ETFs and the democratisation of investing

3 min read  
Date: 20 October 2016

Managed funds are a crucial part of retail investment portfolios because of the exposure they can give to a wide range of assets. However, there are obvious downsides – in particular, a lack of transparency and liquidity.

Over the past few years, a new type of managed trust – exchange-traded funds, or ETFs – have emerged to address these shortcomings. In a September Netwealth webinar, Vinnie Wadhera, BetaShares Director of Institutional Business and National Accounts explained what they are, how they’ve grown so fast, and why he believes they represent the ‘democratisation’ of investments.

Wadhera explained, unlike with a managed fund, “You're not filling out application forms or going through other avenues. You are simply investing and redeeming these units via the Australian Stock Exchange. You're doing so at the real-time value of the fund.”

This already entails a level of liquidity that a managed fund can’t provide. On top of that, because the vast majority of ETFs are passively invested in various indices, fees are generally low and investors have a much clearer sense of where their money is actually going. Wadhera said that transparency is “something that ETFs really do pride themselves on.”

In some cases, this isn’t just listing individual securities held in a fund; in the BetaShares Gold Bullion ETF (ASX code: QAU), for example, the custodian who holds the gold bullion bars publishes their individual serial numbers. That direct access to the details of individual holdings is something Wadhera believes is particularly important to investors since the GFC.

A changing regulatory climate played an important role, too: since advisers are now compelled, to a certain extent, to explore what Wadhera described as ‘lower-cost options’, the affordability and transparency of ETF products became increasingly attractive over the past two to three years. And because there are now so many – over 175, by his estimation, representing $24 billion in aggregate assets under management – these low-cost options provide numerous opportunities for portfolio diversification. Wadhera said that “because it’s a trade on the ASX, in one investment, you’re able to gain a very wide range of diversification.”

In addition, to a certain extent, the growth of the ETF sector has also been fuelled by the development of new investment technology, and the processing power underpinning it.

For all these reasons, ETFs have been on a rapid global growth trajectory; worldwide, there is over US $3 trillion in the sector, spread across well over 5,000 different products. At this stage, in Australia, the majority of ETF investors are either self-directed and/or self-managed super funds, but Wadhera has seen a growing number of advisers beginning to implement ETF-based strategies into their clients’ portfolios. In the next article, we’ll investigate the different ways you can do just that.