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The other side of the ETP growth story

There is another side to the exponential growth exchange traded products have enjoyed; not every manager will be able to get in on the action, and legacy unit trusts will likely lose out.

Rainmaker head of investment research John Dyall, speaking at the Financial Standard Exchange Traded Product Forum in Sydney this morning, took a deeper look at the growth of ETPs and ETFs.

The exponential growth rate of 40% per annum for ETPs over the past 10 years have allowed the products to now reach more than $100 billion in assets.

When compared with unlisted unit trusts, ETPs are a better "mouse trap", Dyall said.

"It's the difference between booking a taxi the day before you need it for a price you don't know, compared with booking an Uber that will arrive in five minutes and knowing the price instantly," he explained.

Although, he added, product distribution is in a state of flux industry-wide at the moment."

"Unlisted unit trusts won't disappear, but it is my belief that they will diminish," Dyall said.

His research indicates that ETPs will be the preferred product for the wholesale market and retail clients. And advice fees will reduce in the process as ETPs are cheaper products.

The big loser in this growth story will be unit trusts, according to Dyall, which have already been suffering yearly net outflows of close to 1% per annum.

"Rent seeking behaviour" could be of concern, Dyall said, as unit trusts suffer and ETPs become more popular. He cautioned the audience that large licensees have been known to apply pressure to keep clients in high-fee legacy products.

He said it would be unlikely for ETPs to continue to grow at 40% per annum and unit trusts to decline at 1% per annum continuously, rather there is likely to be a "step event" which changes the market dramatically.

Dyall then compared Magellan and Vanguard in terms of net flows. He noted that both have "steady drumbeats" of positive flows into the ETP market.

The number of active managers and of active ETPs have also grown steadily over time. There are now 44 active ETPs in the Australian market.

"They are launching at an increasing rate. I am concerned about some of them. I've heard anecdotally that many fund managers plan to launch active ETPs, the trouble is there are only two ETP providers that partner with fund managers to launch ETFs - BetaShares and VanEck," Dyall said.

Director of adviser business at BetaShares Chris Yates reiterated Dyall's observations on the growth in popularity of ETFs. BetaShares alone has grown to more than $17 billion in funds under management.

In 2020, BetaShares enjoyed more than $5 billion in inflows. During 11 of the 12 months last year, Yates said BetaShares had the most inflows of any ETP provider in Australia. However, overall BetaShares was pipped at the post; Vanguard had the most inflows with 27% growth, while BetaShares had 26%.

He added that managed accounts have been experiencing a very similar growth trajectory to ETPs, with about $80 billion now invested through managed accounts - a number which has surpassed analyst predictions that managed accounts would be worth closer to $60 billion by 2020.

According to Yates, fee pressure explains much of the growth, and since ETPs are generally included in model portfolios for managed accounts the growth stories between the two align.

He showed an example of two comparable risk-adjusted model portfolios, one heavily invested in ETFs and one in unit trusts, the ETFs resulted in a 60% reduction of fees across the portfolio.

Yates also pointed to the latest S&P SPIVA report which found that even when the markets were down during COVID-19 volatility, Aussie equities active managers largely failed to beat the benchmark. He said to the advisers in the audience that this should be pause for thought on whether investment fees in more expensive active funds were really worth passing on to clients.

Read more: BetaSharesVanguardChris YatesJohn DyallMagellanS&P SPIVAVanEck