Partner Series

ASX Insights: the Australian ETF market

The ETF Securities Partner Series joins with Australian and international investment professionals to discuss the big issues of the day and what these mean for investors.

The Australian ETF market has grown rapidly in recent years, with current market capitalisation at $56.63bn across 212 products [1]. Like other investment products, it has also been affected by COVID-19 driven market volatility.

ETF Securities spoke to Martin Dinh, Senior Product Manager at the Australian Securities Exchange (ASX) to explore his insights on the Australian ETF market and what has happened in recent months.

The increasing popularity of ETFs

The first Australian ETF was launched in 2001 and while growth in assets and available products was initially slow, taking nearly 16 years to reach $30bn in assets under management, the Australian ETF market doubled in value between 2017 and 2020.

Investors often consider ETFs for characteristics like liquidity, ease of access and cost efficiency. Mr Dinh views part of their popularity being driven by offering access to a wider audience.

“ETFs have democratised investing, by opening up investment strategies and entire asset classes that were only historically available to the largest investors. Now a retail investor like you or me can get diversification in a single trade to virtually every asset class and investment strategy, improving our ability to diversify our portfolio and express our market views. ETFs have also performed as advertised, and even in the toughest of times, have provided investors with the ability to enter or exit their investment, or purchase their chosen ETF as and when required, with years of trading data showing that the ETF wrapper works,” he says.

Mr Dinh still views there being a long way for the ETF market to go, particularly in terms of education. ETFs started as broad-based simple passive investments but have become more sophisticated over time. While there is still some confusion over how even basic forms trade, many investors are also trying to grapple with leveraged and inverse forms as well, not to mention newer active ETFs.

Financial risks and regulation

ETFs are regulated under an ASX system called the AQUA rules, which covers who can create an ETF, the structures for ETFs, assets which can be included in ETFs, along with other standards. ETFs are actively monitored for compliance with the rules after being admitted.

“The objective of the AQUA rules is to ensure that investors are protected from the financial risk of the ETF provider, and that the ETF wrapper creates an ecosystem where investors can enter or exit the investment or purchase their chosen ETF as and when required,” says Mr Dinh.

Has this held up in the recent market volatility?

ETFs have continued to be accessible in the recent volatility, even experiencing increased levels of trading, but there’s no question these investments have been affected, just as any other products.

“First, we saw FUM fall from $63.6 billion to $59.6 billion, marking the largest ever monthly drop in FUM, mainly driven by adverse price moments. Now, for as bad as March was, you expect to see millions of dollars worth of outflows. But in reality, ETFs actually brought in $300 million of assets,” says Mr Dinh.

He notes flows largely went into broad-based Australian equities, with $919 million into the three largest Australian broad-based ETFs but was also surprised to see flows into poorer performing ETFs, including oil-related, property and domestic financial sector ETFs.

These were not the only areas to experience trading growth as Mr Dinh noticed surges in trading activity for equity leveraged and inverse ETFs, equity and commodity currency hedged ETFs and gold-related products.

“ETF trading activity increased exponentially. ETFs on average traded 770 million dollars a day, which was an astounding more than four times higher than its previous peak. We also saw an uptick in the number of transactions, with ETFs seeing approximately 748,000 transactions for the month, which was more than two and a half times higher than its previous peak,” says Mr Dinh.

Mr Dinh views this trading activity as testament to investor confidence in ETF liquidity.

Future development in ETFs

Mr Dinh sees any continued volatility in markets as providing a case for fixed income ETFs, inverse and leveraged ETFs and currency hedged ETFs.

He says, “On average, fixed income ETFs were only down 4.2% compared to the S&P/ASX 200 which was down 21%”.

Many investors have also viewed ETFs as a short-term trading tool, which has accounted for some of the recent flows.

“I think investors out there will see the COVID-19 pandemic, or at least some of them will see it, as a great buying opportunity, as they say, to take advantage of cheaper prices, or maybe take a swing at beaten down areas, hoping for a big rebound should the COVID-19 fears fade,” Mr Dinh says.

Educating investors on the ETF market

There is still a lot of misunderstanding around ETFs and how they work in the retail investment space.

Investors seeking more information can access education on the ASX website, the education and research sections of the ETF Securities website, as well as by contacting our team.