The allure of active ETFs for financial advisers

Financial advisers’ appetite for active exchange-traded funds (ETFs) as a cost-effective investment solution continues to grow, as advice firms look to manage costs and service more clients.

Australia has seen a range of new active ETFs hit the market with the category accounting for 55 per cent of new fund launches in 2023, according to Global X ETFs.

However, the ETF provider revealed that active ETFs recorded approximately $1 billion in outflows last year. This was primarily attributed to the Magellan Global Fund (Open Class) (Managed Fund), which reported a significant $2.5 billion in outflows.

Despite this, Dugald Higgins, head of responsible investment and sustainability at Zenith, recently said: “Whether it’s index or active management, there will be ebbs and flows depending on how the market’s been, but I think that is going to be quite a big thing going forward, and Australia’s at the forefront for active ETFs.”

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Speaking to Money Management, Paul Turner, Australian head of adviser group and vice president at Dimensional Fund Advisors, recognised advisers’ increasing appetite for these solutions.

“We’re noticing the pressures around running a successful financial planning practice with the cost of compliance and the cost of delivering advice being a challenge for them,” he explained.

“Advisers want to make sure they’ve got really good investment solutions that appeal to different subsets of the market and want to do so in a scalable manner, so it enables them to run efficient businesses.”

While advisers’ clients seek low-cost, diversified options in their investment portfolios, they also want the opportunity to outperform the relative benchmark.

“They wouldn’t want to do so by exposing themselves to risks that are outside their control. It’s a very attractive proposition to advisers,” Turner added.

Dimensional invests with a “never having to say sorry” approach, meaning advisers can rely on sound portfolios that take into account the known risk exposures.

“It’s a very compelling proposition to advice firms when they’re not having to say sorry for something that’s outside their control, and they can consistently deliver a really good investment experience.”

Moreover, having a reliable ETF solution that appeals to a variety of clients – particularly younger generations with low balances – allows advisers to focus on the more fulfilling client-facing duties of running an advice business.

He continued: “Having an investment philosophy that can deliver consistent outcomes is very liberating for a lot of firms. It enables advisers to provide a good investment experience, which frees up their time to do a whole bunch of other things – whether that’s recruitment, training, having more meaningful conversations with clients – so they can invest that time that they’ve gained back into things that are important for them.”

Active ETF fund launch

Dimensional Australia announced the launch of three new active ETFs in November last year, in what was described as a very long-term strategic move for the firm Down Under.

The three offerings, namely Australian Core Equity, Global Core Equity (Unhedged) and Global Core Equity (AUD Hedged), are among Dimensional’s most popular strategies and aim to provide broad exposure to the Australian and other developed equity markets, while emphasising the known drivers of higher expected return in small caps, value stocks and more profitable companies.

“We launched active ETFs in the US three years ago and we’re now the largest active ETF provider globally. We’re seeing the appetite globally and we think that’s going to continue down here in Australia,” Turner remarked.

Commenting on the new products, he said they were launched off the back of client demand – ranging from younger clients looking to make their first investment to clients seeking fund precision.