ETF rise could be short-lived

14-Aug-2017

By Megan Tran

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While exchange traded funds (ETFs) were increasing in popularity in the Australian market, the likelihood of them overtaking active management was minimal, according to the chief executive of online trading platform Bell Direct.

Passive allocation by local investors reached $30 billion in funds under management last month, but Bell Direct chief executive Arnie Selvarajah said the popularity of the investment vehicles was likely to be short-lived depending on market movements.

“A small proportion will grow but they won’t overtake active management as ETF movement revolves around the current cycle. When markets don’t perform passive ETFs come under pressure”, Selvarajah said.

“Currently the market is performing well as a whole, so ETFs will do well but markets are cyclical and [future performance] will depend on how the broader market performs.”

Though many investors were attracted to passive investment vehicles for their low cost, Selvarajah said investors should be wary of picking an investment on cost alone, saying the adage of ‘you get what you pay for’ often rang true.

“For the ill-informed investor, unquestioned allocation to ETFs is a common trap. Attention must be given to the different styles and exposures of various ETF products, and investors should understand that passive alone will not deliver the desired return outcomes,” he said.

He said the ultimate aim should be deciding which investment was fit for the client’s purpose.

“If you’re in the pension phase you’d want lower volatility so ETFs might be better for you as you won’t go backwards. Younger [clients] should look for growth, so cost should be seen in the context of returns,” he said.

Selvarajah said Bell Direct’s new ETF Filter, a research tool that ranks funds by factors such as asset class, product issuer and performance fee, would help investors select an appropriate ETF by saving them research time and drilling down to actionable outcomes.

“The main question is what is the objective and how much do they want to gain from their portfolio,”Selvarajah said.

“The key here is balance rather than 100 per cent allocation [to ETFs] and our filter will help them decide this.”

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