Targeting a new audience

If you looked at the exchange traded fund (ETF) market 10 years ago, the typical findings would have been a focus on Australian or global equities with a small proportion in fixed income and commodities funds. Little interest was paid to thematic or environmental, social and governance (ESG) investments. 

In 2011, a report by the Reserve Bank of Australia referenced the “relatively recent innovation” of ETFs but global assets were already over US$1.2 trillion. It seems Australia was a slow mover to the space, however, with only US$4 billion at the time.

Alex Vynokur, chief executive at BetaShares, said: “When we started BetaShares 11 years ago, the early adopters were male, wealthy self-managed superannuation fund clients and advisers who focused on high-net-worth individuals (HNWIs). “The last few years have been transformational, and it has gone from early adopters to mainstream investors”. 

A decade on, the Australian ETF market has risen to $132 billion and the audience has tilted to include more young people who are getting into investment for the first time and women who may have been previously disengaged with investment. Others are using them as an easy way to access stocks which are listed offshore, particularly mega-cap technology names in the US such as Tesla and Apple.

With no minimum investment, less paperwork, lower total expenses ratios than active funds and transparent pricing, first-time investors are finding them easier to understand and access than managed funds. They are also able to enter and exit the investment at any time during trading hours, which was appealing compared to their money being tied up.

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As a result, ETF providers have had to change the type of funds they are launching to address the demands of this new changing audience. 

This has included thematic funds in areas such as video gaming, electric vehicles and robotics. 

It has also led to the huge growth in development and inflows to funds focused on areas such as the environment, responsible investments and sustainability.

ESG DEMOGRAPHICS

During the pandemic, more women and young people than ever were interested in ETFs as an easy way to take their first steps into investment markets. 

Mik Kase, fixed income and multi-asset manager at Schroders, said: “There has definitely been a rise in millennials holding more ETFs, this has been driven by the accessibility of them and gives them another access point to invest without needing a broker.

“ETFs can easily slot into their financial ecosystem; if they already have a Commonwealth Bank account for example, then they can use CommSec to buy an ETF.” 

Vynokur added the gender balance had shifted away from male investors in their 40-50s to more women and millennials.

“There has been a significant shift towards true gender balance and investors are getting younger too. We have long believed ETFs give people the power to democratise wealth creation; everyone should have that opportunity at any age.”

FUND LAUNCHES

One particular area of growth which was being driven by the changing audience was ESG funds. In less than a year, there had been numerous launches of ETFs in this space and according to the 2021 annual ETF report from BetaShares, one sustainable ETF received such strong flows that it was among the top 10 largest inflows for the year. 

This was the BetaShares Global Sustainability Leaders fund which received $786 million in inflows throughout the year. Launched in July 2017, the fund now had $2.1 billion in assets under management and sought to invest in ‘climate leaders’ which excluded those with direct or significant exposure to fossil fuels or engaged in activities inconsistent with responsible investment considerations.

On a monthly basis, the iShares Core MSCI World ex Australia ESG Leaders ETF, launched in April 2016, saw inflows of $134 million during December 2021 to make it one of the top 10 largest monthly inflows.

In contrast, there were no ESG ETFs featured in the top 10 funds with the largest monthly outflows. 

This was echoed by data from the Australian Securities Exchange (ASX) that showed top 10 net flows during 2021 included multiple ESG funds such as BetaShares Climate Change Innovation ETF, VanEck Global Clean Energy ETF and ETFS Hydrogen ETF.

Over at State Street Global Advisors (SSGA), it stated ESG ETFs were “increasingly becoming core holdings” for many investors which was forcing them to take steps with ESG in mind. In February, SSGA reduced fees on its two carbon-control funds SPDR S&P World ex Australia Carbon Control and SPDR S&P World ex Australia Carbon Control (Hedge) by 12 and 14 basis points respectively. 

The firm also announced the two funds would change the specific indices they tracked in order to improve their ESG profile. This decision was taken in response to investor demand for improved sustainability scores and lower greenhouse gas emissions.

Kase said: “Already, across all cohorts, we are seeing increased interest in ESG and that will continue to be an element of people’s investment decision. ETFs can allow them to use ESG as a thematic rather than just a part of a wider portfolio. The desire to focus on ESG will only continue to grow and it will be vitally important for asset managers to focus on that”.
 

ACTIVE ETFS

This drive for ESG was also prompting those firms which had traditionally focused on the active management side to consider ETFs for the first time.

Australian Ethical, one of Australia’s largest providers of ethical and sustainable funds, launched its first ETF, the High Conviction fund. This was an actively-managed portfolio of 20-35 companies drawn from the ASX 300 which met extensive ethical criteria based on the firm’s Ethical Charter. 

The firm said the decision to launch an ETF had been taken as a way to “democratise” ethical investing to the most possible investors. While the firm had been around for 20 years, chief executive, John McMurdo, said he had witnessed an “enormous change” in the last five years, particularly around interest in climate change and renewable energy.

“[Ethical investing] has transformed from being a niche industry to one which is part of every conversation. CEOs used to ignore the conversation but now they are coming to us for advice, it has been turned on its head.”

Its Ethical Charter requirements included factors such as alignment with the US Sustainable Development Goals (SDGs), seeking out investments which developed locally-based ventures, developed appropriate technology, preserved endangered ecosystems and undertook efficient disposal of waste, among more than 20 considerations.

McMurdo said: “We hadn’t been looking to target a specific audience or demographic with an ETF, we wanted to make sure everyone who wanted to invest ethically had the option to do so. Many in that channel will be millennials though and this will make it easier to cater to them.

“It is our first listed product but we wouldn’t call it a thematic fund. It is an actively managed portfolio of companies that meet our Ethical Charter. 

“We have a strong history in the active equity space so this was a natural place to start. People don’t need to fill out extensive paperwork and it has a smaller minimum investment.”

Over at Perpetual, Karen Trau, senior product manager, listed and direct, said the launch of the firm’s socially responsible investment (SRI) ETF in December, Perpetual Ethical SRI, was the first in a suite of active of ETFs for the firm.

“We put a lot of thought into the ETFs we launch and they are driven by the needs of our clients rather than us targeting a particular audience. 

“We do recognise though that one of the big trends in the marketplace has been the growth of ESG and advisers are shifting their clients towards using that and clients are demanding it.

“ETFs will continue to grow, there will be a broad variety of strategies coming to market. For us, this fund is the start of a suite of active ETFs we are launching.”

Meanwhile, Munro Partners said their decision had been taken on the back of demand from certain advisers who had set up their businesses to focus on ETFs. The firm had three listed ETFs on the ASX, the most recent of which was the Climate Change Leaders fund.

“There is a section of the community who have told us they have a strong preference for listed or quoted products. They would say they liked our products but couldn’t invest unless it was in a different structure because of how they’ve set up their back office systems or platform to focus on ETFs,” said chief executive Ronald Calvert.

He said the decision to focus a fund on the theme of climate change was based on the vast potential market it saw for companies to benefit from the decision to go carbon neutral.

“The Climate Change Leaders fund is focused on those companies which are going to benefit from governments or organisations taking the decision to go carbon neutral. We think it will be a huge spend in the future and wanted to seek companies which were going to be drawing revenue from that expenditure.