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Investors are pouring billions of dollars into ETFs that aim to beat their passive peers

- Pam Walkley

The rise of exchange-traded funds (ETFs) has democratized investing. Now a retail investor like you or me can get global diversification (previously only available to large institutional investors) in a single trade.

In the 26 years since ETFs launched in the US, they have become one of the most popular investment vehicles for both institutions and individuals.

In Australia, ETFs were launched 18 years ago. The local exchange-traded product (ETP) market – financial products traded on the Australian Securities Exchange (ASX), including ETFs, managed funds and structured products – exceeded $54 billion in market capitalization at August 2019, says Alva Devoy, Australian managing director at Fidelity International.

She says the ETF sector has steadily grown over the past six years and retail investors have helped drive the investment vehicle’s popularity.

In 2030, ETPs in Australia are expected to have about $600 billion in funds under management, representing 12% of the broad market, according to estimates from researcher Rainmaker Information.

Originally, ETFs were passive investments, designed to mimic an index focused on equities, fixed income or a blend of asset classes. Active ETFs, which aim to outperform their index by engaging the services of a portfolio manager, were only introduced into Australia in 2015.

Devoy says ASX trends showed that 50% of new ETF trades were active ETFs in the 2018 calendar year.

“There were 41 active ETFs at end August 2019 with $4.5 billion in funds under management,” she says.

Both active and smart beta (see a breakout, right) segments have grown at around 70% a year for the past three years, says Rainmaker.

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