If you were looking at the exchange-traded fund (ETF) market 10 years ago, the typical conclusions would have been to focus on Australian or global equities with a small proportion in fixed income funds and commodities. Little attention has been given to thematic or environmental, social and governance (ESG) investments.
In 2011, a report by the Reserve Bank of Australia referred to the “relatively recent innovation” of ETFs, but global assets already exceeded US$1.2 trillion. It seems Australia was slow in the space, however, with just US$4 billion at the time.
Alex Vynokur, Managing Director of BetaShares, said: “When we launched BetaShares 11 years ago, the first users were wealthy, male self-directed pension fund clients and advisors who focused on high net worth individuals ( HNWI). “The last few years have been transformational, and they’ve gone from early adopters to mainstream investors.”
A decade later, Australia’s ETF market has grown to $132 billion and audiences have tilted to include more young people getting into investing for the first time and women who may have been previously disengaged from investment. Others use them as an easy way to access overseas-listed stocks, especially mega-cap tech names in the United States such as Tesla and Apple.
With no minimum investment, less paperwork, lower total expense ratios than active funds, and transparent pricing, new investors find them easier to understand and access than managed funds. They are also able to enter and exit the investment at any time during trading hours, which was attractive compared to their tied up money.
As a result, ETF providers have had to change the type of funds they launch to meet the demands of this new and evolving audience.
This has included thematic funds in areas such as video games, electric vehicles and robotics.
It has also led to tremendous growth in development and fund flows focused on areas such as the environment, responsible investing and sustainability.
During the pandemic, more women and young people than ever have become interested in ETFs as an easy way to get started in the investment markets.
Mik Kase, fixed income and multi-asset manager at Schroders, said: “There has definitely been an increase in the number of millennials holding more ETFs, this has been driven by their accessibility and gives them another access point to invest without the need for a broker.
“ETFs can easily fit into their financial ecosystem; if they already have a Commonwealth Bank account for example, they can use CommSec to buy an ETF.
Vynokur added that the gender balance had shifted from male investors in their 40s to 50s to more women and millennials.
“There has been a significant shift towards true gender balance and investors are also getting younger. We have long believed that ETFs give people the power to democratize wealth creation; everyone should have this opportunity at any age.
ESG funds were a particular area of growth that was driven by changing audiences. In less than a year, there have been numerous ETF launches in this space and according to BetaShares’ 2021 Annual ETF Report, a sustainable ETF received such strong inflows that it was among the top 10 inflows of the year.
This is the BetaShares Global Sustainability Leaders fund which received $786 million in inflows throughout the year. Launched in July 2017, the fund now had $2.1 billion in assets under management and sought to invest in “climate leaders,” which excluded those with direct or significant exposure to fossil fuels or engaging in to activities incompatible with responsible investment considerations.
On a monthly basis, the iShares Core MSCI World ex Australia ESG Leaders ETF, launched in April 2016, saw inflows of $134 million in December 2021, making it one of the 10 largest monthly inflows.
In contrast, no ESG ETFs were in the top 10 funds with the largest monthly outflows.
This was echoed by data from the Australian Securities Exchange (ASX) which showed that the top 10 net flows in 2021 included several ESG funds such as BetaShares Climate Change Innovation ETF, VanEck Global Clean Energy ETF and ETFS Hydrogen ETF.
At State Street Global Advisors (SSGA), he said ESG ETFs are “increasingly becoming staple assets” for many investors, requiring them to take action with ESG in mind. In February, SSGA cut the fees of its two carbon control funds SPDR S&P World ex Australia Carbon Control and SPDR S&P World ex Australia Carbon Control (Hedge) by 12 and 14 basis points respectively.
The company also announced that both funds would change the specific indices they track to improve their ESG profile. This decision was made in response to investor demand to improve sustainability scores and reduce greenhouse gas emissions.
Kase said: “Already, across all cohorts, we are seeing increased interest in ESG and it will continue to be a part of people’s investment decision. ETFs can allow them to use ESG as a theme rather than just part of a larger portfolio. The desire to focus on ESG will only grow and it will be vital for asset managers to focus on this”.
This ESG trend was also prompting companies that traditionally focused on active management to consider ETFs for the first time.
Australian Ethical, one of Australia’s largest providers of ethical and sustainable funds, has launched its first ETF, the High Conviction fund. It was an actively managed portfolio of 20 to 35 companies from the ASX 300 that met extensive ethical criteria based on the company’s ethics charter.
The company said the decision to launch an ETF was made as a way to “democratize” ethical investing to as many investors as possible. While the company has been around for 20 years, chief executive John McMurdo said he’s seen a ‘huge change’ over the past five years, particularly around interest in climate change and renewable energies. renewable.
“[Ethical investing] has gone from a niche industry to one that is part of everyone’s conversation. CEOs used to ignore the conversation, but now they come to us for advice, it’s been reversed.
Its ethical charter requirements included factors such as alignment with the United States’ Sustainable Development Goals (SDGs), seeking investments that grew local businesses, developed appropriate technology, preserved ecosystems under threat, and undertook efficient waste disposal, among more than 20 considerations.
McMurdo said: “We hadn’t set out to target a specific audience or demographic with an ETF, we wanted to make sure everyone who wanted to invest ethically had the opportunity to do so. Many in this channel however will be millennials and this will make it easier to care for them.
“It’s our first listed product but we wouldn’t call it a theme fund. This is an actively managed portfolio of companies that adhere to our ethics charter.
“We have a strong history in active equities, so it was a natural place to start. People don’t have to fill out a lot of paperwork and the minimum investment is less.
At Perpetual, Karen Trau, senior product manager, listed and direct, said the launch of the company’s socially responsible investing (SRI) ETF in December, Perpetual Ethical SRI, was the first in a series active ETFs for the company.
“We’ve put a lot of thought into the ETFs we launch and they’re driven by the needs of our clients rather than targeting a particular audience.
“However, we recognize that one of the big trends in the market has been the growth of ESG and advisors are moving their clients towards this use and clients are demanding it.
“ETFs will continue to grow, there will be a wide variety of strategies coming to market. For us, this fund is the start of a suite of active ETFs that we are launching.
Meanwhile, Munro Partners said its decision was made following a request from some advisers who had set up their business to focus on ETFs. The company had three ETFs listed on the ASX, the most recent of which was the Climate Change Leaders fund.
“There is a part of the community who told us that they have a strong preference for listed or rated products. They would say they liked our products but couldn’t invest unless it was in a different structure because of how they configured their systems or back office platform to focus on ETFs,” Chief Executive Ronald Calvert said.
He said the decision to focus a climate change themed fund was based on the large potential market he saw for companies to benefit from the decision to go carbon neutral.
“The Climate Change Leaders fund focuses on companies that will benefit from governments or organizations deciding to become carbon neutral. We believe this will be a huge expense in the future and wanted to research companies that were going to earn revenue from this expense.