on September 20, 2017 Trading & Investing Industry Talk

The top five ETFs and a few to watch

Form title

Australians’ love affair with ETFs is far from over. August marked another record, with total market cap breaking the $30 billion barrier. According to ASX data, flows into ETFs totalled $842m in August, a growth of 2.2%, of which nearly three quarters was new money flowing into the sector. Over the  year ended 31 August, total ETF market cap grew a whopping 30.5% and product numbers grew 12.4% to 165.

Given this growth profile, I thought it would be interesting to explore where the money is going – and where it might head in the future. ETFs – particularly the broad index based ETFs – are becoming more widely used by robo-advice businesses and innovative investment portals such as Acorns; the latter has just hit $100 million funds under management.

While there are many ways to slice and dice the data, I settled on basing the top five ETFs on funds flow for the 2017 financial year.  The market cap alone would skew the results toward those funds with a longer history, and shorter-term flows may paint a different picture altogether.

The top five

Interestingly, three of my top five were also in the top five by market cap, and only one didn’t make the top 10. That same three featured in the top five by value traded in July. A clue or two – check out the market cap and those funds with positive flows in July.

An interesting point to remember with ETFs; thanks to Market Makers each fund creates new units as required…theoretically, an ETF has no size limitation. Subject to availability of stock, there is no cap on their size.

Figure one: Top five ETFs by fund inflow financial year 2017

 

BetaShares Australian High Interest Cash ETF

SPDR S&P/ASX200 Fund

BetaShares Australian Dividend Harvester

Vanguard Property Securities Index ETF

Vanguard Australian Shares Index ETF

Ticker

AAA

STW

HVST

VAP

VAS

Benchmark

30-day BBSW

S&P/ASX200

N/A

S&P/ASX 300 A-REIT Index

S&P/ASX300

Manager

BetaShares

State Street Global Advisors

BetaShares

Vanguard

Vanguard

Launch date

6 March 2012

24 August 2001

29 October 2014

11 Oct 2010

4 May 2009

Market Cap1

$1200.1M

$3541.5M

$425.3M

$947.1M

$2024.9M

Funds flow FY2017

$340.4M

$295.04

$277.3M

$263.5M

$243.1M

Funds flow FY2016

$199.7M

$188.7M

$111.2M

$196.9M

$499.4M

Funds flow July 2017

-$46.01

$60.1M

-$5.1M

$56.4M

$89.1M

Historical dividend yield

2.01%

4.09%

11.27%

4.27%

4.04%

Source: ASX, ETF Watch           Data at 31 July 2017

1. AAA - BetaShares Australian High Interest Cash ETF

AAA gives Australian investors a chance to marry two investments they hold dear – ETFs and cash. Despite the paltry term deposit rates on offer from our banks, APRA’s Monthly Banking Statistics report for June 2017 revealed that Australians have more than $844 billion on deposit. RBA stats has the average rate for a three-year deposit at 2.25% – take away tax at the investor’s marginal rate, allow for inflation, currently at 1.9% – there’s not much left.

A significant benefit of the ETF over a term deposit is access to money – tapping into a term deposit early comes with penalties, units in an ETF can be sold on market as and when required.

2. STW - SPDR S&P/ASX200 Fund

STW featured in the top five inflows in both FY 2016 and 2017, and is the largest ETF in the market. This long standing Australian equity ETF tracks the S&P/ASX200 index and was awarded Money magazine’s 2017 ‘Best of the Best Award’ for Best Australian Shares in the ETF category. Clearly investors are voting with their feet – or at least, their money.

3. HVST- BetaShares Australian Dividend Harvester

The newest kid on the block in the top five, and the only non-vanilla ETF. While the other top five track broad-based indices, HVST focuses on Australia’s top 50 stocks and, within that group, those paying high franked dividends. In other words, it’s a strategy focused on harvesting dividends – and in a world where term deposits potentially erode the value of the money on deposit in post-tax, post-inflation terms, a positive tax effective income stream would be particularly attractive to retirees.

4. VAP - Vanguard Property Securities Index ETF

If it’s not direct property, it’s property securities – and VAP’s appearance in the top five should be no surprise given Australia’s love of all things property. VAP has been tracking the S&P/ASX 300 A-REIT Index for nearly seven years, and although it wasn’t in the top five funds by volume traded for July 2017, its positive funds flow cements its place as a perennial favourite.

