ETF Boom in Australia

ETF Boom

2020 has seen a large number of young investors entering the share market in Australia and around the world. Exchange-traded funds (ETFs) have also grown dramatically as a result of active stock market participation. Recently, the value of ETFs in Australia has exceeded $100 billion.

An ETF is an investment fund product traded on a stock exchange. An investment fund pools other investors’ money for the professional management of a fund manager, allowing investors to buy and sell investment funds easily, just as they trade shares.

ETFs are popular due to lower fees, ease of diversification, investment expertise of professional fund managers and liquidity, making them a popular choice for inexperienced retail investors. According to an ASX 2020 investor study, 20% of those who began investing in the last 12 months invested in ETFs.

The ASX report also shows that 45% of ‘next Gen’ investors plan to invest in ETFs in the next 12 months. iShare Australia reports that the number of ETF investors has doubled to 1 million recently.

Among the wide range of ETF products, thematic ETFs – investment funds that focus on companies in trending investment themes – have gained popularity.

For instance, ETFS FANGS (ASX: FANG) is an exchange-traded fund that invests in leading tech companies listed in the US, including Apple, Facebook and Netflix. Australian investors who want to invest in these US companies can choose to buy this ETF on the ASX, instead of opening an international trading account to buy the US shares directly.

Other popular themes include ethical investing, eSports companies, BetaShares Asia Technology Tigers, artificial intelligence. These thematic ETFs accommodate investors’ preferences for market darlings while providing diversification benefits at the same time.

Factors to consider before investing in thematic ETFs

However, retail investors need to be cautious when committing to thematic ETFs. There are multiple factors to consider.

First, what is trending today may no longer be popular in the next few months. A thematic ETF generating high returns could lose investor attention quickly, sweeping the gains away.

Second, it’s important that investors evaluate and review their existing position to avoid overweighting a certain sector.

Third, market timing is important but difficult to gauge and thematic ETFs could be volatile due to their focuses on hot stocks in the market.

With the increasing concern over the tech stock bubble, it is essential to evaluate the valuation of the underlying companies in tech ETFs before committing.

Dr Angel Zhong, School of Economics, Finance and Marketing. RMIT College of Business and Law.