ETFs go vertical

Trialogue chart 3 Feb 15 - ETFs go vertical

February 4, 2015

While much of the wealth management industry was absorbed by the Financial System Inquiry and other regulation in 2014, ETFs quietly went vertical.

You don’t often get to see a classic product “S” curve unfold outside of the technology industry, so watch this one.  An S curve refers to the shape of the lifetime revenue curve for a product that takes off (a lot of products just flatline of course, never getting off the bottom of the “S”).

But a product that does take off generally follows an S curve.  In its early life of an investment product, AUM and revenue are low – the bottom of the S – as catches on with early adopters.  Then something changes and the product jumps from early adopters to the mainstream.  AUM starts increasing exponentially as the mainstream pours in – which is where we are now, indeed arguably 2 years into this phase.

Eventually – which can take many years – AUM growth starts to flatten out and the top of the S curve forms, and may even start falling away.

Part of the ETF story is investment returns.  It was a good year for global equities returns (15% unhedged), which is the second biggest ETF category with about one third of total AUM, but relatively subdued for the biggest category, Australian equities, with a return of ~5%.  So while returns were supportive, they’re only a small part of the 2014 story of 50% growth.

Nor was it about product proliferation.  Yes, new launches saw product numbers exceed 100 for the first time, but that was an increase of only 10 products over the year.

So this is mostly about take-up of existing products – a genuine expansion of the market.  This is consistent with the improvement in investor sentiment which has been observed elsewhere in the past year – for example in super fund member contributions.

What’s working is mostly the things you would expect – the big equity categories.  But yield is also working well in a range of incarnations – including equity income, fixed income, and high yield cash.

The rapid expansion of the ETF market has been accompanied by some big changes in market share.

Five years ago, the Australian ETF market was dominated by SSgA with an 80% market share.  That’s now down to just over 25%.  The main market share gains have been with the players you would expect – iShares with a 36% market share and Vanguard with 19%.

In most markets there’s also an entrepreneurial niche player; in Australia it’s Betashares.  Betashares has played the yield theme well and developed some innovative products such as a USD ETF and a High Interest Cash ETF, both creative takes on bank account products.  This has taken them to a 10% market share.

The breakout into the mainstream we’ve seen in the past year is not a surprise in the sense that we’re following the US and Europe.  There’s lot of reasons to be pleased about this development.  Most ETFs are consumer friendly (assuming you’re happy with the beta risk of your ETF):

Simple

Transparent

Liquid

Somewhere between reasonably priced and dirt cheap.

ETFs are easily accessible – both to get in and get out.  If you’ve got a share trading account, you can buy and sell ETFs, and this is increasingly available in major super funds via MDIOs.  It fits with how many investors want to transact and manage their portfolios.

Compare that to the experience of the consumer wishing to invest in a managed fund – if not turned away and told to go to a financial planner, they are still often dealing with the nightmare of paper applications, AML, and cheques.  The lure of a bit of alpha quickly evaporates with the frustrations of attempting the application process.

 

Posted In: Trialogue