Global Investors 'Piled Into ETFs'

A recent personal finance feature published by Bloomberg asks readers to guess "who just turned 40".

The answer is the world’s first index fund for individual investors launched by Vanguard in the US on August 31, 1976. (For further reading, see: 40 years of innovations in indexing.)

Bloomberg suggests that Vanguard may have been somewhat premature in 1995 when it declared the "triumph of indexing". That was six years before the launch of the first Vanguard Exchange Traded Funds (ETFs) in the US and 14 years before its first Australian-listed ETFs.

As Bloomberg observes, "investors piled into exchange-traded funds". The arrival of ETFs accelerated the popularity of indexing.

London-based ETF researcher ETFGI reports that the market capitalisation of the 6,476 exchange traded products/ETFs listed on 65 global exchanges reached a record US$3.343 trillion at the end of July 2016. July was the 30th consecutive month of positive net investment inflows.

Key differences exist between the style of some ETFs listed in Australia and overseas. Nevertheless, the majority of ETFs listed globally are index-based.

The ETF experience in Australia had a relatively subdued beginning before gaining in popularity – with SMSF trustees being among the earliest and biggest investors.

ASX research shows that shows that the market capitalisation of Australian-listed exchange traded products – most being index-tracking ETFs – has risen by 88 per cent over the past two years to $23.29 billion at the end of July.

Meanwhile, the 12-month average transaction of Australian-listed exchange traded products rose from $32,396 two years ago to $65,006 by July this year – a rise of more than 100 per cent.

More investors are adopting a "core-satellite" approach, investing the core of their portfolios in traditional index funds and/or ETFs while holding smaller satellites of favoured actively-managed funds and direct investments.

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia.

As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

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