Record number of exchange-traded funds hit share market, but investors warn of ‘gambling’ risk

A record number of exchange-traded funds (ETFs) have been listed on the local stock market during the past financial year.

The Australian Securities Exchange (ASX) added 72 new ETFs to its boards, up from 50 listings in the previous year.

ETFs are pooled investment funds that typically follow an index or a sector.

They have risen in popularity in recent years, with a total of $350 billion in ETF funds under management in Australia as of May this year.

ETF trader Nate Smyth, a financial planner by day, said he uses his spare time to pick stocks and watch the share market.

“That can be a mixture of things, buying and selling, but generally I’m a buy-to-hold person.”

Australian investors pile into ETFs

According to Nate’s broker, Betashares, it is boom time for ETFs.

“There has been a surge in both the creation of ETFs as well as the uptake of ETFs,” said Betashares chief executive officer Alex Vynokur.

“And in fact, one of the reasons why we’re seeing the industry really grow quite significantly at the moment is that the client demand is there like never before.”

ETFs are also exchanging hands more frequently on the Australian Securities Exchange.

According to the ASX, ETF trading activity last financial year surged 26 per cent compared to the previous year.

By comparison, there was a 22 per cent increase in ordinary shares trading hands over the same period.

ASX senior manager Rory Cunningham said there was widespread interest in ETFs due to their accessibility, diversification opportunities and low cost.

Many are younger investors, with 550,000 Australians aged 18 to 34 now invested in ETFs.

“It really is across the board,” he said.

“So across different segments, be that younger investors, high net worth investors, self-managed super funds, we’re seeing growth in ETF adoption across all those segments.”

Forager Funds chief investment officer Steve Johnson said there was something of a “dirty little secret” in the active funds management industry.

Active funds management involves professionals charging clients to produce investment returns that (hopefully) beat the return of investing in a broad range of big companies, or the market as a whole.

The secret, he said, was that active managers follow the market like passive fund managers but charge fees like active ones.

Experts warn of potential risks

However, Mr Johnson also offered caution about investing.

“One thing you can rest assured of with the financial services industry is that it will deliver what people want,” he said.

“And at the moment there is huge demand for these products.”

He told The Business program there was a lot of investor enthusiasm around technology and, specifically, AI-related ETFs, which in some cases was no different to gambling.

“So ETFs that are set up to allow investors to gamble on whatever is the latest, hottest trend.

“So it might have been cybersecurity a few years ago. It might have been software 12 months ago. And today, it’s pretty obviously AI that people are setting these funds up to let people gamble on.”

Nate Smyth agreed that choosing the right ETF could be challenging.

“Now there’s so many out there, but the thing to be careful with is that you can be doubling up without really knowing it, and you might not actually be diversifying yourself,” he said.

The impact of recent tax changes

Recent tax changes, some analysts argue, may further encourage some investors into exchange-traded funds.

That was because net gains and losses are contained inside the ETF itself, so any surge in an individual company that might attract capital gains tax is offset by another loss-making stock.

But Mr Johnson said he had not yet seen any shift in investment trends.

“I haven’t yet seen a huge change in investor behaviour, and I’ll be surprised if we do see anything particularly significant,” he said.