Exchange Traded Funds (ETFs) on the ASX have grown to a $126.9 billion industry. Here’s a guide on the ASX ETF sector and what investors need to know. 

 

Key points

  • ETFs are managed funds, listed on stock exchanges that invest in various financial assets
  • The ASX has over 150 ETFs and the industry is worth $126.9 billion as of mid-October 2021
  • Average ASX-listed ETF is up 12% but some specific ETFs have significantly outperformed, particularly those offering exposure to international shares
  • People invest in ETFs to gain broader exposure to assets otherwise difficult to access or lower investing costs
  • Industry experts warn investors need to do proper due diligence beyond an ETF’s mere name
  • In 2022, investors will be offered more thematic ETFs but it is unlikely that a similar sector-wide performance will be repeated

 

What are ETFs?

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.

 

The ETF market

According to BetaShares’ most recent annual ETF Report (issued in June 2021), the ETF investor population in Australia grew from 455,000 to 720,000 in the 12 months to August 2020. BetaShares also tipped a further 190,000 Australians to invest in ETFs in 2021.

ETF investors are increasingly skewing towards Millennial and Gen Z investors – 65% of new ETF investors fall in these cohorts.

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.

The ASX has over 150 ETFs and the industry is worth $126.9 billion as of mid-October 2021.

According to Betashares this is up 27 per cent from 12 months prior and monthly net inflows surpassed $2 billion for the first time.

 

Here’s a list of all ASX ETFs and their YTD performance in 2021…

Swipe or scroll to reveal the full table. Click headings to sort. Best viewed on a laptop.

 

Performance of ASX ETFs in 2021

In 2021 the average ASX ETF is up 12% – an improvement from last year’s 9% gain.

However, there is a big gap between the best and the worst performing ETFs and there is a different set of winners this year compared to last year.

The top fund is BetaShares’ Geared US Equities (ASX:GGUS), which is up over 60% in 12 months.

This ETF is not the only one to offer exposure to US equities but is unique in being “internally geared”, in combining equity investors’ money with debt investors’. It then invests in the top 500 shares listed in the US by market capitalisation.

The majority of the top 10 offer exposure to global equities although one sector specific ETF is the BetaShares Global Cybersecurity ETF (ASX:HACK).

At the other end of the scale some of the poorer performing ETFs have been ETFs offering exposure to gold, to China, as well as bear-market focused ETFs.

While ETFs help investors avoid fluctuations in individual companies, they cannot prevent fluctuations due to movements in broader markets – for instance gold ETFs have suffered as gold prices stagnated throughout 2021.

2021 has seen a number of new ETFs, some to the ASX, but not all have performed well.

As of December 13, 2021 the long awaited and much hyped BetaShares Crypto Innovation ETF (ASX:CRYP) was down 27% in the last month and the ETF Securities Hydrogen ETF (ASX:HGEN) was down 15%.

 

Why do people invest in ETFs?

According to BetaShares’ most recent Annual ETF report, the most common reasons investors used ASX ETFs were:

  • Diversification (over 63%)
  • Access to overseas markets (42%) and;
  • Avoiding the risk of individual stock fluctuations (42%).

 

Diversification

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 last year.

The top three investment themes ETF investors have sought have been high growth ETFs, sector specific ETFs and global equities, desired by 26%, 24% and 22% of investors respectively.

Socially responsible products have also been in higher demand, particularly among millennial investors – 28% of millennials have requested socially responsible products compared to just 20% of all current ETF investors.

 

Lower costs

“Low cost” has actually completely dropped off BetaShares’ top reasons why investors buy into ETFs, whereas it was once sitting near the top of the list.

Inevitably this is because of the low cost (or in some cases no cost) brokerages which have emerged in the past couple of years which make it less of a burden to invest in several different stocks.

Nonetheless, ETFs still have potential to be more cost-effective than buying several stocks on your own and have 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.

ETF providers globally have engaged in a race to provide the lowest cost to investors.

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 was paying them to invest.

 

What are the risks?

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 so simple in practice. For instance one US ETF – The Herzfeld Caribbean Basin Fund (NDQ:CUBA) – rallied upon the death of Cuban dictator Fidel Castro despite having nothing to do with the Caribbean nation.

And ETF Securities’ Kanish Chugh reckons this played out with a number of the new ETFs launched on the ASX this year such as the ETFS Fintech & Blockchain ETF (ASX:FTEC).

“I think people need to really wary of a fund name and a code and need to make sure they read the material that the fund managers make available,” he told Stockhead.

“There are investors that invest in those type of ETFs for the right reasons, they understand risk and exposure… but there are some investors from where I sit that could do more due diligence on underlying funds they’ve invested in.”

 

What to expect from ASX ETFs in 2022?

The one consistent promise among experts Stockhead has spoken to is the promise of more products and the market maturing further.

But inevitably the performance of ETFs will depend on the performance of underlying assets, be it commodities, market indices or sectors.

And there is less certainty as to whether the performance of 2021 will be replicated in 2022.

 

Market maturing

“I would say in the Australian ETF market we’ve started to see the markets maturing in the sense of there is a new type of investor that’s entered,” ETF Securities’ Kanish Chugh said.

“You have three distinct client segments: your traditional institutional clients (super funds, large insurance companies etc.), you’ve got what you could call your advised/advisor segment – whether it’s planners, wealth or stockbrokers – and then you’ve got those pure retails.

“And pure retail has been driven by younger investors and I think that’s going to continue in 2022; we’ve seen a lot more interest from that retail question.

“We’re getting past the questions of what is an ETF – what are the types, what are the structures, the differences between these the styles. It follows a trend of what you saw in America, Canada and Europe.”

As for new products, Chugh says investors can look forward to physical Bitcoin and Ethereum ETFs in 2022, based on his firm’s physical gold ETF, along with further ESG ETFs.

 

2022 to be more challenging

Meanwhile, Arian Neiron, the Asia-Pacific CEO & managing director of Van Eck, thinks 2021 was a growth year but 2022 will be more challenging given a potential shift in US monetary policy as well as inflation and the impact that both could have on asset prices, boosted by excess liquidity.

“All that excess liquidity in the market will impact pricing, particularly growth assets, the likes of technology,” he said.

“We think companies that are paying dividends, companies that have been undervalued on relative basis or more cyclical stocks are well positioned to hedge inflation or perform better relative to growth stocks in the next 12 months.”

Tim Murphy, director of Manager Research at Morningstar, likewise says 2022 might not be a repeat of 2021.

“We wouldn’t expect magnitude of returns at the top to be repeated. When you have indices up 25-30% there’s not many years where it repeats itself, so it’s not our base forecast,” he said.

“We’d caution investors, who’ve for the most part done well – think what it means so you’re not over-exposed.

“There’s potential for us to see decreased valuations put on stocks if threats arise or the inflation trend seems to become permanent rather than transitory.”

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