Investors take ETF holdings to a record high

By Tony Kaye, Senior Personal Finance Writer, Vanguard Australia

In a tumultuous year on financial markets, investors worldwide channelled almost $1 trillion (US$763 billion) into exchange traded funds in 2020 – taking total ETF assets to a new high just short of $10 trillion.

The 2020 global ETF inflows were about 17 per cent above the previous annual record of around $850 billion set in 2017, and 34 per cent higher than the $740 billion directed into ETF products in 2019.

Australian investors were very much part of the extraordinary ETFs global money flow in 2020, collectively investing around $21 billion into ETFs and lifting the total value of listed fund assets here to more than $94 billion.

It's widely expected the Australian industry will break through the $100 billion in assets mark during this year, and early inflows data for 2021 is supporting that expectation.

But, beyond the astonishing numbers, what's more interesting is delving into the factors that are continuing to drive the large investor inflows into ETFs across the world.

Behind the ETF inflows

Many of those factors reflect the growing recognition by investors of the fundamental benefits of investing into ETFs, not the least being the ability to gain exposure to hundreds or even thousands of listed companies held within a single fund in one market trade.

In the Australian context that was indicated by the $2.3 billion of investments into the Vanguard Australian Shares Index ETF (VAS) in 2020, the largest inflows into any ETF product on the local market. VAS easily remains Australia's biggest index ETF by value, with around $7.2 billion of funds under management.

In total, last year around $7 billion (one-third of total inflows) went into the 50 or so ETF products listed on the Australian share market that exclusively invest in ASX-listed shares.

Having a "home" investment bias is an investor behaviour that's certainly not unique to Australia, and investors globally continued to pour capital into index-tracking ETFs covering equities on their domestic market. Yet, equally, many investors are also using ETFs to gain exposure to securities listed on international markets.

Again, that was illustrated in Australia during 2020 when $7.14 billion was invested across the more than 90 global equity ETF products listed on the Australian Securities Exchange.

These products cover single countries, broader regions, market sectors, or more complex investment strategies.

The largest total inflows into global equity ETFs from transactions on the Australian market in 2020 related to products providing broad international exposure, once again a reflection of the growing appetite for index-tracking funds providing easy diversification.

Vanguard's Head of Capital Markets for Asia-Pacific, Minh Tieu, says market exposure provided by international ETFs is a drawcard for many investors who are looking to diversify away from home-grown companies.

"With international shares, particularly those with exposure to the technology sector outperforming in the second half of 2020, investors may be seizing the opportunity to capture higher returns. ETFs can be a low-cost and efficient gateway to overseas markets where these shares may be more difficult and expensive to purchase individually."

Responding to economic forces

Economic forces also came into play for ETF products during 2020, and those same factors are likely to continue through 2021 and into the foreseeable future.

As the spread of COVID-19 accelerated through the year, central banks moved to cut their official interest rates to record lows in a bid to provide economic support.

The Reserve Bank of Australia was among them, trimming Australia's cash rate (the rate charged on overnight unsecured loans between banks) in November to just 0.1 per cent.

Inflows into fixed interest ETFs were still strong in 2020, particularly into funds exposed to highly-rated government bond issues and investment grade corporate credit.

But, with fixed interest returns expected to remain low for years, many investors have been adjusting their portfolio asset allocations to take on more equity risk.

In the recently released Vanguard Economic and Market Outlook report for 2020 we noted that equities are likely to continue outperforming most other investments and the rate of inflation.

Equity returns are expected to be 3 to 5 percentage points higher than that of traditional bond instruments over the next decade.

Yet, it's important to maintain a broadly diversified portfolio that's well aligned to your goals and risk-tolerance, and to avoid over-reaching for yield or return by taking on higher risk exposures.

2020 ETF market net cash flow by asset class