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Investors risk falling into ETF ‘trap’

Bell Direct, ETF, Exchange-traded fund, Arnie Selvarajah, VanEck

The growth of the ETF market means investors will need to be more cautious in their approach to passive investment products to avoid a common pitfall, a stock broker has warned.

The uptake of ETFs in Australia shows “no signs of abating”, according to stock broking firm Bell Direct, and last month the volume of funds being managed by such products reached $30 billion.

Arnie Selvarajah, the company’s chief executive, explained that these products were becoming increasingly popular due to their accessibility, liquidity, and price, but cautioned that investors should be careful of “blind overallocation” into the sector.

“Not all index-driven products are created equal,” he said.

The large number of available ETFs and the different ways in which these are structured needs to be a point of consideration for potential investors, Mr Selvarajah explained, and investors will need to assess which ones meet their needs as not all ETFs will be suitable products.

“For the ill-informed investor, unquestioned allocation to ETFs is a common trap. Attention must be given to the different styles and exposures of various ETF products, and investors should understand that passive alone will not deliver the desired return outcomes,” he said

“An issue we are now seeing emerge is an overexposure to overtly-similar passive strategies, leaving investors’ poorly-diversified and their portfolio performance at risk. For every eight stocks a self-directed investor owns, at least one of these stocks is an ETF if not more.”

On the ASX alone, Mr Selvarajah said, there are now more than 200 different ETFs, and the trend towards both actively-managed and smart beta (which use an alternative index built around a theme or factor, such as healthcare) ETFs means investors need now, more than ever, to be smart about how they allocate their money.

According to a recent study conducted by ETF provider VanEck, the smart beta market is the fastest growing segment of the investment management industry worldwide, and now represents US$592 billion in funds.

The same report also found the percentage of financial advisers using ETF products grew from 37 per cent last year to 50 per cent in 2017.

Investors risk falling into ETF ‘trap’
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