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FEBRUARY 2, 2012
Bonds, tailored equities and income to rule ETF market in 2012, says Russell
- Bond ETF market could be worth $500m by year end
SYDNEY, February 2, 2012 - Global financial services firm Russell Investments predicts bonds, international equities and income are to be the biggest growth areas for Australian exchange traded funds (ETFs) in 2012 as the ETF market continues to soar.
"The ETF market in Australia, which has grown to $5bn in assets under management (AUM) in the last three years, will continue its upward rise in 2012, and we expect a raft of new investment options to further attract investors," said Amanda Skelly, director of ETFs at Russell Investments.
Retail investors bunker down in bonds
Product issuers are rushing to bring bond ETFs to market, after regulatory changes earlier this year cleared the way for them to be quoted on the AQUA Market of the ASX, with the ASX anticipating that as many as 10 bond ETFs will be available by mid-year. Russell intends to launch its range of bond ETFs in the early part of this year.
"Globally, bond ETFs were far and away the outstanding ETF performer in 2011, from both a performance and cash flow perspective. Bond ETFs were the only type of ETF that achieved positive net inflows each month in 2011, and we think we'll see as much as $500m in the Australian Bond ETF market by year end," said Ms Skelly.
Locally, Australian bonds were the best performing asset class of 2011 and while Australian bond yields are now near record lows, investor concern is still at record highs.
"Many investors continue to position their portfolios defensively and bond ETFs will provide an additional tool for them. Until now bonds have been difficult or expensive for retail investors to access, despite the appetite for fixed income as evidenced by the recent popularity of products like hybrids," said Ms Skelly.
Broad market Australian equities less appealing
There is no denying Australian investors are biased towards domestic equities, so one surprising trend that Russell predicts will play out in 2012 is the move towards international equity ETFs.
"While we anticipate most investor's nerves will keep them on the defensive, we have started to see some momentum building in international ETFs," said Ms Skelly. "There is increasing investor interest in ETFs which try to capitalise on potential offshore opportunities, particularly in developed markets such as the US where valuations are relatively attractive." Around $1bn, or 20% of the Australian ETF market, was in international equities as of December 2011, up from 15% in December 2010.
Meanwhile broad based Australian equity ETFs, such as those offering exposure to the top 200 Australian stocks, struggled to gain assets this year, slipping from 61% of the market in December 2010 to 53% in December 2011. This is likely to continue as investors remain attracted to more specialised ETFs which offer alignment with specific goals such as stability and income.
Income a haven in uncertainty
Dividends continued to provide investors some level of certainty in 2011 and Russell predicts investors will be looking for the same this year. This will mean increased popularity of high dividend ETFs, such as Russell's High Dividend Australian Shares ETF (RDV).
"The popularity of high dividend ETFs highlights the important role income plays in a portfolio and the resilience of the strategy in volatile markets. A dividend strategy makes a lot of sense when there is uncertainty because investors can continue to rely on companies to pay dividends, even when capital growth looks shaky," Ms Skelly said.
Russell's High Dividend Australian Shares ETF (RDV) finished 2011 strongly with a distributable yield (including franking credits) of 10.09%* for the calendar year based on closing prices. This saw RDV outperform other high dividend ETFs on the Australian market, in some instances by more than 3%, while beating the ASX200 on a total return basis by circa 2% for the year.
"The rise of ETFs has given Australian investors a valuable, easily accessible tool to meet a variety of needs. This year should bring even more products to market, notably bond ETFs, which will expand the menu of options and strategies investors can use," Ms Skelly concluded.
Australian ETF market breakdown comparison by year
Data source: ASX
* Performance data is net of fees and charges
About Russell Investments
Russell Investments is an independent, global financial services firm that provides strategic advice, investment solutions, implementation services and global performance benchmarks that are customized to meet the unique needs of institutional investors, financial advisors and individuals.
Celebrating its 75th anniversary in 2011, and 25 years in Australia, Russell has pioneered innovations that have come to define many of the practices that are standard in the investment world today, and has four decades of experience researching and selecting money managers globally.
Russell has about US$161 billion in assets under management (as of 3/31/11) and works with 2,300 institutional clients, 530 independent distribution partners and millions of individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2 trillion in assets under advisement (as of 12/31/2010) and traded $1.5 trillion last year through its implementation services business. Russell provides leading administration and member services to over 220,000 individuals through its Australian Member Administration Centre. The Russell Global Indexes calculate over 50,000 benchmarks daily covering 63 countries and more than 10,000 securities.
Founded in 1936, Russell is headquartered in Seattle, Washington, USA and has offices in Amsterdam, Auckland, Chicago, London, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit
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