Why more ASX investors are flocking to ETFs

By Adam De Sanctis, Head of ETF Capital Markets, Asia-Pacific, Vanguard

It’s a startling number. Out of all the new listings on the Australian Securities Exchange (ASX) so far this year, the vast majority (66%) have been exchange traded funds (ETFs).

Yet, at the same time, given the burgeoning demand from Australian investors for ETF products, it shouldn’t come as a major surprise.

ETF providers are now managing close to $200 billion of investors’ assets via more than 330 ASX-listed funds, with the number of Australians tapping into ETF products continuing to surge.

Vanguard continues to maintain the top spot in the Australian ETF industry as the largest ETF issuer by assets under management.

The reasons behind the popularity of ETF products is well documented, especially their ability to provide investors with exposure to a wide range of stocks, regions, asset classes and different strategies, which make it relatively easy to build a well-diversified portfolio.

According to the ASX Australian Investor Study 2023, one-in-five (20%) of the 7.7 million on-exchange investors in Australia invest in at least one ETF.

Among them are a growing number of self-managed super fund (SMSF) trustees. In fact, the recently released 2024 Vanguard/Investment Trends SMSF Report found that around 43% of SMSFs (265,000 funds) are using ETF products. SMSFs now account for 13% of Australia’s total ETF investor population.

This number is likely to continue to rise, with 175,000 SMSFs (28%) expected to reinvest in ETFs over the next 12 months (up from 155,000 in 2023), and a further 65,000 (10.6%) likely to make their first ETF investment over the same period.

As well as greater adoption of ETFs by SMSFs there has also been a sharp increase in the average amount allocated to ETF products ($250,000, up from $180,000 the year before).

The Vanguard/Investment Trends research found this increased allocation to ETFs was observed across both advised and non-advised SMSFs. Interestingly, nearly 60% of newly established SMSFs intend to invest in ETFs over the next 12 months.

Tracking the trends

Aside from using ETFs for diversification, one of the primary attractions for investors is to gain exposure to specific overseas markets.

ASX and Vanguard data shows that international equity ETFs have continued to gain the biggest investor inflows this year, outpacing the still-strong inflows into Australian equity ETF products.

The biggest lure for Australian investors has been ETFs providing exposure to U.S. stock markets, which have reached record highs mainly thanks to the impressive returns from the biggest U.S. technology stocks.

As well as investing in ETFs that purely focus on US equities, a large amount of Australian investors’ capital has also been channelled into ETFs that have broader international equity exposures incorporating stocks in the U.S., Europe, Asia, and other regions.

In 2023 higher interest rates spurred record investor inflows into fixed income ETFs amid expectations for higher long-term bond returns. The bulk of ASX investor money was directed into ETFs that invest in Australian government bond issues.

ETF naming convention changes

The ETFs universe is complex. As well as index-tracking ETFs, ASX products include actively managed funds and others providing more complex trading strategies, sometimes through the use of debt and synthetic financial instruments.

Reflecting this, new guidelines from the Australian Securities and Investments Commission introducing a series of changes to ETF product labels and naming considerations have come into force to better inform and protect investors.

Vanguard has proactively advocated for and supported these changes for several years.

The changes mean that ETFs must now have a primary product label, and in some cases a secondary product label, such as Active for active ETFs, or Complex for ETFs designated as employing complex trading strategies using debt, leverage or derivatives.

All primary labels, such as ETF, will need to appear at the end of the product trading name. If a secondary label is applied it will need to appear immediately before the primary label.

These changes are a step forward for the Australian ETF industry and are aimed at highlighting the risks and complexities of existing ETF products with investors to drive better outcomes, whilst being hugely impactful in how products come to the Australian market and shape the future.

Important Information

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFSL 227263) is the product issuer of Vanguard Personal Investor and the Vanguard Australian funds and ETFs. You should read the relevant IDPS Guide, PDS and TMD available at www.vanguard.com.au and consider if a product is right for you before making an investment decision.

Any investment is subject to investment and other known and unknown risks, some of which are beyond the control of VIA, including possible delays in repayment and loss of income and principal invested. Please see the risks section of the PDS for the relevant VIA product for further details.