Australia’s exchange traded fund (ETF) market reached a record market capitalisation of $226.9 billion in the September quarter. The question now is whether it will follow global trends to provide access to more asset classes and investment strategies. We spoke with Marc Jocum, Product and Investment Strategist at Global X ETFs about where markets might be heading in the future.

The big picture: More than 50 ETFs have been launched in Australia so far in 2024, bringing the total number to just shy of 400¹.

• That’s a big leap from the 226 that were available at the end of 2020, but still far less than the thousands available in the US and UK.

The newcomers: Many of the new ETFs are active funds that replicate unlisted versions of the same product. 

• International managers like Dimensional Fund Advisors and JP Morgan are among those which have launched active ETFs, alongside locals like Macquarie Investment Management.
• Thematic ETFs also continue to grow in number, with several launched in 2024 that focus on artificial intelligence. More recently, providers have listed defence ETFs in expectation that increased global military spending could drive up defence stocks.
• Other newly-launched products aim to provide retail investors with diversified and low-cost exposure to asset classes that can be difficult to access. The Global X Australian Bank Credit ETF (ASX: BANK), for example, launched in July and invests in local banking debt across the capital structure. 

Price pressures: Around two-thirds of money going into ETFs is directed at low-cost products to the detriment of active funds, Marc says.

• “Active ETFs don’t appear to resonate with Aussies – they are among the few product categories to have outflows this year as people migrated from high-cost to low-cost funds. It will be interesting to see how active managers respond,” Jocum says.

What’s next: Global ETF providers continue to launch innovative products but it’s unclear if all of them would suit the Australian market.

• Fixed income ETFs stand out as one category likely to grow locally: “they counted for around 7% of the Australian ETF market five years ago. It’s now closer to 14% and could be 20% over the next five to 10 years,” Jocum says.
• ETFs which use options strategies, such as covered calls, to generate income could also gain more traction as investors look to diversify income sources and monetise volatility. 
• But single stock ETFs which allow investors to magnify exposure on both the upside and downside might not gain the same popularity in Australia as the US – simply because local investors lack the same risk appetite as their US peers, he argues.
• Demand for ESG ETFs is falling in the US and, to a lesser extent, Australia. Local investors are displaying more interest in industries with the potential to profit from the net zero transition, such as uranium, copper and other renewable energy sources.

Why it all matters: The local ETF industry has the potential to record a new phase of growth as more investors accept these products as a core part of portfolios.

• “More people are becoming comfortable with the ETF structure – they understand the tax efficiency, enhanced liquidity, transparency and low cost in a way they didn’t 10 years ago,” Jocum says.

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¹Australian Funds Market Report Cboe September 2024