ETF s Ask the Experts LIVE Q&A Questions Which ETF asset classes have seen the largest flows YTD? Global Flows Ranked by Asset Class (USbn) Asset Class 2016 YTD Flows Equity 124.0 Fixed Income 108.8 Commodities & Other 32.3 Source: BlackRock Global ETP Landscape, October 2016 With the ETF space becoming more crowded, how do you differentiate your products? How do you choose an ETF provider? At ishares, we focus on providing quality products that help investors build better portfolios. When selecting an ETF provider we suggest considering the following: Provider How well do you know your provider? Your ETF provider should have: Experience in the ETF market. Size, scale, expertise, track record and level of commitment to the ETF industry. Experience and relationships with market participants, index providers, the exchange and the regulator. A business model that supports and advocates the role of the adviser as the key to investor success (education, consulting and solutions to investment professionals and market participants). Benchmark What s in your ETF? Index name recognition. The most widely recognised and respected benchmarks in the industry are supported by index providers who ensure that their indices are trackable, complete and accurately represent the investment opportunity. Frequency of disclosure and level of transparency. While some indices report holdings on a daily basis, not all do which impacts investor ability to see exactly what is inside the ETF on a given day. Structure What are the implications of the ETFs structure? Key considerations A structure that provides transparent benefits to the unitholder, minimising unintended risks or costs. Product design that balances desired exposure and helps to ensure cost and tax efficiency and liquidity. An independent, dedicated ETF structure that helps insulate ETF unitholders from unintended tax consequences and inherent conflicts of interest. Liquidity Can you trade when you need to? It s critical to examine the real liquidity of the ETF through both its market volume and the liquidity of the underlying securities. Liquidity and access in volatile market conditions. ETF provider support for liquidity strong relationships with index providers and market participants to help provide deeper, more liquid products and the insights to access and exit them.
Costs Can you trade when you need to? Expense ratios are important; however all implicit costs trading, market impact, rebalancing should be factored in to determine the true total cost. Tight bid/offer spreads, which lower the cost for investors to enter and exit positions. For smart beta and alterative risk premium how do the ETF providers mitigate the potential front running by hedge funds and other market participants given the transparency of the index rebalance information available prior to the physical index change. Smart beta encompasses a diverse group of ETFs that track well known style factors such as value, quality, momentum and minimum volatility. In the last 12 months, minimum volatility has seen record inflows as a means to improve the risk & return profile of portfolios. Despite the strong flow, minimum volatility ETFs own a tiny fraction of the equity market representing less than 1% of. Experienced ETF issuers do not blindly trade on index rebalance dates. At ishares, our ETFs are managed by highly experienced portfolio managers who use a level of discretion as to when they rebalance portfolios. This ensures we keeps costs down, reduce tracking difference and deliver the best results for our investors. In relation to costs, for a typical ASX 200 ETF, on average how often would the ETF trade/re-balance? The S&P/ASX200 benchmark rebalances quarterly. We would typically expect turnover of less than 5% within the benchmark. There are two ETFs in Australia that track the S&P/ASX200. Based on ASX data, both are highly liquid and trade daily. What would be a reasonable tracking error for an Aussie 200 ETF? The ASX 200 is a very liquid benchmark as the top 200 companies by market capitalisation are very liquid themselves. We would expect a large fund with a long track record to have a very low tracking error, for example STW is only 10bps. A lower tracking error ensures clients are actually getting the exposure they're seeking and so is an important part of the due diligence check list. If you were to consider IOZ, which is the lowest priced ETF tracking the S&P/ASX200, the tracking error has been 0.05% over 1, 3 and 5yrs (at as 31 October 2016). This is very low and a good benchmark to use for comparison purposes. Why are some ETFs domiciled locally and some not? Some ETFs have a primary listing in the US and are "cross listed" in Australia. They are often called a CHESS depository interest, or CDI. This structure allows for an offshore fund that may have superior liquidity and size to be listed on the ASX. Whilst this structure has some administrative differences to those that have a primary listing in Australia, such as the requirement for investors to complete a W-8BEN form, the funds themselves are often managed in exactly the same way.
