Market maturity barrier to ETF growth in NZ

Exchange traded funds have surged in popularity globally but the New Zealand financial services industry has yet to fully embrace them, according to some advisors.

Monday, December 9th 2024, 2:09PM

by Kim Savage

Once a niche investment product when they were first created in the 1990s, PwC estimates ETF assets under management globally will reach at least US$19.2 trillion by June 2028, from US$11.5 trillion at the end of 2023. The consultancy’s research also found the number of managers offering ETFs has more than doubled since 2013.

New Zealand’s market size, and the relatively small amount of capital available mean New Zealand ETFs can come with high price tags, says Amicus Financial director and Wealthpoint investment advisor Tom Stanley.

Stanley says retail investors are not always aware of the layers of cost involved in pursuing offshore ETF options available via investment platforms.

“If you're a US investor, which is where most of this passive phenomenon has kicked off because they have such huge volumes of money, the expense ratios for economies of scale are really, really tight for US-listed ETFs, and that's structured around being the most simple, tax efficient, best answer for US-based investor,” he says.

“With that scale of volume you end up having discount brokerage or brokerage models, where they'll allow people to transact sometimes for zero commission, whereas in New Zealand up until recently, you had brokers wanting to charge 1.5% to transact.”

Heathcote Investment Partners director Clayton Copplestone says while ETFs are now gaining in popularity locally, New Zealand has been slow to pick up on the trend.

“They’re very expensive here, you don’t have to go too far afield to find that you’re paying as much for an ETF exposure as you would for an active manager.”

“I don’t know why that is, I think there could be people quarantining and protecting their margins, maybe we haven't embraced it so maybe there’s a sense of immaturity in our industry?”

But Copplestone believes a more level playing field is on the horizon.

“You only need to see some of the kingmakers like BlackRock or Vanguard or Fidelity come to town with their product - they’re offering the equivalents now in single digit.”

“I can’t help but think the role technology is playing and will continue to play and investors will have access to all of that stuff regardless of where they’re domiciled.”

When do ETFs fit the bill for clients?

Copplestone says ETFs are increasingly being recognised as having a role to play in portfolio construction.

“I think they’re useful tools to have for achieving beta or passive but I think the challenge for anyone playing in that passive space irrespective of that gateway, is that it’s a commodity.

“Price, and to a lesser extent - brand, are going to be deciding factors in that space.”

A proponent of index funds over ETFs, Amicus’ Tom Stanley says there are times when an ETF fits - like in the case of a client who is a US citizen, where US-listed ETFs simplify tax implications.

Ultimately, with choice in the market, understanding the end result for the client remains the priority, he says.

“You can access all these different things and depending on the situation, understand the pros and cons of each of those vehicles, and often the tax treatment and the total cost is where you can really structure things that are meaningful, achieve the person's goals, but also respect their specific situation.

“Hopefully it is thoughtful from a ‘total cost’ point of view.”

Tags: ETFs