5. VAS - Vanguard Australian Shares Index ETF

Another market darling of ETF investors, VAS tracks the S&P/ASX300 index, taking in some mid-cap stocks as well (a point of differentiation from STW). This one was in the top five by volume traded for July 2017 and is the third largest fund by market cap.

 

The next gen ETFs

Product innovation ensures there’s a steady stream of ETFs coming onto the market. Here are three recent ETF launches that caught my eye.

ETHI - BetaShares’ Global Sustainability Leaders ETF 

One of the first launches of 2017, BetaShares’ Global Sustainability Leaders ETF (ETHI) hit the market in January. It invests in 100 global stocks (ex-Australia) that are climate change leaders and not involved in activities inconsistent with responsible investment principles.

Climate leaders are selected based on relative carbon efficiency, and the additional screens for responsible investment include the usual suspects – gambling, tobacco, armaments, nuclear energy. It also includes a few that don’t always pop up on ‘ethical’ screens – pornography, animal cruelty, human rights concerns and companies involved in the mandatory detention of asylum seekers.

TECH - ANZ ETFS Morningstar Global Technology ETF 

Launched in April, the ANZ ETFS Morningstar Global Technology ETF (TECH) tracks the share price of 32 companies, including the likes of Apple, Google and Microsoft, through Morningstar’s Developed Markets Technology Moat Focus Index. The index includes companies from US, Canada, Japan and Australia.

The idea behind TECH is to provide Australian investors with exposure to technology stocks; while a large sector in global markets (information technology represents 16% of the MSCI World Index) it’s under-represented in the Australian market. Given the share price of some of these tech giants, an ETF is more accessible for many investors.

MONY - UBS IQ Cash ETF 

And because Australian’s love their cash, UBS joined the party with the launch of the UBS IQ Cash ETF (MONY) in May. As with similar products, MONY provides investors with exposure to a portfolio of investments in bank deposits and bank certificates.

 

Looking further afield…

No review of ETFs would be complete without a look at some of the more left field ideas cropping up (pun intended – you’ll see) in other markets.

HMMJ - Horizons Medical Marijuana Life Sciences ETF

Listed on the Toronto exchange in April 2017, the Horizons Medical Marijuana Life Sciences ETF invests in, as the name suggests, publicly listed life sciences companies with significant business activities in the marijuana industry.

CALF - The Small Cap Cash Cow ETF 

The Small Cap Cash Cow ETF (CALF) is focused on small caps. It screens the S&P Small Cap600 and invests in the top 100 based on free cash flow yield.

BOSS - The Global X Founder-Run Companies ETF

A basket of primarily US mid and large-cap companies where the founder is serving as CEO, with a focus on identifying “visionary" leaders. Tends to be overweight tech and biotech.

UP and DOWN

In May this year the SEC approved two leveraged ETFs (which had previously been knocked back). UP is designed to produce four times the daily performance of S&P500 index futures, and DOWN four times the inverse of the daily performance of those same index futures. What could possibly go wrong?

Finally, the Winklevoss twins (those of Facebook failure fame) have succeeded in having the SEC revisit their attempt to get a bitcoin ETF up and running. In light of the sudden and stellar increase in the value of cyber currency, other players have indicated interest. Just last month, established ETF manager Van Eck filed with the SEC for an ETF to invest in bitcoin derivatives, despite publicly acknowledging the riskiness of cryptocurrency and doubting its status as a ‘safe haven’.

Assuming Australia continues to follow the lead of other markets, continued growth seems assured, as does continued innovation in the ETFs available to local investors. While I am not sure we’ll see the ticker WEED pop up anytime soon, Australian ETF providers will continue to scour local and global markets for great ideas to bring to market. Trends such as impact investing are likely to direct some of those efforts.


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Tracey Franks

Tracey Franks is one of OpenMarkets' regular blog contributors and content writers, who has worked in financial services for over 20 years in businesses spanning stockbroking, funds management, research and consulting, as well as financial planning. When not writing about finance-related topics, Tracey is working on her first novel.