Some ETFs in Australia are cross listed which means their primary listing is somewhere else, often being the US. The benefit of this approach has been to tap into the existing scale of the global ETF market and deliver very low cost, highly liquid ETFs to Australia. A good example is IVV which tracks the S&P500 - it is the lowest priced ETF in Australia at only 0.04%. Most ETFs are registered managed investment schemes, like unlisted funds. However a manager with a track record and presence off shore may cross-list an existing fund currently offered on another exchange. These are called CDIs (CHESS Depositary Interests). CDIs give investors a beneficial interest in Fund Shares listed on another exchange and are designed to give investors substantially the same rights and entitlements as holding the Fund Shares directly. A global asset manager will choose to utilise a CDI: so they can tap into those strategies with greater liquidity than if the fund was local, as it is may be cheaper and more efficient than starting the same fund locally, to access a longer track record and history of investing in often complex markets. Do you see the current Tax structure for funds in Australia as an inhibitor to ETF growth? And what changes would you like to see to benefit Australia as an ETF investment location compared to other regions Not really in fact ETFs have tax benefits. There are two ways ETFs are considered tax efficient. 1. ETFs are generally a tax-efficient investment vehicle because they minimise exposure to CGT when other investors redeem. 2. As passive funds, ETFs typically have low turnover and therefore generate lower levels of capital gains tax compared to actively managed funds. The most easily understood is number two. In more detail number one is a concern for investors that have had a bad experience with an unlisted managed fund. An ETF won t hit you with a large taxable distribution the way an unlisted actively managed fund can do due to other client redemptions. With unlisted managed funds, if an investor redeems from the fund before a distribution is made, he leaves behind his share of any upcoming distributions for remaining investors, along with the associated tax liability. The departing investor may also have to be paid out through the sale of fund assets, leaving the remaining investors with an increased capital gains tax (CGT) liability. This does not happen with an ETF. Investors sell their units on the exchange to other investors or the market maker. A market maker is someone whose job it is to ensure there are units available for investors to trade (buy and/or sell). The market maker may redeem its units in the ETF but the good news is when it does, its CGT attached to those units redeemed goes with them. The ETF therefore minimises the impact of redemptions by other investors and the associated potentially higher CGT liability. A key feature of ETFs is their tax efficiency. 1. Equity ETFs pass all income and the associated franking credits through to unitholders. 2. When investors hold the security for longer than 12 months they are eligible for capital gains discounting. 3. ETFs are low turnover index investments, this low turnover reduces the realised capital gains hence reduces the distributed capital gains that are paid to investors. These three elements mean that investors, by utilising ETFs in a low cost and broadly diversified portfolio, get to keep more of what they earn. To further improve the ETF ecosystem in Australia we at Vanguard would like to see continued growth in usage of the product type by institutional investors. More incoming cash flow and more trading will reduce spreads and attract more liquidity providers to the market, reducing cost and risk for all investors. Lower spreads reduces the total cost of investment for all investors. More liquidity providers enhances competition and provides more trading options for investors. Answered by Vanguard
Focusing on Australian equities only & ignoring issues of accessibility & cost what are pros/cons direct vs ETF for this sector only? Using an ETF for your Australian equities exposure can reduce some of the administrative burdens of investing directly. Some pros are that events such as corporate actions are taken care of by the portfolio manager, there is instant diversification without having to buy a large number of single stocks and the portfolio is re-balanced for you. Direct ownership allows more flexibility of weights and for excluding stocks. Is the ETF price live i.e. does it reflect the live underlying share prices? When the underlying constituents of the ETF are trading then the ETF price is considered to be live Consider an ETF tracking Asian markets they are closed during Australian morning hours and open during our afternoon. So the ETF price would be considered live in the afternoon when Asian markets are open. ETFs Vs mfunds Vs active ETPs vs LICs - how do we educate the self-directed investor on which way to go? We have prepared this table comparing investment vehicles 1. The extent of diversification varies depending on the index the ETF tracks. 2. ASX requires that an ETF has an inav service and is supported by a Market Maker. 3. An ETF is required to have a Market Maker to facilitate liquidity. Unlisted managed funds process redemptions only on end of day s or previous day s price. 4. Limit, market and stop orders etc. 5. Assuming the ETF and unlisted managed fund have similar investment objectives. 6. Unlike an ETF which is supported by a third party Market Maker, the fund manager typically provides internal market making Which ETF provider has taken the most CF YTD? Global ETP Providers Ranked by Assets (USbn) Provider 2016 YTD Flows ishares 99.7 Vanguard 76.2 State Street 21.8 Source: BlackRock Global ETP Landscape, October 2016
IMPORTANT INFORMATION Issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should therefore assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. This material is not a securities recommendation or an offer or solicitation with respect to the purchase or sale of any securities in any jurisdiction. BIMAL is the responsible entity and issuer of units in the Australian domiciled managed investment schemes referred to in this material, including the Australian domiciled ishares ETFs. BIMAL is the local agent and intermediary for non-australian domiciled ishares ETFs referred to in this material that are quoted on ASX and are issued by ishares, Inc. ARBN 125632 279 formed in Maryland, USA; and ishares Trust ARBN 125 632 411 organised in Delaware, USA (International ishares ETFs). BlackRock Fund Advisors (BFA) serves as an advisor to the International ishares ETFs, which are registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940. BFA is a subsidiary of BlackRock Institutional Trust Company, N.A. (BTC). BTC is a wholly-owned subsidiary of BlackRock, Inc.. An ishares ETF is not sponsored, endorsed, issued, sold or promoted by the provider of the index which a particular ishares ETF seeks to track. No index provider makes any representation regarding the advisability of investing in the ishares ETFs. Further information on the index providers can be found in the BIMAL website terms and conditions at www.blackrock.com.au. BIMAL, its officers, employees and agents believe that the information in this material and the sources on which the information is based (which may be sourced from third parties) are correct as at the date of this material. While reasonable efforts have been made in good faith and after reasonable enquiry, to ensure the information contained in this material is factually correct as at the date of the material, no warranty of accuracy or reliability is given and no responsibility for this information is accepted by BIMAL, its officers, employees or agents. Except where contrary to law, BIMAL excludes all liability for this information. Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds and the loss of income or the principal invested. While any forecasts, estimates and opinions in this material are made on a reasonable basis, actual future results and operations may differ materially from the forecasts, estimates and opinions set out in this material. No guarantee as to the repayment of capital or the performance of any product or rate of return referred to in this material is made by BIMAL or any entity in the BlackRock group of companies. This material is not a securities recommendation. This material is not intended as an offer or solicitation with respect to the purchase or sale of any securities in any jurisdiction. No part of this material may be reproduced or distributed in any manner without the prior written permission of BIMAL. 2016 BlackRock, Inc. All Rights Reserved. BLACKROCK, ishares, and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.