Fee-for-service model drives ETF breakthrough

The recent announcement by the Australian Clearing House that it has added the first ETF to its list of acceptable collateral represents a watershed moment in the life of ETFs in Australia.

The recent announcement by the Australian Clearing House (ACH) that it has added the first exchange traded fund (ETF) to its list of acceptable collateral represents a watershed moment in the life of ETFs in Australia.

The ACH has included the SPDR S&P/ASX 200 Fund as acceptable collateral for lodgement against margin positions on the Australian Securities Exchange (ASX).

According to ASX manager, trading derivatives equity markets, David Stocken, the ASX expects the status upgrade will drive further volume growth in the ETF sector as well as the exchange traded options market.

The ACH, which is responsible for overseeing margin activity on the ASX, confirmed the SPDR 200 Fund (STW) is now the only security outside the top 200 listed stocks that could be used as collateral against margin positions under the general rule of acceptable collateral.

The addition of STW follows a refinement to the ACH collateral policy announced as part of its latest quarterly review.

The policy shift provides sophisticated investors with the ability to lodge STW as collateral against any margin call or option exposure.

Under the previous restrictions, only individual stocks included in the top 200 index could be lodged as collateral against a margin position.

While the SPDR 200 fund is, at this stage, the only ETF to be affected by the policy shift, the development confirms the robust trend of fund flows into ETFs.

The latest decision by the ACH adds further fuel to the proposition that ETFs will become a major instrument for investors and advisers.

The ASX added its backing to the belief that the decision taken by the ACH would add an avenue for greater sophistication of investment strategies for advisers.

The ongoing push for a fee-for-service model among financial advisers is one influence arguably supporting greater demand for ETFs.

Given ETFs do not pay commissions or trails to advisers, there has previously existed a significant disincentive for advisers to recommend ETFs to their clients.

Under a fee-for-service model, where commissioned-based selling is largely irrelevant, ETFs offer an attractive, easy to access option for advisers to offer equity market exposure to their clients.

Through ETFs investors can access broad and diversified equity market exposure for less than 50 basis points compared to managed fund costs often well in excess of 1 per cent. Such a cost savings is understandably gaining strong traction in the marketplace.

A consistent investment fund flows trend confirms the growing popularity of ETFs. Supporting the data, mainstream studies continue to demonstrate the inability of the average active manager to consistently beat the benchmark index.

According to the latest ASX Listed Managed Investment Monthly update, the value of assets under management invested in Australian ETFs increased 151.2 per cent in the 12 months to February 2010 to more than $3 billion.

Furthermore, the annualised liquidity of all ETFs was 190.67 per cent, confirming ETFs as the most liquid of all listed managed investments.

For years ETFs have lived life in the shadows of high profile active managers. But the global financial rout of the previous 18 months, and a general trend towards a fee-for-service model among advisory groups, has added real impetus to demand for ETFs by adviser groups and investors alike.

Bill McConnell is a former equity holder and continuing writer for industry website ETFmate.com.au.