SMSFundamentals | Feb 12 2020
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Exchange traded funds are becoming more popular as investors seek alternatives in a low-yield world.
-Convenient way for Australian investors to access global strategies
-The range of ETFs continues to grow and broaden
-Active ETFs an emerging area
By Eva Brocklehurst
As ultra-low interest rates prevail, investors are increasingly seeking alternative sources of yield and exchange traded funds (ETFs) are becoming more popular, particularly those exposed to the US dollar which has been stronger than the currencies in many developed markets.
Technology is enabling ETFs to become more sophisticated and meet investor demands. ETF Securities Australia believes ETFs provide one of the most transparent, convenient and cost-effective forms of investing, both locally and globally. The value of Australian ETFs is currently around $60.24bn.
ETFs come in many shapes and sizes, from global and local strategies in equities to fixed income to commodities and foreign exchange. There were 210 ETFs available in Australia at the end of December 2019.
One of the many advantages, given the Australian Securities Exchange (ASX) is less than 3% of global markets, is the ability to diversify a portfolio and broaden geographical reach.
Moreover, ETFs provide simple and convenient access to offshore companies without foreign market tax reporting and withholding tax complications, head of ETF Securities Australia, Kris Walesby, points out.
ETF Securities Australia believes investors need to focus more on investing internationally and disperse the local risks such as a slowing in resources and residential property and a weaker Australian dollar.
The infrastructure sector, which includes many essential services such as utilities, telecoms, industrials and transport, tends to be less vulnerable to market cycles and movements. Hence those concerned about volatility risks may consider infrastructure ETFs.
Moreover, those that wish to focus on sectors not widely available in the Australian market, such as technology, can do so via ETFs. Environmental investing is also developing quickly, the analysts point out, and there is likely to be continued growth of ETFs in this area.
ETFs are, therefore, a way for investors to target specific market opinions, themes, ethical views and/or niche areas of growth. There is also an increase in ETFs using sophisticated rules or algorithms while still remaining passive. For example, rather than weighting the investment based on company size it might be weighted based on how sensitive the business is to market movements.
Active ETFs are an emerging area and typically track the strategies of active investment managers. In December, ASIC lifted the suspension of new active ETFs and released new admission guidelines.
ETF Securities Australia believes these may appeal to self-directed investors looking for active and liquid solutions with greater ease of use compared with many other managed funds.
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