The ETF market in Australia remains buoyant despite the ravages of COVID-19, with total FUM at 31 March 2020 of close to $57b, up 24% year-on-year despite the severe market sell off in March. Much of this growth has been driven from strong product innovation and subsequent fund inflows in non-Australian equity sectors, with the Equity Global Strategy, Fixed Income Australian and Global, Commodity, Global Infrastructure and Mixed Asset all recording +50% FUM growth. These were driven by a mix of long-standing market themes such as the quest for yield as well as the need for a defensive hedge against market volatility lead to gold ETF inflows.

As a postscript to the March data, the subsequent April 2020 has seen the ETP market record its second biggest month in history with over $1b in inflows according to BetaShares data. This along with the April recovery in equity markets led to FUM rising +$4b for the month to close at $61.3b; however this is still short of the all-time industry peak value of +$66b recorded in early 2020. In terms of the net flows, BetaShares data highlights that the strongest April flows were in Australian equities ($575m), Commodities ($264m) and Short ($234m). This was funded by net outlfows from Fixed Income ($224m). This data perfectly highlights the increasing role that ETFs are playing as an efficient vehicle to rebalance portfolios.

As an overall observation, the COVID-19 sell off has proven to be a strong stress test for the ETF market both in Australian and globally. This is not to say that is has all been smooth sailing, with the most acute issue having been that a number of local Fixed Income ETFs started to trade at sizable discount to NAV at the height of the March dislocation. Additionally, spreads on global equity ETFs tended to gap out considerably in March in the immediate aftermath of widely used NAV proxy the S&P500 futures contracts going into limit down on very volatile days. However, as a general rule price discovery remained solid across ETFs throughout. Additionally, the FED bolstered Fixed Income ETFs in the US when they announced that they would be in part be implementing QE measures by buying ETFs that track the corporate bond market.

The rise of the ’boutique’ issuers

While Vanguard and iShares remain the dominant passive ETF issuers in the Australian market, holding 33% and 26% of FUM respectively as at March 2020, boutique ETF innovators such as BetaShares, Van Eck and ETF Securities (collectively ‘the Boutiques’) continue to experience rapid growth. This has been at the expense of StateStreet, which now has significantly less FUM than BetaShares with Van Eck snapping at its heels.

The strong FUM momentum outside of what used to be the ‘big 3’, i.e. Vanguard, iShares and StateStreet, is due to a number of factors. The first is that of the ‘big 3’, only Vanguard has been issuing new ETFs. Neither iShares nor StateStreet has issued a new ETF in the Australian market for some time, which has been a change in the dynamic of the local market given the pivotal role both played in building the ETF sector in Australia. By contrast, Vanguard has issued seven new Lonsec rated ETFs in the last two years which include three active ETFs.

The second and most critical reason has been the strong execution on their business plans by the Boutiques. They have continued their strong roll-out of new ETFs, contributing 18 new ETF to the Lonsec rated universe over the last two years. BetaShares has been the most prolific, adding nine funds, while Van Eck added six and ETF Securities the remainder. Most of these products were issued in sectors outside of Australian equities including smart beta and regional global equities, Emerging markets including regional allocations (China, India), hard assets, credit, cash and ESG options.

Another area contributing to FUM growth is the success the Boutiques have had in growing a number of key ETFs to substantial scale. Again BetaShares has led the pack, with each of A200, FAIR, ETHI, NDQ, AAA, QPON and HBRD all having market caps above $400m and in the case of AAA now well above $1.6b. Van Eck has also had great success with two equity smart beta options, with each of MVW and QUAL having a market cap in excess of $800m. Finally, ETF Securities has seen the FUM of GOLD grow to above $1.6b.

Figure 1 – FUM Split by Issuer March 2020

Top 10 continues to be equity heavy

ASX CODE NAME $M
VAS Vanguard Australian Shares Index ETF 4,199.39
STW SPDR S&P/ASX 200 3,094.58
IVV iShares S&P 500 ETF 3,029.76
VGS Vanguard MSCI Index International Shares ETF 2,011.73
AAA Betashares Australian High Interest Cash ETF 1,682.88
IOO iShares S&P Global 100 ETF 1,678.67
VTS Vanguard US Total Market Shares Index ETF 1,677.14
GOLD ETFS Physical Gold 1,637.95
MGE Magellan Global Equities Fund (Managed Fund) 1,614.34
IOZ iShares Core S&P/ASX 200 ETF 1,582.18

VAS has continued its ascendancy as the largest ETF on the ASX with a market cap of approximately $4.2b despite the market impact of the COVID-19 sell off. IVV is closing in on STW for the second position, with both the relative outperformance of the S&P500 versus the ASX200, currency impacts and re-balancing to global equities closing the gap. AAA has continued to rise up the ranks in the last few years, driven by yield hungry investors interested in the listed enhanced cash space. Finally, GOLD has had strong inflows during recent more volatile markets and has also benefitted from strength in the gold price.

As an overall observation, the ‘top 10’ continues to be dominated by Australian and global/US equity ETFs. MGE, AAA and GOLD are the only active ETF in the cohort, with the remainder being passive trackers of mostly marketcap weighted beta indices.

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