• Resize text
• Print this page

November 17, 2011

Advisers and brokers see liquidity and cost benefits of bond ETFs, new Russell survey shows

• Knowledge the main barrier to widespread acceptance

SYDNEY, November 17, 2011 – With bond ETFs on the horizon in Australia, a new survey by Russell Investments has found many advisers and brokers are keen to embrace the new products for liquidity, low fees and diversification, but more education is needed before they are fully accepted by their clients.

A survey conducted with over 104 brokers and advisers by ETF provider Russell Investments* found a high appetite for bond ETFs with 54% of advisers and brokers saying they were likely or highly likely to recommend them to their clients. Further, 36.5% saw bond ETFs as a substitute for term deposits.

Equity ETFs have taken off in Australia in the last two years, and bond ETFs have been touted as the next innovation to hit the market. However ETF providers have been waiting for changes to the listing rules which will allow bond ETFs.

Liquidity, low fees and diversification were the main benefits of accessing fixed income through ETFs, named by 59%, 54% and 50% of respondents, respectively.

"Bonds are part of a well constructed portfolio, particularly in the current volatile market. ETFs will allow easy access, as the OTC market is generally shut to smaller parcels of bonds and are therefore beyond the scope of the average investor, adviser or even small institution," said Amanda Skelly, director of ETFs at Russell Investments.

In terms of which of their client segments brokers and advisers viewed as most suited to bond ETFs, SMSFs received the most votes with 77%, while post-retirees came in second with 61% and high net wealth individuals with 42%. Their clients currently favour cash and term deposits in their portfolios, with 92% saying their clients are using cash or term deposits often or very often compared to 70% who said they use fixed income often or very often. Managed funds and hybrids were named as the most popular method for clients to access fixed income.

"With the very real possibility that term deposit rates will continue to fall, bond ETFs provide another option for investors to access income without being exposed to equity market volatility," said Ms Skelly.

Ms Skelly said it was also good to see recognition of the benefits of having another option for accessing bonds through an ETF at a lower cost than a managed fund.

"We think this shows bond ETFs will be of interest to advisers and dealer groups trying to move to low cost models," said Ms Skelly. "We also believe bond ETFs will be appealing for brokers, who traditionally haven't been big users of ETFs or managed funds because they could easily purchase stocks and like providing their stock picks, but bond ETFs will provide them with access to a new asset class," Ms Skelly said.

Many concerned about lack of knowledge

Despite their apparent favourable view of bond ETFs, lack of familiarity and transparency were the main negatives. An overwhelming number (95%) of respondents agreed bond ETFs needed to be better explained before they are accepted and they could recommend them to clients. Around 75% of respondents agreed their clients are more likely to lean towards hybrids or term deposits until they've had a chance to 'look under the bonnet' of bond ETFs.

"Bond ETFs have experienced significant growth and acceptance in other regions, accounting for 18.1% of total ETF assets under management globally," said Ms Skelly. "However this result definitely shows we as an industry need to do more to educate people in Australia about the benefits – for advisers, brokers and the end investor.

"We believe the introduction of bond ETFs will appeal to investors' desire to be more in control, as evidenced by this survey. They will be a real innovation for investors, providing both ease of access and lower cost together for the first time," Ms Skelly concluded.

* The survey was conducted by Core Data on behalf of Russell Investments in September 2011 via an online questionnaire. There were 104 complete responses to this survey from both advisers and brokers and this number has been used as a basis for analysis throughout.

Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS License 247185 (RIM). This communication provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. Any potential investor should consider the latest Product Disclosure Statement (PDS) for the Russell High Dividend Australian Shares ETF (RDV) and/or Russell Australian Value ETF (RVL) in deciding whether to acquire, or to continue to hold, units in RDV or RVL. Only persons who have been authorised as trading participants under the Australian Securities Exchange (ASX) Market Rules can apply for units in RDV or RVL through the latest PDSs. Investors who are not Authorised Participants looking to acquire units in RDV or RVL cannot invest through the PDS but may purchase units on the ASX. Please consult your stockbroker or financial adviser.

The Russell High Dividend Australian Shares ETF tracks an index that is weighted towards companies that are expected to deliver dividends higher than the market average, however high dividends cannot be guaranteed.

The Russell Indexes are trademarks of Frank Russell Company (FRC) and have been licensed for use by RIM. Neither RDV nor RVL is sponsored, issued, sold or promoted by FRC and FRC makes no representation or warranty regarding the advisability of investing in RDV or in any of the securities upon which the Russell Index is based. FRC has no obligation or liability in connection with the administration, marketing or trading of either RDV or RVL. FRC is not responsible for and has not reviewed RDV or RVL, nor any associated literature or publications and makes no representation or warranty express or implied as to their accuracy or completeness. FRC does not guarantee the accuracy and/or the completeness of the Russell Indexes or any data included therein and FRC shall have no liability for any errors, omissions or interruptions therein.