SMSFundamentals: ETFs Killing It In Tough Times

This story features MAGELLAN FINANCIAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MFG

FNArena has been notified the half-yearly industry assessment by BetaShares contained an incorrect market share percentage, which made it into our story, originally published on 21 July 2023. This percentage has now been corrected, with BetaShares having updated their report.

ETF markets hit new records globally and domestically in the June half, as investors, pressured by rising interest rates, flocked to low fees, hedged exposures, rate exposures and outperforming equity ETFs.

-Global and Australian ETFs Post Strong Growth in June half
-Shift from Unlisted Funds continues
-Rate-linked ETFs steal the flows show
-Crypto and AI ETFs top performance charts
-Property ETFs struggle as rates rise
-Vanilla equities ETFs the flavour of the day

By Sarah Mills

The exchange-traded fund (ETF) industry defied global market trends in FY23, after registering strong momentum in the June half in both Australia and overseas.

Low fees, hedged exposures and outperforming funds proved an irresistible combination in a period marked by rising interest rates and market volatility.

Independent ETF research consultancy ETFGI says Global ETF assets hit a record US$10.51trn as at June 30, rising 13.5% year on year from $9.26bn.

ETFGI’s June 2023 global ETFs and ETPs (exchange-traded products) industry landscape insight reports observed strong momentum heading into the December half.

In June, the industry experienced US$103.96bn in net inflows, taking June half flows to US$376.19bn, the third highest inflows on record.

The previous highest June-half flows were recorded in FY21 (US$658bn) and FY12 (US$462.53bn).

Australian ETFs Also On A Roll

This strength was echoed in Australia, where ETF manager BetaShares reports the ETF industry broke the $150bn funds-under-management (FUM) barrier in the month of June, 2023.

In the June half, Australian ETFs recorded $4.8bn in net inflows, the industry appearing to benefit from market turmoil.

FUM rose 12.2% to $16.3bn and BetaShares believes Australian ETF FUM could break $160bn by year-end, despite sluggish markets.

The ETF manager observes the industry has posted a compound annual growth rate of 43% since its inception in November 2001.

ETF trading values were down -13% on the previous June half but remained overall on a growing trajectory, said BetaShares.

BetaShares CEO Alex Vyokur says the trend evidences a growing desire by investors to improve diversification and cut portfolio costs, and shows no sign of slowing.

BetaShares’ analysis, based on recent ASX and CBOE data, reveals BetaShares recorded the largest level of net inflows in the June half, logging $1.8bn in net inflows, followed by Vanguard at $1.5bn and iShares at $1.1bn.

Collectively, these three constituted 92% of industry flows in the half. More than 40 ETF issuers operate in Australia. 

Shift from Unlisted To ETFs Continues

So, where is all the money coming from?

At least some of it is coming at the expense of unlisted funds, suggests BetaShares.

Morningstar data reveal that unlisted funds, in comparison, have logged net outflows of roughly -$23.4bn between January and May.

The active ETF category posted cumulative net outflows due mainly to big flows out of Magellan Financial Group’s ((MFG)) active ETFs.

Stockspot observes that Magellan held three out of the five ETFs with the most significant asset under management declines.

International Equities Also Give Up Flows

Despite recording small outflows for the first time in BetaShares’ report’s history, international equities still constituted nearly half ($74.6bn) of all Australia ETF assets, followed by Australian equities ($39bn) and fixed income ($17.9bn).

The ETF manager puts the outflows down to concerns of a US recession and rising interest rates.

One ETF to buck the flow was the VanEck MSCI International Quality ETF ((QUAL)), which added $1.2bn in assets over FY23, according to Stockpot, thanks to strong net flows and the contribution of tech shares with solid balance sheets.

Unhedged gold ETFs also recorded small outflows.

Rate-linked ETFs Crowned The Most Popular This Year 

BetaShares observes the most popular EFT category in the June half was fixed income, the asset class enjoying $2.5bn in net inflows. 

This was followed by Australian equities and Cash ETFs, which added $1.6bn and $688m respectively.

Rising interest rates were behind the rush to money-market ETFs in FY23, observes online investment adviser Stockspot, bond ETFs attracting the highest inflows of $5bn, outpacing Australian and global shares for the first time in Australia’s history.

Having posted their worst performance in decades in 2022 in response to rising rates, bond ETFs returned to favour on expectations of softening inflation and stabilising of rates, says the adviser.

