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The rise of the hybrid ETP

In the three years to March the number of ETPs increased by 29%, with the Australian market now made up of different subsets.

This morning, Rainmaker Information's head of investment research John Dyall appeared at the Financial Standard Best Practice Forum on Exchange Traded Products, saying the hybrid market is currently the most interesting space.

This is because hybrids operate both as ETPs - in that they can be bought and sold on the stock exchange - and also as unlisted unit trusts, he explained.

"The ETP version can be bought and sold during trading hours at known prices, they are transacted with brokerage costs and the buy/sell spread may be larger than those charged directly by the manager," Dyall said.

"The unit trust version may have buy/share spreads that are less than those charged on the exchange and there are no brokerage costs."

Dyall said this makes unit trusts advantageous to investors either buying or selling units on a regular plan.

"These investors do not need to know the price of their transaction, they most likely will have these units sitting on an administration platform, which is a cost in itself," he said.

Hybrid products now represent around 15% of the total market. Magellan was the first major manager to implement this rearrangement of its ETPs in November 2020 which added around $13 billion to the size of the Australian ETP market.

"These are the products that straddle the old world of unlisted unit trusts that have held sway for decades now," Dyall said.

"The truth is the managed investments industry in Australia goes through constant change, the rise of the hybrid is a sign we are going through one of those periods right now."

Dyall added that managers with existing assets under management - in the form of unlisted unit trusts - can provide existing and new investors with easily accessible liquidity at known prices.

"Units purchased on the exchange can be redeemed directly from the manager at the daily net asset value while units previously purchased from the manager can be sold on the exchange," he explained.

"There are benefits to both approaches... the one downside [of the ETP version] is that they are subject to brokerage costs, and the buy-sell spread may differ to those charged directly by the manager, due to the price rounding convention on the stock exchange."

Meanwhile, the funds under management of hybrid products in international equities strategies rose from zero in the middle of 2020 to $15.7 billion at the end of March 2022 and now represent 23% of all international equities assets.

The proportion of hybrid products in Australian equities is substantially less with 4% or $1.6 billion.

"Knowing the size of assets ported over from the unlisted unit trust environment helps to differentiate between organic growth - that comes from net flow - and growth that comes from a change in the legal structure of the product. When adjustment for this is made it reduces the funds under management from 157% to 146%," Dyall explained.

He said this means that international and Australian equities have seen organic growth at approximately the same rate as a funds under management perspective.

"Overall organic market growth is reduced to 155%, which means that international equities is not the star performer among the asset classes; fixed interest is with organic growth of 197% over three years," he said.

He concluded by saying the key takeaway is that the Australian ETP market continues to evolve.

"It is not so much a question anymore of watching this astounding growth rather a call to look behind the numbers to see where the growth is coming from," Dyall said.

Read more: John DyallExchange Traded ProductsFinancial Standard Best Practice ForumMagellanRainmaker Information