The best ETFs in a boom year

Photo of Chris Brycki, Stockspot By Chris Brycki, Stockspot

min read

Phenomenal growth of 70% in past two years in Australian ETF market.

The Australian exchange-traded funds (ETFs) industry continues to be the biggest trend in asset management in recent years. Its prominence has grown as the sector has matured and investors seek diversification for their portfolios.


Stockspot’s annual Australian ETF Report is the largest analysis of the ETF landscape. It looks at the key trends within ETFs and gives investors an objective view to help them better understand and compare listed ETFs.


This year 178 ETFs were analysed by looking at factors such as fees, performance, size and activity.


For readers unfamiliar with exchange-traded funds, the way to think about them is:


  • An ETF is listed on ASX and can be bought and sold in the same way as shares.
  • Rather than buying individual shares, ETFs provide direct exposure to a wide range of investments in their asset class, such as Australian and international shares, bonds or metals. An ETF invests small amounts in all the companies in an index, the S&P ASX 300 for example.
  • Fees are lower than typical active funds and ETFs have the benefits of transparency, immediate liquidity and potential tax advantages.

ETFs in Australia


Over the past 15 years, more than US$2 trillion moved out of active funds into index funds and ETFs. By 2020 it is projected that the global ETF market will reach US$10 trillion and by 2027 it will be larger than the active managed funds market.


The use of ETFs in Australia has grown at a phenomenal rate. The sector grew 70 per cent from $23 billion in August 2016 to $39 billion in August 2018. Twenty-three new ETFs listed on ASX, with a significant increase in global shares and fixed-income ETFs.


Diversification drives growth


Driving this popularity are individual investors, advisers and Self-Managed Superannuation Fund (SMSF) trustees, who are attracted to ETFs’ low cost, transparency, diversification benefits and easy access via ASX.


SMSFs and older Australians are turning to ETFs to earn better returns than cash or term deposits. ETFs offer lower risk and better diversification than only owning a few Australian shares.


The growing suite of fixed-income ETFs (17 to 26 last financial year) is filling diversification gaps in many portfolios. For retirees and pre-retirees, ETFs offer exposure to global shares and bonds, improving their overall diversification and lowering portfolio volatility.


Many young Australians are drawn to ETFs as their first investment experience, often via robo advisers or round-up Apps. The impact of popular business culture influencers such as Anthony Robbins and Tim Ferris, as well as Warren Buffett – all strong ETF advocates – has helped raise the profile.


Best performing ETFs


The best performing ETF of the year was the UBS IQ MSCI Asia APEX 50 Ethical ETF, which returned 30.1 per cent.


Asia-focused ETFs performed strongly overall with 18.9 per cent return for the year, and having four of the top five ETFs by annual returns.


The BetaShares Crude Oil Index ETF Currency Hedged Synthetic (OOO) performed well with 22.9 per cent, aided by macro decisions to reduce oil supplies, Australian dollar weakness and ongoing political tensions.


The worst performers


The BetaShares Australian Dividend Harvester Fund (HSVT) performed poorly. It invests in large ASX shares about to pay dividends while also selling futures contracts as a form of hedging. It significantly underperformed with an annual loss of -16.2 per cent.



Vanguard’s rise

Vanguard is popular with Australian investors because of the simplicity of its ETFs and broad market approach. The index mega fund’s rapid advance was propelled on multiple fronts in the past year.


Vanguard’s Australian Shares Index ETF (VAS) was by far the biggest winner in terms of funds under management (FUM), growing by $888 million in the last financial year to $2.8 billion.


Vanguard also grew overall FUM by $3.2 billion (+45 per cent) and now holds 28 per cent of all Australian ETF FUM compared to iShares’ 29 per cent. Vanguard is likely to overtake iShares in 2019 as the leading ETF issuer in Australia.


Vanguard launched four new multi-asset ETFs and a new global bond ETF to expand its fixed-income offerings.


The BlackRock-owned iShares took $2.6 billion in new FUM (+33per cent). Its globally focused ETFs gained from strong sharemarket returns overseas. It also launched two new fixed-income ETFs in the past year.


Global ETF appetite


Global sharemarket ETFs had an outstanding year in terms of returns and FUM increases. This category overtook Australian shares to become the largest sector attracting investors’ money.


The Australian sharemarket is still behind the US and Asia when it comes to technology stocks. Many investors look to global ETFs to access superior diversification and to gain exposure to tech companies.


US shares were supported by strong growth from the tech sector. BetaShares’ NASDAQ 100 ETF (NDQ) was the top performer with a return of 19.4 per cent.


Also benefiting from exposure to tech giants like Tencent and Samsung, Asian shares had the second-highest average returns of any region and grew FUM by 52.8 per cent to $1 billion. iShares’ S&P Asia 50 ETF was the top performer in this category (as well as the second-best performer among all ETFs) returning 29.1 per cent.


Emerging markets also had a stellar year with the top average return of 21.9 per cent among all sub-groups. This sector benefited from high growth in China, Brazil and Russia, and has potential for higher growth, but is a riskier investment because of vulnerability to global macro-economic conditions.


Australian broad market ETFs prospered despite low returns


The broad Australian sharemarket ETFs such as Vanguard’s VAS ETF and SPDR’s STW ETF were popular with investors, who continue to gravitate towards large ETFs tracking well-known indices.


This is despite low average returns of 2.1 per cent after fees (including a 4-5 per cent dividend yield). It’s likely that the popularity of these ETFs is from investors switching out of direct shares and underperforming actively managed funds.


The outperformance of small companies and negative returns of dividend and active strategies stand out as key trends. Australian banks have a large weighting in market-cap indices; their performance is the largest swing factor in determining if large-cap beats small-cap.


Smart beta ETFs and active ETMFs underperform


Smart beta is one of the latest trends in ETFs. Marketed as a new way to diversify and reduce risk, it aims to combine elements of passive index investing and active fund management to deliver the best of transparency, broad diversification and market-beating returns.


At their core, all smart beta ETFs take a bet on certain market factors being more important than others. Despite the large number of new active ETF listings (17), few could match the return of their respective benchmarks or traditional market-cap weighted ETFs.


This year Magellan’s Unhedged Global Equities Fund would have beaten the Global 100 ETF if it were not for its high fees, which brought net returns below the index product.


What ETFs to invest in


Stockspot believes that when building a portfolio, investors should look for ETFs that provide diversification across countries, sectors and asset classes. It is important to keep costs low and focus on asset allocation, ensuring the right balance of growth and defensive assets for investment goals.


Stockspot’s latest ETF report is available to download here.

About the author

Chris Brycki is the CEO and founder of Stockspot and a pioneer in investment and personal finance. He sits on two ASIC advisory boards and is known as a consumer advocate in financial service. His mission is to ensure a better, fairer way for Australians to grow their wealth and feel secure in retirement.


Stockspot is Australia's first and most experienced online investment adviser, with portfolios in a broad mix of the best low-fee ETFs across Australian, global and emerging markets, as well as bonds and gold. It provides personalised advice to clients and its philosophy is built on the values of simplicity, consistency and discipline.

From ASX

If you have ignored ETFs because you do not understand them, or because they did not offer you the exposure you were looking for at the time, now might be a good time to review the ASX online course on ETFs.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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