The popularity of Exchange Traded Funds (ETFs) has rapidly grown over the past 10 years in Australia and overseas – a decade that begun ominously enough with the beginning of the global financial crisis (GFC).
This popularity is attributable to a range of factors yet it’s worth emphasising that the GFC has undoubtedly underlined to many investors the attributes of having low-cost, broadly-diversified and transparent investments – typical characteristics of ETFs.
Recent ASX research shows that the market capitalisation of Australian-listed exchange traded products, most being index ETFs, reached $29.84 billion by the end of July. A decade ago, Australian-listed ETFs alone held about $926 million.
Globally, London-based ETF researcher ETFGI reports that assets invested in the 6965 exchange traded products (again including ETFs) listed on 70 exchanges in 56 countries reached a record USD $4.168 trillion by June 30. This is up from USD $857 billion a decade earlier. (Key differences exist between the style of some ETFs listed in Australia and overseas.)
An interesting aspect of the growth in the market capitalisation of ETFs is that this period began as the share markets were within a few months of their pre-GFC high. And the decade covers, of course, the markets’ fall to their GFC lows and their comeback from those lows.
The latest Morningstar ETF Investor newsletter looks at some of the new ETFs on the Australian market and emphasises the need for investors to understand the costs and what are the underlying investments of an ETF.
Although this edition of the newsletter specifically focuses on cash ETFs, its broad comments are pertinent no matter what type of fund, active or passive, an investor is considering.
Echoing a long-time favourite saying of Vanguard founder Jack Bogle, the newsletter says: "The old saying ‘you get what you pay for’ is not so true in the investing world … you could argue ‘you get what you don’t pay for.’"
And on the need to understand a fund’s underlying assets, Morningstar comments: "Understand what’s Inside. When you buy a car, you may not know how the engine works but should know whether it is a 1.4 litre diesel or a V8 supercar. It’s the same with investment products—make sure you understand what’s inside the portfolio, now, and what may be there in future."
Before buying any investment, including ETFs, have a good look under the bonnet.