From the beginning, which in ETF terms is the early 1990s, the vehicles have had the retail investor in mind. That can be sensed by the ‘catchy’ names of the first ETFs, if nothing else – Morgan Stanley’s World Equity Benchmark Shares, or ‘WEBS’, and the State Street Global Advisers-managed ‘Standard & Poor’s Depositary Receipt’ ETF over the S&P 500, which gave its acronym to the subsequent family of SSgA ETFs, known as ‘SPDRs’ or ‘spiders’. Whether there was any collusion in the naming of these two initial ETFs is lost to history, but we do know that investors have happily become stuck in the spiders’ webs. The number of ETFs in the US market was almost 800 by 2009, managing north of US$730 billion, while Europe is home to about 900 ETFs with US$218 billion under management. The ETF concept now has over US$1 trillion of support globally, although this is one area of asset management where Australia does not punch above its weight. As at June this year, only A$3.2 billion was invested in Australian ETFs, and much of that may be held by non-Australian institutions.
Indeed, SSgA’s head of structured products in Australia, Darroch, says that one of the key non-retail customers of ASXdomiciled ETFs is US pension funds. “It’s true that your big institutions would be able to do a separately managed mandate for a lower fee than an ETF. But often they’re only looking for a tactical or medium-term allocation to Australia, and might want to avoid the administrative burden of establishing a custodian relationship here,” Darroch says. On the flipside, some demand from Australian institutions for ETFs might be hidden inside their transition management relationships. The managing director of Citi’s transition management unit, Michael Jackett-Simpson, singles out emerging markets as the asset class where ETFs are the most useful for the pension funds he services. “There is no futures contract for emerging markets, so an ETF is by far the most flexible and liquid hedging tool for that asset class,” he says.
Jackett-Simpson observes that ETFs are becoming more commonly used in all types of transitions, particularly as placeholders in more complex transitions, because the investor continues to benefit from dividends and franking credits, while paying only a pro rata fraction of the ETF’s annual management fee. “The emerging markets ETFs have a price tag of 67-70 bps, but that’s only about 1.5 bps if you hold it for a week,” he says. However SSgA’s Darroch admits an ETF is unsuitable for some funds in some situations, because it requires settlement of its full face value in cash within a T+3 timeframe, whereas futures only ever require posting of collateral equivalent to 10 per cent of their face value.