Make friends with new trends through ETFs

From ethical investing to active management, new funds continue to mirror the market.

The exchange-traded fund landscape has evolved rapidly beyond the replication of major stock market indices such as the S&P/ASX 200 and S&P 500. Today’s investors can use ETFs to access different asset classes, regions and sectors as well as topical themes and a range of dynamic strategies (commonly referred to as “smart beta”). When looking into what trends are appearing in the Australian ETF market, it is useful to separate out the recent market activity from the longer-term evolution of the industry.

Investors won’t be surprised to see that the current concerns around COVID-19 have influenced how ETFs are being used by many people. There has been increased interest in ETFs that invest in “safe-haven” assets — assets likely to hold up as equity markets plunge. Gold-backed ETFs are a good example.

On the flip side, some investors have viewed the market volatility as a buying opportunity, focusing on sectors they expect to benefit fastest from any recovery. Technology-related ETFs are a good example.

Beyond the current market volatility, a number of deeper trends have appeared in the ETF market in recent times.

One of these is thematic investing. This is where investors seek to access global growth themes, such as virtual connectivity and artificial intelligence or the growing Asian middle class. Many of these themes have previously been difficult for individuals to access, requiring extensive research, being cost-prohibitive and requiring the ability to trade across international stock exchanges. ETFs have offered a cost-effective and easy-to-use access point for investors who want exposure to long-term growth themes in their portfolios. Similarly, we are seeing trends in the sphere of ethical and sustainable investing.

Increased concern over ethical behaviour and environmental standards is driving the emergence of a range of ETFs (and indeed, many other products) to cater for this interest. This trend initially focused on broader ESG (environmental, social and governance) factors, but has now moved into niche areas. For example, there are ETFs that focus specifically on environmental aspects such as clean energy. Ethical ETFs are becoming increasingly tailored to certain moral views and interests. While earlier products excluded investments in controversial companies like weapons or tobacco manufacturers, next generation products aim to have a positive social impact aspect to them.

Another trend in the Australian ETF market is the emergence of active ETFs. ETFs have traditionally been passive investments — designed to match the market. Active ETFs, which are exchange-traded versions of traditional actively managed funds, have taken off in recent years.

In recent times, the Australian Securities & Investments Commission has paused new issuance of active ETFs, as it reviewed the way these products operated, but has since given a green light and investors can expect to see increasing numbers of active ETFs appear on the market in the coming years.

While these trends are likely to continue, we also expect to see ongoing world events, such as the COVID-19 pandemic, influence the demand for different types of ETFs over time.

Sara Allen is head of content at ETF Securities Australia

www.etfsecurities.com.au