ASX Exchange Traded Funds (ETFs) have grown from just two in 2001 to 223 in 2021. So what’s behind their rising popularity?

In August 2001, State Street Global Advisors listed two Exchange Traded Funds on ASX. For the first time, Australian investors could easily access an innovative investment product that tracked shares on an index.

Like managed funds, ETFs gave investors cost-effective exposure to a wide range of investments. But unlike managed funds, ETFs could be bought and sold easily on an exchange – just like shares.

Exponential growth

In the years that followed, other large investment firms like Blackrock and Vanguard listed their own ETFs on ASX. Two decades after the first listing, there are now 223 different ETFs available on ASX, tracking a range of asset classes including Australian and global equities, commodities, fixed income and currencies[1]. ETFs also allow investors to gain exposure to small, mid or large cap companies; specific sectors; and themes like environmental, social and governance (ESG) or artificial intelligence.

Globally, ETFs were valued at a staggering US$7 trillion in 2020. In Australia, as at June 2021, ETFs on ASX were worth $113.5 billion[2].

The ASX Australian Investor Study 2020 found some interesting trends in the uptake of ETFs[3]. The study is based on a wide-ranging online survey of Australian adult investors, self-managed super fund (SMSF) trustees, lapsed investors and non-investors. It found that next generation investors – those aged between 18-24 – were the most enthusiastic group of ETF investors.

So what’s driving this growing uptake of ETFs?   

A growing group of young investors

Our study found that ETFs were especially popular among younger investors, with 8% of young, first-time investors choosing to launch their investing journey by investing in an ETF. Overall, 20% of next generation investors hold ETFs, with 16% of this cohort having bought ETFs in the 12 months leading up to our survey. This compares to 24% of next generation who had chosen to invest in shares.

ETFs were even more preferred by those who intend to invest within the next 12 months. 45% of next generation investors said that their choice of investment vehicle would be ETFs, second only to Australian shares (83%).

It’s no surprise that ETFs are popular among young and entry-level investors. For one thing, they’re easy to buy and sell – like shares, all you need is an online brokerage account to get started. They also allow you to diversify across asset classes, with the possibility of having exposure to hundreds of securities in a single trade. And investors can start investing in ETFs with relatively little capital, while new investors can choose to invest in a broad market ETF covering an index or a range of more specific sectors without needing to select individual shares.

Our survey underlines their role in further democratising investment in Australia by providing an accessible, low-cost option.

ETFs: a popular entry point for investors 

COVID-19 and ETFs

ETFs are also a popular investment choice among those who invested all their spare cash in the wake of the COVID-19 market disruption, underscoring their role as a tool for diversified market exposure. Overall, 64% of next generation investors had changed their investment priorities directly in response to the pandemic, concentrating more on diversification to help mitigate the impact of market volatility on their returns.

There has been a renewed interest in sharemarket investing among younger investors, with much of the interest in themes and megatrends such as stocks with an ESG focus, emerging technologies such as AI and gaming, and stocks related to biotech and healthcare. New investors are findings that ETFs also present an opportunity to make a prudent and more diversified entry into the sharemarket, enabling them to invest in emerging and established sectors.