Young Australians are turning to exchange traded funds

Posted: 15 March 2018 11:03 am
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Young retail investors are choosing ETFs for their instant diversification, low cost and access to international markets.

More Australians are adding exchange traded funds (ETFs) to their investment portfolios, with the number of ETF investors growing by 18% in the past 12 months alone according to the latest research by Investment Trends in collaboration with ETF provider BetaShares. The report revealed there are now 314,000 ETF investors in Australia, up from 265,000 in 2016 and up from just 69,000 five years ago.

Not only are ETFs becoming more mainstream investment choices, but those investing in ETFs are getting younger. The report found the average age of those choosing to invest in ETFs for the first time is now 42, down from the average age of 56 for those who started investing in the products more than five years ago. Plus, of the number of investors planning to invest in ETFs over the next 12 months, one third are millennials.

Why are ETFs becoming so popular?

I recently spoke with CEO of BetaShares Alex Vynokur as to why ETFs are becoming so popular among retail investors. He explained that ETFs by their very nature provide instant diversification and, because they track a particular index, their performance isn't reliant on an investor trying to beat the market. In other words, it's about time in the market rather than timing the market.

"As a retail investor, what is your chance of picking the market? What's more important first and foremost is being invested in the market. Traditional managed funds are expensive to invest in, but ETFs really simplify investing. ETFs are by their very nature well-diversified," he said.

The report findings support this view, with 72% of current ETF investors saying diversification is the main reason they use ETFs. This is followed by their low cost, their access to overseas markets and the idea that ETFs avoid the risk of individual stock exposure.

ETFs versus listed investment companies (LICs)

I asked Vynokur about listed investment companies which also provide instant diversification for a low cost, and avoid the risk of picking individual stocks. I was curious what the key difference was between these traditional managed funds and ETFs.

"The key difference is that listed investment companies are closed-ended investment vehicles, while ETFs are open-ended. This means the ETFs on the market will trade at their fair value 99% of the time. Plus, ETFs really stand out for their transparency. They disclose daily what's under the bonnet."

Basically, the share price of a listed investment company can be largely influenced by demand, or lack thereof, from buyers. This can make it difficult for retail investors, particularly new investors, to work out the true underlying value of the share.

The 2018 outlook

BetaShares predicts the popularity of the products will continue to grow, hitting more than 381,000 ETF investors by late 2018. When I spoke with Vynokur about the direction the ETF market was heading, he said they've seen a huge demand for ethical ETF options, particularly among younger investors. As such, BetaShares has recently launched two ethical funds as a direct result of this demand: Australian Sustainability Leaders ETF (FAIR) and Global Sustainability Leaders ETF (ETHI).

Ethical investing involves screening companies to avoid those that may produce tobacco or fossil fuels, promote child labour and even companies that have no female representation on their board, among many other things.

“Ethical investing is a broad term. It means different things to different people. What we’ve done is bring together all the considerations people have into the one product. If you’re a mining company that clearly has a direct impact on fossil fuels, you’re out. And if you’re a bank that invests in those coal mining companies, you’re out too," said Vynokur.

And for those investors curious about ethical investing but worried it may affect the fund's performance, Vynokur says not to worry about that. "It's absolute nonsense. Investing ethically absolutely does not come at the expense of performance."

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