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SMSFundamentals: ETF Investment Drags On SMAs

SMSFundamentals | Dec 15 2022

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ETF Investment Drags On SMAs

Increasing investment in ETFs comes at the expense of managed funds, as investors seek out safer options in a volatile market.

By Danielle Austin

Investors are increasingly channelling funds into exchange traded funds – ETFs – over managed funds, or separately managed accounts (SMA), underpinning ongoing growth in the domestic ETF market and contributing to record outflows in managed funds. 

New research from BetaShares has found the domestic ETF market to have performed resiliently through a difficult year for financial markets, reporting $12bn in inflows in the year to October while unlisted managed funds reported a record -$25bn in outflows. 

According to the fund manager, Australian investors are proving to be increasingly drawn to the portfolio diversification and convenience offered by ETFs, particularly given the ongoing volatility of markets, and allocating funds accordingly. This ongoing increased allocation towards ETFs comes at the expense of direct shares and managed funds. 

BetaShares’ data revealed 1.9m Australian investors already include ETFs in their portfolios, with 1.4m of these investors expected to increase their allocation to ETFs in the coming year. Further, 230,000 investors are expected to make a first investment in ETFs in 2023, as diversification and the overall cost of portfolios remains front of mind for many investors. 

Global ETF markets demonstrate similarly strong inflows

Substantial inflows into ETFs over the last year are not unique to the Australian market. Globally, ETFs have reported inflows of US$786.92bn for the year to November, reports ETFGI, while assets invested in the industry equated to US$9.48 trillion. 

S&P Global believes concerns around an impending recession are driving investor behaviour, with risk appetite sinking to its lowest level since September and investors increasingly pessimistic about near-term returns. S&P Global’s Risk Appetite Index tumbled to -13% in December, from a neutral 0% in November. 

According to S&P Global, real estate remains the least preferred sector for investors amid ongoing interest rate hikes, while healthcare stocks have displaced energy as the most preferred sector. The market largely remains bearish on technology, communications, industrial and basic material exposures. 

BofA Securities’ December Fund Manager Survey echoed similar sentiments. The survey reiterated that investors remain bearish on growth and the US dollar.

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