Cost and transparency leading the way to ‘democratised’ investing.

With over $56 billion in 204 exchange-traded products (ETPs) now listed on ASX, according to the ASX Monthly Investment Products Report at the end of October, the Australian ETP industry has grown by leaps and bounds since its launch 18 years ago. 

StreetTRACKS, now known as SPDR ETFs, listed Australia’s first exchange-traded funds (ETFs) – the SPDR S&P/ASX 200 Fund (STW) and the SPDR S&P/ASX 50 Fund (SFY) – on 27 August 2001. 

Today, anyone with access to a broking account can build an ETF-focused portfolio, opening new market segments and asset classes, including real estate investment trusts (REITs), global equities, emerging markets, currency, fixed income, commodities and smart beta.

Originally introduced as a tool for institutional investors to invest their cash reserves, ETFs proved to be popular with retail investors because of their “instant diversification” potential. 

Investors can buy exposure to all the biggest 200 Australian companies in one ETF via a single transaction, allowing them to spread their risk in a simple and cost-efficient way.

The increasing value of ETFs 

ETFs provide more value than just their low cost; they also offer expanded market exposures via a convenient, portable investment instrument that is transparent and liquid, creating a powerful value proposition for investors. 

Many of these features tie back to the ways in which ETFs have democratised investing by making previously difficult-to-access market segments available to all investors. In addition to gaining exposure to an entire market segment in one trade, investors now have complete visibility into the physical underlying securities, enabling them to see the real-time market value of their holdings at any point during the day.

Products innovation, strong demand

ETF product innovation continues to expand locally and globally, while investment industry trends underpin investor demand. 

Globally, ETFs have increasingly moved into niche segments such as ETFs that track billionaire investments, whiskey and spirits, restaurants, video games and even an ageing population ETF that weights companies by how much revenue they derive from that population segment in emerging and developed markets.

In Australia, the regulatory landscape continues to increase the demand for ETFs through the removal of commissions on financial advice. The very features of ETFs – ease of investing, transparency of fees and underlying holdings, and cost efficiency – put them in a great position to take advantage of industry trends.

Factor in market volatility

During meetings with clients we collectively hear how investors are closely focused on managing investment portfolio risk in 2020. Fuelling this risk-oriented viewpoint is a challenging blend of global economic uncertainty, falling corporate profits, trade tensions and lingering memories of large drawdowns in 2018 — all juxtaposed against year-to-date double-digit gains in global equity markets and record highs in US stocks.

In today’s environment of heightened market uncertainty, the approach of combining specific factors, or investment characteristics, offers both defensive risk and growth potential. 

Until recently, finding an investment vehicle in the local market for a strategy that seeks to capture multiple factors had been challenging. With the introduction of smart beta ETFs, investors now have easy access to sophisticated portfolio-tilting strategies that were previously available only to institutional investors. 

The age of disruption and ETFs

What does the future hold for the ETF industry? If you believe the disrupters, the financial services industry of the future is likely to have lower fees, better access to quality advice and increased awareness of the products people are buying.

That sounds like a future where ETFs will have a major role because of their lower costs and transparency of underlying investments.

ETFs not only provide greater exposure to hard-to-reach markets, but also have changed the way people invest. We no longer need paper-based application forms faxed to fund managers. With a click of a button, anyone with a brokerage account, directly or via a platform, can access a diversified portfolio of securities. 

This has also paved the way for fractional or micro investing. Although only in its infancy, it is expected to gain momentum and become a real disrupter to the financial services industry. ETFs are a great tool for investors looking to invest small amounts at a time.

ETF-based portfolios

Fast-evolving technology has opened ETF investing to a new audience, be they first-time investors or digitally savvy millennials. Robo-advisers or automated advisers are steering clients towards ETF-focused portfolios because of ETFs’ ability to diversify for relatively small amounts of investment. 

Whether it is spare change, purchase round-ups, recurring investments or lump-sum deposits, ETF investing can help investors build toward the future they envision – whether than means preparing for retirement, planning for university, supporting kids or ageing parents, preparing a financial legacy, donating to cherished causes or travelling the world.

This trend of ETF-based portfolios is not limited to digital providers. We are seeing advisers recommend model portfolios that are built by highly sophisticated managers. A model portfolio is a globally diversified investment approach that targets a particular balance of return and risk. Through model portfolios, advisers can offer investors access to the teams that manage the assets of some of the largest and most discerning investors.

As we look into 2020, it has never been easier to access an ETF, through an App or a financial adviser. 

As the pioneer in ETFs, SPDR ETFs believes the most powerful innovations are those driven by investors’ needs and that is why this remains at the heart of its ETF solutions design. The next 18 years could well see more investor-centred ETF innovation, propelling the industry to greater heights.