Just four of 163 exchange traded funds listed on the Australian Securities Exchange have been rated ‘highly recommended’ by investment researcher Zenith Investment Partners in its latest review of the sector. Three of them are offered by the same fund manager.
Zenith has assigned its top rating to the Magellan Global Equities Fund, Magellan Global Equities Fund (Currency Hedged), Magellan Infrastructure Fund and BetaShares Australian High Interest Cash ETF.
Among the other ETFs, 36 are ‘recommended’, 19 ‘approved’ and 103 have been withdrawn, declined or not rated.
BetaShares, iShares, Platinum, State Street, VanEck and Vanguard funds feature prominently in the list of ‘recommended’ funds.
Three products were upgraded and four were downgraded. The upgrades include Magellan Infrastructure Fund, BetaShares Managed Risk Australian Share Fund (‘recommended’) and BetaShares Managed Risk Global Share Fund (‘recommended’).
Referring to its decision to upgrade the Magellan fund, Zenith says: “Zenith retains a high level of conviction in the fund, owing to our regard for the portfolio managers, the stringent infrastructure definition applied to the investment universe and well constructed process and approach to portfolio construction. Since our last review, Zenith has gained further conviction in Magellan’s market making capabilities.”
On the BetaShares funds, it says: “With a longer time horizon to assess the efficacy of the risk overlay strategy, Zenith’s confidence has increased, particularly with respect to the responsiveness of the overlay strategy during stressed equity environments.”
The downgrades include AMP Capital Global Property Securities Fund (‘approved’), Russell High Dividend Australian Shares (approved”), State Street SPDR S&P 500 (‘approved’).
Reasons for the downgrades include underperformance and turnover in the investment team (in AMP Capital’s case), lack of scale in the business (Russell) and high cost (State Street).
No Australian equities ETF received a ‘highly recommended’ rating. Those with ‘recommended’ ratings include BetaShares FTSE RAFI Australia 200, BetaShares Managed Risk Australian Share Fund, iShares Core S&P/ASX 200, SPDR MSCI Australia Select High Dividend Yield Fund, SPDR S&P/ASX 200 Fund, SPDR S&P/ASX 50 Fund, VanEck Vectors Australian Equal Weight and Vanguard Australian Shares Index ETF.
The total market capitalisation of ASX-listed ETFs grew by 23 per cent to $30.7 billion over the 12 months to the end of August.
Zenith says this growth is bringing greater diversity to the market, which makes it easier for investors to use low-cost investment products to build diversified portfolios.
However, “the increasing complexity and erosion of the barriers between passive and active strategies means that more than ever investors need to look beyond headline characteristics and fees in choosing the right product.”
Fees have come down, with the asset-weighted average of all ETF fees falling from 32 basis points to 28 bps over the past 12 months. This is despite the fact that more complex, higher-cost products have been coming to market.
Fees range from 7 bps for the iShares S&P 500 ETF to 1.35 per cent for Magellan Global Equities.
The ETF market is still dominated by passive Australian equity funds but the big growth is in offshore equities. A number of other asset classes, including commodities, currency, fixed income and property are growing.