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The Exchange Traded Product market is growing supported by the rise in hybrids
From its infancy to now, the Exchange Traded Products (ETP) market has been growing exponentially, with 2021 becoming a record year for flows despite the COVID-19 pandemic. The 12 months to November 30, 2021, the industry grew in size by 44% to a record $132.66 billion. ETFs make up around 90% of the Australian ETP market. What started with about 126 products, has quickly grown to more than 266 products in the Australian market alone.
John Dyall from the Rainmaker Group, spoke at the Financial Standard’s forum on Exchange Traded Products this week. He says, “The ETP market is so large, that it is creating anomalies never seen before. The ETP market is also starting to draw funds from other markets which have also allowed the creation of new products.”
According to Dyall, the number of products has gone up 30 percent in three years, with FUM up 200 percent and net flows up 287 percent. All of that, in just three years. Part of the reason is due to the rise in hybrid structures that combine an ETF with an unlisted trust.
Hybrids are a form of unlisted unit trust but are also a traded product on either of the stock exchanges ASX or Cboe Australia. Two products in the one. Being able to have unlisted unit trust via an ETP, has been the bridge that has connected unlisted funds with stocks. A stockbroking client that could only purchase stocks through their stockbroker, can now trade on a minute-to-minute basis, a managed fund via this hybrid ETF structure. It gave new and existing customers the chance to trade unlisted assets. The hybrid market represents around 15 percent of the market. It isn’t huge but certainly isn’t small.
Dyall says the reason hybrid structures have grown is due to actively fund managers witnessing the growth in the ETF market and deciding they have better prospects for growth in these channels rather than the old distribution channel of unlisted unit trusts. As a consequence, the ETF market’s rapid growth has seen large amounts of flows coming from managed funds (unit trusts) that have been re-structured as ETFs or as hybrid structures.
“Magellan was the first major manager to implement this rearrangement of its ETFs in November 2020, adding around $13 billion to the size of the Australian ETF market. Magellan was promptly followed by two large unlisted unit trusts, the AB Managed Volatility Australian Equities Fund (with $1.5 billion) and the Hyperion Global Growth Companies Fund (with $2 billion),” says Dyall.
What was evident, was that growth didn’t just come from a change in investor attitude towards distribution channels but was also driven by active managers changing their distribution models to suit the customer. Dyall says, “Australia was one of the first movers in the world when it came to combining existing unlisted unit trusts with ETFs.”
Looking at the chart below, Rainmaker compared net flows in ETFs vs unlisted unit trusts for the year November 2021-2022. Unlisted unit trusts lost saw significant outflows, while ETFs recorded positive inflows.
