VanEck’s annual Australian Smart Beta Survey attracted 547 responses from the advice sector, finding that ETF usage is increasing due to the reduced portfolio costs that they present.
Notably, the study found that 91 per cent of advisers use ETFs in client portfolios, up from 87 per cent in 2020.
Moreover, 74 per cent of respondents increased their allocation to ETFs over the last 12 months, catalysing the sector recording a record market cap of $125.1 billion in August.
According to VanEck, ETFs allow advisers to have greater control of client outcomes alongside boosting transparency and performance.
VanEck’s report also noted that 56 per cent of advisers were using smart beta ETFs in lieu of active management strategies, while 55 per cent of respondents were said to be planning to bring up their smart beta allocation in the next 12 months.
Smart beta refers to investment strategies tracking an index that differs from the traditional market capitalisation approach of selecting shares, bonds or other assets.
“Not surprisingly, strong performance is the number one motivation for advisers using smart beta strategies, with improved portfolio diversification, reduced volatility and improved risk-adjusted returns also key reasons for using smart beta ETFs,” said Arian Neiron, VanEck’s CEO and managing director, Asia Pacific.
“We also found that 75 per cent of respondents think smart beta strategies are going to become more prevalent in portfolios; the reason for that could be that advisers are happy with their performance, with 99 per cent of smart beta users satisfied with their strategy.”
According to Mr Neiron, a theme of underperformance among more expensive actively managed funds was also pushing advisers, knowledgeable about the product, towards smart beta ETFs.
“Just 9 per cent of respondents said they did not use smart beta ETFs because they only use actively managed funds,” said Mr Neiron.
“The biggest reason for not using smart beta strategies stemmed from not knowing enough about them, with 44 per cent of respondents who don’t use them giving this as the reason why.”
The thematic strengths offered by ETFs has also allowed advisers to use the products to meet client demand for macroeconomic areas such as ESG investment, video gaming or semiconductors.
“As knowledge of ETFs and their benefits grows, flows into the sector are expected to gain even greater momentum,” Mr Neiron stated.
“The range of ETFs now available includes those offering exposure to equity factors such as quality and thematic ETFs including those invested in the rapidly growing clean energy and video gaming sectors; this is drawing in the younger demographic and more sophisticated investors alike, which is driving growth of the ETF market overall.”
The report found that 46 per cent of advisers studied were invested in ESG strategies.
Aren’t ETFs just speeding up ‘herd mentality’
I primarily use Index growth funds as a one-off SoA, as a measure to offload my small clients (according to their risk profile). FirstChoice index funds are probably the best value. A $1500 super fund only pays $9 fees a year!
You have clients with a $1500 balance?
Well stop the press!! 9/10 advisers asked by an ETF provider if they’re using ETF’s use ETF’s. That’s like standing at a Coles checkout and asking how many Coles shoppers buy Coles own brand products.
In my humble opinion, if you’re overweighting index funds for “reduced costs”, then either you have insufficient skills to know or sell your true value as an adviser and/or insufficient understanding of how markets work over a full cycle.
In my experiences, clients have nil concerns about fees when you’re selling value and peace of mind instead of returns. Also in my experience, the current dispersion between growth and value means that index funds are currently piling more money into the most overvalued stocks and are dramatically overweight these same stocks. Adding more money to already overpriced investments at market highs has not historically ended well and there’s no reason to expect this cycle will be any different. Now is the perfect time to reducing exposure to ETF’s in favour of more discerning active management.
Interesting that ETFs are piling money into overweight stocks but active managers supposedly aren’t. The reason ETFs are so popular is that 75% of active fund managers don’t beat the index over the long term (I also acknowledge here that they do have a better track record for smallcaps).
Forget returns. While it’s not hard to identify the 25% of active managers who DO outperform, I prefer active management for capital preservation and reduced risk. Most active managers will achieve a very close return to the index, but with significantly less risk. This appeals to clients who get worried during volatile periods.
“While it’s not hard to identify the 25% of active managers who DO outperform”.
So all the studies that show there is no correlation between those active fund managers that have performed better for the last 5 years and those that will perform better for the next 5 are wrong….
5 years? LOL!
My business plan, nor my client relationships or clients goals are too fussed with 5 year periods. Nor do the better active managers care for how they stack up against an index over 5 year periods to be honest, if over any time frame.
What’s 5 years in the scheme of a business? A retirement? A client relationship?
If you’re not thinking in decades you’ve already lost.
Looking at a 5 year study to make decisions about something that should have a 10-20-30-40 year lifespan is irrelevant.
The business cycle isn’t even that short… It’s completely irrelevant.
I’m looking for managers who will outperform over a time frame that’s aligned to my business plan, my client times frames and my clients goals. And they are not hard to identify.
I completely 100% agree with this, though unfortunately it’s the direction the majority of Dealer Groups is pushing Advisers, along with MDAs. It’s removing the Adviser from Advice and creating a one-size-fits-all herd. Disgraceful really, though it’s indirectly the result of ASIC putting pressure on Advisers and Dealer Groups and the product providers also as typically if the regulator (and many in charge of compliance in Dealer Groups) don’t understand a strategy or “product” it’s typically considered to be too risky.