Why ETFs still have a "long runway" for growth in Australia

10 years ago, the ETF industry managed just under $7 billion in funds under management (FUM). In January 2013, there were just 90 ETFs and ETPs. There were no thematic-oriented products available on the market and a majority of the money was tracking the ASX 200 index. 

But a decade is an eternity in financial markets - and nowhere is that more true than in the listed products market. Today, the FUM figure is closer to $138 billion. There are now nearly 300 ETFs and ETPs, including 40 which listed last year alone. A whole range of options are now available to Australian investors covering regions, countries, and even specific sectors or assets.

So if that was the last 10 years, what could the next 10 years and beyond look like? To provide some perspective, Kanish Chugh, Head of Distribution at Global X ETFs joined me recently for this wide-ranging interview.

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ETF and Investor Innovation

In the last few years, ETF product expansion has exploded. There are now 285 ETFs and ETPs listed on the ASX. There were 40 listings last year alone, including several from new entrants into the Australian market. 

But if our survey results - and Chugh's comments are anything to go by - there is no reason to believe the expansion will slow anytime soon.

"There is still a long runway for growth in Australia," Chugh tells me.

Nearly two million Australian individuals now own at least one ETF as part of their portfolio as well. Much of this growth came from the pandemic when the great retail frenzy started. But Chugh says the most significant push is actually coming from financial planners and advisers.

"From eight or nine years ago when I started in this industry, the conversation with advisers was "What is an ETF?". Now, the conversation is around the types of ETFs available, the mechanisms and intricacies behind how ETFs trade, and this is what you need to know," Chugh says. 

"What we've actually seen is these professional investors start to use ETFs across the portfolio whereas traditionally they would have only looked at them as building blocks," he adds.

The fees war

Earlier this month, BlackRock's ETF arm iShares cut the management fees on two of its most popular products. Betashares then countered the BlackRock move by cutting the fee on its ASX 200 product. The argument is that a lower fee on a similarly-created product attracts more customers.

But not all players have not taken part, including Global X. When I asked him about whether the fee-cutting is here to stay, Chugh says it's not just about what you pay but also what you are paying for.

"People need to understand what the cost that goes into managing an ETF," Chugh says. "Some of these ETFs are quite sophisticated in its structure or their underlying index exposure and that leads to higher costs as well," he adds. He adds that it's unfair to compare the sophisticated ETFs with the simple index trackers.

There is also a quality factor that Chugh says investors need to consider seriously - that is, does a low-fee option provide the highest-quality return?

"Sometimes we get very caught up in that space and there could be this argument to say cost shouldn't be equated to quality," he says. "When we launch a product, we want it to be cost-effective and accessible to investors. We don't want to gouge them," he adds.

The next ten years in thematic innovation

Most ETPs are designed to list and stay in the market for at least three years - or as Chugh puts it, "it's not a short-term fad". The reason, as Chugh says, is because each product needs to run through at least one market cycle. One perfect case of this medium-to-long-term outlook is the Global X Copper Miners ETF (ASX: WIRE), which was launched last year.

"That is because there is a fundamental belief around the future for what copper will mean for a greener future. That's not a short-term thesis, that's a long-term, fundamental megatrend," Chugh argues.

Chugh also says more thematic investments can be expected, as it tries to fill investor demand as well as product-oriented gaps in the market. Soon, Chugh thinks that we could even see income-oriented ETPs aimed at young people. The average investor profile is changing and so are their reasons. Young people now make up more of the investor base, and they are saving for the Great Australian Dream.

"In 10 years' time, could the younger investor be looking at investments more to support their lifestyle where currently, income-orientated strategies are tailored to an older generation like retirees and pre-retirees," he hints.

At the broadest level, Chugh thinks that product expansion over the next decade won't be in one specific area but rather, across the entire industry.

"From an Australian perspective, there are still many gaps in the market from sustainability to renewables, as well as providing greater asset allocation tools," he says. 

"We talk about being able to build an entire portfolio using ETFs. There are still certain gaps in the markets whether it's sectors, regions, countries, or even thematics and asset classes," he adds while pointing out that carbon credit and cryptocurrency ETFs only hit our shores last year - namely (ASX: EBTC) and (ASX: CRYP). 

Tips for the ETF/ETP novices

While there are two million ETF and ETP users now in the Australian market, it always helps to get a refresher from an industry insider. Here are Chugh's top three tips for anyone looking to get an edge in the market:

• ETF liquidity is like an iceberg: "There's this myth that the size of the ETF is basically the total size they can invest in - and that's not true."
• No two ETFs are identical twins: "Two ETFs may track a similar exposure - perhaps the same index but there will be nuances."
• Pick up the phone: "Call the provider. Do your research. Just because an ETF has one of the best codes doesn't make it right for you."

Chugh's personal favourite ETF is one that Global X is well-known for locally - the Global X Physical Gold (ASX: GOLD). Since launching, the ETF now manages $2.6 billion in assets under management but Chugh says the goal remains the same.

"Whether we managed $1 million or $2.6 billion, we want to be it as liquid as the underlying exposure and the underlying exposure we are trying to track is physical gold," Chugh emphasises. "Liquidity is our main concern."

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