ETFs provide a simpler and low-cost way to broaden investment horizons.
As we commemorate the 20th anniversary of the first ETF to be listed on ASX this year, ETFs have revolutionised the investing landscape by providing efficient and low-cost access to a broad range of asset classes and sectors.
It has been nearly 15 years since the cross-listing of our inaugural suite of iShares global equity ETFs on ASX. The move marked the start of a more simplified and transparent way for more Australian investors to access diversified global investment opportunities at a low cost. Back then, the Australian ETP sector was worth a mere $1.5 billion, with only 18 ETF products available in the market. [1]
Growth in the Australian ETP landscape improved the diversity and liquidity of ETFs, as well as the trading infrastructure in place locally. BlackRock converted 14 US-domiciled iShares ETFs to new Australian-domiciled ETFs in early 2018 to make it easier for Australian investors to invest offshore. The range included exposure to 100 large global transnational companies, in addition to other market exposure, such as to European, Japanese and emerging markets.
ETF growth can be attributed to the role they play in democratising access to nearly every investment strategy, asset class, market, sector and country-specific segment. ETFs may also be used as effective portfolio-construction tools for investors looking to diversify their portfolios and express certain market and investment views – and these benefits have underpinned their popularity.
The Australian ETP industry has experienced exponential growth, surpassing $100 billion in March this year, [2], and is expected to accelerate towards year end. There are now 252 products available in the Australian market, ranging from traditional vanilla long-only ETFs, active ETFs, exchange-traded commodities (i.e. oil or precious metals) to exchange-traded instruments (i.e. leveraged or inverse) at June 2021.
Within that, international equities make up over half of the fund flows – 58 per cent – as investors increasingly use them to access diversified global investment markets more efficiently in a single trade.
Geography and sector diversification
The restart of economic activity following the pandemic has varied extensively across the world. For example, Europe, Japan and China are indicating a faster-than-expected economic recovery on the back of pent-up business activity and consumer demand, while others, like the UK, are still navigating their way out.
It’s common for Australian investors to have a domestic bias towards Australian equities. However, it also means many investors are underweight global markets, which make up 98% world’s total share market.
Looking at the annualised returns of the S&P/ASX 200 compared to the MSCI ACWI Index [3] (which includes large- and mid-cap companies across 23 developed markets and 27 emerging markets) in the past five years, the MSCI ACWI Index has delivered an annualised return of 14.57 per cent versus 11.16 per cent by the S&P/ASX 200 (at June 30, 2021).
The Australian equity market is also dominated by names in the financial and materials sectors, so investor portfolios may be more susceptible to sector-specific performance outcomes. Furthermore, the technology and healthcare industries are at a relatively nascent stage in Australia compared to global markets, so if investors want specific exposures, there may be benefits in looking beyond our borders.
Holding a basket of well-diversified exposures across multiple countries and sectors can be a way to capture varying rates of growth within a portfolio, given the high level of concentration risk in Australian investments.
Sustainable investing is becoming mainstream
Our view is that climate risk is investment risk and we expect sustainability-integrated portfolios to outperform traditional market-cap weighted portfolios over the long term. ETFs provide a more transparent, affordable access point for those seeking exposures in emerging segments like sustainability. In fact, we believe indexing will do for sustainable investing what it did for investing in stocks and bonds.
Until recently, sustainable investment strategies were almost exclusively available through higher-fee active strategies or customised mandates. Sustainable indices give investors the choice to screen out certain sectors and industries, improve the ESG ratings of their portfolio or invest in specific types of investment outcomes.
ETFs have democratised investing by providing access to a variety of asset classes, sectors, and countries. While Australian investors may still have a home bias, it is important to also keep in mind the broader range of global investment opportunities that can be accessed on ASX.