ASX Exchange Traded Funds (ETFs) guide: Here’s everything you need to know
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Exchange Traded Funds (ETFs) on the ASX have grown to a $70 billion industry. Here’s a guide on the ASX ETF sector and what investors need to know.
ETFs work similarly to managed funds which invest in various financial assets including shares, bonds, infrastructure and in some cases even other ETFs. Among shares, ETFs can invest in shares of particular countries’ exchanges (such as the NASDAQ), a sector (such as defence) or to track an index (like the ASX 200).
They are managed by portfolio managers from financial institutions which buy and sell stocks on a regular basis. Australia’s biggest ETF providers include BetaShares, VanEck and iShares.
Unlike traditional unlisted funds they can be bought and sold through an exchange.
According to BetaShares, the ETF investor population in Australia in 2019 reached 455,000, which is 18 per cent higher than last year.
Of the investor population, 43 per cent are millennials, although the average age is 42. While the industry is still skewed 76/24 per cent towards males, this is an improvement from five years ago when it was 89/11 per cent.
Currently 30 per cent of ETF investors hold it through their self-managed super fund, whereas back in 2008 this figure was higher at 51 per cent. More investors are now buying and selling them directly.
There are over 140 ETFs on the ASX and the industry is worth $71.4 billion as of mid-October.
According to Betashares this is up 27 per cent from 12 months prior and monthly net inflows surpassed $2 billion for the first time.
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In 2020 the average ASX ETF is up 9 per cent but there is a big gap between the best and the worst performing ETFs.
“If you look at it [ETF returns] based on performance, generally it’s been the growth areas that’ve performed very well,” ETF Securities’ Kanish Chugh told Stockhead.
“You generally see when you look at the top 5-10 best performers its been around that space looking at robotics and automation, technology, battery technology.”
“The biotech sector is another. With COVID there’s been this big push into healthcare and biotech is seen as the driver of performance of healthcare,” he said.
One particular ETFs Chugh named was the ETFS Battery Tech & Lithium ETF (ASX:ACDC) which is up 55 per cent in 2020 according to Bloomberg. It is the second best performer behind the BetaShares Asia Technology Tigers ETF (ASX:ASIA), up 57 per cent.
Other top performong ETFs on these themes include both ETFS and BetaShares’ Robotics funds which are up 26 per cent and 38 per cent respectively and BetaShares’ NASDAQ 100 ETF (ASX:NDQ) which has gained 33 per cent.
However if you look at ASX ETFs by their inflows, there is a different story.
“The top 2 largest funds that have attracted inflows have been your broader Australian benchmarks ETFs in the Vanguard and IShares fund,” Chugh said.
“Because a lot of investors when they’re want to enter the market but see volatility they want to get out of direct stocks,” he said.
There was also interest in short and leveraged products but 3rd largest inflow was into gold.
“With interest rates and yields being so low and further pressure because of the shake up to the economy because of COVID-9 we actually saw investors look outside of fixed income and look beyond traditional asset classes,” Chugh explained.
“More recently hasn’t been seen as a place for investors because it does not produce income – it is very much a defensive asset.”
But he said it was actually the outflow side that was most interesting.
Despite the US market performance the 2nd largest outflow of the year was from the iShares S&P 500 fund. Chugh observed this was likely because investors did not want too broad an exposure to the US market.
According to BetaShares’ most recent Annual ETF report, the most common reasons investors used ASX ETFs were diversification (over 75 per cent), lower cost (64 per cent) and access to overseas markets (57 per cent).
ETFs can suit a wide range of investment styles and offer access to a wide variety of sectors – some of which may be difficult to invest in.
Examples include exposure to American, European and Asian market indices, currency fluctuations and sector thematics.
“You won’t get blown up by one stock that falls 80 per cent or something like that – and it’s important for a long term investor you get that diversification,” Morningstar senior analyst Matthew Wilkinson told Stockhead earlier this year.
It goes without saying ETFs have potential to be more cost-effective than buying several stocks on your own and has the similar effect of not putting all your eggs in one basket.
One trait of traditional unlisted funds is high fees. Hedge funds for example charge management and performance fees – the former is typically a percentage of a fund’s net asset value and ranges from 1 to 4 per cent per annum.
One US institution Salt Financial went even further and launched an ETF that temporarily gave investors 50c back for every $US1,000 ($1,444) in its fund up to $100 million. In effect, Salt paying them to invest.
As with any financial product, ASX ETFs are not without risks and pitfalls. Many of these stem from misconceptions about ETFs.
It is easy to sit back and relax thinking the portfolio managers will handle everything for you and if the market crashes you can quickly sell out, but this may not be the case.
As with any financial product you should seek advice before making any financial product decisions beyond the mere name of the product.
This may seem common sense in theory but isn’t in practice. For instance one US ETF – The Herzfeld Caribbean Basin Fund (NDQ:CUBA) – rallied upon the death of Cuban dictator Fidel Castro’s despite having nothing to do with the Carribean nation.
“Don’t judge an ETF’s name as being what that exposure is – do a little homework and look at what’s underlying,” Chugh says.
“The simple name of an ETF may not provide enough of an insight to tell investors exactly what they’re getting exposure to.
Chugh also warns “no two ETFs are twins”.
“Take the European equity market for example – there are 4 of 5 European equity [ETFs] here and each of them are different to each other and each is tracking a different index or benchmark,” he said.
Other traits Chugh says investors need to do their homework on are ETF fees and liquidity – both on and off market.