- ETF investment remains one of the favourites in the stock market with strong inflows recorded in 2019 that followed in Q1’ 2020, beating all odds such as pandemic effect and challenging market conditions like US-China tensions
- Australian ETF market recorded its third strongest quarter in Q1
- ETFs are proving to be a go-to-investment type because of low-cost fee structure, diversified nature of stock portfolio and opportunity to access difficult and expensive stocks
- Its diversified nature spreads the risk, making ETF a desired investment type for long haul
ETFs are one of the best investment products if you are looking for diversified returns, low capital investment and returns similar to an index or a commodity. They are considered to be one of investors’ favourite because of the passive income opportunity they present. In the Australian market, more than 200 ETFs are listed. Let’s dig deeper to understand this investing form and its stance amid the pandemic turmoil.
What are ETFs?
An ETF or exchange traded fund comprises assets such as stocks (both domestic and international), commodities, precious metals like gold, safe investment options such as bonds, and currencies. Operating as a managed fund, ETFs are traded on an exchange, like ASX (Australian Securities Exchange).
An ETF primarily follows an index and in general don’t outperform the index it tracks, but exceptional growth could occur. For example, the below chart where STW Fund is tracking the S&P/ASX 200 index, percentage change in prices of the index is mirrored by percentage changes in the price of the ETF. The chart also shows that in March 2020, when Australia was majorly dealing with the COVID-19 pandemic, S&P/SX 200 experienced a sharp decline with the ETF being no exception.
Fig 1: STW Fund vs S&P/ASX 200 – One-Year Price Performance
For more information, please read Points To Consider While Investing In ETFs?
ETFs and the Australian Market
As per data released by the ASX and Vanguard, one of the world's largest investment companies, the Australian Exchange Traded Fund (ETF) market crossed $61 billion in assets under management (AUM) in 2019. Inflows for the year reached over $13.7 billion. ETF industry inflows for 2019 far outpaced $8.0 billion and $6.4 billion received in 2017 and 2018, respectively, with ETF assets growing at a compound annual growth rate (CAGR) of over 23% for the past five years.
According to investment advisor Vanguard and the ASX, new ETF inflows in the first quarter of 2020 were $3.8 billion. 1Q20 was also the third strongest quarter on record for the Australian ETF market in terms of new inflows.
According to Minh Tieu, Head of ETF Capital Markets for Asia Pacific at Vanguard, 2019 observed a challenging market because of the Australian federal election, international issues such as the US and China trade war and Brexit, along with adapting to the findings of the Royal Commission. Amid such market conditions, the ETF market continued to show resilience with more investors choosing ETFs, leading to increased competition among issuers, which in turn drove down the cost to invest, giving investors more returns.
As on 31 March 2020, Vanguard remains the largest ETF manager in Australia, with AUM of $17.6 billion and 29 ETF offered products.
Why ETFs are a Good Option for Long-Term Investment?
What to consider during ETF investing?
ETFs give access to a range of assets and markets, both at domestic and global levels, thereby delivering benefits like instant diversification, asset allocation adjustments, and potential returns in terms of income and capital growth, provided they are used wisely. As they also carry risks, one should make a decision regarding ETF sale or purchase, considering how much risk one can assume to get to the desired results.
Disclaimer: All the currencies mentioned are in AUD unless specified
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