ETFs withstand market conditions to dominate

Yasmine Raso

Senior Journalist, Financial Newswire

22 February 2023

Exchange traded funds (ETFs) have managed to endure increased market volatility and investor caution to record growth in assets and net inflows in 2022, albeit at a slower pace than 2021.

According to Morningstar’s ETFInvestor Year End Review 2022, there were several product launches that kept the market alive as net new inflows dropped, with environmental, social and governance (ESG) and themed ETFs the most popular.

The industry also continues to be dominated by the three most concentrated players, with Vanguard, BetaShares and iShares accounting for 72 per cent of the total ETF funds under management (FUM) in Australia.

Vanguard maintained its lead over BetaShares and iShares, seeing a 7.3 per cent jump in FUM when compared to 2021 to manage 33.5 per cent of the total market share, closely followed by the latter two at 19.4 per cent.

State Street also managed to remain in the top five ETF providers in Australia despite a 3.3 per cent decline in FUM from 2021 to 2022, recording a surge in net flow growth in 2022.

2022 also saw the highest number of ETF launches in the last decade, with 41 new products introduced to the market compared to 2021’s 23. With bond ETFs the top investor preference when it came to choosing products, it came as no surprise that BetaShares’ Australian Composite Bond ETF and the Global X US Treasury Bond (Currency Hedged) ETF launched successfully and drew in AUD $194 million and AUD $158 million in net flows, respectively.

“Rapid growth in the ETF industry has opened multiple avenues for people to invest according to their style, philosophy, and outlook,” Kongkon Gogoi, Senior Analyst, Manager Research at Morningstar, said in the report.

“But the surge in ETF demand has led to product proliferation. To stay relevant and address investors’ ever-changing preferences, product innovation has been directed toward the niche and narrow market segments, which are often new, under-researched, or focused on just one specific theme.

“As such, investors may often get exposure via an obscure rules-based index from a little-known index provider. As product innovation is perceived to remain predominantly theme-based (as witnessed in the 2022 new launch pipeline), investors should be wary of the risk/return imbalance that such products exhibit.

“Our view is that careful due diligence before investing remains as critical as ever. Many strategies focus on specific themes that often only capture the fleeting interest of investors (and markets). At Morningstar, we see that ‘investment merit’ is of crucial importance.

“Our view is that investors should avoid fads and focus on long-term, well-diversified options at the lowest possible price. This, for us, remains a core principle of ETF investing.”