Australia's ETF industry may be slow to boil but it is finally taking the flame.
Australia's ETF industry has grown 39% this year and is on target to hit A$35bn by year's end.
As of October, assets in Australian ETFs stood at $33bn, up from $24bn in October 2016, new data from VanEck and the Australian Securities Exchange has shown. On the current trend line, the Australian ETF industry will break $70bn within five years.
"The market hasn't grown to the extent that people thought it would 5 years ago," said Arian Neiron, managing director of VanEck Australia, observing that the Australian market remained significantly smaller than the US and Europe's.
"The Australian market is very intermediator-driven and very gated by advisors and other institutions."
He added that this is true even of Australia's famous superannuation sector, where high net worth individuals with knowledge of ETFs can manage their own retirement pots.
"Self-managed superannuation funds are large proponents of ETFs but they often aren't self-directed money. Our experience is that 70% of self-managed superannuation investors are advised through brokers or adviser. It's very intermediated."
International equity ETFs have proved most popular with Australians attracting $2.66bn in yearly inflows, VanEck noted. Australian equity ETFs, by contrast, netted only $1.95bn - suggesting Australians see more promise in foreign companies than they do their own.
Smart beta was the star performer in 2017, VanEck found. Thanks to a wave of new listings, almost one in three ETFs listed on the ASX are now smart beta. But what's particularly interesting about the rise of smart beta is how it's pulling the rug from active managers - not other ETFs.
"We've seen a lot of investors shift, especially with smart beta, away from active incumbents," Mr Neiron said.
"Smart beta is not taking market share from passive. Its taking market share is the active side."
He added that this made sense given the notable correlations between some active managers and single factor approaches. It meant that some active managers gave investors and their advisers every reason to use factor ETFs, which do the same thing but more cheaply.
Fixed Income ETFs are also simmering - in Australia as in other parts of the world. Flows into fixed income ETFs this year sit at $450m. This comes despite competition from cash ETFs, which allow term deposits to trade on exchange, and exchange-traded bonds, which list blue-chip corporate bonds directly on exchange.
A cause for optimism in Australian ETFs was how the fee model had changed among brokerages and advisors, away from commission and towards clients' best interest. Many have credited this shift with igniting Australia's ETF market in recent years while Asia's has been left behind.
"Upfront commission and trader commission have been abolished… But in parts of Asia you still have that."
