The $14bn cost saving from index ETFs
Australian investors have collectively saved $14.4 billion over the last 26 years by investing in index exchange-traded funds (ETFs).
According to Vanguard, low management fees have paid off for investors in Australian index-tracking ETFs. The more than $14 billion saved in fees reflects ongoing reductions in the asset-weighted expense ratios of Australian index funds, the firm noted.
The first index fund was launched in Australia in 1998.
It recently found that despite a surge in active ETF listings, more than 85 per cent of investor inflows are going into index-tracking funds on the ASX this year.
Index funds now make up over $700 billion in assets under management (AUM) in Australia, including $168.2 billion invested across 243 index-tracking ETFs. This accounts for approximately 81 per cent of the Australian ETF industry’s total AUM, while active ETFs make up the remaining 19 per cent at $40.6 billion.
Duncan Burns, Vanguard chief investment officer for Asia-Pacific, noted the significant cost savings born from these types of ETFs for advisers and their clients.
“The take-up of index funds by Australian investors over the last 26 years has been phenomenal. By introducing significant competitive price pressure into the Australian industry, index funds have helped to drive down costs for all investors,” he said.
“Higher investment costs diminish returns, especially for active managers who aim to outperform markets. The higher the investment costs, the higher the odds of market underperformance.”
He noted that a higher proportion of investors in active funds underperform index benchmarks due to high management costs eroding their returns.
“Australian investors are increasingly recognising the performance advantages of being invested in low-cost index funds and the disadvantages of investing into high-cost fund alternatives.”
However, State Street recently named the growth of active funds as one of its top trends set to fuel the rise of ETFs globally next year. It said 2023 was a record year for active ETF flows, with active ETFs accounting for 20.3 per cent of global ETF inflows.
As a result, it expects active ETFs to “take centre stage”, especially in Asia-Pacific where they are predicted to grow at a 37 per cent compound annual growth rate over the next five years.
AUTHOR
Jasmine Siljic
Recommended for you
Clime Investment Management has welcomed an independent director to its board, which follows a series of recent appointments at the company.
Ethical investment manager Australian Ethical has cited the ongoing challenging market environment for its modest decrease in assets over the latest quarter.
Commentators have said Australian fund managers are less knowledgeable compared with overseas peers when it comes to expanding their range with ETFs and underestimating the competition from passive strategies.
VanEck is to list two ETFs on the ASX next week, one investing in residential mortgage-backed securities and the other in Indian companies.
