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Records smashed!

Records were broken all over the ETF industry globally in 2019, and Australia was no different. The Australian ETF industry surged past the $60B milestone and ended the year at $61.8B, an all-time high, and a full 52% higher than its level as at the end of 2018 ($41B). In our 2018 report, after a year in which the industry’s growth was hampered by declining asset prices, I wrote “strong ‘unit’ growth means that if and when asset prices recover, we will see some “bumper” growth months in the year ahead”. This occurred ‘in spades’ in 2019, and, in many ways, this bumper result was ‘set up’ by the consistent unit growth we saw in 2018. Read on for the key stats and figures for the year in ETFs.

Australian ETP Market Cap: April 2001 – December 2019

CAGR: Compound Annual Growth Rate

Source: ASX, Chi-X, BetaShares

Market cap

Australian Exchange Traded Product Market Cap: $61.8B – new all-time high

Market cap growth for year: +52%, +$21.1B – largest absolute 12-month $ growth on record

New money

New unit growth for year (units outstanding by number): 39%

Net new money (units outstanding by $ value): +$12.9B – all time high annual flows on record (65% increase on previous annual record)

Comment: Unquestionably the industry was assisted by strong asset value appreciation, but nonetheless ~60% of the year’s industry growth came from net inflows, with $12.9B flowing into the industry over the course of the year. This represents far and away the highest annual inflows on record, and, in fact, represents a 65% increase on the previous annual record (which was in 2017).

Products

258 Exchange Traded Products trading on the ASX

Exchange Traded Products trading on the ASX New products: 24 new products launched in the year (vs. 38 in 2018), 1 product closed

Comment: We saw a noticeable slow-down in new products launched in 2019 compared to previous years. Over the course of 2019, 24 funds were launched – compared to an average of 37 new products launched/year in the 4 years prior. 11 of the new funds launched were Active ETFs, and we would not be surprised to see >50% of new launches in 2020 be in this form, particularly now that ASIC has lifted its pause on the launch of non-transparent Active ETFs.

Trading value

Trading value increased 38% from 2018 – all-time record trading year for ETPs – $50B traded on ASX (v. $36B as previous record)

Performance

Analysis of inflows

Product Style Inflow Value 2019 (%) 2018 (%) 2017 (%) 2016 (%) Passive $10,192,610,634 79% 78% 79% 67% Active $1,388,265,574 11% 12% 13% 21% Smart Beta $1,353,518,805 10% 9% 8% 11%

Comment: In terms of net inflows, the bulk of flows this year continued to be in Passive products, which have remained at ~89% of flows for the last 5 years. Active ETFs retained approximately the same proportion of flows as 2018 at ~11%, however we continue to believe that this proportion will edge up over time as more of these products are launched in the months and years ahead. The table shows that Active ETFs once again outsold ‘smart beta’ ETFs in 2019 (as they did in 2018), which themselves were slightly up in terms of share of flows compared to 2018 and 2017.

Top 5 category inflows (by $) – 2019

Category Inflow Value Change in rank v 2018 Fixed Income $3,713,437,161 +3 International Equities $3,608,942,351 -1 Australian Equities $3,048,589,817 -1 Cash $887,719,067 +1 Australian Listed Property $596,636,920 +1

Comment: In my end-year 2018 report I wrote: “I would not be surprised to see Fixed Income ETFs outsell Australian equities exposures in 2019”. As the table above indicates, this was indeed the case. As I have been noting throughout the year, 2019 was very much a year for Fixed Income ETFs, which rose 3 places to be the largest category for flows in the industry, just edging out the ever-popular International Equities category. More broadly, it is pleasing to see flows of over $3B in three different categories, illustrating how investors are using ETFs to build diversified portfolios across asset classes. In 2020, we expect International Equities to return to the top of the table, given the current yield environment and investor expectations of potentially decent overall equity market returns this year.

Top sub-category inflows (by $) – 2019

Sub-Category Inflow Value Change in rank v 2018 Australian Bonds $2,925,337,856 +1 Australian Equities – Broad $2,173,383,858 +1 International Equities – Developed World $1,910,305,404 -2 Cash $887,719,067 +1 International Equities – Sector $828,651,779 +14

Comment: The sub-category flows mirrored those of the broad categories with Australian Bonds taking out the top place. There was a notable and substantial increase in investment into global sector products in 2019, a category which rose a full 14 places v. 2018. In particular, global infrastructure exposures were popular.

Top sub-category outflows (by $) – 2019

Sub-Category Inflow Value Currency ($99,508,062) International Equities – Europe ($61,303,564) Australian Equities – Geared ($46,569,600) International Equities – Geared ($6,974,462) Oil ($4,379,709)

Comment: Relatively low outflows were recorded by category again this year – the largest one being USD currency exposure which was sold off as investors took profits.

We believe the industry will continue to grow strongly in 2020, but feel that another year of 50%+ growth is unlikely. As such, we forecast total industry FuM at end 2020 to be in the range of $72-$78B.