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ETP demand soars, unlisted unit trusts retract

The exchange-traded products market skyrocketed 149% to $95 billion in the three years to December 2020, new research finds.

Rainmaker's latest research predicts that ETPs will eclipse the unlisted unit trust market in another three to five years.

Unlisted unit trusts grew just 1% to $510.1 billion in the last three years and barely grew in asset size in the 12 months to December 2020.

The size of the unlisted unit trust industry appears to be in slow decline with the Australian and global equities sectors suffering ongoing outflows, Rainmaker said. "The money isn't leaving managed funds however, it is moving to ETPs."

One notable move helped boost ETP assets. Magellan converted three global equities products: one fund now has two different unit classes, one of which is now the largest ETP in Australia, and the other is now a closed-ended trust.

Prior to consolidating, the three funds were known as Magellan Global Fund ($11.6bn), Magellan Global Equity Fund ($1.7bn) and Magellan Global Trust ($2.3bn).

While the conversion itself was complicated, Rainmaker said that it was a "mark of confidence in ETPs".

"The effective transfer of unlisted trust into an exchange-traded managed fund was also a sign that ETPs are now more likely to become the dominant distribution channel for wholesale fund managers," the report read.

The industry can expect to see more assets transfer from unit trusts to ETPs. Additionally, more hybrid structures of unlisted unit trusts will emerge.

The research drew on 180 Australian equities; 254 international equities; 254 fixed interest and 842 unit trust products.

Similarly, Morningstar's research found that the Australian ETP market is booming, recording a 70% jump to $96 billion (US$73.1bn) at the end of 2020. Looking at strategic-beta ETP products specially, demand across the Asia Pacific region outpaced the rest of the world.

The research house found that VanEck consolidated its position as the dominant player in the Australian strategic beta products ETP market.

As of December 2020, VanEck had 46% market share of strategic beta products with US$3.1 billion of assets under management across 11 products. VanEck's market share has risen 37% from 2019.Strategic-beta ETP's total assets under management in the region grew 34% to US$46.1 billion, boosted by the stock market's rally in the second half of 2020.

Japan is the largest strategic-beta ETP market in the region with $37.3 billion (US$28.4bn) in AUM, growing 24% year on year.

Japan's growth is largely supported by the Bank of Japan's ongoing ETF purchase program directed toward fighting prolonged deflation in the Japanese economy.

Morningstar director of ETF research Asia Jackie Choy said: "In 2020, assets in Asia-Pacific strategic-beta ETPs grew marginally slower than the overall regional ETP market. While net inflows also decelerated marginally in 2020 to US$6 billion, it nonetheless raises the question of whether it reflects waning interest among investors."

"The proliferation of these strategies and their complexity have created a significant due-diligence burden for investors. This has been part of the natural evolution of the market and one that has already played out in the slicing and dicing of traditional market-cap-weighted exposures along the lines of region, country, sector, industry, and so on," she said.

This article was updated on April 14.

Read more: RainmakerVanEckMorningstarBank of JapanJackie Choy