Over ten years we've seen the appetite for ETFs grow significantly amongst advisers and individual investors to a market currently worth over $53 billion. From what was a standing start in Australia a decade ago, ETFs have moved from the margins right to the fore of portfolio construction.
With one-trade an investor can put to work the same sophisticated tools of asset allocation and portfolio construction used by the world's largest financial institutions. This has surely been one of the game-changing aspects of the story of ETFs so far.
Vanguard is proud to be a part of the growth of the ETF market in Australia. At this milestone anniversary we're taking a quick glance in the rear view mirror and reflecting briefly on ten things we've learned along the way:
1. ETFs are traded in Australia with a fluency and frequency hard to imagine when they were first launched in 2001.
With ETFs now established as a mainstream investing tool, it's easy to forget that message wasn't as widely understood and appreciated as it is now. Ten years ago there were just 25 ETF products available in a market worth around $2.5 billion. Flash forward ten years and today investors have the choice of around 200 different ETF products and transact an average of $168 million every day. To put this in perspective, Vanguard's total cash flows into ETFs in the year-to-date for 2019 is equal to the entire market size when Vanguard started this ETF journey in Australia ten years ago [1].
2. Costs matter
As Jack Bogle said in his founding vision for Vanguard Inc.: costs matter. Investors' increasingly recognise they are more likely to reach their investment goals when costs are minimised. ETFs are generally a low-cost investment. They typically cost less than traditional managed funds and substantially less than if you were investing in the same exposure of individually purchased shares. Vanguard's commitment to using its economies of scale to lower the cost of investing ensures more of what you earn as an investor stays in your pocket.
3. When it comes to ETFs, you don't necessarily get more if you pay more.
We know that expense ratios are a key consideration when choosing the right ETF product. This is not surprising given the powerful role costs play in investment success. Vanguard research bears out just how valuable 'low-cost' options can be to investors over time. By investing in Vanguard Australia's range of low-cost ETFs with their asset weighted average MER of 0.17% per annum, investors have saved approximately $90 million in fees over the past decade than if they invested in ETFs at the current industry asset weighted MER of 0.40% per annum (excluding Vanguard) over that same ten-year investment horizon. The comparison draws on all Vanguard's 29 Australian-domiciled and cross-listed ETFs [2]. In short, the rise of Vanguard's low-cost ETFs has allowed investors to save on investing expenses and ultimately keep more of their investment returns over time.
4. The greatest ETF portfolio in the world is ineffective without an investment plan and long-term discipline.
The best investment portfolio is one that your clients can actually live with. This means staying the course long enough to see your investment choices count meaningfully towards your investment goals. As advisers, this means helping clients to not only identify their desired investment outcomes but ensuring they keep sight of those amidst the inevitable highs and lows along the way. ETFs have become a staple tool for individuals wanting to build portfolios targeted at specific outcomes. Vanguard Research [3] shows sticking to those objectives - or "staying the course" - over the long-term gives investors the best chance of investment success.
5. The value of advice is changing
The past decade has seen a noticeable shift in the perceived value of investment advice. This has seen advisers move away from traditional investment propositions focused on chasing outperformance by picking winners and timing the market to one built around the solid foundations of asset allocation, portfolio construction and the attainment of long-term investment objectives. ETFs are increasingly seen as an easy, convenient way to implement this trend for investors.
6. Australia's ETF market growth has been unique.
ETF usage has grown all over the world but has evolved differently in Australia compared to the US with retail investors and advisers, rather than institutional investors, driving much of the growth. Here in 2019, the Australian market for ETFs is around $53 billion across around 200 products listed on the ASX. The pool of individual investors in Australia using the low-cost benefits of ETFs is twenty times what it was ten years ago.
7. Some of the most widely-held ETFs in the industry are from Vanguard
Today Vanguard is the largest ETF provider in the Australian market. It's humbling to think that around 37 cents of every dollar invested in ETFs in Australia is invested in a Vanguard ETF [4]. Recently our Vanguard Australian Shares Index ETF (VAS) became the largest ETF in Australia with just over $4 billion in assets under management. We take the responsibility of managing those assets seriously knowing how important they are to every individual investors' life goals.
8. ETFs have not only been a growth story in numbers but in preferences too.
In 2019, we're seeing investors take up more fixed income options and also favour broad-based diversified products rather than single country or sector-specific exposures. Over the decade Vanguard's product line up has evolved in response to client needs. We've added new and diverse ETF strategies to our range of low-cost ETFs at the rate of at least one every year since we launched our first ETF in the local market back in 2009.
9. The ETF story is still being written.
Globally, ETF products are forecast to reach a total market capitalisation of US$25 trillion by 2027_[5]_. There is a whole new generation of investors who appreciate the flexibility and choice ETFs offer. Research shows both new and existing investors are keen to meet their future investment needs with ETF products and millennials will increasingly be part of this 'next wave' of investors.
10. Vanguard Australia's ETFs are only ten years old but already a game-changer.
Thanks to ETFs, many more individual investors have access to low-cost portfolio strategies that have transformed their investment choices. Thanks to ETFs, investors have the opportunity to keep a greater share of their investment returns than if ETFs weren't available. ETFs have given investors one-trade access to the same portfolio construction tools used by the world's largest financial institutions. These are some of the game-changing opportunities Vanguard's range of low-cost ETFs have provided in the first ten years of their life. We are proud to be a part of the growth of the ETF market in Australia and are looking forward to what we can achieve for our investors and their investing goals in the next ten years.