The winners and losers of the ETF world

If you dream it, ETF issuers can build it. It’s a far cry from the humble days of simple S&P/ASX200 or S&P500 trackers. The Australian ETF market really hit its stride in the past few years and currently stands at $121.47bn in funds under management as at September 22. The number of ETFs has really exploded too – this year alone, we’ve seen 30 ETFs listed on the ASX, bringing the total ETFs to 259.

While flows were already trending upwards as more investors realised the value of ETFs, COVID-19 was a gamechanger. Masses of retail investors hit the market during lockdowns and used ETFs as a quick access point to the themes they were interested in. At the time, growth assets like technology were the big winners.

Flows have dropped off slightly – a combination of both market sentiment and, to an extent, less time and interest from investors no longer stuck in lockdown. That said, the ETF market provides an interesting insight into the way that investors are feeling about the state of the world.

The winners of the ETF world

The ETF market dropped 1.12% in value in September as investors looked for safe havens or switched their trading styles. Flows have increased towards property, commodities and fixed income. Australian equities have picked up slightly, while global equities have seen a drop. 

“Investors continue to show a preference for Australian equities over their international counterparts as inflation, rising interest rates and geopolitical uncertainty brings investors home,” says Cameron Gleeson, senior investment specialist at BetaShares.

Similarly, Kathleen Gallagher, Head of SPDR ETFs at StateStreet Global identifies defensive and safe haven sectors, in particular ETFs focused on dividends or commodities, as being the strongest part of the industry at the moment. She’s seen increased interest in the SPDR MSCI Australia Select High Dividend Yield ETF (ASX: SYI) recently.

“High yield, low volatility and quality sectors have been relatively good performers this year, while growth has underperformed,” she adds.

That’s not to say that investors have stopped investing in global equities. After all, monthly flows to global equities are still the bulk of all flows at 47%. But investors are being more targeted in their approach to reflect the global environment.

Gleeson points to investors switching from unhedged to hedged versions of ETFs to account for falls in the AUD/USD exchange rate as a trend they’ve experienced in their product set.

There is also still opportunistic buying behaviour across the market. Kanish Chugh, Head of Distribution at Global X ETFs, shares that there has been increased trading activity across the long/short NASDAQ products Global X offers as investors seek to capitalise on volatility.

Where things also get more interesting and targeted again is the space occupied by thematic ETFs. Generally speaking, such ETFs are growth oriented – an area that has suffered in the past year. But this decline is not universal, and some themes have bucked the trend. One key area is the lithium space, as demand has skyrocketed for use in electric vehicles and battery storage.

“Miners such as Pilbara, Mineral Resources and Allkem have all benefited from the historically high commodity prices. Similarly, inflows to the Global X ETFs Australia Battery Tech & Lithium ETF (ASX: ACDC) have followed momentum in the sector,” says Chugh.

In a month where most ETFs saw more outflows, there were a couple of inflow winners for September.

1. Vanguard Australian Shares Index ETF (ASX: VAS) - $241.62m
2. BetaShares Australia 200 ETF (ASX: A200) - $72.31m
3. Vanguard Australian Shares High Yield ETF (ASX: VHY) – $62.55m

Who loses in the current environment?

It’s no secret this environment is not ideal for growth assets. Correspondingly, growth-oriented ETFs have seen outflows or less interest from investors.

“Growth-focused areas like technology typically need new rounds of capital to grow until they are profitable and financially sustainable. These capital rounds are becoming more difficult to secure through risk-averse investors,” Gallagher says.

As previously mentioned, thematic ETFs typically fall into the growth space, which has meant a drop off not only in terms of flows but also performance. Chugh suggests this could be an opportunity for some investors to get ahead of the next bull run by investing now, but it all comes down to identifying genuine structural growth trends and which indices are best positioned to access these trends.

Looking at the ASX report for September, the flows aren’t moving in big volumes in or out for thematic ETFs. It’s not necessarily bad news for issuers, but certainly not great either.

If there’s a surprise to be found in investor behaviour, it might be in ethical and sustainability-themed products. After all, isn’t the age-old wisdom that our morals are amongst the first to suffer in tough times? There’s also been some healthy scepticism about whether ethical and sustainable investments can still perform in bear markets.

The flows match the scepticism with some of the larger ASX outflows in September belonging to ESG focused ETFs. Despite this, BetaShares have continued to find investor interest in ‘green’ products.

“Ethical and sustainability-themed ETFs have been very well supported by investors, consistent with what we saw in 2020 and 2021. We’ve seen strong interest in this range of strategies as they can combine positive and negative screens, with the transparent nature of ETFs,” says Gleeson.

It may be a matter of the approach to ESG as to whether it receives flows or not.

BetaShares and Global X ETFs each released products in recent weeks targeting the shift towards green in the energy and mining sectors. Both have been positively received by the market.

Where the ETF market has seen some of its biggest hits to flows has been in active ETFs. A newer addition to the Australian market, many were embraced by retail investors as a cost-effective access point to the insights and strategies of high quality fund managers. Such products also come with higher fees as a result of more intensive management processes.

“Some actively managed funds have seen significant outflows as investors seek to replace their allocations to these funds with more cost-effective, index tracking ETFs,” says Gleeson.

This trend is in keeping with what has happened more broadly speaking across the managed funds industry and also reflects some investors freeing up capital to manage concerns relating to cost of living and rising interest rates.

Where to find performance

It’s worth remembering that ETFs are spread across all asset classes and regions, so if a particular asset benefits in this environment, then ETFs exposed to that asset are likely to as well.

Performance in the energy sector has been an obvious winner this year off the back of the crisis in Europe. Gleeson notes that BetaShares products exposed to energy and crude oil had particularly strong performance across the year.

The top performers on a 1-year basis based on Livewire’s fund tool were:

1. Global X ETFs Australia Ultra Short Nasdaq 100 ETF (ASX: SNAS) 55.37%
2. BetaShares Strong US dollar ETF (Hedge Fund) (ASX: YANK) 41.45%
3. BetaShares Global Energy Companies ETF – Currency Hedged (ASX: FUEL) 38.73%
4. BetaShares US Equities Strong Bear Hedge Fund – Currency Hedged (ASX: BBUS) 27.76%
5. VanEck Australian Resources ETF (ASX: MVR) 22.06%

It’s hardly surprising that all of these ETFs have been popular in terms of fund flows as well. 

Will they stay popular in coming months? Well, that depends on investor sentiment and what happens in markets.

Want more content like this?

This is the second wire in a three-part series on ETFs featuring Kathleen Gallagher, Cameron Gleeson, and Kanish Chugh. In the previous wire, we explored the role of vanilla broad-based indices. 

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