What Covid-19 has told us about investing?
During the first quarter of 2020, the coronavirus epidemic shook the fixed-income market, producing dislocations and a liquidity shock not seen since the global financial crisis of 2008. For the investment markets, 2020 has been an interesting year. Many significant investing lessons have been learned as a result of the Covid-19 epidemic and government actions. When the full magnitude of the epidemic was revealed in March, financial markets all over the world plummeted. According to the Guardian, worries of a recession caused the FTSE to drop to its lowest level since the 2008 financial crisis, and trading on Wall Street was momentarily halted when circuit breakers were activated.
Rise in trading and investing in Australia/ETFs
As markets reacted to the increasing coronavirus epidemic, ETF investors were taken on a rollercoaster trip in the March 2020 quarter. The epidemic triggered a paradigm change in economic uncertainty, sending the S&P/ASX 200 down almost 20% after it carried the momentum of 2019 into 2020, backed by lessening global recessionary pressure, a long-awaited Brexit settlement, and receding fears of US-China trade-war tensions. Extreme volatility and low investor confidence hurt the Australian ETF market, which fell 13.5 percent to $56 billion. However, inflows persisted, with $4.9 billion going into the exchange’s 219 goods vs $1.6 billion going out.
In many aspects, the massive inflows into exchange-traded funds (ETFs) that have occurred in recent months are additional proof of financial trends that have been in place for some time now. Certainly, they have been heightened as a result of the disturbing market events caused by COVID-19, but what is taking place also indicates a more general shift in the manner that many retail investors choose to make their investments.
Increasing rates of diversification
Investors are becoming increasingly attracted to ETFs, either via direct investment or through investment advisors and stockbrokers, and this is because they understand that a portfolio diversification may assist to mitigate the effects of market volatility and lower overall exposure risk. No one should be surprised by the increase in ETF inflows that occurred amid the turbulent conditions we have experienced recently. ETFs give people the ability to quickly diversify their portfolios, because each one holds several different investments. Investors have made massive allocations to ETFs as a method to exploit lower market pricing and diversify and minimize their risk at the same time. Moreover, in response to the significant price drops of both equities and fixed-income securities, investors have also been turning to ETFs for use in portfolio management. Investing in ETFs allows investors to easily rebalance their portfolios when their asset allocations begin to diverge from their investment plan. Investors can instantly adjust their holdings by purchasing ETFs to address any regions that could be underrepresented.
A litmus test for COVID-19
The broad market volatility sparked by COVID-19 – primarily because to the still-evolving economic and financial consequences – has served as a litmus test for how ETFs function in severe market situations. As previously stated, the large inflows into ETFs reflect their appeal to investors because to their built-in diversification. However, the epidemic has put the performance of ETFs in terms of market liquidity to the test. On this level, ETFs have successfully proven that they can provide adequate liquidity for investors who need to transact even when markets are volatile.
Recent influx of ETFs
According to Australian statistics, equity-based ETFs continue to be the most popular investment among citizens. The largest ASX firms by market capitalization are covered by almost a third of all stock inflow channeled into Australian broad market index (BMI) ETFs. About a quarter of all ETF funds under management in the domestic market is in this top-end market category. Australian stock inflows remain tied to the home bias, although the value of Australian-quoted products in the global market is actually greater than the share of the local ETF pie they comprise. According to a recent Morningstar research report, the global BMI equities ETFs on ASX control over a quarter of all ETF assets under management.
Thematic ETFs
Thematic exchange-traded funds (ETFs) have exploded in popularity during the pandemic as investors have jumped at the chance to participate in the opportunities afforded by tectonic shifts happening in the world, whether it be the transition to a carbon-neutral economy or advancements in gene technology.
According to VanEck, funds under management (FUM) in thematic exchange-traded funds (ETFs) listed on the Australian Securities Exchange (ASX) increased by more than 70% to $4.3 billion in the six months leading up to April 2021. The company predicts that the acceleration of flows will push thematic FUM to $10 billion by the end of the year. Thematic exchange-traded funds (ETFs) seek to follow long-term investing patterns, sometimes known as “megatrends,” which are frequently associated with macroeconomic or structural changes in the economy that go beyond the conventional business cycle. These trends include technological advancements such as cloud computing, artificial intelligence, and robotics, as well as environmental, social, and governance (ESG) issues such as climate change and clean energy.
An inexorable, irresistible force
As the fundamental components of their client’s investment portfolios, ETF products are becoming increasingly popular with retail investors, with financial advisers helping them make informed decisions. The ETF industry provides investors with inexpensive access to worldwide markets and the opportunity to quickly diversify their investments by purchasing assets in a single market. ETFs provide Australian investors with a way to diversify their portfolios across markets and industries.
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