The exponential growth of exchange traded funds (ETFs) in the United States could be a sign of things to come in Australia, according to Axel Lomholt, Vanguard’s international Head of ETFs.
ETFs are a type of investment fund that can be bought and sold on a securities exchange market. Speaking in front of a packed audience at the FSC’s ETF Forum in Sydney last week, Lomholt outlined three reasons why he thought ETFs had had a really positive impact on the financial industry.
First, Lomholt said ETFs had changed the distribution landscape. “Most products in financial services are sold with heavy commissions outside of the US and ETFs have managed to wedge themselves into previously inaccessible markets because you can buy them off the exchange,” he explained. “ETFs don’t sit well with distributors – they don’t like them because ETFs don’t pay commissions.”
Second, Lomholt said ETFs were democratising investing. “ETFs allow easy access to hard-to-reach markets, so retail investors can get exactly the same quality product as PIMCO investments,” he said. “There’s no difference in those two products and we can get it at the same price. There’s trading flexibility compared to mutual funds. That is democracy.”
Third, Lomholt pointed to portfolio construction. “ETFs offer operational simplicity and blend well with other types of investments,” he said.
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Ecosystem is vital for ETF expansion
While ETFs have become enormously popular in the United States over the past decade, the same cannot yet be said of Australia. “What really drives a successful ETF market is a fertile ecosystem,” said Lomholt, emphasising the importance of distribution, market structure and support from regulators.
“Distribution in the US is not captive and that was arguably the biggest driver of ETFs there,” said Lomholt. “And US regulators have been very accommodating over time too.
“At Vanguard, we’re spending a lot of time working with regulators and policy makers in the rest of the world to make sure we get this fertile ecosystem elsewhere. We applaud the work that regulators are doing and we acknowledge and share their view that not all asset classes are suitable for passive investments and ETFs.”
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The future is bright
Reflecting on nations like Australia, Lomholt sees massive potential for growth. “Globally speaking, ETF adoption is still low. Do we believe that’s going to change? Absolutely,” he said. “There’s a massive tail wind for ETFs with major shifts happening in asset management. Technology is giving clients a completely different experience. Regulators are doing good things around transparency and disclosure. All the clients that we talk to are worried about the low return environment. And clients want to understand how products work holistically.
“These are all reasons why investors are adopting ETFs and will increasingly do so. Change is already happening and the future is bright for ETFs.”
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