ETFs are outpacing other investment options, with investors able to take advantage of returns of up to 64%. Small wonder millennials are finding them very appealing.
State Street Global Advisors released research showing that under 40s are dominating the ETF market, for the first time since it launched 20 years ago.
An ETF is a financial product that is very similar to a mutual fund. An ETF is made up of shares, bonds and currencies or commodities such as gold.
Millennials made up 47% of ETF investors compared with Gen Xers at 23% and Baby Boomers at 25%.
This is a stark contrast to 20 years ago when 45% of ETF investors were Gen Xers, 24% Baby Boomers, and 24% Millennials.
Australians have invested more than $36 billion in the last 12 months, which is significantly higher than all other major financial markets, including North America and Europe.
Head of SPDR ETF Asia Pacific Distribution Meaghan Victor expects the trend to continue and referenced better financial education as being one of the reasons for the growth.
She said that millennials are the ETF generation of the 2020s. Some commentators say they are replacing their dreams of home ownership with ETFs as the price of property rises out of reach.
An ETF (exchange trade fund) is a type of ETP. An exchange traded product (ETP) is a financial product that is sold on the stock exchange. These can include index funds, bonds, stocks or commodities.
“The Australian ETP (Exchange Traded Product) market is now five times larger than it was just five years ago, with more than $116 billion in assets under management (AUM) and more than 200 ETPs for investors to choose from.
“Even if CAGR (compound under growth rate) slows to a more comparable rate of 25% like we have seen in Europe and the US, Australian ETP assets are still expected to grow from more than $110 billion to $226 billion in the next three years,” Ms Victor said.
The compound under growth rate is the total growth of an investment over a period of time longer than a year.
The COVID-19 pandemic has affected the market, with her adding, “What we have seen during market crises is that ETF trading volumes have surged, highlighting that ETFs continue to function as originally intended – as buffers and sources of liquidity in stressed markets. And although there are more active ETFs to choose from than ever before, ETFs that track an index still dominant, with 82% of investors using this style.”
Victor added that “The COVID-19 pandemic has brought extreme challenges to markets across the globe, impacting liquidity across nearly all investment vehicles and asset classes.”
“ETFs have performed well providing market participants with liquidity and price discovery when they need it most. Investors are particularly drawn to ETFs as a way to take advantage of market downturns.”
“Over the last two decades, ETFs have proven to be one of the most disruptive forces to the way Australians can build wealth.”
One of the biggest ETF funds is STW, which is a fund that is listed on the ASX (Australian Stock Exchange).
The 12-month return has been 28.52%. It has $4.7 billion in AUM, which represents 4% of total Australian ETPs AUM, and is the only ETF in Australia that has traded more than $50 billion. Since its launch, the fund has traded over $56 billion. The average daily trading dollar volume is $11 million.
Assets under management (AUM) is the total market value of of investments handled by a person or company on behalf of investors.
Victor said that “if someone had invested $10,000 in STW every year since 2001, they would have $519,932, assuming all distributions from the funds were reinvested.”
More and more investors are choosing thematic ETFs. These are ETFs that are made up of shares or bonds from similar business categories.
There are four main investment categories: Transformative Technology, Society & Lifestyle, Health & Wellness, and Environment & Resources.
The top 10 thematic EFTs listed on the ASX, according to Morningstar are:
- ETFs Battery Tech and Lithium ETF (ASX: ACDC)
- ETFS Fang+ETF (ASX: FANG)
- BetaShares Asia Technology Tigers ETF (ASX: ASIA)
- ETFs Morningstar Global Technology ETF (ASX: TECH)
- BetaShares Global Robotics and Artificial Intelligence ETF (ASX: RBTZ)
- ETFs Robo Global Robotics And Automation ETF (ASX: ROBO)
- BetaShares Global Sustainability Leaders ETF (ASX: ETHI)
- BetaShares Nasdaq 100 ETF (ASX: NDQ)
- BetaShares Global Cybersecurity ETF (ASX: HACK)
- ETFs S&P Biotech ETF (ASX: CURE)
The average Australian has $170,000 invested in ETFs. Long-term ETF investors said ETFs were the most reliable financial product when there is a market downturn.
ETFs Battery Tech and Lithium ETF has performed exceptionally well over the last 12 months, with a return of 63.49%. This is a massive return compared with the average return on Australian shares sitting at 6.5% per year. From 1981 until 2021, the average deposit interest rate was sitting at 5.81%, however, it reached a record low of 0.10% in February 2021.
ETFs Fang+ETF’s growth wasn’t as high, however with returns of 33.15% over the last 12 months, you have the opportunity to substantially increase your investment portfolio.
The minimum rate to invest in ETFs is $500. Commonwealth Bank charges 0.5% annual management. If you invest the minimum, you will only pay $2.50 in fees, compared with a $19.95 brokerage fee to trade shares.
New investors typically start with $62,000. 20 years ago when ETFs first appeared on the Australian marketplace, the entry figure was much higher at $125,000.