This article has been written by expert contributor, Robin Bowerman, Head of Corporate Affairs, Vanguard Australia
Twenty years of exchange traded funds
The Australian exchange-traded fund (ETF) industry turned 20 in 2021, and what an eventful two decades it has had. From the birth of the first ASX-100 tracking ETF in 2001 to the now 220-odd product range, the ETF industry has certainly amassed some significant milestones.
In 2021, the Australian industry surpassed $110 billion in AUM after experiencing an impressive growth spurt of 75 per cent over the previous 12 months.
Part of this momentum can be attributed to the rise in retail investor interest. Traditionally popular with financial advisers, ETFs are now bookmarked on the desktops of individual investors who are increasingly realising the many benefits that ETFs have to offer.
So as the ETF industry continues to grow, it offers a timely opportunity to go back to basics and revisit the fundamentals of an investment product that has now become a market staple.
What exactly is an ETF?
An ETF is a managed fund that is traded on the stock exchange and provides investors access to hundreds – sometimes thousands – of securities in a single market trade.
ETFs can offer exposure to a range of asset classes including equities, fixed income, property and more, and seek to track the returns of a broad market index.
For example, the largest ETF on the market is the Vanguard Australian Shares Index ETF (VAS), which tracks the return of the S&P/ASX300. As the index rises and falls in value, VAS will rise and fall accordingly.
Investing in VAS is akin to investing in the top 300 companies listed on the ASX, but instead of purchasing individual shares from each of the 300 companies, VAS combines them all into the one fund according to their market size.
ETFs, like regular shares, can be bought and sold through brokerage accounts at any time during exchange hours (10am – 4pm).
Low-cost, diversified and easily accessible
The key benefits of most ETFs are that they’re low-cost, accessible and provide diversification benefits in just one trade.
The management fees for index-based ETFs are usually significantly less than what it would cost you to buy the same portfolio of individual securities. ETFs are also lower cost than actively managed funds, which typically charge higher fees to cover research, transaction, and performance costs.
ETFs tracking broad market indexes also provide investors with exposure to entire markets (both domestic and international), asset classes and multi-asset class investments – essentially offering an all-in-one investment solution.
And as ETFs pool together investors’ money they can offer access to a wider range of investments that may otherwise have too high an investment minimum or be too costly to access by an individual investor.
Aside from the above, ETFs are also highly transparent, liquid due to their ability to be traded, and relatively tax-efficient when compared to other investments.
Tax is naturally a concern for many investors as it can potentially take a large chunk out of investment returns. The low turnover of an index ETF however minimises the capital gains distribution impact, which improves after-tax performance and tax efficiency over the longer term.
Who suits an ETF?
ETFs may be suited to a wide range of investors, from those just starting their investment journey with smaller investment amounts, to more seasoned investors with established portfolios, to SMSFs who are looking for lower-risk products with international diversification and the potential to return both income and growth.
Different ETFs will suit different investors depending on their investment objective, time frame and risk tolerance.
For example, equity ETFs will be suited to longer-term investors with higher risk tolerances as equity markets may experience higher volatility in the short term when compared to other asset classes like bonds.
Bond ETFs on the other hand are more suitable for investors with a shorter time horizon and a goal of protecting assets rather than generating higher returns.
As index ETFs seek to track the returns of an index, they may be less suited to investors who are looking to significantly outperform the market or have very short investment time frames.
Looking ahead
As new investors enter the market and as ETFs continue to gain popularity, it’s likely that investors by the next decade milestone will have an even greater variety to choose from, particularly in the thematic space.
What will not change however is that investors should begin their investing journey with a strategy in mind, and then choose products that are suitable for achieving their long-term goals regardless of what trends are in vogue.
Robin Bowerman is the Principal, Head of Corporate Affairs at Vanguard and a member of Vanguard’s executive team.
In his current role, Robin leads the corporate communications and government relations functions of the business and plays a key role in Vanguard’s long-term strategy development. Robin joined Vanguard in 2003 as Head of Retail and played a pivotal role in the growth of Vanguard’s retail business and the products and services offered to financial advisers and retail investors, as well as overseeing retail sales and marketing.
Robin is a key spokesperson and experienced presenter for Vanguard, with expertise in investor education, funds management, self managed super funds, product development, industry and regulatory affairs related topics.
Learn more about Vanguard here.
The above material has been republished with the permission of Vanguard Investments Australia Ltd.