effective access to gold via one call to their broker or one click on their device.
ETFs have superior trading flexibility to managed funds which typically have just one price per day — the price is quoted at the end of the day after market close, whereas ETFs are traded, and prices set, while ever the securities exchange, i.e. the ASX, is open.
Part of the appeal for all types of investors is the critical fact that ETFs’ prices actually track and reflect the underlying net asset value, thus limiting the risk of needing to sell for less than asset worth.
ETFs publish their full portfolio holdings daily, allowing the true NAV to be calculated. During ASX trading hours, an “indicative NAV” or “iNAV” is updated every 30 seconds.
Compare that to a listed investment company (LIC) or a listed investment trust (LIT).
ASX figures show the vast majority of LICs and LITs trade at varying discounts to NAV and very often very large discounts at that. Sure, there are a few standouts that trade above NAV; however, they are a relatively small minority to the total pool. If you randomly purchased an LIC at its IPO, there is an 80 per cent chance that it is now trading below its asset value.
A recent investment newsletter article titled “No answer to chronic LIC price discounts” is one of many reporting of the travails of promoters, managers and investors in LICs and LITs in seeking to address the undervaluation syndrome.
ETFs typically have significantly lower costs than mutual funds, particularly actively managed funds. Less staff are required to run research and trading, trading costs themselves are lower and some client service-related expenses are passed on to the brokerage firms that hold the exchange-traded securities in customer accounts.
The revolution in the way wealth advisers charge has also contributed to the increasing awareness of the simplicity, transparency and cost-effectiveness of ETFs.
In the “old days”, many advisers would include an upfront commission when placing client funds in a managed fund.
These days with the new fee-for-service paradigm in “adviser land”, there is no additional financial incentive for advisers to direct clients towards managed funds.
Melbourne-based advisory shop Wattle Partners, which has only ever operated on a fee-for-service basis, even offers a complete model portfolio service comprised exclusively of ETFs. Targeted at cost-conscious clients with portfolios under $2 million, and known as “Wattle Lite”, a typical portfolio is globally diversified, includes alternative assets and can be tailored to individual situations.
The advent of ETFs in Australia has also been a positive force for the diversification and de-risking of investors’ portfolios.
One of the elephants in the room in any discussion on the Australian retirement savings is the home country bias.
It’s generally agreed Australia has an extreme case of this affliction — we have just 3 per cent of the world’s listed equities, but most investors are dramatically overweight on Australian equities. Of course, the four banks, two miners and Telstra are front and centre here. Global/international ETFs provide investors with almost seamless access to international markets without the bureaucratic and tax headaches of owning international shares, and this fact has also been a significant contributor to the spectacular growth of ETFs in the Australian market.
Another key factor to the success of ETFs has been the way they have developed to provide access to investment themes and market niches. For instance, the ETFS Battery Tech & Lithium ETF (ACDC) provides investors with access to firms involved in the electric car revolution, while the ETFS ROBO Global Robotics and Automation ETF (ROBO) is focused on AI and robotics.
These are highly specialised and expertly curated investments available to the Australian mum and dad investors and SMSF trustees via a single click or single call to their broker.
ETFs have arrived and it is easy to understand why.
Kris Walesby, head of ETF Securities Australia