“There are currently $18.2bn tracking bond ETFS in Australia, growing at a  rate of 42% per years, over the past five years,” observes Stockspot. “Bond ETFs now make up 12% of the $150bn Australian ETF markets.”

Stockspot observes returns on cash ETFs were attractive relative to bank deposits and reports the Betashares Australian High Interest Cash ETF ((AAA)) registered year-on-year asset growth of $1.4bn, the second-highest increase posted by ETFs that year.

IAF Named As Stockspot’s Favourite Bond ETF

Stockspot nominates Australia’s largest Australian bond index ETF, Blackrock’s iShares Core Composite Bond ETF ((IAF)), as its preferred sector pick, appreciating the mostly AAA-rating of its 500 Australian government and corporate bonds.

IAF hold $1.9bn in assets, has gained $176m in net inflows in FY2023 and is the lowest cost bond ETF in the country with the tightest spreads, observes Stockspot.

The ETF is trading on a distribution yield of 4.6% a year. This compares to the average since 2012 of 2.6% (a period of falling interest rates), explaining the popularity of bond ETFs in 2023.

Growth and Crypto Star Performers

BetaShares also reports an increase in performance in growth ETFs.

Sluggish in the beginning of the year, growth came from behind to dominate the performance table for the June half.

BetaShares Crypto Innovators ETF proved the top performer, delivering 121%, followed by other crypto and technology exposures.

Stockspot confirms the trend after rounding up the best and worst-performing ETFs for FY23.

Cryptocurrency ETFs were the best performers, and among these, Global X 21Shares Ethereum ETF ((EETH) and the Global X 21Shares bitcoin ETF ((EBTC)) topped the charts, posting gains of 75.6% and 58.5% respectively, says Stockspot.

That’s after losing -50% immediately on listing at the end of FY22.

Artificial Intelligence ETFs Well Bid

Stockspot confirms technology companies also performed well, aided by the trending of artificial intelligence.

Semiconductors were also well bid, hence the Global X Semiconductor ETF ((SEMI)), which invests in semiconductor companies that make computer chips to power AI, jumped 51.8%.

BetaShares Global Robotics and Artificial Intelligence ETF ((RBTZ)), which invests in similar businesses, rose 45.5%.

Chinese Equities ETFs Worst Performers

Chinese ETF underperformance is not surprising given China’s sluggishness in the past year, retreating between -12.9% and -18.5%.

Certain commodities also felt the crunch, Global X Physical Palladium ((ETPMPD)) and the BetaShares Crude Oil Index ETF-Currency Hedged (Synthetic) ((OOO)) tumbling -33.5% and -32.5%.

Both funds had performed well in FY2022, OOO the top performer for that year.

But Overall Investors Still Prefer Vanilla To Exotic

Year on year, the top and bottom performers also tended to be the most volatile, so it is not surprising that the bulk of investors still favour more conservative ETFs.

Stockspot reports the ETFs with the largest yearly assets under management growth were low-cost vanilla ETFs linked to broad-based share markets.

The Vanguard Australian Shares Index ETF ((VAS)), Australia’s largest ETF, attracted $1.9bn assets in FY23, of which $1.1bn represented net inflows.

It was also one of the top performers, proving that risk is not always correlated with high returns.

VAS earned investors $1.7bn.

iShares S&P500 ETF ((IVV)), which tracks the US equities market, pocketed $1.2bn.

Magellan, as unloved as it seems to be and despite high outflows, posted strong returns in its Magellan Global Fund – Open Class Units (Managed Fund) ((MGOC)) of $1.4bn.

Worst Performing Funds

Stockspot’s research also highlighted the ETFs that posted negative dollar returns in FY23.

Property ETFs particularly struggled, says the report, in the face of higher interest rates.

The actively managed Resolution Capital Global Property Securities Fund (Managed Fund) ((RCAP)) lost -$104m.

Inverse shares (which rise when markets fall) also lost money (Stockspot advises against using inverse shares in a long-term portfolio given markets typically rise over the long term and high holding costs tend to drive strong erosion of value).

BetaShares' US Equities Strong Bear Currency Hedged (Hedge Fund) ((BBUS)), lost -$100m.

BetaShares' Australian Strong Bear (Hedge Fund) ((BBOZ)) gave up -$76.6m.

The Global X Ultra Short Nasdaq 100 Hedge Fund ((SNAS)) returned a -$53.1m.

OOO, as noted above, lost -$70m.

Source: BetaShares

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