Fund flows into exchange-traded products remained healthy this year as investors continue to embrace these relatively cheap financial instruments for their low-cost and easy-to-trade properties. More of the same is expected for 2017.
According to BetaShares' figures, net inflows into the Australian ETF industry for the year to October 2016 reached $2.7 billion. Of this, $1.4 billion went into local equities ETFs, $1 billion went into broad global equities ETFs and $50 million when into US equities ETFs. According to its figures, one part of the market that suffered a decline was developed Asian equities, which had drawdowns of $250 million.
Alex Vynokur, managing director, BetaShares says the ETF industry has continued to grow as it becomes more mainstream and as ETFs are adopted by a broader variety of investors.
"The early adopters were self-managed super fund investors and, while this continues to be a very strong growth channel, non-SMSF individual investors are increasingly using ETFs for their portfolios," says Vynokur.
"We've also had significantly more acceptance of ETFs by financial advisers and stockbrokers who are increasingly using ETFs in client portfolios. As ETFs are investment tools, we generally find that the money flows by category reflect broader themes in the investment industry," he says.
Kris Walesby, head of ANZ ETFS says Australia's ETF funds under management growth has been surprisingly slower than the preceding two years.
"The main reason for this is the market moving from obvious growth to the latter stages of a bull market and, with that, higher levels of caution from investors."
He says the 13 per cent growth shown in local ETFs in 2016 is similar to the wider global market. But as US interest rates rise, the use of ETFs will grow, with clients continuing to look for cost-effective tools for onshore yield and offshore diversification.
Arian Neiron, managing director of VanEck Australia, explains the drivers of growth in the local equities market in 2016. He attributes the ongoing preference for local exchange-traded products to domestic equity bias.
"Gross dividend yields including franking credits make for significant income benefits and with low yields in defensive assets, demand for Australian equities continues to increase," he says.
Neiron says investors are moving into international equities for their diversification benefits away from Australian equities and the local economy and exposure to sectors such as healthcare and technology.
When it comes to investors choosing to allocate funds to US equities, they are looking for exposure to the growing US economy, and expected higher interest rates.
Local investors displayed tepid attitudes to Asian ETPs following the Bank of Japan's unprecedented monetary policy intervention to keep interest rates at negative levels and lack of confidence over China's continued structural reform and growth prospects.
VanEck's numbers show investors also turned their back on European equity ETPs, with this market demonstrating outflows of $41.9 million. Neiron says this is due to events such as Brexit, the European Central Bank's decision to continue its quantitative easing program, as well as an anti-establishment political environment and negative interest rates.
In terms of 2017, Vynokur expects another strong year of growth. "Depending on market conditions, we could expect to see between $4 billion and $5 billion of net inflows. We believe high-yield Australian equity exposures will continue to remain very popular, as well as global equities. We are also seeing more interest than ever before in bond products."
Walesby agrees there is increasing interest in fixed income ETFs among investors, who want to protect their portfolios as equity markets look expensive, especially in the US.
"In Australia it is very likely that fixed income ETFs will grow in number and in funds under management as the size of the market is so small versus other regions. This is reinforced because of Australians' hunger for yield above most other investment priorities," he says.
Current interest in fixed income products notwithstanding, Walesby says while the market is still relatively young, expect local equities ETFs to continue to be the mainstay for allocations, although more money will go into smart beta opportunities.
Smart beta products are a broad category of financial products that use non-traditional benchmarks to allow investors to express their views about risk in the market.
According to Neiron, as we move into 2017 expect continued market volatility as a result of political and economic pressures as well as valuations being at or approaching long term averages.
"There is continued speculation about a possible Fed rate hike at the end of the year and as a result we expect the gold bullion and gold miners' ETPs' price to rise in early 2017. We believe gold bullion hasn't yet reached its peak price and gold should rally into 2017," he says.
VanEck's Gold Miners ETF returned 71 per cent year-to-date to 31 Oct 2016, which is one of the best performing ETFs on the ASX this year.
"Next year we expect to see investors access sectors and strategies where they see pockets of opportunities or are seeking to improve the robustness of their portfolios. For example, investors are increasingly investing in the mid and small-caps sector using ETPs. Emerging markets also have attractive valuations compared to developed markets," says Neiron.
He notes that total inflows into Australian equity ETPs was almost double the investment in international equity ETPs, reversing the trend of the past few years.
Says Neiron: "If market volatility continues, investment in Australian equity ETPs could outshine investment in international equity ETPs, at least in the early stages of 2017."
