Australian ETF
Landscape

The market is now on the verge of reaching a quarter of a trillion dollars in assets, marked by the largest ever yearly increase in assets of $69 billion, and a 10-year compound annual growth rate (CAGR) of 32.4% p.a. However, this accounts for just 1% of the global ETF market. While ETF adoption in Australia is still in its early stages, the industry has significant potential for growth.

2024’s Record-Breaking Year for ETFs

The Australian ETF market achieved unprecedented milestones in 2024, highlighting its growing position in the Australian wealth management ecosystem. With record net flows of $31 billion, surpassing the calendar year net flow record of $23.6 billion set in 2021, investors continued to embrace ETFs as a trusted investment vehicle for their investment portfolios.

Additionally, the market welcomed 65 new ETF products, breaking the previous record of 55 launches last year, underscoring the industry’s innovation in broader product proliferation. While most of the new products have been active ETFs (either via conversion or dual-listed share classes), there has also been notable innovation in thematic and smart-beta strategies launched in 2024 such as artificial intelligence (AI) and growth at a reasonable price (GARP).

Shift from High-Cost to Low-Cost

The majority of ETF flows are going into lower-cost ETFs, with nearly two-thirds directed to funds charging less than 0.25% per year, while expensive ETFs have seen outflows, highlighting the growing preference for cost-effective investment options.

Our analysis of fees paid by Australian investors in unlisted managed funds shows that switching to lower-cost ETFs could save investors up to $3.9 billion annually.[1] Since Jack Bogle launched the first index fund in 1976, indexing has saved global investors around $1 trillion, with ongoing annual savings estimated at US$150–200 billion.[2] ETFs represent the next phase of this evolution, with projections suggesting they could capture at least half of mutual fund assets over the next decade.[3]

The migration from high-cost to low-cost investing is likely set to continue, with investors increasingly seeking alternative cheaper vehicles to traditional unlisted managed funds. ETFs are attractive due to their low cost, transparency, liquidity, and ease of use. As more capital shifts from managed funds to ETFs, total fees paid across the financial industry will likely decline, which is bad news for high-cost fund managers, but a win for investors. This trend underscores Australian investors’ fee sensitivity and the increasing use of low-cost ETFs as key building blocks in investment portfolios.

All aboard the US Train

Global share ETFs were the star in 2024 drawing over $16 billion in net flows, accounting for over half of ETF flows, up from 23% in 2023. US equities led the way, with US equity ETFs attracting a record $5 billion in net flows, doubling the previous high set in 2021.  Investors were keen to get exposure to the US market, especially after US equities experienced their best two-year run in a quarter of a century. This momentum could extend into 2025, driven by US exceptionalism and the prospect of stronger earnings growth under a pro-markets Trump presidency. However, rather than just the ‘Magnificent 7’, we may see broader market participation across US equities.

Crypto ETFs Cashing In

The Global X 21Shares Bitcoin ETF (EBTC) was the top-performing ETF of 2024, rising 146% for the year. Cryptocurrencies thrived in a risk-on environment fueled by “animal spirits” following Trump’s election victory and his crypto-friendly cabinet picks. Falling interest rates and strong inflows into bitcoin ETFs further supported the rally of the bitcoin price. ETFs have made crypto investing more accessible, particularly for those hesitant to buy directly through unfamiliar crypto exchanges.

In 2024, over $330 million flowed into Australian crypto ETFs, representing 1% of total ETF flows, while US crypto ETFs saw over US$40 billion in ETF flows, representing 3-4% of total ETF flows. Looking ahead, we expect significant innovation in the crypto ETF space over the next 12-24 months, bringing new and unique exposures to market. With the US leading the charge, boosted by Trump’s pro-crypto stance, we could see a wave of new crypto ETFs hitting the market in the year ahead, with Australia, an early pioneer in crypto ETFs, potentially playing a key role.

Three Key Trends to Potentially Shape Out in H1 2025

Three main trends we see potentially unfolding throughout the first half of 2025:

• US Exceptionalism but Market Broadening: Expectations are high for the US to lead global markets in 2025. Earnings growth may be broadening across sectors, driven by strong economic fundamentals, policy support, and improving investor confidence, fostering greater market participation amongst US companies.
• Powering the AI Revolution: The AI revolution demands renewable energy to be an important source to power its growth, with nuclear and copper playing critical roles, driving investment opportunities across sustainable infrastructure and supporting AI’s expanding global footprint.
• Paying Attention to Valuations: Elevated equity valuations may urge investors to adopt a cautious approach to help balance growth potential and stability amidst potential slowing growth, stagflation concerns, and geopolitical volatility.

[1]Source: Morningstar using lowest average fee for respective ETF and managed fund category.

[2]The Evidence Based Investor (17 January 2023): $1 Trillion and Counting – Jack Bogle’s Legacy to Investors

[3]Financial Times (19 June 2024): ETFs could seize half of current US mutual fund assets, says Citi