Sony is among range of interesting Japanese companies that investors now access to through EFTs. Photo / Getty Images
Sony is among range of interesting Japanese companies that investors now access to through EFTs. Photo / Getty Images
COMMENT:
Eight new exchange-traded funds on the NZX have garnered more than $30 million of investment in their first month of trading and it may be just the tip of the iceberg.
An ETF is essentially a basket of assets that trade like a single stock. Critically, they offer lowmanagement fees.
Through platforms like NZX's Smartshares, Sharesies and InvestNow investors can gain exposure to a raft of companies like Toyota Motor Corp, Sony Corp and Nintendo by tapping into the new Japan Equities ESG ETF for $1.85 a unit and a management fee of 0.55 per cent.
"You get a well-diversified portfolio in one single stock trade rather than having to try and put something together yourself," said Thom Bentley, Smartshares' director for institutional clients.
"It is a really simple way of building a portfolio. With six trades you could buy six ETFs and you get a really broad, well-balanced portfolio with equities, bonds, listed real estate, cash. It is an incredibly efficient way to do that."
Smartshares is New Zealand's only issuer of ETFs listed on the NZX main board and manages over $3.5 billion.
Ease of access, cheaper fees and high returns have seen ETFs explode in popularity since the early 1990s.
Passive managed funds – not just ETFs - now account for around 45 per cent of the US market, according to Merrill Lynch data. In New Zealand it's probably less than 5 per cent, Bentley says.
"It's a good window for growth."
The new funds give investors access to companies like Nintendo. Photo / Getty Images
Until recently, passive investment options were limited in New Zealand, he said. Fund managers have also created a narrative that the New Zealand and Australian equity markets are less efficient than those in the US and Europe and so better suited to active management.
"It has taken time for the consistent outperformance of passive funds to really come to the fore and be recognised," Bentley said.
Low fees are key. Actively managed funds require more research and portfolio management. Research shows, however, not many can sustain outperformance over an extended period of time and fees tend to eat into returns.
"It's consistent across all markets," Bentley said. "The less you pay the more you get. It really is the case in investing that you get what you don't pay for."
Thirty-one ETFs on the NZX offer a range of investment.
The NZ Top-10 ETF had an investor return of 15.86 per cent in the June year for a fund charge of 0.6 per cent. The US 500 ETF – which tracks the S&P 500 index - returned 8.86 per cent for a 0.34 per cent fee.
Low interest rates – both at home and abroad – are also driving interest in the ETFs. No-one's expecting rates to rise soon. But even if they were to push up 100 basis points to 2.5 per cent, "in a high-dividend fund you can still get a 5 per cent yield," Bentley said. NZX's Smartshares and global asset manager BlackRock teamed up to offer the eight new ETFs.
Bentley said their "environmental and socially responsible" nature, which screen out activities such as nuclear weapons and tobacco, has proven popular.
They also include two thematic funds, targeting healthcare and automation and robotics.
A global aggregate bond ETF tracks a benchmark index containing more than 24,000 different bonds.
Bentley said that fund has proven the most popular of the eight, driven by the fact it is the cheapest retail bond fund on the market with a fund charge of 0.3 per cent.
"Where interest rates and therefore returns on bonds are quite low, every basis point that you can reduce fees is significant," he said.
Sharesies co-founder Leighton Roberts said the thematic ETFs captured the interest of their users, most of whom are under 40.
Sharesies is one of a number of companies making it easier for Kiwis to invest. Photo / File
They have put about $2.5 million into the new ETFs. The robotics fund has already hit the $1 million mark.
"We have some that have been around for a lot longer and still don't have that much." Roberts believes the growing popularity of ETFs is linked to behavioural trends.
"In today's world we expect things to be instant or reasonably instant and with ETFs you get that experience.
"Technological advance means we expect things to happen faster and more transparently, which is what you get out of an ETF."
Both Roberts and Bentley say ETFs are just one tool in the investor toolbox.
ETFs helped Sharesies' users get comfortable with the platform, while enabling the firm to develop its own thinking about customer needs and how technology could deliver that. The firm now plans to launch direct share investments this month.
Bentley says investors shouldn't put 100 per cent of their portfolios in passive funds, but there is a case for having a large proportion of assets managed passively.
"In other words, don't pay active fees unless it's for specialist asset classes rather than mainstream listed shares and bonds."
