A pedestrian walks past the indicator board at the Australian Stock Exchange in Sidney
The Australian Stock Exchange’s board in Sidney. Australia’s ETF space has expanded more rapidly than the global ETF industry © EPA

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The Australian exchange traded fund space has achieved a record-setting growth in assets last year, outpacing the expansion of the global ETF industry. But recent market volatility has introduced uncertainty around investor appetite going forward for thematic ETF strategies.

Australia’s ETF total assets increased 44 per cent from A$95bn ($68.2bn) reaching a record high of A$136.9bn, its sharpest annual expansion, according to data from local ETF issuer BetaShares. This followed a landmark asset growth of more than 30 per cent in 2020.

Australia’s ETF industry has expanded more rapidly than the global ETF space, whose assets rose 28.5 per cent in 2021 reaching an all-time high of $10.27tn, and ahead of the 31.9 per cent growth rate seen in the US last year, according to ETFGI data.

US fund managers Vanguard and BlackRock’s iShares, as well as local ETF provider BetaShares, have been the biggest beneficiaries of this ETF asset growth in Australia, collecting 75 per cent of the A$25.9bn in net new flows last year.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Participants are banking on continued strong growth rates in the local ETF industry that has been buoyed by a 33 per cent increase in the number of ETF investors, bringing the total to 1.73mn last year, according to a December report from industry researcher Investment Trends.

These new investors, many of whom are younger individuals, are increasingly using ETFs to build their investment portfolios.

But recent turbulence in local and international markets, as well as changing demands for the type of ETFs that are available among domestic investors, are tempering expectations.

“We’re going through a challenging period right now,” said Arian Neiron, Australia chief executive and managing director for Asia Pacific at US-headquartered ETF issuer VanEck.

As the US Federal Reserve was committed to raising rates, that was going to affect investor sentiment, Neiron added.

The S&P/ASX 200 index, the flagship index for the Australian Securities Exchange, fell more than 8 per cent in January, wiping out almost all of the gains from the consistent growth in 2021 that helped the index finish the year 10.1 per cent higher.

Thematic ETF strategies recorded strong growth in Australia last year accounting for 10 of the 33 new ETF launches in the country. By the end of December, there were 22 Australian-listed thematic ETFs with combined assets of A$4.26bn, according to BetaShares.

However, thematic strategies account for just 3 per cent of Australian ETF assets and VanEck expects investors to pivot away from high-momentum thematic strategies.

Different technology-themed ETFs, from cyber security to video games and e-sports, which invested in companies that had been trading on high price to sales but with no earnings, were going to get hurt, said Neiron.

“I don’t see thematics growing at the same rate as they did last year, and I think a lot of the mainstream thematic and structural growth trends have been captured,” he said.

“ETF strategies that are very niche and targeting more high-momentum and visionary growth ideas and thematics, they’re going to come down harder,” he added.

Alex Vynokur, BetaShares’ Sydney-based chief executive, was more bullish on thematic products, arguing that there were certain megatrends, including cyber security, robotics and climate change, which represented long-term opportunities for investors.

“I certainly believe that those opportunities transcend a short-term period of market uncertainty or volatility,” Vynokur said.

“If anything, any weakness in the market probably presents an opportunity to start allocating, or a more attractive entry point,” he argued.

The company launched five of its nine Australia-listed thematic ETFs last year, including strategies focused on cloud computing and electric vehicles. The five new ETFs had total assets of A$354.7mn as of February 2.

In 2015, Australia opened up its market to actively managed ETFs, becoming one of the first regional markets to do so.

While active ETFs accounted for only 8 per cent of all ETF flows in Australia last year, the space is attracting more global asset managers aiming to make their active strategies accessible to more investors.

Fidelity launched its second active ETF in Australia in December last year. The launch of the Fidelity Global Demographics Fund came three years after the company introduced its first active ETF to the market. Loomis Sayles also joined the active ETF bandwagon in Australia in September last year.

VanEck’s Neiron predicts a “massive uptick” in active ETF listings in 2022 as managers create greater accessibility for investors ranging from retail to self-managed superannuation funds.

Of the 33 new product launches in Australia last year, 13 were active ETFs, with nearly all being via the creation of traded classes of existing unlisted funds, according to BetaShares data.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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