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SMSFundamentals: Diversified ETFs Continue to Surge

SMSFundamentals | Sep 16 2020

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Australian exchange traded funds posted a record in August as the product of choice for investors wishing to capture exposure to a more flexible investment product.

-First proposal to convert an Australian LIC to an ETF
-International exposures dominate Australian ETF flows
-Globally, ETF investments break US$7trn in August


By Eva Brocklehurst

Australia's exchange traded fund (ETF) industry continues to grow rapidly, exceeding $70bn for the first time in August. Since the inception of ETFs in 2001, annual growth of around 45% compares with listed investment company (LIC) growth at a far less rapid 11%.

Importantly, given the banning of sales commissions for the distribution of LICs that came into effect in May 2020, BetaShares expects the trend to continue and has witnessed the first proposal to convert a closed-end LIC into an ETF.

BetaShares notes growth over August stemmed from an equal share of market movements and net new money. Industry funds under management (FUM) grew by $3.6bn, the third largest monthly increase on record.

The best performance came from US technology exposures as well as geared US equity exposures. The Australian Technology ETF was a top 5 performer and recorded a 13.2% return for the month.

Flows were robust across a number of asset categories and international exposures dominated. BetaShares notes, however, that investors continue to diversify portfolios away from equities, with around $370m into fixed income and $200m into cash and commodity ETFs, the latter being largely gold products.

Outflows were limited due to US dollar products, even as the US dollar fell in value, as investors apparently assessed that more Australian dollar strength was likely.

The number one product for flows in August was the Australian High Interest Cash ETF, which in the current circumstances provides an attractive return above the record low Reserve Bank cash rate.

Meanwhile, on a global scale, assets invested in ETFs, as noted by UK-based consultancy ETFGI, broke through US$7 trillion at the end of August. Assets invested in global ETF industries have increased by 5.1% over the month.

The consultancy notes the S&P500 produced the best August since 1986, gaining 7.2% in the month. The 24 developed markets outside of the US were all stronger as well and emerging markets gained 2.7% in August, as US dollar weakness and the response to the pandemic affected performances.

August is the fifteenth month of net inflows and equity products attracted the great majority, at US$24.92bn. Net flows for 2020 so far are significantly higher than for the equivalent period in 2019.

Breaking down the inflows, fixed income garnered US$19.99bn and active funds reported US$7.82bn in net inflows. The consultancy points out substantial inflows can be attributed to the top 20 ETFs by net new assets.

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