‘You get what you don’t pay for’: The $40 billion winner from the banking royal commission

It’s one of the most popular investments for millennials who dream of retiring at 40, and this Australian sector is set for explosive growth.

It’s one of the most popular investments for millennials who dream of retiring at 40, and this $40 billion Australian sector is set to be one of the biggest winners from this week’s banking royal commission report.

Exchange-traded funds (ETF), which can be bought and sold like regular shares but allow consumers to invest in hundreds of companies at once, have been rapidly growing in popularity due to their steady returns and low fees.

Legendary investor Warren Buffett is their most vocal proponent, famously winning a 10-year bet that the S&P500 index fund, which tracks the top 500 US companies, would outperform a basket of stocks hand-picked by hedge funds.

In recent years the growing “Financial Independence, Retire Early” (FIRE) movement has fuelled interest in the low-cost, “passive” investments. The Australian ETF industry is worth about $41 billion and that number is tipped to hit $60 billion this year.

“It really just comes down to getting started early, allow that magic of compounding to do its work and really be mindful of the fees you’re paying and the cost of investing,” said Alex Vynokur, founder of Australia’s second-largest ETF provider BetaShares, which now has $6.4 billion under management.

“Sometimes people say you get what you pay for. In the investing world you get what you don’t pay for. Not paying very high fees and being able to save some of that will guarantee you a bit more in your pocket down the track.”

One of the big questions to in the lead-up to the release of the banking inquiry’s final report this week was whether the banks would be forced to separate their “vertically integrated” product and advice functions.

To the surprise of some observers, they dodged that bullet. Bank shares skyrocketed on Tuesday as a result.

“Enforced separation of product and advice would be a very large step to take,” Commissioner Hayne said in his report, warning it would be “both costly and disruptive” and it was not clear the benefits would outweigh the costs.

Still, Mr Vynokur believes the ETF industry will ultimately benefit as the playing field levels out. “It’s a time of great opportunity for people who are doing great things for their clients,” he said. “Consumers are going to win, in my mind there’s no doubt.”

When he started BetaShares in 2010, financial planners and advisers rarely directed their clients to buy ETFs, despite three quarters of active managers underperforming the market.

“People would say, ‘What’s in it for me? I’m not getting the kickback, how am I going to get paid?’ You could explain and educate until you’re blue in the face.”

Mr Vynokur said while the 2013 Future of Financial Advice reforms in theory put all investment products on a level playing field and eliminated conflicted remuneration, “we see a lot of people not complying”.

“My sense is we don’t actually need new legislation, (that there will be a) tightening of screws in compliance. I think for the ETF industry we will almost undoubtedly be a pretty significant beneficiary.”

As the Chinese Year of the Pig kicks off amid lingering “fear and uncertainty” in financial markets, Mr Vynokur said there were plenty of investing opportunities in Asia, where markets have been hammered by Donald Trump’s trade war.

“Alibaba, Tencent, Baidu, JD, a lot of these have been sold off on the back of the Trump trade war, but the Asian tech sector is actually benefiting from domestic consumers because of the younger tech-savvy population,” he said.

“Those companies in our view have been caught up in the broader sell-off. To me that represents a very interesting opportunity for growth-oriented investors.”

Shane Wise, 49, a qualified financial adviser and self-described “ETF junkie” from Adelaide, has about $300,000 invested across a mixture of funds including Vanguard, Blackrock, BetaShares and VanEck.

“When I started in finance I was horrified by what I saw, I was gobsmacked,” he said. “I’m not surprised (by the royal commission). It’s completely broken at its core.”

He recommends ETFs because they are “purely transparent”. “At any moment I can see every single holding that’s in there on any day,” he said. “That makes it really hard for the finance industry to make any money out of it because there’s no black box.”

Due to the lack of trust in the financial industry, many mum-and-dad investors “do it themselves”. “I get horrified to see they’re holding about five blue-chip companies,” he said. “The ETF is something that protects the novice through diversification.”

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