ETFs, the new black

ETFs - the new black

By Arian Neiron, Managing Director, Market Vectors Australia.

2013 was an exceptional year for the exchange traded funds (ETFs) market in Australia which reached a significant milestone with over $10 billion in market capitalisation – a 55% increase from 12 months earlier, according to ASX data.

Globally the exchange traded products (ETP) market hit $US2.4 trillion with 4,988 ETPs according to the Blackrock ETP Landscape December 2013 report. 2013 was the third strongest on record for the Global ETP Industry with flows of $US 235.5 billion topped only by the 2008 and 2012 totals.

Australian ETF investors accessed a number of broad based international ETFs focusing on US equities as well as strategy based ETFs focused on Australian shares. The lure of the booming US stock market with the overall strength of the Australian dollar, while diminished lately, made it attractive to invest in US equities which outperformed the Australian share market in 2013.

In general commodity ETFs struggled, representing just 5.8% of ETF assets as at December 2013, as a result of a shift back into equity ETFs in line with rising share markets.  Gold ETFs suffered major outflows with gold bullion down 3.8% in December to close the year at US$1,205.65 per ounce.

Aside from using ETFs to gain international diversification, investors used Australian equity strategy-based ETFs to obtain high dividend yields. Australian ETFs are utilised by all types of investors and we have seen particular interest from self-managed superannuation funds (SMSFs), who are attracted to ETFs because of their low cost, transparency of holdings and the easy access they provide to diverse investments. SMSF trustees see ETFs as innovative tools that can be used as building blocks in their portfolio towards achieving their investment objectives.

It is evident that Australian investors follow the global trends towards investing in developed equity markets. Australia also has one of the highest levels of bias to domestic equities in the OECD, so we expect to see more of that this year.

We also expect to see a number of new innovative ETFs come to market that seek to track alternative indices that address market inefficiencies.

2014 will be yet another exciting year for ETFs and their investors in Australia.

For more information about exchange traded funds visit our investment funds guide.

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